Understanding International Accounting Standards (IAS)

What Are International Accounting Standards (IAS)?

International Accounting Standards (IAS) are a set of rules for financial statements that were replaced in 2001 by International Financial Reporting Standards (IFRS). They've since been adopted by most major financial markets worldwide.

Both standards were issued by the International Accounting Standards Board (IASB), an independent body based in London. IFRS has been widely adopted with 160 of 168 nations and reporting jurisdictions committing to these accounting standards for domestically listed companies.

The United States doesn't follow IFRS, however. The U.S. Securities & Exchange Commission requires public companies in the U.S. to follow Generally Accepted Accounting Principles (GAAP). China and Japan also declined to adopt IFRS although adoption has slowly gained momentum in Japan over the years.

Understanding International Accounting Standards (IAS)

International Accounting Standards (IAS) were the first such standards issued by the International Accounting Standards Committee (IASC) formed in 1973. The goal was to make it easier to compare businesses worldwide, increase transparency and trust in financial reporting, and foster global trade and investment.

Globally comparable accounting standards can help promote transparency, accountability, and efficiency in financial markets. They help investors and market participants make more informed economic decisions regarding investment opportunities and risks. This can improve capital allocation.

Universal standards also significantly reduce reporting and regulatory costs, especially for companies with international operations and subsidiaries in multiple countries.

Moving Toward Global Accounting Standards

Significant progress has been made toward developing a single set of high-quality global accounting standards since the IASC was replaced by the IASB. The European Union has adopted IFRS, leaving the United States, Japan, and China as the only major capital markets without an IFRS mandate. Voluntary adoption is allowed in Japan and China says it's working toward IFRS.

The IFRS Foundation says that 147 jurisdictions require IFRS for all or most publicly listed companies, and 12 more permit its use as of September 2023.

The United States is exploring the adoption of international accounting standards. America's accounting standards body, the Financial Accounting Standards Board (FASB), and the IASB have collaborated on a project to improve and converge the U.S. generally accepted accounting principles (GAAP) and IFRS since 2002.

The convergence process is taking much longer than was expected, however, even as the FASB and IASB have issued norms together. This is reportedly due to the complexity of implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Securities and Exchange Commission (SEC), which regulates U.S. securities markets, has long supported high-quality global accounting standards in principle and it continues to do so. Fully understanding the similarities and differences between U.S. GAAP and IFRS is crucial in the meantime because U.S. investors and companies routinely invest trillions of dollars abroad.

One conceptual difference is that IFRS is a more principles-based accounting system. GAAP is more rules-based.

The Bottom Line

Academic research and reports from adopting jurisdictions such as the European Commission and Korean Accounting Standards Board indicate that IFRS adoption has positively impacted capital markets by reducing investment risk, lowering the cost of capital, and improving overall business efficiency.

Adoption of IFRS is crucial, according to IFRS, because it will make financial statements more comparable, transparent, and reliable across markets. This can make them easier for investors and companies globally to understand and use.