- IFRS, it sounds like jargon
but it's an important concept to understand in accounting.
IFRS stands for International Financial Reporting Standards
and it's something you can use for your private unlisted
small or medium sized business, but the key questions are,
what exactly is it and does it apply
to your small or medium company?
In this video I'm going to cover what exactly is IFRS,
the difference between IFRS and local GAAP,
what is the purpose of IFRS,
why do most large companies use IFRS,
and finally, IFRS and your small business.
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Now, this opening section is actually very short.
Put in the most simplest way I can actually think of,
IFRS is like a dialect of accounting.
Whilst accounting and numbers are the language of business,
there are variations of the accounting language
known as accounting standards,
basically principles and rules.
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Here in the UK, for many years, it was UK GAAP,
GAAP standing for Generally Accepted Accounting Principles,
was used in the production and presentation
of financial statements.
These financial statements
included a profit and loss account, a balance sheet,
and quite often a cashflow statement.
In the US it was US GAAP,
in Germany, you guessed it, it was German GAAP.
Now the issue with so many local GAAPS
can be compared to apples.
Let's suppose UK GAAP is a green apple,
US GAAP a red apple, and Germany GAAP a Braeburn apple,
fundamentally an apple is an apple
and likewise, fundamentally accounting is accounting,
but like the apples, each GAAP has its variations.
To begin with, the apples are all of a different color,
they have different levels of firmness, taste, texture,
sweetness, and bitterness.
Each GAAP has variations like the apples
and quite often if you were to produce the same set
of financial statements, using the same numbers
on the UK GAAP, US GAAP, and German GAAP,
some of the key metrics, like profit and their assets,
would often be different for a given period,
therefore, a set of accounts in the UK
was not always consistent with a set of accounts
from the USA.
As a footnote, the USA has not fully prescribed
to IFRS just yet, instead they are taking an approach
of convergence, that is narrowing the GAAP
between US GAAP and IFRS.
In fact, there are a number of countries
that apply convergence as they retain their own local GAAPs,
often for political, legal, and cultural reasons.
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The goal of IFRS was to essentially harmonize
accounting standards, principles, and rules
into one globally accepted,
understandable accounting dialect.
The key really is consistency.
Like our apples, if we took the green, red, and Braeburn
and blended them together into one consistent apple
that is enjoyed across the world,
whether you are in the UK, US,
or as far afield as Australia,
you know what you're getting when you're crunching
into an IFRS apple.
To provide a little history,
the development of IFRS gathered paced in the 1990s,
when interest was expressed by the world stock exchanges
in a globally accepted set of accounting rules,
which would, amongst other benefits,
make accounts more consistently prepared
and hence comparable and encourage investment
on a global scale.
The European union, for example, made a decision
that from 2005 it's listed companies should follow IFRS,
this resulted in thousands of listed companies
across the European union, switching from local GAAPs
to IFRS and with cross border transactions
becoming more common than ever,
IFRS certainly is the way forward
for the language of accounting.
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IFRS is used by listed companies
in more than 140 different countries across the world,
primarily to meet the needs of equity investors
in large public companies.
In the past many investment opportunities were hampered
because the numbers were presented in different dialects,
whether it be UK GAAP, US GAAP, or any GAAP,
IFRS reporting is now the norm, rather than the exception
for major companies around the world.
An example of a set of IFRS compliant financial statements
for a large bank here in the UK can be seen on screen.
First of all the notes of the financial statements
transparently declare that the financial statements
have been prepared in conformity
with International Financial Reporting Standards, IFRS.
Essentially the financial statements consist
of a statement of financial position,
the statement of profit and loss
and other comprehensive income,
the statement of changes in equity,
the statement of cashflow, notes comprising a summary
of significant accounting policies,
and other explanatory information,
and finally comparative information
in respect of the proceeding period.
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In 2009, the IASB,
that is the International Accounting Standards Board,
issued the IFRS for SMEs.
This is a completely standalone sort of guidance
developed specifically for smaller companies.
The IFRS for SME is only a few hundred pages long
and is less detailed than most local GAAPS
and certainly far less than the 3000 odd pages
of principles and rules for full IFRS.
The IFRS for SMEs is available for any country to adopt
whether or not it has adopted full IFRS.
So far over 80 have adopted the IFRS for SMEs
for the purposes of applying the IFRS for SMEs,
an SME is not determined by its monetary size,
instead, the definition is as follows,
SMEs are entities that do not have public accountability
and publish general purpose financial statements
for external users.
Essentially this means that most non-listed organizations
that are nonfinancial institutions,
such as banks or insurance companies
are likely to meet the definition,
including small and medium private limited companies.
However, here in the UK,
a new set of financial reporting standards,
namely FRS 100, 101, 102 and 105, were implemented in 2015
that replaced the old regime of the local UK GAAP
and these FRS's are broadly based on IFRS principles,
and rather IFRS is for SMEs per se,
it is FRS that non-listed small and medium-sized companies
are permitted to use here in the UK by the FRC,
that is the Financial Reporting Council of the UK.
Many countries, like here in the UK, require the use of IFRS
for listed companies, but allow local GAAP,
which can be based on IFRS principles
for non-listed companies or IFRS for SMEs.
To check what your company is using,
speak to your accountant,
or head over to the accounting policy section
of the deck of financial statements
and it will highlight what standards have been used
for your company.
So what could be three useful benefits of reporting
on the IFRS for small or medium sized businesses
or an IFRS based local GAAP like FRS in the UK,
well number one is cross border transactions,
particularly with the E-commerce trading companies
and businesses with international transactions,
or even subsidiaries adopting an IFRS based approach
could be beneficial in making your numbers more consistent.
Number two is investors.
If you are thinking of attracting investors
into your business,
then you'll want to probably cast a net as wide as possible
and reporting in IFRS would certainly be a positive
for international investors.
And number three is scaling your growth.
If your company starts moving up the gears
from a small company to a small group,
up to a medium size company and so on,
certainly an IFRS based approach as early as possible
to your financial statements will start to yield benefit
as your reporting requirements will start
to become more complex,
especially if you are producing consolidated accounts,
which must be done using a uniform accounting standard.
I hope this video has helped you understand more about IFRS,
that is International Financial Reporting Standards,
and taking you one step closer to knowing your numbers.
As always let us know in the comments your thoughts
on today's video or if there are any topics
you'd like us to cover in the future.
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as this really does help us to get our content out there.
This is Tony Dhanjal for the Accounting and Tax Academy.
Thanks for tuning in.
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