Role of IFRS in Safeguarding Investor Interests

Role of IFRS in safeguarding investor interests

IFRS is a global financial reporting language. There are 130+ countries that have either adopted the International Financial Reporting Standards (IFRS) or are in the process of doing so.

How does IFRS help companies to safeguard investor interests?

The correct adoption of a single set of trusted global accounting standards brings transparency and international comparability of financial information, which increases the confidence in and efficiency of the capital markets.

The consistency in when transactions are recognised, and how they are measured and presented, enables investors, analysts and other users of financial statements to make informed investment decisions. This is particularly more relevant in the current volatile markets.

How is financial reporting standardised globally?

As of March 2020, there are 41 international accounting and financial reporting standards and 20 interpretations (these are issued to clarify specific issues not addressed by any standard) to ensure consistency in how transactions and events are recognised, measured, derecognised, presented and disclosed.

The world of IFRS has gone through a huge change in the last decade. The following standards and interpretations have been effective in the last decade, which has helped improve the quality of financial information available to the investors:

International Financial Reporting Standards : 

  • IFRS 9 Financial Instruments
  • IFRS 10 Consolidated Financial Statements
  • IFRS 11 Joint Arrangements
  • IFRS 12 Disclosure of Interests in Other Entities
  • IFRS 13 Fair Value Measurement
  • IFRS 14 Regulatory Deferral Accounts
  • IFRS 15 Revenue from Contracts with Customers
  • IFRS 16 Leases

IFRS 17 Insurance contracts was published in May 2017 and is effective for periods beginning on or after 1 January 2023.

Interpretations

  • IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments
  • IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine
  • IFRIC 21 Levies
  • IFRIC 22 Foreign Currency Transactions and Advance Consideration
  • IFRIC 23 Uncertainty over Income Tax Treatments

In addition, we have a revised “Conceptual Framework for Financial Reporting” and also amendments to other standards.

How do the changes in the accounting standards help safeguard investor interest?

Let’s look at two examples.

IFRS 16 Leases, effective for periods beginning on or after 1 January 2019 replaces IAS 17 Leases. IAS 17 Leases had a fundamental flaw when it came to the recognition of operating leases by the lessee (customer). Though the lessee had a right-of-use asset and obligation to pay rentals for the underlying asset, there was no asset or liability recognised on the balance sheet. The lease financing was basically off-balance sheet and the lessee’s leverage was under-stated. The investors and analysts adjusted the published financial statements by estimating the lease liability and related asset for the purpose of their analysis.

IFRS 16 fixes this issue through a single lessee accounting model, which requires most leases (optional exemptions available for short term leases and low-value assets) to be on the balance sheet with no distinction between operating and finance lease. It ensures that the leverage is correctly stated on the balance sheet. It improves the comparability of financial statements of entities that borrow money to buy an asset and those that lease assets. It is estimated that this change has brought approximately USD 3 trillion of lease debt on the balance sheet.

IFRS 17 Insurance Contracts is the first proper standard on insurance contracts accounting. The standard changes the way insurance business is presented in the financial statements. It will enable the insurer’s financial statements to be more comparable internationally which helps investors and analysts make informed investment decisions.

In summary, experience has shown that the correct application of IFRS can result in enormous benefits, including a reduction in the cost of capital and more informed investment decisions. Thus the role of IFRS is crucial in safeguarding the investors’ interest by bringing in transparency, accountability and efficiency.

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