What is IFRS?
International Financial Reporting Standards (IFRS) is a set of accounting standards,
developed by the International Accounting Standards Board (IASB) that is
becoming the global standard for the preparation of public company financial
statements. The IASB is an independent accounting standards body, based in
London that is unaffiliated with the AICPA, CPA2Biz or this website.
What is the IASB?
The IASB is an independent accounting standard-setting body, based in London. It
consists of 14 members from nine countries, including the United States. The
IASB began operations in 2001, when it succeeded the International Accounting
Standards Committee. It is funded by contributions from major accounting firms,
private financial institutions and industrial companies, central and development
banks, and other international and professional organizations throughout the
world. The AICPA was a founding member of the International Accounting
Standards Committee, but the IASB neither sponsors nor endorses this website.
How widespread is the adoption of IFRS around the
More than 12,000 companies in almost 100 nations have adopted IFRS, including
listed companies in the European Union. Other countries, including Canada and
India, are expected to transition to IFRS by 2011. Some estimate that the number
of countries requiring or accepting IFRS could grow to 150 in the next few
years. Other countries, such as Japan and Mexico, have plans to converge
(eliminate significant differences) their national standards.
What is the possibility of the Securities and Exchange
Commission substituting IFRS for GAAP?
Many people believe that acceptance of IFRS in the United States by the SEC
for public companies are inevitable. For many years the SEC has been
expressing its support for a core set of accounting standards that could
serve as a framework for financial reporting in cross-border offerings. In
recent years, it has supported efforts of the Financial Accounting Standards
Board (FASB) and the IASB to develop a common set of high-quality, global
standards. And most recently, it issued a Concept Release seeking input on
allowing U.S. public companies to use IFRS when preparing financial
statements. SEC Chairman Christopher Cox also announced that later this
year the SEC staff will formally propose to the Commission an updated
“roadmap” that will lay out a schedule and appropriate milestones for
continuing U.S. progress toward acceptance of IFRS.
The bottom line is that CPAs need to begin to prepare for the day in the not-
so-distant future when the SEC could designate a date for voluntary, or even
mandatory, adoption of IFRS by all U.S. public companies.
What are the likely costs of converting to IFRS?
The costs would be determined largely by the size and nature of the respective
company. While the initial cost to identify and quantify the differences between
U.S. GAAP and IFRS, staff training, and implementing IT support could be
significant, the conversion also might result in a reduction of capital and financial
reporting related operation costs.
What are some of the most important specific
differences between IFRS and U.S. GAAP?
Because of longstanding convergence projects between the IASB and FASB, the
extent of the specific differences between IFRS and GAAP has been shrinking. Yet,
significant differences do remain, most any one of which can result in significantly
different reported results, depending on a company’s industry and individual facts
• IFRS does not permit Last in First out (LIFO).
• IFRS uses a single-step method for impairment write-downs rather than the
two-step method used in U.S. GAAP, making write-downs more likely.
• IFRS has a different probability threshold and measurement objective for
• IFRS does not permit curing debt covenant violations after year-end.
The Importance of IFRS
Standards present themselves in different ways. In accounting terms, standards
are a mark of quality. International standards are international marks of quality,
and specifically the IFRS. In the most part, IFRS is widely recognized as the leading
standard to be adhered to. The quicker that local organizations move to working
within this framework, the quicker the investment will flow. It's all about quality
and transparency, a transparency that is not so apparent in the region.
"The Middle East could follow the example of India, which is experiencing major
investment growth. India is moving towards IFRS because its major trading
partners like Russia and China are doing so." The UAE has no legislation
mandating the use of IFRS by all companies, although the banks follow IFRS on
directives of the Central Bank and listed companies because of stock market
guidelines. Those without IFRS, looking for investment could struggle against
those that do, in an increasingly competitive arena, locally in the UAE, regionally
in the GCC and in the greater emerging markets. Where super powers are rising
up, adopting IFRS will assist in the ease of linking with the bigger players and
continue in cementing the UAE as a global hub.
By adopting IFRS, a business can present its financial statements on the same
basis as its foreign competitors, making comparisons easier. Furthermore,
companies with subsidiaries in countries that require or permit IFRS may be able
to use one accounting language company-wide. Companies also may need to
convert to IFRS if they are a subsidiary of a foreign company that must use IFRS,
or if they have a foreign investor that must use IFRS. In addition, companies may
benefit if they wish to raise capital abroad.
