The International Financial Reporting Standards (IFRS) is a principal set of bookkeeping standards adopted by nations worldwide. IFRS was established by the International Accounting Standards Board (IABS). This is an international standard for the preparation of financial statements of public industries. IFRS adoption is remarkably widespread with about 113 nations being conformed to it. The taking up of IFRS demands that businesses take a practical role to attain compliance. The globalization of commerce and finance has generated the necessity for a universal set of accounting principles. These principles are used by all nations as a way to improve the effectiveness of cross-border businesses management and accountability. This paper will discuss the effects of IFRS on the oil industry (Needles, 2009).
IFRS affects each aspect of the oil industry. The American Institute of Certified Public Accountants states that IFRS influences nearly every aspect of an oil industry operation. The execution of IFRS leads to alterations in three principal areas of industry. The oil industry for instance is affected by having to develop modern accounting strategies, reorganize reporting procedures, bring up-to-date information systems, and train staff at all levels of the industry. The techniques used to compute results whether dividend distribution, reimbursements, business strategies, and payment of tariffs must be evaluated and acclimatized to the new system. Last but not least, a change management procedure must be efficiently carried out as an assurance that the industry continues to function without disruption.
IFRS is a financial reporting standard in the oil industry. It ensures that financial reports of industries reflect industry affairs that are true and just. Financial statements prepared under IFRS point towards a true picture of the economic position of the industry. The economic position of the industry can thus be checked for a given time. The reporting method of an oil industry through IFRS is consistent and stable.
IFRS adoption is beneficial to shareholders and other financial report users in the oil industry. It reduces the charges of contrasting alternative investments and improves information quality. An oil industry that adopts IFRS will also gain from the fact that investors will be more determined to offer finances to them.
By adopting IFRS, an oil industry can present its fiscal and economic statements on a basis that is similar to that of its distant competitors. This allows for easy comparison. Additionally, oil companies with subordinates in nations that require or allow IFRS use one language of accounting company-wide. Oil industries benefit from IFRS since it allows them to raise capital overseas.
As IFRS develops in acceptance, the fiscal statement preparers and assessors in the oil industry become conversant with the new rules. Valuation specialists and actuaries employed to help in estimating assets and liabilities embark on comprehensive training. IFRS has, therefore, made oil industries incorporate IFRS into their teaching materials, publications, and examination and qualification programs.
Adoption of IFRS leads to reduced costs in terms of capital and operations linked to financial reporting. The oil industry gains the advantages of clearness and increased reliability, reduced complexity of the organization, and increased opportunities to optimize procedures (Mirza et al., 2006).
IFRS may also affect an oil company negatively. It increases the costs in the oil industry. For instance, costs associated with staff training and executions of IT support rise. For example, the oil industry in the US incurred costs of about $32 million in 2008. The provision of excess information to the shareholders through this standard may sometimes make financial reports perplexing and less useful. IFRS standards are wide and may not be fully incorporated in an oil industry due to differing political and financial influences on reporting among nations.
Small businesses at times believe that IFRS will not affect their organization. This is, however, not the case. Small businesses only publish overall financial statements for users outside the business. Nations have developed IFRS for small companies. This is most cases is a self-sufficient standard of around 230 pages adapted to the needs and capacities of smaller businesses. Not-for-profit organizations may not be required to adopt IFRS.
Without IFRS issues, cost accounting may not be a topic. This is because victorious methods of accounting require accounting that is in general consistent with IFRS. This does not lead to transition issues as those demonstrated in companies under the complete cost accounting technique. Translating IFRS to explain issues relating to industries such as program corporations, subscriber cases, publishing, and ownership and dissemination rights play a significant role in accounting. This can be attributed to the fact that, in many circumstances, there are no accounting rules for businesses to apply (Kieso et al., 2010).
IFRS faces some drawbacks in its operation. Some nations believe that full acceptance of IFRS could lead to the loss of a certain quality degree in an industry. Other nations may also reject IFRS due to a lack of enough market resources to prepare IFRS fiscal statements. Such nations may believe that the costs linked with taking up IFRS offset the benefits. As a result, process areas affected by the execution of IFRS should not be overlooked since this can lead to serious penalties and process ineffectiveness. An efficient, cost-effective IFRS program should be executed. The enforcement of IFRS standards could be difficult due to national differences in bookkeeping.
Kieso, E. D., Weygandt, J. J., & Warfield, D.T. (2010). Intermediate accounting. New York: Wiley.
Mirza, A. A., Holt, J. G., & Orrell, M. (2006). Wiley IFRS: International financial reporting standards: workbook and guide. New York; Chichester: Wiley.
Needles, E. B. (2009). International Financial Reporting Standards. Mason, Ohio: South-Western Cengage Learning.