Each journal will need to include a brief description indicating why it is required, eg. why would a particular journal need to be credit/debit, etc.
International Financial Reporting Standards (IFRS), a solitary set of accounting standards, has been framed by an independent standard-setting body, The International Accounting Standards Board (IASB). The basic objective of IASB was to introduce a greater amount of transparency in financial reporting and to provide a high level of disclosure to investors so as to lead them to better decision making (Ifrs.org, 2016). IFRS has delivered many benefits to the member countries. A critical analysis of the benefits is as follows:
Globalization of capital markets gave birth to the need for a common language for financial reporting across borders. This need was sufficed by IFRS, which served as a common reporting standard for all the member counties (Culture and the Globalization of the International Financial Reporting Standards (IFRS) in Developing Countries, 2012). The objective of a common reporting standard has majorly being achieved as 114 jurisdictions have already adopted IFRS and many others are in the process of adopting the same. IFRS has benefited both the investors and Companies situated in the countries which have adopted IFRS and have mandated the same. The benefits that have been accrued are in the following nature:
- Investors: Better knowledge of financial statements as a common standard is used across borders which helps in reducing the risk of foreign investments.
- Companies: They have been able to generate higher foreign capital as investors have been able to gain greater trust in the Companies as the acceptance of their financial statements has grown.
The economies across the globe have become more integrated and implementation of a single accounting system will provide benefits to both the companies and the investors. Therefore, the objective of common standards for the preparation of statements across the globe has partially being achieved as almost 83% of the major counties have adopted IFRS (Ifrs.org, 2016).
? Better understanding to Investors: benefit for the Companies as well
IFRS provides a better understanding of investors. The key features of financial statements presented by a Company which has adopted IFRS are as follows:
- Timely, comprehensive and accurate results
- Easy to understand
- Better quality of statements
These features help the investor in getting a better understanding of the financial position of the Company. A prospective investor will be able to invest in a much efficient manner due to the application of IFRS as he is required to be aware of a single standard only. Application and adoption of IFRS help an investor to reduce his cost as he does not have to pay for the processing of financial statements to make them understandable. The comparability of financial statements plays a very important role for the investors as they are able to judge the position of the Company with reference to the industry averages as well as the past performance of the Company. IFRS reduces the risks for small and new investors and helps them to be on par with professional investors.
The above-mentioned benefits will enable the Companies to reduce their cost of capital as the investors investing would be more informed and would not select the shares with incomplete knowledge. The risk of less-informed investors would be minimal (Iasplus.com, 2016).
?Timelines for recognition of losses
A good approach towards the recognition of losses has been introduced under IFRS which is beneficial for all the stakeholders of the Company. The financial statements are required to reflect the impact of losses as and when they occur. This presents a more transparent and true picture of the actual situation to the investors. Even the lenders can be sure of the creditability of the Company as losses cannot be deferred in general after the applicability of IFRS. This also helps in improving the corporate governance of the Company as it increases the efficiency of contracts between the management and the Company. Timely recognition of losses also enables the Company to assess the book value of its assets and liabilities (Chen and Rezaee, 2012).
?Standardization of books of accounts and financial reporting: Increased comparability
This is one of the most stated factors as IFRS has been able to standardize financial reporting of different Companies which sooner or later develops the comparability of financial statements in financial markets. A single reporting standard has helped the member countries to remove/reduce the trade barriers and this benefit is majorly achieved by the EU Nations. The comparability of the financial statement also increases when a high number of Companies adopt/implements IFRS at the same time i.e. with effect from the same financial year.
However, the objective of comparability of financial statement has still not being achieved entirely as inconsistencies prevail in the books of accounts of different companies as there is a lack of industry-specific guidelines and the adoption of IFRS has been customized by the companies situated in jurisdictions which have implemented IFRS with mandatory clauses (Iasplus.com, 2016).
