Although the US has not adopted the International Financial Reporting Standards (IFRS), accounting firms still can’t ignore the international set of rules used by many countries worldwide.
So, what is it, and how might it affect you?
What Are the IFRS
The IFRS are a globally developed and accepted set of accounting standards. They were devised and adopted in the European Union in the early 2000s, but their origins reach back to the 1970s.
Currently, 16 countries and economic entities use the IFRS, including the European Union, Russia, Japan, Canada, Australia, Brazil, and India.
Why Global Accounting Standards?
A global economy requires global rules. That’s true for many areas of international business, including shipping, insurance, foreign direct investments, and accounting.
A unified, international set of accounting rules and standards creates transparency, accountability, and economic efficiency for global financial transactions
Since more than a third of financial transactions in the world have at least some sort of international element (like transfers between global subsidiaries of the same company, or foreign trade transactions), global accounting standards are very helpful for the businesses concerned.
A unified, international set of accounting rules and standards creates transparency, accountability, and economic efficiency for global financial transactions, considerably reducing the administrative burden and working hours of globally active businesses.
IFRS and the US
The US opted out of using IFRS. Instead, US accounting firms need to adhere to the rules of GAAP (Generally Accepted Accounting Principles), adopted by the SEC (Securities and Exchange Commission).
In the early 2010s, there was a strong push for the US to adopt the IFRS. The process came to a halt in 2012, when the SEC published a report that raised concerns about the financing of the IFRS governing body, the International Accounting Standards Board (IASB).
IFRS are crucial for US companies involved in international joint ventures, foreign trade, investment, or any other global business activities.
In addition to that, accountants and other stakeholders believe that although an international set of accounting standards is desirable for global businesses, the interests of US companies are currently better served by the GAAP rules due to special legislative circumstances and tradition.
However, this doesn’t mean that accounting firms in the US don’t ever encounter IFRS rules. In fact, IFRS are crucial for US companies involved in international joint ventures, foreign trade, investment, or any other global business activities.
As Mary Jo White, Chairperson of the SEC remarked, “in light of…global realities, fully understanding IFRS, including similarities and differences between US GAAP and IFRS, is of central importance to US investors and companies.”
If your accounting firm has clients with cross-border interests like global trade, international investments, or subsidiaries around the globe, you should be prepared to receive and create accounting documents according to both standards.
Luckily, most accounting software providers work according to both sets of rules. However, especially if you work with both standards, it’s best if your client provides you with clear documentation and transparent payment records.