In this age of change, IFRS (International Financial Reporting Standard) have adopted in many countries. Compared by IAS (International Accounting Standards), IFRS have more advantages and developments. What is more, IFRS have extensively adopted in the European Union's (EU) which is more significant of investors and standard setters. Nevertheless, because of IFRS development, some problems have arisen such as it might alter the enterprises financial reporting structure and have influence of the whole accounting quality. Refer to these problem, financial analysts have to take some measurements to solve them.
Basic information of International Financial Reporting Standards
2.1 Introduce of IFRS
International Financial Reporting Standards (IFRS) have developed from IAS (International Accounting Standards) which regards as the essential principle of standards. Since IFRS adopted in Europe in 2005, most of European enterprises have put on practice as the main accounting standard (Armstrong et al,2010). In addition, IFRS have adopted by more than 117 countries and the number will ascend to 150 by next year which can attract more new alien investors and cooperative companies. Because of that, it is simple for buyers and potential investors to comprehend the financial reporting and make decision of the operation to international partners. (Salvatore, 2010) Actually, IFRS have some approaches in practice which rely on the process. The differences of recognized, reported and measured have decided which approach to use.(Epstein and Jermakowicz, 2008)
Development of IFRS
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IFRS has developed from IAS (International Accounting Standard). Actually, IAS was used by IASC (International Accounting Standards Committee) from 1973 to 2001. After 2001, the new IASB (International Accounting Standards Board) has replaced by IASC and then it has developed to IFRS which is used until now. Specifically, IASB emphasize on enhance the harmonization of global accounting and the efficiency of standard. By contrast, IFRS focus on the fair value of asset and liabilities. (Alexander and Jermakowicz,2006; Hung and Subramanyam,2007; Schipper, 2005; Whittington, 2005)
2.2.1 IFRS in European Union
When IFRS widely used in the Europe, it shows that IFRS has adopt the world structure of financial accounting. Because of that, no matter present or potential investors and standard planner, who accept IFRS get with the accounting variable. For instance, the application of IFRS in 2005 and 2006 reflect the success used in Europe. Besides, the application of IFRS may change the enterprises reporting structure and then affect the whole quality of accounting. (Paananen and Lin, 2009)
When IFRS perform in EU, over 7000 enterprises have faced the challenge to auditors and standard setters. Besides, it is common to lose market confidence through the transition process. In fact, managers always assert that IFRS can advance the financial reporting quality and raise transparency of accounting disclosure. (Accountancy,2007)
The council of EU think a new regulation conform the audit and accounts which include both annual accounts and consolidated accounts. In addition, the new regulation also has to adopt the international auditing standard and get accord of the oversight system. More specifically, EU have established EGAOB (European Group of Auditor's Oversight Bodies) to harmonize auditor oversight and supervise the accounting behavior. At the end of 2005, regulators include bank, insurance and security all pass through a propose of overlapping enforcement problem which refer to financial reporting. (Alfredson et al, 2007)
2.2.2 The change between IAS and IFRS
There are some differences between IAS and IFRS. Consider to the changes, the main influence is on financial reporting from IAS period to IFRS mandatory period. Consequently, this influence directly affects the equity and earning book value from the IAS period to IFRS mandatory period. To be more precise, the changes are interrelated to IAS 36, IAS 38 and IFRS 3 which refer to impairment of assets, intangible assets and business combinations. (Paananen and Lin, 2009)
IFRS is more considered the fair value during the transactions and the historical cost. Because of that, the fair value is less objective than the historical cost, so the current value is related of economics decision making. As regard of the development, there are some new changes of recent IFRS. For example, assets should be disclosed at fair value, IFRS should enhance the reporting of financial statement which focus on adjudications and assumptions. (Alfredson et al ,2007)
Current Framework of IFRS
As the based principle, the framework directs IASB and IFRIC (International Financial Reporting Interpretations Committee) to formulate and establish IFRS and relevant interpretations. In addition, the framework is a general principle which covers the basic items but not detail. (Alfredson et al ,2007)
