IFRS: What Are the International Financial Reporting Standards?

IFRS is an acronym for “International Financial Reporting Standards,” a set of principles governing how various countries require companies to record and release information about their financial status internationally.

The IFRS Foundation and the International Accounting Standards Board (IASB) work in concert to release IFRS standards for economies throughout the European Union, Canada, and other regions of the world. This helps keep capital markets, large corporations, and SMEs (small and medium-sized enterprises) conversant in a common financial language from one nation to another.

Thanks to these standards, countries as far apart as France, South Korea, and Kenya all utilize the same disclosure requirements, revenue recognition practices, and accounting principles. This makes the convergence of economies far easier to navigate on an international scale.

Certain core principles form the backbone of the International Financial Reporting Standards. Keep these in mind:

1. 1. Coherent accounting policies: The IFRS Foundation puts accounting rules in place that companies of all different types can use to document the fair value of their businesses, while also conveying other important financial information. This includes international policies involving consolidated financial statements (IFRS 10), financial instruments (IFRS 9), insurance contracts (IFRS 17), and leases (IFRS 16).
2. 2. Financial transparency: IFRS regulators strive to ensure financial transparency and honesty on an international scale. They do so by encouraging businesses to share an accurate valuation of their business via a statement of financial position, as well as documenting their performance on other essential metrics to reassure consumers and investors they’re on a path of sustainability.
3. 3. Release of cash flow statements: Companies issue various pronouncements and financial statements to help outside observers get an idea of their internal organizational health. The IFRS Foundation and the International Accounting Standards Board both encourage the release of a steady stream of cash flow statements to serve this purpose. This might include accounting for cash flows in regard to assets, operations costs, equities, and other business transactions.

International Financial Reporting Standards help different countries and companies collaborate on shared economic and financial goals. These elements make up the broader purpose of the IFRS:

• To consolidate standards: With the implementation of these standards, well over a hundred different countries brought their accounting principles in line with each other. This sort of consolidation assures far more efficient working relationships on an international scale. The IFRS Interpretations Committee (sometimes abbreviated as IFRIC) can also help adjudicate whether or not specific companies are in compliance with the standards overall.
• To facilitate international understanding: Adoption of IFRS made financial filings uniform for the first time throughout hundreds of countries across the globe. In the past, each country had separate regulatory rules dictating how to report on assets, liabilities, and the like. With the advent of IFRS, well over a hundred jurisdictions—including countries throughout the European Union, Asia, and both North and South America—are now on the same page about the preparation and presentation of financial statements.
• To guide fair conduct: These standards put guardrails in place to ensure companies all adhere to the same rules and regulations of fair economic play. For instance, they provide guidance about how to list information on a balance sheet and other financial statements. These standards ensure different business combinations hew to the same general principles.

The main difference between GAAP (Generally Accepted Accounting Principles) and IFRS is the United States uses the former but not the latter.

While IFRS countries and companies might also adhere to guidelines dictated by the US GAAP, United States companies are generally less likely to hew closely to IFRS standards the European Union and other regions use. This is partially due to strict requirements the Financial Accounting Standards Board (FASB) places on US businesses to adhere specifically to GAAP.

There are other differences between the two in terms of the actual standards. For instance, the IFRS Foundation prohibits LIFO (Last In, First Out) inventory cost practices, while GAAP allows for it. Issuers of stocks must also adhere to rules set by the Securities and Exchange Commission (SEC) in the United States, alongside the regulations GAAP has put in place.

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