International Financial Reporting Standards: A moving goal post!

International Financial Reporting Standards: A moving goal post!

International Financial Reporting Standards (IFRS) have played an important role in connecting the global financial markets in the past decade. In the ever increasing globalised world that we live in, IFRS provide a common platform to understand financial transactions and performance across borders.

IFRS were made mandatory for the listed companies in the European Union in 2005. Since then these global standards have been adopted by more than 100 countries. Most G20 members now require the use of IFRS and the remaining major economies have established plans to migrate towards the use of IFRS.

The implementation of IFRS have provided high quality financial information and improved the comparability of financial statements across companies in different countries. It has also helped improve the efficiency of capital allocation decisions by reducing the information asymmetry between the parties involved in the transaction. Research has shown that the adoption of IFRS attracts more investments and is also associated with lower costs of equity.

The application of IFRS has got its own challenges however. The biggest challenge is that we do not have a complete set of standards to take from and adopt in our companies. In the past few years, we have seen updates to the existing standards, additional guidance on how to apply the principles in the standards and replacement of existing standards with new standards. It is still very much a work in progress as we expect to see updates to standards including revenue recognition, leasing, financial instruments and a detailed standard on insurance contracts. These updates and new standards will have a huge impact on how transactions are recognised in the financial statements which will ultimately have an effect on financial performance and position.

The most important changes we need to understand in the next year relate to IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IFRS 13 Fair Value Measurement. IFRS 9 Financial Instruments is a replacement of IAS 39 Financial Instruments: Recognition and Measurement. Though IFRS 9 is effective from 2015, it affects current decisions on how financial instruments should be classified and measured. IFRS 10 to IFRS 13 are effective from 1 January 2013 so companies should have plans in place now to recognise the impact of these forthcoming changes.

Who will all be impacted by these changes? It is not just accountants and auditors who prepare and review the financial statements. IFRS has a strong influence on the decisions that businesses make and hence it is important for controllers, internal auditors, heads of business, board of directors, chief financial officers and analysts to appreciate and understand that IFRS is a moving goal post affecting the way business is conducted.

Saket Modi, CA