The International Financial Reporting Standards - Coursework Example

Rеsеаrсh аnd аnаlysis еssаy Name: College: Course: Tutor: Date: Rеsеаrсh аnd аnаlysis еssаy Table of Contents Contents Page Contents Page 2 Abstract 3 1.0 Introduction 3 2.0 The International Financial Reporting Standards - IFRS 4 2.1 Background for IFRS 4 2.2 Definition of IFRS 5 2.2.1 Application and importance of IFRS to countries 6 2.2.2 IFRS in the future 8 2.3 Accounting policies influencing IFRS 9 3. Analyzing options that MoF raised and their influence on the implementation of IFRS 10 3.1 Influence of suspending the convergence program 10 3.2 Influence of retaining Indonesian standards 10 3.3 Influence of continuing the ‘gradual convergence’ 11 3.4 Influence of fully adopting IFRS as soon as possible 11 4. Conclusion 12 5. Recommendations 13 7. Reference list 14 Abstract The IFRS are meant to enhance comparability, reliability and accuracy in the reporting of financial statements across the world in a coherent and uniform manner. These standards are designed to enable international business and particularly the movement of capital across national borders. Indonesia recognized this in 2008 and engaged in a gradual convergence program thereafter, which was meant to reduce the discrepancies between Indonesian accounting standards (SAK) and the international accounting standards (IFRS). The country and the its standards-setting body (DSAK) have made much progress with the gradual convergence program, although the dynamics of the international business environment continue to change faster that the program is progressing. After considering the political positions taken by the United States and the United Kingdom, and the disquiet emerging countries in continental Europe such as France, the rethinking of the continuation of the gradual convergence program was necessary. However, the benefits of convergence proffer more benefits to Indonesia and its economy than retention of national standards or immediate full adoption of IFRS. Therefore, it was recommended that the country continue with its gradual convergence program. 1.0 Introduction Only 90 countries have fully adopted the international financial reporting standards (IFRS) and Indonesia is not one of them. About 200 countries including Indonesia have undertaken convergence programs, which indicated that generally, IFRS are being increasingly accepted globally. For companies undertaking international business and those that look forward to internationalizing their businesses, the uniformity of accounting reporting standards are welcome because they would not only ease doing business in diverse locations globally, but would provide accurate and comparable information of high standards, that can be used to make informed business decisions. However, many countries including Indonesia, have developed their own domestic standards, some of which do not conform to IFRS. Therefore, countries wishing to adopt IFRS need to compare and convert their domestic standards to IFRS, which can be lengthy depending with the magnitude and nature of the discrepancies therein. The ensuing report intends to help the ministry of finance make a decision regarding its convergence program, which would determine whether the country would or would not adopt IFRS. After providing pertinent background concerning IFRs, the report explores the options available to the ministry and makes recommendations thereafter. 2.0 The International Financial Reporting Standards - IFRS 2.1 Background for IFRS The international financial reporting standards have a longstanding history that can be traced back to 1966 when a proposal was made to create and establish an international study group. The proposers of the study group included the Canadian Institute of Chartered Accountants (CICA), the American Institute of Certified Public Accountants (AICPA) and the Institute of Chartered Accountants of England and Wales (ICAEW). This study group was transformed into the accountants international study group (AISG) in 1967, and published papers that laid the foundation for the development of international accounting standards that culminated to the formation of the international accounting standards committee (IASC) in 1973 (American Institute of Certified Public Accountants 1970). The committee was constituted by representatives of professional accounting bodies from Germany, the United Kingdom, Ireland, France, the Netherlands, Australia, Canada, Japan, Mexico, and the United States (Cardona, Castro-González and Ríos-Figueroa 2014). Indeed, this committee remained as the main developer of International Accounting Standards (IAS) until it was restructured and transformed into the International Accounting Standards Board (IASB) in 2001. Meanwhile, a special task force called the standing interpretations committed, which was set up in 1997, had been dealing with contentious issues in accounting as organizations such as the United States Securities And Exchange Commission (SEC), the International Organization of Securities Commission (IOSCO), and the Institute of Chartered Accountants of England and Wales (ICAEW) made their contributions and endorsed the adoption of International Accounting Standards (IAS) (Skotarczyk 2011). However, while the IASB agreed to adopt the international accounting standards that had been developed by IASC, it declared that any subsequent standards that it would publish would be designated as a new series of standards called the international financial reporting standards (IFRS) (Skotarczyk 2011). However, it is worth noting that while many governments in countries have formulated legislation and regulations that mandate the use of uniform accounting standards based on the international accounting standards and international financial reporting standards, the creation of these uniform standards has been undertaken in a voluntary and market setting (Ball 2012). 