?Reduction in Cost of Capital
The measurement of the reduction in the cost of capital for Companies is a very complex task. Adoption and implementation of IFRS surely lead in a reduction of share capital as it increases the trust amongst investors which is reflected by the increase in share price of the Company. The increase in share price automatically decreases the cost of capital for the Company. The impact on the cost of capital is generally stronger in countries that did not follow any particular accounting standard before the implementation of IFRS. The impact is comparatively lower for countries that had a fixed set of rules for financial reporting and have just converged with IFRS.
?Improvements inconsistencies and transparency of financial statements
A vital advantage of the implementation of IFRS is that it ensures the Companies to be consistent and stable in macroeconomic aspects. IFRS has displayed improved relationships between investors and companies amongst various member companies due to transparency in financial statements (Goodwin, Ahmed and Heaney, 2008).
?Quality of accounts being prepared by member counties
The quality of accounts is generally measured by the true and fair view presented by them. Poor quality is generally referred when the accounts show a resistance towards recognition of losses and are have a greater readiness towards acceptance of profits. IFRS has improved the quality of accounting in majority of the countries who have adopted the same. The impact on quality depends more on the efficiency of the implementation of IFRS. The impact was greater in the countries which have mandatorily adopted IFRS than the countries that have gradually converged with IFRS (Icaew.com, 2016).
?Relevance to the substance
The relevance of IFRS is one of the most important benefits of IFRS. It is more in a form of economic nature than a legal form. The stakeholders of the Company are able to get a more appropriate true and fair view. It is reliable and creditable than the majority of other standards due to the timely recognition and treatment of revenues and losses. The statements prepared under IFRS are less complex, more consistent and easy to grasp due to the layout used for their preparation. The window-dressing and manipulation in books of accounts by managers cannot be achieved under IFRS as it restricts the creation of hidden reserves. This makes the financial statements to be more investor-oriented (Ifrs.org, 2010).
?Cost savings for Multinational Companies
Multinational Companies spends a huge amount of money for the transition of their books of accounts as per the requirements of different rules and regulations of the countries in which they are operating. Implementation of IFRS, even if it is not mandatory, helps such multinational companies considerably reduce their costs which were incurred for the transition of their books of accounts. IFRS helps these Companies to expand rapidly as the trade barriers are reduced by mandatory implementation of IFRS (Journal of Accountancy, 2009).
In the nutshell, it can be concluded that IFRS has partially achieved the intended benefits. Though preparation costs are involved at the time of implementation of IFRS, the benefits start accruing after 2 years of implementation. The countries that have adopted IFRS have witnessed growth in their economies as the adoption of IFRS benefits both the companies and investors in multiple ways which have been highlighted above. IFRS presents a truer and fairer view of the financial position of the Company which attracts global investors. The basic objectives of a single accounting standard, that are, comparability, reduced risk, understandability, and transparency have been majorly achieved by IFRS in multiple countries, although, the percentage of success has differed from country to country. This difference was dependent on various factors such as level of enforcement, the role of regional groupings, standards prevailing before implementation, etc which have played an important role in the achievement of the objective of IFRS.
ACCOUNTING OF INTANGIBLE ASSETS (focus on Goodwill)
The treatment of goodwill which is considered to be generated as part a part of business combinations have been standardized through the implementation of IFRS 3: Business Combinations. The guidelines for the accounting of goodwill and other intangible assets are also prescribed under IAS 36: Impairment of Assets. Goodwill is described as an identifiable asset that does not have a monetary substance and future economic benefits arising out of goodwill are not individually identified and thus cannot be separately recognized. Goodwill can be generated internally within the company as well due to some development activities.
Goodwill is represented as the difference between the total purchase consideration paid to a Company and the total fair values of assets acquired by the company paying the purchase consideration. The fair value of assets includes the value of recognized intangible assets, and assumed liabilities. If the amount of purchase consideration is lower than the fair value of assets,which means that the amount of goodwill is negative, then, the excess value is to be recognized instantly as a profit due to business combinations (Iasplus.com, 2016)
Since goodwill can only be recognized at the time of business combinations, it is important to understand the interpretation of business combinations. As per IFRS 3, business combination includes the following type of transactions:
- Business combinations may occur by transfer of cash, issuing equity, incurring liabilities (or any combination thereof),
- The combination may occur even there is no consideration at all (i.e. by contract alone)
- The business combination should necessarily involve the acquisition of a business. General acquisition of business has three elements that have been highlighted in IFRS 3. These three elements have been explained below:
Inputs – There must be the presence of an economic resource such as non-current assets, intellectual property, etc. This input should be capable of generating output when one or more processes are applied to it.
