What is IFRS? |International Financial Reporting Standards, Principles, Objectives
In the interconnected and rapidly evolving world of global business, the need for standardized financial reporting is more crucial than ever. IFRS or International Financial Reporting Standards refers to a globally accepted set of accounting and financial reporting guidelines for preparing and presenting financial statements.
It ensures uniformity in accounting practice that makes financial records comparable across different reporting entities worldwide. IFRS has emerged as a comprehensive framework designed to enhance transparency, comparability, and accountability in financial reporting across borders.
What you are going to learn?
History of IFRS
It was first published in the year 2003. It was designed by the International Accounting Standards Board (IASB) and is adopted by more than 167 jurisdictions and countries worldwide, including the European Union. The U.S. government, however, uses the U.S. Generally Accepted Accounting Principles (GAAP) system of accounting rules. Before IFRS, the International Accounting Standards (IAS) were in regulation.
The purpose of financial statements is to provide information on a company’s financial performance and position to help current or prospective stakeholders make reliable financing decisions. It is a company’s primary means of communication with them.
Objectives of IFRS
1. Create a Common Law:
IFRS aims to establish a common set of accounting standards that can be universally adopted by companies across different countries and jurisdictions. This commonality facilitates consistency, comparability, and transparency in financial reporting.
2. Aid Analysis:
IFRS provides a framework that aids stakeholders, including investors, analysts, and creditors, in analyzing and interpreting financial statements. By adhering to standardized accounting practices, companies make it easier for users to assess their financial performance and make informed decisions.
3. Assist in Preparation of Reliable Financial Records:
Following IFRS helps ensure the accuracy, reliability, and consistency of financial records. This, in turn, contributes to the production of high-quality financial statements that can be relied upon by investors and other stakeholders. Reliable financial information is crucial for making sound economic decisions.
4. Ensure Comparability, Transparency, and Flexibility in Reporting:
- Comparability: IFRS promotes consistency in reporting practices, making it easier to compare financial information across different companies and countries. This comparability is valuable for investors looking to assess investment opportunities.
- Transparency: IFRS emphasizes the disclosure of relevant information, ensuring that stakeholders have a comprehensive understanding of a company’s financial position. Transparency is essential for building trust and confidence in financial markets.
- Flexibility: While providing a framework for standardization, IFRS is also principle-based, allowing companies some flexibility in adapting the standards to their specific circumstances. This flexibility acknowledges the diverse nature of business transactions and industries.
Overall, the objectives you’ve outlined reflect the broader goals of IFRS in promoting consistency, transparency, and reliability in financial reporting on a global scale. These objectives contribute to the efficiency of capital markets, enhance investor confidence, and facilitate international business and investment.
Principles of IFRS
The following are some key principles and concepts underlying IFRS:
1. Fair Presentation:
- Financial statements should present a true and fair view of the financial position, performance, and cash flows of an entity.
- Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the framework concepts.
2. Going Concern:
Financial statements are prepared on the assumption that the entity will continue as a going concern unless management intends to liquidate the entity or cease trading, or has no realistic alternative but to do so.
3. Accrual Basis of Accounting:
Transactions and events are recorded in the periods to which they relate, rather than when cash is received or paid. This is based on the accrual accounting principle.
4. Consistency:
Consistency in the presentation and classification of items in financial statements is important for comparability over time.
5. Materiality:
Financial statements should disclose all material items relevant to understanding the financial position, performance, and cash flows of an entity.
6. Prudence (Conservatism):
Prudence is the inclusion of a degree of caution in the exercise of judgment needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.
7. Understandability:
Financial statements should be presented in a manner that makes them understandable to users who have a reasonable knowledge of business and economic activities.
8. Comparability:
Users should be able to compare the financial statements of an entity over time and with the financial statements of other entities.
9. Entity-Specific Considerations:
IFRS acknowledges that in certain circumstances, it may be necessary for management to consider the substance of transactions and events, rather than their legal form.
10. Completeness:
Financial statements should include all information necessary for a user to understand the financial position, performance, and cash flows of the entity.
These principles guide the preparation and presentation of financial statements under IFRS, providing a framework for transparent and comparable financial reporting across different organizations and jurisdictions.
Uses of IFRS
1. Financial Tool
The International Financial Reporting Standards bring efficiency, accuracy, and data transparency to serve public interests for the growth, trust, and sustainability of the world economy.
2. Principles and Guide
The companies run their whole business and represent their financial data and information as per the IFRS accounting principles. If they fail to do so, they may be penalized for it. Hence, it assures the trustworthiness of a company.
3. Promotes Decision Making
The standards help investors make wise decisions regarding their investments by providing a clear picture of company reports and financial statements. It is possible because of its singular and universal language, making it easy to comprehend.
4. Improves Economy
Globally, investors are more open to investing in companies with IFRS-compliant financial records. Again, it is because such reports are presumed to be authentic, easily understandable, and comparable. This credibility opens the economy to foreign investment and thereby makes the way for economic progress.
Impact on Global Business:
- Investor Confidence: The adoption of IFRS enhances investor confidence by providing a standardized and transparent framework for assessing financial performance. This, in turn, attracts global investment and promotes the efficient allocation of capital.
- Cross-Border Mergers and Acquisitions: IFRS simplifies the process of cross-border mergers and acquisitions by offering a common financial reporting language. Companies can seamlessly integrate financial information from different jurisdictions, streamlining due diligence processes.
- Reduced Reporting Costs: Standardizing financial reporting practices under IFRS reduces the compliance burden for multinational companies. With consistent accounting standards, companies can prepare financial statements that comply with multiple regulatory requirements, thereby lowering reporting costs.
- Facilitation of Capital Flows: IFRS facilitates the flow of capital across borders by eliminating barriers arising from diverse accounting practices. Investors can make more informed decisions, and companies can access a broader range of funding sources, fostering global economic growth.
International Financial Reporting Standards have undoubtedly transformed the global financial reporting landscape, bringing about greater transparency, comparability, and efficiency. As the business world continues to evolve, the ongoing commitment to refining and improving IFRS will play a crucial role in maintaining a harmonized financial reporting environment that meets the needs of diverse stakeholders worldwide.
