What Are International Financial Reporting Standards (IFRS)?

Introduction

In an increasingly global economy where businesses operate across borders, the need for standardized financial reporting has never been greater. This is where International Financial Reporting Standards comes in. 

IFRS is a set of accounting standards that provide a unified framework for financial statements, ensuring transparency, accountability, and efficiency in the global marketplace. These standards are aimed at introducing consistency into accounting practices, enabling companies and d investors to comprehend and compare financial statements from any country. 

In this blog, we will get a comprehensive understanding of what IFRS is, its history, how it compares to GAAP (Generally Accepted Accounting Principles), and much more.

What are IFRS Standards?

IFRS Standards are accounting rules issued by International Financial Reporting Standards Foundation, that have been designed to establish a common framework for the preparation and disclosure of the financial statements of public companies globally. These standards improve the accuracy, comparability, and quality of financial information. 

By adopting IFRS, companies will be able to provide transparent, comparable, and consistent financial statements. Such uniformity is very important to investors, regulators, and other stakeholders seeking to make decisions based on accurate and comparable financial information.

Some of the prime characteristics of IFRS Standards are as follows:

1. Global comparability

   IFRS Standards are applied in more than 140 countries, which offers a single set of accounting principles that is most widely adopted across the world. This makes global comparability possible, as organizations operating in more than one country can maintain consistency in financial reporting, making consolidation of reports much easier and also easy to compare across borders. Infact, a survey by the CFA Institute found that 70% of investors preferred global comparability of financial statements. The adoption of IFRS enhanced comparability across borders, facilitating international investment decisions. 

2. Transparency and accountability

   IFRS ensures the true and fair view of a company’s financial position through many detailed disclosures and adherence to specific accounting treatments. Such transparency will make the management more accountable to investors, regulators, and other relevant stakeholders.

3. Principle-based approach

   Unlike the rules-based accounting standards, IFRS is principle-based, providing general guidance that allows professional judgment to be exercised when applying the accounting practices. It gives flexibility to companies in applying the IFRS Standards in a manner that best depicts their unique circumstances, all the while maintaining consistency and comparability. Infact, when it comes to presenting financial statements, IFRS offers about 50% more flexibility compared to GAAP. This flexibility allowed entities to tailor their financial narratives to what they deemed most relevant, resulting in more meaningful and understandable reports for stakeholders. 

4. Relevance to investors

   IFRS is written with investors’ needs in mind. It ensures the provision of relevant and reliable information regarding an entity’s financial performance, position, and prospects. The focus on investor needs makes IFRS crucial for capital markets.

5. Continuous improvements and updates

   In accordance with changes in the global economy, financial markets, and business practice, the International Accounting Standards Board (IASB) updates these standards from time to time. This will help to keep the standard relevant and effective towards providing relevant, up-to-date, and accurate financial information.

History of IFRS

The history of IFRS dates back to the formation of the International Accounting Standards Committee (IASC) in 1973. The purpose of IASC was to create international accounting standards. In 2001, this IASC was reorganized into the International Accounting Standards Board (IASB), which undertook the responsibility of developing these standards. 

The IASB introduced IFRS as an improved and more globally adopted version of accounting principles. This is why, over the years, more than 140 countries have adopted it, including Europe, Australia, Canada, and others. It is due to its wide adoption that IFRS is currently regarded as the de facto global standard for financial reporting.

List of IFRS Standards

IFRS encompasses a wide range of standards that cover various aspects of financial reporting. These standards are designed to address specific accounting issues and provide guidelines on how to present financial information accurately and consistently. Below is a list of some key IFRS Standards:

IFRS vs. GAAP

IFRS is undeniably an internationally recognized standard, but it is not the only one in use. The Generally Accepted Accounting Principles form another set of accounting standards in use, primarily in the United States with more than $50.8 trillion market capitalization under GAAP.

Even though IFRS and GAAP are intended to achieve the same purpose, accuracy, and transparency of the financial statements, there are fundamental differences between them. While GAAP’s rule-based approach provided detailed guidance, IFRS’s principle-based framework offered flexibility and international comparability.

Understanding the differences and similarities between these frameworks was crucial for businesses operating globally and for investors making cross-border investment decisions.Some key differences are:

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FAQs

1) What is the International Financial Reporting Standard?

The International Financial Reporting Standard (IFRS) is a set of accounting guidelines that standardizes financial reporting globally. It ensures transparency, consistency, and comparability in financial statements, allowing stakeholders to make informed decisions globally.

2) What does IFRS stand for?

IFRS stands for International Financial Reporting Standards. These are globally recognized accounting standards set by the International Accounting Standards Board (IASB) to ensure transparent and comparable financial reporting across different countries and industries alike.

3) What is the International Financial Standard Board?

The International Accounting Standards Board (IASB) is an independent body that develops and issues the International Financial Reporting Standards (IFRS). The IASB aims to create a single set of high-quality accounting standards that promote transparency and comparability in financial reporting globally.

4) Are ASC 606 and IFRS 15 the same?

ASC 606 and IFRS 15 are similar in that both provide a framework for recognizing revenue from contracts with customers. While they are aligned in many aspects, minor differences exist in application and disclosures, tailored to the specific needs of GAAP (ASC 606) and IFRS (IFRS 15).

5) Are IFRS S1 and S2 mandatory?

IFRS S1 and IFRS S2 are related to sustainability and climate-related disclosures and are not universally mandatory yet. Adoption depends on jurisdictional requirements. However, they are increasingly being incorporated into regulatory frameworks, making them more prevalent globally.