Effects Of IFRS And IAS Guidelines to Kenyan Tax System
The call for harmonization of global accounting has resulted in the enhancement of the adoption of International Financial Reporting Standards (IFRS) with approximately one hundred nations permitting the use of, or having a comprehensive policy of convergence with the international financial reporting standards. Nevertheless, several countries are yet to adopt and switch to the IFRS. Most of these countries are ranked as emerging economies. The International Accounting Standards Board (IASB) regularly lauds the positive implication that a universally harmonized system of reporting would have on mitigating data asymmetries between entities in developing economies and their participants in the foreign and domestic markets.
Overview Of IFRS And IAS Guidelines Implications on Tax
In several nations across the globe, tax obligations and tax are majorly driven by the employed accounting standards in recording various business transactions. Additionally, several countries have precise provisions regarding tax that require all eligible taxpayers to make effective several adjustments to the accounting treatment to attain tax liability. It is due to this and some other reasons that the computation of tax results in an adjusted tax loss or taxable income.
Accounting standards keep evolving while new standards come into force as witnessed over the last two years. In Kenya, the most critical standards are:
- International Financial Reporting Standard (IFRS) 15 on revenue recognition
- International Financial Reporting Standard (IFRS) 16 on leases
These two financial standards have potential tax implications on income tax liability and Value Added Tax (VAT).
It is for this reason that Dennykins and associates with our team of tax experts continuously commit to ensuring that entities are well taken care of during operations to ensure domestic and international tax compliance. Also, we help businesses both local and international businesses set up shop.
We take pride in offering training that helps your business review the tax implications of these standards and ensure that we provide suitable adjustment proposals that taxpayers should always consider in computing tax liability. Visit dennykinsassociate.com for more related information and professional tax consultancy services.
Generally, there are two categories of voluntary International Financial Reporting Standards adopters and they include:
- Serious adopters – in this category, we have firms that adopt International Financial Reporting Standards (IFRS)in both practice and name.
- Label adopters- this category entails entities that adopt International Financial Reporting Standards (IFRS) in name but partially in practice.
A regulation established in the Kenyan Company Act also requires that private entities adopt IFRS. Although the Act details many minimum requirements for financial reporting, it does not provide a comprehensive guide on the precise reporting standards that entities should implement.
The Institute of Chartered Public Accountants of Kenya (ICPAK), with legal authority to provide the guidelines on the various accounting standards, chose to have both private and public entities adopt International Financial Reporting Standards and International Accounting Standards. This is due to the fact that ICPAK realized that having the same set of standards for all entities is likely to be cost-effective from the regulatory point of view.
Pros And Cons of International Financial Reporting Standards
As most businesses are expanding their global trade and financial ties, most countries are advancing towards International Financial Reporting Standards (IFRS), which are the basic rules in accounting that define how business transactions ought to be reported and the nature of the information that should be made available in the financial statements. Although such standards established harmony in the accounting sector, there are drawbacks that countries encounter in an attempt to adopt the policy.
Mostly, most developing economies face more challenges since they are striving to ensure that they attain the global standards of financial reporting while ensuring their economy is stable enough to serve both the domestic and foreign markets.
I. The International Financial Reporting Standards Are Not Accepted Globally
The United States has not adopted the International Financial Reporting Standards and other nations continue holding out as well. Due to this, accounting for entities that are based in foreign countries, for instance, the United States, and countries that have not adopted IFRS is a major challenge. As a result, such entities usually have to prepare financial statements using American Generally Accepted Accounting Principles and another set using IFRS.
Preparing financial reports using two sets of financial reporting standards can be hectic, especially for multi-national businesses that have massive operations. As such, there is the likelihood of having conflicting information that might mislead the users of such financial reports.
II. IFRS Provide Greater Comparability and Flexibility
Entities using the same standard to prepare their financial reports have great chances of accurately comparing their financial statements. This comes in handy for companies that have establishments in different countries since they can use the same methodology and rules to prepare their financial statements. Thus, investors have better and more enhanced chances of determining where they would prefer to invest their dollars.
The international financial reporting standard uses the principal-based approach to make financial statements. That is to say, the objective of every standard is to attain a reasonable valuation and there are several ways to attain the goal. Thus, IFRS gives entities the freedom to adopt a principle that suits their situation, and hence, they can generate statements that are useful and easy to read.
It is critical for entities to ensure that all their operations are well documented to ensure the remittance of tax to the authorities. It is a great achievement for a business serving both the domestic and international markets, to have all its financial statements prepared comprehensively and as per the adopted standard.
Therefore, entities should e open to making pieces of training on IFRS and IAS available to their staff as a way of enhancing capacity building. Given the dynamic nature of the global markets, it is critical that all the staff understand the implication of International Financial Reporting Standards (IFRS) and the International Accounting Standards (IAS) on local and international tax systems.
For more insight into the effects of IFRS and IAS guidelines on the Kenyan tax system, visit dennykinsassociate.com.