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What Is IFRS Convergence?

Jim B.
Jim B.

IFRS convergence refers to the process by which countries that have previously established standards for financial reporting begin to switch over to international standards followed by all countries. These standards are the International Financial Reporting Standards (IFRS) which are established by the International Accounting Standards Board. The process of IFRS convergence affects all companies that must change the way they report their earnings and net worth on financial statements like balance sheets and income statements. Ultimately, this process is necessary because of the interconnected nature of the world's nations in a global economy.

A company that does business on a significant level and has to respond to shareholders is responsible for accurate reporting of its finances. By providing financial statements that relate to such important business factors as revenue, expenses, assets, and liabilities, a corporation leaves nothing to hide about its business operations. Since all businesses should ideally be on a level playing field when it comes to such reporting, it is important that standards be in place. For local standards to become international standards, a process of IFRS convergence must take place.

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In many cases, the similarities between local financial rules and regulations that bind companies and IFRS are such that the convergence process is not a drastic change. The various systems overlap in many ways. Accountants and other financial professionals employed by companies simply need to make themselves aware of the subtle differences and make adjustments while the IFRS convergence process is taking place.

If is important to note that IFRS convergence does not mean that local guidelines need to be completely eliminated. Often, the local rules and regulations on financial statements and income reporting can hold sway for a while until the convergence is complete. The idea behind convergence is that the old ways and the new standards should gradually unite at a point somewhere between any differences they might have. Once this takes place, there is only one set of standards left.

There likely would be no need for IFRS convergence if businesses simply operated on a local level like in times past, but that is not the case anymore. A large corporation located in one country often has subsidiaries that are based in several foreign countries, requiring consolidated financial statements for the parent company and its subsidiaries. In addition, investors need to have confidence that a company's financial statements will not only be accurate but also that they will unaffected by local reporting rules not found in other countries. A global economy requires a global set of standards.

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