International Financial Reporting Standards

International Financial Reporting Standards (IFRS) are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB).^[1] They constitute a standardised way of describing a company's financial performance and position so that company financial statements are understandable and comparable across international boundaries.^[2] They are particularly relevant for companies with publicly listed shares or securities.^[3]

IFRS have replaced many different national accounting standards around the world but have not replaced the separate accounting standards in the United States, where US GAAP is applied.^[4]

History

The International Accounting Standards Committee (IASC) was established in June 1973 by accountancy bodies representing ten countries. It devised and published International Accounting Standards (IAS), interpretations and a conceptual framework. These were looked to by many national accounting standard-setters in developing national standards.^[5]

In 2001, the International Accounting Standards Board (IASB) replaced the IASC with a remit to bring about convergence between national accounting standards through the development of global accounting standards.^[6] During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards, calling the new standards "International Financial Reporting Standards" (IFRS).^[7]

In 2002, the European Union (EU) agreed that, from 1 January 2005, International Financial Reporting Standards^[8] would apply for the consolidated accounts of EU-listed companies, bringing about the introduction of IFRS to many large entities.^[9][10][11] This integration subjects the definitive legal interpretation of the standards within the EU to the authority of the European Court of Justice (ECJ), acting in cooperation with national courts.^[12] Other countries have since followed the lead of the EU.^[13]

In 2021, on the occasion of COP26 of the United Nations Framework Convention on Climate Change in Glasgow, the IFRS Foundation announced the formation of the new International Sustainability Standards Board, ISSB.^[14]

Adoption

IFRS Standards are required or permitted in 169 jurisdictions across the world, including major countries and territories such as Australia, Brazil, Canada, Chile, the European Union, GCC countries, Hong Kong, India, Israel, Malaysia, Pakistan, Philippines, Russia, Singapore, South Africa, South Korea, Taiwan, and Turkey.^[13] Out of 169 total jurisdictions surveyed, Europe (44 jurisdictions, 26.1%) and Africa (40 jurisdictions, 23.6%) represent the largest regions for IFRS adoption, with the highest requirement rates where 43 of 44 European jurisdictions (98%) and 37 of 40 African jurisdictions (92.5%) mandate IFRS Accounting Standards for all or most domestic publicly accountable entities, followed by the Americas (37 jurisdictions, 21.9%, 73% required), Asia and Oceania (35 jurisdictions, 20.7%, 80% required), and the Middle East (13 jurisdictions, 7.7%, 92% required).^[13] The IAS regulation and successive amendments include: 25 IAS ranging from presentation of financial statements to borrowing costs and intangible assets, 18 international financial reporting standards on subjects such as business combinations and insurance contracts, 15 interpretations from the International Financial Reporting Interpretations Committee covering, among others, rights to interests from decommissioning, restoration and environmental rehabilitation funds, 5 interpretations by the Standard Interpretations Committee, including the introduction of the euro and government assistance.^[3][15]

To assess progress towards the goal of a single set of global accounting standards, the IFRS Foundation has developed and posted profiles of the use of IFRS Standards in individual jurisdictions. These are based on information from various sources, with the starting point being the responses provided by standard-setting and other relevant bodies to a survey that the IFRS Foundation conducted. As of May 2025, profiles are completed for 169 jurisdictions, with 169 jurisdictions requiring the use of IFRS Standards.^[16]

Due to the difficulty of maintaining up-to-date information in individual jurisdictions, three sources of information on current worldwide IFRS adoption are recommended:

• IFRS Foundation profiles page^[16]
• The World Bank^[17]
• International Federation of Accountants^[18]

Ray J. Ball described the expectation by the European Union and others that IFRS adoption worldwide would be beneficial to investors and other users of financial statements, by reducing the costs of comparing investment opportunities and increasing the quality of information.^[19] Companies are also expected to benefit, as investors will be more willing to provide financing. Companies that have high levels of international activities are among the group that would benefit from a switch to IFRS Standards. Companies that are involved in foreign activities and investing benefit from the switch due to the increased comparability of a set accounting standard.^[20] However, Ray J. Ball has expressed some scepticism of the overall cost of the international standard; he argues that the enforcement of the standards could be lax, and the regional differences in accounting could become obscured behind a label. He also expressed concerns about the fair value emphasis of IFRS and the influence of accountants from non-common-law regions, where losses have been recognised in a less timely manner.^[19]

US Generally Accepted Accounting Principles

See also: Convergence of accounting standards § United States

US Generally Accepted Accounting Principles, commonly called US GAAP, remains separate from IFRS. The Securities Exchange Committee (SEC) requires the use of US GAAP by domestic companies with listed securities and does not permit them to use IFRS; US GAAP is also used by some companies in Japan and the rest of the world.

