IFRS explained simply: what you need to know

The most important facts in brief

The International Financial Reporting Standards (IFRS) are a globally recognized standard for the standardization of financial reporting. They aim to make company figures more transparent, comparable and easier to understand - a significant advantage for investors and other stakeholders.

Internationally active companies in particular, or those seeking a stock market listing, are often obliged to align their reporting with IFRS. However, the introduction and application of the standards entails challenges, such as the interpretation of complex regulations and the adaptation of internal processes. Despite these hurdles, IFRS facilitates investment decisions, improves global competitiveness and strengthens confidence in corporate communications.

What is IFRS?

The International Financial Reporting Standards (IFRS) are a global standard for the preparation and disclosure of financial reports. Their aim is to ensure transparency, comparability and comprehensibility of company financial statements - regardless of whether a company operates in Europe, Asia or America. The IFRS were developed to harmonize the different national accounting standards and thus strengthen the global economy.

The development of IFRS: a brief overview

The history of IFRS goes back to the 1970s. Here are the most important milestones:

Why does IFRS exist?

Increasing globalization has led to companies operating across borders and raising capital on international financial markets. However, different national regulations made comparability difficult and increased the risk for investors. This is where IFRS comes in:

• They ensure uniform rules that are recognized globally.
• They strengthen confidence in the financial markets and promote investment.
• They simplify the work of companies that are active in several countries.

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What characterizes IFRS?

1. Global reach: IFRS applies in over 140 countries, including the EU, Canada and Australia.
2. Uniformity: They harmonize financial reporting and promote international competition.
3. Dynamic: Regular updates by the IASB ensure that the standards remain current and relevant.
4. Flexibility and clarity: Companies receive clear guidelines, but also scope for specific requirements.

Why is IFRS important?

The importance of International Financial Reporting Standards (IFRS) for the global economy is enormous. They create a framework that ensures transparency and trust in financial reporting and makes it easier for companies to access international capital markets.

1. advantages of IFRS

For companies:

• Facilitation of international business activities through uniform standards.
• Access to international financial markets and sources of capital.
• More efficient management of multinational business units.

For investors:

• Clarity and transparency in financial reports.
• Better basis for decision-making thanks to comparable data.
• Greater confidence in the reliability of the published figures.

For financial markets:

• Global comparability of company financial statements.
• Promoting stability and competition on international markets.

2. comparison: IFRS vs. national standards

IFRS differs fundamentally from national regulations such as the German Commercial Code (HGB) in Germany. While IFRS is based on international comparability and investor orientation, national standards often have a tax law focus.

Aspect	IFRS	National standards (e.g. HGB)
Objective	Investor orientation	Tax and legal requirements
Area of application	Global, over 140 countries	National
Flexibility	Principle-based, requires interpretation	Rule-based, clearly defined specifications

3. an example from practice

An international company based in Germany with subsidiaries in several countries can use IFRS:

• Present financial information in a standardized format.
• provide investors worldwide with comparable financial statements.
• Prepare for international financing rounds.

Info text:

"In a globalized world, IFRS are far more than just a standard.
They are the key to economic stability,
easier access to international financial markets
and increased investor confidence."

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What requirements does IFRS place on companies?

The application of IFRS standards is associated with specific accounting requirements for companies. These standards are based on clearly defined accounting principles that are intended to ensure transparency, comparability and reliable financial reporting. Companies must adapt both their internal processes and their financial statements to the international requirements.

General requirements of the IFRS standards

IFRS require a standardized presentation of financial information. These include:

• Annual and consolidated financial statements: Companies must submit consolidated reports that meet the requirements of the IASB (International Accounting Standards Board).
• Precision in presentation: Balance sheet items such as assets, liabilities and equity must be clearly defined and reported.
• Implementation of specific standards: These include, for example, IFRS 2 (Share-based Payment) or IFRS 9 (Financial Instruments). Companies must ensure that these standards are interpreted and applied correctly. An error can have serious consequences, such as penalties imposed by supervisory authorities or a loss of confidence among investors.

