Accounting Theory and Application

This report critically analyzes the adoption of International Financial Reporting Standards (IFRS) by countries worldwide, discussing the challenges and consequences. It also examines the current status and development of IFRS globally, including recent updates in financial reporting standards.

Running head: ACCOUNTING THEORY AND APPLICATION
Accounting theory and application
Name of the Student
Name of the University
Author Note

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ACCOUNTING THEORY AND APPLICATION
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Current status and development of IFRS all over the world:.....................................................4
Conclusion:................................................................................................................................9
Reference list:...........................................................................................................................10

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ACCOUNTING THEORY AND APPLICATION
Introduction:
The report is prepared to critically analyze the adoption of International financial
reporting standard (IFRS) by the countries all over the world. Such analysis is supported by
conducting an investigation on the recent development on the adoption of IFRS and the
challenges faced concerning the implementation of the standard. The mandatory adoption of
such standard by large number of companies has resulted in studying the consequences of
settings of accounting setting and how such consequences vary across legal and institutional
regimes by providing empirical researchers with an unparalleled experiment. However, the
adoption of IFRS all over the world and convergence plan and harmonization differ widely
by jurisdictions. Most part of the globe now covers the adoption of IFRS standard and the
progress seems to be effortless. The convergence and improvement of US GAAP and IFRS is
done by the efforts of FASB and IASB that shared a goal of achieving single set of standards
and it also requires the countries to strengthen their regulatory mechanism (Alon and Dwyer
2016).
Discussion:
IASB (International accounting standard board) is constantly amending and
developing the IFRS. The adoption of the IFRS by the countries over short period of time is
surprising with limited evidence available indicating the standard conveys unambiguous
benefits to the users and adopters of financial statement. Since the objective of conducting
this study is to provide cohesive picture of empirical literature concerning the adoption of
IFRS. Considering this, the differences and similarities across the several studies is
emphasizing in terms of the findings. In addition to this, the some of the alternative reporting
choices which are inherent in the increased disclosure requirement such as criteria for
recognizing and lease classifications and principles based standards have been limited by the
convergence efforts with the US GAAP. (Micallef 2017).
The adoption of IFRS has been analyzed by many researchers in terms of the issues
associated with the implementation, market based and compliance. The adoption of the
standard by the countries involves a benefit and cost trade off. One of the major issues faced
by the adoption of the standard is the cultural issue that requires the countries to develop
appropriate regulatory mechanism. Furthermore, the amendment to the existing standard
requires the agencies of the countries to have proper plan in place in order to keep pace with
the changes being made (Dugan et al. 2016).

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Smaller countries adopting IFRS are particularly sensitive to the network effects
because even though the institutions might not be particularly well suited to the set of the
standards. Such networked benefits arise from lower perceived cost of transactions of trade
and foreign investments. Intuitively, lower cost of transactions are incurred by the portfolio
and foreign direct investors based on the similar set of standards (Harris and Stahlin 2018).
Therefore, it can be inferred that developing countries would face the problems in the
adoption of the standard because of lack of enforcement mechanism and standardized
institution.
The impeding factors that are faced by some of the countries such as America, Europe
and rest of the world are mainly cultural issues, impediment models, political influences,
educational needs, legal impediment rather than technical issue (Chen et al. 2017). Many
countries are faced with the implementation challenges such as continuous amendments to
IFRES makes it difficult to adhere, timely preparation of the standard, expertise and
knowledge possessed by the users of financial statement, managerial incentive, regulators and
auditors. Therefore, in can be inferred that the political, cultural and business differences
imposes a considerable obstacles in the progress of global financial communication system
and the differences in the national accounting practices cannot be reflected by the single set
of accounting standards.
Some of the other issues associated with the adoption of IFRS are listed below:
 Consistent adoption, application and review- The adoption of IFRS by most of the
countries is inconsistent with the prescription of IASB. In addition to this, there are
various uneven applications that results in the breeding different versions of the
standard. The facilitation of consistent application of the standard is associated with
the existence of enforcement mechanism and coordinated regulatory review. The
most significant impediments to the convergence of the IFRS by the countries have
been identified as tax orientation and certain complexities of the standard.
 Governance structure, staffing and funding- The assurance of true independence is
needed by the adopters of the standard from the International accounting standard
board along with the expert staffing and stable funding. In addition to this, it is also
required by the adopters to assure that the standard setting process is free from
political maneuvers and any undue influence (Dinh et al. 2016). This will help in

