First pioneered by the International Accounting Standards Board (IASB) in 1975, IFRS began as an alternative to GAAP, Generally Accepted Accounting Principles, used in the United States. Today, more than 100 countries around the world use IFRS, most of which were introduced during the 1980s and 1990s (Larry). To fully understand all the pros and cons of IFRS, one must see what a country was like before implementing it. In 1981, HP Holzer and JS Chandler investigated accounting problems in the developing countries of Tunisia, Tanzania, Fiji, Thailand, and Pakistan in the business sector, local accounting professions, accounting in the government sector, and accounting education. What they discovered was horrible compared to American accounting; late closing of accounts (sometimes years behind schedule), shortage of adequate accounting manuals and shortages of qualified personnel. Specifically, in the corporate sector, developing countries saw problems with a lack of accountants, bookkeepers, and even auditors because companies could not pay salaries as high as the private sector. The staff members they encountered were highly unqualified and a lack of on-the-job training made matters worse. The accounting systems of the companies were outdated without manuals or accounting forms. Due to poor accounting systems, there was absolutely no internal control, which of course can lead to fraud and abuse. The financial statements that were made were three years old.
Without proper financial statements, the management cannot make proper decisions for the organization and the actual financial position of the company is questionable. This led to a lack of international investors interested in the business. To help improve the state of the financial statements, the auditors had to intervene. Because so many companies needed the help of auditors just to complete monthly and annual statements, this created an even worse staffing situation. The government sector in these developing countries was just as dire, if not worse. Government agencies can only pay lower salaries than those mentioned in the business sector, so staffing is an even bigger problem. The accounting basis is generally based on cash rather than a modified or total accrual basis. This base is very outdated for accounting needs in governments. As with the corporate sector, the financial statements that were made were inaccurate or not made at all, requiring more help from the external auditors. With incomplete declarations, the government’s finances were uncertain, including external debt that negatively impacted foreign trade. As for professional accountants in developing countries, there was still a lack of staff, although it was not as worrying as in the previous sectors. The reasons for this were different; many accountants who were trained for this sector more often ended up in the richer developing areas of the countries, leaving the poorer developing areas without adequate staff. The staff that did exist were used inefficiently; As stated before, the auditors of the accounting firms were forced to reconcile the inadequate financial statements. The problems of the business and government sectors negatively impacted the professional sector with a lack of adequate records and no internal control. Finally, the educational sector was where all the problems began. In developing countries in the 1980s, there were few universities that actually offered an accounting program. The programs that were taught educated students more about accounting procedures in developing countries. When these students were ready to enter the workforce, they found that they could not fully understand the differences in accounting in the developing country. The poor education of the students was due to the lack of educated teachers, textbooks, and properly educated students in high school (Holzer). The four accounting sectors of developing countries affect each other with their problems and deficiencies. Solutions to these problems can be resolved over time by improving education in these countries, as well as through more stringent accounting standards. International Financial Reporting Standards would ultimately allow these countries to solve these problems. Currently, only three out of five of the listed developing countries have now implemented IFRS. Fiji and Tanzania have already fully adopted IFRS, while Pakistan is still in the process of converting to them. Thailand and Tunisia still use their systems similar to GAAP, however both countries’ accounting systems are currently converting to GAAP systems closer to IFRS (“IFRS”). Although not all of these countries have fully adopted IFRS as their financial reporting standards, they are well on their way to doing so. This means that the problems in your previous accounting systems are being reduced. However, the adoption of IFRS is not an easy process for a country. Next, we will discover the challenges of converting to IFRS.
There are several reasons why countries decide to convert to IFRS, including the desire for foreign investment, lower costs, and the listing of companies on the stock exchanges of other countries. Challenges that a country may face in the adoption process include awareness, reporting standards, compliance, and training. In the case of Nigeria, university student Abdulkadir Madawaki considers these implementation challenges. Knowledge of IFRS is the most important step in the conversion. As Madawaki states, “implementation of IFRS requires considerable preparation at both the country and entity levels to ensure consistency and provide clarity on the authority that IFRS will have in relation to other existing national laws” (156). Auditors, accountants, regulators, and educators need to be aware of the country’s new accounting standards and what it means for them. In order to fully convert to IFRS, countries must be able to make changes to their current tax reporting laws. According to Madawaki, “accounting issues that may present a significant tax burden in the adoption of IFRS include the determination of impairment, provision for credit losses, and investment in securities/financial instruments” (157). These adjustments to current tax laws are complex and can be very confusing, but with a proper regulatory system, they can improve accountability in the country. Some of the existing laws in these countries are also modified or repealed by the adoption of IFRS. While it can be a difficult process to reverse some of these laws, the implementation of IFRS requires that this be done. Training and education are of paramount importance when a country is converting to IFRS. Education in developing countries about IFRS can cause a problem, as there may be a lack of professionally trained educators. This means that there will be a lack of competent people in the accounting profession. Accountants who were already trained in old accounting practices will need to relearn financial reporting under IFRS. Another problem with training is that the cost of accounting manuals is too high for many companies. (Madawaki 156). Fully trained and trained accountants can ensure the proper implementation of IFRS to receive its full benefits. Finally, the last challenge of implementing IFRS is compliance. Full compliance with IFRS results in more benefits from the standards. Writing in the Journal of International Accounting Research, Francesco Bova and Raynolde Pereira investigate levels of IFRS compliance in Kenya. What they discovered is that there are better levels of compliance in publicly traded companies compared to private companies. His reasoning for this is that shareholders of public companies demand better and more concise financial statements than shareholders of private companies. This is probably true because public shareholders are more likely to keep up with the company’s financial statements, while private shareholders are less practical and only request financial statements when necessary (Bova 89). Increased business communication to shareholders will create a greater need for IFRS compliance. Weaker IFRS compliance will generally damage the company’s financial structure. Proper IFRS compliance is needed to reap its full benefits. In the next section, solutions to adoption and implementation problems will be discussed.
Although the implementation of IFRS can cause problems in a country, there are some solutions that could improve this. With regard to awareness, a country’s government, its accounting associations, as well as the IASB should work together to make accountants and others who work with financial statements aware of the new IFRS standards and laws. Awareness in turn will create a more successful compliance rate. In the conversion process to IFRS, new laws and adjustments to previous laws are established. An appropriate government regulatory body should be established to ensure that these laws are properly instituted by accountants. Regulatory compliance with new and changed laws will lead to greater overall compliance with IFRS. IFRS training and education is the best way to prepare individual accountants to use the new standards. Universities in countries implementing IFRS must provide adequate education on the new reporting standards. IFRS workplace training can be enhanced by having affordable accounting manuals and software. Governments should find ways that they can attract accounting students and professionals to stay in the developing country for accounting work, rather than go to a more developed country. Perhaps a monetary incentive given to people who stay in their educated home country to do accounting would encourage more professionals to stay there. Ultimately, this will address the understaffing issue seen in countries prior to the implementation of IFRS. Proper training and education will also in turn improve compliance levels. Finally, IFRS compliance levels can be improved if auditors and accounting associations ensure proper compliance. As stated above, higher compliance is generally observed with public companies compared to private companies. One solution to this would be for shareholders of private companies to be more practical and request financial statements more frequently. Solutions to other IFRS problems will also lead to increased compliance. With all the solutions for the implementation of IFRS, the higher level of compliance will make IFRS more beneficial for the country. Greater awareness, better regulators, more education and training on IFRS will result in a higher level of compliance leading to cheaper operating costs, more investment from foreign countries by having higher quality financial statements and a better reputation for companies. companies that can be listed on the stock exchanges of other countries.