What is IFRS ? International reporting standards explained
When we talk about finance and accounting on an international scale, it’s almost impossible not to mention the IFRS (International Financial Reporting Standards).
This acronym, often mentioned but rarely detailed, deserves closer attention. What exactly are these standards, who uses them, and why are they important? Let’s try to clarify all of this.
What is IFRS ?
International accounting standards
IFRS, also known as International Financial Reporting Standards, are a set of accounting rules applicable to the financial statements of public companies.
Their main objective is to make these financial statements consistent, transparent, and easily comparable worldwide, especially among different publicly traded companies.
These standards, issued by the IASB (International Accounting Standards Board) based in London, are now applied in 167 jurisdictions, including within the European Union.
IFRS and other accounting standards
It’s worth noting that not all countries use IFRS. For example, the United States uses its own standards, the USGAAP (Generally Accepted Accounting Principles), while China has adopted Accounting Standards for Business Enterprises (ASBEs). It is key to note that IFRS and USGAAP are quite different.
IAS or IFRS
In 2001, IFRS replaced the International Accounting Standards (IAS), which were the first international accounting standards issued by the IASB.
The International Accounting Standards (IAS) are, therefore, the former set of international accounting standards. Although IAS are no longer updated, they remain relevant as many IFRS standards are based on the principles established by the IAS.
In summary, IFRS represent a more modern and comprehensive version of the IAS. That’s why it’s sometimes common to confuse IAS and IFRS.
The importance of IFRS
Why are IFRS important?
IFRS play a crucial role in promoting transparency and confidence in international financial markets.
Without such standards, investors might hesitate to trust the financial statements and other information presented by companies. This could result in fewer transactions and a less robust economy.
Moreover, IFRS facilitate investors’ analysis of companies by allowing for more accurate comparisons between different companies by standardizing accounting practices, which is essential for a fundamental analysis of a company’s performance.
How do IFRS work?
IFRS cover a wide range of accounting activities and set mandatory rules for certain business practices.
For example, they influence how the components of a financial statement are reported, they regulate the declaration of a company’s cash flow statement, and they require companies to provide a summary of their accounting policies.
Key IFRS standards
There are numerous IFRS standards. Below we detail some of the main ones:
IAS 1: Presentation of financial statements
The IAS 1 standard provides guidelines for the general presentation of financial statements. It offers recommendations on the structure of these reports, including the balance sheet, income statement, and the annex to the accounts (the notes), to facilitate comparison between different companies and accounting periods.
IAS 2: Inventories
IAS 2 defines accounting practices for managing stocks and inventories. This includes determining costs, accounting treatment, and recognizing impairment losses.
IAS 16: Property, plant, and equipment
The IAS 16 standard guides the accounting of tangible fixed assets, like buildings, machinery, and vehicles. It outlines how to measure the value of these assets and the rules for their depreciation.
IAS 36: Impairment of assets
The IAS 36 standard provides guidelines on how a company should test for an asset’s impairment. It details how to determine an asset’s recoverable amount and when to recognize or reverse an impairment loss.
IAS 38: Intangible assets
The IAS 38 standard applies to the accounting of intangible assets, such as patents, licenses, and trademarks. It defines how to assess and amortize these types of assets.
IFRS 1: First-time adoption of international financial reporting standards
The IFRS 1 standard concerns companies adopting IFRS for the first time. It establishes the general principles for the first publication of financial statements in accordance with IFRS, thereby allowing companies to transition from previous accounting standards to IFRS.
IFRS 3: Business combinations
The IFRS 3 standard guides companies in accounting and disclosing information when they acquire control of another company. The standard aims to improve the comparability and relevance of information provided to users of financial statements. It also deals with calculating goodwill upon purchasing a company.
IFRS 9: Financial instruments
IFRS 9 relates to the classification, measurement, impairment, and recognition of financial instruments. The standard aims to improve and simplify reporting on financial transactions.
IFRS 15: Revenue from contracts with customers
The IFRS 15 standard establishes a comprehensive framework for determining when and how revenue is recognized. It helps companies understand and manage revenue-related risks and revenue recognition.
IFRS 16: Leases
The IFRS 16 standard provides guidelines on how to recognize, measure, present, and disclose leases. This standard aims to offer a more accurate picture of a company’s financial situation by including leases and lease agreements in the financial statements.
Evolution of accounting standards
The current trend is towards the harmonization of accounting standards internationally. Thus, the United States and Japan are considering adopting IFRS. The American Financial Accounting Standards Board (FASB) and the IASB have been working since 2002 on a project to improve and converge US GAAP and IFRS.
Questions and answers on IFRS standards
What are IFRS ?
IFRS (International Financial Reporting Standards) are a set of international accounting standards governing how financial statements are prepared. They are designed to bring more consistency and transparency to public financial statements, making it easier for investors, auditors, and regulators to evaluate and compare companies.
Who establishes IFRS standards ?
IFRS standards are issued by the International Accounting Standards Board (IASB), an independent body based in London. The IASB is part of the IFRS Foundation, a non-profit organization.
What is the difference between IAS and IFRS ?
The International Accounting Standards (IAS) are the former set of international accounting standards that were replaced by IFRS in 2001. Although IAS are no longer updated, they remain relevant as many IFRS standards are based on the principles established by the IAS. In summary, IFRS are a more modern and comprehensive version of the IAS.
Do all countries use IFRS standards ?
No, not all countries use IFRS standards. While 167 jurisdictions have full IFRS profiles, some countries, like the United States and China, use their own accounting systems. In the United States, for example, Generally Accepted Accounting Principles (GAAP) are used.
Why are IFRS important ?
IFRS are important because they allow for greater transparency and better comparability of companies’ financial statements worldwide. This fosters trust in global financial markets, facilitates informed decision-making by investors, and improves the efficiency of economic resource allocation.
What are some examples of IFRS standards ?
Key examples of IFRS standards include IFRS 1 (First-time Adoption of International Financial Reporting Standards), IFRS 3 (Business Combinations), IFRS 9 (Financial Instruments), IFRS 15 (Revenue from Contracts with Customers), and IFRS 16 (Leases). Each standard addresses a different aspect of accounting and presenting financial statements.
Conclusion: Essential IFRS standards
In conclusion, although their implementation can sometimes seem complex, IFRS play an essential role in creating a common international accounting language.
They contribute to the transparency, accountability, and efficiency of global financial markets, and help companies and investors make informed financial decisions.
Understanding and correctly applying them is therefore crucial for any company operating on the international stage. Our CPAs and IFRS experts advise you on implementing these standards.
