IFRS: A Critical Discussion on Pros and Cons for Investors - Finance

This essay provides a critical analysis of the advantages and disadvantages of International Financial Reporting Standards (IFRS) for investors, based on the article by Ray Ball. It highlights the potential benefits, such as increased transparency, reduced information asymmetry, and improved comparability of financial statements. However, it also addresses concerns related to fair value accounting, uneven enforcement of IFRS across different countries due to economic and political factors, and the potential for manipulation by managers. The essay emphasizes that the implementation of IFRS is influenced by local economic and political institutions and concludes that the actual impact of IFRS adoption on investors is still uncertain, requiring further clarification on the various pros and cons.

Running head: ACCOUNTING STANDARDS AND THEORY
Accounting standards and theory
Name of the University
Name of the Student
Authors Note
Introduction:
The report is prepared for demonstrating the advantages and disadvantages of

1ACCOUNTING STANDARDS AND THEORY
International financial reporting standards (IFRS) to investors. International financial
reporting standards are the standards that are issued by independent organization based in
United Kingdom that is International accounting standards boards. It was ascertained that the
uniform accounting standard had substantial ignorance of making it mandatory. Agreement
about the implementation of important commercial transactions is the fundamental economic
functioning of the accounting standards. The integral component between firms and its
stakeholders such as lenders, shareholders, suppliers, customers and managers are method
used for accounting (Grabinskia et al. 2014). Efforts are made by such organization in
narrowing down the gap between accounting standard of different countries and IFRS.
Countries under this concept are not required to make the recognition of IFRS standards and
can comply their reporting with the standards of respective countries. The discussion of pros
and cons of such international standard is done by making reference to the given article
“international financial reporting standards (IFRS); pros and cons for investors”, Accounting
and Business Research, International Accounting Policy Forum, pp. 5-27.
Discussion:
World is witnessing increased integration of politics and markets and that is what
making the integration of adoption of accounting standards inevitable. The contracts

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efficiency between firms and their lender have become more transparent with the
implementation of IFRS. The working on convergence project of IFRS comes with the
likelihood of addition of this particular standard by almost all countries over the world. There
are varieties of potential direct advantages attributable to investors resulting from the
widespread international adoption of IFRS (Hagen 2016).
Therefore, the advantages that are derived by equity investors from the international
standard can be divided into direct and indirect advantages. Comprehensive, accurate and
timely information about the financial statements of different reporting entities will be
provided to investors using the IFRS platform. Many of the adjustments made in the
financials of company would be eliminated with the adoption and this will facilitate
comparison between entities and help in providing relevant information to investors.
Investors risks pertaining to adverse selection of stock and being les informed will also be
eliminated with the help of such international standard (Gallego et al. 2016). Furthermore,
IFRS also promises increased transparency and accordingly increasing efficiency between
investors and firms. Equity investors will be at advantageous state in terms of reduced cost of
capital along with increasing debt market contract efficiency. The ability of investors to make
informed financial decisions is triggered by the adoption of such standard as it will contribute
towards elimination of confusion arising from financial measures used in different countries
and using different ways for measuring financial status of reporting entities. Among various
investors, the standard will help in creating a fairness and establishment of code of conduct.
There will be greater scope for investor to make international investments and the financial
resources will be effectively allocated worldwide. Moreover, there will be increased
attraction of foreign and institutional investor’s for making investment in different countries
and accordingly this will lead to diversification of the risks by widening their portfolio of
stocks (Nastase et al. 2016). It is seen that as the world of business comes closer with the help

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of globalisation with the help of their trade and financial ties, there are several countries that
are moving towards International Financial Standards and the general rules of accounting that
addresses how the transactions need to be reported and what is the kind of information that
should be revealed in the financial reports. This unitary set of the standards has rectified the
several issues while generating others. The organizations that utilise similar standards in
order to construct their financial reports can be compared with one and another in a more
accurate manner. This is especially significant when undertaking a comparison among the
organizations that are situated in various countries as they may in certain cases may be
making use of various methodologies and rules to construct their financial reports. This rise
in the level of comparability has assisted the investors to effectively ascertain whether the
dollar that has been invested should go. There has been an observation that implementation of
IFRS by a nation can have an impact on smaller and the larger companies. Conversely, the
small businesses have a greater impact as they do not have significant amount of resources at
their disposal to incorporate any transformations and even train their employees. This leads to
the smaller organizations appointing accountants either internally or externally in order to
assist the changes that have taken place. These small organizations will bear further financial
stress than the larger organizations. IFRS makes use of principle based philosophy rather than
the rule based one. The principle based philosophy explains that the aim of each of the
standard is to reach at a significant valuation and that there are several ways to reach there.
This provides the organizations the independence to incorporate IFRS to their specific
scenario which leads to more simplified and effective financial reports. Therefore, investors
would also be beneficial in terms of their efficient management of their portfolio.
Improvement in professional practice of reporting entity to report their financials would help
in development of stock market of fewer developing countries.

