There are two main accounting standards that corporations use. Generally Accepted Accounting Principles (GAAP), which is rule-based and accepted only in the United States. And International Financial Reporting Standards (IFRS), which are principle-based and globally accepted. Determining which standard to use depends 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) is an international accounting framework that was developed to be used as a single set of accounting standards throughout the world. IFRS focus on general accounting principles and provide guidance on reporting results and financial position. In addition to the transparency, accountability and efficiency that are obtained with the guidance of IFRS, the uniformity in financial information facilitates the comparison of financial results.

Who uses the International Financial Reporting Standards?

IFRS are being adopted around the world specifically by international companies. The standard has currently been accepted by approximately 90 countries and 120 nations, including Europe, which requires domestic companies to follow IFRS. By adopting global accounting standards, it is easier for international companies to compete globally against local companies in respected countries, raise capital from international investors, and provide financial details to interested parties that may 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 they are under GAAP. What saves time for executives and their subordinates in preparing adequate schedules. In addition, only one IFRS inventory method is allowed, first in, first out (FIFO), and there is only one step method for depreciation.

Benefits of International Financial Reporting Standards

There are advantages and disadvantages to using both standards. However, under IFRS, the pros outweigh the cons. For example, as mentioned above, IFRS focuses 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). Under IFRS, only the FIFO methodology is accepted; Also, one of the biggest differences is that IFRS allows for inventory reversals but using GAAP. In addition, IFRS allows for the capitalization of development costs rather than spending them in the year in which they occur.

The future of International Financial Reporting Standards

As more and more companies do business internationally and a greater number of international investors, embedded companies are turning to IFRS to make themselves more attractive. With the growth of international companies and investors, the Securities and Exchange Commission (SEC) is considering adopting IFRS as the primary standard in the United States to unify with international companies that have already filed IFRS with the SEC.