Table of Contents Hide
- What is IFRS Accounting?
- IFRS Accounting Principles
- IFRS Accounting Trends and Techniques
- What is the main objective of IFRS?
- What is difference between GAAP & IFRS?
- Who benefits from IFRS?
- Does IFRS use accrual accounting?
- What are the disadvantages of IFRS?
- Which 3 assumptions are followed under IFRS?
- What are expenses in IFRS?
- Bottom Line
- IFRS Accounting FAQs
- What does IFRS means in accounting?
- What are the 4 principles of IFRS?
- What is difference between GAAP and IFRS?
The International Financial Reporting Standards (IFRS) are a globally recognized set of accounting rules that provide transparency, accountability, and efficiency. However, the big question is, what does it mean for me and my business? Find out what IFRS means for you and how you can maximize it in this article.
Let’s start with the basics.
What is IFRS Accounting?
IFRS which simply stands for International Financial Reporting Standards is the international accounting framework that is to properly organizes and reports financial information.
IFRS are issued by the International Accounting Standards Board (IASB). The IASB specifies how companies must maintain and report their accounts, defining types of transactions, and other events with financial impact.
In recent times, more than 120 countries now use it as their accounting framework. International Financial Reporting Standards (IFRS) put together a set of common rules that guide the financial statements of companies towards achieving consistency, transparency, and comparison around the world.
The stated rules by IFRS entail that businesses report their financial results and position. This means that, barring any fraudulent manipulation, there is considerable uniformity in the financial reporting of all businesses using IFRS. This act makes it easier to compare and contrast their financial results.
Furthermore, the International Financial Reporting Standards (IFRS) were created to develop a common accounting language.
This is to enable the financial statements of businesses to be consistent and dependable from company to company and country to country. IFRS is used primarily by businesses reporting their financial results anywhere in the world except the United States.
Generally Accepted Accounting Principles (GAAP) is the accounting framework used in the United States. The GAAP is more rules-based than IFRS.
IFRS on the other hand focuses more on general principles than GAAP, which makes the IFRS body of work much smaller, cleaner, and easier to understand than GAAP.
READ MORE: IFRS (International Financial Reporting Standards) List, Requirements, Compliance & Benefits
IFRS Accounting Principles
Accounting principles are the general rules and guidelines that companies are required to follow when reporting all accounts and financial data.
International Financial Reporting Standards (IFRS) establish uniform rules to ensure that financial statements are consistent, transparent, and comparable around the world.
They define the types of transactions and other events that have a financial impact, as well as how corporations must manage and report their accounts.
These rules are embedded in the principles of IFRS accounting and they require that financial statements be prepared using four basic principles which include; Principle of Clarity, Relevance, Reliability, and Comparability.
#1. Principle of Clarity
The idea of clarity necessitates that the financial statements be simple to read and understand. The IFRS guidelines provide you a lot of leeway in determining what information to include and how you present it in your financial statements.
The accountant makes the final decision. Simply said, IFRS mandates a genuine and fair depiction of the company’s financial condition, financial performance, and cash flow. But it’s not as simple as it seems.
Accountants should prioritize simplicity over-complication in order to obtain clarity. You must keep in mind that the readers of these financial statements may not have an accounting background.
Anyone viewing the financial statements should be able to understand the company’s financial situation. This is the true IFRS challenge.
#2. Principle of Relevance
The relevance principle is an accounting principle that states that financial information must be relevant in order for it to be valuable to external consumers.
Relevant information is relevant because it is helpful, intelligible, timely, and required for decision-making.
Financial information would be meaningless to investors and creditors if it lacked significance. The primary goal of financial accounting is to assist external users such as investors and creditors in making business choices.
For instance, financial information loses meaning if these external users do not grasp it. That is why IFRS requires all financial statements to be in a uniform format.
Investors and creditors will comprehend the data and be able to compare them to other companies that use financial ratios in this manner.
More about the relevance Principle
Financial data must also be updated on a regular basis. A 5-year-old income statement provides little to help an investor grasp the company’s present financial status.
Financial information must be current and timely in order to be relevant to the investor’s decision-making process.
Finally, relevance requires that the financial information given must be needed by the decision-maker.
For instance, companies could report the type of car their CEO drives in an understandable and timely manner, but this doesn’t make this information relevant.
Conversely, the company might report useful financial information that creditors aren’t interested in like employee salaries. Creditors are more concerned about cash flow and profitability and not smaller operational details.
Investors and creditors need information that is useful. That is why the relevance principle is so important to financial accounting. Finally, relevance necessitates that the financial information provided be required by the decision-maker.
Companies, for example, could publish the type of automobile their CEO drives in a clear and timely manner, but this does not make the information meaningful.
On the other hand, the corporation may publish useful financial information that creditors aren’t interested in, such as staff pay. Creditors are more interested in cash flow and profitability than they are with minor operational concerns.
Investors and creditors require useful information. That is why the relevance concept in financial accounting is so crucial.
#3. Principle of Reliability
The Reliability Principle is an accounting principle concerned with the dependability of financial information recorded and presented in an entity’s financial statements.
The dependability principle states that transactions or events can only be recorded and presented in the entity’s financial statements if they can be validated using reliable objective evidence.
