The Pros And Cons Of International Financial Reporting Standards

With financial standards being somewhat confusing for certain companies to adapt to, it can prove problematic for these standards to become uniform. Ball (2006) claims that “The notion that uniform standards alone will produce uniform financial reporting seems naïve”. The reasons against the adoption of these standards, whether they are localised or globalised, are that some countries, or companies, may ‘symbolically comply’ to these standards, essentially complying to these standards on paper, whereas their practical standards do not change. Secondly, the implementation of these standards, again whether they are the International Financial Reporting Standards (IFRS) or Domestic Reporting Standards (DRS), would require a non-bias regulator

Accounting reporting standards typically come in two different forms; International Financial Reporting Standards (IFRS), a set of accounting standards created by the International Accounting Standards Board (IASB); and Domestic Accounting Standards (DAS), which are accounting standards set by a governing board within a country, and these then tend to become standards generally practiced across the countries in question, for example the US Generally Accepted Accounting Principles (GAAP) and the UK GAAP. These standards are then the idealised format at which to produce financial reports.

Currently, only few countries currently implement the IFRS, and have their own nationwide accounting practice (Approximately 120 countries currently require IFRS for domestic listed companies, and approximately 90 countries fully implement the IFRS ) (IFRS 2016).

The reasons as to why these entities have adopted the IFRS can be summarised into three broad reasons; the net economic value of the IFRS; the net political value of the IFRS; synchronisation value of the IFRS (Ramman and Sletten 2009). The net economic value of the IFRS can be described as

The first of these issues, the information problem, refers to the fact that it is difficult for the standards setters to identify and better their rules, as each rule can affect several different members of society. The way individuals act makes it difficult to anticipate an aggregate rule that will be satisfactory for all those involved. The second issue, the design problem, suggests that the three main requirements in the design of an entity (structure, people, and resources) necessitate compromises. This means it is difficult to achieve a procedure that is representative, impartial and consistent, under a single structure. It then goes on to state that it becomes difficult to find a representative to make sure these rules are regulated correctly under no influence, with non-bias. The gaming problem defines how the rules set are devised for specific influencers. It is based off of the fact that each standard affects each different economic