International Financial Reporting Standards

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International Financial Reporting Standards, usually called IFRS, [1] are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB) to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly relevant for companies with shares or securities listed on a public stock exchange. They are progressively replacing the many different national accounting standards.

Accounting standard the specific accouning discipline followed (IFRS, US GAAP, Chinese AS, France GAAP, Germany GAAP,  Russian GAAP, UK GAAP, etc.)

Financial statements prepared and presented by a company typically follow an external standard that specifically guides their preparation. These standards vary across the globe and are typically overseen by some combination of the private accounting profession in that specific nation and the various government regulators. Variations across countries may be considerable, making cross-country evaluation of financial data challenging.

IFRS Foundation

The International Financial Reporting Standards Foundation, or IFRS Foundation, is a nonprofit accounting organisation. Its main objectives include the development and promotion of the International Financial Reporting Standards through the International Accounting Standards Board (IASB), which it oversees.

The International Accounting Standards Board (IASB) is the independent, accounting standard-setting body of the IFRS Foundation.

Contents

IFRS are widely used around the world but have not replaced the separate accounting standards in the United States where US GAAP is applied.

Generally Accepted Accounting Principles (United States) Accounting principles and rules used in the United States

Generally Accepted Accounting Principles is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the latter differ considerably from GAAP and progress has been slow and uncertain. More recently, the SEC has acknowledged that there is no longer a push to move more U.S companies to IFRS so the two sets of standards will "continue to coexist" for the foreseeable future.

History of IFRS

The International Accounting Standards Committee (IASC) was established in June 1973 by accountancy bodies representing ten countries. It devised and published International Accounting Standards (IAS), interpretations and a conceptual framework. These were looked to by many national accounting standard-setters in developing national standards. [2]

The International Accounting Standards Committee (IASC) was founded in June 1973 in London and was replaced by the International Accounting Standards Board on 1 April 2001. It was responsible for developing the International Accounting Standards and promoting the use and application of these standards.

In 2001 the International Accounting Standards Board (IASB) replaced the IASC with a remit to bring about convergence between national accounting standards through the development of global accounting standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards "International Financial Reporting Standards" (IFRS). [3]

In 2002 the European Union (EU) agreed that, from 1 January 2005, International Financial Reporting Standards would apply for the consolidated accounts of the EU listed companies, bringing about the introduction of IFRS to many large entities. Other countries have since followed the lead of the EU.

European Union Economic and political union of European states

The European Union (EU) is a political and economic union of 28 member states that are located primarily in Europe. It has an area of 4,475,757 km2 (1,728,099 sq mi) and an estimated population of about 513 million. The EU has developed an internal single market through a standardised system of laws that apply in all member states in those matters, and only those matters, where members have agreed to act as one. EU policies aim to ensure the free movement of people, goods, services and capital within the internal market, enact legislation in justice and home affairs and maintain common policies on trade, agriculture, fisheries and regional development. For travel within the Schengen Area, passport controls have been abolished. A monetary union was established in 1999 and came into full force in 2002 and is composed of 19 EU member states which use the euro currency.

Adoption

IFRS Standards are required in more than 140 jurisdictions and permitted in many parts of the world, including South Korea, Brazil, the European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, Chile, Philippines, South Africa, Singapore and Turkey.

South Korea Republic in East Asia

South Korea is a country in East Asia, constituting the southern part of the Korean Peninsula and sharing a land border with North Korea. The name Korea is derived from Goguryeo which was one of the great powers in East Asia during its time, ruling most of the Korean Peninsula, Manchuria, parts of the Russian Far East and Inner Mongolia under Gwanggaeto the Great. Its capital, Seoul, is a major global city and half of South Korea's over 51 million people live in the Seoul Capital Area, the fourth largest metropolitan economy in the world.

Brazil Federal republic in South America

Brazil, officially the Federative Republic of Brazil, is the largest country in both South America and Latin America. At 8.5 million square kilometers and with over 208 million people, Brazil is the world's fifth-largest country by area and the fifth most populous. Its capital is Brasília, and its most populated city is São Paulo. The federation is composed of the union of the 26 states, the Federal District, and the 5,570 municipalities. It is the largest country to have Portuguese as an official language and the only one in the Americas; it is also one of the most multicultural and ethnically diverse nations, due to over a century of mass immigration from around the world.

India Country in South Asia

India is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the south, the Arabian Sea on the southwest, and the Bay of Bengal on the southeast, it shares land borders with Pakistan to the west; China, Nepal, and Bhutan to the north; and Bangladesh and Myanmar to the east. In the Indian Ocean, India is in the vicinity of Sri Lanka and the Maldives; its Andaman and Nicobar Islands share a maritime border with Thailand and Indonesia.