2.2 Definition of IFRS The international financial reporting standards (IFRS) are a set of standards or rules issued by the IASB that are internationally accepted as unifying accounting practices and specifically how accountants should maintain and report their accounts. As such, they are purported to be rules that would be applied equally in financial reporting by public companies worldwide (Ball 2012). To this end, the standards aim at having a common accounting language that can help businesses across different countries understand business and accounts. They also aim at enabling comparability between financial reports from businesses in different countries, thus forming a relevant and reliable basis of making economic decisions (Arum 2013). As such, although the accounting issues covered by IFRS are expansive, four aspects of business practice have mandatory rules set regarding financial reporting, and include the statement of financial position, the statement of comprehensive income, the statement of changes in equity and the statement of cash flow (Ball 2012). In addition to these rules, companies are expected to provide a summary of their accounting policies in the reports. Ultimately, these standards hope to maintain stability and enhance transparency in financial matters worldwide, and facilitate international trade and globalization of economies. 2.2.1 Application and importance of IFRS to countries About 120 countries have embraced and permitted the application of IFRS by their domestic companies that have been listed in financial markets and are therefore public. However, only 90 nations have conformed fully to IFRS as stipulated by the IASB and always include a statement that acknowledges such conformity in the audit reports produced in the country. These figures are not only indicative of the complexity and difficulty of adopting IFRS, but also serve as a pointer to the progress towards universal acceptance of the standards. Countries and companies that employ IFRS find benefits from the greater comparability of financial statements that the standards provide. Such comparability is particularly important for companies that have international presence, by easing the comparison of financial reports prepared in different countries, thus enabling a more accurate evaluation of the financial performance located in different countries (Arum 2013). In addition, multinational companies benefit from creating only one financial statement from all its international branches to meet the needs of all its investors located domestically and in foreign countries as well, which is cost-effective. Further, multinationals benefit from increased confidence from potential investors, which lowers the cost of capital (Arum 2013; Daske, Hail, Leuz &Verdi 2008). From a different perspective, IFRS provides vital information to investors, thus enabling them make informed decisions on where their investments should be directed. The other benefit is the enhancement of flexibility, which emanates from IFRS being principles-based rather than being rules-based. This enables countries and public companies to customize IFRS to suit their unique political, cultural, and economic environment and circumstances. Additional benefit to countries include saving of the cost of developing their domestic standards, particularly when they have none already and have limited resources as well, by simply adopting IFRS, which have been rigorously developed, tested and qualified. While the benefits of adopting IFRS are evident, different countries face different challenges and have thus adopted different strategies of incorporating IFRS into their accounting practices. The IFRS have been developed based on common law rather than code law, and therefore, appear best suited for countries that are governed by common law such as England and the United States. Therefore, countries that are governed by code-law may find adoption of IFRS challenging particularly if their formal rules of disclosure, financial reporting and governance conflict with IFRS (Ball 2004). In addition, countries that are large and well developed may already have well developed domestic standards and therefore, would be reluctant to adopt IFRS, particularly if IFRS are markedly different from their domestic standards. In addition, the culture of a country influences the acceptability of IFRS (Skotarczyk 2011). 2.2.2 IFRS in the future The future of IFRS is shrouded with uncertainly due to the rapidly changing dynamics in the business environment globally. As such, either IFRS will become fully adopted by all countries in the world, or some countries will continue investing in the development of their own domestic standards, thus rejecting the IFRS altogether. For full global adoption of IFRS in future, countries that do not have any accounting standards will adopt IFRS. This will be done through incentivizing companies to engage in such adoption and facilitating such adoption through education and training. For countries that have adopted some tenets of IFRS, full adoption can be attained by reforming their domestic standards continuously with the aim of fully domesticating IFRS. In addition, liberalization of international trade and globalization of economies have been cited as facilitators of adoption of IFRS if a majority of the countries that trade on the international scene have already adopted IFRS. This would encourage countries that have not adopted IFRS to adopt fully the international standards to engage in international trade actively. However, current trends in the political and economic arena are indicative of total adoption of IFRS globally as being a mirage and as an unachievable fete. Specifically, countries such as the United States and the United Kingdom, who are the largest contributors of the development of IFRS, have recently started looking inwards and displaying protectionism tendencies in their approach to international trade. For instance, the