International Financial Reporting Standards (IFRS)

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  • 0:03 IFRS
  • 0:42 IFRS Organization
  • 1:26 Goals of the IFRS
  • 2:09 IFRS Standards
  • 3:33 Impact of Implenting…
  • 5:12 Lesson Summary
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Lesson Transcript
Instructor: Lori Forrest

Lori has taught college Finance, Operations and Business courses for over five years. She has a master's degree in both Accounting and Project Management.

The International Financial Reporting Standards (IFRS) provide guidance for preparing financial statements globally. This lesson will define the IFRS, outline its goals and objectives, and discuss the advantages and disadvantages of a single set of global accounting standards.

IFRS

As global trade increases and companies are doing business in many different countries, the need for common accounting rules is imperative. The International Accounting Standards Board (IASB) has formulated a set of International Financial Reporting Standards (IFRS). The goal is that these become the global standard for the preparation of financial statements by public companies.

How can investors compare financial statements for global companies against their competitors or market leaders? The use of IFRS helps investors have a means to compare and evaluate potential opportunities or mitigate risks.

IFRS Organization

The IFRS Foundation is a non-profit organization focused on public interest and protection as it relates to financial reporting standards. IFRS is gaining widespread adoption around the world. Approximately 120 nations or reporting jurisdictions allow or require the IFRS conformity. There were 90 countries fully conformed, including statements acknowledging conformity in their audit reports. The Security and Exchange Commission (SEC) has been expressing support of convergence and global accounting standards since 2010 and is currently executing on a project called the Work Plan which sets a goal for incorporating IFRS into the financial reporting system for those companies governed by the SEC.

Goals of the IFRS

Investors and companies alike seek to compare financial statements in order to make improved decisions. Investors want to assess potential investments and companies are looking to understand their place in the market or overall industry and make performance improvements when needed. When companies use the same set of standards to prepare statements, this type of comparison is more accurate. Many companies doing business in different countries find this useful when analyzing performance. The IFRS mission focuses on the following: fostering trust; quality financial reporting; and improved regulation through transparency, accountability, and improving investors' ability to realize opportunities or mitigate risk across a global economy.

IFRS Standards

The accounting standards published by the IFRS and the International Accounting Standards Committee provide requirements that companies must follow when preparing their financial statements. Public companies, not only those listed on the stock exchange but other organizations with public accountability, such as financial institutions or banks, are held to these standards. The IFRS has also provided small- and medium-sized entity standards (SMEs), to provide guidance for small- and medium-sized companies that do not fall into the public accountability category.

IFRS does allow for some level of company decision making when adopting standards. A principle-based approach versus a rules-based approach, means that companies can determine how they will arrive at a reasonable standard. In other words, there is more than one way to get there. Companies are able to focus on their situation and what will make the financial statements easier to read, more readily comparable, and useful. This same flexibility also proves challenging in that some argue this allows companies to show the most desirable reports. The argument is that with a rules-based approach companies would all be valuing their statements in the same way. Two of the biggest areas of difference are in the inventory cost management and intangible assets reporting. Revenue recognition is also very specific and detailed under U.S. GAAP reporting requirements, but very general under IFRS.

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