What is an accrued expense vs accounts payable?
In accounting, understanding the difference between accrued expenses and accounts payable is crucial for managing a company’s financial health. Both terms refer …
The International Financial Reporting Standards (IFRS) are a set of international rules and regulations for public companies when they are issuing financial statements. These regulations were designed to make the financial information coming from large companies understandable, uniform, and comparable from country to country.
Issued by the International Accounting Standards Board, the IFRS replaced the International Accounting Standards in 2001. These thoughtful and detailed rules give specific guidance as to how public companies should maintain their financial records and report key metrics. Since they use a common accounting language, they can be understood and implemented by financial leaders all over the globe. Every major market follows the IFRS guidelines except the US, Japan, and China, which have their own national accounting standards.
As mentioned, up until 2001, the International Accounting Standards were the benchmark for public companies. The IAS were created by the International Accounting Standards Committee (IASC) to make it easier to compare businesses around the world, boost transparency within financial reporting practices, and propel global trade activities. With universal standards paving the way, companies save money on regulatory costs and compliance activities because multinational organizations only have to use one set of accounting standards.
As it stands today, the IFRS were developed in the European Union and were rapidly adopted at scale. There are currently 168 jurisdictions that fall under the IFRS, making it the most-used set of international accounting standards in history. Corporations aren’t the only entities to benefit from this set of standards; investors, analysts, and business stakeholders use the IFRS when evaluating companies.
As of 2024, the International Financial Reporting Standards bring together IFRS accounting standards, IAS standards, and IFRIC interpretations to create a comprehensive set of regulations for businesses and related entities. Ranging from share-based payments to financial instruments and operating segments, the IFRS sets global accounting standards for most business transactions. First, the IFRS details a set of IFRS financial reporting statements that are required:
Beyond the financial accounting standards of each financial statement, the IFRS outlines a number of business transactions or opportunities and provides guidance on how companies should handle certain activities in order to stay compliant. For instance:
IFRS 9 tells public companies how to classify and measure financial assets, financial liabilities, and certain contracts when buying or selling non-financial items. This standard requires companies to use a forward-looking method when assessing losses on financial assets, taking into consideration the expected credit losses over the item’s lifetime.
Focusing on revenue recognition practices, IFRS 15 provides information on how companies should report their income. By mandating that businesses record revenue when they actually deliver the goods and services, IFRS 15 reduces inconsistencies in revenue recognition practices.
One of the key global accounting standards regarding fair value measurement, IFRS 13 provides a framework for companies to use when determining the value of their assets and liabilities. It ensures that companies are reporting on the value of these accounts accurately and transparently, in a way that investors and stakeholders can easily understand.
One of the key requirements that was rolled over from the International Accounting Standards, IAS 1 dictates the structure and content of regular financial statements. The statements listed in the section above are the main focal points of this standard.
A full list of requirements that are included in the current International Financial Reporting Standards can be found here. By combining some of the earlier requirements outlined by the International Accounting Standards Board, with updated mandates, the IFRS serves as a comprehensive finance guide for companies.
Because the United States does not follow IFRS, a country-specific set of standards is used instead. With the Financial Accounting Standards Board (FASB) serving in an oversight role, the Generally Accepted Accounting Principles (GAAP) are the set accounting standards used by US-based companies to ensure alignment and transparency within financial reporting practices.
GAAP was initially a response to the stock market crash of 1929, which officials thought was exacerbated by less-than-transparent accounting practices in large companies at the time. GAAP has grown and evolved into what it is today, but it doesn’t fully overlap with the International Financial Reporting Standards used by most countries.
As early as 2008, there was an effort by the US Securities and Exchange Commission (SEC) to converge both sets of standards into one, unified approach to financial accounting, but to this day, that convergence has not been achieved. Harmonizing the frameworks will require compromise from both the International Accounting Standards Board and the Financial Accounting Standards Board, and while both bodies are committed to working together, there have been many hiccups along the way.
At a surface level, GAAP is considered more rules-based while IFRS is more principles-based, giving businesses under IFRS a bit more of an opportunity to interpret the requirements as they see fit and determine how they should be applied. Zooming in to a more detailed view, there are many differences between what GAAP requires and what IFRS mandates, but a few of the key issues are:
Despite a long-standing struggle to get full alignment between IFRS and countries like the US, Japan, and China, having one set of global accounting standards has brought about a period of financial uniformity and alignment that businesses and their stakeholders rely on. Though the list of benefits is long, the benefits topping that list are:
The IFRS have been instrumental in cultivating a globally connected economy. While there are many recognized benefits of these standards and high rates of adoption, the International Accounting Standards Board faces ongoing challenges.
Background References:
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