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International financial reporting standards (IFRS) represent a set of guidelines and principles a company may follow. In order to follow IFRS properly, companies must use specific regulations — often called assumptions — inherent in IFRS. The four standard IFRS regulations include accrual basis, going concern, stable measuring unit, and units of constant purchasing power. Companies must at least adhere to these IFRS requirements in order to use these principles effectively for their financial operations. Failure to adhere to these IFRS requirements can result in improperly prepared financial statements that do not meet audit or other requirements.
Accrual basis represents an accounting method where a company records transactions as they occur rather than when cash changes hands. IFRS regulations desire accrual basis accounting as this method typically provides the best record for accounting information. Most other national accounting standards desire accrual basis accounting as well, so this transition is not difficult for most companies. Companies may be able to get a reprieve from this requirement if they use a hybrid accounting method.
IFRS regulations also have a going concern clause as part of the basic assumptions in these national and international accounting standards. This requirement means a company will be in business for the foreseeable future. This IFRS regulation can be difficult to ascertain for an outside entity, especially if a company fudges numbers and is not honest with outside accountants. Outside accountants must review information and make a determination if a company is a going concern. If not, the accountants may need to make a statement that indicates their perception of the company’s inability to continue.
As IFRS is an international set of accounting standards, there are IFRS regulations that a stable measuring unit exists in a country. This requirement usually relates to inflation as some international countries may have more inflationary problems than others. IFRS has specific guidelines for inflation and deflation and how a company should handle these issues with business transactions. This also has strict application in cost accounting practices.
Units of constant purchasing power are also closely related to the previous IFRS regulations. A company needs to have a specific monetary unit in which they record and display transactions. Again, as IFRS is an international set of accounting standards, companies with multiple operations in several countries may need to consider units of constant purchasing power. Consolidated financial reporting may be the area where this standard is most important for these large companies.