Accounting standards are the rules and conventions applied by companies when setting their accounting policies. Those policies, in turn, dictate how assets, liabilities, income and expenses are recognised, measured, and presented in the financial statements.
The purpose of accounting standards is to promote comparability between the financial statements of different companies. The range of possible accounting policies is so vast that it would be infeasible or at the very least ineffective to compare the net assets of one company to another unless you could be sure that they applied a similar methodology when preparing those figures.
To those who would assume that there is a simple ‘right’ and ‘wrong’ way to account for transactions, you may be surprised. Even the accounting for a simple sale could be recognised at a different date depending on different interpretations of when in the sale process should revenue actually be recognised.
Alongside the revenue question, there are all sorts of judgements that companies must make about how prudent to be when creating provisions, and whether they should record assets at the historical cost of buying them, or at their current market value.
Such arguments have fortunately been settled by the major accounting standards-setting bodies around the world, and this has given rise to two mainstream accounting standards that leading British companies could apply:
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IFRS (International Financial Reporting Standards) set by the International Accounting Standards Board (IASB).
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UK GAAP (UK Generally Accepted Accounting Principles) set by the UK Financial Reporting Council (FRC)
In this article, we’ll summarise the pros and cons of any company considering whether they should apply IFRS in the preparation of their financial statements.
Pros of applying IFRS:
The International Financial Reporting Standards, as the name suggests, are the most globally recognised set of rules. This has been enforced by the stock exchanges of the world which usually require all companies listed on their exchange to apply IFRS in their public annual reports.
This applies to the London Stock Exchange, as well as the New York Stock Exchange and NASDAQ. If you name a single public company at random, the odds are that they will apply IFRS in their accounts.
Therefore, it confers a level of prestige and formality to adopt IFRS in your financial statements.
If you are an unlisted firm, it also reduces the barriers to entry when considering listing the companies’ shares on an exchange via an Initial Public Offering (IPO).
Cons of applying IFRS:
While pursuing the noble objective of creating the most transparent and rigorous set of standards, the IASB has in fact created the most onerous list of accounting and presentation rules.
This can be clearly seen when comparing the number of pages of an IFRS annual report to a UK GAAP annual report. IFRS demands far more narrative disclosure of estimates, judgements, and other supplementary information.
This places a tremendous burden upon the financial reporting team in the compliant organisation, requiring a higher headcount and technical accounting expertise to ensure compliance. The external audit of accounts to a more detailed set of rules will naturally be more costly, time-consuming, and likely to lead to audit findings regarding the disclosure of information in the financial statements.
To a company that wants to preserve its privacy, the broad demands of IFRS often require them to disclose more information than they would like, such as information they would deem as being commercially sensitive.
In summary, complying with IFRS is more laborious than complying with local GAAP such as UK GAAP. For this reason, companies generally steer away from adopting IFRS in their financial statements, unless listing rules or other regulations require them to.
