International Financial Reporting Standards: an Analysis from Deutsche Bank
History of International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) is referred to as the bookkeeping standards that are laid down by an organization which is non profit and is independent called International Accounting Standard Board (IASB). These financial standards are set as a universal communications system for all the businesses; this makes it very easy for financial accounting of the companies to be understood throughout the globe.
IFRS was started off in 2001 to help to bring into line accounting in Europe, this was greatly appreciated and achieved especially with the European Union and it was the spread in the world at large. Years ago countries used to do their financial reporting standards, but in this era there have been changes and there are over 113 countries that permit the International Financial Reporting Standards in their accounting. We find that many companies actually have extended their business internationally and they find it easier to use the IFRS, this allows them to have both local and foreign investment markets which are profitable to them. The IFRS also help to reduce costs incurred while trying to get information to help with investments and planning in these companies.
It is not right to say that the idea of the financial convergence just began in 2001 because it was started long before that. After the Second World War economy was greatly affected and it collapsed, many nations agreed to have standard financial reports to help bring unity and cooperation among the countries financial reports. In 1973 International Accounting Standard (IAS) was brought up to help bring unity with the global companies by the International Accounting Standards Committee (IASC). These standards were then changed when the IASC was replaced by the International Accounting Standard Board (IASB) which took charge in 2001 and changed the name to IFRS the standards that we know today.
The main objectives of IFRS are to try coming up with ways to that help set up standards that are easy to use and implement. It also hopes to encourage as many countries as possible to use these standards in their financial accounting. The IFRS also helps the promising small or medium sized companies in their financial reporting needs. The non-profit oriented establishments may also benefit from the IFRS standards, their guidelines help cater for the requirements of the public, share owners and everyone else by providing information about any fiscal matters and the currency flow of a firm.
The IFRS also gives any information about issues that may affect the pecuniary stature of a business both the single production and combined industries fiscal reports. A complete fiscal report consists of a conclusive cash flow, incomes and the modification in bookkeeping policies and some illustrative notes which help the establishments to work diligently. Many establishments that are using the IFRS are said to be doing very well, this is because they gain a lot by the information and the reports that are given.
1) Why do Germany implement mandatory IFRS accounting standard for bank industry? In particularly, for DEUTSCH BANK.
2) What are the impacts of IFRS implementation have over DEUTSCH BANK’s financial statementsand its’ effect on?
3) How does DEUTSCH BANK manage the challenges and transition from implementing IFRS over Germany GAAP?
Chapter 2. Literature Review
Process of IFRS adoption
There are some procedures that are required to be followed when a firm wants to adopt the IFRS. It is very important for a first time IFRS adopter fiscal statements to be equivalent over time and also with the units that are already in application with IFRS. Comparability should not in any way be befuddled with standardization in the use of similar bookkeeping methods by various organizations.
It should be analyzed as a process which results from a methodical choice between bookkeeping methods reliant upon the nature and the unit operating setting but otherwise independent of the scenery in which the unit turns out to be indexed. It is vital for a unit to apply the existing edition of IFRS throughout all periods presented in its first set of IFRS pecuniary statements and also in its opening report of pecuniary position.
It has gone ahead to come up with two groupings of exceptions to the most important of exposition application of each IFRS that are valuable on the reporting date, the standard do not allow retrospective of some characteristics that is the mandatory exceptions of some IFRS members and then gives a chance for the exclusion from some requirements of other IFRS members.
The first time adopters have a chance to choose options within the bookkeeping standards; it is mandatory for a company to adopt the IFRS during the first submission of the fiscal reports on the reporting day. It is also possible to adopt standards that are not yet mandatory to the first adopters but are encouraged. Some of the standards are not effective up until the opening date even if the unit’s transition has already happened.
The most important step when making the transition to IFRS is the selection of bookkeeping guidelines. Most of the accounting guidelines are forced by conditions, it is very important for a unit to select the best depreciating technique that replicate on the outline in which it is hoping to progress in the future. The other policies reflect on the IFRS elasticity, it provides a choice for the new units which include the exclusion from some necessities, on the first time adoption it is possible for an entity to recognize actuarial gains and losses immediately in profits or loss.