To assess progress towards the goal of a single set global accounting standards, the IFRS Foundation has developed and posted profiles about the use of IFRS Standards in individual jurisdictions. These are based on information from various sources. The starting point was the responses provided by standard-setting and other relevant bodies to a survey that the IFRS Foundation conducted. As of August 2019, profiles are completed for 166 jurisdictions, with 144 jurisdictions requiring the use of IFRS Standards. [4]

Due to the difficulty of maintaining up-to-date information in individual jurisdictions, three sources of information on current worldwide IFRS adoption are recommended:

Ray J. Ball described the expectation by the European Union and others that IFRS adoption worldwide would be beneficial to investors and other users of financial statements, by reducing the costs of comparing investment opportunities and increasing the quality of information. [8] Companies are also expected to benefit, as investors will be more willing to provide financing. Companies that have high levels of international activities are among the group that would benefit from a switch to IFRS Standards. Companies that are involved in foreign activities and investing benefit from the switch due to the increased comparability of a set accounting standard. [9] However, Ray J. Ball has expressed some scepticism of the overall cost of the international standard; he argues that the enforcement of the standards could be lax, and the regional differences in accounting could become obscured behind a label. He also expressed concerns about the fair value emphasis of IFRS and the influence of accountants from non-common-law regions, where losses have been recognised in a less timely manner. [8]

IFRS and US GAAP

US GAAP remains separate from IFRS. The Securities Exchange Committee (SEC) requires the use of US GAAP by domestic companies with listed securities and does not permit them to use IFRS; US GAAP is also used by some companies in Japan and the rest of the world.

In 2002 IASB and the Financial Accounting Standards Board (FASB), the body supporting US GAAP, announced a programme known as the Norwalk Agreement that aimed at eliminating differences between IFRS and US GAAP. [10] In 2012 the SEC announced that it expected separate US GAAP to continue for the foreseeable future but sought to encourage further work to align the two standards. [11] [12]

IFRS is sometimes described as principles-based, as opposed to a rules-based approach in US GAAP; so in US GAAP there is more instruction in the application of standards to specific examples and industries. [13]

Conceptual Framework for Financial Reporting

The Conceptual Framework serves as a tool for the IASB to develop standards. It does not override the requirements of individual IFRSs. Some companies may use the Framework as a reference for selecting their accounting policies in the absence of specific IFRS requirements. [14]

Objective of financial statements

The Conceptual Framework states that the primary purpose of financial information is to be useful to existing and potential investors, lenders and other creditors when making decisions about the financing of the entity and exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources. [15]

Users base their expectations of returns on their assessment of:

Qualitative characteristics of financial information

The Conceptual Framework for Financial Reporting defines the fundamental qualitative characteristics of financial information to be: [16]

The Framework also describes enhancing qualitative characteristics:

Elements of financial statements

The Conceptual Framework defines the elements of financial statements to be:- [17]

Recognition of elements of financial statements

An item is recognized in the financial statements when: [18]

In some cases specific standards add additional conditions before recognition is possible or prohibit recognition altogether.

An example is the recognition of internally generated brands, mastheads, publishing titles, customer lists and items similar in substance, for which recognition is prohibited by IAS 38. [19] In addition research and development expenses can only be recognised as an intangible asset if they cross the threshold of being classified as 'development cost'. [20]

Whilst the standard on provisions, IAS 37, prohibits the recognition of a provision for contingent liabilities, [21] this prohibition is not applicable to the accounting for contingent liabilities in a business combination. In that case the acquirer shall recognise a contingent liability even if it is not probable that an outflow of resources embodying economic benefits will be required. [22]

Concepts of capital and capital maintenance

Concepts of capital maintenance are important as only income earned in excess of amounts needed to maintain capital may be regarded as profit. The Conceptual Framework describes the following concepts of capital maintenance: [23]

Most entities adopt a financial concept of capital maintenance. However, the Conceptual Framework does not prescribe any model of capital maintenance.

Requirements of IFRS

Presentation of Financial Statements

IFRS financial statements consist of:- [24]

Comparative information is required for the prior reporting period.

General Features in IFRS

The following are the general features in IFRS:

Cash flow statements

Cash flow statements in IFRS are presented as follows: [35] [36]

Criticisms

In 2012, staff of the Securities and Exchange Commission (SEC) issued a report setting out observations on a potential adoption of IFRS in the United States. This included the following criticisms:- [37] [38]

IASB staff have responded to these observations and concluded that there were no insurmountable obstacles for the adoption of IFRS by the United States. [39]


In 2013 IASB member Philippe Danjou listed ten common criticisms of IFRS. He sought to counter these, describing them as misconceptions [40]


Charles Lee, professor of accounting at Stanford Graduate School of Business, has also criticised the use of fair values in financial reporting. [41]


H David Sherman and S David Young have criticised the current state of financial reporting under IFRS and US GAAP:- [42]

Consequences of adopting IFRS

Many researchers have studied the effects of IFRS adoption, and there are debates on whether the effects can be attributed solely to IFRS mandate adoption. For example, one study [43] uses data from 26 countries to study the economic consequences of mandatory IFRS adoption. It shows that, on average, even though market liquidity increases around the time of the introduction of IFRS, it is unclear whether IFRS mandate adoption is the sole reason of observed market effects. Firms’ reporting incentives, law enforcement, and increased comparability of financial reports can also explain the effects.

