Question

Navjot Foods Limited is a large multinational private company generating in excess of $7 billion in sales. It produces both frozen and non-frozen food products and makes one third of the frozen French fries produced worldwide. It has manufacturing operations on six continents, sales operations in over 160 countries, and employs more than 17,000 people Most private companies choose to use ASPE. However, some private companies like Navjot have adopted IFRS. Because the company is so large, it treats itself for reporting purposes like a public company

Instructions (a) Navjot has numerous subsidiaries located throughout the globe. How would this type of multinational structure motivate Navjot to choose IFRS?

(b) Why would users of Navjot's financial statements want those prepared using IFRS? Try to relate the usersneeds to the four qualitative characteristics of accounting information relevance, faithful representation comparability and understandability

(c) It is often assumed that only large private companies would choose to adopt IFRS and small companies would avoid IFRS. do you think that is? Can you think of reasons why a small private company would want to adopt IFRS?

Answer 1

International Financial Reporting Standard (IFRS) is a principle based system or standards which defines how a transaction should be reported.

a) Normally subsidiaries of Multinational companies prepare their financial reports according to relevent accounting standards prevailing their respective countries. It would require additional effort to make the financial report comparable and for any investment decisions. A large multinational with multiple subsidiaries in different countries are benefited many ways by adopting single standard globally. It brings transperancy by enhancing the international comparability and quality of financial information, enabling investors and other market participants to make informed economic decisions. It helps to identify opportunities and risks across the world and easily control and monitor subsidiaries across the globe.

b) Users of Navjot's financial statement prefer to have it prepared using IFRS because it eliminates confusion on reporting due to different standards adopted in different countries.As a source of globally comparable information, IFRS Standards are also of vital importance to regulators around the world. IFRS Standards contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus improving capital allocation.

Relevance -The information must be relevant to the needs of the users, which is the case when the information influences their economic decisions. Financial reporting using IFRS provide relevant information which influence the economic decisions of users.

Faithfulness - The information must be free of material error and bias, and not misleading. Financial report using IFRS provide information, faithfully represented transactions and other events, reflect the underlying substance of events, and prudently represent estimates and uncertainties through proper disclosure.

Comparability - IFRS is global uniform accounting standards that enables financial information comparable which is presented for other accounting periods, so that users can identify trends in the performance and financial position of the reporting entity.

Understandability - The information must be readily understandable to users of the financial statements. IFRS ensures that information must be clearly presented, with additional information supplied in the supporting footnotes as needed to assist in clarification.

c) No. That isn't. There are number of reasons for small companies to adopt IFRS . It improves quality of reporting.

Significant time and costs are saved due to simplified disclosures. The IFRS for SME's will provide businesses an opportunity to raise capital on a national or international basis.