financial reporting standards

Last Updated on 02/10/2023 by Sophia

What will the international financial reporting standards (IFRS) mean to businesses and investors? What are the new standards and how have they evolved? APA

                                                            Answer

International financial reporting standards(IFRS) refers to international established
standards of accounting outlining how certain varieties of events and transactions ought to be
stated in financial reports. IFRS was initiated in the European Union with a goal to make
business accounts and entity affairs accessible across the continent (IFRS, 2017). These rules and
regulations of accounting principles are provided by the International Accounting Standard
Board (IASB) and the IFRS foundation with an aim to create a common language for business
affairs and to ensure that the business or organization accounts are comparable and
understandable globally. Over the years, many debates have been brought out relating to the
necessity of regulations in accounting. The IFRS standards have gradually substituted the many
different accounting standards of various nations. The IFRS regulations are rules and guidelines
that are adopted by the accountants in their daily routine activities of maintaining books of
accounts (Erkens, 2016). The rules are relevant, reliable, understandable and comparable to both
internal and external users.
The IFRS regulations were initiated with the attempt to harmonize the accounting
practices across the great European Union. However, the rules produced an adorable output
benefit such that it attracted the attention of other countries globally. Different individuals and
organization have varied reasons in favor of regulating accounting practices (Camfferman &
Zeff, 2015). Some of the reasons and arguments in favor of applying accounting regulations are
the belief that accounting agreements are necessary to control and allocate economic outcome of
a resource. On the other hand, other people have opposed these international regulations for
some reasons. One of the arguments against the regulations is that they lead to the oversupply of
information besides users who do not encounter any cost tends to overstates their needs.

Financial statements refer to the structured representation of financial performance and
financial condition of a firm, corporate or organization. The main aim of preparing the financial
statements is to offer relevant facts about the current financial achievements, financial situation
and cash flow of a company. These financial reports are usually applicable to various
stakeholders of an entity, and they communicate significant information relating to the firm. The
financial reports help the investors in making economic decision on whether to invest or not in
the entity. Also, the reports explain to the shareholders how well the management is performing
beside enhancing transparency and efficiency of the entity (Staff, 2005). Moreover, the financial
statements display the entity’s cash flows and assets. Typically, the reports provide necessary
information that aids in forecasting and predicting the entity’s performance, in particular,
certainty and their timing.
International Financial regulation standards have distinguished general features. The fast
feature states that there should be a good compliance and presentation with IFRS. According to
this regulation, fair presentation means that there should be a faithful representation of the effects
of conditions, events, and transactions (Rosli, Amdan, Mudzamir, & Universiti Utara Malaysia,
2003). The representation should be by the recognition and definition of criteria for income,
assets, expenses, and liabilities set out in the IFRS framework. It is unethical to provide
misleading information: transparency and formality are necessary. The second feature of IFRS is
the going concern that assumes that the business will continue with its normal operations in the
foreseeable future without downsizing its operations. The regulation state that the business
reports are presented in the going concern bases only in exceptional cases where the management
intends to either cease the business or liquidate the entity or has no realistic options. The gives
the investor excellent opportunity to assess and predict the future operations of the firm.

The third feature is that accrual basis of accounting. It requires that every entity should
recognize items as, equity, assets, income, liability or expenses when they meet the recognition
and definition criteria for those elements. However, the regulation is an exception to intellectual
properties of immaterial nature such as goodwill, patent, logs, brand names among others.
Aggregation and materiality is the other feature of IFRS. It requires that every class of material
of similar items has to be distinguished in separation (McGill, 2013). Only for immaterial items,
other items that are not similar in function and nature should be presented separately. Offsetting
is the additional feature of IFRS. The standards prohibit this practice. Although offsetting is
forbidden, in some instances is allowed when certain conditions are satisfied. For example, in
accounting for defined and recognized liabilities in IAS 19 and in the net presentation of tax
liability deferred or deferred tax in IAS 12.
The other general feature requires that a complete set of the financial statement to be
presented at least annually. However, different companies usually publish interim reports for
which the presentation complies with the IAS 34. Comparative information is the other general
feature of IFRS (Linguanming & Yangmengping, 2016). It requires that the entity should present
its comparative information for whole amount reported in the present year concerning preceding
period’s financial reports. The reports and financial statement should be presented in an
understandable way to all individual with accounting knowledge. Lastly, IFRS, requires
consistency in presentation. It means that classification and presentation of items in the financial
reports should be reserved for all the accounting period. This aid to avoiding confusion to the
investors and other stakeholders.
International financial reporting standards have a broad coverage of the accounting and
business reports. The standards require financial reports from the business. One of the

