What is IFRS accounting and why should finance teams care?

Ever wondered why numbers matter so much in business? Welcome to the world of IFRS accounting - a global language for finance teams. It's not just about crunching numbers; it's about ensuring transparency, consistency, and comparability.

Curious to learn more? In this article, we explain what IFRS accounting is, and why it should be on every finance team's radar. We’ll also cover:

• What are International Financial Reporting Standards (IFRS)?
• What is IFRS accounting?
• The 4 principles of IFRS, explained
• Differences between IFRS vs. GAAP
• Conclusion: IFRS accounting with Prophix

What are International Financial Reporting Standards (IFRS)?

International Financial Reporting Standards (IFRS) is a set of principles for the preparation of financial statements of public companies that aims to improve transparency, efficiency, and accountability.

These standards cover a wide range of topics, including revenue recognition, balance sheet items like inventory and property, plant and equipment, and various other issues that impact the reporting of a company's income.

Who created IFRS standards?

The International Accounting Standards Board (IASB) is responsible for the development and publication of the International Financial Reporting Standards (IFRS). The IASB is an independent, private-sector body that was formed in 2001 to replace the International Accounting Standards (IAS).

IASB’s standards apply to 168 jurisdictions worldwide, including the European Union. Other countries that abide by IFRS include Canada, India, Russia, South Africa, South Korea, and Chile. However, it’s important to note that IFRS has not been adopted in the United States, as they adhere to Generally Accepted Accounting Principles (GAAP).

The goal of IFRS was to create a common accounting language, and as a result, it is the most widely used set of standards in use today. In addition to IFRS, IASB has also created the International Sustainability Standards Board (ISSB) to standardize sustainability disclosures, which reflects the increasing importance of environmental, social, and governance (ESG) data.

How many IFRS standards are there?

There are 17 IFRS standards, which cover a wide array of financial metrics and reports, including:

• IFRS 1: First-time adoption of international financial reporting standards
  • IFRS 1 outlines the procedures that a company must follow when it adopts IFRS standards for the first time as the basis for preparing its general-purpose financial statements.

• IFRS 2: Share-based payment
  • IFRS 2 is about rules for payments made with shares. When a company acquires goods or services and pays with its own shares or creates debt based on the price of its shares. How the company records this in its books depends on how it plans to settle the transaction - by issuing more shares (equity) or paying cash.

• IFRS 3: Business combinations
  • IFRS 3 is about making sure the information provided about business deals, such as mergers and takeovers, is relevant, reliable, and can be easily compared. It gives rules on how to record assets and liabilities gained through these deals, how to calculate goodwill, and what needs to be disclosed or shared publicly.

• IFRS 4: Insurance contracts
  • IFRS 4 was replaced by IFRS 17 on January 1, 2023. IFRS 4 is a set of rules about insurance contracts. It covers almost all types of insurance contracts that a company issues or holds.

• IFRS 5: Non-current assets held for sale and discontinued operations
  • IFRS 5 is a set of rules for how to handle the accounting for long-term assets that a company plans to sell (or give to owners). Generally, these assets are not depreciated, are valued at the lower of their book value or their selling price minus selling costs, and they're shown separately in the balance sheet. There are also specific things that need to be shared about discontinued operations and when long-term assets are sold off.
    

• IFRS 6: Exploration and evaluation of mineral resources
  • IFRS 6 is a set of rules for how to handle the accounting for exploring and assessing mineral resources. It lets companies that are using these rules for the first time continue to use the accounting methods they used before they adopted IFRS. It also changes how companies test if the value of these exploration and evaluation assets has been reduced, by introducing new indicators of impairment and allowing the value to be tested as a whole (but not more than a segment).

• IFRS 7: Financial instruments: disclosures
  • IFRS 7 is a set of rules about sharing information on financial instruments, like stocks or bonds, that a company holds. It requires companies to share how important these financial instruments are to them and the type and level of risk they pose. This information needs to be shared in both descriptive (qualitative) and numerical (quantitative) terms.

• IFRS 8: Operating segments
  • IFRS 8 is a set of rules that mainly apply to companies with publicly traded securities like stocks. It requires these companies to share information about their different business areas, the products, and services they offer, where they operate, and who their main customers are. The information they share should be based on their internal management reports, both for identifying their business areas and for measuring the information they disclose about these areas.

• IFRS 9: Financial instruments
  • IFRS 9 is a set of rules about financial instruments like stocks or bonds, including how to recognize and measure these financial instruments, how to account for their loss in value (impairment), when to remove them from the books (derecognition) and how to handle hedge accounting. However, IFRS 9 does not address macro hedge accounting, so IAS 39 standards still apply.

• IFRS 10: Consolidated financial statements
  • IFRS 10 is a set of rules about how to prepare and present consolidated financial statements. These are the combined financial statements of a company and all the entities it controls, like subsidiaries. According to these rules, a company has control over an entity when it has the power to influence the returns of that entity. This could be through owning shares, having voting rights, or other means. If a company has such control, it needs to include that entity in its consolidated financial statements.

• IFRS 11: Joint arrangements
  • IFRS 11 is a set of rules for how companies should do their accounting when they share control over an arrangement. This shared control must be agreed upon in a contract.
  • There are two types of these arrangements. One is a joint venture, where each company has a share of the net assets. In this case, they account for their share of the venture as part of their equity. The other type is a joint operation, where each company has rights to certain assets and responsibilities for certain liabilities. They account for these rights and responsibilities directly in their own accounts.
    

