There are two major accounting standards being used by corporations. General Accepted Accounting Principles (GAAP) which is rule based and accepted only in the United States. And, International Financial Reporting Standards (IFRS) which is principle based and is accepted globally. The determination on which standard to use is made by whether or not the company conducts business locally or internationally. Global companies may option to follow IFRS which is managed by International Accounting Standards Board (IASB) and is framework for more than 120 countries oversees.
What is 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 worldwide. IFRS focuses on general principles of accounting and provides guidance on reporting financial results and position. In addition to transparency, accountability, and efficiency that is gained under IFRS guidance, the uniformity in the financial reporting makes easier to compare financial results.
Who uses International Financial Reporting Standards?
IFRS is being adopted around the world specifically by international companies. The standard currently has been accepted by approximately 90 countries and 120 nations, which includes Europe who requires domestic companies to follow IFRS. By adopting the global accounting standards, it makes easier for international corporations to compete globally against local companies in respected countries, raise capital from international investors, and provide financial details to stakeholders who could be spread around the globe.
Why is International Financial Reporting Standards preferred over other Standards?
As global companies take time and fully compresence IFRS, they discover the standards is more lenient than others. Under IFRS, companies are not required to provide as much detail when it comes to revenue or expenses, as for example under GAAP. Which safes time for executives and their subordinates in preparing appropriate schedules. In addition, only one inventory method is permitted under IFRS, First-in First-out (FIFO), and there is only one step method for write downs.
Benefits of International Financial Reporting Standards
There are advantages and disadvantages using both standards. However, under IFRS the advantages out way drawbacks. For example, as was mentioned earlier, IFRS is focused on the general principle, providing guidance rather than specific rule(s). GAAP allows companies have an option between two valuation methods for inventory Last-in- First-out (LIFO) or First in First out (FIFO). Under IFRS, only FIFO methodology is accepted; in addition, one of the biggest difference is the reversal of inventory is allowed by IFRS but using GAAP. Additionally, IFRS allows capitalization of development costs versus expensing it the year it occurred.
The Future of International Financial Reporting Standards
As more and more companies conduct business internationally and greater amount of international investors’ immerge companies are turning to IFRS to be more attractive. With the growth of international investors and companies, the Security and Exchange Commission (SEC) is considering of adopting IFRS as the main standard in the United States to be unified with international companies who have already filed using IFRS with the SEC.