It is also probable to utilize other diverse ways to extend the cost. It is also recommended by the IFRS for a first time adopter to explain their previous GAAP to them, including the preceding currency flows and the fiscal performance. It is important to have professional judgment when selecting the policies most especially where the IFRS does not address a deal or a form, this will help to get the best policy for the given firm.
The mandatory IFRS adoption in European Banking
Importance of having fiscal reports in banking industries is an issue that has been raised globally. Fair value is the connection linking the prospect contract on a market and the actual value on a catalog; it is one of the primary focuses in public debates. Fair value has been accused of immense contribution to the effects of pecuniary condense that are associated with crediting of loans.
This is not very logic because the loans are considered as the most assets that are owned by the bank, and to make the matter more clear the IFRS and all the other financial reporting establishments for example the local Generally Accepted Accounting Principles (GAAP) measure the loans on an expenditure basis. The corrosion of the acclaim worthy loans has always been renowned via loan loss provisions, when you apply the impairment rules of the bookkeeping management in specific establishments. The loan loss provisions are very vital when it comes to the statement earnings in a bank.
The force adoption of IFRS by some specific banks in European Union shows a very big change when it comes to the acknowledgment and dimensions of credit loss stipulation. IFRS to be precise is able to recognize a gained loss which is severe fast as compared to the loan loss provisions systems that existed before its implementation. This has therefore bought about very many changes when to comes to financial reporting in banking industries in Europe.
Way before the adoption of IFS in Europe the then reporting regime local GAAP rules permitted banks to predict the losses they expected to incur due to prospect dealings. This was however not effective because the directors used discretion because of the many principle rules. This is a very different approach from the one the IFRS is using, which only expects the banks to provide the losses that have already been registered not mentioning the prospect losses that are expected.
The most important work of the IFRS loss incur approach is to ensure that there few cases of discretions and also judgments. There are still some arguments that have occurred about the loss approach, the critics say that all the credited loan portfolios are not reflected. They continue to argue that the IFRS do not allow the banks to report on the already incurred losses that are already in their assortment.
Their arguments are further accelerated to the fact that the risks that are taken in the interest’s rate are the gained in the net income which make the loss of the loans to be deferred up until the borrower fails to pay. This is said to lead to higher earnings in the beginning and lower earnings at the end which aggravates the fluctuations of the banks incomes. The loan loss accounting has really caught attention of the banks monitors and the customary setters especially now that there is a universal pecuniary crisis. The financial Accounting Standards Board suggested that the accounting standards needed to be updated implementing reasonable ethics and measurements back in May 2010.
With the introduction of the IFRS there has been a reduction with the income flat behaviors of the European banks. This is dependable with the study of Ewert who disputed that the tight accounting rules would reduce the bookkeeping gross management. This is however wrong when we compare it to the IFRS adoption effects, it is very clear that when banks with widely detached ownership provide more for expected losses, and hence keeps advanced levels of credit loss rations and a smooth income even after the change in bookkeeping management.
Comparing the US banking which have not adopted the IFRS with the Europe banking it is very clear that the US banking do not have any income smoothing change as compared to the European banks which have significant smoothing changes. We can therefore be convinced in the use of IFRS in the banking industries. When it comes to timely loss recognition it has become very easy for banks with the IFRS to recognize their losses within a very short time.
For the pecuniary year commencing in 2007, IFRS outmoded IAS 30 it even replaced all parts of IAS 32 that dealt with disclosure requirements in that all the requirements dealing with the fiscal instruments were merged in the new customs. IFRS 7 is different with the IAS 30 in that it is not a bank regulation but it only applies to all its units that use the monetary instruments. These ensure that the extent of revelation is determined by the degree of a unit’s use of monetary instruments rather than the business sector. It is then evident that the level of disclosure in IFRS 7 is then to a great extent superior than in the other standards.