Despite a general consensus of the inevitability of the global acceptance of IFRS,
many people also believe that U.S. GAAP is the gold standard, and that something
will be lost with full acceptance of IFRS. Further, certain U.S. issuers without
significant customers or operations outside the United States may resist IFRS
because they may not have a market incentive to prepare IFRS financial
statements. Some other U.S. issuers may have to stick with U.S. GAAP because it
is required for filings with other regulators and authorities, thus resulting in extra
costs than currently incurred by following only U.S. GAAP.
Another concern is that many countries that claim to be converting to
international standards may never get to 100 percent compliance. Most reserve
the right to carve out selectively or modify standards they do not consider in their
national interest, an action that could lead to incomparability – one of the very
issues that IFRS seeks to address.
“I See Opportunities, Not Challenges, For Indian
With India on the road to IFRS, companies are worried about the transition.
The sole Indian on the board that drafts the IFRS clears the confusion.
Prabhakar Kalavacherla: IASB Member
What are the challenges facing Indian firms during the
transition to International Financial Reporting
I see opportunities and not challenges. The new standards will give them
access to resources around the world at reduced costs. Moreover, it will
make it easy for FDI to come into the country. The International Accounting
Standards Board (IASB) can help countries cope with transitional challenges
they face. Many countries have gone through this period. It’s unlikely that
India will have some unique problems.
Do you think the government is on track to bring about
the implementation of IFRS by 2011?
The decision to switch to IFRS by 2011 is an important one. There will be
challenges along the way, but the benefits far outweigh them. The Ministry
of Corporate Affairs has formed a core group and two sub-groups to work
on the roadmap. These groups have tight deadlines but I am sure they will
come out with their recommendations by November. As a member of the
IASB and an Indian, I will lead discussions from the IASB side with these
groups in order to effect a smooth transition.
Adoption of IFRS
IFRS are used in many parts of the world, including the European Union,
Hong Kong, Australia, Malaysia, Pakistan, and GCC countries, Russia, South
Africa, Singapore and Turkey. As of 27 August 2008, more than 113
countries around the world, including all of Europe, currently require or
permit IFRS reporting. Approximately 85 of those countries require IFRS
reporting for all domestic, listed companies.
The Australian Accounting Standards Board (AASB) has issued 'Australian
equivalents to IFRS' (A-IFRS), numbering IFRS standards as AASB 1-8 and IAS
standards as AASB 101 - 141. Australian equivalents to SIC and IFRIC
Interpretations have also been issued, along with a number of 'domestic'
standards and interpretations. These pronouncements replaced previous
Australian generally accepted accounting principles with effect from annual
reporting periods beginning on or after 1 January 2005 (i.e. 30 June 2006
was the first report prepared under IFRS-equivalent standards for June year
Ends). To this end, Australia, along with Europe and a few other countries,
was one of the initial adopters of IFRS for domestic purposes.
The AASB has made certain amendments to the IASB pronouncements in
making A-IFRS; however these generally have the effect of eliminating an
option under IFRS, introducing additional disclosures or implementing
requirements for not-for-profit entities, rather than departing from IFRS for
Australian entities. Accordingly, for-profit entities that prepare financial
statements in accordance with A-IFRS are able to make an unreserved
statement of compliance with IFRS.
The AASB continues to mirror changes made by the IASB as local
pronouncements. In addition, over recent years, the AASB has issued so-
called 'Amending Standards' to reverse some of the initial changes made to
the IFRS text for local terminology differences, to reinstate options and
eliminate some Australian-specific disclosure. There are some calls for
Australia to simply adopt IFRS without 'Australianising' them and this has
resulted in the AASB itself looking at alternative ways of adopting IFRS in
The use of IFRS will be required for Canadian publicly accountable profit-
oriented enterprises for financial periods beginning on or after 1 January
2011. This includes public companies and other “profit-oriented enterprises
that are responsible to large or diverse groups of shareholders.”
All listed EU companies have been required to use IFRS since 2005.
In order to be approved for use in the EU, standards must be endorsed by
the Accounting Regulatory Committee (ARC), which includes representatives
of member state governments and is advised by a group of accounting
experts known as the European Financial Reporting Advisory Group. As a
result IFRS as applied in the EU may differ from that used elsewhere.
