Are you wondering ‘what is IFRS’ and its purpose in business? If so, then you are in the right place.
IFRS is an internationally recognized set of accounting standards created by the International Accounting Standard Board (IASB), an independent, non-profit organization. The set of accounting rules is designed to bring a global framework to accounting by promoting accountability, efficiency and transparency. But exactly what is IFRS meaning for organizations?
IFRS is an acronym for International Financial Reporting Standards. As mentioned earlier, this is a collection of accounting standards that govern how companies or businesses should record their accounting events in their financial statements.
The primary purpose of these International Financial Reporting Standards is to unify the financial statements of all businesses and companies across the globe by making them comparable and transparent.
You should not confuse International Financial Reporting Standards with Generally Accepted Accounting Principles (GAAP) as there are notable differences between the two sets of rules. Although the International Financial Reporting Standards are used across the globe, some countries, such as the US, still use GAAP.
What are the differences between International Financial Reporting Standards and Generally Accepted Accounting Principles?
- The most notable difference between the two sets of accounting standards is that the International Financial Reporting Standards is principles-based while Generally Accepted Accounting Principles (GAAP) is rules-based. The divide between the two systems reflects itself in interpretations and the specific details.
For instance, Generally Accepted Accounting Principles (GAAP) provides far more overall details than the International Financial Reporting Standards. As a result, the International Financial Reporting Standards’ theoretical foundation and principles offer you more opportunity for interpretation, which may need extensive financial statements disclosures.
- Another primary difference between the two systems lies in how each treats inventory. For instance, the International Financial Reporting Standards prohibit the use of LIFO (Last-In, First-Out) inventory accounting procedures while GAAP allows them. Additionally, GAAP does not permit inventory reversals, while the International Financial Reporting Standards permit them under specific situations.
Benefits of IFRS
Since we already answered ‘what is IFRS?’, let’s look at some of its benefits.
There are three primary benefits of adhering to the International Financial Reporting Standards:
- Increases comparability between companies, minimizing investor risk and promotes international financing and investment.
- Decreases the cost of generating financial statements for international businesses.
- Enhances the credibility and dependability of financial reports.
By adhering to a single set of global accounting standards (International Financial Reporting Standards), international firms, governments, investors, and other organizations can benefit in various ways. But, in what way are these accounting standards beneficial to these organizations?
The free flow of foreign capital and international transactions are an integral part of the modern economy. Today, close to 30% of financial transactions occur internationally, and this percentage rises every day as more investors seek to diversify and invest across borders.
Before the IASB created the International Financial Reporting Standards, these international operations were pretty complicated because each country maintained its own national accounting rules. The differences in these accounting standards hampered cross-border activities as they brought about complexity, not to mention additional costs. Additionally, the split in the accounting requirements posed a great risk to firms generating financial statements, as well as investors using the financial statements to make investment decisions.
The use of International Financial Reporting Standards lifts the challenges by bringing transparency, strengthening accountability and contributing to economic efficiency in financial markets across the globe.
As the name implies, the International Financial Reporting Standards are global accounting standards for generating financial statements. As they simplify accounting operations, these standards are extremely crucial for firms, especially companies with international subsidiaries.
Additionally, investors can make better international investments decisions as these global accounting rules allow them to see the financial picture as a whole.