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International financial accounting is a process companies must follow when reporting financial information for multiple international users. The International Accounting Standards Board (IASB) is responsible for developing the International Financial Reporting Standards (IFRS), the gold standard of international financial accounting. IFRS is a principles-based system with some specific directive standards mixed in. A company must follow IFRS based on its country's acceptance of IFRS for reporting information.
IFRS relies on a conceptual framework for those companies needing to report information for international financial accounting purposes. The framework requires users to use proper management judgment when an applicably IFRS principle is not available to guide an accountant recording a transaction. Considerations under proper judgment include defining the transaction; developing recognition criteria; and measuring the materiality of assets, liabilities, income, and expenses in a reasonable manner.
Financial statements are also an important presentation under international financial accounting principles. Each statement falls under two assumptions. First, each transaction or financial capital item falls under nominal monetary units during periods or low inflation or deflation. Second, each transaction or financial capital item will use units of constant item purchasing power during times of low inflation and deflation while using constant purchasing power during hyperinflation. This is necessary as some economies can experience rampant inflation.
In addition to the financial capital maintenance concepts under international financial accounting principles, two other assumptions exist. Companies must record transactions using the accrual accounting basis. This requires accountants to record transactions as they occur during the company's normal operating standards. Companies must also be a going concern. The purpose of this means the company will remain in business for the foreseeable future. These two assumptions work in tandem with the financial capital maintenance principles.
Other elements of international financial accounting include current cost and realizable value. While long-term assets must be recorded at their historical cost, all cash and cash equivalents need to indicate their current cost to the firm. This principle falls under the umbrella of capital unit measurements. In some countries, rampant inflation changes the purchasing power or value of currency. Companies must reflect the current value of the currency in order to present information accurately.
Realizable value indicates the replacement cost of certain assets. For example, if a company must pay a certain amount to replace inventory, this is the asset's realizable value. International accounting standards may require companies to report information at the lower of current cost or realizable value. This presents a conservative approach to the accounting process.
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