By: CPA Elkana Kimeli
Accounting profession convergence gained traction in the 1950s in the aftermath of the World War II, the period was associated with economic integration and cross border trade among nations. Initial efforts went into harmonization so as to reduce variations in the accounting principles used by various capital markets around the world based on the nation’s accounting standards.
The harmonization efforts were replaced by the concept of convergence where uniform high-quality standards capable of application to all global capital markets. Consequently, the International Accounting Standards Committee was established in 1973 and started issuing International Accounting Standards (IAS) in the same year. International Accounting Standards Board (IASB) established in 2001 was tasked with the development of more robust, highly acceptable International.
Financial Reporting Standards (IFRS) to replace the International Accounting Standards (IAS) which were associated with a lot of discretion. In most countries now, adoption of IFRS has been incorporated in the laws or have been made mandatory by capital market regulators. Since adoption, the benefits have been immense notwithstanding the challenges associated with adoption.
Adoption of IFRS has resulted to improved quality of accounting information during post adoption period. Through prescription of the minimum financial disclosures in financial reporting processes inhibits
management discretions. Specifically, the IFRS adoption results to lower incidences of managing earnings in
firms, timely recognition of losses, more timely information, higher transparency, easy to understand and relevant information to the financial users.
Information asymmetry is reduced through disclosure of timely and relevant financial information that is useful to the users. Recognizing the intra county variations in relation to accounting quality information and economic efficiency, accounting standards offers Due to the great variance in terms of the quality of accounting and the economic efficiency of different countries, international standards are expected to
offer a unique opportunity to evaluate the economic consequences of accounting reports.
The adoption of International Financial Reporting Standards (IFRS) helps the users to comprehend financial
reports in areas beyond their domain countries. Since 1980s there has been significant efforts to deregulate markets mostly driven by the International Monetary Fund’s structural adjustment programs that advocate for minimal government intervention in markets.
As a result of globalization and integration of financial markets, the harmonization efforts for accounting
standards becomes very critical. Consequently, harmonization results investors in making better informed
decisions relating to the internationally diverse portfolios through comparison of financial performance relating to the various firms drawn from the diverse nationalities.
Capital markets integration enhances access to financial markets overseas resulting in higher flow of foreign direct investments to several markets as a result, promoting the growth of capital markets globally. IFRS adoption eliminates the need to restate financials and to minimize accounting information presentation variations therefore promoting integration of financial markets and cross-border capital movement.
The capital markets liquidity has been found to be enhanced post adoption of the IFRS, they further found out that the cost of capital reduced with adoption of IFRS. The improved liquidity post IFRS adoption is attributed to the enhanced comparability of IFRS based financial statements in multiple jurisdictions.
Further, the costs to providers of capital to validate financial reports figures was significantly lower after adoption.
Adoption of IFRS improves comparability of accounting information, which enhances analysts’ ability to predict, higher quality financial information capable of better usability. Further, for countries whose GAAPs
are closer to IFRS, the foreign analysts are most likely to follow and generate more accurate firm forecasts in a given country. Market analysts have also been found to benefit from the adoption of IFRS since they are the most important users of financial statements;this is due to the improvements in relevance transparency and comparability of accounting information.
The comparability of financial reports is however only realized for countries having credible mechanisms of
implementing the standards. Adopting IFRS leads to improvements on the cross country comparability of information by making it look alike without having them being less different. Further, it has been observed that the international comparability of financial information is pegged on the firm’s institutional environment.
The comparability of financial reports is significantly higher where there are underlying firm incentives. Comparability of financial reports creates a level playing field for the players in capital markets through
the application of uniform standards of accounting across the globe. Consequently, comparability It has been argued that the ultimate goal of adopting IFRS and the efforts to harmonize accounting was to deliver
exceptionally high-quality information to capital markets and therefore helping improve the efficiency of the markets and as a result lowering the cost of capital to company’s and further enhance access to capital by firms.
Transparency of financial reporting by improved communication to the firm’s investors is greatly aided by adoption of IFRS. The adoption of IFRS results to increase in the information disclosed and comparability
of financial reports, therefore, lower cost of capital. Adopting IFRS enhances financial information disclosures and comparability of financial statements, therefore, lower cost of capital. However, such reduction in the cost of capital only occurred for markets or economies with strong legal enforcements mechanisms.
The adoption of IFRS globally in multiple jurisdictions has facilitated the adoption and application of major technology and accounting software’s to facilitate the workings of accountants and to aid in financial reporting. The fact that accounting standards are unified means that regardless of where an accounting
software has been developed, it is capable of global reporting if it meets the minimum financial reporting
requirements of the underlying standards, making it easier to automate financial reporting.
The capital markets liquidity has been found to be enhanced post adoption of the IFRS, they further found out that the cost of capital reduced with adoption of IFRS. The improved liquidity post IFRS adoption is attributed to the enhanced comparability of IFRS based financial statements in multiple jurisdictions. Further, the costs to providers of capital to validate financial reports figures was significantly lower after adoption.
In spite of the numerous benefits that are associate with IFRS adoption, the full realization of the benefits is dependent on a number of factors such as the firm’s management integrity in relation to both management of the businesses and the financial reporting. This has been evident from the many corporate scandals we continue to witness, case in point the Chase bank, Nakumatt and Mumias sugar are just a few notable local
examples despite the adoption of IFRS.
The fact that accounting standards are unified means that regardless of where an accounting
software has been developed, it is capable of global reporting if it meets the minimum financial reporting
requirements of the underlying standards, making it easier to automate financial reporting. The institutional factors such as the existing legal and investor protection mechanisms are significant determinants of the outcome or benefits of the adoption of IFRS.
A number of countries have legislated the adoption of IFRS making it mandatory to apply IFRS in financial
reporting. The laws and the market regulators provide the critical measure to check on the corporate managers to ensure good governance with financial disclosures at the core. The regulators and the legal systems further provide mechanism to discipline the errand players not adhering to the required financial reporting framework.
It is expected that nations having strong legal enforcement and investor protection mechanisms to report higher IFRS adoption benefits than nations having weak legal enforcement and investor protection mechanisms. Another key challenge of conversation to IFRS is the emphasis on the use of fair values as a primary base for measuring assets and liabilities. The use of fair values as opposed to the historical costs
approach creates increased volatility of both assets and the liabilities values to be reported by firms.
Going forward, countries especially the developing countries, where IFRS benefits are yet to be fully realized, should strive to strengthen their legal enforcement mechanisms such as the adherence to the rule of law, regulatory quality, corruption index and developing capacity through training and continuous capacity building for the country’s accountants to ensure that the full benefits of IFRS adoption are fully
realized.
The writer is a PFM consultant
elkanakimeli@gmail.com
