Pros and Cons of International Financial Reporting Standards (IFRS)
Assessment Information – What you need to do
This assignment is an individual assignment. It requires you to consider the essay theme below: ESSAY THEME
For well-integrated global financial markets, the adoption of the International Financial Reporting Standards (IFRSs) is considered beneficial. However, contrary to this widely held perception, it is argued that the proliferation of IFRSs is by no means a logical consequence of rational standard setting.
REQUIREDWith the above theme in mind, you are required to write a critical essay of 1,800 words minimum in length arguing the pros and cons of IFRSs. You may, for demonstrating your intellectual understanding, discuss why wholesale adoption of IFRSs and or standardisation of accounting is considered problematic.
Please refer the following (attached at the end): Appendix A – Suggested ReadingAppendix B – DMU Generic Undergraduate Mark Descriptors
Criteria for Assessment - How you will be marked
The breakdown of how the essay will be assessed is provided below: Weightage % Approx. word length(Min-Max)• Introduction 10 200 -220• Critical discussion demonstrating arguments for an against the IFRSs (e.g., critical theories/factors/issues for the regulators, policymakers, relevant stakeholders, etc.) 50 1000-1,100• Synthesis (15) and structure (5) 20 400 - 440• Conclusion 10 200-220• Harvard Referencing 10 -Total 100 1,800 - 1,980Note: In order that you produce a work of quality, it is expected that your essay1. Show a coherent discussion demonstrating a good reference to prevalent but important theories.2. Reflect a clear structure which should guide your reader.3. Should be “informative”, “critical” and is evidenced by a good use of literature.
Further information on University mark descriptors can be found here. This assignment is designed to assess the following learning outcomes:
Subject - specific knowledge and skillsStudents will:1. Demonstrate subject specific knowledge informed by theoretical perspectives2. Critique contemporary professional norms and practice in their field3. Appreciate and evaluate influences on international accounting developments.4. Appraise how social, political, and legal systems affect national accounting practice.
Cognitive and non-subject-specific skillsStudents will:1. Demonstrate the ability to apply a number of skills to support an accounting or finance discussion.2. Demonstrate the ability to manage and take responsibility for own learning.3. Use a range of published academic material for a given purpose.
PROS AND CONS OF ADOPTING IFRS
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Pros and Cons of Adopting IFRS
Introduction
Regions such as Europe have embraced the International Financial Reporting Standards (IFRS), whereas the U.S. emphasizes the Generally Accepted Accounting Principles (GAAP). The International Accounting Standards Board (IASB) has been mandated to ensure that the IFRSs have been adopted in Europe to promote standardization and harmonization of financial reporting practice in the region. This objective has crossed Europe's borders, requiring other countries and regions to either adopt or converge to the standards. Various studies, such as Atu et al. (2016), have studied the effect of adopting and converging on companies and countries. However, this objective has not been fully realized due to various challenges.
Literature Review
Whether adopting and converging to IFRS positively or negatively impacts countries has been a hot debate among regulatory authorities, professionals, and academicians. Various studies have explored both arguments and most of them are limited in scope. For instance, some research is limited to certain regions, such as Europe and Asia, while others focus on developing countries (Zaidi & Huerta, 2014). This limitation makes the generalization of results difficult.
Pros of Adopting IFRS
Previous studies have suggested that businesses following the IFRS framework are better than those using local GAAP. The reason is that the accounting quality for firms that follow the IFRS framework is higher than those that use local GAAP. Fortunately, the accounting standards' developers assess quality through the reliability and relevance of the reported information. This increase in quality has enhanced the comparability of financial information with other markets (Choi & Meek, 2008; Owolabi & Iyoha, 2012). Investors tend to have confidence and trust in businesses if the financial reports are prepared according to a framework they understand; and are easy to compare with other markets, unlike when they are prepared to local standards (Abdul-Baki et al., 2014). Standardizing financial reporting increases a nation's access to foreign capital (Chand & Patel, 2011). Moreover, a study by DeFond et al. (2019) demonstrates that not only investors who benefit from IFRS but also local entrepreneurs who believe that adopting IFRSs has opened their access to international funding. According to Laurent (2006), IFRS reduces the costs of processing financial data for foreign investors and provides comparable, comprehensive, accurate, and timely reports.