current United States administration of President Trump has indicated that it would review its foreign and trade policies, to ensure that they prioritize the interest of Americans. Therefore, the hope of the united states adopting IFRS is diminished even further, considering that the united states has stuck to its domestic accounting standards rather than adopt IFRS. In addition, the United Kingdom recently exited the European Union, a trading bloc that has helped develop and has adopted the IFRS widely. The implications of the actions of these two global economic powerhouses spells doom for IFRS as they already have well established and highly similar accounting standards, namely the GAAP for the united states and the UK GAAP for the United Kingdom. The recently ended presidential elections in France indicated a growing popularity of economic nationalism that was against globalization of trade and vouched for the exit from the European Union by France (Kottasova 2017). Therefore, if nationalistic sentiments were to be in the politics of Europe in future, the survival of the European union would be endangered and with it the survivability of IFRS. 2.3 Accounting policies influencing IFRS Policies, which are formulated and implemented by government, influence greatly the acceptability and the rate of adoption of IFRS. Governments always formulate policies that prioritize their national interests, and in some cases, the interests of the administrations with power. In this case, the IFRS were formulated based on the accounting policies of the United Kingdom and other European countries. Many of these policies are based on the Anglo-Saxon accounting system, which would conflict with policies from other jurisdiction that do not prescribe to common law (Ball 2004). From another perspective, the involvement of the government in business may influence the accounting policies it formulates. Notably, countries such as Indonesia and many others that subscribe to code-law have their accounting principles coded into law and are heavily influenced by the politics of the day and the administration in power. In addition, they have different approaches to fair value whereby loses are not recognized in a timely manner, whereas IFRS emphasizes fair value and immediate recognition of losses in financial statements (Arum 2013). Therefore, if the legislation in a country conflicts with the principles of the IFRS, the motivation to adopt IFRS in such as country is diminished. 3. Analyzing options that MoF raised and their influence on the implementation of IFRS Indonesian accounting standards (Indonesian GAAP) are developed by the Indonesian financial accounting standards board (DSAK) and apply to both public companies and private companies. While Indonesia has made a public commitment to support IFRS in 2008 and even embarked on a convergence process, the following are possible outcomes of adopting different options. 3.1 Influence of suspending the convergence program Indonesia is already undertaking the convergence of its indigenous financial accounting standards (SAK) and the IFRS and made significant progress whereby as at 2012, the SAK were in line with the IFRS of 2009, a three-year lag. Already, DSAK was looking forward to reducing this discrepancy from three years to one year (Rasuna 2016). Suspending the convergence program save the DSAK and indeed the Indonesian government resources that would have been earmarked for research, consultation, and training. However, the suspension would undo the progress made thus far. Indeed, the investors’ confidence in Indonesia was gradually increasing with the progress made in the convergence programs, enabling inflows of foreign direct investments into the country. In addition, local companies were being attracted increasingly into venturing into internationalization of their businesses because there was hope off accessing capital to undertake such a venture. 3.2 Influence of retaining Indonesian standards Retaining Indonesian standards would incur no switching costs to companies operating therein, because they are already employing the SAK. In contranst, while the SAK are largely compatible with IFRS, there are significant discrepancies in which some provisions of the IFRS have no equivalent in SAK. These discrepancies would discourage full integration into international trade. 3.3 Influence of continuing the ‘gradual convergence’ Gradual convergence would allow the country to adjust to the global dynamics in international trade considering that this arena is bound to change significantly in the near future, going by the political trends in the United States and the United Kingdom, and the increasing integration of China into the global economy. In addition, gradual convergence would not place a heavy capital investment load on the country and DSAK, thus leaving sufficient resources to engage in the development of other sectors that would facilitate the conduct of business such as infrastructure development projects, legislation formulation and upgrading of the accounting human resource that would endear investors in future (Saito & Mayangsari 2011). However, continuation of the gradual convergence process would be viewed with suspicion by investors and foreign partners, because it would be interpreted as a lack of commitment to attain full convergence. At the worst, it may be viewed as leaving windows for rethinking the process if different regimes that are not interested in convergence take over power in future. In addition, misinterpretation of financial statements by stakeholders would continue (Heykal & Siagian 2014). Indeed, this situation would be increase investor uncertainty, which would hold investments that would have otherwise flowed into the country. As such, many businesses would lose the opportunity to access capital from investor and financiers and grow in the process. 