International Financial Reporting Standards (IFRS) lurk in the background for many digital businesses that operate around the world.
As an online entrepreneur, you know about the various sales tax, VAT, and GST laws that apply when you sell across borders. But sometimes there are specific ways of accounting that you must adhere to, as well.
The IFRS are likely in effect in one or several of the countries where you do business, but what are the standards and do they apply to you?
That’s what we’re here to answer. (Psst — SaaS and subscription businesses should definitely take a look at #15).
This article will explain what each standard means, who develops and regulates them, and which companies need to comply.
What are the IFRS?
The IFRS are a set of accounting rules for the financial statements of public companies. The goal is to make financial reporting consistent, transparent, and easily comparable across the globe. The set of standards is evolving and new ones are added every couple years.
The concept is similar to the United States’ Generally Accepted Accounting Principles (GAAP), but IFRS are the global version.
So far the standards have been adopted in 166 jurisdictions, including all countries in the European Union. Other countries include Australia, Brazil, Canada, India, South Korea, Malaysia, Pakistan, GCC countries, Russia, Chile, South Africa, Singapore, and Turkey. They’re truly around the world!
Who must comply with IFRS?
Which businesses are required to use IFRS depends on each jurisdiction. Typically, publicly traded companies must comply with IFRS. Some countries require SMEs to comply, too.
Smaller, private companies can apply the standards to their accounting practices, even when it’s not required by law. There are a few reasons why such businesses might want to voluntarily adopt IFRS:
- Seeking funding from VCs, other investment firms, or even governmental grants. These organizations might use IFRS to evaluate potential investments. If your business accounting already aligns with their standards, it’s much easier for investors to have a clear picture of the opportunity and to trust your reporting!
- Plans to scale and go public. The standards will be mandatory once the company is public anyway. If feasible, why not have them in place before you file for an IPO?
- Solid business practices. Even without big growth plans, some companies may simply want to use solid, globally approved accounting practices. Some of the standards might be a pain to implement for smaller teams with fewer resources (read: burden), but for these companies, IFRS is not an all-or-nothing game. You can choose which standards make sense for your business.
Who determines the IFRS?
The IFRS Foundation describes itself as a not-for-profit, public interest organization whose aim is to not only develop a set of enforceable rules but to also help companies adopt them. With its head office in London, the foundation has a three-tier structure.
The group that actually creates the rules is the International Accounting Standards Board. That board is in turn governed and overseen by trustees from around the world (IFRS Foundation Trustees) who in turn are accountable to a monitoring board of public authorities (IFRS Foundation Monitoring Board).
The IFRS standards
Below is a quick overview of each standard. The nitty-gritty details of how these standards work can be found through the foundation’s website or other global financial firms, such as Deloitte. If there’s any concept you don’t understand, don’t worry! Our explanation of accounting jargon should help you out.
Note: Jurisdictions have some leeway in how they apply these standards, so be sure to double check the amendments and interpretations wherever you’re in business.
IFRS 1 - First-time Adoption of International Financial Reporting Standards
This lays out the procedures that a company must follow when it adopts IFRS for the very first time, as a guide for preparing its general financial statements.
IFRS 2 - Share-based Payment
Companies must include share-based payment transactions (such as granted shares or share options) in financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity deals.
IFRS 3 - Business Combinations
This standard covers mergers and acquisitions. Such combined businesses should be reported using the “acquisition method,” which generally says assets acquired and liabilities assumed to be measured at their fair values at the acquisition date.
IFRS 4 - Insurance Contracts
This standard covers all types of insurance contracts, including short-term, long-term, and re-insurance deals. It will be replaced by IFRS 17 as of January 1, 2023.
IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations
Non-current assets include long-term investments that aren’t easily turned into cash, such as real estate or equipment. When a company wants to sell such things, IFRS 5 applies. “Non-current assets held for sale” are not depreciated, are measured at the lower of carrying amount and fair value less costs to sell, and are listed separately in the financial statement.
IFRS 6 - Exploration for and Evaluation of Mineral Resources
Well this is a niche one! It basically allows companies who just adopted IFRS to apply the standards to activities that happened before the adoption date.
IFRS 7 - Financial Instruments: Disclosures
This requires specific disclosure of information about the value (and risks!) of financial instruments to a company, both in qualitative and quantitative terms.
IFRS 8 - Operating Segments
Certain companies (especially those with publicly traded securities) must share information about their operations, including the products and services they sell, where they sell, and their major customers.
IFRS 9 - Financial Instruments
This standard covers requirements for recognition and measurement, impairment, derecognition and general hedge accounting.
IFRS 10 - Consolidated Financial Statements
If a company owns or controls multiple businesses, then it must prepare consolidated financial statements that cover all of them. This comes with specific accounting requirements.
IFRS 11 - Joint Arrangements
When two different entities share control of a business or investment, they must follow this standard to properly account for it, outlining each party’s rights and obligations.
IFRS 12 - Disclosure of Interests in Other Entities
This is a sweeping standard that requires companies to disclose financial interests. According to Deloitte, this information allows people who are looking at financial statements to evaluate:
- the nature of, and risks associated with, its interests in other entities
- the effects of those interests on its financial position, financial performance and cash flows.
IFRS 13 - Fair Value Measurement
This provides a single framework for measuring fair value and requires disclosures about fair value measurement. Fair value is based on the 'exit price' notion and uses a 'fair value hierarchy', which results in a market-based, rather than company-specific, measurement.
IFRS 14 - Regulatory Deferral Accounts
This applies to companies that sell goods or services to customers at a price or rate that is subject to regulation. The standard includes financial reporting requirements for such cases.
IFRS 15 - Revenue from Contracts with Customers
SaaS and subscription businesses, listen up! This standard says how companies should recognize revenue and which other disclosures to include in statements. The standard provides a single, principles based five-step model to be applied to all contracts with customers.
IFRS 16 - Leases
This standard determines how a business will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model.
IFRS 17 - Insurance Contracts
Coming in 2023 and meant to replace IFRS 4, this standard covers the principles for the recognition, measurement, presentation and disclosure of insurance contracts. The goal is that this information will help other people assess the effect that insurance contracts have on the business’ financial position, performance, and cash flows.
If you’re concerned about applying these international standards or US GAAP to your accounting, we encourage you to check with a certified accountant that can give you solid, professional advice.
If you need help simplifying your small business accounting, that’s where we come in! Quaderno is designed to automate billing and expenses, as well as sales tax, VAT, and GST.
In fact, Quaderno can do all of the following:
- Calculate the right amount of tax to charge each customer, right on your checkout page.
- Automatically verify the tax IDs you receive from customers.
- Collect and store the customer location evidence that you need to get from every sale.
- Create and send invoices in multiple languages and currencies.
- Send invoices automatically.
- Ensure you never overpay on your returns.
- Notify you when any tax policies or tax rates change, so that you’re always in the loop.
Sign up for your free trial of Quaderno today!