World economies depend heavily on cross-border transactions, with over half of the financial transactions occurring transborder. Investors look for companies to invest worldwide while corporations raise funds, actively participate in global transactions, and expand business globally.
Transactions across the border were complicated owing to different countries following distinctly different accounting standards. This often increases costs and adds complexity and risks to companies preparing and using those financial records. Application of nation-based accounting standards can mean that amounts reflected on financial statements are calculated differently. A small difference while tallying the accounts can have a major impact on a company's financials and eventually put foreign investors in financial jeopardy.
IFRS takes on this challenge head-on by bridging the gap between traditional systems and introducing internationally recognised standards that bring transparency, consistency, and efficiency to global markets.
If you are an aspiring accounting professional seeking global employment opportunities, enrolling in ACCA online courses can help you gain extensive knowledge on IFRS and other accounting concepts.
Introduction to IFRS
International Financial Reporting Standards (IFRS) are a set of rules and guidelines drafted by the London-based Accounting Standard Board (LASB) to bring transparency, consistency, and comparability to financial markets worldwide. IFRS specifies how corporations should maintain their records and establish a common accounting language. The United States is one of the nations that has yet to comply with IFRS. It complies with Generally Accepted Accounting Principles (GAAP).
IFRS have been established as a universally accepted set of rules and regulations that decide how corporations communicate their financial information. This blog will cover the multifaceted approach towards IFRS and its potential advantages while exploring the career paths and their impact on financial statements.
Importance of International Financial Reporting Standards
With businesses looking for global expansion more than ever before, adhering to IFRS remains of utmost importance. Here’s why IFRS is important:
1. Uniform and comprehensive
International Financial Reporting Standards were developed to set uniformity in place. It develops an easy understanding of finance statements and presentations. When everyone adheres to a common law, it helps world economies to compare growth. Also, the readability of financial statements becomes easier.
2. Security and flow
It helps track the flow of information and work towards attaining a specific security level for foreign investments across nations. This accounting standard is essential when getting into heavy transactions.
3. Risk evaluation
The investors assign a premium if financial statements are not prepared in terms of international standards. IFRS eliminates hurdles for cross-border listings, benefiting investors significantly. For years, risk management was focused on the future, and accounting management was essential for running the company. However, with evolving times, risk management has become an essential aspect of securing a business’s present state as well.
The main advantage of complying with IFRS is that it's one of the most fair accounting systems globally. If more and more business entities become IFRS compliant, foreign investors would be at ease and find such destinations lucrative.
Features of IFRS
To establish a successful career in fintech, thorough knowledge of the IFRS features is essential. Listed below are some of the features of IFRS:
1. Principle-Based Approach
The advantage of the principle-based approach lies in the flexibility of its broad guidelines. Precise procedures can sometimes lead to managers manipulating the statements. The business entities have the freedom to use their discretion/judgment with the overall framework.
2. Fair-Value Accounting
International Financial Reporting Standards encourage fair value accounting. Proper value accounting is the amount an asset could be sold for a price that is fair to both buyer and seller. Fair value accounting was introduced by the Financial Accounting Standards Board (FASB) to streamline the calculation of financial instruments.
3. Comprehensive Income
Comprehensive income represents the combined net income of a company and revenue the corporation didn't include on the balance sheet. Companies list this commodity after net income as it assists accountants in predicting the company's future. It provides complete transparency in displaying the revenue expenses, losses, and gains.
Consolidation refers to combining assets, liabilities, and other financial entities into one. Consolidation also means the merger of smaller companies into larger ones through acquisitions. This is in stark contrast to traditional GAAP standards.
Objectives of IFRS
The goals IFRS aims to achieve are listed below:
- Reliability: Financial statements that are provided are complete and unbiased. It indicates the importance of being widely used by businesses to represent their financial entities.
- Relevance: Information derived using IFRS is relevant and works in favour of making good decisions and comparability across geographical lines.
- Framework: A conceptual tool to develop standards according to a particular framework. Many corporations incorporate this framework while drafting economic policies.
- Timelines: The IFRS framework is not time-consuming. It assesses potential loss and analyses gains that can prove beneficial for investors and other stakeholders in the company. The time-saving component fosters growth for business entities.
