Offering transparency, accountability, and efficiency, IFRS provides an internationally recognized set of accounting standards. But what do they mean for your business? Find out everything you need to know about the international financial reporting standards with our comprehensive guide.
What is IFRS?
IFRS stands for international financial reporting standards. It’s a set of accounting rules and standards that determine how accounting events should be reported in your business’s financial statements. Issued by the International Accounting Standards Board (IASB), IFRS aims to make financial statements consistent, comparable, and transparent across the world.
The United States is one notable country that doesn’t prescribe to IFRS, instead following a system called GAAP.
What are the benefits of IFRS?
Today, cross-border transactions are commonplace, with vast numbers of businesses seeking investment opportunities across the globe. In the past, this sort of internationalism was hampered by different countries maintaining different accounting standards, adding cost, complexity, and risk to business deals. IFRS eliminates that problem by ensuring that different countries adopt the same, globally applicable set of accounting standards.
Explain international financial reporting standards
IFRS specifies how businesses need to maintain and report their accounts. Created to establish a common accounting language, the goal of the international financial reporting standards is to make financial statements coherent and consistent across different industries and countries. IFRS covers a broad range of topics, including revenue recognition, income taxes, inventories, fixed assets, business combinations, foreign exchange rates, and the presentation of financial statements.
There are many different IFRS standards that you need to pay attention to. Here are a couple of areas where IFRS provides comprehensive rules:
Statement of Financial Position – More commonly referred to as a balance sheet, IFRS details the different components and how it should be reported.
Statement of Comprehensive Income – This can be presented as a single statement or a profit and loss statement and a statement of other income.
Statement of Changes in Equity – Sometimes referred to as a statement of retained earnings, this should document your business’s change in profits over the course of a given financial period.
Statement of Cash Flow – This document should provide a summary of your business’s financial transactions over the given period, separating your cash flow into Financing, Operations, and Investing.
What is IFRS compliance?
International financial reporting standards are used in a wide range of countries and jurisdictions. You can see the IFRS website to work out exactly where IFRS is used. If you aren’t compliant with IFRS standards, it may be more difficult to receive investment or business credit. However, by taking a proactive approach to achieving compliance, you can set your business up for success.
What is the difference between GAAP and IFRS?
The standards that are used to govern the rules of financial reporting can vary across countries. In the United States, these standards are grouped under GAAP (generally accepted accounting principles). However, in over 100 countries across the world, accounting standards are organized within the IFRS framework. So, what is the difference between GAAP and IFRS? On the whole, the difference comes down to methodology. IFRS is principles-based, whereas GAAP is rules-based. Practically, this means that IFRS goes into much less detail than gap, leaving more room for interpretation.
For US-based businesses, GAAP is still the standard to adhere to. However, there is a chance that the U.S. Securities and Exchange Commission (SEC) will change to IFRS at some point in the future. The global adoption of IFRS may reduce the costs of comparing international businesses, while it would also cut down on the time and expense of duplicating accounting work.
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