Question

Identify and discuss at least three specific risks/challenges with adopting or adapting to IFRS.

Answer 1

(Q) Identify and discuss at least three specific risks/challenges with adopting or adapting to IFRS.

(Ans) Adoption of IFRS, in simple terms, means that the Country applying IFRS would be Implementing IFRS in the same manner as issued by the IASB and would be 100% compliant with the guidelines issued by IASB. However, Convergence with IFRS means that the Accounting Standard Board of the Country applying IFRS would work together with IASB to develop high quality compatible Accounting Standards over time. Thus, Countries converging with IFRS may deviate to a certain extent from the IFRS’s as issued by the IASB. There are several countries who have not yet adopted IFRS, including the United States. Because this system does not receive global acceptance, the accounting by foreign-based companies that conduct business in a nation which doesn’t use the International Financial Reporting Standards becomes more of a challenge. These firms must create a statement using one system, and then make another report using the Generally Accepted Accounting Principles that others use.

Major risks/challenges with IFRS adoption

1. Concerns with standards manipulation :- Organizations can choose to use only the methods that they wish to incorporate in their reporting, allowing their financial statements to show the results they desire. This structure makes it easier to incorporate profit or revenue manipulation into the findings, making it easier to hide financial problems that might exist. The International Financial Reporting Standards can even lead to fraudulent activities, like changing the method of inventory valuation to make more income come into the profit and loss statement to make it seem like the company is in a better position than it actually is.
2. Huge cost of implementation for small businesses :- Large businesses would absorb the cost of adopting the International Financial Reporting Standards thanks to their need to produce these reports outside of the U.S. already. Only small businesses which provide local goods and services would receive the brunt of this expense since they’d be forced to change as well. Since there are fewer resources available for SMEs, it would take them more time and effort to train their staff in this method. This process means that it would be the sole proprietors, single-person LLCs, and partnerships which would bear the brunt of this accounting change.
3. It would increase the amount of work load on accountants :- When you add in the additional training that many accountants would require to stay in compliance with the new rules, determining how continuing education programs would work is an issue that has little clarity at the moment. The implementation of a new system of global accounting standards would require a complete revision of the domestic accounting processes and strategies. Although the CFO of each organization would be responsible for this task under most circumstances, the implementation of the new rules would come from the accounting team. These departments are already busy trying to manage the rules and regulations that are in place currently, so they would be asked to continue with their daily work while creating the foundation for this system to receive implementation too.
4. It would still need global acceptance to be useful :- Since a majority of the businesses in the U.S. operate locally, the time and expense to implement this system would not make much sense. The greatest brunt of the disadvantages of the International Financial Reporting Standards would always be felt by the country’s smallest companies. If the United States decides to adopt IFRS, then there would still be other holdouts around the world that would choose to use their preferred domestic standard.