Hi,
So,
can’t wait to start learning IFRS with me? Well then, welcome to our first lesson that will teach you the very basics about IFRS.
What
is IFRS?
IFRS
stands for International Financial Reporting Standards issued by non-profit body IASB (International Accounting Standards Board). Simply said, it is a
set of standards and principles for the preparation and presentation of the financial statements, especially for publicly traded companies.
Until
several years ago, every country used its own principles for financial reporting – for example, Canada used Canadian GAAP, USA used US GAAP,
etc. and no international principles existed.
However,
due to the ever-globalizing world, it was necessary to ensure comparability of financial results between companies from various countries.
That’s probably the main reason why IFRS emerged.
Currently,
IFRS is an alternative set of accounting principles to national accounting rules in many countries and companies based in these countries may select
to report under national GAAP or IFRS.
What
countries adopted IFRS?
In
the present time, more than 120 countries adopted IFRS. Still, some countries do not permit application to IFRS: for example, Vietnam, Thailand,
Cuba…and USA, of course.
What
does it mean? It means that a company based in USA that wants to trade its shares publicly outside USA must report under both US GAAP and IFRS. You
can imagine how time consuming and costly it might be!
However,
IFRS shall be adopted worldwide by 2015 – at least, this is the aim according to some financial authorities. With this regard,
you might have heard about IFRS adoption and IFRS convergence…
What
is the difference between IFRS adoption and IFRS convergence?
IFRS
adoption: a country adopting IFRS is implementing IFRS into its legislation in exact form as issued by IASB. Most of the countries adopted
IFRS, rather than converged.
IFRS
convergence: a country converging to IFRS cooperates with IASB to mutually develop compatible accounting and financial reporting standards
(so, no 100% mere adoption occurs). A typical example of IFRS convergence is USA, where IASB and FASB (US GAAP setting body) work together.
What
are the main differences between US GAAP and IFRS?
The
biggest difference is that US GAAP is rule-based and IFRS is principle-based. So, while US GAAP contains more
precise rules and industry-specific guidelines, IFRS contains principles where the substance of the transaction overrides its form.
These
2 sets of standards are written in a very different way, thus it is impossible to list all the differences. But to bring the biggest ones:
-
IFRS
does not allow LIFO inventory costing, while US GAAP does allow that
-
IFRS
classifies some financial assets differently than US GAAP
-
IFRS
has one-step testing for impairment of assets, while US GAAP uses a 2-step approach
-
IFRS
allows capitalization of development expenses when some criteria are met, but US GAAP typically does not allow that
-
there
are big differences in revenue recognition
If
you would like to read more details about IFRS and US GAAP differences, please refer to my article
here.
What’s
next…
Is
IFRS good for anything? Won’t it bring more accounting fraud? And how does it affect you and your business? Just wait until the next lesson and
you will learn much more!
Take
care!
Silvia,
IFRSbox.com
