Here’s what you need to know about IFRS, GAAP, and the organizations that oversee them.
What Is IFRS?
International Financial Reporting Standards are the rules that corporate accountants follow when reporting financial data on behalf of their companies. Many companies voluntarily follow these guidelines, but in some 144 countries that have mandated IFRS, these accounting practices are a legal requirement for financial institutions and public companies (those that issue stock on a public stock exchange). In the U.S., the Financial Accounting Standards Board (FASB) sets the national accounting standards called the Generally Accepted Accounting Principles (GAAP). While GAAP and IFRS are similar concepts, there are differences in their guidelines.
How Does IFRS Work?
Accurate reporting of finances is an important condition for a fair and competitive marketplace. Inaccurate or falsified reports can have detrimental effects on businesses and consumers alike. Thus, IFRS and GAAP were created to standardize the way these reports are created and distributed. The IASB—which determines the standards included in the IFRS—is ultimately overseen by a group known as the Monitoring Board. Members of the Monitoring Board include representatives from government agencies that oversee the economies of the U.S., Japan, the EU, South Korea, Brazil, China, and more. The members of the Monitoring Board staff the IASB through an open process that publicly advertises any vacancies.
GAAP
In the U.S., where public companies adhere to GAAP instead of IFRS, the governing board of accounting practices is the FASB. The members of this board are appointed by a private nonprofit organization known as the Financial Accounting Foundation. Financial statements are compiled using GAAP for the benefit of investors and regulators. These financial statements are the balance sheet, income statement, and statement of cash flows.
Oversight and Enforcement
While the IASB and FASB set accounting standards, they aren’t directly responsible for oversight and enforcement of those standards. That’s where the SEC and PCAOB come into play. The Securities and Exchange Commission (SEC) is the authority in the U.S. for regulating trade and markets, overseeing and auditing corporate financial reporting, and regulating investment. It was created during the 1930s, after the major stock market crash of 1929. The SEC also has the authority to enforce the regulations they publish. GAAP is merely a recommendation for most companies, but the SEC does force publicly traded companies to follow GAAP. The SEC can file cease and desist orders and impose fines on companies that report non-GAAP financial figures without also presenting the same information in a format that adheres to GAAP. If you own a publicly traded business, then the standards are something worth ensuring your business is following. You are not required to follow GAAP if you are a private entity, but it might be worth considering if you think you might offer shares publicly at some point.
PCAOB
The Public Company Accounting Oversight Board (PCAOB) was established in 2002 to oversee the auditing of public companies and financial institutions. While the SEC sets the rules and issues fines for infractions, the purpose of the PCAOB is to ensure that the people checking for compliance are also acting ethically themselves. Accounting firms that conduct audits must be registered with the PCAOB to conduct business. The SEC appoints members to the PCAOB in consultation with the Federal Reserve and Treasury Secretary.
