IFRS stands for International Financial Reporting Standards and it is a set of principles and rules for reporting various transactions and items in the financial statements.
Just like United States have their US GAAP, Canada has its Canadian GAAP, United Kingdom has its UK GAAP etc, the WORLD will have its world GAAP that is under construction right now. But it’s not called “world GAAP”—it is called IFRS.
Now be careful. Before some time, IFRS was called IAS (International Accounting Standards). Indeed, the first standards carried the name starting with “IAS”, e.g. IAS 1—Presentation of Financial Statements. Exactly 41 standards started with IAS.
But then, IASs were renamed to IFRS. After renaming and rebranding the titles of new standards start with IFRS.
Why do we need IFRS?
Today, everything in the world comes closer than ever before. Things are harmonizing and people learn to think and act global.
And indeed, you can see that in every step you make—you can shop the same items anywhere in the world, you can get the same food in McDonalds anywhere in the world, you can even fly anywhere in the world in less than 24 hours.
Accounting and financial reporting are no exception. This is where IFRS has its own spot—it will serve as unified set of principles for financial reporting anywhere in the world.
What is the main benefit of IFRS?
In today’s ever globalizing world, the key concept is COMPARABILITY.
Just imagine yourself as the owner of multinational holding who wants to review financial results of your companies in different countries. But—every country uses different accounting rules!
For example, revenues are reported on accrual basis in 1 country, and on cash basis in another country. How can you say which of your companies has better sales if those figures are incomparable?
Or even if you are small investor playing on the stock exchange and you (hopefully) look to financial statements of your prospect investment before buying. How can you read those statements if everybody reports differently?
So you get the picture. IFRS gives us united global set of accounting and reporting rules, so that you understand financial statements from whatever country. And not only this—if your company wants access to international capital or to stock exchange, it must present its financial statements in compliance with IFRS.
Who reports under IFRS?
Currently, there are over 120 countries who adopted IFRS, some of them fully, some of them partially. The aim is to adopt IFRS by 2015.
The fact is that one of major players in the global market, the United States still use their US GAAP. In this case, US GAAP and IFRS shall rather approach each other and gradually eliminate differences — or converge. The IFRS convergence process should have been finished by 2012.
But, FASB (issuer of US GAAP) and IASB (issuer of IFRS) slowed down the convergence process and new deadline is somewhere around 2015.
Moreover, SEC (Securities and Exchange Commission) should have decided about incorporation of IFRS for U.S. issuers until the end of 2011, but the decision has been delayed by few more months.
If you wish to get the idea how to start studying IFRS, read our article on How to learn IFRS.
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