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How Transitioning from GAAP to IFRS Can Drive Global Expansion for Your Business.

With Globalisation, international capital is flowing more freely than ever before. In fact, the IFRS Foundation reports that more than one-third of all financial transactions today are cross-border and the number is going to increase going forward. This includes not only companies raising capital and undertaking cross-border transactions, but also investors seeking to diversify with international asset classes.

Traditionally, each country maintains its own standards of accounting and financial reporting known as Generally Accepted Accounting Principles (GAAP). Lack of internationalism in local GAAP has pulled back Globalisation as different countries maintaining disparate frameworks, adding cost, complexity, and risk to business deals. The drawbacks of using the localised set of framework meant amounts reported in financial statements might be calculated on a different basis using different rules and different principles leading to different understanding and decisions.

This is where the International Financial Reporting Standards (IFRS) eliminates that problem by ensuring that different countries adopt the same, globally applicable set of accounting framework so that companies preparing financial statements and investors and others using those financial statements to make economic decisions speaks on the same language.

What IFRS Offers:

IFRS reflects on economic substance more than legal form and thus helping the companies and other stakeholders to have true and fair view of the transactions. IFRS has significantly transformed banks’ existing impairment assessment to address concerns about “too late and too little” provisioning for loan losses. IFRS benefits Firms, Investors and Analysts in multiple ways:

1-Investor Focused: IFRS is investor-friendly due to its broader application and adaptation since it includes harmonized and standardized reporting standards which do not require additional analysis. To add on, it reduces the differences between reporting standards of various jurisdictions and speaking the same language.

2-Principles based: It is principles-based as against GAAP which is rules-based. IFRS provides general guidelines that firms are encouraged to interpret to the best of their ability since same size doesn’t fit all.

3-Comparability: The adoption of IFRS has improved the comparability of financial statements across geography not only for investors, but also all stakeholders who use the financial statements.

4-Better access to Foreign Capital Markets and Investment: IFRS provides firms better access to foreign markets and investments. Adoption of IFRS improves the firms to access to financial markets by having the easy-to-use financial statements for Investors across globe.

With a view of having global standards for global markets, IFRS framework addresses the challenges by providing an internationally comparability standards having transparency, accountability and efficiency as its core strength to the financial market around the world.

Benefits of Transitioning to the IFRS

The IFRS has brought in transparency and standardised the quality of financial information, while also strengthening accountability by reducing information gaps and enhancing the ability of investors to identify risks and opportunities worldwide. It works to enforce three values at a global level:

  1. Completeness: All off-balance sheet information should be done away with, and financial statements must reflect the complete financial activity of the reporting company.

  2. Comparability: All companies need to have standardised statements that are easy to compare for analytical and investment purposes.

  3. Neutrality: There should not be any gaps in understanding accounts for companies.

Today, 167 jurisdictions have adopted the global IFRS standard and another 12 allow for its use. Overwhelming positive feedback has poured in from all directions for the IFRS reducing risk for domestic firms and attracting foreign capital. Needless to say, for any firm aiming to establish a global footprint, the IFRS could prove much more useful than GAAP. Eventually, the adoption of IFRS by all countries around the world gives even more increased usefulness and comparability of financial statements. However, make sure to partner with an experienced consultant to transition your accounting system.

“Higher the compliance for stakeholders, lower the price of your funds”

Blog by Krishnendu Chanda - Principal Business Analyst - IFRS, CRSPL

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