Position Paper on Ifrs
Position Paper on Ifrs
Introduction
In recent years, there has been a rapid increase in business internationally along with a trend of enhanced globalization. Corporations around the world have substantially increased the level of business activity outside of their national borders, creating a significant problem for accounting. In previous years, countries involved in the global marketplace were permitted to use their own standards for accounting. These practices impair the usefulness of financial statements to investors and their investment decisions. Many investors have been discourages from investing outside of their home countries because of the difficulties in comparing the financial information from corporations with varying standards. Therefore, in attempt to deal with the increased demand for a common financial reporting language, the highly controversial International Financial Reporting Standards (IFRS) were created.
IFRS are a set of guidelines and rules created by the International Accounting Standards Board (IASB) to be used by corporations when compiling financial statements. Since the initial implementation, IFRS has been uses in over 100 countries for the preparation of financial statements by publicly held companies (AICPA, 2008). For Canadians, the changeover from Canadian GAAP to IFRS has already occurred on January 1, 2011. This movement towards international accounting standards will result in an improvement in financial reporting for Canada as a result of the increased comparability and an increase in disclosure notes.
Support (In Agreement)
Increased Disclosure
Compliance with disclosure requirements of IFRS increases the reliability of analysts forecasts.
There has been evidence that suggests that the disclosure requirements of IFRS have enhanced the ability of financial analysts to provide more accurate forecasts (C. Hodgson, 2008). Results have shown that for firms which provide “all or most of the financial disclosures required by IFRS, financial analysts are better able to predict earnings per share, a variable relevant to the valuation of a firms securities” (C. Hodgson, 2008). This would clearly suggest that the adoption of IFRS would lead to the advantage of investors, as more reliable forecasts free from errors will be made. Additionally, investors will grow increasingly more comfortable with the predictions of their analysts and may be willing to invest more.
Enhanced transparency will allow users of financial information to gain a better understanding of the firm.
By implementing IFRS, disclosure policies, users of financial statements will see an increase in transparency. Under IFRS, firms are expected to disclose more of their off-balance sheet items than previously required. Enhanced transparency provides the readers of financial statements with more information on the firm as a whole. Using this additional information, investors are better able to bring attention to those activities of the firm that do not support their best interests. This increased disclosure will allow analysts to be more critical and using their expertise allow them to better educate investors, and make better predictions of the future cash flow and operations of the firm. Analysts increased ability to analyze the activities of the firms will reduce the agency affect and better align the interests of managers and shareholders.
Information asymmetry will be reduced, causing markets to be more efficient.
The adoption of IFRS will lead to a reduction in information asymmetry because of the increased level of disclosure required by IFRS. Information asymmetry, the unequal amount of information two parties of a transaction are privy to, suggests that markets are inefficient. One way to determine the effect of information asymmetry (with particular focus on insider trading) is to analyze the bid-ask spread, the difference in share price between the bidding and asking price of a stock. After the German corporation adopted IFRS, it was discovered that there was a bid-ask spread reduction by 70 base points (Joachim, 2006). This reduction shows that through the increased disclosure requirements, information asymmetry is substantially reduced. For an investor, this allows them to have more trust in the information provided to them in the financial statements. Investors will feel more comfortable knowing that the information they receive is closer to the information other hold, than in the past.
Increase in Comparability
Ease of comparability has allowed Canadian firms to attract international investors.
One of the key benefits of