- Identifying potential opportunities and averting threats: IFRS helps businesses identify potential opportunities. It issues financial statements that are easy to comprehend, thus helping spot potential risks and mitigating those risk factors in time. This contributes to economic efficiency as well as capital allocation.
- Access to foreign capital in terms of investment: IFRS is adopted by developed countries like Japan, Canada, and adjoining countries in the European Union. So, when financial statements are prepared following the same uniform standards, domestic players can easily access foreign capital and investment.
- Decision-making: It helps stakeholders assess the company's position and financial stand. Categorising and reporting financial data accurately and consistently promotes better comprehension and decision-making.
Benefits of IFRS
Here’s how IFRS can benefit businesses:
- Transparency: IFRS clarifies the quality of financial information by disclosing several requirements that enable investors and shareholders to make informed economic decisions. It decreases the margin of error and any irregularities in funds, transactions, and balances.
- Accountability: IFRS enhances accountability by bridging the information gap between investors and people with whom they have invested money. The standards bring about information that holds the management accountable. Inconsistent financial reporting is penalised.
- Consistency: IFRS enables companies in different countries to communicate with each other using the same accounting standards. This makes it easy for stakeholders and investors to analyse a corporation's finances on a global scale.
- Efficiency: IFRS assists investors in identifying potential opportunities and risks worldwide. The use of uniform accounting language cuts international reporting costs.
- Improves credibility: Maintaining transparency and consistency in financial reporting enhances a corporation's credibility from the perspective of investors and stakeholders.
- Accessibility: Corporations that have adapted to IFRS standards have an edge in accessing international markets. Companies complying with this standard attract investors worldwide and achieve a higher valuation.
- Flexibility: International Finance Reporting Standards make use of a uniform principle-based framework. This framework develops statements that are easier to understand.
- Corporate governance: Incorporating IFRS while presenting financial statements by developing countries leads to implementing robust internal controls, which in turn can improve corporate governance in these countries. This improves management practices like risk management.
- Economic stability: Improves the accuracy of financial reporting, which makes it simpler for policymakers to recognise and eradicate economic risks, leading to greater stability.
IFRS is growing in popularity and is slowly replacing national standards. These comprehensive standards include balance sheets, cash flow statements, income statements, and notes to financial statements.
It gives the organisation's financial status at the end of the financial year. A balance sheet gives a historical record of the company's financial position through the years. By equating balance sheets from different periods, corporations can keep track of changes in their financial position and lay down concrete plans for the future. It comprises three constituents.
- Liabilities: Incurring costs in the future, mainly generated from current obligations. Simply put, it is money a company owes to third parties and capital required to rent an office space. Current liabilities are short-term debts due within a year, and long-term liabilities are due in the future.
- Assets: Accounts within this row are listed with the ease with which they can be converted into a monetary resource. Assets are a corporation's chief financial component.
- Equity: Money attributed to the business owners and shareholders. It is equivalent to total assets minus all types of liabilities and debt.
Cash Flow Statement
A cash flow statement comprehensively reports the company's cash flow (inflows & outflows) during the accounting period. Cash flow is calculated by direct and indirect method. A CFS outlines a corporation's cash management. The statement shows the ability of any company to generate cash and provides insightful information on the liquidity and solvency position of an entity.
Cash flow has a three-part structure.
- Operating Activities: Cash generated by the goods and services rendered by the company, including the income and expenses.
- Investing Activities: Cash flow from purchasing physical and non-physical property. Any sources of cash from the company's investments.
- Financing Activities: Sources of cash from banks and investors and detailed cash flow from debt and seed funding.
An income statement demonstrates a company's performance in a given financial year. A comprehensive income statement provides valuable insights into the company's top-performing and underperforming sectors. The following are the components of the income statement.
- Operating Revenue: Revenue derived from the product's sale or the cash influx from primary income-generating activities.
- Non-operating Revenue: Not all income is generated from the primary revenue source; they can also be from varied sources like settlement of lawsuits, placement of billboard ads, royalty payment, etc.
