International Financial Reporting Standard Explained

The International Financial Reporting Standard (IFRS) is a set of accounting standards used by governments, business associations and accounting professionals all over the world. This set of standards is used across most jurisdictions throughout the G20 as well as Hong Kong, Chile, Israel, Taiwan and Singapore. The only G20 country not to use IFRS is the United States, which instead uses Generally Acceptable Accounting Principles (GAAP).

An increasingly globalised economy where transactions frequently cross international borders necessitates uniformity in accounting standards. IFRS is designed to ensure greater efficiency and transparency in the accounting sector. These accounting principles were designed by two bodies: the International Accounting Standards Board (IASB) and the International Sustainability Standards Board (ISSB). These standards build on the previous International Accounting Standards (IAS), covering a broader range of accounting issues and providing more detailed guidelines for financial reporting.

How does IFRS work?

IFRS provides detailed guidelines on how businesses should prepare and maintain their financial statements in a way that is consistent and easily understood across a range of jurisdictions and sectors.

These accounting standards cover a comprehensive range of topics, including:

• international exchange rates

• revenue recognition

• fixed assets

• income taxation

• inventories

• the presentation of financial statements

They also provide detailed guidelines on the proper preparation and presentation of different financial statements including:

• balance sheets

• income statements

• cash flow statements

• statements of retained earnings

Benefits of IFRS

While IFRS is endorsed in the UK, it is not mandatory as long as accounting follows the International Accounting Standards (IAS). However, it does have some distinct advantages for accounting professionals, businesses and investors:

• Its global recognition makes it easy to compare and analyse financial statements from around the world

• It provides a consistent accounting framework to demystify financial reporting

• It compels businesses to disclose data that provides a clear picture of their financial health

• It provides stakeholders with clear and accurate information on which to base their decisions

• IFRS provides guidelines rather than prescriptions, making it flexible with room for interpretation

• Can reduce international reporting costs

• As it is extrapolated from IAS, it is often fairly easy to implement for new users

Disadvantages of IFRS

Like any accounting standard, IFRS has some potential disadvantages. These include:

• IFRS compliance may result in increased costs such as software or consultants

• Training and implementation of IFRS may be time-consuming and disruptive

• Critics argue that the subjectivity of IFRS may leave it open to misinterpretation or manipulation

International Financial Reporting Standards FAQs

When were IFRS requirements first introduced?

The first set of standards was introduced in 2003, and at the time of writing the latest version is IFRS 17 which was introduced in January 2023.

What is the difference between IFRS and IAS?

IFRS is a more up-to-date version of IAS. While it uses IAS as its foundation, IFRS provides more detailed guidelines for financial reporting and covers a broader range of subjects.

How does IFRS differ from GAAP?

While there are many similarities between IFRS and GAAP, the methodology behind them is different. IFRS is principles-based, while GAAP is rules-based. Therefore, IFRS is less detailed and proscriptive, making it more open to interpretation.