The reporting of financial news is of great importance since it is one of the most significant factors considered when investing. International financial reporting standards(IFRS) are set by the international accounting and standards board (ISAB) stating how various types of transactions are reported by any organization. Financial statements that are required to be issued either annually or quarterly inform the current and future investors of the profitability of the company. It also permits the comparison of statements from different companies in the same industry.
Therefore, the standards used to write such statements should be reflective of future economic global trends.
International financial reporting standards(IFRS) have been adopted by most countries such as the European Union, Canada, New Zealand and Australia. IFRS are compulsory for all companies listed in the European Union and they have agreed to use one set of harmonized accounting standards. There is increasing acceptance of a single standard to be used in financial reporting because of its advantages. It allows investors to compare various companies in different countries on the same basis and it eliminates the complexities associated with interpreting different standards. It also creates a level playing field in the capital markets since countries that used lower standards now have to use improved ones. An individual can make an investment decision based on the past and future growth prospects of a company as reported in the financial statement. These statements are using common definitions as opposed to prior situations where each country had its own, hence there is a consensus on the meaning of the various economic terms used.
Other countries such as the US and Japan are in transition towards adopting IFRS. The US American institute of certified public accountants is educating accountants, auditors and other professionals on the use of these standards as it plans to abandon its old accounting standards and adopt the IFRS. They have set a time line of three to five years by which all public companies will be expected to be fully compliant with the international standards(Roberts,2007). Government bodies such as the US securities and exchange commission have supported the adoption of the standard. This is because it will greatly assist it in playing its role in the economy which is to regulate the stock market, sale of securities and prevent false financial reporting (Anonymous. PR Newswire. 2008).
However, some individuals argue that there will be challenges towards the adoption of a unified standard. For instance, there will be the need for the creation of a regulatory body to oversee the compliance to the set standards. There are different institutional environments in different countries all with differing goals and ways of achieving set objectives. It might be too costly for some companies to comply with and may even discourage some private companies from listing themselves. There may also be resistance to change from both the government and the companies which may hinder the realization of the benefits of a single standard (Hertz, 2007).
The convergence of the various reporting standards will greatly assist in reducing the complexities associated with understanding various statements from different companies. It will also assist companies become more competitive in the global market. It is also a change towards globalization which is occurring rapidly world wide. Cross boundary investment is also going to be a possibility for any investor (Fletchall, 2006). There are many advantages associated with the use of a single standard as opposed to the challenges to be faced. It will boost investor confidence, create a level playing ground for all and eliminate the complexities of understanding various financial statements. The ability to make comparison of the performance of various companies will allow one to make wise decisions and will be in trend with the globalization.
The future stock and equity markets for the countries that will have adopted one international accounting standard will be able to run smoothly since they will have eliminated most of the challenges, will be able to make comparisons with other companies in same industry and play on a level ground. This will enhance competitiveness in the global economy.
Anonymous. PR Newswire. AICPA Statement on SEC Road map for IFRS. New York: 2008. Web.
Fletchall, Randy. (2006). Chair’s Corner. 2008. Web.
Hertz, Robert. H.(2007). International accounting standards: Opportunities, challenges and global convergence issues. 2008. Web.
AICPA publishes IFRS.com website to inform members and financial professionals about international accounting standards. 2008. Web.