For a stakeholder to make a wise and calculated investment decision of investing in a number of different companies, he must have access to financial statements that are considered comparable, and reliable. To achieve this comparability between financial statements of different companies, all companies are required to present their results in a matter that conforms to certain standards. This requirement to present present financial information at certain intervals is usually required by regulatory authorities such as the Securities and Exchange Commission (SEC) in the United States. This minimizes the risk of a company deliberately manipulating its financial information to appear more favorable to stakeholders. These standards or the accounting framework that financial information has to comply with are known as International Financial Reporting Standards (IFRS).
IFRS are a set of standards that address accounting issues and provide requirements that must be complied with in order for financial information to be considered true and fair. The foremost requirement of IFRS is the presentation of operating results in a set of financial statements. These financial statements usually consist of a statement of financial position, a profit and loss statement, a statement of cash flows, a statement of changes in shareholder’s equity and related notes.
These statements in turn present certain amounts of balances and transactions representing the company’s assets, liabilities, income and expenses. Simply put, IFRS provide requirements for the recognition, measurement and disclosure of these balances and transactions.
The IFRS have presented certain concepts such as accruals, going concern and prudence to name a few. These concepts are followed to ensure that investors are not misled by manipulated or window-dressed financial statements.
For example, to minimize the risk of overstatement of profits by not recording expenses incurred close to year end but not invoiced, IFRS require the recognition of an estimated expense since the company had already received the benefits.
To ensure that companies comply with the requirements of IFRS, companies are also required by regulatory authorities to have financial information audited by accounting firms. These firms essentially review financial information in light of the requirements prescribed by IFRS. Once reviewed, the financial statements are considered comparable and reliable and conforming to a set standard.