International Financial Reporting Standards

From Wikipedia, the free encyclopedia

  (Redirected from IFRS)
Jump to: navigation, search
Money Coin Icon.svg
Accountancy
Key concepts

Accountant
Bookkeeping
Trial balance
General ledger
Debits and credits
Cost of goods sold
Double-entry system
Standard practices
Cash and accrual basis
GAAP / IFRS
Financial statements

Balance sheet
Income statement
Cash flow statement
Equity
Retained earnings
Auditing

Financial audit
GAAS
Internal audit
Sarbanes-Oxley Act
Big Four auditors
Fields of accounting

Cost • Financial • Forensic
Fund • Management • Tax
This box: view • talk • edit

International Financial Reporting Standards (IFRS) are Standards,[1] Interpretations and the Framework[2][3] adopted by the International Accounting Standards Board (IASB).

Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and SICs. The IASB has continued to develop standards calling the new standards IFRS.

Contents

[edit] Structure of IFRS

IFRS are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments.

International Financial Reporting Standards comprise:

  • International Financial Reporting Standards (IFRS) - standards issued after 2001
  • International Accounting Standards (IAS) - standards issued before 2001
  • Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC) - issued after 2001
  • Standing Interpretations Committee (SIC) - issued before 2001

There is also a Framework for the Preparation and Presentation of Financial Statements which describes the principles underlying IFRS...

IAS 8 Par. 11

"In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order:

(a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and

(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework."

[edit] Framework

The Framework for the Preparation and Presentation of Financial Statements states basic principles for IFRS.

[edit] Role of Framework

The IASB states:

In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8.[4]

[edit] Objective of financial statements

A framework is the foundation of accounting standards. The framework states that the objective of financial statements is to provide information about the financial position, performance and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions, and to provide the current financial status of the entity to its shareholders and public in general.

[edit] Underlying assumptions

The underlying assumptions used in IFRS are:

  • Accrual basis - the effect of transactions and other events are recognized when they occur, not as cash is gained or paid.
  • Going concern - the financial statements are prepared on the basis that an entity will continue in operation for the foreseeable future.

[edit] Qualitative characteristics of financial statements

The Framework describes the qualitative characteristics of financial statements as having

  • Understandability
  • Relevance
  • Reliability &
  • Comparability
  • Accountability
  • Timeliness

[edit] Elements of financial statements

The financial position of an enterprise is primarily provided in a balance sheet. The elements of a balance sheet or the elements that measure the financial position are as follows:

1. Asset: An asset is a resource controlled by the enterprise as a result of past events, and from which future economic benefits are expected to flow to the enterprise.

2. Liability: A liability is a present obligation of the enterprise arising from the past events, the settlement of which is expected to result in an outflow from the enterprise' resources, i.e., assets.

3. Equity: Equity is the residual interest in the assets of the enterprise after deducting all the liabilities. Equity is also known as owner's equity.

The financial performance of an enterprise is primarily provided in an income statement or profit and loss account. The elements of an income statement or the elements that measure the financial performance are as follows:

4. Revenues: increases in economic benefit during an accounting period in the form of inflows or enhancements of assets, or decrease of liabilities that result in increases in equity. However, it does not include the contributions made by the equity participants, i.e., proprietor, partners and shareholders.

5. Expenses: decreases in economic benefits during an accounting period in the form of outflows, or depletions of assets or incurrences of liabilities that result in decreases in equity.

[edit] Recognition of elements of financial statements

An item is recognized in the financial statements when:

  • it is probable that a future economic benefit will flow to or from an entity and
  • when the item has a cost or value that can be measured with reliability.
  • financial stability

[edit] Measurement of the Elements of Financial Statements

Par. 99. Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement.

Par. 100. A number of different measurement bases are employed to different degrees and in varying combinations in financial statements. They include the following:

(a) Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.

(b) Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.

(c) Realisable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.

(d) Present value. Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

Par. 101. The measurement basis most commonly adopted by entities in preparing their financial statements is historical cost. This is usually combined with other measurement bases. For example, inventories are usually carried at the lower of cost and net realisable value, marketable securities may be carried at market value and pension liabilities are carried at their present value. Furthermore, some entities use the current cost basis as a response to the inability of the historical cost accounting model to deal with the effects of changing prices of non-monetary assets.[5]

[edit] Concepts of Capital and Capital Maintenance

[6]

[edit] Concepts of Capital

Par. 102. A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.

