It is critical for enterprises to standardize their financial processes, especially accounting and auditing to be on par with leading global counterparts. International Financial Reporting Standards, commonly known as IFRS, enable businesses to maintain a global standard for financial reporting. It provides guidelines for businesses to streamline transactions, statements, and reporting to achieve comparability, verifiability, timeliness, and understandability of financial data across the globe. The adoption of IFRS by enterprises requires them to transform their existing local account and audit mechanisms. However, it becomes critical for enterprises to maintain productivity with uninterrupted financial operations during the transformation process.
IFRS became an accounting and auditing benchmark with the growing relevance of international business, foreign investments, and cross-border listing. Adoption of IFRS is gradual because enterprises face several technical challenges while implementing the standards in their financial administration. The major hurdles are:
Accounting and auditing have evolved from paper-based repositories to digital applications and frameworks. Enterprises that want to achieve their global objectives require adherence to IFRS with in-depth algorithm customization of financial applications. Strong programming skills are essential for achieving the required level of customization. Additionally, the existing systems that depend on the internet and database technology have technical limitations of obstinacy and centralization. These limitations and the need for complicated programming are critical barriers to developing IFRS-compliant accounting and audit applications.
IFRS provides universal guidelines for accounting and audit that are consistent across the globe. The mechanism to adopt IFRS needs a new technology platform that supports the approach and objective of these standards. The platform must enable synchronization, availability, authenticity, security, and accessibility of data across the networks of financial administrations.
A smart contract, an application of blockchain technology, is a technical solution to implement IFRS efficiently. A smart contract is a digital version of an agreement or contract, which is self-executable. The mechanism behind this technology is simple. A smart contract executes automatically when the conditions of the parties involved in the agreement match with a predefined set of parameters. These parameters are immutable unless there is a change in the coding of the contract. A new smart contract will replace the existing one to change the parameters of the agreement. Deloitte, in its research, highlighted the impact of blockchain technology in accounting and auditing. The technology has a strong impact on the recordkeeping process, improvement of business models, and changing the role and skills of CPA auditors.
Implementation of IFRS is about improving the compatibility, verifiability, timeliness, and understandability of financial information in terms of relevance and representation. Blockchain technology revolves around similar parameters of audibility, transparency, and controlled accessibility, in a highly secure environment. The smart contract has the potential to implement IFRS effectively because it addresses the current challenges of its adoption.
The smart contract ensures complete security against external influence. It is a digital implementation of predefined terms and agreements that are immutable. This mechanism can implement the algorithms of accounting and audit in complete adherence to IFRS. Smart contract eradicates the possibility of malpractices and external influence in the adoption of IFRS by automating the process of accounting and auditing. Once programmed to implement IFRS-compliant auditing and accounting processes, the smart contract will self-execute the operations without external input.
The smart contract, together with distributed ledger technology, enables fair and even implementation of the accounting process. It can guarantee consistent IFRS implementation as the mechanism is deployed over the entire enterprise network involved in auditing and accounting. The technology addresses the issue of lack of coordination in enforcing the standards across the entire process of accounting in the enterprise.
The technology streamlines the implementation of the latest IFRS updates across an enterprise. The International Accounting Standards Board (IASB) updates IFRS regularly as per the changing requirements of international businesses. The swift adoption of these changes in the internal accounting processes is not practical with legacy accounting technologies. A smart contract solves this issue by operating as a single mechanism for different accounting processes as per their requirements. Programming the smart contract to perform according to the latest IFRS updates ensures even implementation across every financial reporting in the network of the business.
The fintech industry is gradually adopting blockchain technology. An advantage of implementing blockchain is its compatibility with legacy enterprise platforms. It does not cause any major disruption to existing operations for adopting blockchain. It acts as a secure layer of an encrypted network that decentralizes the data over an existing system. The process of adopting smart contracts to implement IFRS doesn’t lead to major disruptions. It reduces the possibility of negative impacts in the short term while successfully implementing IFRS. Blockchain technology is steadily gaining recognition as the next-generation enterprise technology. It is advantageous for enterprises to align their long-term goals with blockchain.
Blockchain and smart contract development services provide several operational advantages over the existing applications of accounting. Blockchain is the appropriate technology to implement IFRS because of its radical alignment with the objective of the latter. Transparency, accountability, and efficiency are basic advantages of both Blockchain and IFRS.
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We can develop smart contracts using any blockchain technology that meets your specific business requirements. Ethereum Virtual Machine is among the most common tools to create a smart contract using the Solidity program for accounting. Encoding the program as per the standards of IFRS will address the adoption challenges effectively. For businesses that are oriented toward fintech, Stellar smart contracts can develop an efficient accounting platform to implement IFRS standards. It is necessary to evaluate specific functionalities of accounting and auditing requirements of the business to select an appropriate blockchain platform. If you are interested in adopting IFRS with digital accounting platforms based on a smart contract, then contact us for a free consultation.
The objective of IFRS is to bring consistency to financial reporting processes across borders. Blockchain solutions like smart contracts provide a secure mechanism to initiate, process, authorize, record, and report transactions. Financial institutions are adopting blockchain solutions aggressively because of their practical advantages in achieving operational efficiency and cross-border transactions. Several enterprises are in the early stages of adoption. Others have implemented partially and many businesses have completely adopted the standards. Implementing blockchain solutions to adopt IFRS makes the auditing and accounting process more efficient and transparent. Blockchain not only makes internal processes consistent but also improves global adoption.