What is IFRS? It is the global accounting and financial reporting language. The purpose of
IFRS is to ensure that a transaction is recognised in the same way, irrespective of what part of the world it happens in.
Uniformity in financial reporting ensures that if the same transaction was carried out in Delhi, Durban and Dallas, it is reported in the financial statements in the same way. IFRS helps investors better understand the financial statements. It increases the credibility of the companies (as they report in a language that is universal) and reduces the cost of raising capital.
The big question that arises when moving to IFRS is “adoption” or “convergence”. Let us first understand the difference between the two.
“Adoption” means that the entities use IFRS as issued by the International Accounting Standards Board (IASB). This implies that the national accounting standards would lose their identity. On the other hand, the national accounting standards could be made similar to IFRS and hence the national flavour continued to be retained. In the latter case we would have the national accounting standards “converged” to IFRS.
Adoption is probably easier than convergence. The risk in case of convergence is that we have carve-outs from the IFRS as issued by the IASB, which means that the converged accounting standards are not exactly the same as IFRS. Can the entity still state in its financial statements that it is IFRS compliant?