You are required to write their understanding on the responses, challenges and implications of adoption and full convergence of IFRS in Malaysia.
IFRS is superior over GAAP reporting standards in a variety of ways, which are elaborated briefly as follows:
Focus on investors:
IFRS ensures timely, accurate and comprehensive financial reporting information pertinent to the national standards. In addition, the provided information helps in easy understanding for the investors, since they do not have to rely on other sources for obtaining information. Moreover, the standardisation and harmonisation of reporting standards under IFRS have eliminated the payments for the investors in relation to processing and adjusting financial statements. Hence, it helps in minimising the overall cost for the investors (Houqe, Monem & van Zijl, 2016).
Comparability:
The IFRS convergence has enhanced the financial statement comparability in EU by following a single reporting standard under one market, which is the EU. The improvement is designed not only for the investors, instead for all the stakeholders using the financial statements. One more reason that has attributed to the success of the adoption of IFRS is due to the period of transition, since above 8,000 EU listed organisations have adopted IFRS in the same year.
Standardisation of accounting and financial reporting:
One of the significant benefits of IFRS over GAAP is the standardisation of financial reporting that enhances the financial statement comparability in the main financial markets. This eliminates the trade barrier as well, as this was one of the significant factors behind the motive of the EU to implement a single reporting standard (Fiechter, Halberkann & Meyer, 2017).
Enhanced transparency and consistency of financial reporting:
This influential dynamic could be cited as one of the critical benefits of converting to IFRS from GAAP, since it makes the nations to be consistent on macroeconomic aspects as well as financial reporting. This helps in strengthening the relationship between the organisations and the investors among member nations.
Better access to investments and foreign capital markets:
Since numerous global organisations and other joining nations have developed large base for adoption of IFRS, it enhances the organisations in accessing to financial markets by preparing the financial statements under a single reporting framework. One of the primary reasons for converting from GAAP to IFRS is to enhance comparability in global financial markets for raising the focus on investors (Abdallah, 2016).
Enhanced comparability of financial information with international competitors:
The financial statement comparability under IFRS would be enhanced if the enforcement of IFRS expands including more nations. However, the comparability aspect could be worsened, if a nation uses two sets of reporting standards, which are national reporting standards and IFRS. There might be negative impact on the local share market because of the difference between market value and book value, when both IFRS and national reporting standards are in place (Tuzarová & Mejzlík, 2018).
Relevance:
IFRS lays stress more on economic substance rather than legal form, which enables the organisations and their stakeholders to gain a fair understanding of the business transactions. In addition, it reflects to losses and gains within time, which places it in a credible position than GAAP, as far as the reporting standards are concerned. Finally, the statement of financial position prepared in accordance with IFRS is more useful because of its consistency and layout along with the complexity level in contrast to GAAP, which tends to be excessively detailed.
It has been observed that the step towards the convergence of IFRS would improve the performance of the capital market along with spurring international business expansion. By taking into consideration this development on the convergence of IFRS, it is critical for the organisations to make them versed with the situation by analysing their current process of financial reporting, financial resources, human capital and information systems. Hence, by considering the effects of the convergence of IFRS, it is necessary to study the responses of the public listed firms in the world towards full IFRS convergence. Despite the widespread adoption of IFRS by the global business organisations, the level of preparedness in adopting IFRS has varied broadly between nations and organisations. According to the research work of Ozu et al., (2018), a survey was carried out on the adoption of IFRS in Japan, in which the level of preparedness of the organisations is gauged depending on the assessment mode and conversion process. The assessment mode takes into account the analysis of the changes in accounting policy, changes in system, training scope, changes in cost and stakeholder reactions. On the other hand, the conversion process mode takes into account preparation for systems of financial reporting, training course provision, accumulation of additional accounting information along with enforcement of other procedures.
Another qualitative study has been conducted by Phang & Mahzan (2017) on Malaysian public listed companies, in which the researchers have arranged for one-to-one interview to gain understanding on the social and economic effects of the convergence of IFRS. The findings state that concerns are inherent in the Malaysian listed firms regarding the introduction of IFRS by the Malaysian authority. This is because it has not taken into account religious, cultural and societal variations prevalent in the global arena.
In the research work of Chen et al., (2017), various surveys have been conducted to examine the phase of preparedness of the organisations in adopting IFRS in China compared to the developed nations like Canada and European Union. The surveys reveal that that sufficient training and resources, changes in the systems of financial reporting, impact awareness, engagement of the external consultants and communication to external stakeholders are critical factors that the Chinese organisations need to take into account in the implementation procedure of IFRS.
