IFRS meaning and importance – Features and Role

ifrs-meaning-and-importance 

Overview 

To understand what is IFRS we will first have to know who Issues International Financial Reporting Standards.  The present global business scenario requires equal accounting policies and procedures accepted by investors, stakeholders, individuals, businesses, and industries worldwide.   

To worldwide importance of IFRS, we first have to know what are the main objectives of IFRS.  which helps a lot in this matter. To deal with this situation, the European Union brought the International Financial Reporting Standards (IFRS) into existence European Union on April 1, 2000. 

IFRS Meaning and Importance

The Accounting Standards are a Group of accounting standards for a particular type of transaction that controls the manner that which similar types of transactions and other financial activities should be incorporated in the financial statements.  

The main object of accounting standards is to provide financial statements to investors like banks, financial institutions, shareholders, and others. Which consists of transparency, consistency, uniformity, and fairness in financial statements so that they (investors) can take their investment decisions with closed eyes.  

Given this, the need for International Financial Reporting Standards (IFRS) was felt by the International Accounting Standards Committee (IAS) and it created new financial standards (IFRS) that replaced the operating financial standards (IAS). 

The International Accounting Standards Board (IASB) create and issue these accounting standards. It is focused on whether a particular group of entries and events should be treated similarly and whether their financial statements should be implemented globally.  

These are mainly concerned with interpreting the financial statements in the same manner by all and giving the same results to the investors to make the necessary financial and other decisions. It succeeds in getting confidence in investors like banks, shareholders, and financial institutions to make decisions to invest their money with confidence. No doubt, the creation and adoption of IFRS boost the business of a large number of companies as well as investors [2]

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Highlights (key features) of International Financial Reporting Standards and what are the main objectives of IFRS?

  • The International Financial Reporting Standards (IFRS) were mainly brought into existence to establish uniformity, continuity, and transparency in accounting and financial statements without keeping in view the status and/or size of the company or country.
  • In the year 2001, International Accounting Reporting Standards came into operation instead of International Accounting Standards because of some latest improvements and approval.
  • The IFRS was issued by the International Accounting Standards Board (IASB) has its headquarters in London (UK) which mainly focuses on trust, transparency, and acceptance.
  • The IFRS is adopted by almost all International companies of a large number of countries except some like the United States (US) which continuously use Generally Accepted Accounting Principles (GAAP).

International Financial Reporting Standards (IFRS) Rules 

  • Ensure the improvement of standards about the facts and figures incorporated by various companies in their financial statements.
  • Prepare a standard set of accounting for all the transactions for all the companies.
  • The accounts and other financial statements are prepared in a common language easily acceptable to all.
  • Maintain constantly the accuracy and transparency of all financial statements of the companies.
  • Create trust in shareholders and investors to make their investments and other financial decisions with full reliability.      

What are Financial Statements and their role in a business?

Financial Statements are the financial documents of the company that give details of the financial position of the company to help investors, shareholders, and financial institutions make decisions about whether they should invest money with that company and get the desired profile and repayment.  

The main financial statements include a Balance Sheet which gives a clear picture of the assets and liabilities of the company. The Cash Flow Statement details the circulation of cash in the company’s business activities. The Cash Flow Statement is an important document for investors to know the availability of cash in different situations and the average maintenance of cash throughout the year. 

Equity is also one of the most important financial statements and is of various types. Out of them, the shareholder’s equity is the most important for investors to make investments. More equity means more capacity to pay bills payables and more profit. Debt Equity plays a major role in making investment decisions by investors (banks, shareholders, financial institutions, and others). 

Debt Equity Ratio gives a clear picture of the total equity of the company against total debts.  If equity is sufficient (not more than 30×70) then the Debt Equity is good and lures the investors to invest in your company.

Role of Financial Statements to create IFRS

The financial statements played the most important part in the creation of IFRS.  Before making these standards the International Financial Standards were in operation in major parts of the world.

Later in 2001, the IFRS replaced them.  The main purpose of replacing them was to bring the most transplant, uniform, and sustainable financial standards which give the true and fair picture of the company’s financial statements and help investors to make reliable decisions for investment which is good for both the investors and the companies.  

