IFRS has become one of the biggest challenges in the current financial and accounting world. One day, every single company will have to apply IFRS because the whole world is moving towards global standards.
Learning it is quite demanding – complete standards with accompanying documents are more than 3,000 pages long and, moreover, they are written in a language that is quite difficult to read and understand.
Don’t let this discourage you! The key of learning IFRS is making baby steps and practicing. I hope this introductory course will help you to get started.
Are you ready? So let’s dive in together!
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 permit or require IFRS financial statements. Still, some countries do not permit application to IFRS: for example, Vietnam, Thailand, Cuba… and USA, of course (although it does permit IFRS for publicly listed foreign companies).
What does it mean? It means that a domestic 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, the aim is to adopt IFRS worldwide in the near future according to some financial authorities. With this regard, you might have heard about IFRS adoption and IFRS convergence…
Difference between IFRS adoption and IFRS convergence
Although IFRS has already become THE need of the hour, confusion still prevails over the difference between IFRS adoption and IFRS convergence. So let’s clarify:
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.
Main differences between US GAAP and IFRS
The biggest difference is that the 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.