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The International Financial Reporting Standards (IFRS) Mean to Businesses

and Investors in Uzbekistan

Khalilov Bahromjon Bahodirovich 1

Abstract: This article presents the importance, development and conditions of creation of
International Financial Reporting Standarts, which is developing all over the world. The accounting
profession is very conservative, and therefore its representatives are wary of such new products and
quite rightly want to first get a thorough analysis of the effectiveness of IFRS, their functionality and
reliability, and only then make a decision on the possibility of their use for investors. It must be said
that in Western countries, IFRS has already become widespread, becoming a familiar way for
businesses to organize the accounting system.
Keywords: business, costs, financial, investors.

On February 24, 2020, The President of Uzbekistan announced a roadmap for a complete change in
U.S. accounting standards. If the roadmap is adopted, Uzbekistan companies will have to change from
the country’s existing accounting rulebook to International Financial Reporting Standards (IFRS) in
2021. Under the Presidental Rule, some very large firms (most likely multinationals) may adopt the
new standards as early as 2020. While in recent weeks market turmoil has grabbed headlines, the
underlying change in accounting rules could have a deeper and longer lasting impact. If the change
goes well, it could usher in easier access to capital for Uzbekistan and foreign firms, lower the costs
for Uzbekistan firms operating overseas, and simplify accounting for companies worldwide.
Critics of the switch point to weaknesses in the international standards; for example, they do not
provide detailed enough guidance to companies, they may allow managers more potential to
manipulate earnings, and they may increase costs and create confusion for businesses. This article
examines whether the changeover is likely to happen, and if so, what it will mean to Uzbekistan and
foreign firms.
International Financial Reporting Standards (IFRS) were developed by the International Accounting
Standards Committee (IASC) and its successor organization, the International Accounting Standards
Board (IASB). Because of the standards’ identification with these bodies, IFRS is sometimes referred
to as IAS GAAP. A note about terminology: Generally Accepted Accounting Principles (GAAP),
either U.S. or IAS, are a set of documents that specify the accounting principles and guidelines that
companies use to prepare their financial statements, which are the main way companies communicate
with their investors and other stakeholders. GAAP documents give guidance on what component
statements should be shown within the published financial statements, how the figures in the financial
statements should be calculated, and what notes and additional details should be included.
Although it seems like a major step to replace one set of accounting principles with another, it should
be noted that any GAAP is a constantly evolving set of principles. Over the last 20 years, U.S. GAAP
has seen complete rewrites in the accounting for mergers and acquisitions and in the accounting for
derivatives and hedges, as well as major changes in 28 other areas. For investors, the new standards
will require an adjustment in how they interpret earnings numbers. For government, it will require
ceding some regulatory power to an international body. The gain will be improved access to
international capital; however, this is no benefit to the many smaller firms uninterested in international
capital, which, in any case, is a difficult benefit to quantify. Adopting IFRS will also require

