International Differences in Financial Reporting
International Differences in Financial Reporting and The Role of Reporting Standards in International Capital Markets. International Financial Reporting Standards (IFRS) is a global market mandate to provide a general reporting structure that is understandable across reporting companies and those that invest in these entities. The IFRS assures an accepted method or format for financial statements. There are over 100 countries that follow the IFRS mandate; the United States, Saudi Arabia, and everything in between. These rules and standards are to create harmonization among global trading practices. International trading and investment are rising, and making informed, comparable decisions are paramount to world economies. The Accounting and Business research journal (ABR) highlights financial reporting and studies around this topic. It is reported that most of the top ten most-read articles from the journal over the last decade have been focused on international reporting specifically. The IFRS has the best intentions but has created confusion in some financial scenarios, additional costs firms must bear, and potential issues for private firms wanting to go public and open their stock up for all investors to buy shares. There are also questions surrounding the enforcement of these standards.
The importance of international reporting standards being adopted globally is undisputed in the research reviewed. (Hajiyev, Stolyarova, Kalacheva, Malitskaya, Ivanova, & Malysheva, 2021; Jamaani, Alidarous, & Alharasis, 2022; Nguyen, Chen, & Nguyen, 2021; Nobes, 2020; Prather-Kinsey, De Luca, & Phan, 2022) As global economies grow and develop, the need to research the impact of these standards further is of the utmost importance. The adoption and enforcement of these standards hold several concerns. Amendments to these standards are continuously added, negatively affecting global accounting practices. (Nguyen, Chen, & Nguyen, 2021; Nobes, 2020; Prather-Kinsey, De Luca, & Phan, 2022) The cost associated with the required enhancements cannot be casually absorbed in firms from underdeveloped countries. Employee training, new or updated software, and technical support are costly and will lead to delayed adoption in some markets. (Nguyen, Chen, & Nguyen, 2021; Prather-Kinsey, De Luca, & Phan, 2022) Non-current asset handling has also posed a serious gap in the IFRS; non-current assets are physical assets held for sale or disposal.
The regulations surrounding this topic are confusing due to the lack of documentation and overall coverage within the IFRS regulations and standards. (Hajiyev, Stolyarova, Kalacheva, Malitskaya, Ivanova, & Malysheva, 2021) The Initial Public Offering (IPO) process also lacks documentation and guidance. The issue of underpricing an IPO is of consequence due to the risk and uncertainty in the various markets. Underpricing occurs when the share price of a new IPO increases significantly when the company debuts the market. Due to the privatization of the firm before the IPO, IFRS data is lacking. The implementation of IFRS before going public needs to be examined. The initial adoption of the regulations would increase validity and act as a certification of the integrity of the financial statements of the IPO. (Jamaani, Alidarous, & Alharasis, 2022) The above issues can all be attributed to applying, adopting, and enforcing the IFRS worldwide. (Hajiyev, Stolyarova, Kalacheva, Malitskaya, Ivanova, & Malysheva, 2021; Jamaani, Alidarous, & Alharasis, 2022; Prather-Kinsey, De Luca, & Phan, 2022) An option to assist with regulation and enforcement is for the International Organization of Securities Commission (IOSCO) to take on this task. The IOSCO could review a firm’s financial statements once every three years and provide a comment letter regarding the findings. This letter could bridge the gap when IFRS amendments are lagging in a firm’s financial reporting; these letters can then be used by creditors and investors alike to make comparables easier. This overseeing the IFRS and documentation would relieve some burdens of delineating and addressing assets, potential underpricing, and lag issues. (Hajiyev, Stolyarova, Kalacheva, Malitskaya, Ivanova, & Malysheva, 2021; Jamaani, Alidarous, & Alharasis, 2022; Prather-Kinsey, De Luca, & Phan, 2022)
The future state of the IFRS needs to be examined on many fronts. The method in which the IFRS addresses the valuation of non-current assets, the disparities in institutional quality on the underpricing of IPOs, and the amendment process must be scrutinized so the markets are accurately informed. The additional regulations also need to be assessed to determine the underlying cost and exposure to firms for them to stay compliant and the data relevant. As previously discussed, the proposal for IOSCO to create comment letters for creditors and investors must be further examined for cost and viability. The need to study, research, and publicize international variants is critical as the global markets become easier to access for investors.
References
Hajiyev, H. A. o., Stolyarova, M., Kalacheva, O., Malitskaya, V., Ivanova, Y., & Malysheva, L. (2021). International financial reporting standards (IFRS) application peculiarities: A case study. Entrepreneurship and Sustainability Issues, 9(2), 255-267. https://10.9770/jesi.2021.9.2(17).
Jamaani, F., Alidarous, M., & Alharasis, E. (2022). The combined impact of IFRS mandatory adoption and institutional quality on the IPO companies’ underpricing. Journal of Financial Reporting & Accounting, https://10.1108/JFRA-07-2021-0199.
Nguyen, T., Chen, J. V., & Nguyen, T. P. H. (2021). Appropriation of accounting information system use under the new IFRS: Impacts on accounting process performance. Information & Management, 58(8), 103534. https://10.1016/j.im.2021.103534.
Nobes, C. (2020). A half-century of accounting and business research: The impact on international financial reporting study. Accounting and Business Research, 50(7), 693-701. https://10.1080/00014788.2020.1742446.
Prather-Kinsey, J., De Luca, F., & Phan, H. (2022). Improving the global comparability of IFRS-based financial reporting through global enforcement: A proposed organizational dynamic. International Journal of Disclosure and Governance, 19(3), 330-351. https://10.1057/s41310-022-00145-5.