What it means
IFRS is issued by the International Accounting Standards Board, an independent body based in London, and is adopted country by country through local law or regulation. The European Union, the United Kingdom, Australia, Canada and most of Asia and South America require listed companies to use it.
The point of a shared rulebook is comparability. If a mining group in Chile and a mining group in Norway both report under IFRS, an investor can line up their revenue and asset figures without translating between two different sets of definitions.
IFRS is often described as principles based, while US GAAP is described as rules based. In practice that means IFRS states the underlying idea and expects preparers to apply judgement, whereas US GAAP tends to spell out detailed thresholds and exceptions for particular industries.
Several of the differences are large enough to change reported profit. IFRS bans the last in, first out method of costing inventory, allows qualifying development costs to be capitalised as an asset rather than expensed immediately, and permits property to be revalued upwards.
Smaller companies are not always caught by the full standard. Many countries offer IFRS for SMEs, a slimmed down version with far fewer disclosures, and private businesses may still be allowed to use their own national rules instead.
For a non-accountant the practical question is simply which basis a set of numbers sits on. Two versions of the same company's profit can differ by millions purely because of the framework used, so a figure quoted without its basis is close to meaningless.
In practice
Real-world examples.
Example
A Brazilian food exporter lists shares in London and must convert its accounts to IFRS. The biggest adjustment is inventory, because it had used last in, first out costing, which IFRS prohibits, and restating to weighted average cost lifts reported inventory by $2,400,000 and prior year profit by $600,000.
Example
A German engineering group capitalises $4,000,000 of development costs on a new gearbox under IFRS. A US competitor expenses identical spending, so the German group reports higher profit in the year of the spend and lower profit across the next five years as the $4,000,000 is amortised at $800,000 a year.
Example
A privately owned retailer with $30,000,000 of turnover applies the reduced disclosure version of the standard rather than the full framework. Its bank wants numbers that can be compared with other borrowers, but no outside investors rely on the detailed notes, so the lighter version is enough.
Formula
Calculation
There is no single IFRS formula, but one of the most common differences can be quantified directly:
Profit difference versus US GAAP = development costs capitalised - amortisation of previously capitalised development costs
A technology group spends $3,000,000 on research and development in a year. Under IFRS, $1,200,000 falls in the research phase and must be expensed, while $1,800,000 meets the development criteria and is capitalised as an intangible asset, then amortised over six years at $1,800,000 / 6 = $300,000 a year from the following year.
Profit before any research and development spending is $5,000,000. Under IFRS the year one charge is $1,200,000, so profit is $5,000,000 - $1,200,000 = $3,800,000. Under US GAAP the whole $3,000,000 is expensed, giving $5,000,000 - $3,000,000 = $2,000,000, a gap of $1,800,000. In year two, with the same trading profit and no new spending, IFRS shows $5,000,000 - $300,000 = $4,700,000 against $5,000,000 under US GAAP, so the early advantage steadily reverses.Case study
Seen in the real world.
This is an illustrative and entirely fictional example. Northwind Instruments, an invented maker of laboratory equipment, listed on a European exchange and reported under IFRS while also filing a reconciliation for a group of American investors. Its IFRS profit for the year was $4,200,000.
The reconciliation to US GAAP stripped out $1,400,000 of development costs the company had capitalised during the year and added back $300,000 of amortisation on costs capitalised earlier, a net reduction of $1,100,000. That took reported profit to $4,200,000 - $1,100,000 = $3,100,000, a fall of roughly 26%.
The finance director of the fictional company spent most of the results call explaining that the business had not suddenly become 26% less profitable. Nothing about the cash, the orders or the products had changed; only the rulebook had, which is exactly why analysts ask which basis a number is prepared on before they use it.
Watch out
Common mistakes.
- Assuming IFRS and US GAAP produce broadly the same profit figure, when the difference on a research heavy business can run to millions in a single year.
- Treating IFRS as a single fixed document, when it is a growing library of standards that changes as new ones are issued and old ones are replaced.
- Comparing a company's current year IFRS numbers with prior year figures prepared under a national framework without checking that the earlier period was restated.
Questions
People also ask.
Who actually writes IFRS?
The International Accounting Standards Board drafts and issues the standards, but each country decides through its own law or regulator whether and how to adopt them.
Does a small private company have to use IFRS?
Usually not, because the requirement generally applies to listed companies and other public interest entities, with smaller businesses using national rules or IFRS for SMEs.
Is IFRS the same as International Accounting Standards?
Not quite, since the older standards carry the IAS label and remain in force unless replaced, so the full rulebook contains both IAS and IFRS numbered standards.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%