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Development of IFRS for Accounting Practices and Procedures

Question:

Discuss about the Contemporary Issues in Accounting use of IFRS.

The International Financial Reporting Standards (IFRS) were developed by IASB (International Accounting Standards Board) in order to achieve harmonization by developing standard accounting practices and procedures that need to be followed by all the businesses worldwide during financial reporting. However, it has been found out by various studies carried out in developing and developed economies of the world that countries are facing challenged on effective implementation of IFRS due to country-specific contextual issues. In this regard, the present report aims to discuss the IFRS and the contextual issues faced by the countries worldwide in its effective implementation through reviewing relevant research articles related to the topic. Also, the report analyses the use of IFRS in businesses by presenting examples of financial reports of two companies and provides an overall discussion of the finding achieved through the use of institutional theory framework.

International Financial Reporting Standards (IFRS) refers to accounting policies and practices that are developed by an independent non-profit organization known as IASB. IASB has developed IFRS in the year 2010 with the objective of developing global standards for the preparation and disclosure of financial statements by businesses around the world. The globalizations of economies have enhanced the complexity in financial reporting for businesses around the world. In this context, the harmonization of financial reporting is very essential for providing reliable, credible and comparable financial information at a global level. Harmonization will help in eliminating the differences that is present in financial reporting in order to overcome the difficulties that exist for companies to present their financial statements around the world. The harmonization can be achieved by developing similar set of procedures that result in unifying reporting standards in order to increase the similarities in international reporting standards (Henry et al., 2006).

The IFRS accounting standards is regarded as an effective way to achieve harmonization in the financial reporting by promoting developing higher quality financial statements through adoption of international standard accounting practices and standards. The adoption of IFRS standards will promote harmonization in  accounting as businesses around the world need to prepare their financial statements through implementing uniform standard accounting practices and policies. The international harmonization through the IFRS standards establishment will prove to be highly beneficial for investors and thus leading to increase in the future investments (Mirza and Ankarath, 2010). Also, the international harmonization besides increasing the investors’ confidence will also help in improving the ease to the global financial market. The absence of IFRS standards have made increasingly difficult for business entities to compare their financial reports and thus IASB has established standards accounting practices with the development for IFRS to promote harmonization in accounting rules and policies. The harmonization of IFRS globally will provide large benefits to parties such as investors, analysts, governments, creditors to easily understand the financial position of a corporation through its financial reports (Morais and Fialho, 2008).


Also, harmonization will result in increasing the efficiency of auditing and reduce the complexity of financial reporting for companies have to otherwise follow different set of reporting standards for preparation of the financial statements for its various units operating in varying countries. The consistency between the financial reports of different business entities will make relatively easier for investors to make decision about their investment and thus will cause more flow of money in the capital market (Chand, 2005). Thus, it can be stated that development of IFRS is mainly done to reduce the conflicting accounting practices that are used by businesses in various countries that makes relatively difficult for analyzing the financial information for the end-users. The process of reconciling the financial information by multi-national companies is very time-consuming and expensive in the absence of IFRS. Also, there are increased chances of error-occurrence and misleading information in the absence of a universal set of accounting practices adopted for preparation of financial reports. The IASB is also aiming for convergence of the GAAP (Generally Accepted Accounting Principles) and IFRS standards to achieve better harmonization in accounting practices as GAAP is regarded to be rule-based whereas IFRS is principle-based (Albu et al., 2014).

Contextual issues of implementing IFRS in emerging economies and in developed countries   
                                                                                                                                                                                                                                                                                                                                                                                          The IFRS standards have largely been impacted by the common law of developed and developing countries such as China, South Asian countries, the United States and the United Kingdom. The establishment of IFRS standards by IASB is still not able to achieve harmonization due to contextual issues such as taxation, culture and political factors that have large impact on the accounting policies of a country (Morais and Fialho, 2008). The emerging economies though believed to have common characteristics are also facing issues in application and adoption of IFRS. This is mainly due to varying strategies used in IFRS adoption by the emerging economies and thus there exist wide difference in the application of IFRS standards by businesses operating within several emerging economies (Albu et al., 2014). Also, there are still some countries within the emerging economies that have still not adopted IFRS standards such as Syria, Morocco, Libya and Algeria. These countries still follow GAAP principles in developing financial reports. The IFRS standards, though, are proving very beneficial for developing countries in economic development through creating better investment opportunities but still some of the Middle Eastern countries do not allow their business corporations to use global IFRS standards (Zakari, 2014).

Harmonizing Financial Reporting through IFRS


The accounting and financial information received from developing countries is still not  believed to be trustworthy at an international level due to such issues. As a result, the developing countries are not able to attract foreign investment for promoting their economic growth and development. Also, besides these political issues, the developing countries also face contextual issues such as inadequate knowledge and cultural factors that have caused difficulties in the adoption of IFRS standards. For example, China is regarded as one of the major emerging economies on an international level is also facing difficulties in the adoption of IFRS standards mainly due to contextual issues. The government of China is aiming to develop convergence between IFRS and CAS (China’s Accounting Standards), however, there are still wide difference between CAS and IFRS. This is mainly due to lack of an international regulatory agency that is impeding the process of harmonization of accounting practices. There is need for developing a commercial language that will help in convergence of accounting practices followed within different developing economies of the world (Wong et al., 2012). The United Arab Emirates, has responded effectively to increasing pressure of integrating its financial reporting standards as per the global standards. The UAE currently requires adopting the IFRS standards for promoting its economic growth and as such undertaking reforms to comply with the global IFRS accounting standards. However, the major challenge faced by the UAE in this context is that it has to undertake regulatory, legal and economic changes in order to adopt the western style financial reporting standards (Irvine, 2008).

