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 on how to treat transactions. These statements give information about performance, position, and cash flow helpful to people making financial decisions.

In today’s globalised world, reporting practices that are comparable, transparent, and reliable for accurate financial information are essential in helping businesses operate and attract investors in multiple countries. This is because countries across the world agree 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 standardised their accounting practices. The International Accounting Standards Board (IASB) created the IFRS to standardise reporting standards across different global markets. 

IFRS 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. This allows 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.

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 Singapore, the European Union, India, 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 SGX or LSE, IFRS is required by law. However, all other companies can choose to apply IFRS to benefit from having globally recognisable financial statements. Note this may vary by country. This is why as an accountant it is important to know the requirements of IFRS.

What are Singapore Financial Accounting Standards (SFRS)?

Singapore uses IFRS through the Singapore Financial Reporting Standards (SFRS). SFRS comprises standards issued by the Accounting Standards Council Singapore (ASC) which are equivalent to IFRS standards. The Companies Act requires all companies incorporated or based in Singapore to comply with SFRS. 

Like in IFRS, Accrual-based accounting is one of the primary principles of Singapore accounting standards. Financial statements are prepared on an accrual basis of accounting, under which the effects of transactions and other events are recognised when they occur.

Financial statements prepared on an accrual basis inform users not only of past transactions involving the payment and receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future. 

Accounting standards can be complex and in an ever-changing and demanding world, it has the potential to be more stringent. This can make complying fully with SFRS costly and is a lot of work for small and medium-sized entities.  

Fortunately for small entities, there is SFRS for Small Entities which is an alternative framework to the full SFRS for eligible entities in Singapore. SFRS for SE is closely aligned with IFRS for Small Entities. It provides an optional financial reporting standard for small entities.The objective of the SFRS for SE is to relieve small entities from compliance with the full SFRS while ensuring quality, transparency and comparability.

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 pulling up 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 more strictly controlled than IFRS. This is because the IFRS needs to account for the differences within global companies, whereas GAAP only focuses on US specifics allowing them to get more detailed. IFRS regulations are more vague and malleable to fit the needs of companies in different countries.
• Revenue recognition is more strict with GAAP. The IFRS allows companies to report revenue earlier and defines income loosely. Therefore, a balance sheet following the IFRS may present higher revenue values than a GAAP 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 as well as other markets would be required to create financial statements that comply with separate standards. 

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 can help in keeping important information organised. Book a demo and try QuickBooks today.

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