By CPA Dr. Zipporah Obonyo Nyachwaya
History and Purpose
The IFRS was designed as a common global language for business affairs to facilitate understandability and comparability of company’s financial accounts across international boundaries. The establishment of IFRS was as result of growing international shareholding and continuous integration of world economy and trade, increased interdependence of the international financial markets, absence of barriers of
capital flows across national boundaries, multiple listing by companies in capital markets within and outside their home jurisdiction, continuous demand by stakeholders for quality information
and greater disclosure.
The IFRS began as an attempt to harmonize accounting across the European Union, but the value of
harmonization quickly made the concept attractive around the world. The IFRS is particularly important
for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. IFRS stands for International Financial Reporting Standards and is set of guidelines that are adopted by organizations worldwide while preparing and presenting financial
statements.
IFRS was designed by the International Accounting Standards Board (IASB) and published in the 2003.
It superseded International Accounting Standards (IAS) that was in operation before. At present, it is adopted by 144 jurisdictions. However, noted that the U.S. government embrace GAAP on their
companies. IFRS is lengthy and flexible compared to GAAP since it is principlebased and its rules are open to multiple interpretations. Nevertheless, both IFRS and GAAP serve a universal purpose being uniformity and transparency in maintaining financial statements.
Objectives of IFRS
International Financial Reporting Standards represents an international financial reporting system and serves multiple purposes. Some of its significant goals in the financial world are as follows:
Create a Common Law
One of its key objectives is to ensure that common law is introduced and adopted by as many jurisdictions and countries as possible to bring everyone on the same page. It ensures that everyone follows the same guidelines and adopts a universal way of reporting business activities.
Aid analysis
It helps stakeholders in analyzing a company’s performance and interpreting its financial position. It aids in categorizing and reporting financial data with accuracy and consistency. Further it promotes better understanding and easier decision-making by stakeholders.
Assist in preparation of reliable financial records
By following International Financial Reporting Standards, the data presented in the books of accounts are likely to be accurate, reliable, uniform, and appropriate within the bounds of its rules. The high quality of financial records assists investors in making informed economic decisions.
Ensure comparability, transparency, and flexibility in reporting
The consistency in reporting accounting practices enables easy comparison of the financial records of compliant companies across nations. Such comparisons allow investors to identify risks and opportunities before investing. As a result, it promotes foreign trade and investment. Since it is principle-based, the rules are not very rigid and allow companies to adapt them in their own way.
Importance of IFRS
It is treated as an international accounting standard and holds great importance for many countries and the world economy.
Below are major significances:
Transparency
It encourages transparency and accountability of financial statements prepared by companies, small firms,
and government agencies. As a result, it minimizes the margin of error and manipulation of any holdings and irregularities of funds, transactions, and balances. Besides, it also motivates consistency and clarity of work.
Uniformity and Comprehensive
The Reporting Standards were developed to ensure uniformity in the presentation and understandability of statements. It becomes easy for companies and agencies to follow a common law that
helps world economies compare their growth comprehensively.
Security and Flow
It helps track the flow of transactions, records funds information, and works towards attaining a security level for direct and indirect foreign investments across nations. This accounting standard is essential when dealing with significant assets or getting into heavy transactions.
Accountability
It strengthens accountability by bridging the gap of incompetent financial reporting. If not complied with it, the companies may face penalties.
Generally Accepted Accounting Principles (GAAP)
The purpose of GAAP was to ensure that financial reporting is transparent and consistent from one public organization to another, and from one accounting period to another. It emerged in the 1970s and was guided by the following major rules and standards:
Accrual accounting methods. It involves the recognition of revenue at the point when a service is
rendered or good is sold but not when payment is received.
Direct expenses for goods sold are recorded when a sale is transacted and indirect expenses are recorded when expenses are paid.
Depreciation and capital expenditures. Costs of major asset acquired by the company are accounted for over the entire life of the asset.
