Global Financial Reporting

A growing global economy and an increase in international shareholding have created the need for a common, shared accounting language for both public and private companies. To this end, the International Accounting Standards Board (IASB) was established as a standard-setting body.

Based in London, the independent, nonprofit IASB created a set of “International Financial Reporting Standards” to replace the various types of accounting standards used by nations around the world. This article provides basic information about these new standards and their effect on domestic and international companies.

Established in 2000, the IASB was an outgrowth of the International Accounting Standards Committee that had provided guidance on accounting standards since 1973. The new IASB sought to be more effective by creating a single set of accounting standards for public companies that were understandable, enforceable, and globally accepted.

Overseen by the IFRS Foundation, the IASB is composed of sixteen geographically dispersed members. The board engages stakeholders around the world, forming consultative groups for major projects, and seeks public input through published discussion papers and exposure drafts.

Benefits on a Global Scale
“Business is more and more global,” commented Debbie Di Gregorio, CPA, CA, with Richter, one of Canada’s largest independent accounting and consulting firms. She notes that the ability to understand and compare financial reports is particularly important for companies with international business dealings and corporations with foreign subsidiaries. “People need to speak the same (financial) language.”

Proponents of International Financial Reporting Standards (IFRS) cite several benefits, including comparability (standardized reporting for companies worldwide can help improve investor decision-making), simplification (one standard eliminates the need for duplicative filings for international investors or multinational companies), savings (universal forms can reduce financial auditing and reporting paperwork, and the need for additional accounting personnel), opportunity (potential investors and shareholders worldwide can more easily conduct cross-border transactions, while foreign banks and other lenders will have access to standardized documentation), and finally, all of the above components can help improve market efficiency.

Small- and medium-sized private entities can also benefit from a simpler version of IFRS. Less complex than its counterpart for publicly traded companies, standards for these businesses omit irrelevant topics and simplify the measurement of assets, liabilities, income, and expenses. Additionally, fewer disclosures are required. Any jurisdiction can adopt IFRS for smaller private companies even without adopting the standards for public companies.

As of March 2014, there were 117 worldwide jurisdictions, including Canada and Mexico, requiring or permitting IFRS for all or most publicly listed companies and/or financial institutions. About half, or 58 jurisdictions, required or permitted IFRS for small or medium-sized private entities, while 7 other jurisdictions, although not yet adopting IFRS, had indicated a commitment to implementing a global, universal set of standards. The United States, however, is not among these countries—and full-scale adoption of IFRS is unlikely—at least in the foreseeable future.

Despite the U.S.’s reticence, IASB chairman Hans Hoogervorst remains optimistic, telling attendees at a December 2013 American Institute for Certified Public Accountants conference, “There is a very large IFRS footprint in the United States, and it is growing by the day.”