IFRS standards are International Financial Reporting Standards (IFRS) that consist of a set of accounting rules that determine how transactions and other accounting events are required to be reported in financial statements. They are designed to maintain credibility and transparency in the financial world, which enables investors and business operators to make informed financial decisions.
IFRS standards are issued and maintained by the International Accounting Standards Board and were created to establish a common language so that financial statements can easily be interpreted from company to company and country to country.
IFRS are the standard in over 100 countries, including the EU and many parts of Asia and South America. The United States, however, has not yet adopted them and the SEC is still deciding whether or not they should move toward them as the official standard of accounting.
The International Financial Reporting Standards (IFRS) specifies how international companies should manage and report their financial statements and define different types of transactions with financial implications. It is a principle-based accounting standard whose foundations set the ground for investors and businesses to analyze financial records and make a decision.
The IFRS aims to ensure that the international markets across the globe follow a common set of standards for transparency, efficiency, and accountability. The element of openness that IFRS advocates for is important for businesses, as it enables investors to invest in companies with transparent business practices.
Principles of IFRS
IFRS requires that financial statements be prepared using four basic principles: clarity, relevance, reliability, and comparability.
• The reliability principle aims to ensure that all transactions, events, and business activities presented in the financial statements is reliable. Information is considered reliable if it can be checked, verified, and reviewed with objective evidence.
• The principle of clarity requires that financial statements be easy to read and easy to understand. IFRS guidelines allow substantial discretion in deciding what information will be included and how it will be presented in the financial statements. The final decision rests with the accountant
• The relevance principle is an accounting principle that states in order for financial information to be useful to external users, it must be relevant
• Comparability allows users to compare financial position and performance across time and across companies. Comparability is achieved by consistency. Consistency refers to application of accounting standards and policies consistently from one period to another and from one region to another.
Importance of IFRS
IFRS fosters transparency and trust in the global financial markets and the companies that list their shares on them. If such standards did not exist, investors would be more reluctant to believe the financial statements and other information presented to them by companies. Without that trust, we might see fewer transactions and a less robust economy.
IFRS also helps investors analyze companies by making it easier to perform “apples to apples” comparisons between one company and another and for fundamental analysis of a company’s performance.
Standard IFRS Requirements
IFRS covers a wide range of accounting activities. There are certain aspects of business practice for which IFRS set mandatory rules.
• Statement of Financial Position: This is the balance sheet. IFRS influences the ways in which the components of a balance sheet are reported.
• Statement of Comprehensive Income: This can take the form of one statement or be separated into a profit and loss statement and a statement of other income, including property and equipment.
• Statement of Changes in Equity: Also known as a statement of retained earnings, this documents the company’s change in earnings or profit for the given financial period.
• Statement of Cash Flows: This report summarizes the company’s financial transactions in the given period, separating cash flow into operations, investing, and financing.
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