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International Financial Reporting

Standards - Advantages & Disadvantages


by Angie Mohr, Demand Media

International Financial Reporting Standards address financial and trade issues globally.
world image by Clark Duffy from Fotolia.com
As the business world becomes closer in its financial and trade ties, many countries are moving
towards International Financial Reporting Standards (IFRS), common accounting rules that define how
transactions should be reported and what information should be disclosed in financial statements. This
unitary set of standards has solved many problems while creating others.

Greater Comparability
Companies that use the same standards to prepare their financial statements can be compared to
each other more accurately. This is especially important when comparing companies located in
different countries, as they might otherwise be using different rules and methodologies to prepare
their statements. This increase in comparability has helped investors better determine where their
investment dollars should go.

Not Globally Accepted


The United States has not yet adopted International Financial Reporting Standards and other countries
continue to hold out as well. This makes accounting by foreign-based companies that do business in
America difficult as they often have to prepare financial statements using IFRS and another set using
American Generally Accepted Accounting Principles.

Related Reading: Advantages & Disadvantages of Financial Management

More Flexibility
IFRS uses a principles-based, rather than rules-based, philosophy. A principles-based philosophy means
that the goal of each standard is to arrive at a reasonable valuation and that there are many ways to
get there. This gives companies the freedom to adapt IFRS to their particular situation, which leads to
more easily read and useful statements.

Manipulation
There is a downside to the flexibility that IFRS allows: companies can utilize only the methods they
wish to, allowing the financial statements to show only desired results. This can lead to revenue or
profit manipulation, can be used to hide financial problems in the company and can even encourage
fraud. For example, changing the method of inventory valuation can bring more income into the
current year's profit and loss statement, making the company appear more profitable than it really is.
While IFRS requires that changes to the application of the rules must be justifiable, it is often possible
for companies to "invent" reasons for making the changes. Stricter rules would ensure that all
companies are valuing their statements the same way.

Cost
A small company would be impacted by a country's adoption of IFRS in the same way a larger one
would. However, small businesses do not have as many resources at their disposal to implement the
changes and train staff. This results in smaller companies bringing in accountants or other outside
consultants to help make the changeover. These smaller companies will bear more of a financial
burden than larger ones in this area.

References (3)
About the Author
Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is
the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks:
Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management
accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier
University.

Photo Credits

Project history
On 9 July 2009 the IASB published an International Financial Reporting Standard (IFRS) designed
for use by small and medium-sized entities (SMEs). SMEs include all entities that are not publicly
traded and that are not banks or similar financial institutions. SMEs are estimated to represent
well over 95 per cent of all companies in both developed and developing countries. The standard
is the result of a five-year development process with extensive consultation of SMEs worldwide.
The complete IFRS for SMEs (together with the basis for conclusions, illustrative financial statements,
and a presentation and disclosure checklist) can be downloaded free of charge. To do so, click here.

Due process steps leading to the IFRS for SMEs

Project was carried forward from the former IASC agenda. IASB
deliberations began in July 2003.

June 2004: Publication of the discussion paper (DP) Preliminary


Views on Accounting Standards for Small and Medium-sized
Entities; comment deadline 24 September 2004

April 2005: Staff Questionnaire on Possible Recognition and


Measurement Modifications for Small and Medium-sized Entities
(SMEs).

October 2005: Public round-table discussions with the Board on


recognition and measurement simplifications.

July 2003 - February 2007: Deliberation of the issues by the Board


at 31 public Board meetings.

August 2006: A complete staff draft of the exposure draft (ED) is


posted on the IASB website

November 2006: A revised staff draft is posted on the IASB


website.

February 2007: Publication of the ED (English language); comment


deadline 30 November 2007

November 2007. Translations into four languages posted


subsequently.

April 2007: Publication of a staff overview of the ED on the IASB's


website.

June 2007: Field-testing of the ED with the participation of 116


small companies in 20 countries

November 2007: End of the comment period; 162 comment letters


received.

March - April 2008: Staff present to the Board an overview of the


main issues raised in the comment letters and field tests.

April 2008: Working Group submits comprehensive


recommendations for possible changes to the ED.

May 2008 April 2009: Board redeliberations of the proposals in


the ED at 13 public Board meetings.

April 2009: Board decides that the name of the final standard will
be International Financial Reporting Standard for Small and
Medium-sized Entities (IFRS for SMEs), as proposed in the ED.

June 2009: 13 Board members vote in favour, 1 dissenting opinion.

July 2009: Publication of the IFRS for SMEs

Why did the IASB undertake this project?


Because full IFRSs were designed to meet the needs of equity investors in companies in public capital
markets, they cover a wide range of issues, contain a sizeable amount of implementation guidance and
include disclosures appropriate for public companies. Users of the financial statements of SMEs do not
have those needs, but, rather are more focused on assessing shorter-term cash flows, liquidity and
solvency. Also, many SMEs say that full IFRSs impose a burden on thema burden that has been
growing as IFRSs have become more detailed and more countries have begun to use them. Thus, in
developing the proposed IFRS for SMEs, IASB's twin goals were to meet user needs while balancing
costs and benefits from a preparer perspective.

Project objective
The objective of this project was to develop an IFRS expressly designed to meet the financial reporting
needs of entities that (a) do not have public accountability and (b) publish general purpose financial
statements for external users. Examples of such external users include owners who are not involved in
managing the business, existing and potential creditors, and credit rating agencies. The IFRS for SMEs
was derived from full IFRSs with appropriate modifications based on the needs of users of SME financial
statements and cost-benefit considerations.

Was this project part of the Memorandum of Understanding?


No. The MoU sets out a Roadmap of Convergence between IFRSs and US GAAP 2006-2008. US GAAP
does not have a separate financial reporting standard for SMEs.
Click here for more information on the MoU.

Working Group
The Board formed a Working Group whose members provided views and comments on specific issues
that were presented to them.
The Working Group met on:

23 April 2003

29 - 30 June 2005

30 - 31 January 2006

10 - 11 April 2008

Benefits Of IFRS

Benefits > Business > Benefits Of IFRS |

Benefits of IFRS
The International Financial Reporting Standards are rules and guidelines that are set by the ISAB
which refers to International Accounting Standards Board that organizations and companies
follow when filling financial statements. The formation of international standards enables
investors, government and organizations to compare various financial statements supported by
IFRS with greater ease. This is because there are many countries nowadays that permit or require
organizations to comply with the set IFRS standards. The following are some key benefits of
IFRS.
1. Unifies business transactions
One of the major aims of the International Financial Reporting Standards is simply to place each
person in the whole world on one level when it comes to making financial statements. This
enables domestic firms to display their financials on similar levels as their foreign competitors.
In addition to that, organizations with various subsidiaries in other continents are also going to be
able to prepare their financial statements in a universal accounting language that is understood by
everyone.
2. Saves cost
Because many different companies are now adopting IFRS, this is going to be a great advantage
for companies with foreign operations. IFRS enables internal consistency with regards to
preparing financial reports. This means that the cost will be reduced since all the reports are
going to be done in a uniform manner in all the different branches of the company.
3. Provides consistency
The best thing about IFRS is the fact that it allows companies having different subsidiaries to
streamline their training, auditing, reporting standards and operation standards as well as
development standards. Whether global or domestic, their offices could possibly adapt the same
reporting techniques and standards providing consistent and precise reporting and company
records.

Nevertheless, there are some drawbacks of IFRS. One of the main drawbacks is that it is quite
expensive to implement these standards. This is because you have to train your employees
regarding the practical implication of these standards to their work.
Benefits Of IFRS