What are the International Financial Reporting Standards?
The International Financial Reporting Standards are a set of accounting principles that provide guidelines for the proper reporting of financial data. The standards of the IFRS are set by the International Accounting Standards Board in London, United Kingdom. The standardization of the principles of accounting ensures the transferability of financial reporting standards between countries as the lack of such standards would mean that financial data would not be accurate and readily understood by a company or investor in a different jurisdiction or country that the reporting company is located at.
Although the United States currently abides by the Generally Accepted Accounting Principles (GAAP), the US has begun to change accepted accounting principles and standards to the International Accounting Standards Board, in order to standardize its accounting principles with the principles used by the rest of the world. If completed on schedule, this change will happen in 2014. Principles of accounting must be standardized to provide the best possible information for potential investors as well as allowing for the finances of two companies to be compared.
What are the characteristics of financial statements under the IFRS?
The core tenants of the IFRS are to make financial statements reliable, clear and comparable to other statements. This is the reason for instituting a dedicated framework for all businesses to report finances, much in the way a unified currency streamlines purchasing decisions across national borders.
Financial statements under the IFRS must contain the following elements:
Statement of Financial Position – this is a balance sheet that reports on the financial condition of a company and expresses its net worth at a given point in the year. The balance sheet will have three parts, consisting of assets, liabilities and equity. The assets are listed first with the assets that are easiest to liquidate and the top of the sheet. Assets listed include cash, accounts receivable and equipment. Liabilities will include accounts payable. Equity will include stocks and earnings.
Statement of Comprehensive Income – the owner must list all items contributing to profit and loss and the net income when accounting for the profit and loss factors. This includes revenue, tax payments, and financing totaling up to the comprehensive income.
Statement of Changes in Equity – this statement shows the comprehensive income and other changes in equity, such as investments by the owners, dividends and withdrawals of capital. This statement is optional if there is no change in owner investment or any of the other changes in equity.
Cash Flow Statement – A cash flow statement is an accounting document that specifically assesses the amount of cash that is handled by a business and the ultimate destination of the infusion of cash. Cash flow statements are usually needed for financing to prove to lenders that companies have adequate cash flow to satisfy repayment demands. Cash flow statements are also released to shareholders and potential investors do that they may judge the short and long term financial health and flexibility of the company.