International Financial Reporting Standards
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International Financial Reporting Standards
The International Financial Reporting Standards refers to a set of rules that govern the financing sector by determining how accounting activities like transactions are reported through financial statements. Through these standards, there is a surety of credibility and transparency in the field of finance; therefore, investors and business managers can make concrete financial decisions to ensure their business if at the float. The International Accounting Standards Board issues and maintains the IFRS. It made it easier for the financial statements to bear a common language, which has made it easier for interpretations as well as an understanding of the stipulations across the globe. This paper explores the IASB chairman’s speech issued about IFRS adoption and the issues related to the adoption thereof.
The IFRS standards have been adopted in over 100 countries in the world with the European Union, Asia, and South America as the paramount entities that adapted to the use of IFRS. However, it has been an issue in the United States to adapt to the IFRS standards, since the SEC is still contemplating on whether to fully incorporate the standards or not. The US is still using its usual GAAP or the Generally Accepted Accounting Principles, which does not work in the same way as the IFRS principles. GAAP is a rule-based framework, meaning that it is rigid and has fewer allowances in terms of financial interpretations. This is different from the IFRS, which is a principle-based framework, an indication that it is more flexible than the rule-based framework. Therefore, the two frameworks have the advantages and disadvantages in their usage, which is why the US financial department is taking some time to think about adapting to the IFRS principle-based framework.
The IASB chairman’s speech took place in Tokyo, whereby the chairman focused more on Japan’s adoption to the IFRS standards as well as their approach on the same. On a global basis, the IFRS standards have been adopted by more than 100 countries. The standards were initially developed in 2001, and ever since then, many countries have incorporated the standards into their financial projects and prospects to ensure transparency and credibility in financial matters. Most of the parts across the globe have progressed through IFRS standards, but to some extent, the IASB chairman says that there are differences in the adoption of these standards. He states that when he became the IASB chairman that is in 2011, the adoption process was at crossroads since the first load of countries that had adapted to the standards had followed the lead from Europe. These countries were Australia, South Africa, as well as Hong Kong. At this time, the chairman said that the IFRS, the FASB, and the GAAP in the US were working collaboratively towards a common goal of having standardized measures to govern the financial matters in a single measure.
According to the IASB chairman, the issues related to the adoption of the IFRS emerged when it was time to shove. This was when the United States of America hesitated from transitioning from its usual GAAP to the new IFRS standards. Furthermore, Japan also expressed a slowdown in the adoption of the IFRS global standards because it had encountered a terrible tsunami in 2011. This made it difficult for Japan to shove into the global IFRS standards. According to the chairman’s speech, many people were puzzled and wanted to know if the United States’ hesitation in adapting to the new IFRS standards had an impact on the entire IFRS project, leading to the unwinding of the same. Fortunately, there was no unwinding of the same because, since then, IFRS is still being adopted across the globe.
Another issue is that each country has a unique and special way of adoption and a different path towards the IFRS standards. There have been various approaches in place for the adoption, and according to the chairman of IASB, the ‘big bang’ has been the best approach across the globe. Almost three-quarters of the G20 countries have adapted to the IFRS standards. From the research done by the IASB in almost 166 countries in the world, it was found that more than 140 countries have adapted to the IFRS standards. Other countries have taken a different path in the adoption by converging the country’s national accounting stipulations and the IFRS standards. That is despite that; there have been some registered differences in the usage of the IFRS standards due to the convergence. However, the IASB chairman said that there had been identical results in the use of IFRS and the Chinese GAAP in China, an indication that IFRS standards are being used in the required and expected way.
Japan took a path that no other country has taken before as far as IFRS adoption is concerned. It allowed the market to dictate how to go about the standards, and thus, according to the chairman of IASB, Japan’s adoption created a global economic experiment. Thus, it becomes vital to critically question ourselves as financial experts, especially after business companies have been given the freedom of choice between adapting to international standard requirements, national GAAP, or the US GAAP (Epstein & Jermakowicz, 2010). Furthermore, it has been a serious issue on whether the countries should fully switch to international IFRS standards requirements or only adapt to a portion of the IFRS standards and converge them with the local preferences through modifications. Even though other countries were forced to choose some set of standards, Japan was not forced in its choice whatsoever. That is why, according to the IASB chairman, the results obtained from their path of adoption to the IFRS standards were fascinating.
Accounting for goodwill has been an issue of discussion as far as the IFRS standards adoption is concerned. In 2004 when IFRS adoption took surface in most businesses, the IASB was forced to abolish goodwill amortization and focused on the approach of impairment alone. Understandably, Japanese GAAP still has goodwill amortization because of the stakeholders in Japan, like how the goodwill amortization in Japan is conservatism, accounting for the two major modifications in the IFRS standards. This comes as a result of the discussions that have been there since the post-implementation of IFRS 3 review of goodwill. At first, the IASB board did not approve of the re-introduction of goodwill amortization because the evidence presented was insufficient to qualify for an investigation of the ideas thereof. However, it was in the best interest of the IASB board to later accept to have a comprehensive analysis of the same ideas and the possibilities of re-starting the amortization of goodwill once again.
The reason for the board’s changed mind in the review of the goodwill amortization surfaced after the post-implementation review, which identified numerous problems in the goodwill impairment approach. For instance, the approach was expensive and subjective since cash flow projections generated from cash-generating units are often rosy. That is to mean that the losses in the impairment approach are always identified at a later time, making the booking and resultant information weaker and invaluable for investors’ confirmation. Therefore, this paused as a problem in the whole idea of IFRS adoption across the globe, since it made it difficult for confirmation and identification of cash flow losses early enough to make adjustments and mitigations. Such issues, according to the IASB chairman, required excellent research, suitable for reviving the impairment approach and making it as effective as possible. This is because the IFRS 3 review completely depends on the impairment test to determine the existence of the goodwill existence (Epstein & Jermakowicz, 2010).
Currently, companies measure the value of their businesses by accounting for the cash flows in the future. Later on, company financial managers compare the value with the business’ carrying amount, which is accounted for in the value book. In this case, the goodwill impairment is recognizable only if the unit value of a business is below the business’ carrying amount registered on the balance sheet. In most cases, companies acquire businesses and incorporate them into existing businesses (Epstein & Jermakowicz, 2010). This is to imply that when testing for impairment, the business value being tested is the new business and the old business as well. In this case, supposing the one acquiring a new business has a good and successful existing business, the economic value will be higher in the book value because the internally generated goodwill is significant and not recognized for the purposes of accounting. That is to mean that the acquisition is an additional value to the existing business, meaning that even if the acquired business is poorly performing, the old business has a high value in impairment, hence will sustain the book of value to stay afloat since the goodwill from the old business will be above the book value.
Conclusively, IFS is vital for financial accounting and managing financial statements. The IASB chairman gave his speech regarding the adoption of the IFRS standards in the global businesses, and from his speech, it was evident that many countries have adapted into the IFRS path either fully or partially, through the convergence of local standards. Japan is ranked high on taking a different path that has led to the experimentation of the adoption of the IFRS standards. Issues such as US switching from US GAAP to IFRS standards, impairment-only approach, and the goodwill amortization have had a significant impact on the progress of adoption of the IFRS standards.
References
Epstein, B. J., & Jermakowicz, E. K. (2010). WILEY Interpretation and Application of International Financial Reporting Standards 2010. John Wiley & Sons.
IFRS. Ifrs.org. (1996). Retrieved 20 May 2020, from https://www.ifrs.org/news-and-events/2018/08/chairmans-speech-japan-and-ifrs-standards/.