What is International Financial Reporting Standards

International Financial Reporting Standards are accounting rules and principles developed and promoted worldwide by the International Accounting Standards Board. Accounting systems reflect the legislative environments in which they have developed. Consequently, how companies report their financial statements can differ across countries. Faced with such differences, the national accountancy bodies of the world’s leading economies in 1973 founded the International Accounting Standards Committee (IASC) to develop and promote internationally recognized financial reporting standards. These standards, the IASC believed, would provide investors and financial analysts with internationally comparable and transparent financial information and enable them to make better economic decisions.
By 2001 the IASC had developed and promoted 41 International Accounting Standards (IAS), providing principles on various accounting topics including the presentation of financial statements (IAS 1), the initial recognition and accounting of property, plant, and equipment (IAS 16), the disclosure of employee benefits (IAS 19), and the reporting of intangible assets (IAS 38).
In April 2001 the IASC was replaced by the International Accounting Standards Board (IASB), which amended some IASs and proposed new International Financial Reporting Standards (IFRSs) on topics for which no IAS standards had previously existed. In 2008, there were eight IFRSs establishing rules for the first-time adoption of IFRS standards (IFRS 1), shared-based payments (IFRS 2), business combinations (IFRS 3), insurance contracts (IFRS 4), non-current assets held for sale (IFRS 5), evaluation of mineral resources (IFRS 6), disclosures of financial instruments (IFRS 7), and operating segments (IFRS 8). That same year, nearly 100 countries required, permitted the use of, or had a policy of convergence with IFRSs.
IFRSs have been promoted by a number of different actors. For example, as cross-border financing has grown, multinational enterprises (MNEs) have increasingly used IFRSs to produce comparable and credible financial statements to access international capital markets. In addition, the increased number of nondomestic firms listed on national stock exchanges has been accompanied by an increased number of stock markets that accept financial statements prepared under international standards. In 2008 capital markets in over 50 countries accepted companies who reported their financial statements using IFRSs.
Companies based in developing countries have also driven the application of international financial reporting standards. Eastern European companies, for example, have significantly enhanced their credibility by drawing up their financial statements in accordance with IFRS. The use and stature of IFRS has also benefited from endorsements from political decision makers. For example, the decision by the European Union (EU) requiring all EU-listed companies to prepare their consolidated accounts using IFRSs beginning in 2005 represented a major milestone for the IASB.
Despite the increased use of IFRSs around the world, convergence between IFRS and country-specific accounting principles remains to be fully achieved. The United States, for example, does not plan to implement IFRSs until 2011. Studies have shown that different types of obstacles have impeded the use of IFRSs. Financial costs are one such obstacle because companies consider the transition to IFRSs to be a costly, complex, and burdensome process requiring, for example, investments to update IT systems so that they can handle IFRS financial statements. Another obstacle is patriotism. Some countries, such as France, are attached to their accounting systems and reluctant to abandon them for ones considered to be inferior. Former colonies of imperial powers can also be sensitive to external intrusions. This helps explain why India and Pakistan currently prohibit companies from using IFRS standards.
Culture presents a further barrier to the use of international accounting standards. For example, French accounting principles have historically stressed conservatism and prudence, as shown, for example, by the requirement that companies report their assets at historical cost. This attachment to conservatism can help explain why French accounting companies, banks, and insurers were concerned about problems of earnings volatility and resisted the introduction under IFRSs of fair-value accounting (whereby annual changes in the value of assets are reported in the income statement). It remains to be seen whether the IASB can overcome these obstacles and further increase the use of IFRS standards.