The International Financial Reporting Standards (IFRS) is a set of accounting standards designed in London, UK, by the International Accounting Standards Board or IASB. US companies don’t need to use IFRS because they follow US GAAP. However, if a US business operates in countries that use IFRS, then it must comply with the local accounting standards for financial reporting in those places. The goal of the IASB is to develop a set of standards that will enable financial statements across countries to be comparable, understandable, and verifiable.
Application and Promulgation of IFRS
The IASB is part of the nonprofit IFRS Foundation, which aims to develop global accounting and sustainability standards. However, the IASB has no regulatory authority and cannot enforce IFRS on countries or companies. Rather, it relies on government regulators to adopt the IFRS in financial reporting. For instance, in 2002, the European Union adopted the IFRS for all EU companies whose debt and equity are traded publicly.
Hierarchy of Application
When applying the IFRS, every financial statement preparer should know the proper hierarchy of IFRS. The application starts with:
- The IFRS or IAS International Accounting Standards , including its corresponding IFRS Interpretations or IAS Interpretations;
- The Conceptual Framework for Financial Reporting; and lastly
- Pronouncements of other standard-setting bodies like the US GAAP.
The IASB allows deviation from IFRS as long as there is no promulgated IFRS for a specific transaction or accounting issue, and applying non-IFRS standards will provide a fair presentation of the financial statements.
IFRS Pronouncements
The IASB releases three types of pronouncements:
- International Financial Reporting Standards are the new standards published after the IASB took over its predecessor, IASC International Accounting Standards Council . Included in the IFRS is the IAS, the pre-existing standards published by the IASC. Currently, there are 19 IFRSes and 24 non-superseded IASes When the IASB updates existing standards or introduces new ones that replace older standards, the new IFRS supersedes the corresponding IAS. This means that once the new IFRS is fully in effect, the superseded IAS can no longer be applied. .
- Conceptual Framework for Financial Reporting sets the fundamental objectives and concepts for developing future standards. However, the Conceptual Framework is not a standard, and specific IFRSes or IASes prevail over it.
- International Financial Reporting Standards Interpretations are interpretations of the IFRS to clarify the application of the standards. It aims to provide additional guidance to specific issues not explicitly mentioned in the IFRS and give clarity to areas where interpretations are conflicting.
These pronouncements are publications that serve as the official basis for following IFRS in accounting for usual and special transactions.
IFRS Financial Statements
The financial statements under IFRS are similar to those under US GAAP. The primary difference lies in the formal naming conventions.
US GAAP Name | IFRS Name |
|---|---|
Balance Sheet | Statement of Financial Position |
Income Statement | Statement of Profit or Loss and Other Comprehensive Income |
Equity Statement | Statement of Changes in Equity |
Cash Flow Statement | Statement of Cash Flows |
Notes to the Financial Statements | Notes to the Financial Statements |
Though naming conventions differ, the functions and purpose of each financial statement remains the same. In fact, the IFRS doesn’t require companies to strictly follow the IFRS name, so companies may use “balance sheet” instead of “statement of financial position” if they believe it is more understandable to readers.
Users of IFRS
There are 168 jurisdictions using IFRS accounting standards, and these include Canada, EU countries, South Africa, Singapore, Japan, and Australia. US companies with international operations also use IFRS for local financial reporting requirements.
IFRS vs US GAAP
The IFRS and the US GAAP accounting standards differ in many ways, with the most famous difference being that IFRS disallows the LIFO method of inventory, while the US GAAP allows it. However, both aim to provide high-quality information for users of financial information.
The IASB and FASB Financial Accounting Standards Board, the promulgator of the US GAAP. have been working together to create a unified set of global standards. This IFRS and US GAAP convergence gained significant success when the US GAAP converged with the revenue recognition standards of IFRS.
IFRS 15 Revenue from Contracts with Customers, the international standard for revenue recognition, is codified in the US GAAP as ASC Accounting Standards Codification 606 under US GAAP. Hence, revenue standards in the US and in IFRS countries are now aligned.
Frequently Asked Questions (FAQs)
IFRS is the accounting standard used internationally, while GAAP is used only in the US. Moreover, IFRS tends to be more principles-based, giving accountants more flexibility in applying the standards. US GAAP, on the contrary, is rules-based, where accountants have limited flexibility.
IFRS stands for International Financial Reporting Standards and is used as the authoritative framework in financial accounting and reporting in 168 jurisdictions globally.
IFRS (International Financial Reporting Standards) is a set of principles that guide how financial statements are prepared, ensuring consistency and transparency in accounting across different countries.
Bottom Line
While not the prevailing standard in the US, IFRS is an international accounting framework used by many countries around the world. It has the same goals as US GAAP of making financial reporting more transparent and uniform for users.