Parts of the standard IAS 39: Financial Instruments: Recognition and
Measurement were not originally approved by the ARC. IAS 39 was
subsequently amended, removing the option to record financial liabilities at
fair value, and the ARC approved the amended version. The IASB is working
with the EU to find an acceptable way to remove a remaining anomaly in
respect of hedge accounting.
The government of Russia has been implementing a program to harmonize
its national accounting standards with IFRS since 1998. Since then twenty
new accounting standards were issued by the Ministry of Finance of the
Russian Federation aiming to align accounting practices with IFRS. Despite
these efforts essential differences between national accounting standards
and IFRS remain. Since 2004 all commercial banks have been obliged to
prepare financial statements in accordance with both national accounting
standards and IFRS. Full transition to IFRS is delayed and is expected to take
place from 2011.
Turkish Accounting Standards Board translated IFRS into Turkish in 2006.
Since 2006 Turkish companies listed in Istanbul Stock Exchange are required
to prepare IFRS reports.
Starting in 2005, Hong Kong Financial Reporting Standards (HKFRS) are
identical to International Financial Reporting Standards. While Hong Kong
had adopted many of the earlier IAS as Hong Kong standards, some had not
been adopted, including IAS 32 and IAS 39. And all of the December 2003
improvements and new and revised IFRS issued in 2004 and 2005 will take
effect in Hong Kong beginning in 2005.
Implementing Hong Kong Financial Reporting Standards: The challenge for
2005 (August 2005) sets out a summary of each standard and interpretation,
the key changes it makes to accounting in Hong Kong, the most significant
implications of its adoption, and related anticipated future developments.
There is one Hong Kong standard and several Hong Kong interpretations
that do not have counterparts in IFRS. Also there are several minor wording
differences between HKFRS and IFRS.
In Singapore the Accounting Standards Committee (ASC) is in charge of
standard setting. Singapore closely models its Financial Reporting Standards
(FRS) according to the IFRS, with appropriate changes made to suit the
Singapore context. Before a standard is enacted, consultations with the IASB
are made to ensure consistency of core principles.
The Institute of Chartered Accountants of
India’s blue-chip companies have begun to align their accounting standards
to the International Financial Reporting Standards (IFRS), three years ahead
of the mandatory time for the switchover. The list of companies includes IT
firms like Wipro, Infosys Technologies and NIIT, automakers like Mahindra &
Mahindra and Tata Motors; textile companies like Bombay Dyeing and
pharma firm Dr Reddy’s Laboratories.
For companies with exposure in European markets through equity or debt,
such transparency is essential to raise capital cheap and hence, the
proactive approach. The Indian accounting standards body, the Institute of
Chartered Accountants of India (ICAI), has set a time line of 2011 for
compulsory switchover to the new standard. IFRS is the accounting
benchmark developed by the International Accounting Standards Board.
Suresh Senapaty, CFO and executive director, Wipro Ltd, said, “We welcome
the initiative of ICAI in driving convergence with international financial
reporting standards by 2011. We have adopted AS-30 from April this year,
much ahead of its scheduled implementation. We are also actively
considering early adoption of AS-31, which is the next standard.”
Ved Jain, president, ICAI, said, “Many companies have already started
following the new accounting standards because these ensure transparency
and uniformity. The implementation would strengthen the confidence of
stakeholders in the companies’ financial statements, which, in turn, will
bring value to the corporate.”
The ICAI’s accounting standard –30 mandates companies to provide for
mark-to-market losses as well as profits from April 2009 on a voluntary
basis. All complexities regarding derivatives have been addressed in AS-30,
which is in line with the IFRS norms.
If an entity does not opt for either AS-30 or AS-1, the auditors will need to
make a suitable disclosure. Analysts note that the total mark-to-market
losses of Indian companies from forex derivative exposures could be about
The company auditors would need to disclose the figures separately if the
company balance sheet does not bring them out. Companies with
international presence are not willing to take this risk. Says Rajendra S
Pawar, chairman, NIIT Technologies: “AS-30 was started from January 2008,
and by 2012, it is expected that we would start...
The Accounting Standards Board of Japan has agreed to resolve all
inconsistencies between the current JP-GAAP and IFRS wholly by 2011.