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ensuring the market confidence and legitimacy of the internal standard all around the
world.
 Enforcement mechanism and compliance issues- Despite the claims that the
companies are complying with the financial statements, there are varying level of
compliance in the adoption of the standard. The factors that contributes to the
enhancing the challenge is the failure of the auditors to express opinion over the
compliance and non compliance with the standard.
 Structural changes in several institutions of the countries- The challenges faced in
adopting the IFRS in terms of developing system of regulations and changing culture
are quite enormous. Such challenges are associated with the challenges faced by the
accounting regulations, embracing of the political reforms and demand for greater
accountability. Adoption of IFRS is considered as challenges as it requires the
country to make necessary reforms in the legal, regulatory and economic structures
(Zaidi and Paz 2015). In addition to this, it is also required that the investors are
trained well and the legal system is conversant to the international standard. For the
effective implementation of the standard, it is required that the institutions of
different countries are strengthened.
Impact of IFRS on earning management:
One of the studies examining the impact of mandatory adoption of IFRS on the
quality of reporting compares the earning management of European companies post and pre
IFRS. It has been concluded from the analysis of the paper that the quality of financial
adoption is improved due to the mandatory adoption of the IFRS. On other hand, the
mandatory adoption of the standard in Australia found post adoption of the standard resulted
in improving the quality of financial reporting and less earning management (Zaidi and Paz
2015). It was found in other study for the listed companies in US, there were no variations in
the quality of financial reporting following an analysis on the quality of earnings
management. Some of the recent study concluded that there was not any improvement in
quality of accounting after the adoption of IFRS. It was also pointed that the effect of
adoption of IFRS on standalone basis is difficult to separate. The researchers were not able to
found the adoption of IFRS resulted in economic benefits. Another study investigated that the
adoption of IFRS in Germany and it was concluded that with the adoption of the standard,
there was an improvement in the quality of financial reporting which measured timely loss

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recognition, generating relevant accounting information and earnings management (Ahalik et
al. 2019).
Current status and development of IFRS all over the world:
The growing acceptance and creation of the IFRS around the world is one of the most
important events in international accounting terms. The standard is no longer a regional
concept with gradual replacement of national accounting standard which helps in favoring
investment and international trade. The countries apt to the adoption of IFRS are the
countries with residual colonial ties and countries with common law are more likely to adopt
the IFRS. The full confirmation of adoption of IFRS has been given by approximately 90
countries of the world and they include a statement that acknowledged the conformity in the
audit reports. Transition to IFRS by Korea and Canada has been done in year 2011. For all
the listed companies, Mexico transitioned to IFRS in 2012 along with a roadmap introduced
by Japan in 2012. However, the adoption of IFRS by economic powers such as United States
remained undecided. With the adoption of IFRS by different countries of the world enable
them to make the comparison of the financial statements easier by creating same basis
(Boolaky et al. 2018). Companies are required to converge to IFRS if they are a foreign
investor or they are a subsidiary of foreign company. Converging to the IFRS by difference
countries faces some of the issues in the institutional context as outlined in several research
papers.
In order to ensure that goodwill really exists, IFRS 3 completely relies on impairment
testing and such facet is far from satisfactory situation. The fact about the accumulation in the
value of goodwill over time is not justified by the economics. In such situation, there might
be an overly optimistic presentation of the financial health of entities (Nurunnabi 2016). Such
overly optimistic presentation might result in misleading the investors or the users of
financial statements in their investment decision making.
Empirical evidences are provided by the literature review that the firms level of
disclosure in higher in the developed companies as against developed companies and the
effective adoption of IFRS across the countries is hindered due to the considerable number of
requirements which at time might be difficult to fulfill. Such requirements include organized
financial market, legal framework for the accounting professionals and due to the lack of
qualified professionals (Palea 2018). In addition to this, the differences in the political and
socio economic environment between the countries also make the adoption of the standard

