There are two main accounting standards that companies use. General Accepted Accounting Principles (GAAP) which is based on rules and accepted only in the United States. And the International Financial Reporting Standards (IFRS), which are based on principles and accepted globally. Determining which standard to use is based on whether the company conducts business locally or internationally. Global companies can choose to follow IFRS, which is administered by the International Accounting Standards Board (IASB) and is the framework for more than 120 supervised countries.
What are the International Financial Reporting Standards?
International Financial Reporting Standards (IFRS) are an international accounting framework that was developed to be used as a single set of accounting standards around the world. IFRS focus on general accounting principles and provide guidance on reporting financial position and results. In addition to the transparency, accountability and efficiency obtained under the guidance of IFRS, uniformity in financial reporting makes it easy to compare financial results.
Who uses the International Financial Reporting Standards?
IFRS are being adopted around the world specifically by international companies. Currently, the standard has been accepted by approximately 90 countries and 120 nations, including Europe, which requires domestic companies to follow IFRS. By adopting global accounting standards, international corporations can compete globally with local companies in respected countries, raise capital from international investors, and provide financial details to stakeholders that could be spread across the globe.
Why are International Financial Reporting Standards preferred over other Standards?
As global companies take time and fully understand IFRS, they find that the standards are more lenient than others. Under IFRS, companies are not required to provide as much detail when it comes to income or expenses, as for example under GAAP. This saves executives and their subordinates time in preparing adequate schedules. Also, only one inventory method is allowed under IFRS, first in, first out (FIFO), and there is only one pass-through method for write-offs.
Benefits of International Financial Reporting Standards
There are advantages and disadvantages to using both standards. However, under IFRS, the benefits outweigh the drawbacks. For example, as mentioned above, IFRS focus on the general principle, providing guidance rather than specific rules. GAAP allows companies to have a choice between two valuation methods for inventory, last in, first out (LIFO), or first in, first out (FIFO). According to IFRS, only the FIFO methodology is accepted; Also, one of the biggest differences is that inventory reversal is allowed by IFRS but using GAAP. In addition, IFRS allows the capitalization of development costs rather than expensing them in the year in which they occurred.
The future of international financial reporting standards
As more and more companies conduct business internationally and more international investor startups are turning to IFRS to be more attractive. With the growth of international investors and companies, the Securities and Exchange Commission (SEC) is considering adopting IFRS as the main standard in the United States to unify with international companies that have already filed using IFRS with the SEC.