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The main elements of financial statement are assets, liabilities, revenue and equity. To be more precise, the coverage of IFRS include the standard of shareholder's equity, revenue, contingent liabilities and contingent assets, financial instruments, share-based payment, income taxes, inventories, property, plant and equipment, intangible assets, business combinations, impairment of assets and leases. (Alfredson et al ,2007)
Under the IFRS framework, different countries have different focus areas. Take Anglo for example, this country has nine focus areas which are necessary for accounting making decisions. More specifically, the nine keys are business combinations, disposal groups, goodwill, currency translation differences, share based payments, post-retirement benefits, joint venture entities, evaluation of mineral resources and exploration. In the modern country, IFRS 6 is considered as a complete view of accounting and an interim standard. After that, Anglo has adopted IAS 32 and IAS 39 since January of 2006. (Kirsty, 2005)
2.4 Requirements of IFRS
IFRS contains a financial position statement, an income statement, statement of cash flow and some notes. In addition, the equity no matter profit or loss which is need of IFRS should recognize by the payment transactions both the employee transaction and other transactions in cash and assets. (Accountancy, 2004)
There are some keys requirements of IFRS. At first, it is necessary to recognize goods and service when they are obtained. More specifically, the goods and service have to be confirmed as expenses rather than assets. Secondly, fair value is a kind of basic factor in payment transaction. Thirdly, except goods and service, fair value of some other business can be evaluated trusty. Besides, the fair value does not include vesting condition which is recognized in measurement transaction. Because of that, the number of equity decides the transaction amount and the vesting condition take place of arranging the amount of equity. Lastly, other equities can be repurchased or replaced by the former one if the term or policy changed. For instance, no matter what the change or cancellation is, IFRS require recognize equities as well. (Kimberley, 2004)
As the based principle, IFRS get a great evaluation from participants. Although most of auditors and management approve the set of IFRS, some specific standards still have controversial problems such as IFRS 3 which refer to associated costs which meet the need of participants who want to estimate intangibles which did not reflect accounting but underlying economics. (Nigel, 2007)
3. Critical discuss of International Financial Reporting Standards
3.1 Arguments of IFRS
As above mentioned, there are many differences between IFRS and the former standards. Take EU for example, some supports and theories arisen latter in the period (Perera, 1989; Doupnik and Salter, 1993). In addition, arguments between companies and standards become more and more intense especially US have put together with UK (Cairns, 1997; Nobes, 1998; Feige,1997; Nobes and Mueller, 1997; Alexander and Archer, 2000; Nobes, 2003; d'Arcy,2001; Nobes,2004).More specifically, different companies use different versions of IFRS. Besides, owing to the different translation of IFRS, the practice is different for some issues. In some specific area, if IFRS translated to different European languages, the real meaning may be misunderstand. (Nobes, 2006)
3.2 The advantage of IFRS
Although there are many arguments of IFRS, the impact of this new rules also have some fundamentally influences. In contemporary society, IFRS has used by over 100 countries. Even more, some countries such as Canada, China, Russia and so on will be adopted in the next two years. (Gray et al, 2009) By GAAP, it is easy to settle net income and equity, but only the two items. On the other hand, except restating profit, IFRS can influence contracts and executive payment. ( Business today, 2008)
First of all, the economy is gradually become more and more global and every country is a member of the global committee. Besides, investors of many European companies prefer to IFRS because they think IFRS stand for higher quality financial information. In addition, they assert that the procedure which use common standard can gain profit. More precisely, they can decrease the cost and increase the global competition of European companies which is lead to liquidity to them. (Armstrong et al, 2010) For instance, compared by non-U.S domestic standard, IFRS have higher characteristic accounting amount and lower the risk (Barth, 2008). Furthermore, IFRS have positive influence of cash flow which comprises the cut-price contracting costs (Beatty et al,1996) or managerial rent extraction which rises transparency of financial reporting (Hope et al. 2006).