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difficult. The adoption of IFRS will be partial unless the countries have monitoring and
enforcement mechanism which results in lacking of the financial reporting quality. Therefore,
the economies lacking behind the economic development and growth faces difficulties in the
adoption of the standard.
In addition to this, the financial reporting quality has some issues associated with the
value relevance of accounting information and accounting quality in the report. Introduction
of such standard brought much required improvements along with increasing implementation
cost for business. Some of the major developments in the financial reporting standard present
significant challenge to the preparer of the financial statements and such standards include
revenue recognition, new standards for financial instruments and leasing (Nurunnabi 2016).
Such recent developments in the standard are listed below:
IFRS 9: Financial Instruments
A fundamental change is brought to the accounting of financial instruments with the
introduction of IFRS 9 as it intended to replace the existing accounting standard that is IAS
139 financial instruments for recognition and measurement. For the impairment of financial
asset, there is a new expected credit loss model which takes into account the consideration of
few assets and impact of business model on accounting. With this new standard, business is
required to make number of choices and decisions at transition along with easing of rules
related to hedge accounting (Wingard et al. 2016). Under this standard, financial assets are
required to be measured at fair value or amortized cost. Changes in fair value will be taken to
other comprehensive income or profit and loss without recycling. For some assets, the fair
value through other comprehensive income is the result of business model. The expected
credit loss model under IFRS 9 would present a challenge to lenders and banks. Furthermore,
under the current guidance, hedge accounting will be more attractive as it becomes easier to
comply with the requirements. There is simplification of effectiveness testing concerning
hedging instruments under the new standard. The most significant improvement brought by
the IFRS 9 is related to the provision of loan loss (Ifrs.org 2019).
IFRS 15: Revenue from contracts with customers
A principle is established under IFRS 15 which is applicable when the information
about timing, amount, nature and uncertainty of cash flow and revenue is reported. Revenue
is recognized by entity under IFRS 15 for depicting the transfer of promised services and
goods in an amount reflecting the extent to which the entity is entitled in exchange for goods

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and services. It is required by reporting entities to use five steps for recognizing the revenue
under the new standard. This requires the entity to invest considerable amount of time in
determining the amount of revenue to be included under the new contract (Dinh et al. 2016).
However, the nature of changes and the complexities brought by the standard depends upon
the accounting policies and the nature of business. Therefore, entities will be required to
determine the prerequisites and collaborate to work on the investment plan which requires
considerable amount of time and involves cost.
IFRS 16: Leases
Under the new standard, all the leases on the balance sheet of the lessees is recognized
reflecting the right to use asset at the end of period and their liability to make rental
payments. However, the accounting model of lessor’s would remain unchanged unlike the
existing standard that requires lessee to account for lease transactions either as on balance
sheet finance leases and off balance operating lease. The key challenges in the application of
the lease standard are obtaining all the necessary information when determining the lease
liabilities and assets. The detailed provisions in the new lease standard make the job
cumbersome to determine the accounting treatment of lease. One of the biggest issues
concerning the lessee would be determining the term of lease and requirement of
considerable judgment (Ey.com 2019).
IFRS 17: Insurance contracts
The accounting for entities issuing insurance contracts within the insurance contracts
scope would fundamentally change under IFRS 17. Issuers are required to use consistent
measurement models based on the current assumptions and change in the treatment would
result in changing the balance sheet and income statement. IFRS 17 combines the current
measurement of future flow of cash by recognizing the profits over the period. In addition to
this, there is separate presentation of insurance finance income and results of insurance
services. Entity is also required to make a choice of accounting policy whether to recognize
income or expense on other comprehensive income or recognize expense or income in the
profit and loss statement (Hodges 2016)
The development of IFRS by IASB followed the due requirement process. The
exposure draft is published under the IFRS foundation constitution which required approval
by ten IASB members if the existing members are exactly sixteen and nine members if there
are fewer than sixteen members. The standard and its interpretation determine the accounting

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policies when such standard and interpretation is specifically applicable to the event,
transactions and conditions (Ellwood and Newberry 2016).
The proposals for amending the performance measures by management are subjected
to general requirement that the information depicts the faithful representation. The
performance measures are specified by the board that intends to make a faithful
representation of entity’s financial performance to the financial statement users. As a
consequence of this, it was tentatively decided by the board making an explicit statement that
prohibits misleading performance measures would be unnecessary (Beerbaum and Piechocki
2016). In addition to this, no additional constraints was placed on the performance measures
of management and prohibited the tailor made accounting policies usage.
Conclusion:
From the analysis of the above facts, it can be inferred that in the last few years, there
have been excellent progress and development in the standards in light of some criticism
faced and effort to make improvement to the existing standard. Furthermore, a number of
research conducted for evaluating the effects of IFRS have generated mixed views
concerning the impact of adoption of such single set of accounting measures on the reporting
entities. However, it is strongly evident that the adoption of IFRS is faced with a
considerable number of challenges. The adoption of the standards by different countries is
mostly faced with the cultural issues along with the regulatory and enforcement mechanism.

