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) were established to bring consistency to accounting standards and practices, regardless of the company or the country.
- They are issued by the Accounting Standards Board (IASB) and address record keeping, account reporting, and other aspects of financial reporting.
- IFRS benefit companies and individuals alike in fostering greater corporate transparency.
- The downside of IFRS are that they are not universal, with the United States using GAAP accounting, and a number of other countries using other methods.
International Financial Reporting Standards (IFRS)
Understanding International Financial Reporting Standards
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.
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 the 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 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 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 allows 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.
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. In addition to the U.S. using GAAP, Canada uses a variant of GAAP and still other countries use entirely different standards. Synchronizing accounting standards across the globe is an ongoing process in the international accounting community.
Frequently Asked Questions
What is IFRS and who uses it?
The International Financial Reporting Standards (IFRS), as set forth by the IASB, are a set of internationally-recognized accounting principles used by firms and accountants around the world, but not often in the U.S., which instead uses the generally accepted accounting principles, or GAAP.
How does IFRS differ from GAAP?
IFRS is a standards-based approach that is used internationally, while GAAP is a rules-based system used primarily in the U.S. The IFRS is seen as a more dynamic platform that is regularly being revised in response to an ever-changing financial environment, while GAAP is more static. Although the majority 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 companies to use either the First in, First out (FIFO) or Last in, First out (LIFO) as an inventory cost method. LIFO, however, is banned under IFRS.
Why is IFRS important?
IFRS is important because it helps maintain transparency and trust in the global financial markets and the companies who list their shares on them. If not for IFRS, investors would be more reluctant to believe the financial statements and other information presented to them by companies because they would have less confidence in their integrity. Without that trust and standardized practices, we might see fewer transactions, potentially leading to higher transaction costs 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.