Companies operate as separate legal entities. They obtain finance from various parties to conduct business with others. Consequently, they may profit from their activities. Later, they use those profits to compensate their investors. The most prevalent forms of payments to them include dividends and interest. However, companies must also report their operations to those investors.
Companies prepare financial statements, which provide information about their operations. Usually, these include four reports with notes to the financial statements. Those reports include the balance sheet, income statement, cash flow statement and statement of changes in equity. Each of these uses a specific format and presents different aspects of operations. Stakeholders can use this information to make well-informed decisions about the company.
Investors may deal with various companies at the same time. If these companies are in the same area, it is more straightforward. However, investors may worry about the reporting process for companies from different countries. Usually, companies use the IFRS and GAAP when preparing financial statements. These constitute accounting standards that apply to various entities.
What are International Financial Reporting Standards (IFRS)?
International Financial Reporting Standards (IFRS) are a set of accounting rules that companies use for accounting. These rules dictate how companies prepare and present their financial statements. Usually, they apply from a low level and cover the overall process. The IFRS also guide companies on the treatment for various financial transactions. Currently, the IFRS applies in over 160 jurisdictions.
The primary objective of the IFRS is to help companies present their financial position and performance. In this regard, the balance sheet and income statement are highly critical. The IFRS provides the rules and procedures to describe those aspects in an understandable and consistent way. Without these standards, companies cannot prepare their financial statements in a standardized manner. Consequently, the IFRS enhance the quality of the information provided to users.
The IFRS come from the International Accounting Standards Board (IASB). This board has been responsible for maintaining and developing IFRS since 2001. Before that, the International Accounting Standards Committee (IASC) overlooked these operations since 1973. Apart from these, the foundation also operates other bodies that can contribute to this process. These primarily include the IASB Interpretations Committee and IASB Advisory Council.
The IFRS took over various national standards that applied to specific countries. Consequently, the IASB also works with the national standard-setting bodies to promote the IFRS. Apart from IFRS, GAAP also is an accounting standard. However, it only applies in the US and some other jurisdictions selectively. Since they apply to many jurisdictions, the IFRS promote consistency and comparability between companies.
Overall, the IFRS include a set of accounting policies and rules that apply to companies. These standards cover the accounting process for various financial transactions. They provide crucial guidance on specific areas. Similarly, the IFRS promote consistency, transparency and understandability for the financial statements. The IFRS are the most prevalent accounting standards worldwide. Apart from it, GAAP is also common in the US.
Why are IFRS Important? 5 Reasons You Should Know
The IFRS include various standards that allow companies to prepare their financial statements. As stated above, this process applies from recording transactions to reporting them. For most companies, IFRS include instructions to prepare financial statements with consistency. However, the IFRS aren’t important for companies and reporting entities only. They also have significant benefits to stakeholders and users of the financial statements.
The IFRS are of high significance to many parties. The five reasons why IFRS is important to include the following.
Global application
One of the most significant importance of the IFRS includes its global presence. As mentioned above, these standards apply in many jurisdictions. Unlike GAAP, IFRS is more prominently used and prevalent in the global economy. For companies, it creates an opportunity to attract more investors. Companies can prepare their financial statements in a way that all investors can use. This way, they can get more finance.
IFRS also allows companies to expand their operations without worrying about the financial impacts. On top of that, acquisitions and mergers between companies from various jurisdictions become more straightforward. It is also one of the advantages that IFRS has over GAAP. GAAP only applies in the US. Therefore, it can only help investors within a limited scope. However, IFRS are more global and help many companies and investors.
Promotes consistency
Attracting investors from various areas is not straightforward. Usually, investors come from different backgrounds. Therefore, having a uniform system that they can understand is highly crucial. IFRS allow companies to present their financial statements in consistency with others. It helps companies prepare financial statements for investors to understand easily. On top of that, it can also promote better practices internally.
IFRS does not bring consistency to financial statements. It also promotes uniformity within the whole accounting process. Usually, these standards provide consistent rules and regulations for treating several items. While some alternatives may exist, companies use the same treatment for items. Consequently, using IFRS allows companies to bring consistency to their accounting process.
Helps auditors
The auditing process is highly crucial for all companies. This process involves external auditors examining a company’s financial statements. Since it involves those statements, using IFRS is critical to the process. Auditing comes with its own standards. However, those standards only dictate the process for auditors. They do not guide them on the financial accounting treatments for various items. However, the IFRS helps in this matter.
IFRS supports auditors in supporting their duties. Moreover, it simplifies their work and makes it easier to examine financial statements. The global presence of the IFRS also helps auditors audit companies from various areas using the same standards. Consequently, it makes auditing subsidiaries and other business ventures straightforward. Overall, IFRS is highly crucial to the work and duties of auditors.
Prevents misstatements and manipulation
IFRS does not exist to regulate the financial reporting process only. It also takes over the overall accounting process performed within companies. Consequently, it helps companies use a standardized approach to reporting their activities. This approach can allow accountants better understand the treatment for several financial transactions. However, it can also help prevent any mistreatments in the financial statements.
Companies may suffer from mistreatments of financial transactions due to several reasons. These include intentional and unintentional issues. Usually, intentional mistreatment relates to fraud or manipulations. On the other hand, unintentional mistreatment may occur due to errors. While the latter can occur at any time, IFRS prevents the former. Since IFRS applies to all areas, it does not allow companies to misrepresent information in the financial statements.
Promotes transparency and accountability
Promoting transparency and accountability in the financial reporting cycle is one of the primary objectives of IFRS. This importance applies to all entities, including companies, small firms, nonprofits, government organizations, etc. Consequently, it minimizes the margin of error and manipulation in various areas. IFRS provides a standardized way to accounting, which offers information transparently.
On top of that, IFRS strengthens accountability for preventing the issues that come with incompetent financial reporting. Some companies may also face penalties and other complications if they don’t use the IFRS. Consequently, it also improves the reliance put over the financial statements prepared. Transparency and accountability also help present a true and fair view of a company’s operations.
Conclusion
Companies use accounting standards within their accounting systems. Usually, they apply IFRS and GAAP. While the former has a global presence, the latter is only prevalent in the US. IFRS come from the IFRS Foundation and IASB. These standards are of high significance for companies and investors. Some of the reasons why IFRS is important include the ones listed above.