Reporting of historical costs. Organizations to report the value of asset using purchase price rather than the current market value
Reporting of bad debts. Companies to disclose the possibility of significant debts not fully or entirely
paid thus becomes lost income.
Principles of GAAP
- Regularity. GAAP to be adopted as standard practice by organizations business and more specifically accounting staff.
- Consistency. Accounting staff apply the same standards through each step of the reporting process and from one reporting cycle to the next thus easy comparison of statement across different period.
- Sincerity. Accounting staff provide objective and accurate information in regards to entities transactions.
- Permanence. Accounting staff use consistent procedures in financial reporting, enabling business finances to be compared from report to report.
- Prudence. Financial data should be based on documented facts and is not influenced by other factors.
- Continuity. At any given point financial data collection and asset valuations process should
not disrupt normal business operations. - Materiality. Accountants must disclose all material financial and accounting facts in financial reports.
- Good Faith. At any given time, honesty and completeness in financial data collection and
reporting should be maintained
Difference between GAAP and IFRS In the world of accounting, there are two different standards of financial reporting. International Financial Reporting Standards (IFRS) and Generally Accepted Accounting
Principles (GAAP). IFRS is the most widely used system currently in the world, with over 110 countries using this method of accounting for publicly traded companies.
The United States of America is the only country that is yet to make the switch to this method of
reporting.
Below are basic differences between IFRS and GAAP accounting:
- IFRS is a globally adopted method for accounting, while GAAP is exclusively used within the United States.
- IFRS is principle-based which allows for different interpretation of the same transactions, where rulebased GAAP follows a set of rules in preparing financial statements thus
no room for error. - Extraordinary or unusual items are included in the income statement and not segregated under IFRS. While, under GAAP, they are separated and shown below the net income portion of the income statement.
- GAAP adopts cost model to value fixed asset while IFRS embraces revaluation model.
- IFRS allows capitalization of development costs as long as certain criteria are met whereas GAAP does not allow.
A major similarity between GAAP and IFRS is that both standards use an income statement, a balance sheet, and a statement of cash flows when dealing with cash and cash equivalents. Another major similarity is that both GAAP and IFRS prepare financial statements on an accrued basis; meaning revenue
is recognized when it is realized or realizable.
Effect of adoption of IFRS on the quality of preparing and reporting of financial statement
IFRS accounting standards bring transparency by enhancing the international comparability and
quality of financial information, enabling investors and other market participants to make informed
economic decisions.
The statements prepared by IFRS constitutes a strong incentive to encourage investment and increase investors’ confidence. This translates to increased market liquidity in countries that have adopted IFRS, leading to higher quality financial statements.
Application of IFRS improves the level of clarity and transparency in accounting procedures thus
attraction of more investors
Implementation of IFRS results into consistency between financial reports prepared by different
entities therefore reducing the cost of interpreting financial statement by investors and other users.
The Challenges of adopting IFRS by reporting Entities
The major challenges of the adoption of IFRS
The complexity of IFRS principles
Lack of adequate training and IFRS guidance- lack of education on IFRS often leading to issues
with ‘copying’ the actions of other reporting entities.
Lack of availability of competent specialist and problems caused by lack of management support
High level of training cost requirements and less familiarity with the IT
Lack of proper instructions from regulatory bodies and problem of proper plan of financial institutions
to implement IFRS
There is lack of training facilities and study courses on IFRS
Recommendations
The regulators to carry out training programmers, and awareness drives to adopt IFRS smoothly.
To raise awareness of professionals, regulators and preparers to improve the knowledge gap among the
reporting entities.
The entities to ensure availability of adequate resources to support the sustainable implementation of IFRS.
Stakeholders to be involved in the process of implementation and adoption of the IFRS standards and
a cost- benefit analysis should be carried out at initial stage.
The writer is a member of ICPAK Research & Development Committee
South Rift Branch- Youth Representative