See also

Related Research Articles

Financial statement formal record of the financial activities and position of a business, person, or other entity

Financial statements are formal records of the financial activities and position of a business, person, or other entity.

Historical cost

In accounting, an economic item's historical cost is the original nominal monetary value of that item. Historical cost accounting involves reporting assets and liabilities at their historical costs, which are not updated for changes in the items' values. Consequently, the amounts reported for these balance sheet items often differ from their current economic or market values.

Financial Accounting Standards Board

The Financial Accounting Standards Board (FASB) is a private, non-profit organization standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the US. The FASB replaced the American Institute of Certified Public Accountants' (AICPA) Accounting Principles Board (APB) on July 1, 1973.

Financial accounting field of accounting

Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.

Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in conformity with an identified financial reporting framework such as Generally Accepted Accounting Principles (GAAP).

Provision (accounting) account which records a present liability of an entity

In financial accounting, a provision is an account which records a present liability of an entity. The recording of the liability in the entity's balance sheet is matched to an appropriate expense account in the entity's income statement. The preceding is correct in IFRS. In U.S. GAAP, a provision is an expense. Thus, "Provision for Income Taxes" is an expense in U.S. GAAP but a liability in IFRS. 

Hedge accounting

Hedge accounting is an accountancy practice, the aim of which is to provide an offset to the mark-to-market movement of the derivative in the profit and loss account. There are two types of hedge recognized. For a fair value hedge, the offset is achieved either by marking-to-market an asset or a liability which offsets the P&L movement of the derivative. For a cash flow hedge, some of the derivative volatility is placed into a separate component of the entity's equity called the cash flow hedge reserve. Where a hedge relationship is effective, most of the mark-to-market derivative volatility will be offset in the profit and loss account. Hedge accounting entails much compliance - involving documenting the hedge relationship and both prospectively and retrospectively proving that the hedge relationship is effective.

A foreign exchange hedge is a method used by companies to eliminate or "hedge" their foreign exchange risk resulting from transactions in foreign currencies. This is done using either the cash flow hedge or the fair value method. The accounting rules for this are addressed by both the International Financial Reporting Standards (IFRS) and by the US Generally Accepted Accounting Principles as well as other national accounting standards.

Asset Assets ,Financial Accounting.

In financial accounting, an asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset. Simply stated, assets represent value of ownership that can be converted into cash. The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business.

Constant purchasing power accounting

Constant purchasing power accounting (CPPA) is an accounting model approved by the International Accounting Standards Board (IASB) as an alternative to traditional historical cost accounting under hyper-inflationary environments. Under this system, financial capital maintenance is measured in units of constant purchasing power (CPP) in terms of a CPI during low inflation. During high inflation and hyperinflation it can also be measured in a monetized daily indexed unit of account and in terms of a daily relatively stable foreign currency parallel rate or daily index.

Liability (financial accounting) future sacrifices of economic benefits that an entity is obliged to make to other entities as a result of past transactions or other past events

In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

International Financial Reporting Standards requirements

This article lists some of the important requirements of International Financial Reporting Standards (IFRS).

An Impairment cost must be included under expenses when the book value of an asset exceeds the recoverable amount. Impairment of assets is the diminishing in quality, strength amount, or value of an asset. Fixed assets, commonly known as PPE, refers to long-lived assets such as buildings, land, machinery, and equipment; these assets are the most likely to experience impairment, which may be caused by several factors.

IAS 1 Presentation of Financial Statements

International Accounting Standard 1: Presentation of Financial Statements or IAS 1 is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). It lays out the guidelines for the presentation of financial statements and sets out minimum requirements of their content; it is applicable to all general purpose financial statements that are based on International Financial Reporting Standards (IFRS).

Convergence of accounting standards

The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally. Convergence in some form has been taking place for several decades, and efforts today include projects that aim to reduce the differences between accounting standards.

IAS 8

International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors or IAS 8 is an international financial reporting standard (IFRS) adopted by the International Accounting Standards Board (IASB). It prescribes the criteria for selecting and changing accounting policies, accounting for changes in estimates and reflecting corrections of prior period errors.

IFRS 1

International Financial Reporting Standard 1: First-time Adoption of International Financial Reporting Standards or IFRS 1 is an international financial reporting standard issued by the International Accounting Standards Board (IASB). It sets out requirements on the preparation and presentation of financial statements and interim financial reports by entities that are adopting the IFRS for the first time, to ensure that they contain high-quality information.

