What Are the International Financial Reporting Standards?

International Financial Reporting Standards (IFRS) are a unified set of accounting principles for public companies worldwide. The objective of IFRS is to create a common financial language that enhances the consistency, transparency, and comparability of financial statements, helping investors and other stakeholders make more informed economic decisions. The standards are developed by the International Accounting Standards Board (IASB), and by providing a universal framework for reporting business transactions, IFRS facilitates international investment and builds trust in capital markets.

The Conceptual Framework for Financial Reporting

The Conceptual Framework for Financial Reporting is the theoretical foundation for IFRS. It is not a standard and does not override specific standards, but it provides the concepts that guide the IASB in developing new standards. It also helps preparers develop consistent accounting policies when no specific standard applies.

For information to be useful, it must be relevant and provide a faithful representation. Its usefulness is enhanced by comparability, verifiability, timeliness, and understandability. The framework defines the five elements of financial statements:

• Asset: A present economic resource controlled by the entity.
• Liability: A present obligation to transfer an economic resource.
• Equity: The residual interest in the assets after deducting all liabilities.
• Income: Increases in assets or decreases in liabilities that increase equity.
• Expenses: Decreases in assets or increases in liabilities that decrease equity.

Governance and Standard-Setting Process

The governance structure of IFRS is led by the IFRS Foundation, a not-for-profit corporation that provides oversight for the organization. The Foundation’s trustees are responsible for governance and strategy, including securing funding and making appointments to the standard-setting board and other bodies. The International Accounting Standards Board (IASB) is the independent body responsible for developing and publishing IFRS. It has full responsibility for all technical matters, and its members are chosen for their technical expertise and diverse international backgrounds.

The IFRS Interpretations Committee (IFRIC) assists the IASB by addressing specific application issues. When needed, the committee develops interpretive guidance that is then approved by the IASB.

Developing a new standard follows a transparent process. The IASB begins with research and consultation, then may publish a discussion paper for public comment. This is followed by an exposure draft, and after considering public feedback, the IASB issues a final IFRS Standard.

Key Principle-Based Distinctions from US GAAP

A primary difference between IFRS and United States Generally Accepted Accounting Principles (US GAAP) is their philosophy. IFRS is a “principle-based” system with a conceptual framework, requiring professional judgment to apply standards to the substance of transactions. In contrast, US GAAP is more “rules-based,” with prescriptive and specific guidance.

One example is inventory valuation. IFRS prohibits the Last-In, First-Out (LIFO) method for valuing inventory. US GAAP, however, permits companies to use either LIFO or the First-In, First-Out (FIFO) method, which can reduce comparability between companies.

Another distinction is the treatment of property, plant, and equipment (PP&E). IFRS allows companies to revalue their PP&E to fair value, meaning the reported value can increase or decrease over time. This practice is forbidden under US GAAP, which requires these assets to be carried at historical cost less accumulated depreciation and impairment charges.

The accounting for development costs also differs. Under IFRS, certain development costs can be capitalized as an intangible asset if specific criteria are met, such as demonstrating technical feasibility. In contrast, US GAAP requires most research and development costs to be expensed as they are incurred.

Overview of Core IFRS Standards

Certain standards provide detailed guidance on specific accounting topics, translating the Conceptual Framework’s principles into actionable requirements. They dictate how transactions should be recorded and presented in financial statements.

IFRS 15 – Revenue from Contracts with Customers

IFRS 15 provides a single framework for revenue recognition using a five-step model to determine when and how much revenue to recognize:

• Identify the contract with a customer.
• Identify the separate performance obligations in the contract.
• Determine the transaction price.
• Allocate the transaction price to the performance obligations.
• Recognize revenue when each performance obligation is satisfied.

Revenue is recognized when the entity satisfies a performance obligation by transferring control of a good or service to the customer, which can happen at a point in time or over time.

IFRS 16 – Leases

IFRS 16 changed lease accounting by introducing a single lessee accounting model. It requires lessees to recognize assets and liabilities for most leases on their balance sheets, eliminating the previous distinction between finance and operating leases for lessees. A lessee recognizes a right-of-use (ROU) asset and a corresponding lease liability for its obligation to make payments. Practical expedients are available for short-term leases (12 months or less) and leases of low-value assets, which can be excluded from this requirement.

IFRS 9 – Financial Instruments

IFRS 9 addresses accounting for financial instruments through a model for classification, measurement, impairment, and hedge accounting. Financial assets are classified based on the entity’s business model and the asset’s cash flow characteristics. The measurement categories are amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVPL).

IFRS 9 introduced an “expected credit loss” model for impairment. This forward-looking model requires accounting for expected credit losses from the moment a financial instrument is recognized, unlike the previous “incurred loss” model. The standard also includes a revised model for hedge accounting to better align with risk management activities.

Global Adoption and Application

The use of IFRS is widespread, with more than 140 jurisdictions requiring it for most domestic publicly listed companies. While many major economies have embraced IFRS, the United States requires domestic public companies to use US GAAP. However, the U.S. Securities and Exchange Commission (SEC) permits foreign private issuers to file financial statements using IFRS without a reconciliation to US GAAP.

The IASB also developed the IFRS for SMEs Accounting Standard for smaller, non-public entities. This is a self-contained, simplified version of IFRS tailored to the needs of small and medium-sized entities. The standard is less complex and has fewer disclosure requirements. The third edition of this standard was issued in early 2025 and is effective from January 1, 2027.