In 2002 IASB and the Financial Accounting Standards Board (FASB), the body supporting US GAAP, announced a programme known as the Norwalk Agreement that aimed at eliminating differences between IFRS and US GAAP.^[21] In 2012 the SEC announced that it expected separate US GAAP to continue for the foreseeable future but sought to encourage further work to align the two standards.^[22][23]

IFRS is sometimes described as principles-based, as opposed to a rules-based approach in US GAAP; in US GAAP there is more instruction in the application of standards to specific examples and industries.^[24]

Conceptual Framework for Financial Reporting

The Conceptual Framework serves as a tool for the IASB to develop standards.^[25][26] The European Commission assessed in 2003 that endorsing (adopting as a Regulation or Directive) the Conceptual Framework was unnecessary because the main standard, IAS 1 Presentation of Financial Statements, already ensured a fair presentation.^[27] It does not override the requirements of individual IFRSs. Some companies may use the Framework as a reference for selecting their accounting policies in the absence of specific IFRS requirements.^[28]

Chapter 1: Objective of general purpose financial reporting (CF 1.1–1.25)

The Conceptual Framework states that the primary purpose of financial information is to be useful to existing and potential investors, lenders and other creditors when making decisions about providing resources to the entity [CF 1.2]. Decisions include buying, selling or holding equity and debt instruments, and exercising rights to vote on management's actions that affect the use of the entity's economic resources.^[29] Users base their expectations of returns on their assessment of:

• The amount, timing and uncertainty of future net cash inflows to the entity [CF 1.3];
• Management's stewardship of the entity's economic resources [CF 1.3].

Chapter 2: Qualitative characteristics of useful financial information (CF 2.1–2.39)

The Conceptual Framework defines the fundamental qualitative characteristics that make financial information useful to users:^[30]

• Relevance: Information is relevant if it is capable of making a difference in the decisions made by users [CF 2.6].
• Faithful representation: To be useful, information must faithfully represent the economic phenomena it purports to represent, being complete, neutral, and free from error [CF 2.12–2.13].

The Framework also describes the following enhancing qualitative characteristics [CF 2.23–2.39]:

• Comparability: Enables users to identify and understand similarities in, and differences among, items [CF 2.24].
• Verifiability: Helps assure users that information faithfully represents the economic phenomena it purports to represent [CF 2.30].
• Timeliness: Having information available to decision-makers in time to be capable of influencing their decisions [CF 2.33].
• Understandability: Classifying, characterizing and presenting information clearly and concisely [CF 2.34].

Chapter 3: Financial Statements and the Reporting Entity (CF 3.1–3.14)

Chapter 3 describes the objective and scope of financial statements and the characteristics of the reporting entity:^[31]

• Objective and scope: Financial statements provide information about assets, liabilities, equity, income, and expenses that is useful in assessing future net cash inflows and management's stewardship [CF 3.2].
• Reporting period: Financial statements provide comparative information for at least one preceding reporting period [CF 3.4].
• Going concern assumption: Financial statements are normally prepared on the assumption that the entity will continue in operation for the foreseeable future [CF 3.9].
• The reporting entity: An entity that is required, or chooses, to prepare financial statements. It can be a single entity or comprise more than one entity (e.g., consolidated financial statements) [CF 3.10].
• Boundary of a reporting entity: Determined by the information needs of the users, often driven by a control relationship [CF 3.12].

Chapter 4: Elements of financial statements (CF 4.1–4.72)

The Conceptual Framework defines the elements of financial statements to be:^[32]

• Asset: A present economic resource controlled by the entity as a result of past events [CF 4.3]. An economic resource is a right that has the potential to produce economic benefits [CF 4.14].
• Liability: A present obligation of the entity to transfer an economic resource as a result of past events [CF 4.26].
• Equity: The residual interest in the assets of the entity after deducting all its liabilities [CF 4.63].
• Income: Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims [CF 4.68].
• Expenses: Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims [CF 4.69].

