International Financial Reporting Standards (IFRS)
International Financial Reporting Standards, also referred to as IFRS or IFRS Accounting Standards, are a set of international rules, standards and procedures accountants use to prepare financial statements.
Canadian entrepreneurs engage with businesses, suppliers and investors worldwide in an increasingly global economy. These connections have created a greater need for globally consistent financial reporting practices. By using International Financial Reporting Standards (IFRS) in their accounting, businesses make it easier for international investors to evaluate their viability.
“If you’re trying to attract global investment, you need globally comparable financial statements. The purpose of IFRS Accounting Standards is to provide a globally consistent basis for standards wordlwide so that we have efficient capital markets across borders,” says Armand Capisciolto, FCPA, FCA and chair of the Canadian Accounting Standards Board.
Whether you aspire to take your company public, are investing abroad or seeking foreign investment, understanding and implementing IFRS is a strategic imperative.
Who created IFRS?
The International Accounting Standards Board (IASB) created IFRS to standardize how financial statements are prepared. The goal was to make accounting standards consistent and transparent across borders, allowing investors to compare companies easily.
It took hold worldwide in 2005 when the European Union (EU) required all EU-listed public companies to use IFRS. “That was a big step for IFRS Accounting Standards because it’s when a large market started using them,” Capisciolto says.
Today, 147 jurisdictions worldwide use IFRS for all or most publicly accountable entities, leading to global harmonization of financial reporting and adherence to international norms.
“Before IFRS, every country in the world had its own GAAP (generally accepted accounting principles). Investing across borders then becomes very difficult. An investor couldn’t be certain if the financial information they were getting from Canada was the same as what they received from the U.K., Germany, or elsewhere,” Capisciolto says.
The adoption of IFRS in Canada in 2011 represented a fundamental shift from our previously used GAAP, signifying the country’s commitment to global standards in financial reporting.
Is IFRS mandatory in Canada?
Since 2011, all publicly accountable enterprises in Canada, including companies listed on the Toronto Stock Exchange, Canadian Securities Exchange, and other Canadian exchanges, have been required to use IFRS to prepare their financial statements. Publicly accountable enterprises also include businesses like credit unions and mutual entities, which, while typically not publicly listed, hold assets in a fiduciary capacity.
One of those jurisdictions which has yet to adopt IFRS is the U.S., which uses U.S. GAAP. Although differences exist between IFRS and U.S. GAAP, the accounting outcomes of applying these standards typically result in similar outcomes.
Private companies in Canada can adopt IFRS or Accounting Standards for Private Enterprises (ASPE).
“IFRS is more onerous than ASPE, but if you’re considering publicizing your company or attracting global capital, you need to apply standards understood globally. That would be IFRS,” Capisciolto says.
He adds that specific industries are more likely to adopt IFRS. “In the tech space, revenue is a critical measure. Even if a company is trying to attract domestic capital, potential investors looking at the financial statements would also look at other companies’ IFRS Accounting Standards statements. It makes the investor’s life easier, leads to more efficient decision making and lowers costs for the investor if companies use the same standards. They can more easily compare companies.”
What is the difference between Canadian GAAP and IFRS?
Canada works with a multi-framework model of accounting standards. The Canadian GAAP is comprised of four parts:
- International Financial Reporting Standards (IFRS)
- Accounting Standards for Private Enterprises (ASPE)
- Accounting Standards for Not-for-Profit Organizations (ASNPO)
- Accounting Standards for Pension Plans (ASPP)
“Whether we’re talking about IFRS or ASPE, they are part of Canadian GAAP. IFRS Accounting Standards is Canadian GAAP,” said Capisciolto.
IFRS is a rigorous system detailing how companies must maintain their financial records and report expenses and income. The significant and detailed disclosures required can consume a business’s time and resources in a way that ASPE would not. Companies that use IFRS typically need the advice and services of a CPA to ensure proper compliance.
“You need someone who can read and understand standards and ensure they comply correctly. Even for a simple entity, IFRS Accounting Standards will be more onerous,” says Capisciolto.
For example, a contractor using IFRS would need to report more detailed information about their contracts in progress than if they were adhering to ASPE. They would need to disclose how much work is left and how much revenue they expect for each ongoing project to create a complete picture of the business’s finances—now and in the foreseeable future.
And if you invest abroad and have foreign operations? In that case, using IFRS provides the benefit of aligning the accounting for all entities in your organizational structure.
ASPE doesn’t require such detail because companies that use it typically have relationships with their lenders and can answer questions and provide further information if needed. A Canadian bank or other domestic investor is more likely to connect with the business to gather the information they need to extend credit. An international investor is less likely to reach out.
“With IFRS Accounting Standards, an investor can look at a business’s financial statements to meet most of their needs. However, if a company is private and uses ASPE, the investor would need to strike up a relationship, as they may need to see additional information to complete their assessment,” Capisciolto says.
He says it’s essential to consider both models from a cost-benefit perspective. While ASPE is more straightforward and requires less time and resources, attracting foreign investment can create difficulties. On the other hand, IFRS can be costly to comply with. If a company isn’t looking for foreign capital, it may be more burdensome than advantageous.
Standard IFRS requirements
IFRS accounting standards comprise some 3,000 pages of exacting detail to ensure companies worldwide present transparent, comparable financial statements.
“When you think about the nature of IFRS—communicating standards that apply in 147 countries—the standards need to be highly principled and specific to function and be applied in all those jurisdictions.”
Here are the key elements of IFRS:
Principles-based approach to accounting
This means principles and concepts are emphasized rather than strict rules. The approach can provide flexibility in financial reporting but may require significant judgment in applying the standards.
Prescriptive format and content of financial statements
These prescriptive elements include the statement of financial position, statement of comprehensive income, statement of changes in equity and statement of cash flows.
Specific guidelines for recognition and measurement
IFRS recognizes revenue, expenses, assets and liabilities in a way that other GAAPs do not. Entrepreneurs need to understand these rules to ensure accurate financial reporting.
Specifics for consolidation of financial statements
Entrepreneurs need to understand the detailed rules for complex ownership structures.
It’s critical to ensure that financial statements have all the necessary information for investors, other businesses and government regulators to make informed decisions.
Rules for transitioning
There are transitional and disclosure requirements when moving from another GAAP to IFRS.
It’s essential to stay informed on any development or update from the IASB.
Whether you’re a public company that is required to use IFRS or a private company considering adopting it to aid in foreign investment, it’s crucial to complete the necessary due diligence to ensure you comply.
You can find more detailed information about IFRS at this link.
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