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Identified issues as presented in the article:
From the analysis of the given article, it can be seen that the crucial issue about the
standard implementation is related to the method of fair value accounting as it creates
ambiguity as well as irrelevance to investors about financial position of entities. Main issue
about the International accounting standard is fair value accounting as it comes with wide
range of problems. In practical life, liquidity of market is considered as an important issue.
Noise can be created in the financial statements presented in the annual report of reporting
entities resulting from creation of substantial uncertainty of fair value due to large spreads.
Moreover, the fair value estimates can be manipulated by managers in an illiquid market by
making an influence on quoted as well as traded prices of shares of entities. During major
financial crisis, the standard has failed to test the fair value accounting concept and making
lenders discover “fair value as fair weather value” (Persons 2014). Fair value accounting
provides information to investors by incorporating that is more accurate and timely about
losses and gains on derivatives, securities and other transactions mentioned in the financial
statements. Under the IFRS, earnings of companies will be more informative and hence in
contradiction there will be more volatility and difficulties in forecasting. Many reporting
entities does not make the estimation of actual arm’s length market price and report the
estimated market price when there is unavailability of liquid market price (Jones 2015). In
such situation, there arises an imperfect pricing model by the introduction of model noise and
consequently imperfect estimation of several parameters of models.
Fair value accounting drift in IFRS is the factor that will accentuate the extent of
adoption and that are dependent upon judgement of managers and auditors. In many
countries, the implementation of concepts of fair value accounting in the IFRS is associated
with encountering of several problems such as widespread, illiquidity and involvement of
subjectivity in making estimates in mark to model. The countries that will be weak in

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enforcement of such standard are the ones that have poor information about the reasons
behind impairment of assets and have greater room for exercising judgement about fair value.
The opportunities for manipulation by managers increase when the stimulation of
market price is done by the accounting method of mark to model. This is so because the
estimates of parameters and choice of models is determined by managers. However,
considerable faith has been placed in the concept of fair value accounting rules of IFRS and
accordingly there is an effort on the development of conceptual framework in joint
association with IASB and FASB. It is depicted from the article provided that there is uneven
enforcement of IFRS around different countries of world due to overwhelming economic and
political reasons. International standard cannot be regarded as international standards because
of inevitability considerable international differences in quality and practice of financial
reporting. One of the concerns that have arisen is misleading of investors in believing about
the uniformity in practice due to widespread adoption of IFRS (Scott 2015). In actual
practice, there will not be such uniformity observed with the implementation of the standard
and it will remain hidden under the seemingly factor of uniformly adoption of standard.
Furthermore, the ability of uniform standard adoption to reduce the risk and cost associated
with the information is curtailed by such uneven implementation. In addition to this,
transnational investors could experience increased cost of information processing due to
uneven standard implementation (Lukka and Pihlanto 2014). This is so because the
accounting inconsistencies and transparency level will be buried at deeper level due to
difference in standard across countries. The article throws light on the fact that the issue
regarding the implementation of IFRS standard is far away from public sight and has not
received substantial attention. Adoption decision of IFRS at the national level is most visibly
impacted by political and economic decisions (Mayer 2016).
One of the vital implications in this particular area of research on the IFRS

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implementation is that the endogenous functions of political, local and economic institutions
is the factor that is responsible for contributing to differences in international reporting
standards. The actual reporting behaviours of companies will not be changed in material
fashion due to importing of exogenously industrial set of accounting standards (Nastase et al.
2016). IASB does not have any implementation mechanisms for making countries adapt to
IFRS and they cannot enforce the requirement of practicing such standard.
Article also focuses on some long-term concerns is using the brand name of IFRS in
an unfettered way. Implementation of IFRS is perceived as signal of quality for the
companies adapting to such reporting standards. Implication and adoption of IFRS has not
been clarified in the presence of local and political problems having considerable influence
on reporting practice. The adoption of IFRS to lower quality countries need to incur lower
costs due to factors such as wholesale adoption of the standard and regimes of lower quality
that has the likelihood of incurring fewer political and economic costs (Level and Schöndube
2014). It is essential for such countries to adopt the brand name of the standard due to
emergence of classic free rider problems.
Incorporation of fair value accounting in the IFRS is another concern is relation to
reporting system in countries that are less developed (Nurunnabi 2016). Adoption of IFRS by
companies is a political and economic experiment and there is yet to be clarified on the
various pros and cons to investors with the implementation of such standard.
Conclusion:
This report has therefore looked to explain the pros and the cons of the investors that
are in accordance to the International Financial Reporting Standards. The report has looked to
recognise the issues that have been presented in the concerned article. The implementation of

7ACCOUNTING STANDARDS AND THEORY
IFRS in several nations is dependent on the social, economic and political factors and the
variations in these standards are due to these factors too. The incorporation of IFRS acts as a
signal of quality for the companies and thereby makes the financial reports of the companies
much more effective. The report has therefore looked to generate a critical thinking and a
technical research on the pros and cons for the investors in accordance to the implementation
of International financial reporting standards. It is known that market liquidity is a significant
issue and therefore any kind of discrepancy that is observed in the financial reports of the
companies generally due to the uncertainty in the fair value. The key factor for such issues
has been manipulations that have been made by the management and therefore this is one of
the cons for the investors. The incorporation of the standards can be helpful in mitigating
these issues and thereby a much fair and true statement can be constructed with the help of
which the investors can be benefitted. The report has therefore explained the article
explicitly.
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