Title: Describe how the International Financial Reporting Standards (IFRS) work and explain why their application worldwide presents both opportunities and challenges.
Financial accounting information is not only transmitted within one country but also to the investors all over the world due to the internationalisation tendency development of global economy and capital market. IFRS mainly means it is a non-profit, public interest organisation, aims to develop a set of high quality, bright and executable globally accepted accounting standards. This essay will be talking about the challenges and opportunities of IFRS brings to all the countries which adopt IFRS in their accounting standards. This article will be divided into four parts. Firstly, will be the definition of the International Financial Reporting Standards then will be the review of opportunities and challenges of IFRS facing and finally is how IFRS adopted in Malaysia.
According to the business dictionary (2017), International Financial Reporting Standards (IFRS) is used for preparing financial statements in the international company whereas this accounting principle was recognised and adopted in the global market. IFRS are used worldwide because this will keep up accuracy and accountability around the financial market. It will allow the business partners or investors to make the final judgment as they are capable of seeing clearly what is going on to the company which they hope to invest in. Different countries adopt different accounting standards such as the United States passes the United States Generally Accepted Accounting Principles (GAAP) and the European Union, China, India, Australia, Malaysia, and other countries implement International Financial Reporting Standards (IFRS).
Opportunities for adopting IFRS
From Jordan’s research report in (2013), IFRS is committed to more accurate, timely and comprehensive financial statements relating to national standards. Therefore, the financial statements prepared by the IFRS are often more understandable to investors because they can understand the financial statements without the need for other sources to make them more aware of the situation. Not only do the quality increase but also the way to operate it becomes more straightforward. In the past financial reporting standard, it was impossible to make the emerging investors have the same position with the professional investors, but IFRS do. The risk of emerging or small investors trading would decrease. This is because of the advantages of the pure nature of the financial statements are not utilised by professional investors. A study report from Afaque in (2014) review that in 2008 investigate the effect of mandatory IFRS on market liquidity and equity valuations in 26 countries. The results show that after the adoption of IFRS, the liquidity of market increases. The result indicates that the capital costs have decreased and equity valuations have increased. After applying IFRS, the cost of the capital fell by 47 basis points in the European Union.
Challenges of adopting IFRS
The most notable disadvantage of International Financial Reporting Standards is the cost of adopting IFRS in the large and small company in the country. However large business does not need to be included, but the financial burden will assign to the small businesses as they do not have sufficient resources to implement the changes of train and hire accountants or consultants to assists their financial statement. Another major of disadvantage is, it does not accept by globally. As we know, United States do not use the matter of IFRS to make their financial statement so that it will be a challenge for companies who adopt IFRS to their statement of income and compare it to the enterprise in the United States. As the two accounting principles are different, like IFRS are not separated the non- recurring items in the profit and loss account, but US GAAP does. Moreover, the earning of per share calculations are not calculated for the average individual medium-term period in the IFRS, but under GAAP in the United States, it will be calculated.
IFRS adopted in Malaysia
There are almost 120 countries that have challenges and opportunities to face IFRS in the world, one of the countries facing both challenges and opportunities in Malaysia. Malaysia has been a British colony. Its political, economic and cultural are deeply influenced by the British, in the accounting internationalisation is also in the forefront of the Association of Asian Nations (ASEAN) countries. In 1979, they joined the International Accounting Standards Committee. From 2007 onwards, Malaysia is committed to Financial Reporting Standards and International Financial Reporting Standards. It can be seen that colonial history and other interest groups have influenced Malaysia’s norm-setting and accounting internationalisation, but the Malaysian government has also played a leading role. The Malaysian Accounting Standards Board is the Organizational Framework of the Malaysian Accounting Standards Board (MASB) established in 1997 under the Financial Reporting Act and the Financial Reporting Foundation (FRF) to formulate financial reporting guidelines. The role of the Financial Reporting Foundation is to guide the accounting standards. Malaysia adopts IFRS in 2012, before convergence to IFRS, Malaysia was using FRS which was developed by the Malaysia accounting standard board in 2006. The reason why Malaysia accounting standard board decided to announce the changing of accounting principle was because IFRS is the absolute choice of accounting standards that are applied worldwide.
First and foremost, one of the benefit is to convert FRS to IFRS so that the investors can understand all the financial report that is prepared by the companies in Malaysia as it would be more clear and easy for them to compare the statement with other businesses in worldwide as they are the ones who is making the decisions around the world. Hence, using internationally recognised financial reporting standards is very important to Malaysia market. Besides that, it also makes those global investors rely more on and understand the financial report which is arranged by the companies in Malaysia because the reports are reliable and transparent.
Another benefit is that it will help through the adoption of international standards in implementing better practices within the company with the integration of Malaysia and Malaysia multinational corporations in international subsidiaries into a single consolidated financial statement, the translation will benefit from reduced compliance costs and reduced risk. Vast and small businesses to attract capital from more of investor groups, lowering the cost of capital, facilitating cross-border mergers and acquisitions and strategic investments.
There are always two sides of a coin. Much the same can be said of adopting IFRS in Malaysia companies. It can say that using IFRS will be difficult in Malaysia as some of the domestic public enterprises are not using IFRS in their financial report even though it was announced in Malaysia in 2012. So, there will be challenges for them to compare their statement with the foreign companies in Malaysia because international companies are required to use IFRS in their statement.
To sum up, the benefits of using IFRS are that it can help the emerging investors to have the same level with the professional investors and decrease the risk of investment because of the pure nature of the financial statement. Moreover, liquidity and equity also increase in the market, and capital costs have decreased. The disadvantage of the IFRS is, it does not use in globally. So, it is very troublesome for the company to compares the statement with other company which does not use IFRS in their statement.
Furthermore, it also became a problem for the small business who applies IFRS. Their financial statement will be costly, as they need to hire accountant and assistant to help them make the statement. Consequently, as this essay has been shown, a full understanding of the IFRS implement in the worldwide.
International Financial Reporting Standards (IFRS). BusinessDictionary.com. Available at: http://www.businessdictionary.com/definition/International-Financial-Reporting-Standards-IFRS.html (Accessed: August 30, 2017).
Zeba Afaque (2014) Arguments for and against IFRS: Advantages and Disadvantages. Available at: https://prezi.com/wqbqglchg9sg/arguments-for-and-against-ifrs-advantages-and-disadvantages/ Accessed 5 May 2014
Anna Jordan (2013) Advantages and Disadvantages of IFRS compared to GAAP. Available at: http://research-methodology.net/advantages-and-disadvantages-of-ifrs-compared-to-gaap/ Accessed 26 September 2013
Malaysia Accounting Standard Board (2011) Frequently Asked Questions on Malaysia’s Convergence with IFRS in 2012. Available at: http://masb.org.my/pages.php?id=229 Accessed 7 December 2011
Remi Forgeas, CPA Insider (2008) Differences Between IFRS and U.S. GAAP. Available at: http://www.ifrs.com/overview/general/differences.html Accessed 16 June 2008
IFRS Malaysia (2017) Extent of IFRS application. Available at: http://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/malaysia/#profile08 February 2017