Process – It is a standard, system, convention, protocol or a rule that generates an output when it is applied on the input. The example of process can be strategic management, resource management, and operational processes.
Output – These are the final outcome from inputs when the processes are applied to those inputs.
MEASUREMENT OF GOODWILL
The detailed calculation of goodwill includes the following process:
(i) Computation of the value of purchase consideration. This is calculated generally at the fair value of net assets.
(ii) the amount of any non-controlling interest (NCI), which is termed as the minority interest in the entity
(iii) the fair value of acquirer's previously-held equity interest in the acquiree as on acquisition-date
(iv) the final amount of adjusted identifiable assets acquired and the liabilities assumed.
The (iii) and (iv) components of goodwill are considered only when the business combination is achieved in stages, i.e., the acquisition of the entity is not in one go, and there is steady growth in the equity held by the acquirer.
Thus, goodwill can be calculated by using the following comprehensive formula:
IMPAIRMENT OF GOODWILL
As per the guidelines mentioned under IFRS 3, goodwill is required to be tested for impairment value at the end of every year. The annual test for impairment of goodwill is a mandatory task. If impairment is identified during an impairment test, then the value of impairment is first of all adjusted with the carrying value of goodwill and then affects the value of other assets. It is pertinent to note that, the impairment of goodwill cannot be reversed under any circumstances. If the value of impairment is higher than the total value of goodwill, then the difference is systematically adjusted from the value of other assets. The test for impairment can be done anytime during the year, provided, the test is being conducted at the same time of the year. If this test is conducted at any time before the reporting date, the test needs to be re-conducted on the reporting date if any indicators of impairment are present. The indicators for impairment can be an unexpected decline in the market value of the entity, changes in foreign exchange rates, interest rates and commodity prices, a severe decline in value of assets due to change in governmental policies, etc. The impairment of goodwill is to be considered when the carrying amount is higher than the recoverable amount
The recoverable amount of goodwill is impacted by various other factors which have been listed below:
As per IFRS 3, goodwill is to be treated only for the following components:
- The fair value of predictable synergies and other benefits that may arise from the combination of net assets and businesses of the two entities which have entered into business combinations is a component for the value of goodwill.
- Higher valuation of the consideration paid to the entity acquired due to errors being committed by the acquiring entity in the valuation of the net assets also becomes a part of goodwill.
The value of goodwill at the time of initial recognition should not include fair valuation of individually identifiable assets, supplementary recognition of intangible assets and accurate measurement of consideration of acquisition.
The reinstatement of intangible assets has been prohibited by the IASB as this may lead to misrepresentation of facts and will lead to difficulties in the understandability of financial statements. Reinstatement of goodwill was earlier allowed in many of the jurisdictions which allowed the creation of self-generated goodwill. Such reinstatement has been disallowed under IFRS.
The disclose requirements obligate the acquirer to disclose information that enables the stakeholders to evaluate the effects of business combination which will occur either during the current reporting period or in the future. The disclosures relating to goodwill requires the following:
- description of all aspects that contribute to the recognition of goodwill
- qualitative aspects including expected synergies from combining operations and other intangible assets that cannot be highlighted separately.
Thus, it can be concluded that IFRS has changed the way of presentation of goodwill in the books of accounts for the companies situated in member countries. The impact of IFRS 3 should be studied along with IFRS 4 if goodwill is being recognized along with insurance contracts. IAS 36, impairment of assets, also provides guidelines on the accounting of impairment losses of assets. The acquirer in the business combination has to measure goodwill at an amount which is recognized at the acquisition date less any accumulated impairment losses.
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