1
Asia International University, Bukhara Lecturer of Department of “Economics”

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businesses to conduct a one-off reworking of accounting records (at an administrative cost), and it may
increase corporate tax payments, due to the “last in, first out” (LIFO) conformity rule, which will be
discussed below. Companies with multinational operations will benefit by saving on the ongoing costs
of annually converting their foreign reports to U.S. GAAP, but purely domestic companies will have
no such countervailing benefit. IFRS is characterized as more “principles based” than U.S. GAAP,
which is seen as largely “rule based.” However, it should be noted that any GAAP is, by definition, a
set of principles. U.S. GAAP gives substantial discretion to managers in determining the assumptions
behind their accounting statements, even on such basic items as depreciation timescale and inventory
costing methods, decisions that can influence annual income by hundreds of millions of dollars for
large firms.
The age of U.S. GAAP (resulting in a larger body of policy than that of the younger international
accounting standards organizations) and the voracious appetite of U.S. accounting practitioners for
official guidance and clarifications of standards (principally as an insulation against liability in the
highly litigious United States) are responsible for much of the rule-based characteristics of U.S.
GAAP. If IFRS is adopted in America, the demand for guidance will likely not abate. As companies
seek guidance on specific situations, standard-setters may feel pressured to expand the IFRS rulebook,
thus eroding its principles-based nature. It may also create additional demand for accountants and
accounting experts. Although there is much discretion in U.S. GAAP and IFRS, there are some marked
distinctions that will force different treatments on U.S. companies, or make new methods available to
U.S. firms. Some of these changes are discussed below note that this is intended to be a representative
sample of differences rather than an exhaustive list of the differences between the two sets of
standards. Citigroup reports there are as many as 426 total differences, but in many areas there is little
divergence. For example, the issue of the marking to market of financial assets (especially hard to
value assets such as mortgage backed securities) is one area that has attracted attention in the current
credit crisis, but the IFRS standard (IAS 39) is similar to the U.S. GAAP standard (contained in FAS
157, FAS 133, and others). (Incidentally, both standards are being relaxed or “reinterpreted”
see Clarifications on Fair Value Accounting and EU Relents on Some Mark-to-Market Accounting.)
The most frequently discussed difference between IFRS and U.S. GAAP is in the treatment of
inventory costing. U.S. GAAP allows the LIFO assumption, which expenses the most recently
purchased inventory (last in) as a cost of goods sold expense first (first out), to be used for inventory
costing. As prices tend to rise in most industries, this practice results in a high cost of goods sold
expense, thereby depressing profits. Nonetheless, most U.S. companies use the LIFO method because
it conveys tax advantages, and due to a unique “conformity rule” if the company uses LIFO in tax
accounting, it must also use the harsh method in financial accounting. Under IFRS, LIFO is not
allowed at all. Unless the SEC seeks an exception for U.S. firms something which the U.S. Financial
Accounting Standards Board has advised against or unless the U.S. Internal Revenue Service scraps
the conformity rule, U.S. companies will be forced to discontinue LIFO. While the result will be
increased net income, it will ultimately be a disadvantage to stockholders because companies will be
charged more corporate taxes. This tax penalty could be in the hundreds of millions of dollars for some
large industrial firms and is seen as a major impediment to IFRS adoption. IFRS gives management
more discretion in the area of asset valuation as a whole discretion that is also likely to increase
company income. In the area of research and development costs and the related area of homegrown
intangible assets valuation, IFRS is more generous than U.S. GAAP. IFRS allows development costs,
but not basic research costs, to be included in the company’s assets and, therefore, not expensed
against income. U.S. GAAP insists that all research and development costs are expensed, except in
extremely limited industry-specific circumstances.
Additionally, under U.S. GAAP, writing assets down due to “impairment” (i.e., permanent decreases
in value), is a one-way process. Once written down, there is no way that an asset can be written back
up, even if economic or industry circumstances improve. IFRS, on the other hand, does allow write-
ups, and allows them to benefit income. Moreover, under U.S. GAAP, an acquired asset can never be
increased in value as a result of market appreciation. In contrast, based on a long-lived but rarely used
UK GAAP convention, IFRS allows assets to be written up in line with market values, as long as the

