International Financial Reporting Standards (IFRS) - Explained
What is IFRS?
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Table of ContentsWhat is the International Financial Reporting Standards?What Does the International Financial Reporting Standards Do?Standard IFRS RequirementsIFRS vs. American StandardsIFRS HistoryAcademic Research on International Financial Reporting Standards (IFRS)
What is the International Financial Reporting Standards?
International Financial Reporting Standards refer to an international accounting standards set which states how specific transaction types and other activities ought to be reported in financial statements. The International Accounting Standards Board (IASB) issues IFRS, and they dictate precisely how accountants must report, as well as, maintain their accounts. International Financial Reporting Standards were established so as to share a mutual accounting language, so accounts and business can be comprehended from company to company, and also country to country.
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What Does the International Financial Reporting Standards Do?
The reason for IFRS is to maintain both stability and transparency all over the financial world. This permits both individual investors and businesses to make educated financial decisions, in that they can see precisely what has been going on with a company which they intend to invest. In various parts of the world, IFRS are standard, with the inclusion of the European Union (EU) and various countries in South America and Asia, but not in the U.S. the Securities and Exchange Commission will, in the near term, not change to International Financial Reporting Standards but would keep on reviewing a proposal to permit IFRS details to supplement United States financial filings. Countries getting the most benefits from the standards are those who engage in lots of international business, as well as, investing. Advocates opine that an IFRS global adoption will save money on individual investigations and alternative comparison cost while allowing for the free flow of information. Sometimes, IFRS are mistaken for International Accounting Standards (IAS). IAS is the older standards that were replaced by IFRS. The issuing of IAS spanned from 1973 to 2000, and a replacement of the International Accounting Standards Committee (IASC) by the International Accounting Standards Board (IASB) occurred in 2001.
Standard IFRS Requirements
IFRS covers a variety of accounting activities. There are some business practice aspects for which IFRS set obligatory rules. Statement of Financial Position: this is also referred to as a balance sheet. International Financial Reporting Standards influences how a balance sheet's components are reported. Statement of Comprehensive Income: this can assume the form of a statement, or it can be split into a profit and loss statement, as well as, other income statements, which includes equipment and property. Statement of Changes in Equity: this is also referred to as a statement of retained earnings. It documents the change in earnings of a company or profit for the specified financial period. Statement of Cash Flow: this report gives a recap of the financial transactions of the company in the specified period, separating cash flow into Investing, Operations, and Financing. Furthermore, it is mandatory that a company gives a summary of its accounting policies. The complete report is usually seen alongside the previous report, in order to show the profit and loss changes. It is mandatory that a parent company creates separate account reports for each subsidiary company it owns.
IFRS vs. American Standards
There are differences between IFRS and the Generally Accepted Accounting Principles (GAAP) of other countries which affect the calculation of a financial ratio. For instance, IFRS isn't so strict on defining revenue and also allows for sooner revenue reporting by companies, so as a result, a balance sheet subject to this system may show a higher revenue stream than GAAP would. Also, IFRS has different prerequisites for expenses; for instance, a company is spending money on a future investment or on development, it's not a must for it to be reported as an expense. Another distinction between IFRS and GAAP is the requirement of how inventory is accounted for. Two methods exist for keeping track of this, while one is first in first out (FIFO), the second is last in last out (LIFO). While FIFO means that the latest inventory is left unsold up until the older one is sold, LIFO means that the latest inventory is sold first. LIFO is prohibited by IFRS, while American standards, as well as, others permit participants to use either freely.
IFRS started in the European Union, with the aim of making business matters and accounts access all over the continent. The idea spread globally in no time, in that a common language allowed for greater communication globally. Even though only a part of the world utilizes IFRS, countries who're participating are widespread globally, as against being restricted to a geographic location. The United States is yet to adopt IFRS mainly because GAAP is considered the "gold standard". At the moment, IFRS is used by about 120 countries in some way, and 90 need them to totally conform to the regulations of IFRS. The IFRS Foundation maintains the IFRS. The IFRS Foundation's mission is to bring accountability, efficiency, and transparency to financial markets globally. The function of the IFRS Foundation is not limited to supplying and monitoring the standards, but it also extends to providing suggestions, as well as, advice to those who fail to abide by the practice guidelines. More information on the history and rules of the IFRS are on the official IFRS website. With IFRS, the goal is to make foreign comparisons very easy. This is hard because, at an extended level, each country has its own unique set of rules. For instance, the United States GAAP varies from Canadian GAAP. The synchronization of accounting standards all over the world is ongoing in the international accounting community.
Academic Research on International Financial Reporting Standards (IFRS)
- International Financial Reporting Standards (IFRS): pros and cons for investors, Ball, R. (2006), 36(sup1), 5-27.
- Does mandatory adoption of International Financial Reporting Standards in the European Union reduce the cost of equity capital?, Li, S. (2010). The accounting review, 85(2), 607-636.
- International financial reporting standards and experts' perceptions of disclosure quality, Daske, H., & Gebhardt, G. (2006). Abacus, 42(34), 461-498.
- The role of international financial reporting standards in accounting quality: Evidence from the European Union, Chen, H., Tang, Q., Jiang, Y., & Lin, Z. (2010). Journal of international financial management & accounting, 21(3), 220-278.
- International Financial Reporting Standards and the quality of financial statement information, Iatridis, G. (2010). International review of financial analysis, 19(3), 193-204.
- International Financial Reporting Standards: what are the benefits?, Brown, P. (2011). Accounting and business research, 41(3), 269-285.
- The post-adoption effects of the implementation of International Financial Reporting Standards in Greece, Iatridis, G., & Rouvolis, S. (2010). Journal of international accounting, auditing and taxation, 19(1), 55-65.
- Corporate governance and disclosures on the transition to international financial reporting standards, Kent, P., & Stewart, J. (2008). Accounting & Finance, 48(4), 649-671.
- Why do countries adopt international financial reporting standards?, Ramanna, K., & Sletten, E. (2009).
- Impact of International Financial Reporting Standard adoption on key financial ratios, Lantto, A. M., & Sahlstrm, P. (2009). Accounting & Finance, 49(2), 341-361.