Assignment Task:

Tax Implications-

Most countries adopting IFRS tax guideline face challenges of tax implication for instance United States where the fiscal law is quite different from IFRS standards and if it is not adjusted then it will create big difference between book and tax income in different countries. Hence this influences the quality of financial reporting by the respective countries. RAM, Rev. Adm. Mackenzie vol.18 no.6 São Paulo Nov./Dec. 2017

For instance, the acceptance of IFRS standard on Taxation will results in several companies to disburse higher tax payments due to the fact that the regulation forbids the use of LIFO method of inventory valuation. This method allows the stock bought most recently to be sold out first and if companies cannot use this method then their cost of goods sold would be low. Thus this will result in higher profit margins and eventually companies will end up paying higher taxes. 

As such, International Financial Reporting standards Internal Revenue Code require companies to use the same inventory valuation method for both financial and tax reporting purposes (IFRSUSA, 2016). 

Moreover the adoption of IFRS tax procedure comprises the implementation of transfer pricing policies. Transfer pricing involves price paid for a product from one company to another when both the subsidiary companies are owned by one main company. Therefore subsidiary companies can either increase or decrease the transfer pricing to take advantage of low tax payments on turnover. For instance if company A is operating in a higher tax country then it will lower the transfer price to company B operating in a country with low tax. Thus this would lower the sales revenue of Company A and eventually the profits will be lower .Therefore company A would end up paying low tax. If the two companies operate under a major company, overall the parent company would benefit. To avoid the advantages of low tax payments by companies, transfer pricing policies prescribes the transfer pricing between sister companies and this brings a lot of challenge to the company adopting IFRS policies on taxation.

Compliance Issues and Enforcement Mechanisms

Another challenge faced by companies in adoption of IFRS is the ability of institutions to abide by it. The Accountants and auditors need to fully comply with IFRS but in many situations, this is not done. Either the auditors undermine their roles or lack skills and practice to ensure full adoption of IFRS. This does not guarantee that intuitions fully follow IFRS and reporting is fair and standard procedures applied across the countries in the world listed for IFRS compliance. 

Moreover, the insufficient enforcement devices of IFRS in many countries also bring a challenge in implementing IFRS preparing financial reports. Countries lack monitoring and control tools such that accountants and auditors are enforced to strictly abide by IFRS.

On the other hand, the difference in ideas in regards to the beliefs and benefits of a country and its political sight has immense challenges and implication in adopting International Standards on financial reporting. For instance, “some Arabic countries fail to adopt IFRS due to their political differences with the West (Mathkur, 2015). They consider the rules to have originated from the foreign enemies”.

Cultural and Structural Barriers

The cultural and structural differences of different society are a challenge in adoption of international Accounting standards of IFRS. The variation in life styles of counties influenced by religious beliefs and language across the world creates difficulty in implementing IFRS globally. For instance, Saudi culture based on Islam has different aspects of how transactions take place, such that “The Quran prohibits the charging of interests, which it refers to as riba”.

Furthermore, different language across the world needs IFRS to be translated for better understanding and implementation to ensure full adoption of the standard. This factor will require a lot of effort and cost for IFRS to be translated into respective countries language and as a result countries may find it difficult to use International Financial Reporting Standards

 

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  • Posted on : July 08th, 2019

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