Definition of International Financial Reporting Standards (IFRS): A widely used set of accounting and financial reporting rules which are applied by most public companies in the creation of their financial statements.
What led to the creation of IFRS?
International Financial Reporting Standards (IFRS) came into being under a different name in the 1970s.
Up until this point, accounting standards had been set by local regulators or accounting bodies. Because companies would apply the generally accepted accounting standards of their local country, this would hinder comparisons at an international level.
This was particularly bothersome when shareholders and analysts needed to compare the financial statements of large publicly listed companies against their international competitors.
Without a single set of accounting rules, figures such as income, cost of goods sold and gross profit could differ widely based upon the policies applied by the company.
A like-for-like comparison of balance sheets was very difficult.
How is the phrase IFRS used in a sentence?
“The deferred consideration was recognised at fair value, in accordance with IFRS.”
“IFRS rules have been applied in restating the equity of foreign subsidiaries.”
“Due to the application of the new IFRS standard, gross profit and gross margin have both increased.”
What else you should know about International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) are confusingly named.
Initially it appears that the standards are arranged into neat topics which are numbered like the following:
- IFRS 9 – Financial Instruments
- IFRS 16 – Leases
However, some standards use the ‘IAS’ prefix rather than IFRS, such as IAS 16 – Property, plant and equipment.
Other guidance is contained under names like IFRIC 23 — Uncertainty over Income Tax Treatments.
What’s more, the numbering is not sequential, therefore it is difficult to check the completeness of any list of standards without using an external guide such as this one.
To study IFRS in great detail, I recommend you buy a financial accounting textbook. These guides are usually structured in a way that sees each chapter cover a different IFRS standard in turn.
How does the definition of IFRS relate to investing?
The existence of International Financial Reporting Standards (IFRS) means that you can place reliance on a companies accounting policies being consistent over time.
This increases the confidence we can have in the analysis we perform on revenue trends, dividend growth, debt:equity ratio analyses and much more.
Virtually all ratios and quantitative assessments rely upon at least one figure taken from the financial statements, therefore it’s helpful to know that these are like-for-like.