Definition
The International Accounting Standards (IAS) are guidelines and rules set by the International Accounting Standards Board (IASB) to establish a common global language for business accounting. The standards aim to make financial information comparable and understandable across international boundaries. Mainly used in financial reporting, IAS guides how certain types of transactions and other events should be reported in financial statements.
Phonetic
International: /ˌɪntərˈnæʃənəl/Accounting: /əˈkaʊntɪŋ/Standards: /ˈstændərdz/IAS: /ˌaɪ.eɪˈɛs/
Key Takeaways
<ol><li>International Accounting Standards (IAS) are professional standards for the preparation and presentation of financial statements. They’re issued by the International Accounting Standards Board (IASB) and provide guidelines on how to account for various transactions and events.</li><li>IAS aims to promote transparency, accountability, and efficiency in financial markets around the world. This ensures that companies in different countries can use a consistent method of financial reporting, which makes comparing and analyzing financial statements across borders easier.</li><li>IAS adoption has been widespread around the world but not universal. While they are mandatory across the European Union and in many other countries, some jurisdictions, such as the U.S., do not require companies to adhere to IAS, instead using their own national Generally Accepted Accounting Principles (GAAP). This variance can result in differences in financial reporting standards between countries.</li></ol>
Importance
International Accounting Standards (IAS) are important because they provide a unified set of financial reporting standards to ensure consistency and transparency in financial reporting across all international boundaries. These standards are crucial in a globalized economy as they promote trust and allow investors, regulators, and stakeholders to accurately compare and understand a company’s financial health irrespective of the country where the company operates. This uniformity eliminates the potential confusion caused by various national accounting principles and enhances the reliability and credibility of financial information disclosed by multinational companies, thus facilitating cross-border transactions and investments.
Explanation
The International Accounting Standards (IAS) are a set of accounting guidelines that aim to standardize accounting practices across international boundaries to ensure consistency, comparability, and transparency in financial reporting. The primary purpose of these standards is to provide a global framework for how public companies prepare and disclose their financial statements. As a consequence, it allows investors and companies to make more accurate comparisons between the financial health of multinational entities.IAS is used extensively for various purposes in the financial world. Primarily, International Accounting Standards reduce inconsistencies in financial reporting, making it easier for foreign investors to understand the financial standing of organizations across countries. It reduces financial unpredictability and volatility, which is commonly seen when companies use different accounting standards. It also aids multinational corporations by streamlining their financial reporting processes in all countries where they function. This implies that they would no longer have to modify their financial reports to align with the particular accounting standards of each country in which they conduct business. Hence, adopting IAS not only increases the richness and quality of financial information, but also lowers the barrier to entry for businesses intending to operate or invest worldwide.
Examples
1. IFRS 16 Leases: This is a recent example from International Accounting Standards where companies are required to report all leases on their balance sheets. This includes major retail firms like Tesco and Sainsbury’s that have significantly large property leases. In its 2019 annual report, Tesco reported that it had included £7.4bn of lease liabilities in its financial statements for the first time because of the transition to IFRS 16.2. Nokia Corporation: Nokia, a Finnish multinational telecommunications, applied IAS 38 (Intangible Assets) when it acquired the Canadian company, “Nortel Networks”. IAS 38 helped Nokia to measure the fair value of intangible assets such as patents and proprietary technology acquired from Nortel.3. Volkswagen AG: The Germany-based automobile manufacturer provides a good example of companies required to comply with IAS 36 (Impairment of Assets) when the diesel emissions scandal hit the company in 2015. Under IAS 36, Volkswagen would have had to recognize an impairment loss in its financial statements, significantly reducing the value of its long-lived assets.
Frequently Asked Questions(FAQ)
What are International Accounting Standards (IAS)?
International Accounting Standards (IAS) are a set of standards stating how specific types of transactions and other events should be reported in financial statements. They were issued by the International Accounting Standards Committee (IASC) between 1973 and 2001.
Who issues and governs International Accounting Standards (IAS)?
Previously issued by the International Accounting Standards Committee (IASC), IAS are now issued and maintained by the International Accounting Standards Board (IASB).
Why are International Accounting Standards (IAS) important?
IAS provide a standardized way of reporting financial transactions and events, which makes it easier for companies to understand and compare financial statements from different countries. This aids in global business operations and investments.
Is it mandatory for all countries to adhere to International Accounting Standards (IAS)?
While IAS are a globally recognised set of standards, not all countries require their use. The use of IAS depends on a country’s regulatory body, however, more than 130 countries either require or permit the use of IAS.
In what aspects does IAS differ from the Generally Accepted Accounting Principles (GAAP)?
While both are standards used in accounting, they differ in many ways. IAS tend to be principle-based, allowing more discretion for interpretation. In contrast, GAAP is generally more rule-based, providing specific rules for individual accounting issues.
Can you provide an example of an International Accounting Standard?
Sure, IAS 1 is an example which presents the basis for presentation of general purpose financial statements, to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities.
Are International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) the same?
No, they are not the same. IFRS is the newer set of standards that started to replace the IAS in 2001, but they are both governed by the IASB. However, existing IAS standards were often re-labeled as IFRS, so the terms are sometimes used interchangeably.
Related Finance Terms
- International Financial Reporting Standards (IFRS)
- International Accounting Standards Board (IASB)
- Financial Accounting Standards Board (FASB)
- Generally Accepted Accounting Principles (GAAP)
- Accounting Standards Codification (ASC)
Sources for More Information
- International Financial Reporting Standards (IFRS)
- Investopedia
- Association of Chartered Certified Accountants (ACCA)
- Financial Accounting Foundation
