The relevance and importance of International Financial Reporting Standards

I often receive questions relating to the International Financial Reporting Standards (IFRS) and why it plays such an important role when it comes to reporting on the financial performance and financial position of a company.

The world economy has become increasingly interdependent over time, but this process of economic globalisation has accelerated significantly over recent years. The growing scale of cross-border trade and flow of international capital has, however, brought about some of its own challenges, with one being the presentation and interpretation of financial information.

Historically (and to a certain extent even today still) different countries maintained and applied their own sets of national accounting and reporting standards, resulting in transactions being treated and financial information reported and interpreted differently in various jurisdictions.

Unpicking this complexity involves studying the minutiae of different accounting standards applied, as what might seem to be minor differences in accounting standards could have a major impact on a company’s reported financial performance and financial position. This patchwork of accounting requirements therefore often add cost, complexity and ultimately risk to those preparing financial statements and those using the financial statements to make economic decisions.

The need therefore arose for financial information that is relevant, reliable and comparable across borders as companies seeking capital and investors and lenders seeking investment opportunities look beyond borders. The IFRS Foundation (the Foundation) was established to address this need and is an international organisation responsible for developing a single set of high-quality global accounting standards, known as the IFRS Standards. The mission of the Foundation is to bring transparency, accountability and efficiency to financial markets around the world by developing the IFRS Standards.

The IFRS Standards is set by the Foundation’s standard-setting body, the International Accounting Standards Board (IASB). The IASB is an independent, private-sector body that develops and approves these standards. The IFRS Standards constitute a globally recognised set of standards for the preparation of financial statements that prescribe: the items that should be recognised as assets, liabilities, equity, income and expenses; how to measure these items; how to present these items in a set of financial statements; and the related disclosures required for each of these items.

Part of the Foundation’s mission statement states that the IFRS Standards:

Bring transparency by enhancing the international comparability and quality of financial information, enabling investors and other market participants to make informed economic decisions.

Strengthen accountability by reducing the information gap between the providers of capital and the people to whom they have entrusted their money. The standards provide information needed to hold management to account. As a source of globally comparable information, IFRS Standards are also of vital importance to regulators around the world.

Contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus improving capital allocation. Use of a single, trusted accounting language lowers the cost of capital and reduces international reporting costs for businesses.

The IFRS Standards have therefore been developed to address the challenge regarding the presentation and interpretation of financial information in today’s world of borderless financial markets. Namibia is one of 166 jurisdictions globally and one of 38 jurisdictions in Africa where IFRS are applied.

Applying one set of high-quality standards by companies throughout the world improves the comparability and transparency of financial information and reduces financial statement preparation costs. When these standards are applied rigorously and consistently, capital market participants receive higher quality information for decision-making. 

Source: James Chapman – Namibia Economist

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