It used to be that each country had their own different reporting standards that governed how financial documents were prepared and accounting was managed. Some, like the United States, still do. However, now over 100 countries the world over have adopted the International Financial Reporting Standards, IFRS, (formerly the International Accounting Standards), which helps to create an all-encompassing set of standards. But what is the IFRS and what are these standards that countries, and accountants, are meant to uphold?
The IFRS were created by the International Accounting Standards Board (IASB), the standards-setting arm of the IFRS Foundation to “to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards”. These standards were originally designed for use in the European Union but have been adopted worldwide.
This wiki goes into detail on the IFRS’s, but here are a summary of the basic principles and international accounting standards of the IFRS:
1. All financial statements “should reflect a true and fair view of the business affairs of the organization”. To that end there are three basic accounting models that the IFRS allows: current cost accounting, financial capital maintenance in nominal monetary units, and financial capital maintenance in units of constant purchasing power. By limiting participating companies to using these accepted models, it helps lower the risk of creative accounting practices and more dubious models.
2. All financial statements must maintain certain qualitative standards. These include: Relevance (materiality), Faithful representation of the business’s dealings, Comparability, Verifiability, Timeliness, and Understandability.
3. All financial statements must include certain elements such as: assets, liabilities, equities, revenues, and expenses.
To discuss in depth the entirety of the international accounting standards that the IFRS promotes would be beyond the scope of this article, but these are the basics that all accounting professionals in signatory countries must follow. These standards ensure that no matter which country a company does business in, if that country has adopted the IFRSs, there are financial reporting standards that they can rely on. The international accounting standards of the IFRS help to increase the transparency of business dealings and financial reports and encourage business investment, as investors are more willing to trust companies that follow set reporting standards that are understandable and comparable to other companies. They also reduce the risk of creative accounting practices and dubious business investments.
However, while the IFRS are the one of the only truly international accounting standards, some countries do still prefer to create their own standards. The United States for example has its own Generally Accepted Accounting Principles (GAAP) at this time, although there was some talk of the United States adopting the IFRSs last year, at this time the US has chosen to stay with its GAAP.
Globalization has changed the way many companies and countries conduct their business dealings and international accounting standards are one part of that. With many countries adopting IFRS standards, it is becoming easier for investors and regulators to ensure that business is being conducted in a fair and ethical manner.