What is the IFRS and why does global accounting rely on it?

It is more common today for a business to go beyond its country's borders than it was a few years ago. A company may be headquartered in Australia, manufacture its goods in the Philippines, sell to customers in Europe, and be backed by investors from Gulf countries. Business owners are constantly looking to enter new markets, investors are looking out for profitable opportunities, and money easily flows from one country to another. How do business owners, investors, financial regulating bodies make sense of the financial reporting made under multiple local accounting rules?

When trade is carried out across multiple countries, money should speak a common language. Without a standardized accounting process, comparing the financial performance of two companies in two different countries will not be a like-to-like comparison. This is where the International Financial Reporting Standards (IFRS) steps in.

The IFRS is a standardized accounting framework that brings consistency and comparability to financial reporting. Accepted and followed by major countries in the world, the IFRS has become the backbone of global accounting in the 21st century. This article will explore what the IFRS is, what it does, and why is it paramount for businesses trying to go global.

What is the IFRS?

The International Financial Reporting Standards (IFRS) are a set of globally standardized accounting rules that define how companies should record and report their financial transactions such as revenue, expenses, loans, investments, and the like. In simpler terms, the IFRS creates a common format which companies in different countries can follow to report their financial statements. For example, if Company A is a shoe manufacturer in Thailand and Company B is an electrical goods manufacturer in Sweden, the IFRS ensures the financial statements of both companies are comparable so that any interested party can compare the performances of both companies on a common scale. The IFRS was issued and is maintained by the International Accounting Standards Board (IASB).

Why do we need the IFRS?

Before the IFRS was created, each country had its own set of accounting rules. This led to a series of challenges like:

• Lack of comparability - A business operating in multiple countries had to prepare financial statements as per the rules of each country they operated in. This process was cumbersome and it also resulted in overvaluation or undervaluation in certain cases.

• Investor inhibition - Without a standard framework in place, investors found it difficult to rely on financial statements to make business decisions. Credible information about companies was missing and even similar companies couldn't be compared.

• Increased costs of compliance - As companies had to prepare multiple reports as per the countries they operated in, this led to additional costs and compliance complexities.

• Inefficient decision making - Inconsistencies in financial data hinders companies' decision-making. Important decisions that aren't backed by accurate data usually lead to financial losses.

Core principles of the IFRS & key concepts

One key characteristic of the IFRS is that it is principle based. Instead of providing several pages of detailed rules, the IFRS lays out broad guidelines that companies can follow in their financial reporting.

Fair value measurement

The IFRS stresses on valuating assets and liabilities as per current market conditions. For example, if a company purchased land for £100,000 and that has appreciated to £250,000 today, the IFRS allows it to be reported at fair value.

Accrual basis of accounting

Transactions need to be recorded as and when they occur, not when cash is received. For example, if a business provided maintenance service in July and will get paid in September, as per the IFRS, the revenue needs to be recorded in July itself.

Going concern assumption

Financial statements assume that businesses will operate in the foreseeable future unless proven otherwise. For example, if a company is facing inevitable bankruptcy, the financial statements need to be prepared on a different basis with necessary disclosures clearly made.

Materiality

The presented information must aid in decision-making and be comprehensive enough to influence financial understanding.

Consistency & comparability

Companies must apply standards consistently and ensure the reports are comparable over time.

What does the IFRS cover? Key standards with examples

The IFRS consists of dozens of standards each focusing on a certain area of accounting. Listed below are some of the commonly used standards with examples.

IFRS 1 - First-time adoption of the IFRS

This provides a clear set of guidelines for companies looking to transition from local accounting rules to the IFRS. For example, a company in the US moving from GAAP to the IFRS must clearly restate lease, revenue, and financial entries to match the IFRS' rules.

IFRS 9 - Financial instruments

This sets rules for the classifying, measuring, reporting, and impairment of assets and liabilities. For example, if a business previously allowed ₹10,000 for doubtful debts but its expected credit loss calculation shows ₹18,000, it must increase the provision and reduce retained earnings by ₹8,000.

IFRS 15 - Revenue from contracts with customers 

This provides a five-step model to recognize revenue consistently across industries. For example, a company offering an annual SaaS subscription must recognize revenue monthly and not when payment is received.

IFRS 16 - Leases

This states that most leases need to be mentioned on the balance sheet as assets/liabilities to improve transparency. For example, if a company is renting an office space for $5,000 per month, they must recognize a right-of-use asset and a lease liability at the present value.

IAS 2 - Inventories

This requires inventory to be valued at the lower cost and net realizable value (NRV), and to clearly add all costs, including overheads, necessary to bring the inventory to its present condition. For example, if a business owner buys goods at AED 200 per unit but they are sold at AED 150, the inventory needs to be written down as AED 150. On the other hand, if it is sold at AED 250, the inventory stays at the original cost AED 200, which is the lower amount.

How widely is the IFRS used globally?

More than 150 countries across the globe have adopted the IFRS completely, including the EU, Canada, Australia, New Zealand, Singapore, Malaysia, Korea, and a number of others across the Middle East, Asia, Africa, and Latin America.

Some of the major countries like China, Japan, India have not fully adopted the IFRS. They either partially adopt it, follow it for certain industries, or follow a mix of their own national standards and the IFRS. The United States does not require the IFRS for domestic companies. They follow US GAAP (Generally Accepted Accounting Principles). There is no mandatory adoption of the IFRS except by some multinational entities.

Challenges with the IFRS

Despite its popularity and wide acceptance, the IFRS has its own challenges.

→ The principles are interpreted based on judgment so there are high chances that different companies interpret them differently.

→ Some of the standards are known to be complex and difficult to follow.

→ Transitioning to the IFRS from local standards can be a costly process.

→ There is a need for continuous training as the IFRS rules go through periodic changes and revisions.

However, the long-term benefits of following the IFRS generally outweigh the short-term challenges.

The IFRS is the binding force in the global business landscape. With clearly defined accounting standards, it enables local businesses to transcend national borders and reach more people. It ensures financial statements across countries remain comparable, clear, and reliable. Whether you are a business owner looking to expand internationally or an investor looking for valuable investment opportunities, the IFRS brings much needed clarity that wouldn't have existed otherwise.

For businesses adopting IFRS, having the right accounting software makes compliance far easier. Tools like Zoho Books help companies maintain accurate financial records, automate reporting, track revenue correctly, and generate compliant statements—making it simpler to align with IFRS principles as your business grows internationally.