International Financial Reporting Standards (IFRS)

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An accounting system that provides the needed economic information is an "organized set of manual and computerized accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for management decisions"³⁰⁰. Besides, not only the management relies on data published, but also shareholders, employees, loan creditors, financial analysts, suppliers and trade creditors, customers, competitors, governments, and the general public.³⁰¹ There are specific widely spread and established common concepts, accountants have to rely on, such as the already discussed going concern principle, but also the consistency, the prudence, and the depreciation concept. The consistency conception asks accountants to prepare data on a basis that allows for quarterly or yearly comparison.

Prudence means that profits should only be accounted for, when they are actually achieved, while companies should make provisions for future losses. The depreciation principle asks for the value of most assets to be written off during their usage period. What companies decide to report on and to which extent is partly dependent on the accounting systems they are using. ³⁰² Generally, there are the national accounting systems, or "local GAAPs"

(General accepted accounting principles), e.g. Austrian UGB, German HGB, etc., the International Financial Reporting Standards (IFRS), and United States GAAP.³⁰³ In further consequence, the first two stated will be elaborated in more detail.

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European Union decided to work together with IASC for developing consistent accounting and reporting principles. In 2001, the IASC became the International Accounting Standards Board (IASB), which consequently led to a change in designation of the published standards.³⁰⁶ Previously published standards were called International Accounting Standards (IAS) and are still valid and applicable till date, unless they were replaced by the newly developed International Financial Reporting Standards (IFRS). Consequently, there are two types of standards available at the moment, namely those published by IASC called IAS before the foundation was renamed, and those newly published ones by IASB called IFRS.

In order to make the standards understandable for companies, additional Interpretations have been published. There are those interpretations made accessible by the Standing Interpretations Committee (SIC) before 2001, and those brought out by the IFRS Interpretations Committee (IFRIC) since 2001. Interpretations are supposed to answer questions of those who implement the standards and making therefore content-related connections between the IFRS standards.³⁰⁷

Standards were originally prepared to be applied by publicly listed companies, those being traded on a stock exchange market and for financial institutions like banks for instance.

Nonetheless, since 2009, there have been reporting standards published for small and medium enterprises (SMEs) as well.³⁰⁸ For gathering an overview, appendix 1 contains all currently available standards. They describe which items a company should recognize as assets, liabilities, expenses and income, clarify how those items should be measured and prepared within financial statements and what should be additionally disclosed for understanding the context of the items.³⁰⁹ Companies should however be aware of how standards are to be implemented. The "House of IFRS" contains three levels as depicted below in figure 5. The first level contains the IASB framework with general objectives and requirements of the accounting and reporting regulation, followed by the second level entailing the IFRS and IAS standards which are more specific than the ones one can find on level 1. The last level contains the IFIC and SIC interpretations and are the most specific regulations stipulated. Companies applying the IFRS accounting regulations, should always

306Cf. International Financial Reporting Standards, 2016, p. 3, Internet:

http://www.ifrs.org/The-organisation/Documents/2016/Who-We-Are-English-May-2016.pdf; RBS - IFRS Portal, n.a., Internet:

http://www.ifrs-portal.com/Grundlagen/Was_sind_IFRS_IAS/Was_sind_IFRS_IAS_01.htm, own translation.

307Cf. ibid, p. 2, Internet: http://www.ifrs.org/The-organisation/Documents/2016/Who-We-Are-English-May-2016.pdf; RBS - IFRS Portal, n.a., Internet:

http://www.ifrs-portal.com/Grundlagen/Was_sind_IFRS_IAS/Was_sind_IFRS_IAS_01.htm, own translation.

308Cf. ibid.

309Cf. Pacter, 2016, p. 10, Internet: http://www.ifrs.org/Use-around-the-world/Documents/2016-pocket-guide.pdf

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start at level 3 and go further down the pyramid, if no specific interpretations for their context can be found.³¹⁰

Figure 5: Three levels of IFRS/IAS guidelines³¹¹

Implementing the standards is supposed to bring along more transparency, as companies all over the world can be compared more easily. Besides, investors should receive a more comprehensive picture of a company's financial situation, which should consequently influence their investment efficiency.³¹² This principle is crucial for understanding the difference between this international accounting system and the Austrian one. IFRS is oriented toward anonymous investors of the capital markets and incorporates the concept of a "fair presentation" of the economic situation of a company. Thus, there is a tendency for companies to disclose higher equity stocks and earlier profit realisations, as IFRS prohibits every kind of liability provisions among others.³¹³

In 2002, the European Parliament and the European Council issued a so-called IAS Regulation (regulation nr. 1606/2002) where it was stipulated that every publicly listed company operating within an EU stock exchange market, has to publish their financial reports according to IFRS. The standards are adopted by the EU through an endorsement process. However, countries within the EU do not necessarily have to transfer IFRS

310Cf. Schiemer-Haberl, 2015, p. 33; RBS - IFRS Portal, n.a., Internet:

http://www.ifrs-portal.com/Grundlagen/Was_sind_IFRS_IAS/Was_sind_IFRS_IAS_01.htm, own translation.

311Based on Schiemer-Haberl, 2015, p. 33.

312Cf. International Financial Reporting Standards, 2016, p. 1, Internet: http://www.ifrs.org/The-organisation/Documents/2016/Who-We-Are-English-May-2016.pdf

313Cf. RBS - IFRS Portal, n.a., Internet:

http://www.ifrs-portal.com/Grundlagen/Was_sind_IFRS_IAS/Was_sind_IFRS_IAS_01.htm, own translation.

Level 1

Interpretations IFRIC, SIC

Standards IFRS, IAS IASB Framework

IFRS, IAS Level 2

Level 1 Level 3

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standards into national law as EU-regulations are directly put in place and are valid for all member states.³¹⁴