International Financial Reporting Standards

International Financial Reporting Standards (IFRS) are a globally recognised set of accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They provide a uniform method for reporting a company’s financial performance and position, enabling financial statements to be understood and compared across international boundaries. IFRS are particularly significant for companies with publicly listed securities and have replaced diverse national accounting regimes in many jurisdictions worldwide. The United States remains an exception, where US Generally Accepted Accounting Principles (US GAAP) continue to apply.

Historical Development

The development of IFRS can be traced to the establishment of the International Accounting Standards Committee (IASC) in June 1973. Formed by accounting bodies from ten countries, the IASC published International Accounting Standards (IAS), interpretations, and a conceptual framework that were widely referenced by national standard setters.
In 2001, the International Accounting Standards Board (IASB) succeeded the IASC with a mandate to promote global convergence of accounting standards. At its initial meeting, the IASB adopted existing IAS and Standing Interpretations Committee (SIC) standards, while developing new standards under the title of IFRS.
A major milestone came in 2002 when the European Union decided that from 1 January 2005 all EU-listed companies were required to apply IFRS in their consolidated financial statements. This marked the beginning of widespread global adoption. Other jurisdictions subsequently followed the EU’s lead.
In 2021, during the COP26 conference in Glasgow, the IFRS Foundation created the International Sustainability Standards Board (ISSB) to establish global sustainability reporting standards. This initiative reflected a growing focus on climate-related and wider sustainability disclosures in corporate reporting.

Global Adoption and Implementation

IFRS are now required or permitted in 132 jurisdictions across the world, including significant economies such as Australia, Brazil, Canada, India, Japan (in part), Russia, South Africa, South Korea, Singapore, and the countries of the European Union. To monitor progress towards global adoption, the IFRS Foundation maintains detailed jurisdictional profiles. As of August 2019, profiles had been completed for 166 jurisdictions, with many requiring IFRS for most listed entities.
The IFRS Foundation recommends three principal sources for current information on global adoption:

• IFRS Foundation jurisdictional profiles;
• national standard setting and regulatory bodies;
• industry and academic analyses.

Advocates of IFRS argue that worldwide adoption reduces the cost of comparing international investment opportunities and enhances the quality of information available to investors. Companies with substantial international activities particularly benefit from a single global reporting language, which can improve access to capital.
However, some scholars, including Ray J. Ball, have expressed concerns that regional differences may remain hidden behind the uniformity of the IFRS label. Criticisms include:

• possible weaknesses in enforcement mechanisms;
• variation in application across jurisdictions;
• concerns about the emphasis on fair value accounting;
• potential delays in the recognition of losses in non-common-law countries.

IFRS and US GAAP

Despite attempts to harmonise IFRS and US GAAP, the two frameworks remain distinct. The US Securities and Exchange Commission (SEC) requires domestic listed companies to report under US GAAP and does not allow them to use IFRS. US GAAP is also applied by certain companies outside the United States, including some in Japan.
The Norwalk Agreement of 2002 initiated a convergence programme between the IASB and the Financial Accounting Standards Board (FASB). Yet in 2012 the SEC confirmed that US GAAP would continue separately for the foreseeable future, though collaborative efforts to reduce differences were encouraged. One commonly cited distinction is that IFRS are often described as principles-based, whereas US GAAP is more rules-based, providing detailed instructions for specific industries and transactions.

The Conceptual Framework for Financial Reporting

The IASB’s Conceptual Framework supports the development of IFRS by providing underlying principles and definitions. Although it does not override individual standards, it guides the creation of accounting policies where no specific IFRS applies.
According to the Framework, the primary objective of financial reporting is to provide information that is useful to existing and potential investors, lenders, and other creditors. Users rely on this information to assess:

• the amount, timing, and uncertainty of future cash inflows;
• management’s stewardship of the entity’s resources.

Qualitative Characteristics of Financial Information

The fundamental qualitative characteristics are:

• Relevance;
• Faithful representation.

Enhancing characteristics include:

• Comparability;
• Verifiability;
• Timeliness;
• Understandability.

Elements of Financial Statements

The Framework identifies the following elements:

• Asset: a present economic resource controlled by the entity as a result of past events, expected to provide future economic benefits.
• Liability: a present obligation to transfer an economic resource as a result of past events.
• Equity: the residual interest in the assets of the entity after deducting liabilities.
• Income: increases in economic benefits through asset enhancements or liability reductions, excluding owner contributions.
• Expenses: decreases in economic benefits through asset reductions or liability increases, excluding distributions to owners.
• Other changes in economic resources and claims, such as contributions from holders of equity and distributions to them.

Recognition of Elements

Items are recognised when:

• it is probable that future economic benefits will flow to or from the entity;
• the item can be measured reliably.

Additional conditions may apply under specific standards. For instance:

• IAS 38 prohibits recognition of internally generated brands, publishing titles, and similar items;
• research and development costs may be recognised as intangible assets only when they meet the criteria for development expenditure;
• IAS 37 prohibits recognising provisions for contingent liabilities, though such liabilities must be recognised in business combinations under separate standards.

Concepts of Capital and Capital Maintenance

Capital maintenance concepts are vital because only income generated beyond the amount required to maintain capital is regarded as profit. Two principal concepts are described:

• Financial capital maintenance – profit arises only when the financial value of net assets at period-end exceeds their opening financial value.
• Physical capital maintenance – profit occurs only when physical productive capacity has been preserved.