Question

1) Give reasons why IFRS might not be the best approach for domestic use by reporting entities in all countries.

Answer 1

There are some issues in Adopting IFRS Because of which it might not be best approach for Domestic use by Reporting entities in all countries.

Issues Are Explained below :

1. High Cost & Complexity

Most noteworthy disadvantage of IFRS relate to the costs related to the application by multinational companies which comprise of changing the internal systems to make it compatible with the new reporting standards, training costs and etc. and the level of complexity of IFRS may not be absorbed by SMEs.

Small companies would not have sufficient resources to implement the changes that come with it, not to mention that they would need to train staff or hire accountants or consultants for assistance.

The total cost of transition costs for the US companies will be over $8 billion and one off transition costs for small and medium sized companies will be in average $420,000, which is quite a huge amount of money to absorb by companies.

1. consistency Issue

And even though the companies and countries are incurring huge transitional costs, the benefits of IFRS can not be seen until later point due to the fact that it takes some years for the harmonization and to have sufficient years of financial statements to be prepared under IFRS to improve consistency.

1. Monopolist in terms of setting the standards

Another major disadvantage of converting to IFRS makes the IASB the monopolist in terms of setting the standards. And this will be strengthened if IFRS is adopted by the US companies. And if there is competition, such IFRS vs. GAAP, there is more chance of having reliable and useful information that will be produced during the course of competition.

1. Fair Value Measurement

They key problem in conversion to IFRS that has stressed with high importance is the use of fair value as the primary basis of asset and liability measurements. And the interviewers think that this principle will bring increased volatility as the assets are reported.

1. Prone to manipulate

As businesses can only use the methods that they wish, this would lead to financial statements show only desired results, which can lead to profit manipulation.

While this new set of standards requires changes to how the rules should be applied to be justifiable, it is often possible for businesses to come up with reasons for making such changes. This means that stricter rules should be implemented to ensure all companies will value their statements in a similar fashion.

1. Not Adopted by all contries

The issue of regulating IFRS in all countries, as it will not be possible due to various reasons beyond IASB or IASC control as they can not enforce the application of IFRS by all countries of the world.

Only over 7000 listed companied adopted IFRS from 2005, there were still more than 7000,000 SMEs in EU, which preferred their national version of reporting standards. This contradicts the aim of the EU and partly of IFRS in implementing single international reporting standards.

The US has not yet adopted the IFRS, so as other countries that choose to continue holding out as well. This means that accounting by foreign companies operating in these countries are facing difficulties because they have to prepare financial statements using such a set of standards and another set of principles that is generally accepted in these countries.

If the adoption of IFRS needed or required by small and medium sized businesses, it will be a big disadvantage for SMEs as they will be hit by the large transition costs And moreover, one of the aims of European Union from applying and standardizing the reporting standards was to increase the international comparability of financial statements.