Companies prepare financial statements to report their operations to their stakeholders. However, they need consistency when presenting the information. On top of that, they must also follow similar rules that define the basis for preparing financial statements. These rules come from accounting standards. These standards play a crucial role in dictating how companies record and report information.
An accounting standard is a common set of principles, rules, standards and procedures. They define the basis of financial accounting policies and practices. Usually, these standards apply to companies and other similar businesses. On top of that, accounting standards are also crucial for other entities that report their operations to stakeholders. These standards may come from various sources based on several factors.
Accounting standards ensure companies report their operations consistently. On top of that, they improve the transparency involved in the financial reporting process. Since they apply to every entity similarly, accounting standards also promote comparability. In most jurisdictions, companies follow IFRS (International Financial Reporting Standards). However, some companies may also comply with GAAP (Generally Accepted Accounting Principles).
The IFRS applies to most companies worldwide. However, they come from a specific process. Before understanding that, however, it is crucial to define what the IFRS is.
What is IFRS?
International Financial Reporting Standards (IFRS) are accounting standards common in many countries. They constitute a standardized method to report company finances. Usually, these include a set of accounting standards that apply to various areas. Consequently, IFRS helps companies report their financial performance and position. It makes them understandable and comparable across all areas.
In the past, most countries used a local or national accounting basis. While it allowed for a customized approach to reporting, it also had some flaws. On top of that, financial statements from one company were not comparable with others. It created issues, particularly when companies expanded their operations to other localities. However, international accounting standards replaced most national accounting standards.
Currently, IFRS is the most applicable financial standard worldwide. Some countries also use it as a basis to customize national accounting standards. However, the US does not fall under this category as it uses the US GAAP standards. In some other jurisdictions, GAAP reporting may also apply. However, most companies use the IFRS as a basis for preparing financial standards.
The IFRS dictates several processes within a company’s accounting cycle. It guides companies from recording transactions to presenting them to stakeholders. On top of that, it also defines other features that apply to the accounting process. As accounting standards, the IFRS helps maintain credibility and promotes transparency in the financial world. It enables and empowers stakeholders to make well-informed decisions.
Overall, IFRS standards include a set of accounting rules that dictate the accounting process. They consist of several standards that apply to specific areas and transactions. These standards help guide companies in preparing and presenting financial statements. On top of that, IFRS also helps companies achieve consistency and transparency. These standards also allow for a more straightforward approach to the accounting process.
Who issues IFRS?
IFRS standards are issued and maintained by the International Accounting Standards Board (IASB). This board is solely responsible for issuing International Financial Reporting Standards. However, it operates under the International Financial Reporting Standards Foundation (IFRS Foundation). This foundation is a nonprofit accounting organization. Its primary objective is to develop and promote the IFRS through the IASB.
Previously, the IFRS came from the International Accounting Standards Committee (IASC). This committee was formed through national accountancy bodies from various countries. Initially, it set to harmonize the international diversity of company reporting practices. Since then, it worked until 2001, during which it developed a set of accounting standards. These standards fell under the International Accounting Standards (IAS). The IAS are now a part of the IFRS.
In 2001, the IASC dissolved and was replaced by the IASB. The IASB is an independent body for setting standards. As mentioned above, the IAS developed by the IASC also became a part of the IASB’s operations. Essentially, the IASB adopted the extant corpus of IAS. Since then, the IASB has developed its standards as the IFRS. However, it also maintains and develops the IAS as IFRS.
The IASB exists to meet various objectives. Primarily, it aims to develop a single set of understandable and enforceable high-quality worldwide accounting standards. However, the board does not have the authority to enforce these standards. Therefore, it cooperates with national standard setters to ensure the standards are applied throughout various jurisdictions. Consequently, the IASB works in partnership with major national standard-setting bodies.
Some other bodies under the IFRS foundation also contribute to the process. One of these includes the IFRS Interpretations Committee (IFRS IC). However, it works in cooperation with the IASB. The IFRS IC issues rapid guidance on accounting matters where divergent interpretations of IFRS may exist. However, issues of concern to a small minority of entities may not require its attention.
The other body contributing to the IASB is the IFRS Advisory Council (IFRC AC). Primarily, it provides a forum for the IASB to consult a wide range of interested parties affected by the board’s work. The council helps advise the board on agenda decisions and priorities in the board’s work. Similarly, the IFRS AC informs the board of the views of the organizations and individuals on the council. Lastly, it advises the board of the trustees on other matters.
How are the IFRS developed?
The IFRS Foundation is responsible for devising and maintaining the IFRS through the IASB. However, the process of developing the IFRS is complex. The IFRS Foundation follows an open and inclusive process in this process. The first step to this process is research. Within this stage, the IASB researches various issues and tries to identify solutions for those. Consequently, it organizes ideas in a discussion paper.
The IASB then seeks feedback on how to proceed with the enlisted issues. During this stage, it appoints an advisory committee to advise on issues. The IASB also issues the discussion paper to encourage comments from the advisory committee. Consequently, it sketches out how the new accounting standard may look. The foundation also allows outsiders to observe the meetings and read their papers.
After the above process, the IASB develops a draft standard. This standard is not applicable and does not constitute the final product. Instead, it is a draft version that may go through various changes. The IASB publishes an exposure draft for public comment, a draft version of the intended standard. Anyone can participate and contribute to setting the final standard. During the process, the IASB also consults with its advisory bodies.
During the process, the IASB receives feedback from various individuals and organizations. The IASB takes part in numerous meetings and events to discuss those comments. Based on those meetings, the IASB refines the exposure draft. However, not all feedback makes a part of the exposure draft. Once done, the IASB issues a new standard.
Every new standard comes with a start date. This date allows countries to authorize its use. Similarly, it helps companies prepare for the new requirements. One issue, the IASB supports the implementation of the standard. Moreover, it ensures the standard is working as intended. Later, the IASB IC may play a role in resolving issues. As mentioned above, these issues exist due to different interpretations of the new standards.
IFRS refers to a set of accounting standards that apply throughout the world, with some exceptions. It includes a set of standards that dictate the accounting cycle. Primarily, the IFRS come from the IFRS Foundation through the IASB. The IASB is responsible for maintaining and developing new standards. During the development process, it may go through various steps.