You are a high-rolling international investor, akin to say a George Soros. Your
ID: 2568967 • Letter: Y
Question
You are a high-rolling international investor, akin to say a George Soros. Your staff researches and often recommends international investments that you may be interested in and possibly purchase. They have become experts on the economic, political, legal and cultural environments of many countries of the world. They have analyzed the financial positions of many investments using the financial reporting standards of those countries. The world is rapidly moving toward a single set of standards such as IFRS so that the comparing of financial statements can be done easier. Is it a good idea to have your staff start sending you reports using only IFRS? Why may converting all financial statements to IFRS not be the most appropriate action to take nor be the best standard for measuring operating performance of the possible investments in those countries?
Explanation / Answer
The Conversion to IFRS should not impact business economics; it will lead to financial statements better reflecting reality. The additional disclosures required under IFRS may provide further insight for investors, influencing how they value stocks. Even the International investors are likely to attach more credibility to our financial statements post-IFRS convergence and it will significantly improve disclosure in annual reports. Further, the increased disclosure and more detailed measurement principles under IFRS will make financial statements more relevant to the needs of investors and make it much more difficult for companies to adopt questionable accounting practices. Hence, it is not a bad idea to implement the IFRS and prepare the books of accounts and the financial statements accordingly.
But converting all financial statements to IFRS may not be the most appropriate action to take nor be the best standard for measuring operating performance of the possible investments.
Firstly, Embedding IFRS reporting into the financial reporting systems and processes is cumbersome and time consuming. It’s not a mere year end conversion activity that can be done with the assistance of auditors.
Secondly, significant time and effort is required to train both internal and external stakeholders and create awareness of the impact of IFRS.
Thirdly, the Business indicators and bank loan covenants may require review due to changes in reporting of income, classification of assets and liabilities. A reclassification will immediately breach a debt/equity or even a current asset to current liability ratio covenant in the loan agreement.
Further, the classification rules between equity and liability instruments would result in certain instruments, such as a plain-vanilla preference share, being classified as debt instruments instead of equity, thereby adversely affecting debt-to-equity and profitability ratios.
Lastly, creating a high level of awareness in the operational people who don’t understand accounting concepts and getting their buy-in is going to be a challenging job. Eg; marketing will have to accept that there is “no free lunch” and everything has a cost that will end up in the P&L, legal will have to understand that “substance” of a sale will determine accounting and not a court order, HR will realise that concessions given to staff are accounted differently.
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