IFRS adoption in Germany (Deutsche bank)
German is one of the countries that have made sure to accommodate the IFRS in their system. Many companies estimation of 63% in Germany had already started adopting the standards in 1990s voluntarily, however being one of the members of the European Union. Germany was forced to go along with the regulations that were implemented in 2002. The regulations stated that all the European companies had to adopt the IFRS with the consolidated companies that do not trade on a regulated security market starting in 2005.
Deutsche bank is one of the greatest global banking and financial company, it has its headquarters in Frankfurt, and in 2009 this bank was prime trader of foreign exchange in the world. The bank had its reporting done in IFRS but by then it was known as IAS from 1995 to 2001, it then changed to GAAP and it was exempted by the European Union rules in 2007 on assuming the IFRS. The case of deutsche bank is one valid case that can be used to identify that IFRS are of great importance and every bank in the world should work with this standards.
The case divulges that IFRS can lead to openness when it comes to matters to do with fiscal reports. When the bank adopted the IFRS it was able to secure 205 more entities as compared to when it was using the US GAAP. IN 2006 this bank was able to register 405 billion more total assets as compared to the time when they used the US GAAP, the difference in the counteract requirements between the IFRS and the US GAAP was the largest ever seen with the Deutsche Bank.
This is a clear indication of how beneficial the IFRS reporting are to the banking industries. The bank’s 2007 financial statements were prepared using the IFRS. The fact that Deutsche Bank does not apply carve out related to hedge accounting in AIS, which is helpful for the financial reports for year ending after November. This made it that the securities and the exchange commission did not require the distant registrants to report with IFRS to merge their financial statements with GAAP. This made it easy for Deutsche Bank to continue reporting with IFRS, it opened its first statement at the transition date following the first time adoption process using the 31st December 2006 IFRS adopted. The results of Deutsche Bank IFRS were different from those of the US GAAP guiding principles applied on that particular day.
The consequential alterations were recognized very fast in retained earnings as from January 2006. The bank has since been using IFRS reporting because they proved to be logic and beneficial to them. Germany has hence made it mandatory for all the banks to use the IFRS reporting for the one reason that it is advantageous for the countries growth in economy which every country requires and the cases of inflation are very low with the use of IFRS reporting. It has also made them to be more economically ventured than the US which has not yet adopted the IFRS reporting but are still using the US GAAP which has been obviously to be inferior to the IFRS.
Study cases in other countries and different companies have also attested to the fact that use of IFRS reporting has brought very great positive changes in their industries. Use of mandatory IFRS adoption on IPO under pricing and capital source in global markets has led to a decrease in the IPO ender pricing. This supports the fact that there is an increase in the quality of reported fiscal information and this leads to the reduction in the irregularities among the contestants in the IPO process.
There is also a very great increase in capital that is raised from the foreign markets. It is also noted that the effects of the forced IFRS adoption on the IPO under pricing and proceeds raised from the foreign market, are more advanced in the firms that are in countries that go through large accounting changes. This is more significant in the firms coming from countries that have strong achievement integrity. All this conclusions support the fact that the effects of IFRS adoption are advantageous to firms that want to improve their financial targets.
When it come to global market capitalization, the adoption of IFRS has helped to increase the comparability of financial reports universally, there if the IFRS can help improve the financial reports it means that there is hope for more foreign investors and in so doing there will be an increase in the foreign capital for any firm that uses the IFRS. There have been studies that have indicated that the cost of the acquiring and processing fiscal information makes it hard for the foreign investors to make investment outside their countries. IFRS has ensured that they provide information that is analogous across many countries and this has led to reduced costs for the investors to acquire the information.