According to Bassemir (2018), KPMG has faced the challenge of developing IFRS-based infrastructure within its international network of member organisations. The other three global audit firms like Ernst & Young, PwC and Deloitte have extended support to the development, application and adoption of IFRS as the only set of greater quality international accounting standards. In addition, these organisations including KPMG have sought to develop networks, resources and infrastructure for supporting the IFRS-based audit as well as advisory service delivery in their global business operations. However, they face a certain challenge in conducting the same, which is the coordination of daily operational activities of more than 140 distinct and independent national practices that are members of the organisation at the time of rendering an inference on the pertinent IFRS application. Therefore, the audit firms are confronted with the challenge to function with an integrated and single voice while remaining distinct and independent legal enterprises.
In the article of Sharma, Joshi & Kansal (2017), the Indian public listed entities would be confronted with various challenges at the time of implementing IFRS. The main implementation issues that the organisations are likely to encounter include the following:
There are certain challenges that the companies of Malaysia, Nigeria, UAE and Libya face in adopting and full convergence of IFRS, which are enumerated briefly as follows:
Malaysia:
Certain issues are covered in “Malaysian Financial Reporting Standards (MFRS) 1” and it has a transition date where an organisation needs to present its entire comparative information in its initial MFRS-based statements. According to MFRS 101, the Malaysian public listed entities need to provide three balance sheet statements, two comprehensive income statements, statement of changes in equity and cash flow statement. In addition, the standard requires the organisation to present their balance sheet statement at the start of the year while exercising utmost caution in making retrospective statements and reclassifying items in financial statements and accounting notes. It has been expected that the organisations would be able to depict financial statements that comply with MFRS. However, certain entities in Malaysia could not present their financial statements accordingly, since they were not MFRS ready (Yaacob & Ahmad, 2017).
Another challenge that confronted the full IFRS adoption in Malaysia is that whenever the cost of adherence to MFRS is more than the benefits of the financial statement users and management judgement of any transaction is needed, exemptions would be granted by IASB. As a result, it would result in the formation of unlevel playing field amongst the Malaysian public entities supposed to apply MFRS framework for overall adoption. Thus, for ensuring compliance it is necessary for the organisations to perform detailed and thorough assessment of their readiness in becoming MFRS compliant so that any authoritative investigation because of non-compliance could be avoided (Abdullah et al., 2015).
Nigeria:
The convergence to IFRS in Nigeria requires heavy initial investment like the cost of training personnel for gaining insight about the global standard, cost to acquire new accounting packages required for implementation and cost to discard previous accounting packages that is not line with IFRS. In Nigeria, cost could be defined as the price tag to implement IFRS of the forgone SAS (Abiodun & Asamu, 2018). The most inherent challenge faced by the Nigerian public organisations is training personnel and management for preparation of financial statements, which comply with IFRS. This challenge had taken huge man hours for the Nigerian organisations. This is because they have to conduct in-house training along with sponsoring staffs for attending seminars and conferences so that they could understand the new IFRS.
Another challenge faced by the Nigerian companies is the difference between the national standard (SAS) and IFRS, especially the Nigerian banks. This is because SAS is more prescriptive than IFRS; for instance, “SAS 10 – Accounting by Banks”. Besides, the accounting policy choices are more in IFRS and hence, this might lack consistency with “Local Legislations of Companies and Allied Matters Act (CAMA) 1990” and “Banks and Other Financial Institutions Act (BOFIA) 1991” (Adeyemo et al., 2017). Furthermore, additional disclosure needs are required in IFRS and differences could be observed in interpretation and application. Thus, IFRS implementation has enhanced the need within the companies to accumulate, evaluate and report additional data for adherence.
United Arab Emirates (UAE):
The Islamic regulations mainly regulate the UAE public companies and thus, the move from Saudi GAAP to IFRS had posed challenges to such organisations. One of the primary challenges is the limited pool of resources, as the number of qualified UAE accountants is 300 only (Perera & Chand, 2015). This shortage was offset by the various expatriates; however, the Arabic language was another challenge. The statutory financial statements that are developed according to Saudi GAAP are to be filed with the pertinent authority in Arabic. It is expected that this process would continue with IFRS transition. This has added pressure on the Arabic speaking professional accountants for assuring that adherence to IFRS was not lost in translation.
Libya:
Since Libya is yet a developing nation, the organisations in Libya had faced various challenges at the time of IFRS implementation. The most significant challenge that the firms and faced was the process of adoption rather than the content of the distinct accounting standards or the adoption decision. The other significant challenges that the Libyan organisations had faced in implementing IFRS constitute of the following:
With the large scale compulsory adoption of IFRS, various research studies have assessed the effects of the adoption of IFRS. In order to evaluate the feasibility of IFRS, its benefits have been discussed widely to show its superiority over GAAP. One of the primary benefits that IFRS possess is that it helps in providing additional information to the investors. This is because one of the significant motives of IFRS is to enable the investors in undertaking significant investment decisions for maximising their overall return on investment. Moreover, the standardisation and harmonisation of reporting standards under IFRS have eliminated the payments for the investors in relation to processing and adjusting financial statements. Hence, it helps in minimising the overall cost for the investors. Along with this, it has been observed that IFRS helps in ensuring relevance to the users of the financial statements. This enables the organisations and their stakeholders to gain a fair understanding of the business transactions. In addition, it reflects to losses and gains within time, which places it in a credible position than GAAP, as far as the reporting standards are concerned.
