Context Slice IFRS Fundamentals
International Financial Reporting Standards (IFRS) are issued by the International Accounting Standards Board (IASB) and used in over 140 jurisdictions worldwide. Unlike the rules-based US GAAP, IFRS takes a principles-based approach—providing frameworks and objectives rather than detailed prescriptions. This requires more judgment but offers flexibility to reflect economic substance.
Core IFRS Principles
Faithful representation: Financial statements must faithfully represent economic phenomena—complete, neutral, and free from error. Substance over form is paramount.
Relevance: Information must be capable of making a difference in user decisions. Materiality is entity-specific—what matters for one company may not matter for another.
Comparability: Users must be able to compare financial statements across entities and periods. Consistency within an entity and across the standard itself.
Verifiability: Different knowledgeable observers should reach similar conclusions. Doesn't require certainty—estimates are acceptable if the process is transparent.
Timeliness: Information must be available to decision-makers in time to influence decisions.
Understandability: Classify, characterize, and present information clearly and concisely.
Key Differences from US GAAP
Inventory valuation: IFRS prohibits LIFO (Last In, First Out). Only FIFO and weighted average cost are permitted. Companies using LIFO under GAAP must convert for IFRS reporting.
Impairment reversals: IFRS allows reversal of impairment losses (except for goodwill) if circumstances improve. GAAP prohibits reversals—once written down, assets stay down.
Development costs: Under IFRS (IAS 38), development costs meeting specific criteria must be capitalized. GAAP expenses most development costs immediately. This significantly affects R&D-intensive companies.
Revaluation of assets: IFRS permits (but doesn't require) revaluing property, plant, and equipment to fair value. GAAP requires historical cost. Revaluation can increase asset values and equity.
Lease classification: IFRS 16 eliminated the operating/finance lease distinction for lessees—nearly all leases go on balance sheet as right-of-use assets. GAAP (ASC 842) maintains the distinction for income statement treatment.
Financial statement presentation: IFRS requires assets ordered from least to most liquid (opposite of GAAP). Current/non-current distinction is required but classification criteria differ slightly.
Revenue Recognition (IFRS 15)
IFRS 15 mirrors ASC 606—both standards were developed jointly and are substantially converged. The same five-step model applies:
- Identify the contract
- Identify performance obligations
- Determine transaction price
- Allocate to performance obligations
- Recognize when obligations satisfied
Minor differences exist in application guidance and examples, but the core framework is identical. This is one area where GAAP and IFRS achieved true convergence.
Financial Instruments (IFRS 9)
IFRS 9 governs financial asset classification and impairment:
Classification: Based on business model (hold to collect, hold to collect and sell, or other) and cash flow characteristics. Categories are amortized cost, fair value through other comprehensive income (FVOCI), or fair value through profit or loss (FVTPL).
Expected credit loss model: Similar in concept to GAAP's CECL but with different staging. Stage 1 (performing) recognizes 12-month expected losses; Stage 2 (significant increase in credit risk) and Stage 3 (credit-impaired) recognize lifetime expected losses.
Hedge accounting: More principles-based than GAAP, with broader eligibility for hedge accounting treatment.
Global Adoption
European Union: IFRS required for consolidated financial statements of all EU-listed companies since 2005.
United Kingdom: Post-Brexit, UK adopted UK-endorsed IFRS, largely identical to full IFRS with minor modifications.
Canada, Australia, South Africa: Full IFRS adoption for public companies.
Japan: Permits IFRS for qualifying companies; Japanese GAAP remains an option.
China: Chinese Accounting Standards substantially converged with IFRS but not identical.
United States: GAAP remains required. SEC permits foreign private issuers to use IFRS without reconciliation. Full US adoption has been discussed but not implemented.
India: Ind AS is converged with IFRS but has carve-outs for local requirements.
IFRS for SMEs
The IASB publishes a simplified standard for small and medium-sized entities not publicly accountable. Key simplifications:
- Fewer disclosure requirements
- Simpler accounting for financial instruments
- No revaluation option for property, plant, and equipment
- Goodwill amortized rather than tested for impairment
- Development costs expensed (no capitalization requirement)
Jurisdictions decide whether to adopt IFRS for SMEs. It's not available in all countries and private companies may still use local GAAP.
Transition Considerations
Companies moving to IFRS face significant transition work:
Opening balance sheet: Restate as if IFRS had always been applied, with some exemptions. First IFRS statements require three years of balance sheets and two years of other statements.
Systems and processes: Chart of accounts, reporting systems, and internal controls may need modification.
Judgment documentation: Principles-based standards require more documented rationale for accounting choices.
Training: Finance teams need education on IFRS requirements and judgment frameworks.
Dual reporting: Some companies maintain both GAAP and IFRS books, especially if US-listed but operating globally.
Common Misconceptions
"IFRS is easier than GAAP." Principles-based doesn't mean simpler. IFRS requires significant judgment, and auditors may challenge those judgments. Documentation and consistency become critical.
"IFRS and GAAP are basically the same." They're converging but significant differences remain. Inventory (LIFO), impairment reversals, development costs, and revaluation can produce materially different numbers.
"We can switch to IFRS anytime." Transition requires significant preparation, retrospective restatement, and for US companies, may not even be permitted depending on their filing status.
"IFRS is only for public companies." Many jurisdictions require or permit IFRS for private companies. IFRS for SMEs provides a simplified option. Check local requirements.