International Financial Reporting Standards

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International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). [1] They constitute a standardised way of describing the company’s financial performance and position so that company financial statements are understandable and comparable across international boundaries. [2] They are particularly relevant for companies with shares or securities listed on a public stock exchange.


IFRS have replaced many different national accounting standards around the world but have not replaced the separate accounting standards in the United States where US GAAP is applied.


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. [3]

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). [4]

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.


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.

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. [5]

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]


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 and 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.


Presentation of financial statements

IFRS financial statements consist of: [24]

Comparative information is required for the prior reporting period.

General features

The following are the general features in IFRS:

Cash flow statements

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


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. The adoption of IFRS in the European Union is a special case because it is an element of wider reforms aiming to consolidate the economies of member countries. One study reports positive market effects for companies adopting IFRS but these positive effects occurred even before the transition took place. [44] Another study looked at the development of the stock market in Poland; it found positive effects associated with Poland joining the EU but no specific effect attributable to the IFRS. [45] Interestingly, member states maintain a large degree of independence in setting national accounting standards for companies that prefer to stay local. [46]

See also

Related Research Articles

Financial statement

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

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.

XBRL Exchange format for business information

XBRL is a freely available and global framework for exchanging business information. XBRL allows the expression of semantic meaning commonly required in business reporting. The language is XML-based and uses the XML syntax and related XML technologies such as XML Schema, XLink, XPath, and Namespaces. One use of XBRL is to define and exchange financial information, such as a financial statement. The XBRL Specification is developed and published by XBRL International, Inc. (XII).

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 under International Financial Reporting Standards (IFRS), 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. In U.S. Generally Accepted Accounting Principles, 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 Economic resource, from which future economic benefits are expected

In financial accounting, an asset is any resource owned by a business or an economic entity. It is anything that can be owned or controlled to produce value and that is held by an economic entity and that could produce positive economic value. 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) and the US Financial Accounting Standards Board (FASB) as an alternative to traditional historical cost accounting under hyper-inflationary environments and all other economic environments. Under this IFRS and US GAAP authorized system, financial capital maintenance is always measured in units of constant purchasing power (CPP) in terms of a Daily CPI during low inflation, high inflation, hyperinflation and deflation; i.e., during all possible economic environments. During all economic environments it can also be measured in a monetized daily indexed unit of account or in terms of a daily relatively stable foreign currency parallel rate, particularly during hyperinflation when a government refuses to publish CPI data.

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 16

International Accounting Standard 16 Property, Plant and Equipment or IAS 16 is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). It concerns accounting for property, plant and equipment, including recognition, determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them.

IAS 8 Accounting Policies, Changes in Accouting Estimates and Errors

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.


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 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 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.


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  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
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  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
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