Impact of Financial Reporting Standards on Quality of

Financial Statements
Syed Sibite Hassan Shah-17171
Anoosha Asim-17292
Hussain hadi-17482

INTRODUCTION:
International Financial Report Standards (IFRS) is the dominant and widely used methods and set
of rules and standards considering the Accounting field. Just as we need a common language to
converse with each other, similarly accountants and business stakeholders need some common
language to communicate the accounting knowledge and data. International Financial Reporting
Standards (IFRSs) were created to guarantee uniform standard as well as great nature of financial
reporting. It is developed by the IFRS Foundation and the International Accounting Standards
Board (IASB), since 2001. It has also been recognized by more than 140 jurisdictions in the world,
including by the European Union. It is considered to improve the quality of financial statements.
The basic purpose of financial statements is to let financial information of the entity or business
to be easily understood and be useful to the stakeholders of the business while making decisions
like investments, loaning etc. Although financial reporting users include a large number of
subjects, IASB focuses on the needs of stakeholders in capital markets especially. Amongst them,
investors are those who are most in need of information from financial statements, given that
the firm usually does not provide its financial information individually. Moreover, as investors
provide risk capital to firms, their needs are therefore considered as highly representative of the
needs of a wide range of users.

FACTORS AFFECTING FINANCIAL STATEMENTS:

The factors that affect the quality of the financial statements consist of:
1. Understandability: This does not only mean that the figures and headings of the
financial statements must be clearly mentioned and separated, it also includes the break
ups of the expenses and revenues and other complex information step by step,
mentioning their sources and other details in the Notes to Accounts
2. Comparability: The data mentioned in the statements must be able to be compared
with the statements of other entities.
3. Reliability: The data presented must show the true picture of the entity. The figures and
transactions mentioned, must be real and honest and verifiable, and must never be
 misleading. In case of any uncertainty or expectation of any mishap, the statements
should very openly disclose it.
4. Relevance: The data presented should be economically relevant. This means that to an
investor, the data must allow predictions to be made and their predictions to be
confirmed.

IMPACT:
The IFRS plays an important role in ensuring these qualitative factors in financial statements.
The IFRS Foundation states that IAS/IFRS are aimed at insuring that firms publish high quality
reports, which can be proven by the fact that European Union has adopted it as its official
accounting standards in European Regulation 1606/2002 which states that “in order to
contribute to a better functioning of the internal market, publicly traded companies must be
required to apply a single set of “high quality international accounting standards” The European
Parliament adopted IAS and IFRS articles and regulations before actual enforcement of IFRS
altogether, which had a very positive impact on the stock market of European nations, every
time there was a speculation of IFRS being imposed in Europe. This was because IFRS
implementation has a lot of pros to the quality of financial statements. For example, Auditors
can justify their professional decisions or actions by using standard to show they are following
the best practices, and thus increase the value of their professionalism. A single set of
accounting standards will ensure comparability, and enable companies from different segments
of the world to apply the same standards. It increases transparency, allowing easier cross-
border investment with higher liquidity and low cost of capital. It will also cut down the time
and costs of preparing financial statements according to different standards and regulations,
achieving enormous savings of capital in the longer term. More than 70% of the companies
examined between 2004 and 2006 had a higher return on equity under IFRS. Under it,
companies will produce a standardized set of accounting and financial reports for complying
with local legal and revenue related requirements. This will help improve the tax planning
processes. Its legitimacy can be explained by findings of a few individuals and firms. Ashbaugh
claims that the decision to report under IFRS is positively related to corporate size, the number
of foreign equity markets on which the firm’s shares are traded and the additional issuance of
equity shares. Gassen and Selhorn found that international presence and greater size of
business firms are also associated to voluntarily shifting to IFRS. Another study shows that first
time adopters of IFRS experienced increase in market liquidity and capital marketing benefits
were present only in countries where policy was strictly implemented . Thus, by these findings
and reports, we can safely say that corporations voluntarily shifting to IFRS have an incentive to
improve transparency and quality of financial reports, along with providing users more
information similar to them, helping to attract foreign investors.

ON THE OTHER SIDE:

However, there have also been many arguments presented against IFRS. Implementing and
impact of IFRS is not independent, it goes hand in hand with
1. Involvement of government in economy,
2. Government involvement in financial reporting practices,
3. Legal systems,
4. Depth and Financial market structures,
5. Structure of cooperate governance and a pair more.
Moreover, IFRS focuses more on fair values of accounting elements, and does not specify very
descriptively the requirements to recognize the revenues. It may classify certain variables as
debt, whereby they may be considered equity by logic. Less earnings management and a
timelier loss recognition is experienced by firms voluntarily adopting IFRS. It will cost 12% of
revenues to implement the standards nationwide, which means the cost can be as high as
several billion dollars and cost to achieve the additional comparability is not worth this much.
And even then, if IFRS is implemented, the financial reports and statements will not be
identical, due to differences of national economic and legal conditions and differences due to
cultures, language, other environmental factors.
 Contribution

First 450 words Syed Sibite Hassan

Second 450 words Anoosha Asim

Last 150 words Hussain Hadi