- Gains: Net amount generated from the sale of long-term assets. These include cumulative amounts from property sales, unused land, and other miscellaneous sources.
- EBITDA: Earnings before taxes, interest, taxes, depreciation, and amortisation (EBITDA). EBITDA comes into the picture when gauging the company's profitability and determining the company's value during acquisition.
- Losses: Decrease in the equity due to any peripheral transitions.
Notes to the Financial Statements
Financial statements provide more clarity to the transactions reported in the income statement, cash flow statement, and balance sheet. Individuals reading through financial statements use them. They may include details that are excluded from the prominent figures. Footnotes heavily rely on the accounting framework. Financial statements for a company that follows IFRS standards will differ from the GAAP standards. Auditors and analysts use them for a deep understanding of a company's financial position.
Other Accounting Standards
Generally Accepted Accounting Standards (GAAP) are accounting standards put forth by the Financial Accounting Standards Board (FASB) that must be followed by US-based companies while presenting financial statements. It was formulated to improve comparability, clarity, and consistency by drafting ten accounting principles aligning with the main mission of GAAP. GAAP can be compared and contrasted with pro forma accounting.
Indian Accounting Standards
Indian Accounting Standards are issued by the Institute of Chartered Accountants of India (ICAI). These standards must be followed by practising accountants of all companies registered in India. Simplified standards are common for all companies to eliminate fraud and irregularities while presenting financial statements. Indian Accounting Standards are formulated to be equivalent to global requirements.
IGAAP, or Indian GAAP, has no framework for evaluating fair value for financial reporting. Indian GAAP has fewer disclosures and excludes inventories from such type of scope. Fair value is entity-based rather than market-based. Depreciation is considered a change in accounting policy and is treated accordingly. According to Indian GAAP, the companies should prepare individual financial statements and not consolidated statements. The drawback of this system is that it doesn't give clear instructions on first-time adoption.
Career Prospect in IFRS
IFRS is in great demand these days as most of the entities comply with IFRS standards. Accounting professionals who have completed courses like Chartered Accountancy (CA), Chartered Financial Analyst (CFA), and Company Secretary (CS) should get certified in IFRS to master global accounting standards.
- Finance professionals who are certified in IFRS enjoy a competitive advantage as they possess a better understanding of international accounting standards.
- IFRS-qualified personnel can choose to work globally in more than a hundred countries due to its wide scope.
- IFRS professionals can also be trainers in recognised institutions and the finance education sector. They can even start consulting as an advisory to corporations to help them interpret their financial statements.
- There is an increasing demand for IFRS professionals in the insurance and banking sectors since they have received a comprehensive set of guidelines to implement IFRS. This ensures that IFRS professionals have a wider selection of employment opportunities.
IFRS Specialised Courses
- Certificate course on International Financial Reporting Standards (IFRS) convergence (crossing any barrier between two accounting standards, i.e., IFRS and Indian AS) by ICWAI for institutions, accounting professionals, senior, mid-level executives working in MNCs, and other organisations.
- Certificate course on IFRS with the duration of a hundred hours for CAs by The Institute of Chartered Accountants of India (ICAI).
- An advanced certification programme is available on IFRS within a week, certified by KPMG for working professionals with 2-3 years of working experience.
- IFRS/Indian AS certification programme spanning 40 hours for students and professionals who want to complete the ACCA course.
- Diploma course in IFRS with the duration of 3-6 months by ACCA for graduates having three or more years of experience in finance and commerce and for master's degree holders having more than two years of experience in the field of finance.
International Financial Reporting Standards (IFRS) is gaining prominence due to its easy approach and multiple benefits. Many countries worldwide are adopting the framework due to the uniformity and ease of trade it offers. The demand for IFRS professionals will grow daily due to its favourable utilisation in business affairs. If you wish to learn about IFRS and other global accounting standards along with risk management and data analytics, enrolling in an ACCA course can be the best step. Professional certification like the Association of Chartered Certified Accountants, UK, offered in collaboration with Imarticus Learning, can prepare you for a successful career in accounting in more than 180 countries. The course will prepare you to ace the prestigious ACCA exam online through question banks, practice papers, MCQs, and course materials.