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3 Benefits of IFRS

Updated on November 17, 2017
The Universal Accounting Standards
The Universal Accounting Standards | Source

“Reimagine accounting so that we minimize differences” in standards and “maximize global investment and access to capital.”

"As companies grow, they need capital. Along with banks, financial markets provide that very important capital. And for financial markets to deliver, they need both companies to list and investors who are willing to provide funding to important infrastructure and other projects". In a speech presented on November 3rd, 2016 at a venue in Peru, Hans Hoogervorst, Chairman, of the International Accounting Standards Board, discussed the importance of harmony throughout the world economy. The link between the companies, banks, market, and the investors, can be visually represented in the form of cash in payments and investments. The best way to invest in companies is to look at their financial reports. But what if you don't understand the format of how a company presents their information, or you want to compare two companies' financial reports? Well the International Accounting Standards Board has a solution, IFRS. "The IFRS Foundation is a not-for-profit, public interest organization established to develop a single set of high-quality, understandable, enforceable and globally accepted accounting standards—IFRS Standards—and to promote and facilitate their adoption worldwide(ifrs.org)." The IASB has constructed IFRS to create continuity within financial reports between companies that operate on the global market. Also, by enacting IFRS, there has been an increase in capital flow not only within a company but throughout the world economy. As well as, enhanced financial reports presented throughout all markets that allow easier interpretation and comparability. Yet there are many more benefits to IFRS, I will lay out three of them and the features they provide to companies and the end users.

Improved Cash Flow

  • Clear logical financial reports instill confidence in investor without accounting background.
  • Using a single, trusted accounting language like IFRS lowers the time and resources used in creating different versions of one financial report.
  • industries are able to raise capital from foreign markets by creating confidence in the minds of foreign investors.
  • Companies will be able to view financial reports easier and quicker improving day to day operations.

Enhanced Financial Reporting

  • Financial statements prepared using a common set of accounting standards help investors better understand investment opportunities as opposed to financial statements prepared using a different set of national accounting standards.
  • IFRS brings transparency by enhancing the international comparability and quality of financial information.
  • Investors will experience the advantage of understanding the financial data reported no matter what country the company is in.
  • Cash accounting methods used in the statement of cash flows can be easier for non-accountants to understand.

Globalized Comparability

  • Financial reports become automatically accepted in IFRS-compliant countries, therefore companies do not need to prepare alternative sets of financial statements when pursuing business interests in these countries.
  • One will be able to access financial statements either as a hard copy or electronically via the Internet.
  • Future or current investors will be able to view the net income and calculate financial ratios for different companies.
  • By understanding reporting guidelines for one company, it can be presumed that all companies in compliance with IFRS follow the same guidelines.

With many advantages of a globalized set of accounting guidelines, that actually benefit the company and the investor on multiple scales, why wouldn’t the world participate. Well thankfully IFRS is already accepted and used as the only accounting principles in some countries. Even though it is not enforced in every country, one day the world will get there. Some countries recognize IFRS but do not use it at all, like the United States of America; who still chooses to use the GAAP method. But, even some countries that still use their own form of accounting principles, allow companies to practice IFRS alongside the regulated requirements. The graph below displays the percentage of governments by region that require the use of IFRS. With the general acceptance and popularity of the international accounting standards, it will help provide unity throughout the world between companies, investors, and the day to day person that the economy affects. In conclusion, IFRS will increase cash flow for future investments and spending. Secondly, accepted guidelines will enhance financial reporting allowing the destruction of language barriers between companies to companies and/or investors to companies. Lastly, IFRS will allow for the ease of comparing businesses for end users who seek best investment.

Bar graph from IFRS.org representing the percentage of jurisdictions that require IFRS
Bar graph from IFRS.org representing the percentage of jurisdictions that require IFRS | Source

References

Cole-Ingait, Paul. “What Are the Benefits of International Accounting Standards?” Chron, Hearst Newspaper, LLC, smallbusiness.chron.com.

“Why Global Accounting Standards?” IFRS, IFRS Foundation, IFRS.org.

Wycherley, Jason. “The 5 Benefits of IFRS.” MorganMcKinley, Morgan McKinley Group, 16 Feb. 2017, morganmckinley.ie.

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