IFRS 9

IFRS 9 is an International Financial Reporting Standard (IFRS) published by the International Accounting Standards Board (IASB). It addresses the accounting for financial instruments. It contains three main topics: classification and measurement of financial instruments, impairment of financial assets and hedge accounting. The standard came into force on 1 January 2018, replacing the earlier IFRS for financial instruments, IAS 39.

IFRS 16

IFRS 16 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB) providing guidance on accounting for leases. IFRS 16 was issued in January 2016 and is effective for most companies that report under IFRS since 1 January 2019. Upon becoming effective, it replaced the earlier leasing standard, IAS 17.

References

  1. IASB. "Who we are" . Retrieved 13 September 2019.
  2. Deloitte. "International Accounting Standards Committee (IASC)" . Retrieved 29 July 2019.
  3. IASB. "Who we are, history" . Retrieved 29 July 2019.
  4. Profiles of the IFRS Foundation
  5. Profiles of the IFRS Foundation
  6. World Bank Reports on the Observance of Standards and Codes
  7. IFAC Member Organizations and Country Profiles
  8. 1 2 Ball R. (2006). [https://www.academia.edu/2480000/International_Financial_Reporting_Standards_IFRS_pros_and_cons_for_investors |date=21 August 2010 }}. Accounting and Business Research
  9. Bradshaw, M., et al (2010). Response to the SEC's Proposed Rule- Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRS) by U.S. Issuers. Accounting Horizons(24)1
  10. FASB. "Convergence with the International Accounting Standards Board (IASB)" . Retrieved 31 July 2019.
  11. PwC. "IFRS in the US" . Retrieved 31 July 2019.
  12. SEC. "A U.S. Imperative: High-Quality, Globally Accepted Accounting Standards" . Retrieved 31 July 2019.
  13. AICPA. "Is IFRS That Different From U.S. GAAP?" . Retrieved 31 July 2019.
  14. KPMG (29 March 2018). "Conceptual Framework – The new foundation for IFRS" . Retrieved 27 August 2019.
  15. Mazars (25 June 2018). "Key Features of the New IFRS Conceptual Framework" . Retrieved 29 August 2019.
  16. Deloitte. "Conceptual Framework for Financial Reporting 2018" . Retrieved 29 August 2019.
  17. International Accounting Standards Board (2010). Conceptual Framework for Financial Reporting, paragraph 4
  18. Paragraph 4.38 of the Conceptual Framework of IFRS
  19. Paragraph 63 of the IFRS standard IAS 38
  20. Paragraphs 54 and 57 of the IFRS standard IAS 38
  21. Paragraph 27 of the IFRS standard IAS 37
  22. Paragraph 23 of the IFRS standard IFRS 3
  23. IASB staff paper (April 2013). "Draft discussion paper: Capital maintenance" (PDF). Retrieved 5 September 2019.
  24. International Accounting Standards Board (2007). IAS1, Presentation of Financial Statements, paragraph 10
  25. Paragraph 15 of the standard IAS 1
  26. Paragraph 25 of the standard IAS 1
  27. Paragraph 28 of the standard IAS 1
  28. Paragraph 29 of the standard IAS 1
  29. Paragraph 32 of the standard IAS 1
  30. Paragraph 57, 63 of the standard IAS 19
  31. Paragraph 71 of the standard IAS 12
  32. Paragraph 36 of the standard IAS 1
  33. Paragraph 38 of the standard IAS 1
  34. Paragraph 10f of the standard IAS 1
  35. International Accounting Standards Board (2016). IAS 7, Statement of Cash Flows
  36. Deloitte. "IAS 7 — Statement of Cash" . Retrieved 5 September 2019.
  37. SEC staff (13 July 2012). "Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers" (PDF). Retrieved 21 August 2019.
  38. Emily Chasan, Wall Street Journal (13 July 2012). "SEC Staff Offers 127 Pages of Reasons Not to Adopt IFRS" . Retrieved 21 August 2019.
  39. IASB (22 October 2012). "Analysis of SEC Final Staff Report" (PDF). Retrieved 21 August 2019.
  40. Deloitte (6 February 2013). "Philippe Danjou answers 10 misconceptions about IFRS" . Retrieved 21 August 2019.
  41. Charles Lee (6 February 2013). "Why fair value isn't fair" . Retrieved 21 August 2019.
  42. H David Sherman and S David Young (1 July 2016). "Where financial reporting still fall short" . Retrieved 21 August 2019.
  43. Daske, H. , Hail, L. , Leuz, C. and Verdi, R. (2013), Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions. Journal of Accounting Research, 51: 495-547.

Further reading

The latest IFRS news and resources from the Institute of Chartered Accountants in England and Wales (ICAEW)