This accounting principle is critical for users of financial information. If the information is untrustworthy, the decision will almost certainly be incorrect.
The reliability Principle is also important for the auditor to review the accounting records of the entity during their cause of audit. There are key factors to consider when ensuring that accounting transactions are reliable and they include:
- Must be accurate:
That is, the information is supported by credible documentation, such as an original invoice or contract. It must be possible for a third party to check.
- Free from bias:
There is no bias in the information. It is present in its entirety.
- Report what actually happens:
The financial data must accurately reflect what occurred. For example, suppose the entity received a 500,000 USD penalty from the government. This amount should be recorded and appropriately disclosed in the entity’s financial statements. If users of financial information use this information, they should be able to determine what actually occurred in the company.
- Be able to inspect by the third party:
It means that if two people use identical accounting data, they will get the same or comparable conclusions.
#4. Principle of Comparability
The principle of comparability is one of the enhancing qualitative characteristics of useful financial information.
Comparability allows users to compare financial position and performance across time and across companies. Comparability achieves consistency.
Consistency refers to the application of accounting standards and policies consistently from one period to another and from one region to another.
Comparability improves the usefulness of financial statements because it allows users to carry out trend analysis, cross-sectional analysis, and common-size analysis. Trend analysis helps us see whether a company’s position and/or performance have improved over time.
The cross-sectional analysis compares a company’s performance with its peers. Comparability does not always imply uniformity. It does not force all businesses to implement the same accounting policies because doing so would reduce their usefulness.
Companies achieve comparability when they offer information in such a way that experienced users can change their financial statements to make them comparable to other periods/companies.
IFRS Accounting Trends and Techniques
IFRS Accounting Trends & Techniques were developed to help management, financial statement preparers, investors, analysts, and academics broaden their understanding and awareness of International Financial Reporting Standards (IFRS).
A variety of businesses around the world already use the International Financial Reporting Standards (IFRS) and its accounting policies.
The IFRS Accounting Trends & Techniques includes the experience of 100 firms including prominent names such as BP, Nokia, Siemens, GlaxoSmithKline, Novartis, Vodafone, Royal Dutch Shell, and Telecom. Italia follows the International Financial Reporting Standards (IFRS).
The companies are based in the United Kingdom, the Netherlands, and Germany. Australia, South Africa, Russia, and other countries provided financial statements reports generated in accordance with IFRS.
Furthermore, the Securities and Exchange Commission is considering a five-year work plan that would result in the conversion of all publicly traded corporations in the United States to IFRS.
This results from the global demand from regulators, investors, businesses, and auditing firms for a single set of high-quality accounting standards. This further leads to the global adoption of IFRS and convergence with US GAAP.
For the preparation of financial statements, more than 100 nations now mandate or permit the adoption of International Financial Reporting Standards. Although Europe is the largest region to have embraced IFRS, major trading partners of the United States, such as Japan and India, are already moving toward broader implementation of IFRS accounting.
What is the main objective of IFRS?
The IFRS Foundation’s goals are to create, in the public interest, a single set of excellent, transparent, enforceable, and widely accepted financial reporting standards based on well-defined principles.
What is difference between GAAP & IFRS?
The main distinction between the two systems is that while IFRS is based on principles, GAAP is based on rules. Specific details and interpretations show how this mismatch occurs. Basically speaking, IFRS norms offer significantly less comprehensive detail than GAAP.
Who benefits from IFRS?
In order for investors and other market participants to make wise economic decisions, IFRS Accounting Standards improve the quality and comparability of financial information on a global scale.
Does IFRS use accrual accounting?
There are two distinct approaches used by accountants to create financial statements: accrual-based accounting and cash-based accounting. Within IFRS, both are permitted (International Financial Reporting Standards).
What are the disadvantages of IFRS?
A few drawbacks of IFRS are its lack of specificity, high adoption costs, and the impression that it is a less rigorous standard than what is currently in place in some nations.
Which 3 assumptions are followed under IFRS?
The IFRS is based on the following four fundamental presumptions: going concern, accrual basis, stable measuring unit assumption, and units of cost purchasing power.
What are expenses in IFRS?
The term “expenses” refers to reductions in economic advantages throughout the accounting period, other than those relating to distributions to equity participants, in the form of outflows, depletions of assets, or incurrences of liabilities, which result in declines in equity.
This article has been able to explain in detail what IFRS accounting is about, the standards, the different principles guiding the IFRS, and lastly the trends and techniques of IFRS.
I hope this article is comprehensive enough to educate and inform you on all that you need to know about IFRS accounting.
IFRS Accounting FAQs
What does IFRS means in accounting?
The International Financial Reporting Standards (IFRS) are a set of accounting standards that dictate how specific types of transactions and events should be recorded in financial statements. The International Accounting Standards Board established and maintains them (IASB).
What are the 4 principles of IFRS?
IFRS mandates that financial statements adhere to four fundamental principles: clarity, relevance, comparability, and dependability.
What is difference between GAAP and IFRS?
GAAP is an acronym for Generally Accepted Accounting Principles, and it is based in the United States. IFRS is a set of international accounting rules that dictate how specific types of transactions and other occurrences should be represented in financial statements.