Thus the financial statements played a vital role in bringing the new standards that ensure accuracy, transparency, sustainability, Honesty, and uniformity.  

Who Makes and Issues IFRS

 Though the International Accounting Standards Committee (IASC) had issued 41 accounting standards up to 2001 on various subjects including the presentation of financial statements,

disclosure of employee benefits, plant, and equipment but the same (IASC) was substituted by the International Accounting Standards Board (IASB) for further development and maintenance of International Accounting Standards which were later called International Financial Reporting Standards (IFRS).  

Thereafter, the Need to know who issues International Financial Reporting Standards became very popular and after understanding its objectives in detail these were adopted and promoted by many other financing institutions and crossed the boundaries of the nations, the business got its identification globally only because of the use of International Financial Reporting Standards (IFRS) which lead to the adoption of the same pattern and rules in the investors and others on an international level.  

The financial statements prepared under the IFRS system were credible and accepted by the leading stock markets in the world.  In 2008, as many as 50 countries’ capital markets had accepted companies that used IFRS in their financial statements. By and by the companies largely based in the developed countries and Eastern Europe had also started accepting IFRS keeping in view its recognition in most of the stock exchanges globally. 

Though the popularity of IFRS was continuously increasing there was still the big problem of their convergence i.e. convergence between the local pattern of accounting or accounting standards and International Financial Reporting Standards. The main example of it is that the most economically powerful countries like the United States did not accept IFRS until 2011.  

Initially, the adoption of IFRS faced many difficulties in many countries due to its adoption cost Investments should be updated through the IT system in financial statements to get updated information and data. Some countries like France prefer their accounting system due to its loyalty to the IFRS.  It was also one of the reasons why India and Pakistan discourage the use of IFRS for their own companies.

Despite all these and other problems, the IFRS is getting recognition day by day and the time will come when no country will have the liberty to dispense with the acceptance and adoption of International Financial Reporting Standards (IFRS). 

 

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The IFRS are made and approved by the International Accounting Standards Board (IASB) and IFRS Foundation which are private bodies and have full autonomy over it.  Earlier it was named as International Accounting Standards Committee (IASC) which was renamed as International Accounting Standards Board in January 2010 and is managed by about 22 trustees.

Who Uses IFRS

These Financial standards are now used by most countries of the European Union and the G20. International Financial Reporting Standards (IFRS) was substituted by the International Accounting Standards (IAS) in 2000 and due to its usefulness, the objective of International Financial Reporting Standards (IFRS) was identified and adopted.

The idea of a set of accounting standards was first given by the U.S. Securities and Exchange Commission (SEC) in November 2008, in which favourable comments were made by the investors, users, regulators, etc. and it was requested to SEC to analyze its prospects and improvements to include IFRS system in the United States.

In its statement in February 2010.  The SEC confirmed in a statement that the efficient accounting standards globally accepted would benefit US investors.  

However, because of it, the Need for International Financial Reporting Standards (IFRS) arose and these standards were issued by the International Accounting Standards Committee, which was later revised by the International Accounting Standards Board (IASB) and accepted all over the world.

Thus, IFRS is now used globally, It was created by the International Accounting Standards Board (IASB), which assures investors and others that all transactions and events of the same nature will be considered alike. (1) 

Who Adopted IFRS

The standards of IFRS are needing 167 jurisdictions and were issued by both authorities, the International Accounting Standards Board and the IFRS Foundation. The IFRS took the responsibility of timely improvement of financial standards issued by them and also ensured the maintenance of transparency, sustainability, Honesty, and uniformity. 

With the hard efforts of the IFRS Foundation, these standards are adopted by most of the multinational companies of different countries (about 100 countries). Though the United States (US) is still adopting Generally Accepted Accounting Principles (GAAP) and China is adopting its standards efforts are being made to bring them within the ambit of IFRS to make the financial statements uniform in most parts of the world.

IFRS vs IAS

Why the International Financial Reporting Standards (IFRS) replaced the International Reporting Standards (IRS) was a matter of concern before the International Accounting Standards Board (IASB) and International Financial Reporting Standards (IFRS) Foundation to make the financial statements most accurate, transplant, uniform, and sustainable.  