The second section of the assignment has highlighted the responses of the global business firms towards the full convergence of IFRS. Even though the big multinational organisations in the developed nations have not faced adequate difficulties in implementing IFRS; however, issues are deemed to be observed in the developing nations and the organisations operating in those nations. Out of the discussed issues, the most inherent issues constitute of lack of knowledge among the professional accountants and cost of training. However, the big four audit firms have responded well to the adoption of IFRS and they have developed adequate infrastructure for complying with the standard.
The final section of the assignment has focused on identifying those challenges that the global business organisations operating in Malaysia, Nigeria, UAE and Libya have encountered while adopting the transition of IFRS. It has been observed that majority of the business organisations operating in these nations do not have adequate accounting professionals having considerable knowledge about the standard. As a result, UAE had to consult with the expatriates of the nation. Moreover, resorting from local standards to IFRS requires numerous changes and the organisations had faced difficulties in preparing their financial statements based on IFRS. In addition, the organisations have to face difficulties in disclosing the notes to accounts, as is the case with the Libyan companies in relation to their tax treatment policy. Therefore, it could be inferred that even though IFRS is designed to bring uniformity in financial reporting, various global organisations have encountered numerous complexities in the initial stage of implementation
References:
Abdallah, W. M. (2016). The Conversion from US-GAAP to IFRS and Transfer Pricing: Irreconcilable Differences. The Journal of Accounting and Management, 6(1).
Abdullah, M., Evans, L., Fraser, I., & Tsalavoutas, I. (2015, December). IFRS Mandatory disclosures in Malaysia: the influence of family control and the value (ir) relevance of compliance levels. In Accounting Forum (Vol. 39, No. 4, pp. 328-348). Elsevier.
Abiodun, J. O., & Asamu, K. (2018). Comparative Analysis of the Pre and Post Adoption of IFRS on Performance of Listed Manufacturing Companies in Nigeria. Social Sciences, 5(1).
Adeyemo, K. A., Ajibolade, S. O., Uwuigbe, U., & Uwuigbe, O. R. (2017). Mandatory Adoption of International Financial Reporting Standards (IFRS) by Nigerian Listed Banks: Any Implication for Value Relevance?. International Journal of Accounting Research, 3(1), 21-33.
Bassemir, M. (2018). Why do private firms adopt IFRS?. Accounting and Business Research, 48(3), 237-263.
Chen, C., Lee, E., Lobo, G. J., & Zhu, J. (2017). Who Benefits From IFRS Convergence in China?. Journal of Accounting, Auditing & Finance, 0148558X16688115.
Faraj, S., & El-Firjani, E. (2014). Challenges facing IASs/IFRS implementation by Libyan listed companies. Universal Journal of Accounting and Finance, 2(3), 57-63.
Fiechter, P., Halberkann, J., & Meyer, C. (2017). Determinants and Consequences of a Voluntary Turn Away from IFRS to Local GAAP: Evidence from Switzerland. European Accounting Review, 1-35.
Houqe, M. N., Monem, R. M., & van Zijl, T. (2016). The economic consequences of IFRS adoption: evidence from New Zealand. Journal of International Accounting, Auditing and Taxation, 27, 40-48.
Lahmar, A. T., & Ali, A. (2017). Factors influence Adoption of International Financial Reporting Standards (IFRS) Adoption in Libya. Global Journal of Accounting and Finance, 1, 18-32.
Ozu, C., Nakamura, M., Nagata, K., & Gray, S. J. (2018). Transitioning to IFRS in Japan: Corporate Perceptions of Costs and Benefits. Australian Accounting Review, 28(1), 4-13.
Perera, D., & Chand, P. (2015). Issues in the adoption of international financial reporting standards (IFRS) for small and medium-sized enterprises (SMES). Advances in accounting, 31(1), 165-178.
Phang, S. Y., & Mahzan, N. (2017). The responses of Malaysian public listed companies to the IFRS convergence. Asian Journal of Business and Accounting, 6(1).
Sharma, S., Joshi, M., & Kansal, M. (2017). IFRS adoption challenges in developing economies: an Indian perspective. Managerial Auditing Journal, 32(4/5), 406-426.
Tuzarová, S., & Mejzlík, L. (2018). The IFRS Assessment by Publicly Traded Companies. In The Impact of Globalization on International Finance and Accounting (pp. 341-346). Springer, Cham.
Yaacob, N. M., & Ahmad, A. C. (2017). First Time FRS Adoption among Top Malaysian Public Listed Companies. Terengganu International Finance and Economics Journal (TIFEJ), 2(1), 67-72.
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