International Financial Reporting Standards (IFRS) are the most common form of international accounting standard. Here we examine four key IFRS that need to be considered by any business expanding globally into an IFRS jurisdiction.
Note, this article provides general information only. For professional guidance specific to your situation, advice from a certified, chartered or registered accountant should be sought.
What is the Definition of the International Financial Reporting Standards (IFRS)?
The IFRS are a set of accounting standards, rules and principles for the presentation of financial statements, which are issued by the International Accounting Standards Board (IASB). They can be distinguished from the ‘International Accounting Standards’ (IAS), which are the standards that were issued by the predecessor to the IASB, the International Accounting Standards Committee (IASC), from 1971 to 2001.
As many IAS still apply, both the IAS and the newer IFRS need to be considered in any jurisdiction where IFRS applies. In this article, we discuss both the IFRS and the IAS when they are applicable.
Currently, IFRS apply in over 120 countries. Note, however, that different countries have different rules about when the IFRS apply (such as only applying them to publicly-listed companies).
Complying with international accounting standards such as IFRS must be a crucial element of any company’s global compliance strategy when expanding abroad.
What is the Difference Between IFRS and GAAP?
While 120 countries have chosen to implement IFRS, including significant multi-country alliances such as the European Union, not all major economies have done so. In those countries where IFRS and IAS apply, they may be applied with modifications specific to those countries.
The United States is one of the countries that has not adopted IFRS, and instead applies its own ‘Generally Accepted Accounting Principles’, or GAAP.
You can read more about the difference between IFRS and GAAP in What are International Accounting Standards?
IFRS 1 – How to Switch from GAAP to IFRS
When a US company operates outside the US, often it needs to come to terms with IFRS. There is a special IFRS standard, IFRS 1, that applies to companies applying IFRS for the first time.
The general rule is that IFRS need to be applied retrospectively from the reporting date, including to interim reports. However, there are a range of exceptions. The list of optional exceptions is long, but includes:
- Assets and liabilities of subsidiaries, associates, and joint ventures
- This may be an important accounting consideration for businesses expanding overseas via a subsidiary or joint venture
- Share-based payments
- This is relevant where, for example, employees will be remunerated with shares/stocks or related financial instruments
- Insurance contracts
- Leases
- Investments in subsidiaries, joint ventures, and associates.
There are also mandatory areas where retrospective application of IFRS is not permitted. This includes, but is not limited to:
- Estimates
- Hedge accounting
- This covers accounting where entries adjusting the fair value of a security and its hedge are treated together
- Non-controlling interests
- This is a minority interest in a company and hence, one without control
- Impairment of financial assets, and Government loans
IAS 1 – Presentation of Financial Statements
The financial reporting which the IFRS relates to culminates in the issuing of the financial statements. IAS 1 sets out the core requirements for presenting financial statements. Important elements include:
- Financial information is presented on a ‘going concern’ basis (i.e., on the assumption that the business will continue indefinitely), and on an accrual basis (income and expenses are reported as incurred, rather than when payment is made or received)
- The Statement of Financial Position covers Assets (e.g., property, plant and equipment; intangible assets; financial assets; tax assets inventories; receivables; and cash and cash equivalents), Equity, Liabilities (including deferred tax liabilities, current and non-current liabilities), and Assets and Liabilities held for sale
- The Statement of Comprehensive Income. This covers an entity’s profit or loss over the reporting period and itemizes the revenue and expenses that resulted in that profit or loss
- The Statement of Changes in Equity. This covers income as attributable to owners and non-controlling interests, transactions with owners and dividends
- A Statement of Cash Flows prepared in alignment with IAS 7. This reports cash as it flows in and out of the entity and distinguishes between cash from operating activities, cash from investing activities, and cash from financing activities.
IFRS 3 – Acquisitions or Business Combinations
A common method of an enterprise entering a foreign market is to do so via a merger or an acquisition of an existing local enterprise. When a business acquires another business, IFRS 3 specifies how this needs to be accounted for, including:
- Recognition of the assets and liabilities acquired in the transaction, as well as any non-controlling interest in the acquisition
- Recognition of the consideration that applies in the transaction
- Measurement of the goodwill acquired in the purchase.
IAS 19 – Accounting for Employee Benefits
When expanding into a new country, it is often a legal requirement to provide a range of employee benefits, such as compulsory pension contributions, redundancy payments, and annual leave. However, the accounting framework for these benefits is necessarily complex and needs to be carried out in accordance with IAS 19.
The complexity arises from the uncertainty associated with many benefits: Employers don’t know decades or years in advance exactly how long former employees will be receiving benefits. For example, pensions organized through a ‘defined benefit plan’ require actuarial methods to correctly account for the liability. That calculation will consider a range of factors relating to employees (such as predicted turnover), and cost increases over time, among other factors, to arrive at a final amount for financial reporting purposes.
Conclusion
Businesses need to carefully consider the accounting standards that apply in every country that they operate in. When expanding globally, it is particularly important to check whether the International Financial Reporting Standards or IFRS, apply in the country of expansion.
Horizons is a global expansion consultancy that can ensure that your expansion is compliant with IFRS. This applies whether you expand via setting up a subsidiary, a merger or acquisition or a Global PEO solution.
