The importance of IFRS and its adoption in Pakistan

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The beginning of International Financial Reporting Standards (hereafter IFRS) is strongly related to the whole subject of globalization. The United Nations Educational, Scientific and Cultural Organization (UNESCO) (2011) has defined globalization as a position of economic, societal, technical, supporting and artistic constitutions and course of actions occurring from the varying nature of the invention, utilization and buy and sell goods and resources that may cooperate the base of the international supporting market.

Anna Lindh (2011), a Swedish politician, was once quoted stated that globalization has made us more susceptible. It generates a world without borders, and make us glaringly conscious of the restrictions of our current gadgets, and of politics, to meet its challenges.

Globalization leads towards change. As the world keeps changing, so the way that things are done needs to keep changing as well. Every change brings about a form of discomfort, but it opens doors to endless opportunities which can be exploited, for long term benefits. These sentiments are echoed by Camacho (2011) of the United States of America when he said that globalization is an idea whose time has come. Our world is increasingly becoming a unified world and the only thing we can do is to take advantage of the many opportunities that will come from it while overcoming the challenges that will also come from globalization.

The focus of this research paper is mainly on a single aspect of economic globalization namely, International Financial Reporting. Multinational organizations and financial integration, through trade and finance, at the international level constitute the dynamics of globalization of the economy (Turker & Yarbasi: n.d.). Accounting and financial reporting are the vessels that will result in the delivery of relevant and reliable information that will aid a healthy global economy.

Cross border investors require harmonized accounting and financial reporting practices in order to make decisions based on worldwide standards (Erhan & Beker: n.d.). Having a single set of global accounting, reporting and disclosure standards would possibly meet this requirement (Erhan & Beker: n.d.). Many countries have taken to this phenomenon of global accounting standards and this is evidenced by the 123 out of 196 (63%) countries in the world that have already adopted International Financial Reporting Standards. The Institute of Internal Auditors is also quoted stated that It’s not surprising that standardization of various aspects of business would be considered desirable by many. Certainly, that is the case in regard to financial reporting as is evidenced by the momentum of International Financial Reporting Standards (IFRS) all around the world. Listed companies in more than 100 countries are now adopting IFRS” (Harris: 2009).

In the past few years, many developed and developing countries have adopted International Financial Reporting Standards (IFRSs) as their basis for financial reporting .The European Union (EU) took the lead when she mandated all listed companies in the European Union to start the adoption and implementation of the IFRS in their financial reporting since 2005. In fact the year 2005 to 2009 was regarded by the IASB to provide a stable platform for EU companies that started implementation in 2005. Presently, over 120 countries are reported to have adopted or converged with IFRS1. IFRSs is a set of accounting principles that is rapidly gaining acceptance on a worldwide basis. They are published by the International Accounting Standards Board (IASB) situated in London. IFRS is more focused on the objectives and principle based. They claim to be a set of policies that ideally would be relevant uniformly to financial reporting by public companies worldwide. The adoption of IFRS as subjects by the International Accounting Standards Board (IASB) is expected to result in the application of a common set of financial reporting standards within and between countries in Europe and many other countries that require or permit application of IFRS. However, comparability is unlikely to arise from IFRS adoption (Ball, Robin &Wu, 2000, Christensen, Lee & Walker 2008, Sunders, 2010). Specifically, Ball (1995, p29) concludes that internationalization will reduce some or much of the diversity in accounting rules and practices across nations, it will not eliminate it. Nor should it”. Ball (2006) expresses concern that the application of IFRS will not be uniform and that this will affect the reporting and the perception of IFRS quality by users.

