The Evolution and Importance of International Financial Reporting Standards: From Ancient Civilizations to Modern Accountability – Part One (1)

INTRODUCTION

Accountants, whether in business or practice, follow a set of accounting rules and guidelines (principles) to ensure they are consistent, transparent, and easily comparable worldwide. The foundation of these principles is deeply rooted in history.

HISTORY OF ACCOUNTING

Financial Accounting Reporting transitioned from the Ancient Civilization days of Mesopotamia more than 7,000 years ago. The Mesopotamians kept records of goods traded and received, the record-keeping of ancient Egyptians and Babylonians. They used primitive accounting methods to keep detailed records of transactions involving animals, livestock, and crops.

Bookkeepers emerged when the barter system was practiced by societies, who needed to record the agreement made regarding goods and services transacted before 2000 B.C. Ledgers emerged from the practice, and accountancy can be traced back to the 13^th century. New and improved ledgers became available, and tradesmen and merchants began to build material wealth. https://en.wikipedia.org/wiki/History_of_accounting.

THE MATHEMATICAL MONK – 15^TH CENTURY.

Luca Pacioli, the father of accounting revamped the common bookkeeping structure and laid the groundwork for modern accounting. The Italian published a textbook called, ‘Summa de Arithmetical, Geometria, Proportion, et Proportionacita’ (Everything About Arithmetic, Geometry, and Proportions) in 1494 to show the benefit of double entry system. This section on accounting served as the world’s only accounting textbook until well into the 16th century, and he is regarded as the “Father of Accounting” because his system included most of the accounting cycle still in use today (https://www.researchgate.net/publication/272304355_Luca_Pacioli_The_Father_of_Accounting). Bookkeeping migrated to America with European Colonization (https://en.wikipedia.org/wiki/Luca_Pacioli).

EARLY FINANCIAL STATEMENTS

To attract investors, corporations began to publish their financials in the form of a balance sheet, income statement, and cash flow statement.

Accountants became essential for maintaining investor confidence. In the 17^th century, the railroads and the emergence of corporations stimulated the establishment of accounting professionals. The modern profession of chartered accountants originated in Scotland in the 19^th century, Smith, M. (2017), The History of Accounting; Journal of Accounting Research, 55(5), 1061-1085.

The American Association of Public Accountants (AAPA) was established in 1887, and the accounting profession was formally recognized in 1896 with the establishment of the professional title of Certified Public Accountants (CPA), AICPA (American Institute of Certified Public Accountants), (2022): Our History.

THE INSTITUTE OF CHARTERED ACCOUNTANTS GHANA (ICAG)

The Institute of Chartered Accountants Ghana (ICAG) is the professional accounting body in Ghana, originally established by Act 170 on April 19, 1963. This act was later repealed and replaced by Act 1058, which was assented to by the President on August 13, 2020. ICAG is responsible for regulating the accounting profession in Ghana and has the exclusive mandate to award the Chartered Accountant designation. It also has the authority to regulate the accountancy profession and practice in the country. Members of ICAG are the only individuals recognized under the companies’ code (Act 992, Act 2019) to conduct audits of company accounts in Ghana. Additionally, ICAG is a member of two international bodies in West Africa and the International Federation of Accountants (IFAC), the global organization for the accountancy profession.

The ICAG is responsible for approving, adopting, and promoting the implementation of standards issued by independent standard-setting boards endorsed by IFAC, as specified in the first schedule of Act 1058. Additionally, ICAG ensures compliance with the International Public Sector Accounting Standards (IPSAS) adopted by the Institute.

Ghana adopted the International Financial Reporting Standard (IFRS) in place of National Accounting Standards, effective January 1, 2007, for all Listed companies, Government Business entities, Banks, Insurance companies, Pension funds, and Public utilities among others.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS).

IFRS is issued by the International Accounting Standard Board. They provide basic requirements and principles for preparing financial reports and determine the types and amount of information that must be provided to users of financial statements worldwide, including investors, and creditors to make informed economic decisions.

WHY IFRS

International Financial Reporting Standards (IFRS) were introduced to address the following issues:

1. Lack of consistency: Financial reports were prepared using different accounting methods, making it difficult to do industry-level comparisons of companies. 
2. Lack of transparency: Financial reports did not provide sufficient information about a company’s financial position and performance. 
3. Lack of accountability: Companies were not held accountable for their financial reporting practices. 
4. Investor confusion: Investors found it difficult to make informed decisions due to inconsistent and incomplete financial reports. 
5. Globalization: As businesses expanded globally, there was a need for a common language and framework for financial reporting. 
6. Enron scandal: The Enron scandal in 2001 highlighted the need for stricter financial reporting standards to prevent similar frauds. The Enron scandal led to the bankruptcy of Enron Corporation, an energy, commodities, and services company from the United States. The firm hid its debts from November 1997 by creating the firm Chewco. 
7. Regulatory requirements: Regulatory bodies needed a framework to ensure companies comply with financial reporting requirements. 
8. Comparability: IFRS enables comparability across industries and countries, facilitating informed investment decisions.
9. Efficient capital allocation: IFRS helps allocate capital efficiently by providing reliable and comparable financial information. 
10. Economic growth: IFRS contributes to economic growth by promoting transparency, accountability, and investor confidence. 

By introducing IFRS, the aim was to establish a consistent, transparent, and accountable financial reporting framework, enabling stakeholders to make informed decisions and promoting trust in the financial markets.

IFRS FOR SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs)

All Small and Medium-sized Enterprises (SMEs) and state-owned organizations are required to use IFRS for SMEs, starting with their financial statements from 2010. International Public Sector Accounting Standards (IPSAS) must be applied by the government and other public sector entities, including Ministries, Departments, and Agencies (MDAs) and Metropolitan Municipal and District Assemblies (MMDAs). The IPSAS handbook was published on January 31, 2022.

CONCLUSION

In the 21st century, adhering to the International Financial Reporting Standards (IFRS) framework is crucial for ensuring transparency, consistency, and accountability in financial reporting. The adoption of IFRS across businesses not only fosters investor confidence and facilitates informed decision-making but also enhances global comparability and economic growth. To preserve the relevance and integrity of financial reporting, it is essential for professionals to continuously learn, adapt, and apply these principles in all business practices. Embracing IFRS is key to building a robust and transparent economic environment.

Prepare by Jennifer Ayampoka Kukua, CA. 

Disclaimer: This paper is for professional and academic discussions; reliance should not be placed on it as a final opinion.  Kindly contact the writer for further discussion and guidance.