February 3, 2017

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International Financial Reporting Standards – All You Need to Know

In the age of globalization, when the number of multi-national corporations is ever-increasing, standardization is a necessity, not a choice. Financial reporting, is an essential aspect of business and requiring standardization. International Financial Reporting Standards (IFRS) aims at exactly that by maintaining stability and transparency in the financial world.

What is IFRS?

International Financial Reporting Standards (IFRS) is a set of accounting guidelines developed by the International Accounting Standards Board (IASB). They are gradually becoming the global yardstick for the preparation of public company financial statements. IFRS can lead to growth in capital markets as it enhances the user-ability to raise capital beyond their own borders while driving down costs.

The rules and guidelines framed for various accounting transactions and events encourage integrity and inspire trust in financial markets. When enterprises across the globe adhere to standardized accounting norms, investors can be confident about the accuracy of financial information. The information can also be used for comparisons across companies and market sectors.

Presently, approximately 120 nations and reporting jurisdictions permit or require IFRS for domestic listed companies, although approximately 90 countries have fully conformed with IFRS as promulgated by the IASB and include a statement acknowledging such conformity in audit reports1. For example, the European Union (EU) has adopted virtually all IFRSs, though a time lag has occurred in the adoption of several recent IFRSs. In the EU, the audit report and basis of presentation note refer to compliance with "IFRSs as adopted by the EU.

Here’s a look at some of the countries and their IFRS adoption:

Countries (by GDP) Financial Reporting Standard
US US GAAP
Japan IFRS roadmap proposed conversion by 2011
China IFRS
Germany IFRS
France IFRS
Russia Russian Accounting Principle – IFRS 2011
Spain IFRS
Brazil Brazilian GAAP – IFRS in 2010
Australia IFRS
Canada IFRS in 2011
Mexico IFRS 2012
Hong Kong IFRS
UK IFRS

 

Evolution of IFRS

The IFRS Foundation was established in 2001. In the very next year, the European Union agreed to adopt IFRS from 2005. In 2003, IFRS 1 was issued and simultaneously, Australia, Hong Kong, New Zealand, and South Africa agreed to adopt IFRS by 2005. While IASB completed stable platform for IFRS 2005 adoption in 2004, almost 7000 companies across 25 nations in Europe migrated from national GAAP to IFRS in 2005. In 2006, China adopted IFRS and, in 2009, Japan approved voluntary adoption of IFRS. Canada began its association with IFRS in 2011. In the following year, Argentina, Mexico, and Russia began using IFRS.

IFRS – Standards Overview

The standards of IFRS are as follows:

IFRS 1 First-time adoption of IFRS
IFRS 2 Share based payment
IFRS 3 Business combinations
IFRS 4 Insurance Contracts
IFRS 5 Disposal of subsidiaries, businesses and non-current assets
IFRS 6 Extractive industries
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Segment reporting
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in other Entities
IFRS 13 Fair value measurement
IFRS 14 Regulatory Deferral accounts
IFRS 15 Revenue from contracts with customers
IFRS 16 Leases

 

IFRS – Impact and Challenges

While more and more nations and enterprises are gearing up to adopt IFRS, some challenges have come to the fore.

Degree of difference: IFRS is dissimilar as compared to the present accounting policies that are followed. The major differences in accounting for financial instruments, business combinations, and employee benefits often become a challenge.

Lack of trained professionals: The number of people who have been trained in IFRS and can address issues and concerns are minimal.

Fair Value (FV) Measurement: IFRS uses FV as a base for measurement of majority of financial items in financial statements. This reveals the true value of the business. However, a large number of banks across the globe prepare financial statements based on historic costs, and the shift is quite a challenge.

Differences in requirements for credit risk: There are differences in Basel and IFRS requirements for the measurement of credit risk. Lower operating margin: IFRS would require banks to provision higher and that could lower operating margin and profitability. This could also impact capital, liquidity, and leverage.

Additional capital requirements: Banks have to maintain added capital as per the new standard’s impairment provisioning guidelines.

Every organization – or nation – would ideally want to be a part of the global economy and to ensure that, IFRS is critical. Standardization is the future and once these initiation impediments are ironed out, IFRS would help both enterprises and investors achieve greater heights with ease.