The Effects of Europe's Transition to Ifrs

The Effects of the Transition to IFRS in Europe

All around the world, countries are adopting the International Financial Reporting Standards (IFRS). Europe was an early adopter of IFRS among the world. As of January 1, 2005, every publicly traded company in the European Union was required to have consolidated financial statements in IFRS. However, most countries in Europe still use their own local GAAP, along with IFRS (Sacho). If IFRS are so much better than local European GAAPs, why are many countries still using their own GAAPs along with the required IFRS? IFRS have many new and different factors involved and the world is just getting acquainted with its concepts. The transition to IFRS is not easy, like much of the world has experienced. It takes time, money, expertise, and a plethora of patience. There have been several effects that IFRS have had on Europe as a result of their transition, both positive and negative. These effects include high volatility, level of disclosure, classification of debt, the decision-making of fund managers and the decision-making of management of European companies.

One of IFRS effects in Europe have been the high volatility due to the financial statements shifting from the historical cost method to the fair value accounting model. Fair value is used in IFRS to determine the cost of several assets and liabilities, when testing assets for impairment, and to measure several assets and liabilities for each balance sheet. With the fair value model, the balance sheet can be used on investment property, plant and equipment, loans and receivables, own debt, and intangible assets (Cairns). The IAS 39 includes a fair value option, “which permits firms to designate financial instruments irrevocably on initial recognition as ones to be measured at fair value with changes in fair value recognized in profit or loss” (Armstrong). Due to this shift, assets and liabilities are now shown at market value. This causes higher volatility...