International Financial Reporting Standards (IFRS)

international-financial-reporting-standards-ifrs

International Financial Reporting Standards (IFRS) are issued by the International Accounting Standards Board (IASB). They are a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS also include International Accounting Standards (IAS) issued by the International Accounting Standards Committee (IASC).

The main goal of IFRS is to make international comparison as easy as possible. Different countries employ different accounting standards while computing the profits of a company. It may happen that if the profits are computed as per the U.S Accounting Laws (U.S GAAPs) the profits are $100 Billion but when the same business is evaluated using U.K Accounting laws (U.K GAAPs) the profit may turn out to be $50 Billion and when computed according to Indian Accounting Laws the profit may be $200 Billion (hypothetical figures). Therefore, uniform results can be achieved across the globe by application of IFRS. Thus IFRS facilitate comparison of financial statements of different firms in different countries.

As the market expands globally, the need for a global standard also increases. Implementation of IFRS benefits the economy by increasing the growth of its international business.  It facilitates the maintenance of orderly and efficient capital markets and also helps to increase the capital formation, and thereby economic growth.

Investors who are willing to invest abroad need information which is more relevant, reliable, timely and comparable across various jurisdictions. Financial statements prepared using a common set of accounting standards help investors better understand the investment opportunities as opposed to financial statements prepared using a different set of national accounting standards. For better understanding of financial statements, global investors have to incur more costs in terms of the time and effort to convert the financial statements so that they can confidently compare opportunities. Investors’ confidence would be strong if the accounting standards used are globally accepted. Thus, implementation of IFRS contributes to investors’ understanding and confidence in high quality financial statements.

A major push towards implementation of IFRS has been coming from the industry. The reason for the same is that the industry would be able to raise capital from the foreign markets at a lower cost if it can create confidence in the minds of foreign investors that their financial statements comply with globally accepted accounting standards. With diversity in accounting standards from country to country, enterprises which operate in different countries face a multitude of accounting requirements prevailing in different countries. The burden of financial reporting is lessened with implementation of IFRS because it simplifies the process of preparing the individual and group financial statements , i.e. eliminating the need for multiple reporting and thereby reduces the cost of preparing financial statements.

IFRS can implemented by a country in 2 ways:

1.Adoption: Adoption of IFRS means accepting the international standards in their original form without making any changes in the language or format. It refers to complete compliance with guidelines issued by IASB.

2.Convergence: Convergence with IFRS means alignment of national accounting standards with the globally accepted international norms. The countries may deviate to a certain extent from the IFRS originally issued by IASB and develop high quality accounting standards over time.

 

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