If accounting is the language of business, financial reporting standards, known as the International Financial Reporting Standards (“IFRS”) would be the language of accounting. Financial statements are among the most important documents to businesses and prospective investors. By law, they are required to contain the most accurate, up-to-date information about a firm. This protects potential investors from being swindled. IFRS was borne out of what accounting professionals saw as the need for a comprehensive set of financial reporting standards that would be used the world over, according to the International Financial Reporting Standards website. Their rationale is that uniform reporting standards will increase comparability among companies, thereby reducing transaction costs and creating a more efficient business environment with fewer barriers. Under IFRS, each of the following must be included in a company’s financial statements.
Statement of Financial Position
This is the balance sheet, perhaps the most sacred of all financial accounting documents. It provides a visual representation of a business’ debits, credits, and shareholder equity at a given point in time.
Statement of Comprehensive Income
A statement of comprehensive income is a little like a balance sheet in that it depicts a firm’s income for a certain period at a particular point in time. The difference is that this is all the information the statement of comprehensive income contains.
Statement of Changes in Equity
This document memorializes any changes in the firm’s shareholder equity that have occurred during a given period of time. These changes could be the result of an increase in retained earnings, a shareholder’s contribution of cash or other assets to the firm or payment of a dividend to the firm’s shareholders.
Statement of Cash Flows
A firm’s statement of cash flows arguably provides investors and third parties with more insight regarding its short-term financial health than any of the preceding documents. It provides a snapshot of the firm’s different accounts on separate dates, indicating increases or decreases in cash reserves during the specified time period (typically one year). For example, it is typically a good sign if a firm’s accounts receivable have decreased over time, as this shows that cash or cash equivalents have been paid into the firm to satisfy these debts. An increase in accounts receivable may seem positive, but eventually a firm must be taking in enough cash to pay off short-term obligations to its creditors. If it does not, it will be in danger of defaulting on these obligations and, if the situation becomes sufficiently dire, of going bankrupt.
The notes section of an IFRS financial statement is something of a catchall. It should include any information on a firm’s important financial goings-on or accounting policies that do not quite fit on any of the documents listed above.
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The International Financial Reporting Standards are the future of the accounting world. You would do well to familiarize yourself with them, buckle up and enjoy the ride.