This reduction is very important especially to the IPO investors who lack the market prices and must therefore depend on bookkeeping and other non price information to review the rationality of the IPO tender price. This helps to increase the demand for IPOs by foreigners and in turn leads to increased capital in the foreign markets. The mandatory adoption of IFRS assists to reduce the costs of firms fiscal reporting when it comes to raising the capital in the overseas markets. Another very obvious implication of the IFRS adoption is that the IPO firms do not have to discuss or explain the divergence in fiscal declarations based on their local GAAP and IFRS, when they are increasing capital in the foreign markets.
This increases the IPO in the firms’ enthusiasm and aptitude to elevate capital in overseas markets; this is because using IFRS presents more recognizable data to foreign capital providers. The above analysis leads us to think that the overseas investors do not get the pamphlet with fiscal statements in their own local GAAP during the IFRS phase. It very clearly known that an IPO offering does not involve listing on the unfamiliar supply exchanges is not required to prepare the prospectus that contains fiscal reports in the local GAAP of the foreign influence. Most firms have domestic IPOs first before they cross list and the average time between the IPO and the cross -listings is three years. This makes it hard for the catalog to have fiscal statements primed under the GAAP. Another thing to note is that the foreign investors are only familiar with the IFRS which they are initiated to during their first phase.
Challenges facing IFRS
Challenges are part of any new implement and this is no different with IFRS, it has also faced some challenges which include the worry that the value of the IFRS may not be accurate because of the fact it is dealing with value of very many different countries worldwide. This has however been checked into, and it also a fact that all the businesses universally are going for the IFRS which has always been giving accurate reports which are not in any way biased.
There is also the fact that the IFRS is not interested in making any profits from the given reports. The IFRS carefully checks on the company’s growth trend so that it can come up with the reports. Their reports are created by a very accurate survey that monitors and ensures that no mistakes are made in the process. To add to this the rules and the laws of the IFRS are very simple and easy to understand thus they cannot be in anyway be confused in any country around the world. Many more countries are expected to join the IFRS in 2015.
There have been arguments as to why the forced IFRS adoption may not work to diminish the IPO under pricing or even increase the capital in foreign markets. They say that the IPO involves a lot of information asymmetry which can be vulnerable to produce management. It is also indicated that the private communication between the managers and the institutions shareholder may lead to reduced revelation associated with IFRS adoption. The arguments that a uniform accounting standard will not in any way affect the firms output and practices unless there are changes in the core supporting and cost-effective institutions in a certain country.
These criticisms indicate that the mandatory IFRS adoption can only work depending on the individual country’s foundational management. Another challenge has been the issue of incentives; the argument is that this will lead to a discouragement on the side of national decision makers from adoption. There has also been the case of country dominion; there is the fear from the different countries that fear that this idea of adopting the IFRS may deprive them of the financial powers they have in the countries. Examples of these countries are Australia and European Union who had a problem agreeing to the adoption due to sovereignty issue. The European Union for example only adopted the IFRS for political reasons; it wanted to distant itself from the US influence by neglecting the use of the US GAAP.
Another challenge that has come up is the issues of regulations, many countries around the globe have their rule and regulations regarding various matters including formation and development of companies in their countries. The IFRS management has not in any way taken into consideration the laws that have been set by the countries and this becomes a problem, they state that they are true and fair in the country bills but this is not well reflected in their deeds.
The other challenge has been the base on the cultural factors; a lot has been brought about the Islamic religion. For example in the adoption of the IFRS in Malaysia there have been an indication of this as a very huge problem and also in another study in Egypt the same problem was mentioned because of the fact that some societies are very secretive in their dealings and the disclosures are seen as breaking the taboos.
The last challenge that has been mentioned is the issue of understandability, it has been mentioned that some people do not understand the fiscal declarations and this has become very problematic. It is said that translations of the standards to different languages may lead to some information getting lost in the process, leading to some communication breakdown. There have been suggestions about incorporating the study of the IFRS adoption in the educational systems to help train people on these standards. In spite of all this challenges the advantages are more when it comes to using the IFRS and so this is not anything to worry about. Implementations will be done and the errors will be corrected to ensure good credibility of the IFRS reporting for all the countries.