What are International Financial Reporting Standards (IFRS)?
International Financial Reporting Standards (IFRS) set common rules so that financial statements can be consistent, transparent and comparable around the world. IFRS are issued by the International Accounting Standards Board (IASB). They specify how companies must maintain and report their accounts, defining types of transactions and other events with financial impact. IFRS were established to create a common accounting language, so that businesses and their financial statements can be consistent and reliable from company to company and country to country.
International Financial Reporting Standards (IFRS)
Understanding International Financial Reporting Standards (IFRS)
IFRS are designed to bring consistency to accounting language, practices and statements, and to help businesses and investors make educated financial analyses and decisions. The IFRS Foundation sets the standards to “bring transparency, accountability and efficiency to financial markets around the world… fostering trust, growth and long-term financial stability in the global economy.” Companies benefit from the IFRS because investors are more likely to put money into a company if the company's business practices are transparent.
[Important: IFRS are used in at least 120 countries, as of March 2018, including those in the European Union (EU) and many in Asia and South America, but the U.S. uses Generally Accepted Accounting Principles (GAAP).]
The U.S. Securities and Exchange Commission (SEC) has said it won't switch to International Financial Reporting Standards, but will continue reviewing a proposal to allow IFRS information to supplement U.S. financial filings. GAAP has been called "the gold standard" of accounting. However, some argue that global adoption of IFRS would save money on duplicative accounting work, and the costs of analyzing and comparing companies internationally.
IFRS are sometimes confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced. IAS was issued from 1973 to 2000, and the International Accounting Standards Board (IASB) replaced the International Accounting Standards Committee (IASC) in 2001.
Standard IFRS Requirements
IFRS covers a wide range of accounting activities. There are certain aspects of business practice for which IFRS set mandatory rules.
- Statement of Financial Position: This is also known as a balance sheet. IFRS influences the ways in which the components of a balance sheet are reported.
- Statement of Comprehensive Income: This can take the form of one statement, or it can be separated into a profit and loss statement and a statement of other income, including property and equipment.
- Statement of Changes in Equity: Also known as a statement of retained earnings, this documents the company's change in earnings or profit for the given financial period.
- Statement of Cash Flow: This report summarizes the company's financial transactions in the given period, separating cash flow into Operations, Investing, and Financing.
In addition to these basic reports, a company must also give a summary of its accounting policies. The full report is often seen side by side with the previous report, to show the changes in profit and loss. A parent company must create separate account reports for each of its subsidiary companies.
IFRS vs. American Standards
Differences exist between IFRS and other countries' Generally Accepted Accounting Principles (GAAP) that affect the way a financial ratio is calculated. For example, IFRS is not as strict on defining revenue and allow companies to report revenue sooner, so consequently, a balance sheet under this system might show a higher stream of revenue than GAAP's. IFRS also has different requirements for expenses; for example, if a company is spending money on development or an investment for the future, it doesn't necessarily have to be reported as an expense (it can be capitalized).
Another difference between IFRS and GAAP is the specification of the way inventory is accounted for. There are two ways to keep track of this, first in first out (FIFO) and last in first out (LIFO). FIFO means that the most recent inventory is left unsold until older inventory is sold; LIFO means that the most recent inventory is the first to be sold. IFRS prohibits LIFO, while American standards and others allow participants to freely use either.
- IFRS were established to create a common accounting language, so business and accounts can be understood from company to company and country to country.
- Both companies and investors benefit from IFRS because people are more confident investing in a company if its business practices are transparent and reliable.
- The IFRS are set by the International Accounting Standards Board, an independent body of the IFRS Foundation, which provide updates, insights and guidance on the standards.
History of IFRS
IFRS originated in the European Union, with the intention of making business affairs and accounts accessible across the continent. The idea quickly spread globally, as a common language allowed greater communication worldwide. Although the U.S. and some other countries don't use IFRS, most do, and they are spread all over the world, making IFRS the most common global set of standards.
The IFRS website has more information on the rules and history of the IFRS.
The goal of IFRS is to make international comparisons as easy as possible. That goal hasn't fully been achieved because, in addition to the U.S. using GAAP, some countries use other standards. And U.S. GAAP is different from Canadian GAAP. Synchronizing accounting standards across the globe is an ongoing process in the international accounting community.