An Executive Guide to IFRS: Content, Costs and Benefits to Business

Why governments support IFRS

There are a number of public policy reasons that also support a move to using IFRS. The most fundamental is probably that using the same accounting basis provides greater comparability between companies. Greater comparability in turn should lead to more efficient investment. The argument is (and there is research evidence to support this) that investors are reluctant to invest across national boundaries because they do not understand the financial statements of foreign companies. Investors face therefore a limited choice, which allows inefficient managements to stay in control of assets. Once investors can compare apples with apples, they can invest more efficiently, which in turn should lead to assets being used more productively.

Access to international markets also means that companies can have access to wider sources of finance, which should in turn mean their finance becomes cheaper. Supposing national governments want their domestic businesses to expand, access to foreign financial markets may be important if the domestic financial market is limited. This was one of the reasons cited by the European Commission for moving to IFRS. It would give smaller listed companies access to more liquid markets. In the case of the European Commission there was also the major motive that use of the same accounting basis across the EU would do (and has done) a great deal to create a single European capital market.

Another side of this argument is that helping ...