Chapter 5: Recognition and Derecognition (CF 5.1–5.33)

An item is recognized in the financial statements only if it meets the definition of an asset, liability, equity, income or expense [CF 5.6]. Recognition is appropriate if it results in:^[33]

• Relevance: The information is useful to users of financial statements [CF 5.12].
• Faithful representation: The item can be measured with a level of measurement uncertainty that does not prevent the information from being useful [CF 5.18].
• Derecognition: The removal of all or part of a recognized asset or liability from an entity’s statement of financial position [CF 5.26].

Chapter 6: Measurement (CF 6.1–6.91)

Measurement involves assigning monetary amounts to elements. The Framework describes two primary measurement bases:^[34]

• Historical cost: Reflects the value of the transaction price at the time of the transaction [CF 6.4].
• Current value: Reflects conditions at the measurement date, including Fair value [CF 6.12], Value in use [CF 6.17], and Current cost [CF 6.21].

Chapter 7: Presentation and Disclosure (CF 7.1–7.29)

Chapter 7 focuses on effective communication of financial information:^[35]

• Classification: Sorting elements based on shared characteristics [CF 7.15].
• Aggregation: Summarizing items so useful information is not obscured [CF 7.20].
• Performance reporting: Profit or loss is the primary source of information about performance [CF 7.17].

Chapter 8: Concepts of capital and capital maintenance (CF 8.1–8.10)

Concepts of capital maintenance determine how an entity defines the capital it seeks to maintain:^[36]

• Financial capital maintenance: Profit is earned only if the financial amount of the net assets at the end of the period exceeds the beginning balance [CF 8.4].
• Physical capital maintenance: Profit is earned only if the physical productive capacity at the end of the period exceeds the beginning capacity [CF 8.4].

Requirements

Presentation of financial statements (IAS 1.10–14)

In accordance with IAS 1 and the objectives outlined in the Conceptual Framework, a complete set of IFRS financial statements consists of:^[37]

• A statement of financial position (balance sheet) [IAS 1.10(a)]
• A statement of comprehensive income [IAS 1.10(b)]. This may be presented as a single statement or as two separate statements: a statement of profit or loss and a statement of other comprehensive income [IAS 1.10A].
• A statement of changes in equity [IAS 1.10(c)]
• A statement of cash flows [IAS 1.10(d)]
• Notes, including a summary of significant accounting policies and other explanatory information [IAS 1.10(e)].

To satisfy the requirements for comparability, an entity must also present comparative information in respect of the preceding period for all amounts reported in the current period's financial statements [IAS 1.38].

General features of financial reporting (IAS 1.15–46)

The following general features are mandated by IAS 1 to ensure that financial statements meet the qualitative characteristics of the Conceptual Framework:^[38]

• Fair presentation and compliance with IFRSs [IAS 1.15–24]: Requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income, and expenses.
• Going concern [IAS 1.25–26]: Financial statements are prepared on a going concern basis unless management intends to liquidate the entity or cease trading.
• Accrual basis of accounting [IAS 1.27–28]: An entity recognizes items as assets, liabilities, equity, income, and expenses when they satisfy the definitions and recognition criteria in the Conceptual Framework.
• Materiality and aggregation [IAS 1.29–31]: Each material class of similar items must be presented separately. Items of a dissimilar nature or function must be presented separately unless they are immaterial.
• Offsetting [IAS 1.32–35]: An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an IFRS.
• Frequency of reporting [IAS 1.36–37]: An entity must present a complete set of financial statements (including comparative information) at least annually.
• Comparative information [IAS 1.38–44]: An entity must disclose comparative information in respect of the previous period for all amounts reported in the current period’s financial statements.
• Consistency of presentation [IAS 1.45]: The presentation and classification of items in the financial statements shall be retained from one period to the next.

