What Are International Accounting Standards (IAS)? A Complete Guide

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). Most major financial markets worldwide have since adopted them

The International Accounting Standards Board (IASB) in London issued both standards. IFRS has been widely adopted with 160 of 168 nations and reporting jurisdictions committing to these accounting standards for transparency, accountability, and informed investment decisions 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.

The Foundations and Purpose of 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.

Progress Toward Unified 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. Japan allows voluntary adoption, and China is working toward adopting IFRS.

As of September 2023, 147 jurisdictions have required IFRS for most public companies, and 12 more allow it.

The U.S. is exploring adopting international accounting standards. The Financial Accounting Standards Board (FASB) and IASB have collaborated since 2002 to improve and align U.S. GAAP and IFRS. The convergence process is taking longer than expected, partly due to the complexities of the Dodd-Frank Act, even as FASB and IASB issue norms together.

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.

IFRS is principles-based, while GAAP is rules-based.

Impact and Importance of Adopting IFRS

IAS transitioned to IFRS in 2001 and experienced widespread global adoption and had a major impact on financial markets. The key benefits of IFRS include reduced investment risk, lower cost of capital, and improved business efficiency as mentioned in the text. It's an important tool for promoting global comparability, transparency, and reliability in financial reporting, which aids in better investment decisions.

The FASB and IASB collaborated to attempt a trend to align GAAP with IFRS, suggesting a trend toward convergence. It's important for investors involved in international markets to understand both IFRS and GAAP, considering the current dual standards environment.