The world of accounting can go pretty deep, but when it comes to financial documents, there are two main types of standards that are used. The first standard that is used in the United States is General Accepted Accounting Principles (GAAP), but the rest of the world uses a standard called International Financial Reporting Standards (IFRS).
Let’s dive into IFRS foundation and principles and how they work and what they mean.
What Are IFRS Standards?
The purpose of IFRS standards is to provide a common set of rules so that financial statements can be consistent, transparent, and easy to read. IFRS standards are issued by the International Accounting Standards Board (IASB). This organization determines how companies should maintain and report their financials and accounts, including transactions and other financial events. IFRS was created so that there would be one universal accounting language that could be used to help international companies produce consistent and reliable financial statements that can be understood from country to county.
Why hasn’t the USA adopted IFRS standards yet? Well, the truth is that the SEC has said it won’t switch to IFRS any time soon, but they continue to review proposals to allow IFRS to supplement financial statements that follow GAAP. While the USA views GAAP as the gold standard of accounting, many financial analysts argue that money and time could be saved if the USA would make the switch to IFRS standards since most international companies have to pay to take the time and work to convert GAAP documents over to IFRS anyway.
Any language that is universal makes it easier to understand and interpret by any person of any country. Having financial transparency that is reported in a universal way allows more companies to play in the international arena. This sort of universal language also helps to mitigate misinterpretations and provides better transparency into the overall financial health and standing of companies internationally. This sort of transparency is appreciated by investors as it helps them to weigh risks with more accurate information.
Here are a few of the standard requirements that IFRS utilizes:
- Statement of Cash Flows – This financial document shows a summary of a company’s financial transactions in a specified time period. This report also separates cash flow into the following three categories: financing, investing, and operations.
- Statement of Changes in Equity – This statement is also known as a statement of retained earnings. This document shows changes in profits or earnings within a given time period for the company.
- Statement of Comprehensive Income – This often can be one statement, but can be broken up into multiple statements. This usually includes a profit and loss statement, as well as statements of other income which typically include equipment and property.
- Statement of Financial Position – Many companies refer to this statement as their balance sheet.
IFRS guidelines originated within Europe with the idea that the standards would quickly fill the globe. Even though the USA does not follow these standards, most other countries do, which makes IFRS the most globally adopted accounting standard out there.
IFRS can sometimes be confused with the International Accounting Standards (IAS), but IAS standards are much older and have been replaced by IFRS standards. IAS was issued back in 1973 and stayed in effect until about the year 2000. In 2001, the IASB replaced the IASC, and IFRS was born shortly thereafter.
While the SEC is dragging its feet when it comes to switching over to IFRS, that doesn’t mean that US companies don’t have to be concerned with IFRS. Since many companies do business internationally, having IFRS financial statements are required in order to invest or do business internationally. Because of this, financial audition and consulting companies can be of great help to lead US companies through the process of converting their existing financial statements into IFRS-friendly statements. These statements can help US-based businesses to broaden their horizons and get on a larger level in order to expand their international reach.
Good accounting consulting firms can help to provide training to your existing accounting employees to help them understand the basics of IFRS, as well as how to convert existing financial statements to this new format. Most US companies that have any dreams of doing business internationally would be doing themselves a great service by adopting IFRS practices now. The reason for this is that the SEC will most likely eventually move to IFRS standards as more and more US businesses are doing financial deals abroad. When this happens, your company will already be ready and the transition over to IFRS will have already been done and implemented.
As you can see, IFRS standards are the most widely used accounting standards worldwide, so choosing an auditing firm that can help you be IFRS compliant will help your company move to the next level.