Factors Behind IFRS Convergence And Its Impact On Financial Reporting Quality

Factors driving convergence to IFRS

This assignment is about the International Financial Reporting Standards convergence. A very simple question that would arise in the minds of the audience of this assignment is that, ‘what international financial reporting standards are all about? Well in very simpler words there are a great number of different countries in this world and each country have their own standards for recording the financial entries to keep their business financially on track (DiTommaso, 2018), till this point everything seems to be right but the actual complications start when the organization start operating in other countries (Milade, 2014). Then the need for common financial reporting standards was felt by the International Accounting Standards Board also known as IASB. The IASB introduced or developed the international financial reporting standard to provide an ease of performing financial reporting activities to the business houses that are doing business in multiple countries (Ghosh, 2016). The main purpose of this assignment is to study the about the post issues of the convergence to the IFRS. There are dour questions in this assignment that we will step by step solve below (Chand, 2005).

Now here we are going to discuss those four questions and will try to answer them in the best way possible with all the relevant and accurate information. The first question is discussed below:

In countries like India or China which are the perfect destinations for foreign direct investments, if we look back at 10 years ago scenario the picture was quite different as both of the nations were not the users of international financial reporting standards (Alfredson, 2017). In the year 2011, India adopted the international financial reporting standards. The main purpose behind adopting the IFRS was to make the financial system more strong and investment friendly and as India was becoming an emerging economy as well as the favorite destination of the foreign investors it was becoming quite necessary for the finance sector of the country to adopt something that will provide benefits and support in the future for the accounting system (Litan, 2017). Below are the factors that drive a country to accept or adopt the international financial reporting standards (Alzeban, 2016):

• Legal System: The adoption of international financial reporting system is directly interlinked with the legal systems of the nations. There is the total one third of the population of the world is living in countries having common law. So when an organization starts operating its business in different countries the legal system of those countries is the first thing to be seen. Legal system is connected with disclosures incentives and earnings(StainBank, 2017). So if IFRS is adopted by a country having higher disclosures or earning benefits then IFRS adoption will boom the market will unlimited benefits but the only condition applied here is that the legal system must provide disclosures incentives and earning potential (Brasted, 2016).     
• Taxation:There are still many countries in the world that heavily rely upon the taxes that they get from the big corporation houses. Taxation system is the one that makes a country decide whether to adopt or not the international financial reporting standards. The countries that have a moderate taxation system for the corporate houses are more likely to adopt international financial reporting standards (Bonito, 2016).
• Trade Alliance:Trade alliance is when a country is involved in doing trade with different foreign partners. Trade alliance is one of the factors that drive a country to whether or not adopt the IFRS. Suppose a country has trade partners that all have adopted IFRS as there accounting standards then the chances are the remaining country will too adopt the international financial reporting standards to keep away the financial implications from the business (Djatej, 2017).
• Executive & Board Support: Another factor that drives the implementation of international financial reporting standards in an emerging nation is the support from the executive & the board of a company(He X. T., 2012). There is no point in implementing a financial reporting system to which most of the corporate houses don’t support. The government along with the market big or small players must have a common support and their willingness to adopt the international financial reporting standards, only this will allow a successful implementation of the international financial reporting standards (Albu C. t., 2014).

Now we will discuss about the second question, the second question of this assignment requires us to study few articles in order to answer what challenges does an emerging or a developing country faces while implementing the international financial reporting system (Ali, 2006). Well it is very common thing to know that every good thing comes with a price. Same is with the case of international financial reporting standards. If it provides numerous benefits then it has few challenges for its users as well and these challenges are described below (Albu, N, & Alexander., 2014).

• Huge Financial Expenses:Not every developing country has a great reserve of funds. Countries like China and India or Singapore can afford such implementations but other developing countries like Pakistan, Libya; Nigeria which is not financially strong seems the adoption of international financial reporting standards as a huge financial expense on their economic structure (He, Wong, & Young., 2012). Hence, financial expenses are the first challenge that comes in the way of a developing country that wishes to implement IFRS.
• Less Number of Certified trained or Certified Accountants:Now if we discuss about the number of certified accountants in countries like India or China, where the population is booming at its peak is very low (Irvine, 2008)The recent result for the examination of a chartered accountant only had a result of only 6% in India. Low or less number of certified accountant is another barrier or a challenge for developing or emerging countries like India or China to adopt international financial reporting standards.
• Professionalism: A major challenge for the adoption of international financial reporting standards in developing countries is that the financial report preparers in these countries lacks the professionalism in them and they don’t opt the secrecy while preparing such reports(Zakari, 2016). It has generally been seen that most of these countries have reported many fraud cases because of the lack of secrecy while preparing financial statements which leads to frauds with the investors or general public.
• Lack of Awareness:A study was conducted in Nigeria to observe the challenges that comes with the adoption or implementation of international financial reporting standards. It came to light that many emerging countries without studying the different challenges of IFRS implement it and then feels that the challenges are hard to cope up with (Gandhi, 2016). These things show that the lack of awareness is another issue or a challenge that comes in the way of successful implementation of the international financial reporting standards.