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Reference list:
Ahalik, A., Murwaningsari, E., Mayangsari, S. and Aryati, T., 2019. The Development of
IFRS Implementation Index and its Effect on Corporate Values in Indonesia in 2015. Journal
of Accounting, Business and Finance Research, 5(2), pp.51-59.
Alon, A. and Dwyer, P.D., 2016. SEC's acceptance of IFRS-based financial reporting: An
examination based in institutional theory. Accounting, Organizations and Society, 48, pp.1-
16.
Beerbaum, D. and Piechocki, M., 2016. IFRS 9 for Financial Institutions–The Case for IFRS
and FINREP Taxonomies–A Conceptual Gap Analysis. Available at SSRN 2857939.
Boolaky, P.K., Omoteso, K., Ibrahim, M.U. and Adelopo, I., 2018. The development of
accounting practices and the adoption of IFRS in selected MENA countries. Journal of
Accounting in Emerging Economies, 8(3), pp.327-351.
Chen, E., Gavious, I. and Lev, B., 2017. The positive externalities of IFRS R&D
capitalization: enhanced voluntary disclosure. Review of Accounting Studies, 22(2), pp.677-
714.
Dinh, T., Kang, H. and Schultze, W., 2016. Capitalizing research & development: Signaling
or earnings management?. European Accounting Review, 25(2), pp.373-401.
Dugan, M.T., McEldowney, J.E., Turner, E.H. and Wheatley, C.M., 2016. The impact of
different accounting reporting methods on the informativeness of research and development
costs: IFRS compared to US GAAP. Review of Pacific Basin Financial Markets and
Policies, 19(04), p.1650025.
Ellwood, S. and Newberry, S., 2016. New development: The conceptual underpinnings of
international public sector accounting. Public Money & Management, 36(3), pp.231-234.
Ey.com. (2019). [online] Available at: https://www.ey.com/Publication/vwLUAssets/ey-
devel145-ibor-pt-2-mar2019/$FILE/ey-devel145-ibor-pt-2-mar2019.pdf [Accessed 22 Apr.
2019].
Harris, P. and Stahlin, W., 2018. GAAP to IFRS Income Conversion Case Study: An
Examination of SEC Noted Accounting Differences. The Accounting Educators'
Journal, 27(1).

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Hodges, R., 2016. New development: The conundrum of fair value measurement—evidence
from the UK FRAB. Public Money & Management, 36(3), pp.227-230.
Ifac.org. (2019). The Wider Implications of Transitioning to IFRS—10 Things to Consider |
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reporting/discussion/wider-implications-transitioning-ifrs-10 [Accessed 22 Apr. 2019].
Ifrs.org. (2019). [online] Available at:
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2014.pdf [Accessed 22 Apr. 2019].
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world/adoption/2012-research-on-global-accounting-standards.pdf?la=en [Accessed 22 Apr.
2019].
Ifrs.org. (2019). IFRS . [online] Available at:
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[Accessed 22 Apr. 2019].
Micallef, M., 2017. Role and Current Status of IFRS in the Completion of National
Accounting Rules–Evidence from Malta. Accounting in Europe, 14(1-2), pp.131-136.
Nurunnabi, M., 2016. The role of the state and accounting transparency: IFRS
implementation in developing countries. Routledge.
Palea, V., 2018, September. Financial reporting for sustainable development: Critical insights
into IFRS implementation in the European Union. In Accounting forum(Vol. 42, No. 3, pp.
248-260). Taylor & Francis.
Wingard, C., Bosman, J. and Amisi, B., 2016. The legitimacy of IFRS: An assessment of the
influences on the due process of standard-setting. Meditari Accountancy Research, 24(1),
pp.134-156.
Zaidi, S. and Paz, V., 2015. THE IMPACT OF IFRS ADOPTION: A LITERATURE
REVIEW. Journal of Theoretical Accounting Research, 10(2).