Essay Example on Global Business: Achieving Consistency with IFRS

The global business has been growing over the past decades, and the use of different accounting standards posed a challenge in the comparability of firm performance. International Financial Reporting Standards (IFRS) did set common rules to ensure financial statements are consistent, comparable, and transparent around the globe. The International Financial Reporting Standards (IFRS) are issued by the International Accounting Standards Board (IASB). IFRS has addressed the challenge of a lack of standard by providing high-quality financial reporting standards that have been globally recognized. The International Financial Reporting Standards (IFRS) have thus brought transparency, efficiency to financial reporting, and increased the quality of financial information.

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A review of the IFRS adoption De George Li and Shivakumar (2016), points out that there have been great benefits out of THE adoption of the International Financial Reporting Standards (IFRS) to the adopting firms and countries in terms of better comparability of financial reports, improved transparency, lower costs of capital, improved cross-country investments and increased following by foreign analysts. The review further established that International Financial Reporting Standards (IFRS) has led to the promotion of international trade by narrowing cross-country differences in global financial institutions. A good example is the EU Regulation 1606/2002 statement that the regulation aimed at reinforcing the freedom of movement of capital in the internal market and that it would assist in enhancing community companies to compete on an equal footing for financial resources available in the market (Da Paixão Duarte, Saur-Amaral and do Carmo Azevedo, 2015). Furthermore, financial reporting would be done efficiently and at a lower cost as the standards emphasize the need for accounting standards.

IFRS has provided the global business with disclosure and accounting standards that are of great value to analysts. Analysts use these data for data consistency, improvement, and global peer comparisons. IRS has also increased book value and assets. A sample of 80 German industrial firms was studied by Pascan (2015), and it established that all the 80 firms had adopted the International Financial Reporting Standards (IFRS). The findings were that adopting the standards led to large equity values and assets. In addition, IAS has led to a better reflection on the economic realities and caused a decrease in managerial discretion, for instance, accounting of the choices and adoption by greater enforcement. In another study by Da Paixão Duarte, Saur-Amaral and do Carmo Azevedo (2015), it revealed that the adoption of the standards has led to an increase in accounting relative to GAAP. An overall study by researchers documents that voluntary adopting the International Financial Reporting Standards (IFRS) will lead to improved financial reporting quality.

Making IRFS adoption mandatory has also affected reporting quality. Basing on the sample of 150 German high- tech firms, their transition to the International Financial Reporting Standards (IFRS) from US GAAP in 2005 was worse with the International Financial Reporting Standards (IFRS), portraying more management earnings, less relevance in value and less timely recognition (Pascan, 2015). Also, despite the International Financial Reporting Standards (IFRS) being globally practiced, there have been shortcomings brought by the standards. Auditors have raised concerns around the lack of preparation for the introduction of IFRS. The adoption of the International Financial Reporting Standards (IFRS) may also leave uncertainties in the minds of investors over surprises that could emerge during the transition. IFRS has also led to a greater informed trading global world. The IFRS standards pose a challenge in establishing a firms real value as it does not use the either the historical-cost model or the fair-value method (De George Li and Shivakumar, 2016). A person can observe higher trading and volatility around earnings announcements. To study this aspect of accounting quality, the information content of earning announcement was researched in countries that mandated IFRS adoption (Da Paixão Duarte, Saur-Amaral and do Carmo Azevedo, 2015).

Adopting International Financial Reporting Standards (IFRS) has also made stock market participants meet their needs. One example of this is the tendency increase of firms in providing management forecasts around IFRS adoption, as documented by (Pascan, 2015). Findings from a research by De George Li and Shivakumar (2016), has pointed out that mandatory IFRS adoption increases the quality of textual disclosures. One of the characteristics of quality financial reporting is comparability. This is usually defined as the quality of information that enables users to identify and understand similarities and differences between accounting items (2010 IFRS Conceptual Framework). This attribute has been promoted by the IFRS Conceptual Framework statement that: ''Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date'' (De George Li and Shivakumar (2016). A statement by the EU regulation for IFRS adoption (EC No. 1606/2002) that having market comparability is an IFRS adoption reason.

Conclusion

In conclusion, proponents of International Financial Reporting Standards (IFRS) have noted that IRFS reporting quality is higher compared to previously adopted standards such as the local GAAP. The adoption of International Financial Reporting Standards (IFRS) has led to the improvement of financial transparency, lowered information asymmetry in capital markets, promoted cross-border comparability, and attracted foreign capital flow. Despite some shortcomings noted in the adoption of the International Financial Reporting Standards (IFRS) that include auditors concerns around the lack of preparation for the introduction of IFRS and uncertainties in the minds of investors over surprises that could emerge during the transition, Most Empirical studies on the adoption of International Financial Reporting Standards (IFRS) have led to a common and conventional held wisdom that the adoption of International Financial Reporting Standards (IFRS) has improved the overall outlook of financial reporting in terms of comparability and quality hence leading to favorable economic consequences across the globe.

Reference List

Da Paixão Duarte, A.M., Saur-Amaral, I. and do Carmo Azevedo, G.M., 2015. IFRS Adoption and Accounting Quality: A Review. Journal of Business & Economic Policy, 2(2), pp.104-123.

De George, E.T., Li, X. and Shivakumar, L., 2016. A review of the IFRS adoption literature. Review of Accounting Studies, 21(3), pp.898-1004.

Pascan, I.D., 2015. Measuring the effects of IFRS adoption on accounting quality: A review. Procedia Economics and Finance, 32, pp.580-587.