Definition: The International Financial Reporting Standards (IFRS) are the principles-based standards and interpretations implemented by the International Accounting Standards Board (IASB) as a framework for global financial reporting.
The IFRS are definitions and guidelines that should be followed by international companies when preparing financial statements.
IAS 8 Par. 11 explains the role of the IFRS in management decisions as follows:
In making the judgment described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order: (a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.
Previously, the IFRS were known as the International Accounting Standards (IAS), but when the International Accounting Standards Board (IASB) in 2001 took over the responsibility for setting international accounting standards, new standards were developed referred to as the IFRS.
Four underlying assumptions characterizes the IFRS: going concern, accrual basis, stable measuring unit assumption and units of cost purchasing power.
Below these assumptions are explained in further detail:
1. Going concern: The assumption that a business entity will be in operation for the foreseeable future. 2. Accrual basis: The assumption that the financial effects of transactions and events are recognized as they occur, and not when cash is received or paid. 3. Stable measuring unit assumption: The assumption that financial capital is measured in nominal monetary units. This is the historical cost accounting in which assets and liabilities are recorded at their values when first acquired and not generally restated for changes in values. 4. Units of constant purchasing power: The assumption that the stable measuring unit assumption can be rejected in certain situations: Only constant real value non-monetary items are adjusted for inflation during low inflation or deflation. During hyperinflation however, all non-monetary items are adjusted as required under Constant Purchasing Power Accounting.
IFRS are a globally accepted, but in both the UK and in the US, the Generally Accepted Accounting Principles (GAAP) are more widely used by accountants. On the PWC website, you can see an overview of countries that have adopted the IFRS.
Currently the IASB and the Financial Accounting Standards Board (FASB) are working on numerous joint projects that are to improve the IFRS and the GAAP in order to ultimately make the standards fully compatible.