What Are 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 intended to make them consistent, transparent, and easily comparable around the world.
IFRS have been adopted for use in 120 nations, including those in the European Union. The United States uses a different system, the Generally Accepted Accounting Principles (GAAP).
The IFRS are issued by the International Accounting Standards Board (IASB).
IFRS are sometimes confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced in 2001.
- International Financial Reporting Standards (IFRS) were created to bring consistency and integrity to accounting standards and practices, regardless of the company or the country.
- They were issued by the London-based Accounting Standards Board (IASB) and address record keeping, account reporting, and other aspects of financial reporting.
- IFRS fosters greater corporate transparency.
International Financial Reporting Standards (IFRS)
IFRS specify in detail how companies must maintain their records and report their expenses and income. They were established to create a common accounting language that could be understood globally by investors, auditors, government regulators, and other interested parties.
The standards are designed to bring consistency to accounting language, practices, and statements, and to help businesses and investors make educated financial analyses and decisions.
They were developed by the International Accounting Standards Board, which is part of the not-for-profit, London-based IFRS Foundation. The Foundation says it sets the standards to “bring transparency, accountability, and efficiency to financial markets around the world."
IFRS vs. GAAP
Public companies in the U.S. are required to use a rival system, the Generally Accepted Accounting Principles (GAAP). The GAAP standards were developed by the Financial Standards Accounting Board (FSAB) and the Governmental Accounting Standards Board (GASB).
The 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.
There are differences between IFRS and GAAP reporting. For example, IFRS is not as strict in defining revenue and allows companies to report revenue sooner. A balance sheet using this system might show a higher stream of revenue than a GAAP version of the same balance sheet.
IFRS also has different requirements for reporting expenses. For example, if a company is spending money on development or on investment for the future, it doesn't necessarily have to be reported as an expense. It can be capitalized instead.
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 the 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 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 Flows: 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 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.
Chinese companies do not use IFRS or GAAP. They use Chinese Accounting Standards for Business Enterprises (ASBEs).
History of IFRS
IFRS originated in the European Union with the intention of making business affairs and accounts accessible across the continent. It was quickly adopted as a common accounting language.
Although the U.S. and some other countries don't use IFRS, 120 countries do, making IFRS the most-used set of standards globally.
Who Uses IFRS?
IFRS are required to be used by public companies based in a total of 120 countries, including all of the nations in the European Union as well as Canada, India, Russia, South Korea, South Africa, and Chile.
The U.S. and China each have their own systems.
Only a few countries have publicly traded companies but require neither system. They include Egypt, Bolivia, Guinea-Bissau, Macao, and Niger.
How Does IFRS Differ from GAAP?
The two systems have the same goal: clarity and honesty in financial reporting by publicly traded companies.
IFRS was designed as is a standards-based approach that could be used internationally. GAAP is a rules-based system used primarily in the U.S.
Although most of the world uses IFRS standards, it is still not part of the U.S. financial accounting world. The SEC continues to review switching to the IFRS but has yet to do so.
Several methodological differences exist between the two systems. For instance, GAAP allows a company to use either of two inventory cost methods: First in, First out (FIFO) or Last in, First out (LIFO). LIFO, however, is banned under IFRS.
Why Is IFRS Important?
IFRS fosters transparency and trust in the global financial markets and the companies that list their shares on them. If such standards did not exist, investors would be more reluctant to believe the financial statements and other information presented to them by companies. Without that trust, we might see fewer transactions and a less robust economy.
IFRS also helps investors analyze companies by making it easier to perform “apples to apples” comparisons between one company and another and for fundamental analysis of a company's performance.