The pros and cons of IFRS

Published:

We shall discuss the advantages of IFRS for investors first. The adoption of IFRS internationally provides investors a variety of potential superiorities, in both direct and indirect aspect of view.

1. IFRS is said to be more accurate, comprehensive and very on-time financial statement information, relative to the standards which were taking the place of the public financial reporting in most of the adopting nations including Continental Europe. Reaching the level that financial statement information is unknown from other sources, this should lead to better-informed valuation in the equity markets, and therefore lower risk to investors.

2. In the market, there are plenty of small investors who are less likely than professional investors to be able to antedate financial statement information from other sources. It is a very good chance for them to perform better compared to professionals with higher financial reporting quality. And also, it reduces the risk the small investors are trading with a professional with more information.

Lady using a tablet
Lady using a tablet

Professional

Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

3. By exterminating differences in accounting standards around the world, and standardizing reporting required formats, IFRS eradicate many of the changes or adjustments made by analysts in the past to make companies' financials and values more comparable internationally. Therefore, adoption of IFRS could decrease the cost of processing financial information for investors. The outstanding outcome would benefit the institutions that create large, standardized-format financial databases the most.

4. An additional advantage is that people can probably increase the efficiency while decreasing the cost of analyzing financial information since the stock market incorporates it in prices. And no matter small or professional investors are all likely to get benefit from increasing the efficiency.

5. Reducing the amount of international differences in accounting standards somehow help to distinct barriers to cross-border acquisitions and divestitures, which in theory will benefit investors with increased takeover premiums.

Generally, IFRS provides increased comparability and therefore decrease information costs and information risk to investors. Also, IFRS offer additional, indirect advantages to investors. Since higher information quality would definitely weaken both the risk to all investors from owning shares and the risk to less-informed investors according to adverse selection, theoretically, it should lead to a decrease in firms' cost of equity capital. This would raise the price of per share, and would make new investments more attractive, while other things remain the same.

People find more indirect advantages to investors of IFRS from promoting the level of use of financial statement information in contracting between firms and variety kinds of parts of the trade, especially lenders and managers (Watts, 1977; Watts and Zimmerman, 1986). Growing transparency makes managers to act more in the favor of shareholders. Former financial reporting standards have some very specific rules for variety kinds of economic events while the new IFRS just give the principles. For instance, the standards towards investment divide investment movements into short term and long term, and in long-term category there were credits and stocks investment due to the time period and form of the investment. IFRS just manage one part of the investment with guidelines of the long-term equity investment law and the other with the guidelines of the financial instrument law. Financial assets could be divided into assets measured at their fair value through profit or loss, investments held to maturity, loans and receivables, and financial assets available for sale. When one investing assets was put into different category, there are different laws and rules towards its initial measurement, subsequent measurement, and processing impairment, which will have different effects on the current and future periods on the balance sheet and income statement. More importantly, a true reflection of the capabilities and intentions of the asset should be held or reported by the enterprises. Indeed, to which category should the investment asset fall into, IFRS give the principle not as specific as the old standards; it requires a high degree of professional accounting personnel judgments. From the previous focus purely on historical cost and fair value to both expand the range of capitalization of borrowing costs, long-term equity investments using the cost method rather than more equity method accounting, the investment real estate inventory and fixed assets from separate, allowing development costs capitalized as intangible asset, employee shares shall be paid waiting period will be measure at fair value at the grant date. And share price reasonably allocate the costs, the goodwill of a business combination is tested for impairment annually rather than the gradual spread marketing. For these changes, it is to make the accounting information reflect the true value of enterprise assets, the true state of business, so that decision-making accounting information is useful. In addition, the new Article 13 of IFRS clearly defined that accounting information should be provided by the enterprises. Users of the financial reports need information about decision-making which would help them to understand the company's past, present or future evaluation of the situation and make predictions.In conclusion, there are a variety of direct and indirect ways in which IFRS deliver benefits to investors.

Lady using a tablet
Lady using a tablet

Comprehensive

Writing Services

Lady Using Tablet

Plagiarism-free
Always on Time

Marked to Standard

Order Now

Generally, the response from the market towards the adoption of IFRS seems good, therefore IFRS seems had reached the goal which its writer, companies and firms and all the investors were expecting. However, with further and more profound analysis, the situation becomes more delicate. Why would some quoted companies voluntarily choose to adopt IFRS while others waited until they were forced to apply? The research results indicates that, positive influence on the value of the company and negotiability started to appear to those companies and forms which choose to adopt IFRS at the very beginning. This is a very fundamental point since to these companies, transferring to IFRS makes them better off or they wouldn't do so. However, this reason could explain why the other companies choose to wait until IFRS were made compulsive to adopt them. It raised the question that if these companies could not earn more or benefit better, why would they change their balance of cost and profit suddenly and leave themselves no other choices? Of course, compared to the period before they adopted IFRS, there must be some advantages such as the increasing corelatability and the reduction of the risks between small investors and well-informed professionals. Actually, the unbalance spread of profit increased the necessity to analysis the motive of reporting. Practically, after a research towards the negotiability after adopting IFRS in different countries, we found that no everyone was better off or benefit from them. Only those countries with comparably more strict operating system or environment, more transparency in income benefit or get improvements in negotiability, values and capital costs. For those who could not operate strictly or have bad reporting motivation, adopting IFRS didn't make them any good.

Like other standards towards accounting or financial reporting, IFRS give companies and firms enough space to judge by themselves. From one aspect of view, it is a progress, since people make a lot of judgments in financial reports, managers should be allowed to deliver advanced information to their investors outside the company or keep them secret due to the competition. However, the right to make judgments is heavily based upon the motive of reporting which due to the country's law, different market forces, characteristics of the company's operation and the personal goal of the manger etc. In the end, although more advanced information were asked to reported in the report by IFRS, whether people can actually get them after the companies turn them in was uncertain.