Par. 103. The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements. Thus, a financial concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital. If, however, the main concern of users is with the operating capability of the entity, a physical concept of capital should be used. The concept chosen indicates the goal to be attained in determining profit, even though there may be some measurement difficulties in making the concept operational.[7]

[edit] Concepts of Capital Maintenance and the Determination of Profit

Par. 104. The concepts of capital in paragraph 102 give rise to the following concepts of capital maintenance:

(a) Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either Nominal monetary units or units of constant purchasing power.

(b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

Par. 105. The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured; it is a prerequisite for distinguishing between an entity’s return on capital and its return of capital; only inflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Hence, profit is the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses exceed income the residual amount is a loss.

Par. 106. The physical capital maintenance concept requires the adoption of the current cost basis of measurement. The financial capital maintenance concept, however, does not require the use of a particular basis of measurement. Selection of the basis under this concept is dependent on the type of financial capital that the entity is seeking to maintain.

Par. 107. The principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity. In general terms, an entity has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit.

Par. 108. Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. They may not be recognised as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity.

Par. 109. Under the concept of physical capital maintenance when capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. All price changes affecting the assets and liabilities of the entity are viewed as changes in the measurement of the physical productive capacity of the entity; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit.

Par. 110. The selection of the measurement bases and concept of capital maintenance will determine the accounting model used in the preparation of the financial statements. Different accounting models exhibit different degrees of relevance and reliability and, as in other areas, management must seek a balance between relevance and reliability. This Framework is applicable to a range of accounting models and provides guidance on preparing and presenting the financial statements constructed under the chosen model. At the present time, it is not the intention of the Board of IASC to prescribe a particular model other than in exceptional circumstances, such as for those entities reporting in the currency of a hyperinflationary economy. This intention will, however, be reviewed in the light of world developments.[8]

[edit] Requirements of IFRS

Main article: Requirements of IFRS

IFRS financial statements consist of (IAS1.8)

Comparative information is provided for the previous reporting period (IAS 1.36). An entity preparing IFRS accounts for the first time must apply IFRS in full for the current and comparative period although there are transitional exemptions (IFRS1.7).

On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements. The main changes from the previous version are to require that an entity must:

  • present all non-owner changes in equity (that is, 'comprehensive income' ) either in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the statement of changes in equity.
  • present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting
  • 'balance sheet' will become 'statement of financial position'
  • 'income statement' will become 'statement of comprehensive income'
  • 'cash flow statement' will become 'statement of cash flows'.

The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is permitted.

[edit] IASB current projects

The IASB publishes a work plan setting out projects in progress[9]. Much of its work is directed at convergence with US GAAP.

[edit] Adoption of IFRS

IFRS are used in many parts of the world, including the European Union, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore and Turkey. As of 27 August 2008, more than 113 countries around the world, including all of Europe, currently require or permit IFRS reporting. Approximately 85 of those countries require IFRS reporting for all domestic, listed companies.[10]

For a current overview see IAS PLUS's list of all countries that have adopted IFRS.

[edit] Australia

The Australian Accounting Standards Board (AASB) has issued 'Australian equivalents to IFRS' (A-IFRS), numbering IFRS standards as AASB 1-8 and IAS standards as AASB 101 - 141. Australian equivalents to SIC and IFRIC Interpretations have also been issued, along with a number of 'domestic' standards and interpretations. These pronouncements replaced previous Australian generally accepted accounting principles with effect from annual reporting periods beginning on or after 1 January 2005 (i.e. 30 June 2006 was the first report prepared under IFRS-equivalent standards for June year ends). To this end, Australia, along with Europe and a few other countries, was one of the initial adopters of IFRS for domestic purposes.

The AASB has made certain amendments to the IASB pronouncements in making A-IFRS, however these generally have the effect of eliminating an option under IFRS, introducing additional disclosures or implementing requirements for not-for-profit entities, rather than departing from IFRS for Australian entities. Accordingly, for-profit entities that prepare financial statements in accordance with A-IFRS are able to make an unreserved statement of compliance with IFRS.

The AASB continues to mirror changes made by the IASB as local pronouncements. In addition, over recent years, the AASB has issued so-called 'Amending Standards' to reverse some of the initial changes made to the IFRS text for local terminology differences, to reinstate options and eliminate some Australian-specific disclosure. There are some calls for Australia to simply adopt IFRS without 'Australianising' them and this has resulted in the AASB itself looking at alternative ways of adopting IFRS in Australia.