requirement is the report of financial position which is also called balance sheet. The IFRS
generates some impacts on the way items, or components of the statement of the financial
position is reported ("Financial Instruments (IFRS 9)," 2015). The other statement that is
influenced by these standards is the statement of comprehensive income. This statement can be
presented in two form; firstly, it can be presented as two separate statements. That is, statement
of other income and profit and loss statement. On the other hand, the presentation can be
presented as one form of a statement. The standards affect the way items of this type are
presented.
The other financial statements affected by IFRS is the statement of retained earnings
commonly known as the statement of changes in equity. The form presents the changes that have
occurred in the companies earning or profits. It usually used by the stakeholders to evaluate how
their wealth maximization goal has been achieved. The last statement that is affected by the
International financial reporting standards is the cash flow statement (Braun, 2005). This
statements usually condenses the monetary transaction of business of a particular Period. The
statement separates the company’s financial deals of cash flows as either investing, operations or
financing. The company is also required by the IFRS to provide brief policies relating to
accounting. The comprehensive statement is attached to the reports of the previous trade period
to display the changes that have occurred in loss and profit. Moreover, a business with branches
businesses must establish separate reports of accounts for each branch business.
Some impacts associated with the standardization of accounting practice have contributed
to positive results. These IFRS are of great importance to both the business, the stakeholders,
investors, and the government. The investors and other financial report users benefit from these
regulations in that it facilitates comparison of financial statements (Neidermeyer, Dorminey,

Jack, & Wilson, 2012). Through effective comparison of financial reports, the investors can
make useful and meaningful decisions. Also, the investor gets to have meaningful and useful
comparisons of the portfolios of investment in different countries globally. Decision-making
process is the crucial step of the investment (IFRS, 2014). Having sufficient, relevant and
understandable financial reports to make the analysis and evaluation is paramount. IFRs have
been of great benefit in ensuring that the investors and other interested parties of the companies
both internal and external get to access the information necessary for investment decision
making.
Multination companies are also put into consideration by these regulations. They benefit
in that the preparation and consolidation of the financial statement are made more accessible.
The uniformity impact of these rules makes the preparation of financial reports easier from one
country to another; the regulations guide follows when preparing financial statements globally.
Also in the event of take-over and merger, the appraisal of companies from abroad is made to be
more straightforward. For a company to merge with another one, the financial statements are put
into considerations (KPMG International Financial Reporting Group, 2016). The stakeholders
must be keen to look on them to avoid making a wrong decision. Also, when handing over the
management, the financial reports are also put into considerations. The IFRS regulations have
made these processes to be more straightforward than it used to be in the past. Moreover, the
basic financial reporting is simplified for the multinational companies to comply with foreign
stock exchange reporting requirements.
IFRs have a great positive impact to multinational companies in that it helps to reduce the
auditing cost and items transfer of staffs in accounting across the globe. Auditing is the process
of evaluating and validating the completeness of the financial reports. The IFRS standards have outlined how the items in the financial statement should be treated and presented hence the
auditors do not take much time to inquire the way forward from the accountant. Usually, the
auditing department should work independently to enhance transparency (Hussey & Ong, 2017).
These regulations have enhanced this principle of independence of the auditors and therefore
promoting transparency in the companies. Also, the regulation makes the presentation clear and
understandable thus saving the auditors time and effort.
Tax is a compulsory obligation that business, company or organization is entitled to meet.
After every trade period, every business entity is required to pay tax to its government. The
amount of tax to be paid is calculated with respect to the results from the financial reports. IFRS
regulation has played a big part in simplifying and standardizing financial reporting (J Romesh,
2012). It aids the company to get the real and accurate representation of the tax due for both
internal and multinational businesses. This benefit is mostly enjoyed by the multinational
corporations that receive capital from abroad. The IFRs have significantly simplified the cost of
calculating tax by the companies.
Typically, IFRS have promoted both internal and external trade among countries
globally. Business has enjoyed the benefit of uniformity in the accounting practice. These
regulations have standardized the presentation of the financial reports/financial statements
(Ferranti, 2003). Moreover, the financial reports have been made understandable and simplified
to all individuals with accounting knowledge globally. Investors have also enjoyed the benefits
triggered by the IFRS. The decision-making process of the investors has been simplified. The
investors can analyze the financial reports easily before risking their resources in various
investment portfolios globally. The stakeholders who are part of the business can get a precise
report of the management performance (Cotugno, 2009). They can understand the financial reports hence analysis of the management performance is simplified. The stakeholders are also
able to make the right decision basing their analysis on the financial statements.
Although the IFRS have been of great benefit to business, they also raise some concern to
the management. One of the primary concern is how the adoption of these regulations affects the
company’s financial position concerning the other competitors in the industry. Change in the
accounting procedures may lead to both positive and negative impacts on the financial position
of the business (Hay, 2014). For the positive aspect, the regulations may improve the appearance
of some business. For example, a firm that has been applying FIFO method to value its inventory
and changes to LIFO it may gain some competitive advantages over its competitors in the
industry. On the other hand, adoption of this IFRS policies may generate an adverse impact on
the business. The business appearances may be reduced due to change in accounting policies.
Functions and operations such as information technology systems, stock keeping records, and tax
reporting are also affected by the IFRs.