Adopting IFRS improves a region or country's financial and accounting procedures. The framework replaces certain accounting standards with new ones and generally accepted international standards that facilitate economic and accounting transactions in the global market. This harmonization and standardization of accounting standards and procedures result in a single accounting language which enhances how comparable and reliable the financial reports are globally (Pacter, 2017).
Cons of Adopting IFRS
While acknowledging the benefits of adopting and converging IFRSs, opponents have argued that the processes are costly. The opponents argue that organizations must adopt and converge to IFRS fully. Hence, various changes must be initiated for efficient adoption and convergence, which are costly for businesses and countries (Jermakowicz & Gornik-Tomaszewski, 2006).
Increased complexity of financial report preparations and audit engagements is another issue that opponents of IFRSs have raised. It has been argued that certain accounting issues, such as fair value accounting under IFRS, involve greater complexity in the work scope of accounting professionals (Palea, 2013; Faraj & El-Firjani, 2014; Akhidime & Ekiomado, 2014). They also argue that it is uncertain whether professionals from the adopting region or country have the knowledge and skills to keep updated with the new trends to remain compliant with IFRS (Firdawok, 2017). Since there is a lack of competency among financial reports preparers and auditors in the adopting countries or regions to conduct proper interpretation of the standards is likely to lead to additional costs and time to firms in the form of employee training and expert recruitment (Herbert et al., 2013; Irvine & Lucas, 2009).
Moreover, opponents of IFRS argue that the framework is unsuitable for certain markets, especially undeveloped ones. Abdullah and Sapiei (2013) established that Malaysia being an undeveloped market, IFRS was unsuitable, especially for the fair value model standards. Certain assets, such as biological ones, should be presented at fair value in the financial statements. Based on this argument, the opponents argue that if countries or businesses have to converge to and adopt IFRS, they should only adopt standards relevant to their needs (Cieslewicz, 2014; Chamisa, 2000; Hossain et al., 2015). Bahadır and Demir (2016) established that the lack of implementation guidance poses a significant problem in adopting and converging IFRS because it will ultimately be costly.
Discussion
Shiferaw and Assefa (2020) established that adopting and converging to IFRSs simplify the financial statements by providing comparable, reliable, and harmonized financial data. This scenario improves the decision-making process for managers and investors. They further assert that IFRS makes foreign mergers and acquisitions easy because the financial statements are easy to compare with other companies in different markets, helping the decision-making process. Jermakowicz (2004) established that adopting and converging to IFRS resulted in the harmonization of internal and external reporting resulting in quality information that meets stakeholders' expectations. Barth et al. (2008) and Soderstorm and Sun (2007) suggested that countries and firms that adopted and converged to IFRS exhibit higher value relevance of accounting and timelier loss recognition.
Daske (2006) demonstrated that adopting IFRS is negatively related to firms' cost of capital while Christensen et al. (2007) assert that there is no positive or negative impact on IFRS adoption and companies' capital cost. However, Daske et al. (2008) posit that adopting IFRS is positively related to firms' cost of capital. Consequently, Odia and Ogiedu (2013) state that adopting IFRS is positively related to firms' cost of capital in voluntary adopters. Gassen and Sellhorn (2006) established global exposure, size of the firm, recent IPOs, and ownership dispersion as significant factors influencing IFRS adoption.
Conclusion
Globalization has resulted in an increased demand for harmonized financial reports from investors across the globe. Investors need comparable, accurate, and reliable information to decide whether to invest in foreign markets. The pros of adopting IFRS include harmonized financial reports, which enhance comparability, transparency, and improved financial and accounting procedures. The cons include increased adoption costs, especially for small businesses or undeveloped economies, IFRS complexities, and lack of implementation guidance.
Reference List
Abdul-Baki, Z., Uthman, A. B., and Sanni, M. (2014) Financial ratios as performance measure: A comparison of IFRS and Nigerian GAAP. Accounting and Management Information Systems 13 (1), pp. 82–97, Available at: /15028557/Financial_ratios_as_performance_measure_A_comparison_of_IFRS_and_Nigerian_GAAP (Accessed: 24 February 2023).
Abdullah, M. and Sapiei, N.S. (2013) Pros and cons of convergence with International Financial Reporting Standards in a developing country: The practitioner’s view. Asian Journal of Accounting Perspectives,&nbs...