• IFRS 12: Disclosure of interests in other entities
  • IFRS 12 is a set of rules about what a company needs to tell people about its interests in other companies. This includes companies it controls (subsidiaries), companies it runs together with others (joint arrangements), companies it has significant influence over (associates), and other kinds of companies it's involved with but doesn't consolidate in its financial statements ('structured entities').
  • The rules lay out a series of disclosure goals, along with detailed instructions on how to meet those goals. This means the company needs to provide a variety of information to give a clear picture of its relationships with these other companies.

• IFRS 13: Fair value measurements
  • IFRS 13 is a set of rules about how to measure and report the 'fair value' of something. Fair value is what you'd get if you sold an asset or paid to transfer a liability in an orderly transaction between market participants. These rules apply whenever other IFRS rules say you must or can use fair value measurements.
  • The rules explain how to work out fair value based on the price you'd get if you were to sell the asset or transfer the liability (the 'exit price'). They also set up a 'fair value hierarchy', which prioritizes market-based information over company-specific information for these calculations. This means the fair value should reflect what the market thinks, not just what the company thinks.

• IFRS 14: Regulatory deferral accounts
  • IFRS 14 is a set of rules for companies that are using International Financial Reporting Standards (IFRS) for the first time. It allows these companies to keep using their old accounting methods for certain 'regulatory deferral account balances', with a few changes.
  • Regulatory deferral account balances are amounts of money that a company can collect from or owe to its customers because of a decision by a regulator. For example, if a utility company spends more than expected on infrastructure, a regulator might let it charge its customers extra in future years to make up the difference. This extra charge would be a regulatory deferral account balance.
  • Under IFRS 14, these balances and any changes to them need to be shown separately in the company's balance sheet and income statement. The rules also require the company to provide specific information about these balances.

• IFRS 15: Revenue from contracts with customers
  • IFRS 15 is a rule about when and how a company should record its income (or 'revenue') and what information it should give about this in its financial reports. It applies to all contracts a company has with its customers.
  • The rule sets out a five-step process for dealing with income from customer contracts. It's designed to make sure the company's financial reports are useful and relevant to people who read them.

• IFRS 16: Leases
  • IFRS 16 is a rule about how a company should handle and report leases.
  • For the company renting the item (the 'lessee'), IFRS 16 says they must record an asset (something they have the right to use) and a liability (something they pay for) for all leases. There are two exceptions: if the lease is for less than a year, or if the item being leased isn't worth very much.
  • For the company renting out the item (the 'lessor'), IFRS 16 doesn't change much. They still categorize leases as either operating leases (like renting out a property) or finance leases (like a lease-to-own agreement).

• IFRS 17: Insurance contracts
  • IFRS 17 is a set of rules about how insurance companies should handle and report their insurance contracts. The goal is to make sure that the company's financial reports give an accurate and useful picture of these contracts.
  • This rule helps people who read financial reports (like investors or regulators) understand how these insurance contracts affect the company's finances, including its overall financial status, its earnings, and its cash flow (money coming in and out).

Who uses IFRS standards?

Publicly traded companies in 168 jurisdictions, including the European Union and Canada, use IFRS standards for financial reporting. Below is a breakdown of jurisdictions by continent:

Source: IFRS.org

Fun fact: The countries who use IFRS standards represent 98% of the world’s GDP.

Why is IFRS important?

IFRS is important because it establishes a sense of transparency and accountability in global financial markets and publicly traded companies.

When companies use the same set of standards to create their financial reports, investors, auditors, and other stakeholders can easily understand the data and how it’s presented, improving efficiency, consistency, and comparability.

What is IFRS accounting?

IFRS accounting is a set of 17 accounting standards. IFRS standards pertain to finance and accounting teams in 168 jurisdictions and ensures everyone is using the same accounting rules when preparing their financial statements and reports.

Standard IFRS requirements

IFRS requires companies to create 5 types of financial statements, including:

• Statement of financial position (the balance sheet) - This shows what a company owns (assets), owes (liabilities), and the equity of the owners at a specific point in time.
• Statement of comprehensive income (the income statement) - This reports a company's profit or loss over a specific period, including all income and expenses.
• Statement of changes in equity - This tracks changes in a company's equity (like retained earnings and share capital) during a specific period.
• Statement of cash flows - This shows how much cash a company is generating and using during a specific period, broken down into operations, investing, and financing activities.
• Summary of accounting policies - This outlines the methods and rules a company follows when preparing its financial statements.
  

The 4 principles of IFRS, explained

IFRS dictates that companies must follow four principles when creating their financial statements: clarity, relevance, reliability, and comparability. Let’s take a closer look at each principle below:

Clarity

Financial reports should be simple and clear. For example, instead of using complex jargon, a company should explain its profits and losses in plain language.

Relevance

The information in financial reports should be useful to people who need it. For instance, a company should include details about a sale that will affect its future earnings.

Reliability

The information in financial reports should be trustworthy. This means, for example, that a company shouldn’t exaggerate its sales or hide its debts.

Comparability

Financial reports should be consistent so that people can compare a company’s performance over time. For example, a company should use the same method to calculate its profits every year.

IFRS vs. GAAP

As we mentioned earlier, Generally Accepted Accounting Principles or GAAP are a set of rules for financial reporting in the United States. Like IFRS, both sets of standards dictate how a company should prepare and present their financial statements. There are key differences between the two standards, however, which are outlined below:

Conclusion

In this blog, we looked at the complexities of IFRS accounting, its principles, and its critical role in global financial reporting. And the comparison with GAAP underscores the need for finance teams to keep pace with evolving standards. It's crucial to remember in the realm of finance, speaking the same language – like IFRS – is the key to success.

Ready to simplify IFRS accounting with Prophix? Check out our webinar on How to get ahead of regulatory reporting and audit changes in 2024.