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It is obvious that IFRS point to investors respond definitely which is accord to advancing the quality of financial reporting and decreasing figures asymmetry. What is more, indication of investigation associates to anticipation of convergence benefits.(Armstrong et al, 2010) Moreover, IFRS is more concise than IASB in some aspects. For example, proportional consolidation of cooperation entities, the criteria of borrowing costs capitalization and the criteria of development costs are three options of the differences. (McQuaid, 2009)
3.3 The disadvantage of IFRS
A client has invest investigate six major companies in UK and got the conclusion of the impact of new IFRS. The mainly negative impact is brought by pension and deficits the deferred tax. (Andrew, 2005) In addition, a investigate showed that three quarters of 500 respondents consider IFRS should be combined with the school's course and seven of ten professors asset the work will be finished step by step. When a company has adopted IFRS, it needs to decline fixed assets components. In addition, companies do not feel flexibility by IFRS because there are many regulations and requirements of the standard. (Arnold, 2009)
More specifically, though IFRS have adopted throughout Europe, it is not precisely compared by IASB in some aspects (Nobes and Zeff, 2008).For instance, a French company wants to combine financial reporting by IFRS in French language version, it must be support by a permitted mechanism (Whittington, 2005). Because of which, it effect delay from IFRS being permitted to IASB being sanction by EU. Sometimes it is a long time of the delay so that some standards have not been sanctioned. IAS 39 is the most obvious example about the accounting regulation. (Whittington, 2005; Zeff, 2008)
What is more, another problem is the different from convergence with IFRS to adoption. Actually, adoption means IFRS have replaced of domestic financial reporting rules. For example, domestic standard do not requested in the listed companies of South Africa, Israel and Swiss. (Nobes and Zeff, 2008)
Lastly, it is limited to use IFRS which is not believed of a general rule. The main reason is IFRS on the basic of principles but some specific countries law regulation on the basic of the rules. Due to different systems depend on diverse prioritier, IFRS is not a commons standard for all of countries. (Hana and Patrick, 2008) Although many firms have used allowable revaluations, some US firms know gains and gather a long time. Because of that, the analysts inspire the firms to express real estate's current value. (Heffes, 2008)
4. Basic information of financial analysts
Financial analyst is one of the open persons who carry out financial analysis of external and internal situations of the company. In addition, financial analyst's task is to examine the financial statement information with investors and consider company's value (Orens and Lybaert, 2010). What is more, financial analysts are the initial operator of financial information so that it stands for the first intended information.
4.1 The role of financial analysts
Generally speaking, the role of financial analysts is approximate the financial value of the enterprise. Besides, fundamental analysis and technical analysis are two normal approaches of the value. Providing trustworthy information to investors is the first role of financial analysts (Barker, 2000). To be more specific, financial analysts should select value information to investors among the sum of publicly information which is contribute to investment decisions (Hong et al, 2000). Owing to the risk, companies should growth the financial analysts' contribution to investors and decline the area of earning information (Amir et al ,2003). Financial analysts have more interested in gathering information which support investors have more choice to trade (Hong et al, 2000). What is more, the second role of financial analysts is companies monitoring. More exactly, financial analysts should lower operation problems from shareholder to corporate management. For instance, agency problems can be ascended when earning is lack of informative but agency costs can alleviated because financial analysts monitor companies. Besides, financial analysts should depend on non-financial information to practice this role. (Chung et al, 2005; Moyer et al, 1989)
4.2 Accuracy of financial analysts' forecast
