Question

What are the International Financial Reporting Standards (IFRS), and how do they differ from the Generally Accepted Accounting Principles (GAAP) in the US? What are some challenges adopting these standards here, and how are companies with a multinational focus impacted? Research this topic online.

Answer 1

The word IFRS stands for International Financial Reporting Standards. It is the set of uniform accounting standards which is used by the companies, accountants, auditors, investors, regulators & tax authorities etc of different nations for preparing books of the accounts or Annual Financial Statements.It is issued by the International Accounting Standards Board (IASB) with the objective of providing a common accounting language to increase transparency in the presentation of financial information.

  The largest difference between the US GAAP (Generally Accepted Accounting Principles) and IFRS(International Financial Reporting Standard) is principle-based while GAAP is rule-based. Rule-based frameworks are more rigid and allow less room for interpretation, while a principle-based framework allows for more flexibility.There are pros and cons to both approaches, depending on how they are used. For example, using a standard that fits within a “rule” but that clearly does not represent the principle behind the standard can be a downside of the GAAP. While conversely, taking an overly liberal interpretation of standards is a potential drawback to the IFRS.

The problem of differences in accounting standards will continue to exist for some time. From a regulatory perspective, convergence to IFRS would require amendments to the Companies Act and the Income Tax Act, to mention the major ones. Currently industries such as banking and insurance are also regulated by specific acts that prescribe accounting norms. Today, IFRS does not provide industry specific standards so there would be additional transition challenges as and when progress is made. IFRS requires valuations and future forecasts, which will involve use of estimates, assumptions and management’s judgments. The ICAI and the Ministry of Corporate Affairs have already made noteworthy progress in moving towards IFRS

Impact on Companies
Companies will benefit from simpler, streamlined standards, rules and practices that apply to all countries and are followed worldwide. The change will afford corporate management the opportunity to raise capital via lower interest rates while lowering risk and the cost of doing business.