New International Financial Standards

The IFRS has standards of a new entity that wants to adopt the measures for the first
time. One of the requirement is that IFRS requires the entity adopting the standards to make a
comprehensive set of financial reports covering the first IFRS period of reporting and the
previous year. Secondly, the firm should apply similar accounting rules all through the period in
its early IFRS financial statement. Also, those plans of accounting must observe each standard
effectively at the conclusion of its initial IFRs period of reporting (Hoggett et al., 2015). The
standards also provide exemptions which are limited from the necessity to repeat prior period in
the indicated parts which would be influenced by complying them and the likelihood of
exceeding the benefits to users of financial reports. Retrospective application of IFRS standards in separate areas is highly prohibited by the IFRs 1, specifically when judgments from the
management are required about past conditions of an already known outcome of a transaction.
Moreover, the IFRS requires the entity to describe how the adoption of the standards will affect
the entity’s reported financial performance, cash flows, and financial position.
Over time the standards have been changed, and some were modified. IFRS 9 which
indicates the accounting requirements for financial reports was altered in the year 2014 and
replaced the IAS 39 of financial items (Wild, Shaw, & Chiappetta, 2017). The 2014 IFRs
standard expounded further on the issue of measurement and classification of items. The
measurement and classification standards required that the monetary assets should be categorized
by entity model they are held and the vowed cash flow trait. The 2014 version introduced a
reasonable worth through other inclusive earning class for debt instruments. Also, the 2014 IFRS
9 version came up with an “expected credit loss” model that would assist in the measurement of
the impairment of financial assets. It means that not a must be a credit event to occur so that it
may be recognized a credit loss (Brüggemann, 2011). Another model was introduced relating to
management actions of risk when hedging nonfinancial and financial uncertainty exposure. The
model is designed to be more closely aligned with how businesses undertake management risk.
IFRS 14 is also a newly established standard. It allows the business that is new in
applying this IFRS to continue with some restriction for regulatory deferral account balances
abiding by the previous GAAP. The IFRS permit the firm to continue this process both in the
initial stages and in the subsequent financial reporting (Palepu, Healy, & Peek, 2016). Due to
increased contract projects, the IFRS also came up with accounting standards relating to
contracts. The IFRS 15 outline the model to be used to all contracts with the customers. The
model provided five-step that made up the single IFRS 15 principle. The first step requires the entity to determine the contract with the consumer. After identification, the entity should define
the performance obligation in the agreement contract. Thirdly, the firm should calculate the price
of the transaction relating to the contract (Green, 2013). The fourth step requires the entity to
align the performance obligation with the transaction price in the contract. Lastly, the entity
should recognize the revenue resulting from the contract performance obligation. Procedures are
provided on the basis such as the point in which earnings are recognized, costs of obtaining and
fulfillment of the contract, accounting for variables consideration and various related matters
(Hochreiter, 2017). Also, the IFRS 15 introduced recent disclosure of revenue.
IFRS 16 is another new standard which specifies how leases will be measured,
recognized, disclosed and presented. The IFRs is a single lessee model of accounting that
requires the lessee to identify liability or assets in all leases unless the underlying asset has no
value or the term is less than 12 months. Lessors are required to classify leases as either finance
or operating. The last trend in International Finance Reporting standards is the IFRS 17 that
provides a model relating to the insurance contract. It requires that insurance liabilities be
measured at a current value of fulfillment and offers a more standardized presentation and
measurement approach for every contract relating to insurance (Neel, 2012). The primary goal of
this principle is to enhance consistency in insurance contract accounting. However, some of
these new International Financial Reporting Standards are yet to be implemented, and soon they
will be enacted.
In conclusion, International Finance Reporting Standards are essential principles that
have brought about the uniformity of accounting practices globally. They have made financial
reporting understandable and straightforward. Besides, the standards have also standardized the
accounting practices to all member countries that apply them. The investors, managers, stakeholders, and businesses have enjoyed the fruits of adopting these standardizing principles.
The standards have significantly reformed the accounting practice into more precise and
standardized form.

References

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