International financial reporting standards (IFRS) are standards published by the International Accounting Standards Board (IASB), which is committed to develop a set of high-quality, global standards that require transparent and comparable information in general purpose financial statements.
The IASB is a private organization that has no legal power to enforce the application of its standards.
After the implementation of the 4th, 7th, and 8th directives, the European Union decided in 2002 to oblige the use of standards published by the IASB as from 2005 for the preparation of the consolidated financial statements of entities listed on a European market.
Foreign registrants in the United States no longer have to reconcile their financial statements to US GAAP if they apply IFRS.
Local amendments of IFRS reduce the comparability of IFRS financial statements, one of the objectives of the IASB.
Why Financial Reporting Needs to Be Harmonized
Although basic accounting principles such as the accrual basis and the going-concern assumption are widely accepted, the application of these principles in different economic and cultural environments has led to significant differences in how accountants report similar transactions. Local differences exist in, for example, the treatment of goodwill, the definition of a group, treatment of borrowing costs, measurement of impairment, and the treatment of deferred taxes.
For entities that are globally active, these differences in financial reporting requirements create extra complications in terms of preparing, consolidating, auditing, and interpreting financial statements. This is because financial statements have to be reconciled before consolidated financial statements can be prepared, the analysis of potential acquirees in a foreign country increases the costs of the mergers and acquisitions department because they have to familiarize themselves with a foreign accounting system, and investors have to be informed about differences in financial reporting. In general, the differences in accounting treatments create non-optimal information for users of financial statements, which in turn leads to less than optimal allocation of resources.
The need for a harmonized, high-quality set of accounting rules is not new. Several initiatives have been taken to arrive at a globally accepted set of financial reporting standards. An important player in this is the European Union. Since the 1970s it has made serious efforts to harmonize the national accounting rules within Europe, resulting in several directives and regulations. Other organizations concerned with international aspects of accounting, active since the 1970s, are: the International Federation of Accountants (IFAC), the Accountants’ International Study Group, the International Organization of Securities Commissions (IOSCO), the Fédération des Experts Comptables Européens (FEE), the Inter-American Accounting Association (IAAA), and the Organisation for Economic Co-operation and Development (OECD).
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