A Global Guide to International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial statements of public companies that are designed to make them consistent, transparent, and easily comparable around the world.
IFRS currently has complete profiles for 167 jurisdictions, including those in the European Union. However, the United States uses a different system known as generally accepted accounting principles (GAAP).
The IFRS is issued by the International Accounting Standards Board (IASB).
The IFRS system is often confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced in 2001.
Why IFRS Matters Globally
- Consistency: IFRS were created to bring consistency and integrity to accounting standards and practices, regardless of the company or the country.
- Transparency: Issued by the London-based International Accounting Standards Board (IASB), IFRS addresses record-keeping, account reporting, and other aspects of financial reporting.
- Global Reach: Replaced the International Accounting Standards (IAS) in 2001, expanding its influence.
- Corporate Transparency: Facilitates greater transparency in financial dealings for global audiences.
- Global Variability: IFRS is not universally adopted; the U.S., for instance, uses GAAP.
Understanding International Financial Reporting Standards (IFRS)
IFRS provides detailed guidance on how companies should maintain their records and report expenses and income. Built to create a common accounting language, they help stakeholders like investors, auditors, and regulators understand financial reports consistently and correctly across borders.
Developed by the International Accounting Standards Board under the not-for-profit IFRS Foundation, these standards aim to foster transparency, accountability, and efficiency in financial markets globally.
IFRS vs. GAAP: Understanding Key Differences
Public companies in the U.S. must adhere to GAAP, created by the Financial Standards Accounting Board (FASB) and the Governmental Accounting Standards Board (GASB). The SEC has stated it will not switch to IFRS but may allow IFRS to supplement U.S. financial filings.
For example, differences in revenue recognition exist between IFRS and GAAP. IFRS allows more flexible revenue reporting, often resulting in higher revenue streams. Conversely, GAAP has stricter guidelines. Differences also extend to expense reporting, with IFRS allowing certain development costs to be capitalized rather than expensed.
Core IFRS Requirements
IFRS covers various accounting activities, mandating certain rules for different aspects of business operations:
- Statement of Financial Position: The balance sheet, with IFRS dictating specific reporting styles.
- Statement of Comprehensive Income: A comprehensive view of income, either in one statement or split into a profit and loss statement and a statement of other income.
- Statement of Changes in Equity: Documents changes in equity over a financial period.
- Statement of Cash Flows: Summarizes financial transactions, categorizing cash flow into operations, investing, and financing.
A company must also provide a summary of its accounting policies alongside its annual reports, often compared with previous reports. Parent companies are required to produce separate account reports for their subsidiaries.
A Brief History of IFRS
IFRS began in the European Union to standardize business accounting across the continent. It quickly became a vital common language in the financial sector.
Despite not being used in countries like the U.S. and China, IFRS is mandatory for public companies in 167 jurisdictions, making it the predominant global accounting standard.
Who Is Required to Use IFRS?
Public companies in 167 jurisdictions across the European Union, Canada, India, Russia, South Korea, South Africa, and Chile, among others, must use IFRS. Contrarily, the U.S. and China maintain their own distinct accounting frameworks.
How Does IFRS Differ From GAAP?
While both IFRS and GAAP aim to ensure clarity and honesty in financial reporting, their methodologies differ. IFRS, designed for global use, is more flexible and principles-based. In contrast, GAAP, primarily used in the U.S., is more rules-based and specific.
For example, GAAP permits two inventory costing methods—FIFO and LIFO—whereas IFRS prohibits LIFO.
The Importance of IFRS
By promoting transparency and trust, IFRS enhances global financial markets and fortifies investor confidence. This encourages more transactions and contributes to economic growth.
IFRS also simplifies comparative financial analyses for investors, enabling ‘apples to apples’ comparisons and facilitating more informed decision-making.
In Summary
International Financial Reporting Standards (IFRS) are pivotal accounting rules that ensure financial statements of public companies are consistent, transparent, and comparable globally. This benefits various stakeholders—from auditors and investors to government regulators—by improving auditing processes, tax assessments, and investment decisions.
Related Terms: International Accounting Standards, GAAP, Financial Analysis, SEC.
References
- International Financial Reporting Standards. “Who Uses IFRS Standards?”
- International Financial Reporting Standards. “Who We Are”.
- U.S. Securities and Exchange Commission. “Working Together to Advance High Quality Information in the Capital Markets”.
- International Financial Reporting Standards. “IAS 1 Presentation of Financial Statements”.
- International Financial Reporting Standards. “IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors”.
- China Briefing. “Chinese Accounting Standards for Business Practices: Prepare for Changes in 2021”.
