The International Financial Reporting Standards

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Meaning of IFRS

International Financial Reporting Standards (IFRS) constitutes the standards, interpretations and accounting framework accepted by the International Accounting Standards Board (IASB). Most of these standards formed the International Financial Reporting Standards (IFRS). The International Financial Reporting Standards were previously known as International Accounting Standards (IAS). These standards were reached between 1973 and 2001 by the International Accounting Standards Committee (IASC). The International Standard Accounting Board took the Standards of the International Standard Board (ISB) and developed them further and called them International Financial Reporting Standards (IFRS) (Camfferman, Zeff, 2007).

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International Financial Reporting Standards were developed to provide the framework of financial accounting principles. IFRS was developed with an objective of providing information regarding the financial position and performance of a business entity, and of any financial change regarding a business that operates in large scale and serves a large market, regarding its economic decision making and providing its financial status to the general public. The International Financial Reporting Standards were developed under assumptions that the effects of any transaction should be recognized as they occur and not when money is paid, and that the financial statement of any business should be prepared with a view that the business will continue operating forever i.e. going concern. The framework intended to develop qualitative financial statement based on relevance, understandability, reliability and comparability of all financial accounting methods in the world (Camfferman, Zeff, 2007).

The framework outlined the essential elements of financial statement to include the assets, the liabilities, revenue and the expenses.

The structure of IFRS consists of a balance sheet, income statement, statements involving changes in equity, a cash flow statement and a summary of major accounting policies. It also requires ac comparative information to be availed from the previous accounting period. A company that is preparing its accounting records for the first time under IFRS rules must meet all the rule requirements for the current and previous accounting periods with only few exemptions where necessary. A company applying IFRS rules must present a comprehensive income statement and present a balance sheet as at the starting of the comparative period comprising a complete set of financial statement while applying for an accounting. IFRS further also requires that for a company that has subsidiary companies, the main branch must prepare consolidated financial statements of the whole company. It further stated that any business combination is accounted by applying the purchase method whereby one company is taken as the acquirer. The acquirer must determine the fair value of the assets and liabilities of the acquired company and also consider intangible assets such as customer relationships. The IFRS accounting rules further requires that property, plant and equipment be measured initially at cost. This cost may include production and construction costs or direct borrowing costs associated with the acquisition. Property, plant and equipment can be revalued in the same manner other such assets are valued. Depreciation on such assets should be charged to reduce the value of the asset to the recoverable amount during its useful life (Camfferman, Zeff, 2007).

Meaning of IASC

International Accounting Standard Committee is an organization that was formed in 1973 by accounting bodies of 140 countries. It was developed with an aim of promoting the use of International Accounted Standards. International Accounting Standards Committee (ISAC) is a group that is made up of leading accounting firms in the United States, England, West Germany, France Canada, Japan, and other countries. This committee recommends the use of internationally accepted accounting standards. It also prepares discussion papers, drafts and formal statements on international accounting issues. It assists in comparing of financial reports among member countries. This committee was made in June 1973 in London. It was then replaced by the International Accounting Standards Board (IASB) on 2001 which was constituted to develop the International Accounting Standards and to see to it that these standards are applied. The committee came to be as a result of an agreement between leading accounting bodies in the following countries: Australia, Canada, France, Germany, Japan, Mexico, The Netherlands, The United Kingdom and the United States of America (The Norwalk Agreement).

Convergence of GAAP with IFRS

The convergence of Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards started in 2002 in Connecticut. The International Accounting Standard Board (IASB) and the United States Financial Standard Accounting Board (FASB) agreed to resolve their accounting principles difference between the GAAP and IFRS. They reached an agreement (the Norwalk Agreement) in 2006. They both signed a Memorandum of Understanding regarding all the accounting topics in which they had differences and in which they would like to achieve convergence by the year 2008. The agreement required that all United States companies registered under United States Securities and Exchange Commission prepare and present financial statements prepared using the United States GAAP regulations until 2007. (The Norwalk Agreement).

Foreign private companies were supposed to prepare financial statements either following US GAAP rules or using the recommended accounting principles of IFRS and provide a footnote reconciling IFRS to US GAAP. This was up to 2007. Starting 2008, foreign private companies were allowed to prepare and present financial statements following IFRS without reconciling them to US GAAP. The Securities Exchange Commission (SEC) by 2008 pledged to allow some companies to start preparing their financial statements under IFRS rules by 2010 and allow all companies by2014.The convergence of the United States Generally Accepted Accounting Principles (GAAP) into the International Financial Reporting Standards was initiated by the Securities and Exchange Commission (SEC) in 2008 to make the accounting systems in United States follow international standards. This move will make the biggest changes ever in the United States accounting rules affecting companies in the United States. Once effected, it will replace the American Accounting authority which is the Financial Accounting Standards Board (FASB). This board will be incorporated under the International Accounting Standards Board (IASB) a body that spearheads the use of London based International financial Reporting Standards. For this to be effective there has been a continued effort by the two accounting bodies to harmonize their accounting principles to accommodate most of the views. (Process of Prescribing Accounting Standards).

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Abandoning of Generally Accepted Accounting Principles and adopting International Financial Reporting Standards which are universal accounting principles will increase the liquidity of capital markets while still reducing the cost of borrowing capital. This will in effect provide good information to prospective investors on performance and financial strength of various industries across the world. The new standards are adopted to help improve the standards of financial reporting and to aid in comparing reporting practices of business ventures around the world (Epstein, Keith, 2008).