Special features of business combinations and disposals

A central area of IFRS is the regulation of business combinations (mergers and acquisitions). The IFRS 3 standard requires:

• The measurement of all acquired assets and liabilities at fair value.
• Detailed information on the effects of the acquisition on the balance sheet.

Disposals of assets or business units must also be presented in accordance with specific requirements in order to give investors a clear picture of the financial impact.

Industry-related challenges

Some sectors face particular challenges when implementing IFRS.

• Insurance contracts: Companies must report complex contracts in accordance with IFRS 17, whereby the focus is on the measurement of long-term obligations.
• Commodity companies: The rules for accounting for exploration and evaluation expenses require precise recording of all costs.

Avoiding mistakes - a critical success factor

The error-free application of IFRS standards is essential. Errors in accounting, for example in the valuation of assets or the application of IFRS 2, can have serious consequences:

• Loss of confidence among investors and stakeholders.
• Reissuing financial statements, which ties up time and resources.
• Penalties and sanctions by supervisory authorities.

Regular internal reviews and training of the finance team are therefore crucial to minimize these risks.

Sustainability standards and the future of IFRS

The importance of sustainability in financial reporting is constantly growing, and IFRS plays a key role in this. In order to meet the requirements of investors and society, the International Accounting Standards Board (IASB) has established the International Sustainability Standards Board (ISSB) . This body develops global standards for sustainability reporting to help companies present their environmental, social and governance (ESG) practices in a transparent manner.

One focus of the ISSB standards is on climate-related disclosures. In future, companies will be required to disclose not only their CO₂ emissions in detail, but also the financial risks and opportunities arising from the global climate crisis. The integration of this data into the existing IFRS standards strengthens the link between sustainability reporting and financial performance assessment.

In addition to sustainability, the future of IFRS is characterized by several trends. Advancing digitalization enables companies to record and analyse data more efficiently. Automated processes make it easier to comply with standards and reduce the susceptibility to errors. At the same time, new standards are being developed that specifically address the needs of individual sectors - for example, insurance contracts or leases.

With the ongoing globalization of the financial markets, the harmonization of reporting standards remains a core objective of the IASB. Uniform rules strengthen investor confidence and promote the comparability of companies across national borders. IFRS thus remain a central pillar for transparency and stability in a globalized economy.

Challenges and practical application

Challenges in the implementation of IFRS

• Interpretation of accounting policies: The principles require precise application, particularly for complex transactions such as leases or business combinations.
• Transition from national standards: The change from standards such as the International Accounting Standards (IAS) to IFRS requires internal conversions.
• Clear definition of responsibilities: Companies must ensure that all relevant data is centralized and processed correctly.
• Susceptibility to errors: Misunderstandings during application can lead to incorrect reports and regulatory consequences.

Practical examples for the application of IFRS

• Multinational corporations: Companies with international subsidiaries use IFRS to present financial data consistently and comparably.
• Easier access to the capital market: The use of IFRS enables companies to approach investors worldwide.
• Optimizing transparency: By complying with IFRS, companies can strengthen the trust of stakeholders.

Frequently asked questions

1. what is IFRS simply explained?

IFRS stands for International Financial Reporting Standards. These are international accounting standards that create uniform global rules for the preparation and disclosure of financial reports. The aim is to promote transparency, comparability and trust in company figures.

2. what is the difference between HGB and IFRS?

The German Commercial Code (HGB) is a national accounting standard that applies in Germany and is heavily influenced by tax law. IFRS , on the other hand, is internationally oriented and focuses on the needs of investors and the comparability of global financial reports.

3 When is IFRS to be applied?

The application of IFRS is mandatory for all listed companies in the EU. Companies seeking access to international capital markets or operating worldwide also frequently use IFRS to make their reporting globally comparable.

4 What are the four principles of IFRS?

IFRS follows these four principles:

1. Transparency: Clear and comprehensible presentation of financial data.
2. Comparability: Standardized rules enable comparison between companies.
3. Relevance: Financial reports must contain useful and decision-relevant information.
4. Reliability: Financial data must be correct and complete.