International Financial Reporting Standards – also known as IFRS – offer accountability, transparency, and efficiency, providing a set of worldwide accounting standards. But what is IFRS, exactly, and what are the true benefits of this system for businesses? Let us delve deeper into these universal accounting rules.
What is IFRS: Meaning and Uses
What is IFRS? The meaning of the term, International Financial Reporting Standards, provides some indication as to what it does, but does not tell the whole story. These specifications apply to accounting events and describe how these should be reported in a business’s financial statements. Their role is to make these statements consistent, transparent, and comparable across all countries. IFRS is governed by the International Accounting Standards Board.
In a context where thousands of cross-border transactions happen every second and where businesses seek out investment opportunities across the entire world, maintaining convenience and transparency is challenging. Back when nations used to have their own individual accounting standards and reporting systems, international business deals were complex, costly, and risky. What is IFRS’s main application? To eliminate this issue by providing one single set of accounting rules for all countries to adopt and abide by.
The only country that does not prescribe to it are the United States, where a system known as GAAP is followed. The Generally Accepted Accounting Principles vary slightly from the IFRS framework in that they use a different methodology to achieve the same ends. The main discrepancy is that GAAP is rules-based whereas IFRS is principles-based, which means that GAAP offers more detail. It is worth noting that the U.S. Securities and Exchange Commission is considering switching to IFRS in an effort to avoid duplicating accounting tasks. This would make comparing international businesses considerably more cost-effective and would take much less time than it does now.
How Do International Financial Reporting Standards Work?
Thanks to IFRS, companies maintain their accounts and carry out their reporting using a common accounting language, making financial reports consistent across all countries and industries. IFRS covers an array of points, from inventories to revenue recognition, all the way to the presentation of statements, income taxes, foreign exchange rates, fixed assets and more.
There exist several standards that qualify as IFRS, providing comprehensive rules for a number of areas.
A Statement of Changes in Equity, for instance, refers to the document companies need to publish whenever they have to report a change in profits during a financial period. Similarly, a Statement of Comprehensive Income details profit, loss, and income in one (or two) convenient document. A Statement of Financial Position – or balance sheet – can be made clear and compliant by following IFRS, while a Statement of Cash Flow provides an overview of a company’s financial transactions over a given period.
What Is IFRS Compliance?
IFRS compliance refers to the observance of the standards in question by companies around the world. International Financial Reporting Standards are used in many jurisdictions and countries to ensure the transparency of businesses. Firms that adopt the principles of IFRS and utilize them to write their accounting documents can prove their trustworthiness. This allows investors to believe the financial statements presented to them and helps them feel confident about the company’s integrity.
Without standardized practices and this level of trust, there is little doubt that much fewer transactions would take place. The absence of such a compelling risk-mitigating system would also lead to higher transaction costs and could potentially impact the economy significantly.
A convenient instrument to help investors compare firms objectively, International Financial Reporting Standards are easy to implement when using the right software. 3V Finance provides effective solutions to help businesses integrate IFRS into their own systems effortlessly.