IFRS (International Financial Reporting Standards)

IFRS (International Financial Reporting Standards)

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The Basics

The International Accounting standards Board (IASB) developed a set of accounting rules known as International Financial Reporting Standards (IFRS) that serve as guidelines for the preparation of financial statements and the reporting of financial transactions. These standards, that are being implemented by nations all over the world, including those in Europe and Asia, are intended to increase financial openness and uniformity on international markets.

Why IFRS?

Financial statements from various businesses and nations may be compared thanks to IFRS, which ensures they are prepared in accordance with the same standards. This increases transparency, enabling investors to choose wisely when investing in international markets. Additionally, IFRS gives companies a uniform language, enabling the transmission of financial data across borders and cutting costs related to various accounting standards.

IASB and related bodies

The IASB is in charge of creating and maintaining IFRS, and it collaborates with organisations that establish national accounting standards to foster convergence between IFRS and regional accounting norms. The International Financial Reporting Interpretations Committee (IFRIC) and the Standards Advisory Council (SAC) are two other boards involved with IFRS in addition to the IASB.

Current Position

There are presently 14 IAS and 17 IFRS standards, which cover a wide range of subjects such as financial instruments, leases, and revenue recognition. Applicability of IFRS is obligatory for  publicly traded corporations in Europe and Asia .

IFRS and SME’s

Small and medium-sized businesses (SMEs) frequently voluntarily embrace these standards. Adopting IFRS standards can be beneficial for SMEs because it increases the reliability of financial statements and gives them a competitive edge when looking for foreign investors or business partners.

Let’s understand IFRS usage with the help of an example

ABC Ltd company is listed in Europe and has formed fully owned subsidiaries in India and USA.

In India I GAAP( accounting standards ) are issued by ICAI whereas in USA US GAAP accounting standards are laid down by Financial Accounting Standards Board.

Both have their own specific rules for accounting and the rules may differ according to the trade practices, various allied acts operating in the country.

As you are aware, at the end of each financial year the financial statements of the subsidiaries are consolidated with the Holding companies financials. If one set of statements follows different policies for instance  -  revenue recognition, stock , valuation of assets and the other follows a different approach. If the statements of both subsidiaries are merged together , the numbers which appear on the Balance sheet of the holding company would not be homogeneous. Also the separate financials of each of the subsidiaries would not be comparable either and the holding company would not be in a position to ascertain that which subsidiary is performing better.

Such non uniformity can create chaos in the economy when the institutional investors rely on unsteady  financial statements. Thus , that’s the fundamental importance of IFRS to bring everyone on the same page.

To conclude  we would say like Mathematics rules are universal for calculation likewise IFRS are universal rules for accounting. 

 

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