Objectives Of IFRS

Published by:   Arunkumar Kamalasanan

Certified Principal VAT Consultan

IFRS is a big topic to discuss. This is a short summary of the objectives of IFRS which will the readers understand why corporates are moving to IFRS reporting.

IFRS is set of international accounting standards developed by IASB (International Accounting Standards Board) under the governance of IFRS foundation stating how the financial & accounting transactions and other events should be reported in financial statements.

Financial Reports are the bible for investors to make investment decisions. The financial performance of the organisation is evaluated on the basis of financial reports. In order to analyse & compare the financial reports of multiple entities accurately, it is extremely important that the companies are following the same set of accounting standards while preparing their financial reports. However due to requirements of national economic, financial & legal systems of each countries, the company’s are required to follow the reporting standards which are prevailing in their country of incorporation and this makes the comparison of financial reports of companies located in different countries ineffective.

The challenge of international capital market is to reduce or eliminate the differences in the reporting standards, to produce a level playing field for financial reporting and to help create more efficient international capital markets.

The below are the main factors influencing the variations in national practices and regulation of financial reporting.

  • Variation in the policies of capital markets of each country
  • Variations in the legal systems of each country
  • Variation in government policies & systems
  • Variation in the type and scale of economic activity, from agricultural to financial services and from developing economies to industrialised economies;
  • Variation in the degree of international influence and openness of an economy;

There has been pressure from international community to standardise the financial reporting practice and regulations globally to minimise the inconsistencies. It is less acceptable to report the same transactions differently in different countries. The need of having a standard financial reports has become a necessity for investors and financial experts and this forced companies to start following the International Financial Reporting Standards.

The below are the primary drivers encouraging the use of IFRS globally.

  • Globalisation of trade & capital markets.
    Rapid development of Information Technology and its impact on operations.
    Fast & simplified process of moving funds between countries.
    Increased investors interest in foreign investments.

A significant milestone towards achieving the goal of having one set of global standards was reached in October 2002 when the Financial Accounting Standards Board (FASB), the US standard setter, and the IASB entered into a Memorandum of Understanding called the ‘Norwalk Agreement’. The Agreement set out a number of initiatives, including a move to eliminate minor differences between US and international standards, a decision to align the two Boards’ future work programmes and a commitment to work together on joint projects.

Since the publication of the Norwalk Agreement, the IASB and FASB (The Financial Accounting Standard Board) have been working together with the common goal of producing a single set of global accounting standards and this resulted in a further formal Memorandum of Understanding being published in February 2006.

In November 2007 the US Securities and Exchange Commission (SEC) agreed to remove with immediate effect the requirement for non-US entities reporting under IFRS (as issued by the IASB) to reconcile their financial statements to US GAAP. Prior to this announcement there was a need for US Registrants to prepare a reconciliation between their financial statements and certain key figures such as earnings and net assets under IFRS with their equivalents under US GAAP.

IFRS is now acceptable in many countries and there is a huge increase in the number of companies across the globe moving to IFRS reporting, to make sure that their financials are comparable for investors and capital markets.