What is International Financial Reporting Standards (IFRS)?
IFRS is a set of globally accepted accounting standards that all publicly traded companies around the world are required to follow in order to prepare their financial records. It’s an entirely different set of standards than US GAAP, or Generally Accepted Accounting Principles, which have been used in America for more than 100 years.
There are two parts to IFRS as observed by Fintalent’s International Financial Reporting Standards consultants:
IFRS 1 – The first part of the IFRS standard is for the preparation of financial statements in accordance with International Financial Reporting Standard. This part covers all the information that a company’s management needs to know about its business.
IFRS 2 – The second part of the IFRS standard is a set of principles and standards (or guidelines) that are used throughout an organization in all its transactions. The rules in this section apply to all transactions — not just those summarized in financial statements prepared using IFRS 1. This part of the standard is meant to create consistency in how money and resources are managed throughout an organization and to ensure fair treatment under all circumstances.
IFRS also includes guidance on consolidation and acquisition accounting. It’s important to note that while a company is preparing its financial statements using IFRS, it is not required to consolidate any of its subsidiaries. In other words, companies can prepare IFRS financial statements without having to prepare consolidated financial statements.
IFRS was created to provide more consistent and comparable reporting for investors across global stock markets. Many of these markets have now adopted the reporting standard, including the EU and Australia, which means that more companies are going public there. Major stock exchanges in America have resisted adopting the new standards because of the massive impact it will have on American companies and investors alike. However, we now have the Securities and Exchange Commission alluding to the fact that it will soon be required for U.S.-based companies to submit their financial statements in conditionally approved compliance with IFRS.
The new rules are similar to major accounting overhauls that occurred several years ago. In both cases, powerful interest groups in the United States opposed these changes, but they both passed anyway. Now that a unified global consensus on IFRS standards has emerged, the power of these interest groups will be even less relevant than it was before. There’s simply too much momentum behind IFRS and too many companies — especially public companies — that want to adopt it.
