IFRS: Rules for Financial Reporting & Accounting Transparency - Essay Sample

Introduction

The International Financial Reporting Standards (IFRS) set rules to ensure that the books of accounts prepared by organizations are consistent. They should be comparable and transparent, and this move makes sure that the users of these financial statements can rely on them to make decisions. The International Accounting Standards Board (IASB) is the body behind the issuance of the IFRS, and it dictates the way that organizations maintain and report their accounting records, the events that are having a financial impact on a business, and the definition of the transaction types.

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Financial Records

The IFRS was introduced to ensure that there is a common language that all companies around the world can use to prepare their financial records. Therefore, it becomes easier to follow the performance of a company, considering that all that is required is knowing the preparation of these books of account. Every financial year, the IFRS requirements tend to change with a new interpretation, standards, and amendments being made, and they tend to affect the future reporting process of companies.

One of the changes that have happened within the 12 months includes the changes made to the International Accounting Standard 8 (IAS 8) on the accounting estimates, policies, and errors (Stadler & Nobes, 2020). The accounting standard is applied when making corrections of errors and the application of the accounting policies. Organizations that are relying on it are offered guidance on the way to develop accounting policies, and any noted errors are retrospectively applied (Stadler & Nobes, 2020). Any changes that are made on the accounting estimates are determined based on a prospective basis. The amendment of these policies was expected to start on or after January 1, 2020.

Policy on Leases

IFRS 16-leases cover the policy on leases, and it involves a determination on the way to recognize and measure leases in a company. It relies on a single lessee accounting model, ensuring that all assets and liabilities are recognized in the determination of a lease. The recognition may only fail to happen if the lease term has a duration of less than one year, or the value of the assets under consideration is low. However, it is critical to note that lessor accounting does not change from the IAS 17, and the finance and operating lease distinction is retained.

The amendment was to become applicable starting January 1, 2019. The amendments that are needed in line with the COVID-19 are effective for reporting in the duration starting June 1, 2020. It is essential to note that the new accounting standard is eliminating the accounting for lessees that is off-balance sheet, and there is a redefinition of the various financial ratios such as the Earnings before interest, taxes, depreciation, and amortization (EBITDA) and gearing ratio. The comparability is likely to be raised, and other elements that are likely to be affected include the credit ratings, cost of borrowing, and covenants (Harms, 2020).

The new standard is also likely to affect the lessor’s offerings and business model due to the changes in the lessees’ behavior and needs. The leasing market developments are likely to accelerate, for there is a possibility of more focus being placed on the services and not the physical assets. The lessees are likely to demand more data on their leases than before due to the on-balance sheet for all the leases. A cross-functional approach will be needed by companies in the accounting and implementation process.

Current Issues with FASB

The Financial Accounting Standards Board (FASB) is a non-government organization that is involved in the process of setting standards and the desire to improve the Generally Accepted Accounting Principles. Some of the recent changes include the 2020-05-Revenue from Contracts with Customers, which was issued in June 2020, and the amendments can only be made upon issuance. The Update No. 2015-14 mainly covered the public entities, not-for-profit businesses, and employee benefit plans, and all these entities are required to apply the policies in this standard.

The private entities are at the moment preparing their first books of accounts under the policies highlighted in this standard. However, the franchise industry stakeholders are against the adoption of these standards due to the revenue application that is directed towards the franchise arrangements. Their main concern is on the initial franchise fee, for it is not clear the amount that will be recognized as revenue at the franchise location opening and the differed amount for accounting purposes. The proposed update should be amended, and the Board has stated that there is a need to implement a deferral of the effective date for the private entities. The 2020-04-Reference Rate Reform is another change that was implemented by FASB, and it was issued in March 2020, and amendments were expected to happen from March 2020.

The FASB has worked on two Accounting Standards Updates (ASUs) that are helping the improving the financial reporting procedure on matters regarding contracts and the convertible instruments. The other ASUs standard is used by the not-for-profit organizations in facilitating the disclosure of the non-financial assets/gifts-in-kind. The process of accounting for the convertible assets is expected to be simplified, and this is through the removal of major separation models with a significant number of these assets getting recognized as equity or single liability and this will leads to equity contracts getting to qualify under the case of the derivative scope exception (Nobes & Stadler, 2020). In July 2019, FASB also proposed the need to simplify the process of accounting for equity contracts. The ASUs that would be undertaken in the coming days will focus on the equity guidance and liabilities that the various stakeholders have identified that they are complex.

Current Issues with SEC

The U.S. Securities and Exchange Commission (SEC) is a body that is involved in the process of protecting investors in the market by ensuring that there is fairness and enables them to get adequate information to facilitate the investment process. The existence of the investment professional helps players to make the right decisions. In the last 12 months, there have been various changes to the SEC operations that include adding the Consolidated Audit Trail (“CAT”) to the section of the minor rules violations. The change is aimed to realize the FINRA Rule 9217 amendments and the IM-9216 have highlighted the regulations upon which a member may be subjected to a fine when following the guidelines highlighted in the Rule 9216(b). A fine not exceeding $2,500 is charged on any entity that does not follow the required guidelines.

The organization has also highlighted changes in the reporting threshold that should be adopted by the institutional investment managers. Updates are to be made to Form 13F, leading to a rise in the reporting threshold to $3.5 billion from $100 million, and this is aimed at ensuring that it is reflecting the changes in the equity market of the United States. The changes will also ensure that there is an increase in the amount of information offered by the institutional investment managers when they are seeking to eliminate the commission threshold.

FASB issued a ruling on the matters regarding revenue recognition. The amount of earnings made by a company is one of the measures that is used by potential investors in the market in determining whether they will invest in a company. However, it was noted that the revenue recognition guidance that was being utilized previously seemed to differ in the case of GAAP and IFRS, and this meant that they needed improvements. Therefore, the International Accounting Standards Board (IASB) and FASB managed to offer converged guidance on matters relating to the revenue recognition in customer contracts.

Conclusion

In conclusion, the financial accounting bodies have played a critical role in ensuring that the sector policies are up to date. The FASB, IFRS, and SEC have been integral in the provision of the information and regulations that the various players that are interested in the affairs that are happening in different companies are getting. They have initiated rules that are to be followed when undertaking various measures, such as when dealing with leases and what needs to be done when correcting errors on a company’s recordings. The FASB is supposed to set standards that companies are supposed to adhere and follow to the letter. The accounting estimates made by a company are supposed to be followed in line with the highlighted policies. The preparation of financial statements should be based on the accounting principles highlighted by these bodies.

Therefore, the various players in this sector including the companies, their accountants, and auditors should be aware of all these changes to ensure that they are preparing the books of accounts in accordance with the latest regulations. Failure to implement the highlighted changes will amount to a crime and the information presented is likely to mislead the users of these books of account. The potential investors, shareholders, lenders, creditors, and the government will be making the wrong decision if they rely on books of accounts that are not following the latest policies and principles highlighted by FASB, SEC, and IFRS.

References

Harms, C. (2020). FASB Lease Accounting Standard Update 2016-02: An Exploration of Similarities and Differences to IFRS 16 (Doctoral dissertation).

Nobes, C. W., & Stadler, C. (2020). Towards a Solution to the International Variety in the Accounting Practices of Extractive Firms Under IFRS. Available at SSRN 3624733.
http://dx.doi.org/10.2139/ssrn.3624733

Stadler, C., & Nobes, C. W. (2020). Varied Practice in Accounting for Extractive Activities under IFRS. Available at SSRN 3627080.
http://dx.doi.org/10.2139/ssrn.3627080