International Financial Reporting Standards (IFRS, see: www.ifrs.org) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards.
IFRS began as an attempt to harmonise accounting across the European Union. The value of harmonisation quickly made the concept attractive around the world. The International Financial Reporting Standards may sometimes still be called by the original name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC).
Many countries around the world, including all of Europe, currently require or permit IFRS reporting and/or require IFRS reporting for all domestic, listed companies, according to the U.S. Securities and Exchange Commission.
IFRS for and by investors and others
It is generally expected that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by reducing the costs of comparing alternative investments and increasing the quality of information.
Companies are also expected to benefit, as investors will be more willing to provide financing and companies that have high levels of international activities are among the group that would benefit from a switch to IFRS.
IFRS in financial accounting
Objective of financial statements
Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management's stewardship of the resources entrusted to it.
To meet this objective, financial statements provide information about an entity's:
- income and expenses, including gains and losses;
- contributions by and distributions to owners in their capacity as owners; and
- cash flows.
This information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.
General features of IFRS
IFRS has a number of general features, which broadly can be summarised as:
- Fair presentation and compliance with IFRS: requiring the faithful representation of the effects of the transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework of IFRS;
- Going concern: financial statements are present on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so;
- Accrual basis of accounting: an entity shall recognise items as assets, liabilities, equity, income and expenses when they satisfy the definition and recognition criteria for those elements in the IFRS framework;
- Materiality and aggregation: every material class of similar items has to be presented separately;
- Frequency of reporting: IFRS requires that at least annually a complete set of financial statements is presented. However, listed companies generally also publish interim financial statements (for which the accounting is fully IFRS compliant) for which the presentation is in accordance with IAS 34 Interim Financing Reporting;
- Comparative information: IFRS requires entities to present comparative information in respect of the preceding period for all amounts reported in the current period's financial statements.