Introduction and Purpose StatementThe ever-increasing globalization and integration of international financial markets have given rise to the need for harmonized international accounting standards. The International Accounting Standards Board (IASB) has responded to the need mentioned above by developing the International Financial Reporting Standards (IFRS) and encouraging accounting bodies around the world to adopt the standards. One hundred and thirty-eight countries have adopted the IFRS standards as developed by the board. One hundred and fourteen of them have fully adopted the standards with no modifications and have made a requirement for their publicly listed companies to use IFRS (Nurunnabi, 2015). The rest, such as The Kingdom of Saudi Arabia, have not adopted the standards fully, as some of their national accounting standards do not correspond to IFRS. The adoption of IFRS is faced with many other challenges apart from the lack of correspondence between it and the national standards of different countries. The various problems facing the adoption and convergence of IFRS are explored in the present essay. Therefore, the research question that the project seeks to answer is ‘what are the challenges facing the adoption and convergence of IFRS?’
The research question involves theory application, and the researcher will rely on what has already been published concerning the topic. The researcher will use search engines and library databases to obtain information about the research topic. The researcher will conduct online searches for the challenges facing the adoption and convergence of IFRS. Most of the resources will be journals and other documents detailing the findings of research work conducted by other scholars.
The various problems for the adoption and convergence of IFRS identified include funding for IASB, tax implications, preparedness for the transition to IFRS, compliance issues and enforcement mechanisms, and cultural and structural barriers.
Funding of the IASB
Funding of the IASB is one of the biggest obstacles to the adoption of IFRS. The board relied on voluntary funding in the early 2000s. According to IFRSUSA (2016), the board was largely financed by the IFRS Foundation through voluntary contributions from different capital markets across the world. However, the voluntary contribution funding model left the board vulnerable to influence, particularly concerning accounting standards, from the organizations that provide funding. For this reason, some countries and entities may feel that the board is not free from undue influence and politicization maneuvers. According to Udofia & Ikpantan (2015), adopters need the assurance that IASB is truly independent, has a stable funding, expert staff, and appropriate governance.
Tax implication as a challenge facing the adoption and convergence of IFRS is particularly common in the United States. The adoption of IFRS would require companies to track a significantly larger number of book–tax differences, particularly if the state and federal tax laws in use are not amended to reflect IFRS. Additionally, the adoption would force some companies to pay higher taxes because it prohibits the use of the LIFO method of valuing inventories. Its Internal Revenue Code requires companies to use the same inventory valuation method for both financial and tax reporting purposes (IFRSUSA, 2016). Other issues related to tax implications as a challenge facing the adoption of IFRS include the implementation of transfer pricing policies, the apportionment of income, particularly if IFRS changes the underlying apportionment factors and the taxes based on the net worth o equity of a company.
Preparedness for Transition to IFRS
Different businesses and countries have varying levels of readiness for IFRS transition. For instance, large and international companies may have experts or IFRS training programs to help in the transition. Others have sufficient financial resources to hire IFRS experts on a permanent basis or as part-time consultants during the transition process. On the contrary, many medium and small companies do not have enough resources to support the transition process (IFRSUSA, 2016). They are not able to hire IFRS experts or to pay for IFRS training. Additionally, countries such as India do not have enough trained professionals to help the country adopt IFRS standards. India also lacks enough training facilities and academic courses to ensure that its companies, auditors, and other stakeholders are appropriately trained and skilled in applying and interpreting IFRS.
Compliance Issues and Enforcement Mechanisms
Many companies, their accountants, and auditors are yet to fully comply with IFRS, even in countries that are listed as having fully adopted the new accounting standards. Additionally, many countries, particularly those with weak institutions, lack sufficient enforcement mechanisms of IFRS. Ideological differences between different countries are yet another challenge facing the adoption of the standards. For example, some Arabic countries fail to adopt IFRS due to their political differences with the West (Mathkur, 2015). They consider the rules to have originated from the foreign enemies.
Cultural and Structural Barriers
The adoption and convergence of IFRS are also faced with many cultural and structural differences. The cultural barriers include religious and language barriers. For example, the Saudi culture is one of the reasons why the Kingdom has not adopted IFRS fully. Islam, which is the major religion in the Kingdom, has a significant influence on how transactions are handled and accounted for. Some Islamic teachings make it very difficult for the Kingdom to adapt to IFRS. For example, Muslims believe that God owns all property and that it should be used for the common good of all people instead of being exploited. The Quran prohibits the charging of interests, which it refers to as riba. Additionally, Zakat, which one of the five pillars of Islam, also prevents the Kingdom from adopting IFRS fully. It requires the wealthy members of the society to redistribute their excess wealth to the disadvantaged people. According to Skotarczyk (2011), it also requires the religious valuation of assets and, therefore, renders historical cost accounting, which is mostly used in IFRS, ineffective. Language barrier is yet another of the challenges facing the adoption and convergence of IFRS, particularly in Arab-speaking nations. According to Alkhtani (2010), the translation of IFRS into Arabic is very difficult and costly, particularly for small companies with inadequate resources. In the US, individual investors are satisfied with the current US GAAPs accounting model and are opposed to the adoption of IFRS.
Some of the challenges facing the adoption and convergence of IFRS have been explored in the present essay. They include the funding for IASB, tax implications, preparedness for the transition to IFRS, compliance issues and enforcement mechanisms, and cultural and structural barriers. Adopters feel that the current contribution funding model exposes IASB to undue influence and politicization. The adopters also believe that the standards make them pay more taxes and affect the implementation of transfer pricing policies. Concerning the preparedness for the transition to IFRS, most companies lack sufficient recourses to hire IFRS experts or train their employees on IFRS matters. Some countries lack enough IFRS experts, training institutions, and curriculum to train IFRS experts. Additionally, most countries lack sufficient enforcement mechanisms for IFRS. Religion and language barriers are the primary cultural and structural obstacles to the adoption and convergence of IFRS. The teachings of Islam make it difficult for most Islamic nations to adopt IFRS. Finally, most Arabic-speaking countries and companies find it difficult to translate IFRS into Arabic.
- Alkhtani, S. (2010). The Relevance of International Financial Reporting Standards to Saudi Arabia: Stakeholder Perspective (1st ed.).
- IFRSUSA (2016). IFRS USA. IFRS USA. Retrieved 26 November 2016, from https://ifrsusa.wordpress.com/
- Mathkur, N. (2015). Worldwide Adoption of International Financial Reporting Standards (IFRSs). Research Journal of Finance and Accounting, 6(7). Retrieved from http://www.iiste.org/Journals/index.php/RJFA/article/viewFile/21609/22457
- Nurunnabi, M. (2015). Benefits and Challenges of IFRS Adoption in Saudi Arabia – Wiley Insight. Ifrs.wiley.com. Retrieved from http://ifrs.wiley.com/news/benefits-and-challenges-of-ifrs-adoption-in-saudi-arabia
- Udofia, L. & Ikpantan, I. (2015). International Financial Reporting Standard (IFRS) Adaptation in Nigeria: Challenges and Prospects. Research Journal of Finance and Accounting, 6(18). Retrieved from http://iiste.org/Journals/index.php/RJFA/article/viewFile/26119/26075