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revaluation is carried out with regular frequency. However, the increase in book value does not
represent an increase in net income. With IFRS, there is also flexibility in many areas of standard
setting, whereby more than one accounting treatment is allowed, although usually, only one treatment
is described as the preferred or “benchmark” treatment. In many areas, IFRS is less conservative than
U.S. GAAP, meaning that it allows an increase in the risk of overstating income in a company’s
financial statements. IFRS also allows more flexibility than U.S. GAAP, and since bonus and stock
option schemes usually give managers incentives to increase income, this flexibility likely will be used
to increase income more often than it will be used to decrease income. It is important to note that
income is always an estimate, based on management judgments such as the useful life of long-term
assets, the expected losses from bad debts, the expected costs of warranties, and the diminution of
large assets such as the value of equipment and the value of accounting goodwill. It can be argued that
the income estimate under U.S. GAAP has no more intrinsic validity than the estimate under IFRS.
However, setting aside the question of intrinsic validity, it is fairly clear that switching from U.S.
GAAP to IFRS will lead to many companies reporting higher income numbers, even while holding
cash flows constant. European companies quoted on U.S. markets provide a natural laboratory since
they were required to report in both U.S. GAAP and IFRS until very recently. Citigroup London
analyzed 73 of the largest European companies quoted in the U.S. and found that 82 percent of the
firms reported higher income under IFRS than under U.S. GAAP. Looking at these findings, the
adoption of IFRS would seem like great news for investors. But this is not the case. Remember, these
European companies were reporting two different income figures based on the same financial year,
that is, based on the same economic activity and cash flows. The question of which income number is
the “true” estimate of underlying profit is irrelevant to some extent. Investors used to analyzing U.S.
GAAP income will have to adjust and discount IFRS figures: one additional dollar of IFRS profit
indicates slightly lesser incremental economic health and, if the underlying assumptions of accounting
are accepted, slightly lesser ability to pay down debt and pay dividends in the future than one dollar of
income calculated under U.S. GAAP.
Apart from magnitude, the second useful facet of income numbers is change. Earnings volatility, often
minimized by earnings management techniques that are legally dubious, is an important signal to
investors of a company’s underlying health. Annual income numbers should reflect the economic
performance of the company in that particular year. The pre-IFRS GAAP of many European countries
often allowed companies wide latitude to manage earnings and show a smooth pattern of earnings
change from year to year that hid changes in company performance investors may have wanted
disclosed. Although IFRS has substantially changed those practices, more latitude remains than under
U.S. GAAP. This has a deleterious effect on how useful IFRS reports are to shareholders. Research
shows that European companies’ IFRS reports, although more informative than pre-IFRS GAAP
reports, are less informative than U.S. GAAP reports for the same firms, because IFRS reports show
smoother earnings, show less correlation between reported earnings and cash flow, show less timely
loss recognition, and crucially, show less association between reported earnings and firms’ stock
prices. Perhaps rumors of U.S. GAAP’s death have been exaggerated. But it is worth noting that 20
years ago, a unification of U.S. standards and Western Europe’s tax-based, low-information-content
financial statements would not have been considered. In fact, the actions of a small coterie of
accounting regulators effectively exported the “Anglo Saxon” concept of an economic-performance-
based, decision-relevant, dual-books accounting system to the world. The IASB now has just under
100 member countries, but management has been tightly concentrated. Between 1973 and 2010, seven
of the 12 IAS chairmen came from just three countries (three from the UK, two from America, and two
from Australia) and, since 2010, UK-based IASB Chairman David Tweedie has served uninterrupted.
The important executive position of secretary/secretary general has been even more tightly controlled
with all but one of the secretaries coming from the UK, America, or Australia. Accountants from these
three countries do not agree on everything, but there is enormous common ground amongst
practitioners and academics on what the aims of a financial accounting system should be. That
common ground may be summed up as follows:

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 A financial accounting system should aim to provide information on how well the company is
doing (economic performance) and help investors in their resource allocation decisions (decision
relevance).
 If the tax authorities or governments require information for their legal or revenue-raising
purposes, this should be accomplished by a separate system (dual books).
These concepts are central to IFRS, but they were not generally accepted by all countries until quite
recently. The United States will grapple with substantial change if it adopts IFRS, but for many IASB
member countries, including Japan, Germany, and France, the past few decades have already brought
changes beyond recognition to their accounting standards, changes that bring them much closer to U.S.
GAAP. It would be a pity if the Uzbekistan backed out of the convergence process after being
intimately involved in the process over the last 30 years. For Uzbekistan firms seeking foreign capital
and Uzbekistan firms operating overseas, convergence is a promising prospect. Many IASB member
countries have undoubtedly favored convergence based on the prospect of gaining access to large
Uzbekistan capital markets a carrot that has been implicitly dangled in front of them based on U.S.
involvement in the process over the years. Even in the markets’ current weakened state, convergence
remains a substantial benefit to foreign firms.
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