International Financial Reporting Standards, or IFRS, are a set of standards intended to regulate international accounting principles. More than one hundred countries have replaced their national generally accepted accounting principles with IFRS, with the most notable exception being the United States.
IFRS was first conceived as a plan to create an accounting standard in the European Union, but soon spread to other parts of the world. Though many nations have adopted it, it is not without its critics and some nations are slow or unwilling to adopt it. Some nations have adopted parts of IFRS while retaining parts of their GAAP. A predecessor group, the International Accounting Standards Committee, created a set of standards known as the International Accounting Standards, which was used in parts of the world from 1973 to 2001.
Adopting IFRS is expected to make creating financial statements easier, for the benefit of international business. It is believed that the system will reduce investment costs and provide higher quality financial information for investors. Because United States GAAP is only used in one nation, multinational corporations seek to benefit from a unified system.
Criticisms of IFRS include the fact that its IAS 29 Financial Reporting in Hyperinflationary Economies did nothing to quell the hyperinflation rampant in Zimbabwe. This guideline is still being attempted in several countries.
IFRS specifies that financial statements should accurately and transparently detail all financial information. Financial statements should be prepared on a frequent basis, unless it is unreasonable to do so. If global standards are to be created, the statuses of emerging markets must be addressed.
IFRS differs from the US GAAP in that it is principle-based rather than rules-based. This means that guidelines are more flexible in how financial information is prepared and more accepting of differing international economies.
For example, in the United States, there are two methods of inventory costing: first-in, first-out, and last-in, first-out. The first-in, first-out method says that the first manufactured items in inventory are sold first, before any newer items, even though this may not be the case in reality. The last-in, first-out method says that the most recent manufactured items in inventory are recorded as sold first, even though this might not be the case. However, IFRS does not allow the last-in, first-out method. Standardizing this method would simplify the reporting of inventory costs between countries.