Financial statements separately from stating the financial position of an association, gives other information such as the value added, changes in equity, if any, and cash flows of the venture within a definite time period to which its associate (Iyoha and Faboyede, 2011). This information is helpful to a broad group of users taking well-versed economic decision. The worth of financial reporting is necessary to the requirement of users who need them for investment and other decision making principles. Financial reports can only observe as helpful if it symbolize the “economic substance” of a business in terms of relevance, consistency, comparability and backups interpretation straightforwardness (Penman, 1984). Ahmed (2003), declared that valuable accounting information resulting from qualitative financial reports help in the proficient allocation of resources by tumbling the distribution of information irregularity and humanizing pricing of securities (Spice land et al., 2001). To set up and audit financial statements, some accounting conference and principles recognized as standards have been put in place by significant bodies set up for the reason to support consistency and trustworthiness (Stainbank and Peeles, 2006). The accomplishment of IFRS would reduce information abnormality and build up the communication link between all stakeholders (Bushman and Smith, 2001). It also reduces the cost of preparing a different description of financial statements where an entity is a multi-national (Healy and Palepu, 2001). Accounting standards make sure that significant issues concerning the preparation and presentation of financial statements are not left to urge of the preparers. Earlier than IFRS adoption era, most countries had their own standards with local bodies accountable for emergent and issuance

Current progress in information and financial technology have paid attention to the ideas of global commerce strategy and agreement. How well the outside world recognizes the company performance of a scrupulous country could find out the distinction between a victorious and a unsuccessful result—particularly if the country is an talented economy like Pakistan. An essential part of this awareness is to decide how a country’s business entities determine, review, and final report their economic transactions to their stakeholders.

Pakistan has been adopting International Accounting Standards (IASs), without modification since 1970s, when the International Accounting Standard Committee (IASC) started issuing International Accounting Standards (IASs). Recently, International Financial Reporting Standards (IFRSs)are the part of the ICAP syllabus. Pakistani Accountants are well versed with IFRSs. Pakistan exports IFRS experts throughout the world. Pakistani qualified Accountants being recruited by big 4 in the US, UK and other regions / getting the same salary as UK qualified CAs.

International financial institutions have been involved in the economic growth of Pakistan and have vested benefit in identifying how their funds (advance, grants, etc.) are billed to advantage Pakistan’s economy. Pakistan suggests a hopeful investing opportunity for overseas stakeholder who desire to expand their threats by investing in the market of other countries. IFRS (International Financial Reporting Standard) gives supportive standards for the developing countries that can amplify the economic revenues by presenting the true and fair position of the economy.

Financial Reporting is one of the key ingredients whilst considering corporate level concerns of business and company law. It is important to consider financial reporting laws and requirements for ensuring investor protection. Quality financial information is critical for good financial decision-making. The data quality issues are also resolvable through proper and mandatory reporting formats. Each country has its own specific reporting requirements to be fulfilled by corporate bodies registered or listed in the respective stock market. However, hyper globalization is affecting these differences in accounting and reporting along with hallmarks and rules. Relentless efforts have been made to harmonize these requirements globally due to the rapid trend of cross-border investment and business opportunities. The harmonized accounting and financial reporting provisions will lead to financial information with understandability, reliability, and (most importantly) comparability.

This research study elaborates the importance of IFRS (International Financial Reporting Standard) and its adoption in Pakistan and contributes to the literature on the determinants of adopting International Financial Reporting standards (IFRS) faced by Pakistan because Pakistan provides a unique research setting. This paper also contains the precise discussion of IFRS (International Financial Reporting Standard) and detailed discussion of IFRS (International Financial Reporting Standard) adoption in Pakistan. There are numerous advantages of IFRS (International Financial Reporting Standard) including comparative analysis of, true and fair statements, appropriate allocation of resources, investor’s confidence, etc. At the end of the study, the researcher states the obstacles in the adoption of IFRS (International Financial Reporting Standard) in Pakistan. Pakistan is an Islamic Republic situated in a constituency that has great economic latent. Pakistan has been following International Accounting Standards (IAS) since 1985. (Meek and Thomas (2004)), note that Islamic states have been generally left out of the accounting expansion research and, this paper contributes to satisfying this space.