What Are the International Financial Reporting Standards & Why Are They Important?

Who uses the IFRS?

The IFRS are a requirement for public companies across 167 jurisdictions. The application of these standards is regularly monitored across each of the jurisdictions. 

What are the benefits of IFRS?

• IFRS brings a large number of important benefits within financial reporting. These include:  
• Helping to increase the growth of international business, therefore boosting the economy.
• Improving economic efficiency by helping investors to spot opportunities and risks.
• Allowing for the easy comparison and analysis of different companies.
• Ensuring accurate and efficient financial reporting through the creation of a common set of accounting standards.
•  Facilitating international acquisitions and mergers, due to the increased exposure and access to foreign companies.  

What are the International Financial Reporting Standards? 

The International Financial Reporting Standards (IFRS) are a set of internationally recognised accounting rules for public companies. The IFRS is issued by the International Accounting Standards Board (IASB). The standards apply in many international jurisdictions (including the European Union and UK). The United States uses a different system; the Generally Accepted Accounting Principles (GAAP).

The rationale behind having a single set of accounting rules, such as international financial reporting standards, is to try to ensure that the financial statements of public companies are consistent, transparent, and easily comparable around the world.

What are the IFRS requirements?

IFRS specifies how companies must maintain their records and report their expenses and income. Effectively, they act as a common, consistent accounting language. One that can be understood by investors, auditors, government regulators, and other stakeholders around the world.

IFRS covers a wide range of accounting practices and statements. Some of the IFRS standard financial reporting requirements cover:

• Statement of Financial Position – the way the components of a balance sheet are reported
• Statement of Comprehensive Income – for example, this could be one statement or separated into a profit and loss (P&L) statement and a statement of other income, such as property and equipment
• Statement of Changes in Equity - this documents the company's change in earnings or profit for the given financial period and is sometimes known as a statement of retained earnings
• Statement of Cash Flows - this summarises the company's financial transactions in the given financial period and separates cash flow into operations, investing, and financing.

In addition, the company must give a summary of its accounting policies. If the company comprises more than one entity, the parent company must create separate financial reports for each of its subsidiaries.

For example: as a Real Estate Investment Trust (REIT) AccountsIQ customer Hibernia, is required to produce a range of external compliance reports (including IFRS) for investors.

What’s the difference between IFRS and GAAP? 

IFRS is used in many, but not all, countries. One notable exception is the United States, which uses the Generally Accepted Accounting Principles (GAAP).

Some of the key differences between IFRS and GAAP reporting are:

• IFRS is not as strict in defining revenue and allows companies to report revenue sooner. That means a balance sheet using IFRS might show a higher revenue stream than a GAAP version of the same balance sheet.
• IFRS has different requirements for reporting expenses. For example, if a company is spending money on development or on investment for the future, it doesn't necessarily have to be reported as an expense. It can be capitalised instead.

Which financial reporting standards are adopted in the UK?

Companies incorporated in the UK (or where the parent company is incorporated in UK) need to comply with UK accounting and reporting requirements.

For financial years beginning on or after 1 January 2021, companies need to use UK-adopted international accounting standards (IAS) instead of EU adopted IAS.

 UK parent companies with subsidiaries or a presence in an EEA country also need to check the reporting requirements in that country.

Why are the international financial reporting standards important? 

International reporting standards are designed to bring consistency to accounting language, practices, and statements. This helps businesses and investors make informed financial analysis and decisions. IFRS also helps to foster transparency and trust in the global financial markets and the companies that list their shares on them.

Without international reporting standards, investors could have less trust in the financial statements and other data presented to them by companies. Without that trust, we might see fewer transactions and a less robust economy. IFRS also helps investors to compare company performance and potential because they are comparing ‘like-for-like’.

Read more about how Cloud accounting software can help your business comply with International Reporting Standards (IFRS)  by ensuring you have easy access to accurate, real-time financial reporting data.