Some years ago, some surveys about the accuracy of financial analysts' forecast have arisen in the market. Refer to the individual analyst, who has confidential attitude of their forecasts (Easterwood and Nutt, 1999). The factors which affect the accuracy include nature of company, financial analysis skill and work experience of themselves, the workload and financial risks (Ernstberger et al, 2008). In addition, financial analysts' work is related to accounting data which is important to their forecast (Acher et al, 2002). As mentioned of the assignment of financial analysts, the main point is forecast the trend and recommend investors next stage (Hirst et al, 1995; Ackert et al,1996; Womack,1996). For example, the disclosure of US companies from 1985 to 1989 which have positively connected with the amount of financial analysts, so does forecast accuracy. On the other sides, the forecast is unpredictability which has negatively connected of the disclosure. The conclusion of this example is financial analysts' forecast lead to the enterprises' disclosure level. (Lang and Lundholm, 1996) What is more, the disclosure prognostic value has positive influence on financial analysts forecast. More specifically, information which shows on financial statement describe current and future function of financial statement and help financial analysts to improve their earning forecast (Behn and Street, 2002). In addition, there is a positive connection between accuracy of financial analysts and disclosure quality (Barron et al, 1999). Expect for disclosure, some definite assets and other influence of forecast accuracy has been tested. For example, the forecast accuracy is inferior when the accounting principle is high use of accounting value and simple use of accounting methods (Hwang and Jan, 1998). Refer to different accounting principle, Ashbaugh and Pincus (2001) did a survey which research 80 cross-company to find the accuracy of forecast. The conclusion is during 1990 to 1993, errors arisen in forecast when there is no unify relating various GAAP and IAS. After the adoption of IAS, forecast accuracy is enhance than before which illustrate that adoption has positive influence on accuracy. In a cross-country, the cost of capital is reduced but accounting quality is improved after adoption of IAS or IFRS. Take Germany as an example, during 1993 to 2002, Daske (2005) discovered that less accuracy but higher spreading arisen in the company. On the other hand, there is no important diversity of earning forecast between it on the basis of IFRS or US GAAP and Germany GAAP. What is more, accounting changed also has a little effect on forecast accuracy. The change is relied on disclosure and the type of change (Peek, 2005).
4.3 Problem which financial analysts can solve
4.3.1 Non-financial information
There are some problems which IFRS cannot mention but financial analysts can solve. Firstly, IFRS cannot reference how to handle non-financial information but financial analysts can do it. Generally speaking, non-financial information is the kind of information which describe outside financial statement (Barker and Imam, 2008) but is also contributed to the decision making of auditors. Traditionally, financial information which is displayed the balance sheet, cash flow statement, income statement and so on (IAS 1.8, IASB 2005). Even though non-financial information is not important than financial but which has influence on stock price and further financial implementation (Hirschey et al, 2001; Banker et al, 2000). Besides, under financial analysts' earnings estimate, non-financial information and some related information is to judge the effects on financial analysts' revealing (Orean and Lybaert, 2010). More specifically, it is positive that link connected correctness of financial analysts' earning prediction with disclosure of forward-thinking (Vanstraelen et al, 2003). Financial analyst' emphasis on lower the mistake of future earning because financial statements are inadequate to satisfied the need of financial analysts' information (Eccles et al, 2001).
What is more, the area non-financial information should be tested which one is financial analyst need. For example, some pharmaceutics and telecommunication companies' analysts' report include more capital information than energy companies (Flöstrand, 2006). In addition, industry association cannot influence the connection of financial and non-financial information to express earning quality (Barker and Imam,2008). What is more, non-financial information has got an advanced position in analysts' reports. Refer to protocol analysis, non-financial information has been collected by financial analysts not only to obtain an improved wisdom of company performance but also detect uncommon facts (Bouwman et al, 1995). A survey conducted by Dempsey et al (1997) showed that non-financial measurements and performance frequently used by financial analysts to evaluate companies.
