As the world is gradually turning into a global village, international trade has grown multifold. But as the trading borders continue to widen into the global marketplace, it has become increasingly difficult for companies to present their financial statements according to the reporting standards of each country it transacts in.
As a result, IASB (International Accounting Standards Board), a London-headquartered independent body, introduced IFRS (International Financial Reporting Standards).
What is IFRS?
IFRS can be defined as accounting rules entities should follow to report their financial statements. The international standards are created with the view to enhance transparency and credibility in the corporate landscape, enabling investors and other parties involved to make improved financial decisions.
As the IFRS is the common language used by entities across countries, it has helped make the interpretation of financial statements more convenient on a global scale. In fact, more than 100 countries across the world have adopted the IFRS accounting standards. However, it is yet to be made the official accounting standard in the USA.
What are the Current Account Reporting Standards?
IASB is the successor of the IASC (International Accounting Standards Committee). Before IASB, IASC was responsible for establishing and maintaining accounting standards. So, the IASC had already issued some accounting standards, known as IAS (International Accounting Standards), between 1973 and 2001.
Currently, both IFRS and IAS accounting standards are in force. Here’s a quick overview of the accounting standards-
|Standard No.||Standard Title|
|IFRS 1||First-Time Adoption of IFRS|
|IFRS 2||Share-based Payment|
|IFRS 3||Business Combinations|
|IFRS 4||Insurance Contracts|
|IFRS 5||Non-current Assets Held for Sale and Discontinued Operations|
|IFRS 6||Exploration For and Evaluation of Mineral Resources|
|IFRS 7||Financial Instruments: Disclosures|
|IFRS 8||Operating Segments|
|IFRS 9||Financial Instruments|
|IFRS 10||Consolidated Financial Statements|
|IFRS 11||Joint Arrangements|
|IFRS 12||Disclosure of Interests in Other Entities|
|IFRS 13||Fair Value Measurement|
|IFRS 14||Regulatory Deferral Accounts|
|IFRS 15||Revenue from Contracts with Customers|
|IFRS 17||Insurance Contracts|
|Standard No.||Standard Title|
|IAS 1||Presentation of Financial Statements|
|IAS 7||Statement of Cash Flows|
|IAS 8||Accounting Policies, Changes in Accounting Estimates and Errors|
|IAS 10||Events after the Reporting Period|
|IAS 12||Income Taxes|
|IAS 16||Property, Plant and Equipment|
|IAS 19||Employee Benefits|
|IAS 20||Government Grants and Disclosure of Government Assistance|
|IAS 21||The Effects of Changes in Foreign Exchange Rates|
|IAS 23||Borrowing Costs|
|IAS 24||Related Party Disclosures|
|IAS 26||Accounting and Reporting by Retirement Benefit Plans|
|IAS 27||Separate Financial Statements|
|IAS 28||Investments in Associates and Joint Ventures|
|IAS 29||Financial Reporting in Hyperinflationary Economies|
|IAS 32||Financial Instruments: Presentation|
|IAS 33||Earnings Per Share|
|IAS 34||Interim Financial Reporting|
|IAS 36||Impairment of Assets|
|IAS 37||Provisions, Contingent Liabilities and Contingent Assets|
|IAS 38||Intangible Assets|
|IAS 39||Financial Instruments: Recognition and Measurement|
|IAS 40||Investment Property|
How are Financial Statements Created Under IFRS?
The financial statements complying with the IFRS standards generally include the following components-
- Statement of Financial Position- It is commonly known as the balance sheet and shows the entity’s financial position at the end of a specific period. The IFRS has rules regarding reporting the components of a balance sheet.
- Statement of Comprehensive Income- It is a profit and loss statement for the period. It also includes other comprehensive income, including income/expense components not reported in the profit and loss statement in compliance with other standards.
- Statement of Changes in Equity- More commonly known as a retained earnings statement, it provides information regarding changes in the entity’s profit or earnings in a certain period.
- Statement of Cash Flows- A detailed summary of an entity’s financial transactions for a certain period. Cash flows like investing, financing, and operations are separately mentioned in the statement.
Apart from the reports listed above, entities should also provide a detailed summary of the accounting policies it follows. Moreover, if the entity has subsidiaries, individual account reports should be presented for each of them.
Who Should Use the IFRS Accounting Standards?
Public companies located in all 27 countries of the European Union should use the IFRS accounting standards. Apart from the EU, the standards have also been adopted by countries like Russia, Canada, South Africa, Chile, and India. However, China and the USA use different accounting standards of their own.
IFRS vs. GAAP
As mentioned above, the USA has not adopted IFRS. Instead, USA-based public companies must report their financial statements as per the Generally Accepted Accounting Principles (GAAP).
While the IFRS and GAAP share several similarities, there are some significant differences too. For instance, GAAP standards are stringent with regard to revenue definition, whereas IFRS is more flexible. It is also worth noting an IFRS-based balance sheet can show a higher revenue stream than a balance sheet created using GAAP.
Moreover, even the expense reporting requirements are different between IFRS and GAAP. For instance, in IFRS, the money spent by an entity on development or future investments is allowed to be capitalized. But with GAAP, all such spending should be mandatorily reported as expenses.
What is the Importance of IFRS?
As IFRS enhances transparency in company accounting, the international financial markets, along with the entities that are listed on them, are the biggest beneficiaries. It is due to a global accounting standard like IFRS that investors trust the financial statements reported by the companies. If the trust was lacking, economies would have been less robust, and international transactions would have been fewer.
Moreover, equity investors abundantly rely on the financial statements of the companies to compare them to their peers and analyze their fundamentals before making an investment decision.
Global Financial Markets Made More Credible with IFRS
The IFRS standards are a set of accounting rules relied upon by global companies to report their financial statements.
The uniform standards help make company statements transparent and consistent. It also makes reporting easier for entities with operations spread across countries and enables investors to analyze potential investment opportunities effectively. Apart from investing, the IFRS standards also play a vital role in tax purposes and auditing.