Countries that have signed the proposal

This proposal to have common international accounting principles through the formation of International Financial Reporting Standards (IFRS) was started by few countries with an aim of harmonizing their accounting practices and developing international accounting rules and regulations to be followed by all private and public companies in their countries. The countries that have signed to this accord include;

  • Australia- through the Australian Accounting Standards Board (AASB) this country has issued accounting rules similar to IFRS accounting rules. These rules have so far replaced the Australian generally accepted accounting principles since January 2005.
  • Canada- the Canadian accounting board is in the process of revising its accounting principles to match the standards of the IFRS. By 2011 the Canadian public and private companies will be using IFRS standards.
  • Europe- the European Union listed companies adopted the IFRS standards in 2005.
  • Russia- Since 1998, the Russian government has been developing accounting programs that will harmonize its accounting principles with those of the IFRS.
  • Turkey- Since 2006, all listed Turkish companies have been using IFRS standards.
  • Hong Kong- This country adopted IFRS in 2005. The Hong Kong Financial Reporting Standards were harmonized with IFRS in 2005.
  • Singapore- in Singapore, the Accounting Standards Committee sets the accounting Standards in accordance with the IFRS. However some changes are made although in consultation with the international accounting standard board.
  • United States- United States has subscribed to the IFRS rules although it has not yet adopted the IFRS principles. The US Financial Accounting Standards Board in 2006 agreed to harmonize the differences between IFRS and its Generally Accepted Accounting Principles. All United States companies will be required to use IFRS by 2014.
  • India- By 2011, the Indian accounting body, the Institute of Chartered Accountants of India will require all companies to use IFRS.
  • Japan- by 2012, the Japan Accounting Standard Board will have fully adopted IFRS and hence all companies will use these rules.

Later on other countries joined in. These countries are Mexico, the Netherlands, the United Kingdom and Ireland. Other countries joined in as associate members through their accounting bodies. They include: Nigeria, South Africa, Italy, The republic of China, East Asia, Pakistan, Sri Lanka, Malaysia, New Zealand, Denmark, Jordan, and Korea (The Norwalk Agreement).

Specific differences between IFRS and GAAP

International Financial Reporting standards (IFRS) was as a result of various countries quest of harmonizing their accounting systems to come up with a universally accepted accounting system which was to be adopted worldwide, while Generally Accepted Accounting Principles (GAAP) only served the interest of United States accounting systems only. The United States GAAP principles have been incorporated by IFRS and therefore they constitute part of IFRS principles. However there exist differences between IFRS and GAAP regarding the formula to be used in calculating assets impairment. The GAAP uses two steps in its methods to recover asset impairment. The first step calls for the concerned company to approximate its future undiscounted cash flow anticipated from the use of that asset to determine its impairment. Step two involves the determination of the loss by subtracting its fair value from the carrying amount of the asset. The IFRS uses one step approach method whereby, the impairment loss is calculated by use of impairment indicators. The method does not require the net undiscounted future cash flows and comparison to asset carrying value. The second great difference between the two accounting systems is on how they handle impairment loss restoration. With GAAP, the deducted carrying value of an asset after the impairment loss becomes its new cost. IFRS states that all durable assets should be reviewed every year for reversal indicators. The loss should be taken to the new estimated recoverable value which should not exceed the initial value adjusted for loss in value (Camfferman, Zeff, 2007).

Russian accounting system and the GAAP

The Russian government is in the process of preparing a program aimed at harmonizing its national accounting standards with International Financial Reporting Standards. Since 1998, the Russian ministry of finance issued twenty new accounting standards in a move to try and harmonize their accounting standards with those of the International financial Reporting Standards. Similarly the United States accounting system, the Generally Accepted Accounting Principles is not fully harmonized with IFRS. The united States like the Russian Federation is in the process of harmonizing its accounting principles with those of IFRS. However there are differences between the accounting systems of these two countries and how they are administered. The Russian accounting rules are regulated by documents such as the Regulation of accounting and book keeping in Russian Federation and the Chart of accounts for the accounting of financial activity of business, and instruction for its use. Like GAAP in United States, these two documents regulate the accounting systems of all legal business entities in Russia as provided by the Russian federation law and hence they act as accounting standards. In United States, accounting procedures are regulated by a certain standardized accounting framework known as Generally Accepted Accounting Principles (GAAP) (Epstein, Keith, 2008).

This framework provides standard guidelines and rules to be followed while preparing accounting and financial statements for both public and private companies in the United States. It dictates the rules, principles and standards that accountants should follow in recording business transactions. These rules and principles are formulated by the Government Accounting Standards Board (GASB). The Government accounting standard board is made up of three bodies which are the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission. These bodies are responsible to offer guidance to accountants regarding acceptable standards to carry out accounting practices. Following the Generally Accepted Accounting Principles, a company’s financial statement reflects its financial position and hence promotes confidence in potential investors, creditors and stockholders of a company’s ability to meet its liabilities. It also facilitates routine auditing by certified public accountants of a company’s compliance with GAAP (Epstein, Keith, 2008).

In Russia; three types of accounting methods are used. These are: operational accounting used for current managerial purposes, statistical accounting and accounting verification. The accounting system in Russia is different from accounting systems in the US. Under GAAP the US do not directly put accounting standards since it considers the private sector to have a good accounting knowledge than the public sector. This is unlike in Russia where most of the Russian the law stipulates the accounting system (Epstein, Keith, 2008).

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Work cited

  1. Process of Prescribing Accounting Standards.
  2. Epstein, Keith, 2008 An SEC Timetable for Global Accounting Rules.
  3. Camfferman, Zeff, 2007, Financial Reporting and Global Capital Markets. A History of the IASC, Oxford University Press 2007.
  4. Financial Accounting Standards Board and International Accounting Standards Board (2002). Memorandum of Understanding, “The Norwalk Agreement”.. Retrieved 25, 4, 2009.

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BusinessEssay. 2022. "The International Financial Reporting Standards." February 10, 2022. https://business-essay.com/the-international-financial-reporting-standards-research-paper/.

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