What are some of the problems identified in the interpretation and application of IFRS? Use examples to illustrate.

Executive Summary

The purpose of the report is to examine, the various hurdles that have come to light, impeding the successful interpretation an implementation of international financial reporting standards (IFRS). Researchers have found such barriers to be cropping from:

-differences in cultures among nations

-semantic and other barriers of language translation

-differences in legal, political and economic settings

The report puts forward recommendations to mitigate the complexities in interpretation and implementation of IFRS. Such recommendations are with specific focus on:

-improving translation process to overcome semantic barriers of language

-sensitising the organisational workforce to global economic, political and legal trends

-making workforce aware of cultural differences while evaluating accounting reports and documents.

_____________________________________________________________________________________________________

As international trade an economic interdependence between corporate and nations increased, a need was felt to communicate information relevant to trade, finance and especially account through a common platform. Thus, in 2002 European Union mandated the use if IFRS as a common language to communicate financial and accounting health of a company. The use of such a language is to make accounting statements and documents comparable and understandable across national barriers. The relevance of the IFRS was so widely acknowledged that currently over a 100 countries have adopted the IFRS approach of presenting accounting statements; a lot of others are gearing up to align their systems with this radical approach.
However, as the use of IFRS grew, it was noticed that there existed a lot of barriers which reasonably distorted accounting statements in different settings, making such documents irrelevant for comparison and rendering the standards inconsistent on approach.

Researchers and analysts were unable to undermine a lot of problems that affected the understanding and implementation of the IFRS thus, affecting the harmonising of accounting standards in various settings.

Some of the major hurdles are elucidated below:

1. Cross cultural differences- researchers have determined through a plethora of studies, that cross - cultural differences go the extra mile in influencing accountants in a particular culture to present accounting statements in such a a manner so as to render them incomparable when studies under a different cultural setting. Two major units of accountancy which have been noticed to be influenced by cultural parameters are conservatism and secrecy. While the former influences measurement of financial information, the latter relates to presentation and disclosure in financial reports; both of them significant enough to render cross border comparability dysfunctional. According to social psychologist Geert Hofstede's research, there are four dimensions that determine the core values of a culture thus, explaining the various similarities and differences between cultures; theses dimensions being:

a) Uncertainty avoidance- the level of comfort, individuals in a society share with risk and ambiguity.
b) Individualism- the level of interdependence or independence of individuals in a society.
c) Achievement orientation- the level of importance given to values like performance, goal orientation and achievement.
d) Power distance- levels of acceptability of hierarchical structure and unequal power distribution, by society.

From an accounting perspective, conservatism refers to the tendency of accounting for all possible losses and ignoring al possible gains. Relating to Hofstede's four dimensions, countries with higher levels of conservatism have ingrained in their cultural values, uncertainty avoidance, and interdependence among individuals and are achievement oriented. Similarly, secrecy refers to the amount of disclosure of information in accounting reports. Countries with high level of secrecy usually have lesser appetite for risks, great power distance, are less oriented towards achievement and have independent individuals. Culture influences applications of IFRS especially where judgement is required; since, IFRS is principles based. This embodies a lot of subjectivity and hence, judgement on part of the accountant is required for example, German accountants are known to be more conservative when considering cases of recognition of a construction contract loss as compared to their American counterparts. Values such as risk avoidance and tight knit social fabric can be directly associated with the German culture whereas, entrepreneurship and individualism are cultural benchmarks of the American society. (ref.5). Thus, it can be deduced that cultural values influence accounting values affecting implementation of IFRS.

2. Semantic barriers of language - the official language used to publish IFRS is English; however, due to wide international acceptance of IFRS, it has been translated in over 40 languages for non - English speaking accountants. Although due care was taken to ensure a correct translation process, there exists certain problems impeding the smooth and consistent interpretation of IFRS in various languages these problems in translation are of two general types:

a) Problems in the translation process- these have occurred due to discrepancies and fallacies in the translation process itself. These problems have surfaces due to the shortcoming of the process.
b) Problems in translation- these problems exist due to ingrained problem in translating for example, the lack of a word in a language that conveys the exact meaning and feeling of a word in another language.