3.4 Influence of fully adopting IFRS as soon as possible Immediate full adoption of IFRS would increase immediately the investor confidence in Indonesia. Specifically, investors would flock into the country considering that it presents a large market in the Southeast Asian region. This would encourage the establishment of foreign companies in the country and increase foreign direct investment inflows into the country. In addition, full adoption would also encourage mergers and joint ventures between foreign companies and local businesses and cross-listing in different capital markets, thus growing the Indonesian businesses significantly (Daske, Hail, Leuz &Verdi 2013). Indeed, such increased engagements of investors with Indonesia would have economic benefits to the country and its people, including reducing unemployment and availing high quality jobs in the country. This would help in controlling emigration of skilled labor and brain drain, making the country more attractive to even more large and high quality investors. Further, Indonesian companies would be more welcome to the international trading space and to foreign countries, particularly those that have adopted IFRS fully as well. On the other hand, such immediate adoption would place much pressure on DSAK to conform. In addition, companies operating in Indonesia would incur much cost in the switching process, which would have to be implemented through new systems of accounting. Specifically, companies would have to invest in new enterprise planning resource software and systems, retrain their accountants and auditors, and create and enact new legislation that would enforce such full adoption. This would be a huge undertaking not only for Indonesian companies but also for the Indonesian government because of the hugeness of the financial capital required. In addition, the country may face relocation of businesses to friendlier environment in the region, and even closure of some local business at the worst. 4. Conclusion Deciding on whether to continue with an IFRS convergence program or not must be informed by knowledge about the national and international standards, the discrepancies between the two, consequences for adopting or not adopting IFRS to the country. The progress that DSAK of Indonesia in converging SAK and IFRS is commendable have commenced in 2008. The convergence process requires investments in training, research, legislation formulation and evaluation of the performance of the standards on the local and international arena. Currently, Indonesia has a three-year lag between the two standards, however, DSAK has indicated that it intends to reduce these discrepancies to year, although it has not provided any indication that it would fully adopt IFRS. 5. Recommendations Considering the progress made in the gradual IFRS/SAK convergence program, it is recommended that this program continues rather than it be suspended or immediate full adoption of IFRS undertaken. This would provide the country with the space to develop its internal capacity among accountants and auditors, endear acceptability in the country’s business community and adjust to further IFRS developments and changes in the global business arena. 7. Reference list American Institute of Certified Public Accountants, 1970, ‘Basic concepts and accounting principles underlying financial statements of business enterprises’, Statement of the Accounting Principles Board, No. 4, viewed 19 May 2017, American Institute of Certified Public Accountants.   Arum, E P, 2013, ‘Implementation of International Financial Reporting Standards (IFRS) and the Quality of Financial Statement Information In Indonesia’, Research Journal of Finance and Accounting (Online), vol. 4, issue 19, pp. 200-209, viewed 19 May 2017, Universe Digtial Library database. Ball, R 2004, ‘Daimler-Benz AG: evolution of corporate governance from a code-law “stakeholder” to a common-law “shareholder value” system’, The Economics and Politics of Accounting: International Perspectives, viewed 19 May 2017, Oxford University Press. Ball, R 2012, ‘International Financial Reporting Standards (IFRS): pros and cons for investors’, Journal of Accounting and Business Research (Online), vol. 36, issue 1, pp. 5-27, viewed 19 May 2017. Cardona, R.J., Castro-González, K.C. & Ríos-Figueroa, C.B., 2014. The Impact of Culture and Economic Factors on the Implementation of IFRS. Accounting & Taxation, vol. 6, issue 2, pp.29-47. Daske, H, Hail, L, Leuz, C &Verdi, R 2008, ‘Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences’, Journal of Accounting Research, vol. 46, issue 5, pp. 1085-1124, viewed 19 May 2017, University of Chicago on behalf of the Institute of Professional Accounting Database. Daske, H, Hail, L, Leuz, C &Verdi, R 2013, ‘I Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions’, Journal of Accounting Research, vol. 51, issue 3, pp. 495-547, viewed 19 May 2017, University of Chicago on behalf of the Institute of Professional Accounting Database. Heykal, M & Siagian, P 2014, ‘Impact Analysis of Indonesian Financial Accounting Standard based on the IFRS Implementation for Financial Instruments in the Indonesian Commercial Ban’, Journal of Social and Behavioral Sciences, vol.109, pp. 1247-1250, viewed 19 May 2017, Elsevier Ltd. Kottasova, I 2017, ‘Macron-Le Pen face off: EU supporter vs. economic nationalist. CNN Money, viewed on 19 May 2017, Cable News Network, viewed 19 May 2017. Rasuna, H R 2016, ‘IFRS and Indonesia GAAP Similarities and Differences’, Review of PwC Indonesia, vol.6, pp. 3-11 viewed 11 April 2017, PwC Indonesia online Database. Saito, M & Mayangsari, S 2011, ‘The Effect of IFRS Implementation on Earnings Quality in Indonesia’, Annual research bulletin of Osaka Sangyo University, vol. 3, pp. 61-77, viewed 09 April 2017. Skotarczyk, M A, 2011, "The Effect of Culture On The Implementation Of International Financial", Journal of Scholarship at Claremont, vol. 3, issue 5, viewed 11 Apr 2017, Claremont Colleges Digital Library Database. Read More