Thus, the development of global financial reporting practices is largely impacted by nation-specific and socio-political factors. The global harmonization of accounting practices is a very challenging task on account of presence of several controversial issues that are recently faced by the accounting standards setting bodies and market regulators.  The developing economies are facing contextual issues such as lack of resources, skills, political and cultural factor that have hindered the harmonization of accounting practices. This is because emerging economies though share common characteristics have varying level of economic and accounting development (Finch, 2008). There are some developing countries such as Singapore and Malaysia that have well-established accounting practices but some such as Marshall Island even don’t have a professional organizational for development of accounting practices (Zehri and Chouaibi, 2013). Apart from the developing economies, the contextual issues are also faced by the developed countries to achieve harmonization in their accounting practices. This is due to the difference in regulator environment of developed economies that cause differences in their accounting practices. The developed nations are recognized as leaders in the global capital markets but still face challenges in achieving a uniform set of accounting standards for financial reporting. The developed nations have established their independent accounting setting bodies such as AASB (Australian Accounting Standards Board) and others that have established their own set of accounting practices and conventions. As such, the IASB has to face difficulties in causing the convergence of accounting practices followed within a developed country and the IFRS standards (Chand, 2005).

Contextual Issues in Implementing IFRS

Thus, it can be said that with increase of globalization, the developing and developed countries are facing increasing pressure to comply with the global accounting practices of IFRS. The developing and developed countries are required to work in co-operation with each other to promote the economic growth and development at an international level through increasing investment opportunities. The developing economies are facing large contextual issues as there is difference in their level of economic and political development in adopting IFRS standards in comparison to developed countries. The developed countries though face issues in the adoption of IFRS they are still able to comply more with the IFRS standards due to their relatively same level of economic and political development (Henry et al., 2006).

Tesco, a general merchandise retailer of the UK, is listed on London Stock Exchange and thus have to comply with the accounting practices of the country. The financial reports of the company have been developed in accordance with the International Financial Reporting Standards (IFRS) as advocated by the European Union (EU) (Tesco, 2016). The financial reports are also developed as per the rules and conventions of Companies Act 2006 included under IFRS. The company have adopted historical cost basis for the preparation of financial statements while share-based payments, customer loyalty and net pension liabilities are measured at fair value (Kirk, 2009). The financial information presented in the annual report of the company is subjected to periodic review by the European Commission and thus can undergo necessary changes as prescribed by the IASB. The European Union (EU) has adopted the IFRS application in the year 2005 in order to adopt the international accounting practices for promoting comparability and transparency in the financial statements of the EU countries (Geens and Hopt, 2010).

The UK being a major member of the EU has to comply with all the reporting standards adopted by the EU and as such Tesco prepares and discloses all its financial information as per the accounting standards adopted by the European Union. This is due to the regulation adopted by the European Commission that all EU companies have to develop their financial statements as per the IFRS. However, the regulation is implemented only on the consolidated statements and thus companies can adopt the national GAAP’s at the time of financial reporting for their subsidiaries and associate entities. As analyzed from the annual report of Tesco, it prepares its consolidated financial statements as per the IFRS standards mandated by the European Commission (Tesco, 2016).

On the other hand, Wesfarmers Limited is recognized as one of the largest retailer of Australia that conducts its business operations through supermarkets and department stores. The company have disclosed in its annual reports that all the financial statements have been prepared in accordance with the AASB (Australian Accounting Standards Board) that holds the responsibility of developing and maintaining the financial reports as per the IASB (Wesfarmers: Annual Report, 2016). However, there exist some differences between IFRS and AASB standards in relation to the development of financial statements due to presence of country-specific issues. As such, AASB standards have been impacted by the country-specific issues and thus there are some differences between the financial reporting standards of AASB and IFRS. For example, as pre IFRS normal procedures are used for inventory calculation while AASB standards require the use of LIFO method in such calculations (Godfrey and Chalmers, 2007). As such, it is also analyzed from the annual report of Wesfarmers that some portion of its financial statements does not comply with the IFRS standards of IASB. Also, Wesfarmers do not develop and publish its statement of changes in equity that is required under IFRS IASB (Wesfarmers: Annual Report, 2016). Thus, it can be stated that there are some differences between the reporting practices of Wesfarmers and Tesco due to contextual issues that has hindered the harmonization of financial reporting standards globally. Therefore, apart from the wide differences that is present between the financial reporting standards still countries are emphasizing on the need of achieving harmonization in accounting practices through IFRS. This has been analyzed from the annual report of Tesco and Wesfarmers that exist in the same retail industry but operate in varying countries but still prepare their financial statements as per IFRS standards (Mirza and Ankarath, 2010).

