An International Financial Reporting Standard (IFRS) is an accounting standard set by the International Accounting Standards Board. IFRS has replaced the older term International Accounting Standard (IAS).
IFRSs are compulsory for listed companies in the EU, and most national accounting standards globally are also converging on IFRSs.
IFRSs have been adopted by many other national accounting standards bodies. In the US, the Financial Accounting Standards Board is working towards converging US GAAP with IFRSs. Japanese accounting standards have been extensively revised to bring them into line with IFRSs. In the rest of the world IFRSs are either being incorporated into national standards or national standards are being gradually converged with IFRSs.
The advantages to investors is clear. IFRSs make it easier to compare the accounts of companies in different countries. They also incorporate many improvements on most current standards. As things stand, the problem of differences in accounting standards will continue to exist for some time.
However, IFRSs do not completely eliminate national differences. In the EU an IFRS only applies after it has been through an approval process and most other countries have similar procedures. There may also be differences in interpretation of IFRSs by national standards bodies, and by national standards that fill in gaps in IFRSs (e.g. valuations of particular types of asset).
US standards will take some years to fully converge with IFRSs and some other countries will take even longer. IFRSs currently allow a number of choices (alternative standards) that will need to be gradually eliminated to provide true uniformity.
Major changes in the UK that resulted from the adoption of IFRSs include:
- the treatment of goodwill
- the value of options issued as remuneration being shown as a cost on the face of the P & L
- the use of fair value rather than book value for assets acquired in a takeover
- valuation of embedded options.