The advantages and disadvantages of new accounting standards IFRS

In 2002, the Financial Reporting Council (FRC) announced that Australia would adopt the accounting standards issued by the International Accounting Standards Board (IASB) from 2005(Baxter 2005). After the first of July 2005, the new standards (IFRS) start to use across national border. companies would be required to report current results under IFRS and restate recent results. They will also have to report their latest results under the old accounting standard, which should make comparing results on a like-for-like basis relatively straightforward. The purpose of this essay is going to give a general idea about advantages and disadvantage of IFRS, which has been widespread debate in the business community.

Main body

The aim of the international harmonisation process of Accounting Standards is to reduce or overcome differences worldwide (Deegan 2005). In order to reach a better international Comparability of financial statements, Australian companies have to continue its active participation with FRC to protect Australia’s interests.

Advantages of IFRS

The following advantages can be seen from the standpoint of preparers and users of financial reports.

Multinational companies would make savings

With a similar internal reporting system within the company, which gives the chance of better comparisons, less confusion and mistakes between the parts of the company (Neil 2002). It allows uncomplicated communication and transfers of finance personnel. By using one set of Accounting Standards in various jurisdictions and capital markets. Further cost savings can be realised, because the preparation of consolidated financial statements will be easier for companies. Since there are no longer costly changes from several different accounting systems of each subsidiary, when the parts of the company are consolidated to one. With one set of Accounting Standards, the credibility of the externally reporting could be raised (Neil 2002).

International companies can realise significant cost savings if they do not have

To change their financial statements to conform to each country’s rules, when listing on security exchanges (Neil 2002). In other words the access to main financial markets will become easier for global acting companies and by this it will be possible to acquire capital simpler for them. For example, a company, which has a subsidiary in Cuba, the parent company is located in Germany and the shares are listed on the NYSE. This company would have to prepare financial statements in Cuba, in Germany and in order to be listed on an U.S. stock exchange it would have to prepare also financial statements in accordance with U.S.-GAAP. Thus, its is easy to understand the advantage that a world-wide accepted set of Accounting Standards would have (Spulber 2001).

From the standpoint of the users of financial statements. Investors, banks or owners are interested in obtaining information, which enables them to make buy/sell/hold investment decisions (Neil 2002). It is easier for users of financial statements to make useful comparisons between countries and companies with similar financial statements. This can be explained with the circumstances that similar transactions are accounted for and reported in the same manner everywhere in the world.

International financial reporting standards are accepting by most nations over the time. The financial reporting council is working close with other countries to further minimise differences between Accounting Standards. For instance, the development of EU, which prescribes IAS with the beginning of year 2005, can be already considered to be a standardisation process.

Disadvantage of the IFRS

The disadvantages of such an implementation mainly consist of the costs of the implementation itself.

The risk that a new accounting system brings along in terms of possibilities for tax avoidance or fraud, that authorities composing the standard might have overlooked (Deegan 2005). The possibility of this happening is not unimaginable especially when the global standard will consist of a mixture of rules from around the globe (Spulber 2001).

The necessary reform at tax authorities will be costly and possibly time consuming (Spulber 2001). As most business are not familiar with the new accounting standards, the government have to give support to business community, this involves lots of time and money spending on training and the transition to IFRS.

Another disadvantage is the differences between Accounting Standards. Apart from international financial reporting standards, there are two other major accounting models—the Anglo-American Model and the Continental-European Model (Spencer 1998). The United States and Europe are the two most important capital markets, which make the company that use accounting standards other than those two, would make it hard to access capital markets.

Conclusion

International Financial Reporting Standard is becoming more important as key accounting rule makers worldwide work toward the goal of convergence. At the forefront is the IASC, committed to developing standards that will bring consistency to accounting policies worldwide. To protect Australia’s interests, Australian business community and government have to work close with IASC, to ensure that Australia is well placed to adopt IFRS standards and secure its position in global capital market.

Reference:

Baxter, p 2005, ACCT19062 issues in financial reporting, Study Guide, Central
Queensland University, Rockhampton.

Deegan, C 2005, Australian financial accounting, 4th edn, McGraw-Hill, North Ryde.

Neil, G 2002, Accounting for the Global Economy, Oxford university press, Oxford.

Spulber, D 2001, A Second Opinion on International Accounting Standards, MIT Press, Cambridge, Massachusetts.

Spencer, K 1998, The View from the AASB: Take it Easy, Get it Right, Australian CPA, SU.