Consider the word "remote"; the interpretation and translation of this word has been particularly problematic. It occurs in IAS 37(Para 28) - indicates that a contingent liability is disclosed unless the possibility of an outflow of resources embodying economic benefit is remote. It occurs in IAS 31(Para 45) - requires separate disclosure of specific types of contingent liabilities unless the probability of loss is remote. Now, the word remote has five different meanings in English of which, the meaning, 'very unlikely' is the one that seems to be intended in IAS 37 and IAS 31. The word having multiple meanings (problems in translation process) and the lack of equivalent word in some languages (problem in translation), is of particular importance to translators. For instance in the French language, direct translation for remote is isole which means distant or vast. So the IFRS translator uses the word faible as indirect translation. Faible's direct English translation being weak, faint or light. Unsure, whether the word communicates the essence of remote the word tres (meaning 'very') is used besides faible in IAS 31; whereas, only faible is mentioned in IAS 37. Thus, the translation process has skewed the disclosure of information in IAS 31 and IAS 37 by suggesting that information of liability is to be presented unless the probability of loss is remote in IAS 37 as against IAS 31 where information about liability is disclosed unless the possibility of loss is "very remote". (ref. 4)

Summing by the way of the above example, it is clearly understood how problems in translation and semantic barriers of language have contributed as barriers in implementation of IFRS.        

3. Differences in economic, political and legal setting-

a) Economic settings- the implementation and understanding of IFRS has varied from economy to economy. In liberal and developing Economies such as china or the USA, there is a greater degree of initiative for enterprise when compared to relatively closed economies such as Bangladesh and Bhutan. High degree of enterprise is an indicator of acceptance of risk thus, accountants in such nations tend to be less conservative as against economies with relatively less boost for entrepreneurship and commerce.

b) Political and legal settings- the political and legal climate go a long way in determining the exact manner of implementation of fauna vial reporting standards. State of laws, political ideology and legal bias help accountants and judgement accordingly. For example, approximately 33% of accountant in the USA consider a law suit as a contingent asset, as against 65% in Greece.72% of accountant consider a law suit a a contingent liability as against 59% in Greece. The data clearly reflects upon the ability of the accountants to gauge the there if law an political bias in their respective situation. (ref.3)

Therefore, it can be deduced that, when we consider cultural differences and language barriers as hurdles to correct interpretation an successful interpretation of IFRS, due attention must also be paid to differences in economic, political and legal spheres across borders.

To counter such hurdles, analysts standard setters have also come up with prospective solutions and recommendations to assigning harmonising the use IFRS globally. Such recommendations are listed as follows:

1. International audit firms and multinational corporations must work towards sensitising their workforce about cultural difference and biases, so the staffs is prepared while evaluating work of their colleagues or organisations from different locations and cultural background. This will also aquatint the workforce with the trends in their own culture and how not affects their own judgement and understanding.

2. Problems in translation can be greatly reduced by firstly, selecting translators who are not only good at languages but, also have knowledge of accounting; secondly, use of ambiguous words and phrases can be avoided, so as to bring out the meaning clearly. Finally, techniques such as back translation can be utilised wherein, a word once translated by a translator to another language, is translated back to English by another translator to double check for consistency.

3. Current practitioners must make an effort to train future professionals from the start. Experienced professionals and educators have the responsibility to enlighten budding accountants about the emerging standards and the need to develop a logical judgement while operating in an international environment. Educators also have the task to reach students to look through political, legal and economic bias and work towards standardising financial reporting across borders.

Inferring from the report, it can be concluded that IFRS surely provide the road ahead in facilitating stronger ties in international trade practices by providing a common language, a ground for mutual understanding while transacting in a global economy. However, it must be purged of the existing weaknesses in its framework. Therefore it is imperative for practitioners of financial management and accounting to take immediate action towards making IFRS even more consistent across borders, to utilise the standards efficiently.

References

1.culure's consequences: comparing values, behaviours, institutions, and organisations across nations, 2nd edition- Geert Hofstede

2.Ball R. (2006) 'international financial reporting standards, IFRS: pros and cons for investors', accounting and business research.

3. The influence of culture on accountants' application of financial reporting rules, Abacus, March 2007.

4. Inter linguistic comparison of international accounting standards. The case of uncertainty expressions, by Ronald A. Davidson and Heidi H. Chrisman, the international journal of accounting, volume 28 issued on 1993.

5. Interpretation of Uncertainty Expressions: A Cross-National Study,” Accounting, Organizations and Society, Jan. 2003, Timothy S. Doupnik and Martin Richter