In: Accounting
QUESTION OPTION 2
Assume you are an advisor to the government of a developing country. You are asked to prepare a report which includes arguments for and against adopting IFRS. What key points would be included in your report? Please answer in your own words.
In the era of globalisation, IFRS (International Financial Reporting Standards) are expected to be uniform standard setting for quality financial information which is more transparent and reliable for all the stakeholders. However, the adoption of these standards is still in lots of controversies for developing countries.
Following are some major accounting issues of developing countries due to which they are not adopting the IFRS as a whole in preparation and presentation of financial statements:
1) Rectification of Breach in Loan Agreement: IAS 1 requires that in case of a loan liability, if any condition of the loan agreement which was classified as non-current is breached on the reporting date, such loan liability should be classified as current irrespective of any reason. Even where the breach is rectified after the balance sheet date, IAS requires loans to be classified as current liability.
Therefore, long-term loan agreement generally contains a large number of conditions in developing countries. Some of these conditions are substantive, such as, recalling the loan in case interest is not paid, and some of these conditions are always substantive and customer-banker relationships are developed whereby in case of any procedural breach, a loan is generally not recalled. Also, in many cases, a breach is rectified after balance sheet date and before the approval of financial statements. Hence, it would be appropriate that the users are informed about the true nature of liabilities being non-current liabilities and not a current liability in developing countries.
2) Treatment of Penalties: IFRS 15 provides that all types of penalties which may be levied in the performance of a contract should be considered in the nature of variable consideration. However, penalties should be accounted for as per the substance of the contract in developing countries like where the penalty is inherent in determination of transaction price, it shall form part of variable consideration, otherwise the same should not be considered for determining the consideration and the transaction price shall be considered as fixed. This is needed in developing countries because they still hold fast to the accounting standards as issued by their respective countries with little bit relaxation.
3) Operating Lease Rentals: IAS 17 requires all leases rentals to be charged to statement of profit and loss on straight-line basis in case of operating leases unless another systematic basis is more representative of the time pattern of the user’s benefit even if the payments to the lessor are not on that basis.
Companies enter into various kinds of lease agreements to get the right to use an asset of the lessor. Considering the inflationary situation of developing country, lease agreement contains periodic rent escalation. Accordingly, where there is periodic rent escalation in line with the expected inflation so as to compensate the lessor for expected inflationary cost increases, the rentals shall not be straight-lined.
Finally, this is the illustrative list of issues faced by developing countries due which they are not ready to adopt the IFRS and on the other hand, companies who are willing to adopt the same but the tax effect due to implementation of IFRS becomes the major obstacle of fully adoption of IFRS in developing countries.