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What Is IFRS?

Alex Newth
Alex Newth

International Financial Reporting Standards (IFRS) are rules governing business and investing. They tell business owners how to calculate profit and make financial statements, and they outline many financial definitions. IFRS rules are used in many countries worldwide, including Australia, Canada and most of Europe, but are not used in the U.S., which as of 2011 follows Generally Accepted Accounting Principles (GAAP). The IFRS technically began in 1989, when most of the standards and procedures were created, but became official in 2001.

Before becoming the International Financial Reporting Standards, the rules went by the name International Accounting Standards (IAS). These standards were created in 1989 and formed most of the framework for the IFRS. In 2001, the International Accounting Standards Board (IASB) took control of the standards, changed the name and added new standards to the list.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

IFRS rules and regulations outline how businesses should do their accounting. Most of the principles revolve around financial statements, calculating and reporting profit, and concepts of capital. Along with how to do accounting properly, these rules also standardize accounting definitions, such as revenue and asset.

Such strict standardization is necessary because of the large network of international markets. Most countries get products from other countries or send products to other countries. Investors are also able to invest in another country’s businesses if doing so is deemed profitable for the investor. This means a standardized accounting method makes it easier for these international businesses and investors to understand one another in a financial sense than would be possible if each country were reporting profit or doing accounting in its own unique way.

Many countries, including Abu Dhabi, Botswana, Spain and Zambia — use part or all of the IFRS. They may either specify the standards as mandatory for some or all businesses or simply urge companies to use the standards. The number of countries using these standards makes the IFRS one of the most popular accounting standards.

While there are many countries using these standards, the U.S. is not one of them. America uses the GAAP, which encourages different accounting methods than the IFRS. This makes international takeovers and investing more difficult for countries that do not use the GAAP, because the numbers reported using GAAP are different from other international standards. The GAAP has been mostly phased out because of the international standards, and America is one of the few countries still using it.

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