Barriers and Challenges to IFRS Adoption: A Literature Review

Research Objective, Questions, and Methodology

This research seeks to understand the challenges involved in simplifying global accounting. Presently, approximately 100 countries require companies to use the IASB's International Financial Reporting Standards (IFRS). This work seeks to understand the challenges and barriers those countries face in adopting these accounting standards.

Introduction: Complexity and Implementation Barriers

The questions this research seeks to answer are as follows:

1) What barriers or challenges do countries face in adopting the IASB's International Financial Reporting Standards (IFRS)?

2) What supports are in place to assist countries in adopting these standards?

The methodology employed in this research is qualitative, conducted through a review of relevant academic and professional literature.

Implementation of the IASB's International Financial Reporting Standards (IFRS) faces barriers and challenges in many countries. Technical problems are known to exist in Pakistan, Turkey, and South Africa, as reviewed in the United Nations Conference on Trade and Development report published in August 2007. Other barriers and challenges have been identified in additional works referenced herein. Compliance with IFRS is greatly dependent upon the effectiveness of implementation at the local level throughout the countries that intend to comply with these standards.

Literature Review: Global Harmonization Challenges

In a recent report, Allen Blewitt, Chief Executive of the Association of Chartered Certified Accountants (ACCA), warned that "implementation of, and compliance with, International Financial Reporting Standards would be adversely impacted unless the standards were made less complex" (ACCA, 2007). Blewitt specifically stated, while speaking at a conference in London:

"What I believe the IASB most urgently needs to address are the barriers to implementation. From talking to our members working in business around the world, it is clear that the length of the standards and complexity of the concepts represent a very real problem in many countries. The standards have been described to me as a major turn-off and disincentive for accountants in commerce and industry. People who initially qualified as accountants and are now principals and managing directors resent that they can no longer understand the accounts of the business that they helped to build. I am concerned that, despite the name of the project, the focus of IASB's considerations are going to be large unlisted entities. The overwhelming need for a new set of standards is not for these few companies but for the much larger numbers of genuine SMEs. If the IASB fails to satisfy this real and urgent demand that exists around the world, then some other body must step in and deal with the real problem. What is needed is highly sophisticated translators with good knowledge of language as well as technical accounting concepts. Such people are rare. This is compounded in the standard-setting process when there is a short period of time between exposure draft and finalization. This does not give sufficient time for those countries where translation is required to first complete the translation, then disseminate the exposure drafts, and finally synthesize a response. Global standard setting will have to grapple with these issues if it is to be ultimately credible, beyond the largest entities." (ACCA, 2007)

The work of Susan Thetford entitled "Global Accounting Harmonization: A Challenging Change," published in the Trusted Professional journal, states that "the old adage 'with change comes challenge' is certainly proving true as many countries, including all 25 members of the European Union (EU), require adoption of international financial reporting standards (IFRS) — formerly known as international accounting standards (IAS) — for the first time in 2005" (Thetford, 2005). Thetford provides as an example the fact that 2,000 listed companies in the United Kingdom alone needed to convert from U.K. generally accepted accounting principles (GAAP) to IFRS through use of "special transition rules covering past transactions and opening balances" (Thetford, 2005).

Thetford relates that ten percent of New York Stock Exchange and NASDAQ listed companies are non-U.S. companies, including some of the largest world corporations. These companies are required by the Securities and Exchange Commission to submit one of the following: (1) financial statements that conform to U.S. GAAP; or (2) financial statements prepared under their own GAAP (e.g., IFRS), accompanied by a reconciliation of earnings and net assets to U.S. GAAP figures (Thetford, 2005). Thetford concludes that "cross-border accounting issues are here to stay" (2005).

Identified challenges for U.S. companies include the fact that U.S. subsidiaries of foreign entities are required to follow the same accounting standards as their parent companies, which means IFRS for many of these firms. Additionally, "U.S. multinational entities seeking to enter new markets or to expand operations abroad may need to provide IFRS financial statements in order to obtain an operating permit or to raise capital. They will find it increasingly easier to recruit local staff that is familiar with IFRS rather than with U.S. GAAP" (Thetford, 2005).

Thetford identifies the following challenges for standard-setters in the convergence of U.S. GAAP with IFRS: (1) SFAS 151 brings U.S. GAAP in line with IFRS in accounting for unused capacity and spoilage; (2) SFAS 153 brings U.S. GAAP in line with IFRS in accounting for nonmonetary exchanges; (3) SFAS 123R requires fair-value accounting for employee stock options using methods comparable to IFRS 2; and (4) SFAS 146 on restructuring specifically refers to IAS 37 as justification for that standard (Thetford, 2005).

Differences still under review include "accounting policies, construction contracts, investments in joint ventures, interim financial reporting, and research and development costs" (Thetford, 2005). In 2005 all 7,000 EU publicly traded companies were required to apply IFRS in preparing their financial statements. New and revised standards included five new IFRSs and 17 amended IASs resulting from the IASB's Improvement Project and Phase I of its Business Combinations Project. Thetford notes the more significant revisions include: (1) the LIFO method for costing inventories is no longer allowed; (2) the concepts of "fundamental error" and "extraordinary items" are eliminated; (3) trading securities are included in a larger defined category of financial instruments "at fair value through profit or loss," and entities may designate any financial asset or liability into this category; (4) fair value hedge accounting may now be used more readily for a portfolio hedge of interest rate risk; (5) guidelines for share-based payments have been added; (6) the pooling-of-interests method for business combinations is no longer allowed; (7) goodwill is no longer amortized, and negative goodwill is not recorded in a business combination; and (8) new requirements for noncurrent assets held for sale and discontinuing operations have been provided (Thetford, 2005).

Thetford also relates that the IASB has additional accounting issues on its agenda, including: (1) insurance contracts — Phase II of the IASB project; (2) financial reporting by small and medium-sized entities; (3) business combinations — Phase II; (4) disclosures for financial instruments; (5) standards and guidance for management commentary; (6) financial guarantees and credit insurance; (7) cash flow hedge accounting of forecast intragroup transactions; and (8) reconsideration of the "fair value option" (Thetford, 2005).

The work entitled "Challenges and Successes in Implementing International Standards: Achieving Convergence to IFRSs and ISAs" relates that Peter Wong, in coordination with senior IFAC staff members, identified the following potential challenges to adoption and implementation of international standards: (1) issues of incentives — factors which might encourage or discourage national decision-makers from adoption; (2) issues of regulation — regulatory challenges in adoption; (3) issues of culture — challenges arising from cultural barriers in adoption and implementation; (4) issues of scale — implementation barriers associated with the relative costs of compliance for small and medium-sized entities and accounting firms; (5) issues of understandability — the complexity and structure of the standards; (6) issues of translation — the ease of translation and the resources available to undertake it; and (7) issues of education — the education and training of students and professional accountants in the international standards (Wong, 2004).

Stakeholders identified actions that must be taken to address these challenges, including: (1) successful adoption of the international standards depends on the development of high-quality standards; (2) integrity in the application of the international standards is essential, and preparers, auditors, and users of financial statements must encourage and support compliance with both the substance and form of the standards; (3) adoption and implementation require action at both the national and international levels — nationally, governments, regulators, and national standard-setters must place international convergence as a priority, and internationally, standard-setters must establish processes that facilitate national input and lead to globally accepted, high-quality standards; and (4) to achieve international convergence, action is necessary at all points along the information supply chain, including boards of directors, management, auditors, standard-setters, regulators, lawyers, investment bankers, analysts, credit rating agencies, and educators (Wong, 2004).