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In this world of finance that connects many nations across the globe, firms around the world need to adopt International Financial Reporting Standards (IFRS). It is important to understand IFRS and its impact on audit procedures as a financial professional. This blog explores what IFRS means, the introduction of newly enacted IFRS 18, and how these standards would change audit procedures in years to come.
What is IFRS?
International Financial Reporting Standards is an accounting framework designed with the primary objective of making financial reporting transparent, consistent, and comparable. Unlike country-specific standards like Generally Accepted Accounting Principles (GAAP), this global framework is especially important for multinational companies. It ensures that financial statements are reliable and comparable across different regions, facilitating smoother operations for businesses operating in multiple countries.
These standards emerged from the growing demand for an integrated framework of financial reporting, especially in a time when international trade and investment have spread across borders. With IFRS adoption, businesses can report their position and outcomes of finances in a manner that makes them understandable and beneficial to widely diversified users such as investors, regulators, and analysts.
The Role of IFRS in Auditing
It is to the auditor's advantage to be aware of IFRS since it governs the preparation of financial statements, and below are its impacts the audit process:
- Enhanced Transparency
One of the elements of IFRS is for transparency. The reason an auditor conducts a review process in financial statement preparation is to make them genuinely reflective of a company's performance and position. Increased scrutiny creates more confidence among stakeholders and creditors.
- Clarity for Cross-Border Application
IFRS encourages standardization of financial reporting, and there are fewer complexities in the comparison of financial statements across different jurisdictions. This makes it easier for auditors to compare financial statements from different jurisdictions. The resultant consistency benefits companies significantly when operating over a range of countries because the auditing process will be relatively simplistic and lead to a more accurate assessment of the financial health of the organization.
- Complexity and Continuing Training
The nature of international accounting standards is in a constant state of evolution, so constant training for auditors is in order to keep abreast with the changes and updates. Continued training contributes to adherence and allows audits to be done according to new standards.
- Improved Risk Assessment
International accounting standards impact the procedures that are adopted by auditors while evaluating risk. Although this influences financial reporting, the adaptation of IFRS brings attention to the processes followed in the evaluation of risks by the auditors. This would then bring out a more distinct sense of the level of financial risks that the company holds.
What's New: IFRS 18
One of the developments in this IFRS landscape is IFRS 18, titled "Presentation and Disclosure in Financial Statements," to replace the extant IAS 1 standard. IFRS 18, scheduled for implementation on January 1, 2027, will change the way financial information is presented.
Main Features of IFRS 18
- Clarity and Consistency
It provides more clarity to the financial statements such that users can understand and compare the different information provided by different organizations.
Compared to IAS 1, which prescribed strict requirements concerning presentation, IFRS 18 is much more flexible. Companies are in a position to present their financial information as best suited for their operations.
- More Disclosure Standards
The new standard would require more disclosure, meaning everything relevant that has an impact on the position of a company must be made available to the relevant stakeholders.
Implications for Auditors and Companies
As IFRS 18 becomes effective soon, it means that auditors and companies need to begin making appropriate preparations:
The auditor would, in turn, prepare to understand IFRS 18 sufficiently to test compliance during audits. This may even require updating audit techniques as well as formulating new tools for auditing financial statements under the new standard.
Accounting Teams Training: There is a need for companies to train their accounting teams on understanding IFRS 18 and implementing it. Indeed, there will be a change in financial reporting processes and the way financial information is represented.
This transition between IAS 1 and IFRS 18 is, therefore a very critical point in the realm of financial reporting, with many implications for auditing practice. It is thus important for accounting and finance professionals to be aware of these changes when the implementation date is fast approaching 2027.
Apart from compliance, understanding and adaptation with IFRS is about enhancing the clarity and credibility of financial reporting at the global level. The ease of moving through this transition is susceptible to early preparation and embracing opportunities presented by IFRS 18 on the part of auditors and businesses.
At BMS Auditing, we will guide you through change - ensuring that your financial reporting is correctly based on the most recent standards available. Seek guidance today to navigate better adaptation into IFRS and do much better audit processes.
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