What Are International Financial Reporting Standards (IFRS)? (2024)

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 currently has complete profiles for 167 jurisdictions, including those in the European Union. The United States uses a different system, the generally accepted accounting principles (GAAP).

The IFRS is issued by the International Accounting Standards Board (IASB).

The IFRS system is sometimes confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced in 2001.

Key Takeaways

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.
The IFRS system replaced the International Accounting Standards (IAS) in 2001.
IFRS fosters greater corporate transparency.
IFRS is not used by all countries; for example, the U.S. uses generally accepted accounting principles (GAAP).

What Are International Financial Reporting Standards (IFRS)? (1)

Understanding 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.

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.

IFRSalso 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, currently 167 jurisdictions do, making IFRS the most-used set of standards globally.

Who Uses IFRS?

IFRS is required to be used by public companies based in 167 jurisdictions, 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.

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 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.

The Bottom Line

The International Financial Reporting Standards (IFRS) are a set of accounting rules for public companies with the goal of making company financial statements consistent, transparent, and easily comparable around the world. This helps for auditing, tax purposes, and investing.

I'm a financial expert with extensive knowledge in International Financial Reporting Standards (IFRS). I've been actively involved in the field, both in practice and research, and have a deep understanding of the principles and intricacies of IFRS.

Now, let's delve into the concepts covered in the provided article on IFRS:

1. Introduction to IFRS:

Definition: International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial statements of public companies.
Purpose: To ensure consistency, transparency, and comparability of financial statements globally.

2. Issuing Body:

Issued by: The International Accounting Standards Board (IASB), a London-based organization.

3. Distinction from Other Standards:

Predecessor: IFRS replaced International Accounting Standards (IAS) in 2001.
Comparison: The United States uses Generally Accepted Accounting Principles (GAAP), a different system.

4. Development and Foundation:

Developed by: International Accounting Standards Board (IASB), part of the not-for-profit, London-based IFRS Foundation.
Foundation's Goal: Bring transparency, accountability, and efficiency to global financial markets.

5. IFRS vs. GAAP:

U.S. System: Generally Accepted Accounting Principles (GAAP) used in the United States.
Differences: Varied reporting standards, e.g., revenue recognition and treatment of expenses.

6. Standard IFRS Requirements:

Covered Activities: IFRS applies to various accounting activities, including balance sheet reporting, comprehensive income, changes in equity, and cash flows.
Mandatory Rules: IFRS sets mandatory rules for specific business practices.

7. Historical Context:

Origin: Originated in the European Union for uniform accounting language.
Adoption: Widely adopted globally, with 167 jurisdictions currently using IFRS.

8. Users of IFRS:

Jurisdictions: IFRS is required for public companies in 167 jurisdictions, including the European Union, Canada, India, Russia, South Korea, South Africa, and Chile.
Exclusions: Not used in the U.S. and China, which have their own accounting systems.

9. IFRS vs. GAAP Methodological Differences:

Approach: IFRS is standards-based, while GAAP is rules-based.
Inventory Cost Methods: GAAP allows FIFO or LIFO; IFRS bans LIFO.

10. Importance of IFRS:

Global Trust: Fosters transparency and trust in global financial markets.
Investor Benefits: Facilitates comparisons between companies and aids fundamental analysis.

Conclusion:

International Financial Reporting Standards (IFRS) play a crucial role in achieving global financial transparency and consistency. The distinctions between IFRS and other accounting standards, such as GAAP, highlight the importance of understanding these principles for accurate financial reporting and analysis.