Then a new form of the financial standard was brought into existence namely IFRS. So the vital difference between the two is that IAS is the old form and IFRS is the latest form. So it may be said that the IFRS is an updated form over the IAS.


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Difference Between IFRS and GAAP 

  • The major difference between IFRS and GAAP is that the IFRS has the force of principle form of excess whereas later (GAAP) is a form of legal authority.
  • GAAP is an authoritarian form of accounting network whereas IFRS is recognized and flexible.
  • Due to the legal boundaries, GAAP imposes more disclosures whereas IFRS requires less. 
  • The validation of assets is more flexible in the adoption of IFRS whereas the validation of assets in GAAP is based on historical cost.
  • IFRS is globally Accepted whereas GAAP is based in the United States (US).
  • IFRS was established by the International Accounting Reporting Board (IASB) whereas GAAP was established by the International Accounting Standards Board (IASB).
  • For inventory evaluation, the GAAP follows the Last In First Out (LIFO) system whereas the IFRS doesn’t permit the LIFO system.
  • In the case of vacation of assets, GAAP follows the cost method whereas IFRS follows the revaluation method.
  • In the case of integrable assets GAAP follows the fair market value of a particular asset whereas IFRS considers future economic benefits.
  • Development Cost is capitalized in the case of IFRS whereas no such capitalized system is allowed in GAAP.

Thus, it can not be ascertained which method between IFRS and GAAP is better. Since IFRS is more flexible and has fewer legal complications, this system is adopted by most companies and countries in the world.  On the other hand, GAAP is recognized by the United States (US). 

To Sum Up 

The Accounting Standards are a group of similar types of transactions and other financial activities that should be incorporated into the financial statements. The new form of accounting standards was the Need for International Financial Reporting Standards (IFRS). 

Therefore the operating International Accounting Standards (IAS) were replaced by new financial standards called International Financial Reporting Standards (IFRS) by the International Accounting Standards Board (IASB).  

This board replaced the operating committee known as the International Accounting Standards Committee (IASC). The IFRS was adopted by most of the countries in the world (about 100 countries).  

The United States is still adopting Generally Accepted Accounting Principals (GAAP) which are controlled by legal authority and are less flexible than IFRS which are more flexible and have the principal form of excess.  

A big nation China has adopted its accounting standards. In 2008, as many as 50 countries’ capital markets had accepted companies that used IFRS in their financial statements. By and by the companies largely based in the developed countries and Eastern Europe had also started accepting IFRS keeping in view its recognition in most of the stock exchanges globally.

Frequently Asked Questions (FAQ)

1. What is the role of International Financial Reporting Standards IFRS?

The companies have to follow uniform accounting rules which aid in transparency, consistency, and fairness in the financial statements to help investors to make investment decisions.

2. What are 5 accounting standards?

The 5 accounting standards are 1. Assets Classification 2. What is considered depreciable 3. An approved system of depreciation 4. Revenue Recognition 5. Outstanding Share Measurement.

3. What is meant by accounting standards?

These are the recognized financial reporting standards and are the most important root of GAAP. This is the way to guide in what manner the accounting transactions and other financial activities are measured, incorporated, recognized, and displayed in the financial statements.

4. Who defines accounting standards?

The Accounting Standards Board issues the Accounting Standards in India which was created by the Institute of Chartered Accountants in India in the year 1977.

5. What are the 4 principles of GAAP?

Revenue, disclosure, matching, and cost are the 4 main principles of Generally Accepted Accounting Principles (GAAP).

6. What is GAAP in simple words?

The full form of GAAP is Generally Accepted Accounting Principals (GAAP or US GAAP). This is the US basic form for gathering collectively used standards and Accounting for financial reporting. This form is legally authority-based and less flexible than IFRS.

7. WHO issues IFRS standards?

IFRS was established with the combination of two boards namely the International According Standards Board (IASB) and the International Sustainability Standards  Board (ISSB).

8. What is the difference between IFRS vs IAS

The International Standards (IAS) are principles-based and more flexible whereas the International Financial Reporting Standards (IFRS) are legally based and less flexible.

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