International Accounting Standards are international principles and rules for the presentation of financial accounts. Most commonly, this term refers to what are now called ‘International Financial Reporting Standards’ (‘IFRS’).
Here, we explain what the International Accounting Standards and IFRS are, and indicate some key ways in which they differ from the ‘Generally Accepted Accounting Principles’ (‘GAAP’) that apply in the United States. This will be of interest to any organization that is required to publish financial statements and operates globally.
What Is the Definition of ‘International Accounting Standards’
Strictly speaking, the ‘International Accounting Standards’ (‘IAS’) are a specific set of norms for the presentation of financial accounts, developed by the International Accounting Standards Board (IASB). Since 2001, those standards have been released under the name ‘International Financial Reporting Standards’ (IFRS). But, more generally, the term ‘international accounting standards’ might be used to refer to any accounting standard that applies to organizations across borders. As we shall explain below, this can include other sets of accounting standards, such as GAAP in the United States.
The push for international accounting standards first arose in the years following World War Two, where record levels of international investment encouraged countries to seek consistency in the way that financial information is reported.
The International Accounting Standards Committee (IASC) was formed in 1973 as the first international standard-setting body. From that point on the ‘IAS’ were issued. A re-organization in 2001 replaced this body with the IASB. From that point on the international standards that were issued were renamed as ‘IFRS’.
Compliance with the IFRS is either required or permitted in over 140 countries around the world, including across the European Union. However, there are significant jurisdictions where IFRS have not been accepted. This includes the United States (which applies ‘Generally Accepted Accounting Principles’ or ‘GAAP’), China and Japan.
Here our focus is on contrasting the IFRS with GAAP in the US, as both may need to be considered by international businesses (we give some examples of when, further below).
What Are the International Financial Reporting Standards (IFRS)?
The IFRS is a broad system of norms for accounting. We cannot set out all of the principles and rules involved here, but some of the key features are set out below.
Are GAAP International Standards?
Strictly speaking, no. US GAAP apply only in the US, and they do not apply to all companies. However, the Securities & Exchange Commission (SEC) in the US does require their use for publicly-listed companies. It is worth noting. however, that GAAP does apply in many cases to foreign businesses operating into the United States: This may be because the business is operating in a context where GAAP compliance is legally mandated (such as the stock market), or because, as a contractual matter, a foreign business has agreed to apply US GAAP dealing with US business.
How Do GAAP and IFRS Differ?
It was originally expected that GAAP would ‘harmonize’ with IFRS over time. There are many similarities, and new developments in one system tend to be, to some extent, reflected in developments in the other. For example, the new IFRS lease accounting standard that brings leases on to the balance sheet has also been introduced into GAAP (albeit with key differences). However, there are a range of sticking points between the two systems which means that complete harmonization has not happened, and is unlikely to happen in the near future.
Global compliance means being familiar with all the accounting standards that apply to the operation of your business. Many countries follow the international accounting standards known as IFRS, but many important economies, such as the US, China and Japan apply their own system. In the US, this accounting system is known as ‘GAAP’.
Businesses operating internationally need to carefully consider the accounting standards that apply across all their international locations. If seeking investment from a foreign entity, businesses also need to consider the standards that are expected by that foreign entity. This may require preparing several sets of financial statements, compliant with each applicable systems.
Horizons supports business expansion across global locations. When advising on the set up of a local subsidiary or company, a merger or acquisition, or some other form of global expansion, Horizons can support your business: They ensure that you have the necessary support to compile compliant financial statements as required under the law.