Pros and Cons of Adopting International Financial Reporting Standards (IFRSs)

PROS AND CONS OF ADOPTING IFRS
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Pros and Cons of Adopting IFRS
Introduction
The International Financial Reporting Standards (IFRSs) are a set of accounting standards developed and published by the International Accounting Standards Board (IASB) to provide a globally accepted set of standards for financial reporting. Thus, it is the primary set of rules and regulations used by companies worldwide to prepare their financial statements. It is the most widely accepted global accounting language and is the basis for financial reporting in many countries (International Accounting Standards Board, 2023).
Adopting IFRSs is widely seen as beneficial for well-integrated global financial markets. This adoption is because it reduces the amount of time and effort required to convert financial statements prepared under different accounting standards into comparable information. Likewise, using a single set of global standards is seen as beneficial to investors, as it increases their ability to make informed decisions. Conversely, this widely held perception is not without its critics. Some experts argue that the proliferation of IFRSs is not a logical consequence of rational standard setting. Rather, it is also claimed that the IFRSs are an imperfect solution to the problem of global financial reporting and that adopting the standards can be seen as a form of rent-seeking by multinational companies and international organizations. This essay will explore the pros and cons of IFRSs in order to evaluate the validity of this argument.
Literature Review
Adopting IFRSs is often seen as a positive development for global financial markets, as it increases the transparency and consistency of financial information. As such, many countries have adopted IFRS as their primary accounting standard. However, there are also criticisms of IFRSs, as the standards may not be suitable for all countries and regions, and significant costs can be associated with implementing IFRSs.
According to a book by Robinson (2020), one of the main debates surrounding IFRSs is the issue of uniformity. IFRSs enable investors to compare financial information across companies and countries more easily. The debate surrounding the issue of uniformity with IFRS is that while the standards are meant to apply to all companies, regardless of their size, sector, or geography, not all companies may benefit from them. Certain countries or sectors may have different accounting requirements and practices that may not be suitable for IFRSs (Robinson, 2020). For example, many countries have regulations that require companies to use certain accounting practices that are not in line with IFRSs. The implementation of IFRSs can be expensive and time-consuming for companies. Companies may need to restructure their accounting systems to comply with the new standards. This implementation may require additional training of staff, as well as additional costs for software and hardware. In other cases, adopting IFRSs may require companies to restate their previous financial statements per the new standards, which can be a lengthy and costly process.
According to Schroeder et al. (2022), the cost issue is also a key concern regarding IFRSs. Adopting IFRSs can be costly for companies, particularly for small companies and companies in developing countries. The costs associated with implementing IFRSs include hiring additional staff, investing in new accounting systems and software, and training existing staff. Companies may need to re-evaluate existing contracts, financial instruments, and accounting policies and procedures to ensure compliance with the new standards. Thus, it can be a costly and time-consuming process which can be difficult for companies to manage.
In terms of the cost of compliance, smaller companies may be particularly disadvantaged. Not only do small companies have limited resources, but they may also be less familiar with the new standards and may require more assistance in implementing them. It becomes much worse when companies in developing countries may have limited access to the necessary resources and technical expertise to implement the standards. In addition, Pinto and Morais (2019) clarify that the costs associated with implementing IFRSs can be a disincentive for companies to adopt the standards. Companies may be reluctant to invest in the required resources and may choose to remain with their existing accounting practices. This conduct can harm the quality of financial reporting and lead to a lack of comparability and reliability of financial information.
The proliferation of International Financial Reporting Standards (IFRSs) has raised concerns about the role of politics in accounting. In most cases, adopting IFRSs is often seen as a way to promote global economic integration and harmonise accounting standards across different countries. Nevertheless, according to Baskerville and Grossi (2019), the political dynamics of IFRSs may lead to certain countries and sectors being disadvantaged, as the standards are not always appropriate for their needs. It leads to a lack of trust in the standards, as there may be perceived inequality in implementing them. For example, the politics of IFRSs can be seen in the selection of standards, the implementation of standards, and the enforcement of standards.
Regarding the selection of standards, there may be a bias towards standards that may benefit certain countries or sectors more than others. Another example is that certain countries may be more likely to adopt standards that benefit their domestic industries, such as tax relief or capital allowances (Putra, 2019). Countries with weaker governance structures tend to be more likely to adopt standards that allow them to hide financial information, such as off-balance-sheet accounting. Also, some countries are less likely to adopt standards requiring strict disclosure requirements, such as those related to environmental issues. Similarly, certain countries may be more likely to adopt standards that favour their domestic industries, such as those that provide tax relief or capital allowances.
Critics of the IFRSs claim that the standards are too inflexible and cannot adequately account for the diverse needs of di...