The third question now that we are going to discuss is about the two companies, one organization is an organization that is listed on the Indian stock exchange and the other organization is listed on the Australian stock exchange (Irvine., 2008). Both the organization are of the same industry, here in this question we are going to compare the basis of the preparation of the financial statements by these two organizations and their accounting policies of these organizations:

Implementing IFRS in emerging and developed economies

The two organizations that we have chosen to discuss about are the Indian Oil Corporation (Indian) and the Austex Oil Limited (Australia). Both the organizations are listed on their national stock exchanges and are operating their business in the same industry membership that is the oil & gas industry. The first thing that we are going to discuss in this question is the comparison between the bases of the preparation of financial statement of both the organizations and their accounting policies as well. The 2017 financial statement of Indian Oil Corporation states that it had revenue of around 4.2 trillion; the operating income was 4 billion US dollar for the year 2017, and net income was 2.9 billion US dollars, whereas the total assets were valued at 40 billion US dollars in the year 2017. Now if we talk about the Austex Oil Limited organization of Australia then the financial statement of this organization for the year 2017 states that it had a total net income of (19,228,752) US dollars and its total assets are valued at (62,727,548) US dollars. Now below is the comparison of the basis of preparation of financial reports of both the organizations (Choudhary, 2016).

It is not really surprising to see that both the countries having different accounting standards have the same basis of preparation of financial statements. The only difference is the accounting standards that are applied differently on different entries (Goswami, 2018). Now if we talk about the accounting policies used by both the countries then accounting policies are the set of procedures or standards that are applied by the organizations differently according to their countries accounting standard board in order to prepare financial statements. The Indian organizations follow AS-1 to AS-29, while the Australian organizations follow; AASB-1, AASB 101 etc.

Now finally we will discuss the fourth question of this assignment that requires us to discuss whether it will the adoption of international financial reporting standards be really prove out beneficial for financial reporting quality. The convergence of international financial reporting standards will prove out to be beneficial for the countries adopting it and it will definitely going to improve the quality of financial reporting (Wycherley, 2016). The companies and the economies will have the following benefits after adopting the International Financial Reporting Standards:

• Economy Growth:The countries that implements the international financial reporting standards will not only make their financial structure more up to date but it will open up the economical gates for many foreign organizations that earlier were hesitating to enter the nations that were not having IFRS. The entries of these foreign organizations not only bring the competitive business but it also brings the opportunities for the economies to grow and expand (Lombardo, 2017).
• Comparability: Now the domestic and the foreign organizations after implementation of international financial reporting standards can easily operate in one nation. It is not like it has become possible only after the implementation of IFRS that the foreign & national organizations are operating in same country but earlier or prior to the implementation of international financial reporting standards it was not easy when the organizations use to compare their financial statements but after the adoption of international financial reporting standards it has become possible for the organizations to compare their profitability by comparing the financial statements that are prepared with the accordance of IFRS.
• Opportunity for Investors:The adoption of international financial reporting standards has brought many opportunities for the small & unprofessional investors as now the financial reporting or the financial statements after the adoption of international financial reporting standards that now any person who wishes to invest in an organizations share or projects can easily do so. Earlier the opportunities were very less or it can be said that the opportunities were only limited to the professional investors but now small or unprofessional can also invests their money. This investment will not only benefits the organizations or investors but will also benefit the economy as a whole (Yvanovich, 2017).
• Capital Raising: The adoption of international financial reporting standards is not only beneficial for the investors or the economies but it is beneficial for the organizations as well. The adoption of international financial reporting standards invites foreign investors to come and invest in that particular economy, this invitation also allows the organizations to raise capital to fund their different projects. Which means capital raising for organizations from foreign sources has become very easy.
• Opportunities for Professionals:The adoption of same accounting principles and procedures throughout the world has increased the opportunities for the accounting professionals in different parts of the world. Earlier it was only the accounting professional that were limited to their countries for job opportunities because of the difference in the accounting standards in different countries but now as almost every country whether developed or developing are adopting international financial reporting standards, this adoption is increasing the job opportunities for the accounting professionals in every part of the world.

The adoption of international financial reporting standards is definitely going to improve the quality of accounting and financial statement of countries adopting it.

Conclusion

After going through an intense research on the topic of the adoption of the international financial reporting standards, a detailed conclusion has been provided here to put a final light on this topic. The United States of America is considered as the father of financial system as it is the country that introduced financial structure very first. As the time passed every country developed its own accounting standards, earlier it was quite difficult for the organizations from different countries to operate business in a country other than its own but somehow every one managed but honestly it was not working quite good, so every organization and the international body or the accounting board felt a need to introduce accounting or financial principles that can be adopt by every country whether the organization is developing or developed. The main purpose behind introducing these accounting standards or principles were to reduce the complications of accounting or financial statements at international level, the other purpose was to bring an accounting structure that can be adopt by every country so that the business can take place without any complications of accounting structures of different countries. The financial conclusion about the adoption of international financial reporting standards is that, the nations must adopt the IFRS in order to harmonies their financial structure and in order to be competitive and up to date with the international market. The countries that are resisting now will find it very difficult later on to adopt the international financial reporting standard. Most of the emerging countries like China & India have already adopted and they are the perfect examples of fully harmonized nations after the adoption of international financial reporting standards.

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