Analyzing the Two Businesses' Financial Reports

The development of standard accounting practices and conventions for promoting harmonization of accounting standards have largely been impacted by the framework of institutional theory. The institutional theory considers the processes that result in development and establishment of standard rules, norms or schemes for conducting social behavior. The theory provides a framework that helps in gaining an understanding of the accounting processes in a better and improved manner.  As per the theory, organization can be considered as operating in social context of norms, values and standards and thus helps the accounting-setting bodies to develop accounting practice that promotes transparency and authenticity in financial reporting.  The accounting-setting bodies can identify and examine the factors that result in legitimacy of organization practices during the development of standard accounting practices with the use of legitimacy theory framework (Carpenter and Feroz, 2001).

The factors include cultural, social, legal and economic that has resulted in development of contextual issues and is negatively impacting the harmonization of accounting practices globally. The theory states that organizational can achieve legitimacy through abiding by all the regulatory structures, norms, societal and cultural practices and governance rules. Thus, as per the theory the presence of social, economic and political factors have a wide impact on the decision-making processes of organization and thus accounting-setting bodies should develop an appropriate understanding of these factors at the time of developing financial reporting standards (Albu et al., 2014). Thus, institutional theory help in determining the legitimate actions for organizations and thus help in development of standards procedures through which they can abide by all the laws, rules and norms for meeting the social behavior expectations. The use of institutional theory framework by accounting-setting bodies will help in determining the appropriate laws and standards that should be abided by the organizations for promoting their legitimacy. It emphasizes on the role of regulatory, social and legal pressures that impact the actions of an organization. Thus, IASB has developed IFRS standards for promoting legitimacy in organizations worldwide as the standards adopted in the IFRS are meant to promote reliability, relevancy, comparability and consistency in the financial reporting. The proper application of IFRS standards by businesses worldwide will help in promoting transparency and credibility of financial reporting thus resulting in international growth and development of economies (Pietra, et al, 2013).

Conclusion

Thus, it has been analyzed from the overall discussion in the report that IFRS has resulted in harmonization of accounting practices for promoting better decision-making process of investors. However, the contextual issues such as economic, political and social factors have largely impacted the harmonization achieved by IFRS in developing and developed countries that need to be eliminated for achieving integrity in financial reporting.

References

Albu, C.N. et al. 2014. When global accounting standards meet the local context—Insights from an emerging economy. Critical Perspectives on Accounting 25, pp. 489–510.

Carpenter, V. L. and Feroz, E. H. 2001. Institutional theory and accounting rule choice. Accounting, Organizations and Society 26, pp. 565-596.

Chand, P. 2005. Impetus to the success of harmonization: the case of South Pacific Island nations. Critical Perspectives on Accounting 16, pp. 209–226.

Finch, N. 2008. A Case Based Analysis of Impairment Decision Making. Journal of Law and Financial Management 7 (2), pp. 36-42.

Geens, K. and Hopt, K.J. 2010. The European Company Law Action Plan Revisited: Reassessment of the 2003 Priorities of the European Commission. Leuven University Press.

Godfrey, J. M. and Chalmers, K. 2007. Globalisation of Accounting Standards. Edward Elgar Publishing.

Henry, D. et al. 2006. Harmonization of Accounting Measurement Practices in South Asia. Advances in International Accounting 19, pp. 25–58.

Irvine, H. 2008. The global institutionalization of financial reporting: The case of the United Arab Emirates. Accounting Forum 32, pp. 125–142.

Kirk, R.J. 2009. IFRS: A Quick Reference Guide. Elsevier.

Mirza, A. and Ankarath, N. 2010. Wiley International Trends in Financial Reporting under IFRS: Including Comparisons with US GAAP, China GAAP, and India Accounting Standards. John Wiley & Sons.

Morais, A. and Fialho, A. 2008. Do Harmonised Accounting Standards Lead to Harmonized Accounting Practices? An Empirical Study of IAS 39 Measurement Requirements in Some European Union Countries. Australian Accounting Review 18 (3), pp. 234-236.

Pietra, R. et al. 2013. Accounting and Regulation: New Insights on Governance, Markets and Institutions. Springer Science & Business Media.

Tesco. 2016. Annual Report and Financial Statements. [Online]. Available at: https://www.tescoplc.com/media/264194/annual-report-2016.pdf [Accessed on: 15 May 2017].

Wesfarmers: Annual Report. 2016. [Online]. Available at: https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4 [Accessed on: 15 May 2017].

Wong, T.J. et al. 2012. Challenges for Implementation of Fair Value Accounting in Emerging Markets: Evidence from China. Contemporary Accounting Research 29 (2), pp. 538–562.

Zakari, M. 2014. Challenges of International Financial Reporting Standards (IFRS) Adoption in Libya. International Journal of Accounting and Financial Reporting 4(2), pp. 390-412.

Zehri, F. and Chouaibi, J. 2013. Adoption determinants of the International Accounting Standards IAS/IFRS by the developing countries. Journal of Economics, Finance and Administrative Science 18, pp. 56-62.

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