Cash flow statements (IAS 7.10–17)

Cash flow statements in IFRS are presented as follows:^[39][40]

• Operating cash flows [IAS 7.13–15]: These are the principal revenue-producing activities of the entity. They are typically reported using the indirect method, where profit or loss is adjusted for non-cash items, deferrals, and accruals [IAS 7.18(b)].
• Investing cash flows [IAS 7.16]: These involve the acquisition and disposal of long-term assets and other investments. Only expenditures that result in a recognized asset in the statement of financial position qualify for this classification.
• Financing cash flows [IAS 7.17]: These are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity, helping users predict claims on future cash flows by capital providers.

Criticisms

In 2012, staff of the Securities and Exchange Commission (SEC) issued a report setting out observations on a potential adoption of IFRS in the United States. This included the following criticisms:^[41][42]

• that it would be expensive for companies to move to compliance with IFRS;
• that the IASB had reliance on funding from large accounting firms which might jeopardise its actual or perceived independence;
• that the process of convergence of IFRS with US GAAP had not made progress in some areas;
• that the valuation of inventory under Last In First Out (LIFO) remains common in the United States, where it has some tax advantages, but would be prohibited under IFRS;
• that IFRS is not comprehensive in its coverage.

IASB staff have responded to these observations and concluded that there were no insurmountable obstacles for the adoption of IFRS by the United States.^[43]

In 2013 IASB member Philippe Danjou listed ten common criticisms of IFRS. He sought to counter these, describing them as misconceptions:^[44]

• IFRS practise a generalized "fair value".
• IFRS are intended to reflect the global financial value of the company.
• IFRS deny the concept of accounting conservatism.
• IFRS give prominence to economic reality over legal form.
• Directors can not make heads or tails of IFRS financial statements.
• IFRS financial statements do not reflect the business model.
• Financial instruments are stated at "full fair value", thereby maximizing earnings volatility. The "fair value" is always defined as "market value" even when markets are illiquid.
• The treatment of business combinations is irrational.
• IFRSs create accounting volatility that does not reflect the economic reality.

Charles Lee, a professor of accounting at Stanford Graduate School of Business, has also criticised the use of fair values in financial reporting.^[45]

In 2019, H. David Sherman and S. David Young criticised the current state of financial reporting under IFRS and US GAAP:^[46]

• Convergence of reporting standards has stalled. IFRS is not consistently applied;
• Alternative methods of revenue recognition make it difficult to interpret reported results;
• Many companies are using unofficial measures, for example earnings before interest, tax, depreciation and amortisation (EBITDA), whether to get around a deficiency in the format in accounting standards or potentially to mislead users;
• Companies can control decisions on expenditure to manage results.

Differences between IFRS and GAAP

There are two frameworks that investors and accountants recognize on a global scale: International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP).^[47] They both serve to ensure transparency and consistency in financial statements. However, they take a vastly different approach to recognizing revenues, reporting leases, and recording inventory. IFRS is followed in over 140 countries, and the system is more principle-based as it gives businesses flexibility in applying standards.^[48] GAAP on the other hand, is used almost exclusively in the United States and is governed by the Financial Accounting Standards Board (FASB). This system is rule-based and much stricter, and it provides industry-specific guidelines. These differences don’t just affect accountants, they also impact how businesses operate and how investors interpret financial performance.

Take two companies for example, one in the U.S. and one in Europe, both selling software subscriptions. Even though they operate the same way, they report their revenues differently, due to the divide between IFRS and GAAP. Both companies follow a five-step model under IFRS 15 and GAAP (ASC 606),^[49] but GAAP includes extra layers of industry-specific guidance for sectors such as real estate, software, and financial services.^[50] This means that a software company in the U.S. might have detailed, step-by-step rules enforcing revenue from subscriptions. In contrast, international companies using IFRS have more flexibility in applying general principles. For companies operating both frameworks, this can lead to confusion when reporting revenue across different financial statements.

Lease accounting (IFRS 16.22–46 vs. ASC 842)

Lease accounting is another crucial part representing the different approaches that IFRS and GAAP take. For IFRS 16, every lease must be recorded on the balance sheet and classified as a right-to-use asset with a corresponding liability [IFRS 16.22].^[51] However, GAAP (ASC 842) maintains two types of leases: one on the balance sheet and operating leases, which are generally not recorded on the balance sheet.^[52] While this approach allows U.S. companies to hide some lease obligations, critics like H. David Sherman and S. David Young argue that it complicates financial comparisons, especially for global investors trying to assess companies’ liabilities.^[53]

Inventory valuation: FIFO and LIFO (IAS 2.9–27 vs. ASC 330)

The divergence in inventory valuation between IFRS and US GAAP represents a significant accounting difference, primarily involving the First-In, First-Out (FIFO) and Last-In, First-Out (LIFO) models.^[54] IFRS adopts the FIFO method [IAS 2.25], while GAAP (ASC 330) utilizes the LIFO method. The LIFO method can provide tax savings during periods of inflation since it results in lower reported profits. However, the inconsistency between the two strategies might cause inconvenience for companies trying to use a standardized rule to value themselves, as using different calculation methods may not always be an "apples-to-apples" comparison.

