IFRS - The Accountant's Guide

It was Charles Scott that said, "Creativity is good, but not in accounting". The reason for this is not far-fetched. If every company was left to prepare its financials as it deems fit, companies will become creative at it, meaning they can decide to overstate or understate profit at will.

The essence of IFRS as a means of harmonizing the preparation and presentation of financial statements across the world is evident in this illustration: 

Towers Plc is a parent company which operates in Country A. Its subsidiary company is located in Country B. Both countries have different local standards used in preparing financial statements. At the end of the year, Towers Plc will consolidate (combine) its accounts with that of its subsidiary operating in Country B. This becomes a challenge as each element on both financial statements may have been prepared using different measures. How then do we add x plus y to make 2x?

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Let's look at IFRS under these five sub-headings:

IN ACRONYM
IFRS simply stands for International Financial Reporting Standards. These are standards that seem in a literal sense as accounting laws (though we prefer to use the word "principles"). Each Standard addresses one or more issues with respect to preparing and presenting financial statements. See list of IFRS Standards and Interpretations currently available on the IFRS Foundation website.

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IN HISTORY
In 1966, a group of independent accounting standard-setting bodies (ICAEW, CICA and AICPA) came together to form a single body that will be in charge of setting international standards that will guide preparers of financial statements all over the world. This group known as IASC issued various Standards and Interpretations to the Standards called IAS and SIC respectively. The group later transited to become IASB on April 2001 and issued Standards and Interpretations to the Standards called IFRS and IFRIC respectively. The standards and interpretations issued under both the IASC and the IASB are all under the umbrella name IFRS.

IN AMENDMENT
As Aanu Adeyeye succinctly puts it, "IFRS is not a static book of law...IFRS is subject to further amendment and even interpretation of areas that require clarity...An IFRS can be amended, scrapped or replaced by another IFRS". Some of the Standards previously issued have been either amended, scrapped or replaced. As a result, Accountants are expected to regularly keep themselves up-to-date with the changes in the field.

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IN ESSENCE
As seen in the introduction above, one of the major reasons for IFRS is comparability. Users of financial statements will find it useful when companies' financial statements can be compared without being materially different from the way other companies in other countries prepare and present theirs. However, comparability should not be confused with uniformity. Accounting policies applicable to each entity even though in similar industry might differ, but the principles applied must be the same.

IN PRINCIPLE
As you would have thought, the IASB never envisaged a perfect financial statement, rather, one that fairly presents the state of the entity in the best possible way. Hence, the saying that, “it is better to be roughly right than to be perfectly wrong.” This is the reason why amendments to, and replacements of IFRS are ways to ensure that Standards are kept in tune with the ever changing world of business.

See abbreviations below:
  1. ICAEW - Institute of Chartered Accountants in England and Wales
  2. CICA - Canadian Institute of Chartered Accountants
  3. AICPA - American Institute of Certified Public Accountants
  4. ASC - International Accounting Standards Committee
  5. IASB - International Accounting Standards Board
  6. IAS - International Accounting Standards
  7. SIC - Standing Interpretations Committee
  8. IFRIC - IFRS Interpretations Committee