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Guide to International Financial Reporting Standards (IFRS): What is IFRS and what are the requirements?
Historically, the format of financial reporting has varied. Each country’s financial reporting practices followed its own set of accounting principles. There hasn’t always been a list of internationally accepted accounting standards. Consequently, financial reports often lacked legibility and acceptance.
The purpose of reporting in accounting is to make financial information recognizable, measurable, and presentable to stakeholders. Accountants know there are multiple different ways of reporting the way money flows through a business. To ensure that reports are easily accessible to stakeholders, there are guidelines, enforced by governments, on standards to follow. Accounting standards consist of principles and methods for treating transactions. These statements give information about performance, position, and cash flow helpful to people making financial decisions.
In today’s globalized world, reporting practices that are comparable, transparent, and reliable for accurate financial information are essential in helping businesses operate in and attract investors in multiple countries. This is because countries across the world agreed to standards that would be followed internationally. These standards are known as the International Financial Reporting Standards (IFRS).
What is IFRS?
IFRS is how most of the world standardize their accounting practices. The International Accounting Standards Board (IASB) created the IFRS to standardize reporting standards across different global markets.
IFRS standards are designed to maintain transparency in the financial world, which enables investors and business operators to make informed financial decisions. The standards ensure data is consistent, comparable and credible worldwide. This makes it easier to interpret financial reports between companies and countries. Simply put, it allows readers of the reports to compare apples with apples. Allowing investors to have more confidence in investing in countries with clear financial reporting standards.
List of IFRS Standards
Below is a list of issued IFRS standards.
IFRS # |
IFRS Standard |
1 | First-time Adoption of International Financial Reporting Standards |
2 | Share-based Payment |
3 | Business Combinations |
4 | Insurance Contracts |
5 | Non-current Assets Held for Sale and Discontinued Operations |
6 | Exploration for and Evaluation of Mineral Resources |
7 | Financial Instruments: Disclosures |
8 | Operating Segments |
9 | Financial Instruments |
10 | Consolidated Financial Statements |
11 | Joint Arrangements |
12 | Disclosure of Interests in Other Entities |
13 | Fair Value Measurement |
14 | Regulatory Deferral Accounts |
15 | Revenue from Contracts with Customers |
16 | Leases |
17 | Insurance Contracts |
Where is IFRS required?
IFRS or a local implementation of IFRS is required to be followed by public companies based in 167 countries worldwide. These include the European Union, India, Chile, South Africa, Canada and, of course, the United Kingdom.
Besides a legal requirement to use IFRS, it is also used by the following:
- Present and potential investors
- Employees
- Lenders
- Suppliers
- Trade creditors
- Customers
- Governments and agencies
- The general public
Generally speaking, if a company is publicly listed on an exchange such as the JSE or LSE, IFRS is required by law. However, all other companies can choose to apply IFRS as they may benefit from having globally recognisable financial statements. Note this may vary by country. Which is why as an accountant it is important to know the requirements of IFRS.
IFRS requirements
A list of international financial reporting standards includes a few of the following:
1. Statement of Financial Position
Commonly known as the balance sheet. This rule dictates that companies have transparent balance sheets. Balance sheets report and track a company's financial health by looking at assets, owner's equity and liabilities at the end of the accounting period.
2. Statement of Profit and Loss
Also known as an income statement. IFRS requires a single profit and loss statement. Under IAS 1 this is considered the primary financial statement to determine a company’s performance. This can be shown as a single statement of comprehensive income or two documents: a profit and loss statement and a statement of comprehensive income. IFRS does not specify a specific format but certain items are required such as: Revenue, Finance Cost, Tax expenses, etc.
3. Statement of Changes in Equity
Similar to the statement of retained earnings under US GAAP. This report shows the differences in equity from one accounting period to the previous one, giving a better idea of how the company grew in the past year.
4. Statement of Cash Flows
IAS 7 requires businesses to have a statement of cash flow as an integral part of their primary financial statements. This report shows cash inflow and outflow. The cash flow statement should classify cash flow from operating, investing and financing activities.
5. Notes of Compliance
Summary of Accounting Policies. These are notes displaying the company accounting policies and explaining figures for extra clarification on the previously mentioned reports. IAS 8 makes this a requirement.
Gathering all the required information can be time-consuming for accountants. Using accounting software like Quickbooks Online can help you save time by making finding the figures for these reports much easier.
Why is IFRS important?
IFRS is important because it increases transparency and builds trust in international financial markets. It helps shareholders build confidence in the public companies that list their shares on the global financial market. It ensures that investors can rely on standardized financial reporting presented to them by companies. It also helps compare and analyze the financial performance of companies in the global market.
IFRS vs GAAP
Some countries have not yet fully adopted IFRS such as the United States of America which has its own accounting standard called Generally Accepted Accounting Policies (GAAP) or US GAAP internationally. US GAAP was published by the Financial Accounting Standards Board (FASB) and is enforced by the Securities and Exchange Commission (SEC).
The main difference between GAAP and IFRS is that IFRS is principle-based and allows more flexibility, while GAAP is rule-based, more rigid and allows less room for interpretation.
Some key differences between the two accounting frameworks are:
- GAAP is much more detailed and stricter than IFRS. This is because the IFRS needs to account for the differences with global companies, whereas GAAP only focuses on US specifics allowing them to get into more detail. IFRS regulations are more vague and malleable to fit the needs of companies in different countries.
- There are discrepancies between reporting under IFRS and GAAP. For instance, IFRS relaxes the definition of revenue and permits business to declare revenue sooner. The revenue stream on a balance sheet prepared using this approach may be higher than on a GAAP-based balance sheet.
- Reporting expenses differs from the IFRS system. An example is the development of future reinvestment money (Assets). With GAAP, these are expenses. With IFRS, you can capitalize them.
- Inventory rules are different between the two systems.
- Inventory reversals aren’t permitted under GAAP. IFRS allows it in certain circumstances.
- GAAP allows for three different inventory reporting methods.
- FIFO, which means First In, First Out method
- Weighted average cost method
- LIFO, which means Last In, First Out method (IFRS does not permit the use of the LIFO method)
It is worth noting that the SEC has indicated a move towards aligning US GAAP with IFRS but progress on making US GAAP IFRS compliant has been slow. This means companies that operate in the US and another market would be required to create financial statements that comply with separate standards.
The Importance Of IFRS
IFRS promotes openness and faith in the international financial markets and the businesses that list their shares there.
Investors would be less likely to accept the financial statements and other information offered to them by corporations if such standards did not exist.
IFRS also makes it simpler to do "apples to apples" comparisons across various firms and to conduct basic analyses of a company's performance.
The International Financial Reporting Standards (IFRS) comprises a collection of accounting regulations for public corporations to achieve consistent, open, and straightforward comparability of corporate financial statements globally.
IFRS is beneficial for investment, tax planning, and auditing, as well as regulation all across the world.
Automating your financial reporting with accounting software
Learn more about the importance of automating your financial reporting with accounting software to access real-time financial information to gain better insights into how your business is performing. QuickBooks accounting reports can help you meet the requirements for IFRS.
Preparing financial statements can be difficult and time consuming. Using accounting software like QuickBooks Online Accountant can help accountants keep their clients’ important information organized. Sign up to use QuickBooks Online Accountant for free for your accounting firm.