• Methodology and Prohibitions [IAS 2.25]: Under IAS 2, an entity must use the FIFO or weighted average cost formula. IFRS explicitly prohibits the use of the LIFO method, which is permitted under US GAAP (ASC 330) and commonly used to provide tax savings during inflationary periods by reporting lower profits.
• Measurement Basis [IAS 2.9]: IFRS requires inventory to be measured at the lower of cost and net realisable value (NRV). US GAAP (ASC 330) distinguishes between the "lower of cost or market" for LIFO users and "lower of cost or NRV" for FIFO users.
• Reversals of Write-downs [IAS 2.33]: IFRS allows the reversal of previous inventory write-downs if the value subsequently recovers. In contrast, US GAAP prohibits such reversals once the inventory has been written down to a new cost basis.

• Methodology and Prohibitions [IAS 2.25]: Under IAS 2, an entity must use the FIFO or weighted average cost formula. IFRS explicitly prohibits the use of the LIFO method, which is permitted under US GAAP (ASC 330) and commonly used to provide tax savings during inflationary periods by reporting lower profits.
• Measurement Basis [IAS 2.9]: IFRS requires inventory to be measured at the lower of cost and net realisable value (NRV). US GAAP (ASC 330) distinguishes between the "lower of cost or market" for LIFO users and "lower of cost or NRV" for FIFO users.
• Reversals of Write-downs [IAS 2.33]: IFRS allows the reversal of previous inventory write-downs if the value subsequently recovers. In contrast, US GAAP prohibits such reversals once the inventory has been written down to a new cost basis.

Economic opportunities

For businesses, the divergence in the two methods isn't just differences in number or technical detail, as they also have real-world consequences. Multinational corporations adjusting in both IFRS and GAAP jurisdictions must maintain separate financial reports, showing the inconvenience in the process. For investors, transparency and accuracy in the decision-making process might be disrupted by discrepancies in revenue timing, asset valuation, and lease obligations to get a clear picture of financial health. Despite ongoing efforts to harmonize the two systems, significant gaps remain, and full convergence may never happen. For now, understanding these variations is crucial, not just for accountants but for anyone making investment decisions in a global economy.^[55]

Economic effects

Using common accounting standards improves the transparency and comparability of company accounts, thus increasing the efficiency of the EU capital market and reducing the cost of raising capital for companies.^[56] Many researchers have studied the effects of IFRS adoption, but results are unclear. For example, one study^[57] used data from 26 countries to study the economic consequences of mandatory IFRS adoption. It showed that, on average, even though market liquidity increases around the time IFRS is introduced, it is unclear whether IFRS mandate adoption is the sole reason for observed market effects. Firms' reporting incentives, law enforcement, and increased comparability of financial reports can also explain the effects. The adoption of IFRS in the European Union is a special case because it is an element of wider reforms aiming to consolidate the economies of member countries. One study reports positive market effects for companies adopting IFRS, but these positive effects occurred even before the transition took place.^[58] Another study looked at the development of the stock market in Poland; it found positive effects associated with Poland joining the EU but no specific effect attributable to its adoption of IFRS.^[59] Interestingly, member states maintain a large degree of independence in setting national accounting standards for companies that prefer to stay local.^[60]

See also

• List of International Financial Reporting Standards
• Chinese accounting standards
• Generally Accepted Accounting Principles (Canada)
• Generally Accepted Accounting Principles (France)
• Generally Accepted Accounting Principles (UK)
• Generally Accepted Accounting Principles (United States)
• Indian Accounting Standards
• International Public Sector Accounting Standards
• Nepal Financial Reporting Standards
• Philosophy of accounting