International Financial Reporting Standards (IFRS)
The International Financial Reporting Standards (IFRS) describe international accounting standards for companies. These standards are published by the Accounting Standards Board (IASB). The goal is to create an international comparability for companies. The International Financial Reporting Standards are mandatory in many countries and contain standards and official interpretations of these standards. The second main goal is to gather information about the financial situation of companies.
The International Financial Reporting Standards Foundation was founded in March 2001 in Delaware, USA.
Annual reports that are created based on the rules of the IFRS are designed to give information about the financial and profit situation of one company. This already shows one difference compared to the third chapter of the German HGB.
The German HGB focuses much more on the protection of the creditors. The information is only considered as a second goal in the HGB.
The IFRS method follows the principals of a strict definition and separation of different financial periods und also always follows the idea of the going-concern-principal. Each annual report that is based on the IFRS rules has to meet the requirements regarding essentiality, comprehensibility and comparability.
A main goal remains the comparability of financial reports of companies worldwide. Additional the development of an integrated international capital market shall be supported by using the IFRS standards. This international market should work as efficient as possible. Furthermore investors shall be protected. Another goal of the IFRS is to strengthen the trust of the market participants for the international financial markets and their free capital movement.
Finally the IFRS are used as a set of rules for international and cross-border businesses and for international stock market listings.
Setup of the IFRS
The IFRS are prepared and published in English language but they are also translated into many other languages such as German, French and Spanish.
In its most easy interpretation the IFRS are some kind of a collection of rules for the creation of annual and financial reports of companies.
It is of high importance that the standards are being interpreted in the same way in all countries. Since 1997 the SIC and later on also the IFRIC boards act as kind of neutral authorities that try to solve problems with the interpretation of the standards.
Many supporters of the IFRS argue that by using these international standards the negotiations of companies with banks about capital loans are being simplified because the IFRS increase the transparency for financial key performance figures such as the liquidity, the equity ratio or the stock turnover. But on the other side the IFRS are not 100% legally binding internationally. Principally each country decides for its own if and how far it wants to follow the IFRS. In the EU, for example, all companies that want to list their shares in one of the regulated markets have to prepare an annual financial report based on the IFRS by law. All other companies can prepare their annual reports based on the IFRS if they want to. In Germany all companies that are in the process of going public also have to prepare their annual reports based on the rules of the IFRS.
In contrary to the German HGB the IFRS calculates all company assets based on the current market value and not on the historic acquisition costs. This makes clear once again that annual reports based on the IFRS are mainly focusing on the interest of investors to get information for their investment decisions.
The IFRS try to avoid to show any hidden reserves.