Fact Checked

What Are the Disadvantages of IFRS?

Terry Masters
Terry Masters

International Financial Reporting Standards (IFRS) are an accounting methodology for preparing financial statements. This set of standards is designed to replace each country's national Generally Accepted Accounting Principals (GAAP) so financial statements from any corporation around the world can be evaluated based on the same set of accounting tenets. Although the global standardization of accounting standards has many benefits for international business, it also presents some disadvantages, particularly for countries that have well-established GAAP. The disadvantages of IFRS include a lack of detail, significant adoption costs and the perception that the IFRS are a lesser standard than what is already in place in some countries.

Investors, regulators, employees and the general public rely on the financial reporting system that requires corporations to reveal details of their financial position every year. This information must be presented in a uniform manner that allows reviewers to compare the information to industry standards. To ensure the standardization of financial reporting, each county's accounting industry adopts GAAP that governs the proper way for accountants to present financial information on behalf of companies.

Woman with hand on her hip
Woman with hand on her hip

When a corporation operates only within its own borders, national GAAP is an appropriate guide for financial reporting. With the globalization of markets and the rise of the multinational corporation, many companies have found it difficult to provide standard information that conforms to the GAAP in one country without violating GAAP in another. The International Accounting Standards Board (IASB) has promoted the adoption of IFAS that would apply worldwide and enable consistency in financial reporting, regardless of where the corporation is located.

Although many countries have adopted IFRS, there are significant holdouts. For some countries, some of the disadvantages of IFRS outweigh the current benefits. The most significant example of a country where the disadvantages of IFRS have impacted and delayed a transition to global accounting standards is the US.

The arguments over the disadvantages of IFRS in the US point to the fact that the IFRS is less detailed than US GAAP. In an effort to achieve global standards that are acceptable to all, the IASB has had to sacrifice a level of detail that national standards currently enjoy as a result of the process of honing the standards over time. Further, US GAAP is considered the gold standard of financial reporting. There is little incentive in the US and countries such as Canada to adopt what some consider to be a lesser standard for the sake of global consistency.

Other significant disadvantages of IFRS concern the cost of implementation. The accounting profession in each country that adopts the new standards would have to bear the cost of re-education and training. Corporations would also have to invest time and resources in the re-education process. Another issue is the cost to corporations that only operate nationally. The cost to these corporations in changing over to IFRS far outweighs any benefits.

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