International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world. International Financial Reporting Standards (IFRS) were created to bring consistency and integrity to accounting standards and practices, regardless of the company or the country. They were issued by the London-based Accounting Standards Board (IASB) and address record keeping, account reporting, and other aspects of financial reporting. IFRS fosters greater corporate transparency. IFRS specify in detail how companies must maintain their records and report their expenses and income. They were established to create a common accounting language that could be understood globally by investors, auditors, government regulators, and other interested parties. The standards are designed to bring consistency to accounting language, practices, and statements, and to help businesses and investors make educated financial analyses and decisions. They were developed by the International Accounting Standards Board, which is part of the not-for-profit, London-based IFRS Foundation. The Foundation says it sets the standards to “bring transparency, accountability, and efficiency to financial markets around the world."
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.
In addition to these basic reports, a company must give a summary of its accounting policies. The full report is often seen side by side with the previous report to show the changes in profit and loss.
The governance and oversight of the activities undertaken by the IFRS Foundation and its standard-setting body rests with a geographically and professionally diverse body of Trustees, who are also responsible for safeguarding the independence of the Board and ensuring the financing of the organisation. The Trustees are publicly accountable to a Monitoring Board of public authorities. The Board is an independent group of experts with an appropriate mix of recent practical experience in setting accounting standards; in preparing, auditing, or using financial reports; and in accounting education. Broad geographical diversity is also required. Members are appointed by the Trustees through an open and rigorous process that includes advertising vacancies and consulting relevant organisations. The IASB has 14 full-time members. The Board develops and maintains a set of accounting requirements collectively referred to as International Financial Reporting Standards (IFRS Standards). IFRS Standards are a set of high quality, understandable, enforceable and globally accepted Standards based up on clearly articulated accounting principles. The Board has no authority to impose those Standards.
However, entities that wish, or are required by a particular jurisdiction, to assert compliance with IFRS Standards must comply with all of the individual IFRSs Standards and IFRS Interpretations (Interpretations) issued by the Board. IFRS Standards generally contain principles and accompanying application guidance, both of which are mandatory and carry equal weight. Some Standards also include illustrative examples or implementation guidance, neither of which is part of IFRS Standards. They are therefore not mandatory. Each Standard and Interpretation has a basis for conclusions that explains the Board's reasons for developing the particular requirements. The basis for conclusions is not part of IFRS Standards and is therefore also not mandatory. Additionally, the Board has a Conceptual Framework for Financial Reporting (the Framework). This Framework is designed to help the Board develop IFRS Standards.
The Framework is also designed to help those applying IFRS Standards address matters not covered by IFRS Standards. However, the Framework is not a Standard and the accounting requirements in an IFRS Standards take precedence over the Framework. The Board develops IFRS Standards in the public interest. Through the Board's due process, it consults and engages with investors, regulators, business leaders and the global accountancy profession at every stage of the process, whilst maintaining collaborative efforts with the worldwide standard-setting community. In developing IFRS Standards and Interpretations the Board publishes and seeks public comment on Discussion Papers and Exposure Drafts. Those documents are not part of IFRS Standards.
The IFRS Interpretations Committee is the interpretative body of the Board. The Interpretations Committee has 14 voting members appointed by the Trustees, and its members are drawn from a variety of countries and professional backgrounds. The Interpretations Committee's mandate is to review on a timely basis widespread accounting issues that have arisen within the context of current IFRS Standards and to provide authoritative guidance (IFRIC Interpretations) on those issues. The Interpretations Committee also develops proposals for narrow scope amendments to IFRS Standards on behalf of the Board. In developing Interpretations and narrow scope amendments, the Interpretations Committee follows a transparent, thorough and open due process. However, it is the Board that issues Interpretations and narrow scope amendments and the Board that considers and votes on each Interpretation and narrow scope amendment before it is issued. As well as IFRS Standards, the Board has issued an IFRS Standard for SMEs, to meet the needs and capabilities of small and medium-sized entities (SMEs) and users of their financial statements.
Any company of any size is eligible to use the IFRS Standard for SMEs, provided it does not have public accountability. An entity has public accountability if it is publicly traded, or if it is a financial institution or similar entity. The IFRS Standard for SMEs is based on IFRS Standards but is much less complex.
Why Is IFRS Important?
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.