IFRS – International Financial Reporting Standards

What Is IFRS?

IFRS (International Financial Reporting Standards) are international accounting standards intended to standardize the preparation of annual financial statements worldwide. They are issued by the IASB (International Accounting Standards Board) and are mandatory in the EU for publicly listed companies.

Origin / History

In March 2001, the International Financial Reporting Standards Foundation was founded in Delaware (USA).

Structure of IFRS

IFRS are created and published in English, but are also translated into other languages. In simplified terms, they represent a collection of rules for the accounting of business enterprises.

Uniform interpretation of these standards is important. For this purpose, the SIC has existed since 1997, and later the IFRIC. These bodies are meant to solve problems that arise when applying IFRS.

Goals of IFRS

Financial statements under IFRS are primarily intended to provide information about a company's asset, financial and earnings position. This marks an important difference from the German HGB, which initially places explicit emphasis on creditor protection.

IFRS accounting follows the overriding principle of accrual accounting and the going-concern principle. Every financial statement must also meet the requirements of decision relevance, materiality, understandability, and comparability.

Further goals:

• Comparability of financial statements of capital-market-oriented companies worldwide
• Building an integrated, efficient and smoothly functioning capital market
• Improved investor protection
• Strengthening confidence in financial markets and free movement of capital
• Binding regulations for cross-border transactions and stock exchange listings worldwide

Key IFRS Standards

IFRS vs. US-GAAP vs. HGB

While IFRS is primarily used by European and international companies, US companies use US-GAAP. German companies that are not publicly listed can use HGB. Understanding these differences is important for international stock comparison.

Unlike HGB, valuation under IFRS is based on market values rather than historical acquisition cost. This particularly serves the information needs of capital market investors. Hidden reserves are largely avoided under IFRS – their income-boosting release is therefore largely excluded.

Discussion

It is often argued that applying IFRS simplifies loan negotiations between companies and banks, since metrics such as liquidity, equity ratio and inventory turnover are presented more transparently.

However, it should be noted that in principle every country decides for itself whether and to what extent it adopts IFRS regulations and for which companies they apply. In the EU, all companies whose securities are listed on a regulated market are required to use IFRS accounting. In Germany, this additionally applies to companies in the stock exchange listing process.

Relevance for Stock Analysis

Since ratios such as P/E ratio, P/B ratio or equity ratio are directly based on balance sheet data, different accounting standards can affect these ratios. Finanzoo normalizes data from various sources for consistent analysis.