In spite of non-financial information has played a crucial role in financial analysis, it is difficult to order and regulate because the character of company and industry, cost disclosure and risk of unclear disclosure. Furthermore, the intended non-financial information disclosure is more effectual in developing the role of capital market than command non-financial disclosure (Skinner, 2008). For example, AICPA (the Jenkins Committee of the American Institute of Certified Public Accountants) find that traditional financial information is incompetent to measure companies. After that, to improve the financial reporting quality, AICPA contains non-financial information which companies report willingly.
4.3.2 Problems of transformation for small and medium-sized enterprises (SME)
As refer to IFRS 2 (share-based payment), it is need a measurement which mention equity fair value but SME need a simple standard for measurement. Besides, IFRS 1 (First-time Adoption of IFRS) , IFRS 3 (Business Combinations), IFRS 5 (Non-current Assets Held for Sale and Discountinued Operations) and IFRS 7 (Financial Instruments: Disclosures) should be simplification under SMEs. What is more, IFRS 6 (Exploration for and Evaluation af Mineral Resources) is omitting by SMEs. (Hana and Danuše, 2007) Due to these problems, financial analysts have to take some solutions to deal with. Actually, the plan of IFRS under SMEs should suit common purpose financial statements and others for SMEs. Because of that, financial analysts have to submit to request of analyzing tools such as financial ratios, in which device from academic journals, model or by analysts themselves. The financial ratio which is connected with analysts' educational background and work experience, who have more complete understanding and skill to deal with the information. In addition, financial analysts also use theoretical model to deal with problems. To be more precise, stock valuation models can deal with the weakness of IFRS 5. What is more, financial analysts use different methods which contain data and project to procedure information which relevant to particular companies, markets and industries. (Hu et al, 2007)
4.3.3 Corporate financial risk management of IFRS 7
IFRS 7 (Financial Instruments: Disclosures) concern disclose and influence of financial issues which include assets, liabilities, equity and net earning. On the other hand, there are some risks such as exposure and market risks. Although the risk disclosure is individual, it has impact system of risk reporting. First of all, risk disclosure comes from accounting data integration and internal reporting. Secondly, the range of risk disclosure concerning financial assets and liabilities has completely broadened. Generally speaking, risk derived from limited quantity of assets and liabilities. Because of that, IFRS 7 has advocated of entire assets and liabilities should be disclosed which is related to financial issues in that case. But there is another problem, risk disclosure should be supplied individualistically of hedge relations. Refer to the above, financial analysts might be take a new approach used to analyst financial assets and liabilities and make it more sensitivity which is significant for disclosure because is belong to a kind of sensitivity analysis of a company. In addition, IAS 32 and IAS 39 also exist the same problem, financial analysts have to disclose the economics contribution of corporate financial risk to the Board. (Conti and Mauri, 2008)
4.3.4 Risk of financial analysts
Although financial analysts can solve many problems which IFRS cannot deal with, some risk still exist of the financial procedure. First of all, financial analysts who have relationship with employers include more issues of positive stock recommendation rather than unassociated analysts. More exactly, it is not integrated that financial analysts have prejudgment of risk by buying these stock and a negative cooperative of these risk assessments have been explained. Secondly, most companies stress three factors which include accounting loss, earning quality and past earnings instability. Although analysts might be combined the variable to risk evaluation, they do not look as measure for itself. Thirdly, no matter cash flow forthcoming or significant economic products which regard as risk measurement. For instance, negative earning is bound to bankruptcy. (Lui et al, 2007)
This paper has considered IFRS and financial analysts and discussed the problems which IFRS cannot resolve all but financial analyst can assist to do it. To summary, although financial analysts have risks of themselves such as stock risk, accounting loss and earning, they also can settle issues which IFRS cannot deal with. Financial analysts forecast the influence of non-financial information and make decision for future operation because non-financial information is rare in IFRS. In addition, financial analysts analyze financial data according to the characteristic of small and medium size companies. What is more, financial analysts avoid risk in some specific IFRS item and make sure forecast is accurate. As mentioned above, financial analysts can resolve most problems which IFRS cannot solve and improve the quality of financial statement and forecast.