In this and further posts I am not going to copy long chapters of books. First of all, it’s illegal, second, it’s not really the exchange of experience and finally, it will make posts unreasonably lengthy.
Okay, so the first enthusiasm goes away quite quickly once u open first chapter of your book and start reading it. At first u think: mmm, that’s okay …that’s also okay. But then u start to fall asleep and count how much pages are still left to read.
Indeed, that’s plain theory. It’s good if u are working in accounting related field , then most likely you already have an idea about those first topics. Otherwise, everything will be new and almost everything will be boring. I don’t generalize, but I’m just sure it will be. Because most of u are definitely so much eager for calculations.
Anyway, you can skip those topics and you won’t fail exam. But you will lose the opportunity to get some easy marks on theoretical parts of questions in case if those topics will be examined. Right now we have lots of time before exam, so why not? I would suggest : go for it.
So take a deep breath, smile and let’s start our construction of IFRS skyscraper. And however boring it might feel at time, remember it’s EASY and USEFUL.
Chapter 1 of syllabus asks to discuss the need for international accounting standards and possible barriers to their development.
Need for international accounting standards.
Good question. Why do we need, and do we actually need them at all ? : )
Well, in simple words, each country speaks it’s language. And each country has it’s laws and accounting principles. Now imagine something like the construction of Babel tower when every worker speaks his own language. A bit of chaos, isn’t it?
National accounting principles are great within certain countries / regions but when it comes to talk to “foreigners”, they might fail to understand that language of reporting.
A simple solution is “to develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles”. Huf ..sounds magnificent : ) Well, this heroic idea happens to be the main objective of IFRS Foundation, and those high quality standards appear to be IFRS.
So that’s the main idea, now all you is to formulate it in technical words and develop this idea further. Here is what can be added :
- IFRS were developed in attempt to deal with subjectivity (of national accounting systems) and to achieve comparability between different organizations. Remember that IFRS ideally should allow a company to prepare a set of clear, transparent reports, which show a true and fair picture of the business.
- IFRS serve to harmonize financial reporting . They remove or significantly reduce differences in methods used to prepare accounting reports.
- IFRS serve to present a single set of accounting standards that will be clear for stakeholders in different countries. Financial reports prepared under IFRS are deemed to be clear for different groups of stakeholders (including foreign, e.g. foreign investors).
The idea to create standards appeared and was successfully developed implemented to practice. Nowadays more and more countries adopt or permit the use of IFRS. Some countries like Australia and New Zealand have accepted IFRS as their main accounting principles already since 2005. UK GAAP is almost completely replaced by IFRS adopted by EU. US Financial Accounting Standards Board is constantly working with IASB on their project of convergence of US GAAP and IFRS. Of course they could simply accept IFRS as it is ,but US accounting system is already too good. Would be pity to simply cancel this one. But those guys are working at this project day and night, so I believe in the nearest future they will give birth to something nice : ) More about convergence of US GAAP and IASB here and here.
More about the use of IFRS around the world here.
However, nothing is ever perfect and so implementation of IFRS faced and still facing lots of barriers.
Barriers to development of IFRS.
In previous part I mentioned how great IFRS are, how they are needed and helpful. So everyone is should be happy: IASB, companies, governments etc. Well, they are. But everything has a price to pay. Development of brand new and amendment of existing standards is already a hard work, meanwhile there many additional barriers occur that slow down or complicate the whole standard-setting process.
And for us accountants, it’s quite clear why :
- Many national accounting systems are very tax driven. Till the point that there exist simultaneously two systems of reporting : accounting and tax. So every change in accounting system poses a dilemma: what do to with tax one? Tax guys are often not happy with new rules. So introduction of IFRS will cause bigger and bigger differences between those two systems;
- Those who are engaged in the process of standard setting should understand them well. In other words, how e.g. you can comment on standards and make proposals if u don’t even understand what it is about. We are humans, not robots, so it all takes time and efforts.
- Cost. Nothing is free, well IASB members are not volunteers as well : ) And as usual financing is limited. So good budgeting system is required. But it all again takes time and slows down the whole process and poses some limits on activity.
- The process of developing a standard, discussing it and elaborating certain rules is sometimes and often quite tough. Everyone has his viewpoint, his background, experience and vision. It’s hard to come to an agreement and to satisfy everyone.
- As it’s been mentioned before, stakeholders are not always happy with new additional workload caused by IFRS. Implementation of new standards creates a lot of additional work for them. IFRS departments have to be created, specialists need to be trained, accounting departments need to familiarize with IFRS, software should be choosen and adjusted, chart of account s, accounting policy and all the drafts of documents are to be created etc etc etc. Not saying about the situation when implementation of IFRS within the country causes changes in national standards. So imagine a usual 45 + aged accountant who got used to work in one way now has to forget all the principles that he followed before and changed his mindset for something brand new and in fact doubtful for him. In addition, not every company will be ready to disclose more information in it’s reports then it usually does.
- Sometimes standards might cause a real complexity. Not only they become complex themselves, but they also appear to be too complex to apply.
Well, that’s it in brief. Looks like, it’s better to revise theory again and again. I remarked from past exams that sometimes it’s easy to remember some points but so hard to formulate those points clearly in exam. Definitely better to read and reread and reread.
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