# Understanding IFRS: Global Accounting Standards Explained

## What Are International Financial Reporting Standards (IFRS)?

International Financial Reporting Standards (IFRS) are globally recognized accounting principles designed to ensure consistency, transparency, and comparability in financial reporting across 168 jurisdictions, including all European Union nations. Although the United States follows the [generally accepted accounting principles](https://www.investopedia.com/terms/g/gaap.asp) (GAAP), IFRS remains the most widely adopted accounting standard worldwide.

The International Accounting Standards Board (IASB) issues IFRS to enhance financial statement clarity and foster investor confidence. Notably, IFRS replaced the older [International Accounting Standards](https://www.investopedia.com/terms/i/ias.asp) (IAS) in 2001, continuing to shape financial practices globally.  

### Key Takeaways

*   Global Standard: International Financial Reporting Standards (IFRS) are global accounting rules used by public companies across 168 jurisdictions, providing consistency and transparency in financial reporting.
*   IFRS vs. GAAP: IFRS and GAAP are two main financial reporting frameworks, with IFRS offering a more flexible, principles-based approach compared to the more rules-based GAAP used primarily in the U.S.
*   Investor Confidence: By fostering transparency and comparability, IFRS enhances investor confidence and facilitates "apples to apples" comparisons of financial statements between companies worldwide.
*   Evolving Standards: While the U.S. continues to use GAAP, the Securities and Exchange Commission (SEC) is evaluating the integration of IFRS principles into U.S. financial reporting.
*   Historical Context: Emerging from the European Union, IFRS has become the most widely adopted set of accounting standards, although key economies like the U.S. and China adopt their frameworks.

![International Financial Reporting Standards (IFRS)](https://www.investopedia.com/thmb/gbRJ6pvsEI6d5gkBdaxAJ8JDfP8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/IFRS_Final_4194858-00f3f3a4c8334cc1aa13b29e692935db.jpg)

*— Investopedia / Paige McLaughlin*

## In-Depth Overview of IFRS

IFRS details how companies must keep records and report expenses and income. It aims to create a global accounting language understood by investors, auditors, and regulators.    

The standards are designed to bring consistency to accounting language, practices, and statements, and to help businesses and investors make educated [financial analyses](https://www.investopedia.com/terms/f/financial-analysis.asp) and decisions.

They were developed by the International Accounting Standards Board, which is part of the not-for-profit, London-based IFRS Foundation. The Foundation says it sets the standards to “bring transparency, accountability, and efficiency to financial markets around the world."

## Comparing IFRS and GAAP: Key Differences Explained

U.S. public companies must use generally accepted accounting principles (GAAP), a rival system. The GAAP standards were developed by the Financial Standards Accounting Board (FSAB) and the Governmental Accounting Standards Board (GASB).

The [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC) has said it won't switch to International Financial Reporting Standards but will continue reviewing a proposal to allow IFRS information to supplement U.S. financial filings.

[IFRS and GAAP reporting](https://www.investopedia.com/ask/answers/09/ifrs-gaap.asp) differ in several ways. For example, IFRS is not as strict in defining revenue and allows companies to report revenue sooner. An IFRS balance sheet might show higher revenue than a GAAP balance sheet.    

IFRS has different expense reporting requirements.  For example, if a company is spending money on development or on investment for the future, it doesn't necessarily have to be reported as an expense. It can be capitalized instead.  

## Essential IFRS Reporting Requirements

IFRS covers various accounting activities. There are certain aspects of business practice for which IFRS set mandatory rules.

*   **Statement of financial position**: This is the [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp). IFRS influences the ways in which the components of a balance sheet are reported.
*   **Statement of comprehensive income**: This can take the form of one statement or be separated into a [profit and loss statement](https://www.investopedia.com/terms/p/plstatement.asp) and a statement of other income, including property and equipment.
*   **Statement of changes in equity:** Also known as a statement of retained earnings, this documents the company's change in earnings or profit for the given financial period.
*   **Statement of cash flows**: This report summarizes the company's financial transactions in the given period, separating cash flow into operations, investing, and financing.

Besides basic reports, a company must summarize its accounting policies. The full report is often seen side by side with the previous report to show the changes in profit and loss.

A parent company must create separate account reports for each of its subsidiary companies.  

> **Fast Fact**
>
> Chinese companies do not use IFRS or GAAP. They use Chinese Accounting Standards for Business Enterprises (ASBEs).

## The Evolution and History of IFRS

IFRS began in the European Union to make business accounts accessible across the continent. It was quickly adopted as a common accounting language.

Although the U.S. and some other countries don’t use IFRS, 168 jurisdictions do, making it the most-used global standard.

## Who Uses IFRS?

IFRS is required to be used by public companies based in 168 jurisdictions, including all of the nations in the European Union as well as Canada, India, Russia, South Korea, South Africa, and Chile. The U.S. and China each have their own systems.  

## What's the Difference Between IFRS and GAAP?

The two systems have the same goal: clarity and honesty in financial reporting by publicly-traded companies. IFRS was designed as a standards-based approach that could be used internationally. GAAP is a rules-based system used primarily in the U.S.

Although most of the world uses IFRS standards, it is still not part of the U.S. financial accounting world. The SEC continues to review switching to the IFRS but has yet to do so.

Several methodological differences exist between the two systems. For instance, GAAP allows a company to use either of two inventory cost methods: First in, First out (FIFO) or Last in, First out (LIFO). LIFO, however, is [banned under IFRS](https://www.investopedia.com/articles/investing/042115/why-last-first-out-banned-under-ifrs.asp).

## Why Is IFRS Important in Global Finance?

IFRS fosters transparency and trust in the global financial markets and the companies that list their shares on them. If such standards did not exist, investors would be more reluctant to believe the financial statements and other information presented to them by companies. Without that trust, we might see fewer transactions and a less robust economy.

IFRS also helps investors analyze companies by making it easier to perform “apples to apples” comparisons between one company and another, and for [fundamental analysis](https://www.investopedia.com/terms/f/fundamentalanalysis.asp) of a company's performance.

## The Bottom Line

The International Financial Reporting Standards (IFRS) are accounting rules for public companies with the goal of making company financial statements consistent, transparent, and easily comparable around the world. This helps with auditing, tax purposes, and investing.

> **Article Sources**
>
> 1.  International Financial Reporting Standards. "[Who Uses IFRS Standards?](https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#use-of-ifrs-standards-by-jurisdiction)"
>     
> 2.  Financial Accounting Standards Board. "[Comparability in International Accounting Standards - A Brief History](https://www.fasb.org/page/PageContent?pageId=/international/briefhistory.html&bcpath=ff&isStaticPage=true)."
>     
> 3.  International Financial Reporting Standards. "[Who We Are](https://www.ifrs.org/about-us/who-we-are/)."
>     
> 4.  U.S. Securities and Exchange Commission. "[Working Together to Advance High Quality Information in the Capital Markets](https://www.sec.gov/news/speech/keynote-address-2016-aicpa-conference-working-together.html)."
>     
> 5.  International Financial Reporting Standards. "[IAS 1 Presentation of Financial Statements](https://www.ifrs.org/issued-standards/list-of-standards/ias-1-presentation-of-financial-statements/)."
>     
> 6.  International Financial Reporting Standards. "[IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors](https://www.ifrs.org/issued-standards/list-of-standards/ias-8-accounting-policies-changes-in-accounting-estimates-and-errors/)."
>     
> 7.  China Briefing. "[Chinese Accounting Standards for Business Practices: Prepare for Changes in 2021](https://www.china-briefing.com/news/chinese-accounting-standards-business-enterprises-prepare-changes-2021/)."