Top 7 Disadvantages of IFRS: What You Need to Know!

Limitations of IFRS

The development of IFRS means that practically every listed company except US companies prepares its financial statements according to the same standards. Furthermore, because the IASB represents a collaboration of worldwide experts with diverse opinions and perspectives, it is generally acknowledged that it has produced excellent standards. IFRS has usually improved the volume and quality of disclosure, prohibited questionable reporting practices, and introduced consistency in how many events are treated across the entire set of financial statements.

Yet any complex, impactful activity is never immune to criticism. The Top 7 commonly voiced complaints are the following:

Disadvantages of IFRS

1. Complexity: IFRS can be complex and may lack clarity in certain areas, leading to interpretation and consistent application challenges.
2. Lack of consistency: They are not always consistent in their treatment of similar items. For example, when investment properties are revalued, the gain is reported in profit or loss in the statement of comprehensive income. However, the gain is treated as other comprehensive income when other properties are revalued.
3. Too many options: Critiques of IFRS include that it is too long and complex, that some of the accounting treatments it prescribes are inconsistent, and that it offers too many different options.
4. Limited guidance: There is too much choice, especially regarding how to measure assets. For example, according to IFRS, a building could be reported at depreciated cost, at a revalued amount (if used in the business’s operations), at market value (if it is an investment), at cost (if the owner is a property developer), or at its market value less selling prices (if it will soon be sold). All of these options seem to undermine the critical objective of enhancing comparability.

5. Cost: There can be significant costs associated with transitioning to IFRS, including the need to train employees, update systems and processes, and restate historical financial statements.

6. Impact on Small Businesses: Smaller companies may find IFRS compliance more burdensome due to limited resources and expertise, potentially leading to increased costs and administrative challenges.
7. Differing Standards Globally: IFRS allows for some degree of flexibility in application, which can result in differing interpretations and reporting practices across different regions and industries.

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The IASB is aware of these disadvantages of IFRS  and other criticisms of the current set of IFRSs and has responded by professing its objective to make the standards understandable and comparable whilst maintaining the fundamental characteristics of relevance and faithful representation.

This is not just talking, though: many of the measures that the IASB has released have later been substantially revised in response to feedback. For example, a few years ago, a new standard on leases (IFRS 16) was released to improve the consistency of the reporting requirements, a feature that its predecessor lacked.

The development of IFRS has been widely acknowledged to have produced excellent standards that improve the volume and quality of disclosure while prohibiting questionable reporting practices and introducing consistency in how many events are treated across financial statements. 

Nevertheless, for those who wish to learn more about IFRS and familiarize themselves with its provisions, Eduyush offers a comprehensive IFRS program taught by experts in the field. 

By the end of the course, participants will be able to Understand regulatory frameworks, why companies worldwide are increasingly adopting International Financial Reporting Standards (IFRS), and apply principles of recognition, measurement and disclosures under IFRS.

Do read our blog on Salary trends for IFRS in India.