[edit] Canada

The use of IFRS will be required for Canadian publicly accountable profit-oriented enterprises for financial periods beginning on or after 1 January 2011. This includes public companies and other “profit-oriented enterprises that are responsible to large or diverse groups of shareholders.”[11]

[edit] European Union

All listed EU companies have been required to use IFRS since 2005.

In order to be approved for use in the EU, standards must be endorsed by the Accounting Regulatory Committee (ARC), which includes representatives of member state governments and is advised by a group of accounting experts known as the European Financial Reporting Advisory Group. As a result IFRS as applied in the EU may differ from that used elsewhere.

Parts of the standard IAS 39: Financial Instruments: Recognition and Measurement were not originally approved by the ARC. IAS 39 was subsequently amended, removing the option to record financial liabilities at fair value, and the ARC approved the amended version. The IASB is working with the EU to find an acceptable way to remove a remaining anomaly in respect of hedge accounting.

[edit] Russia

The government of Russia has been implementing a program to harmonize its national accounting standards with IFRS since 1998. Since then twenty new accounting standards were issued by the Ministry of Finance of the Russian Federation aiming to align accounting practices with IFRS. Despite these efforts essential differences between national accounting standards and IFRS remain. Since 2004 all commercial banks have been obliged to prepare financial statements in accordance with both national accounting standards and IFRS. Full transition to IFRS is delayed and is expected to take place from 2011.

[edit] Turkey

Turkish Accounting Standards Board translated IFRS into Turkish in 2006. Since 2006 Turkish companies listed in Istanbul Stock Exchange are required to prepare IFRS reports.

[edit] Hong Kong

Starting in 2005, Hong Kong Financial Reporting Standards (HKFRS) are identical to International Financial Reporting Standards. While Hong Kong had adopted many of the earlier IAS as Hong Kong standards, some had not been adopted, including IAS 32 and IAS 39. And all of the December 2003 improvements and new and revised IFRS issued in 2004 and 2005 will take effect in Hong Kong beginning in 2005.

Implementing Hong Kong Financial Reporting Standards: The challenge for 2005 (August 2005) sets out a summary of each standard and interpretation, the key changes it makes to accounting in Hong Kong, the most significant implications of its adoption, and related anticipated future developments. There is one Hong Kong standard and several Hong Kong interpretations that do not have counterparts in IFRS. Also there are several minor wording differences between HKFRS and IFRS. [12]

[edit] Singapore

In Singapore the Accounting Standards Committee (ASC) is in charge of standard setting. Singapore closely models its Financial Reporting Standards (FRS) according to the IFRS, with appropriate changes made to suit the Singapore context. Before a standard is enacted, consultations with the IASB are made to ensure consistency of core principles [13].

[edit] United States and convergence with US GAAP

In 2002 at a meeting in Norwalk, Connecticut, the IASB and the US Financial Accounting Standards Board (FASB) agreed to harmonize their agenda and work towards reducing differences between IFRS and US GAAP (the Norwalk agreement). In February 2006 FASB and IASB issued a Memorandum of Understanding including a program of topics on which the two bodies will seek to achieve convergence by 2008.

US companies registered with the United States Securities and Exchange Commission must file financial statements prepared in accordance with US GAAP. Until 2007, foreign private issuers were required to file financial statements prepared either (a) under US GAAP or (b) in accordance with local accounting principles or IFRS with a footnote reconciling from local principles or IFRS to US GAAP. This reconciliation imposed extra expense on companies which are listed on exchanges both in the US and another country. From 2008, foreign private issuers are additionally permitted to file financial statements in accordance with IFRS as issued by the IASB without reconciliation to US GAAP.[14] There is broad expectation among U.S. companies that the SEC will move to allow or require them to use IFRS in the near future and a growing acceptance of that scenario, according to Controllers' Leadership Roundtable survey data.[15]

In August 2008, the SEC announced a timetable that would allow some companies to report under IFRS as soon as 2010 and require it of all companies by 2014.[16]

The SEC received over 220 comment letters from a diverse group of constituents on its timetable. Some of the key points included: - The ultimate goal must be the worldwide use of a single set of high quality financial reporting standards - Most respondents support continuation of the convergence process - Users prefer a principles-based accounting framework that includes application of sound professional judgment coupled with clear and transparent disclosures about the economic substance of the transaction, the reasons for reaching that conclusion, and the related accounting for the transaction. - Acknowledgment that the expected costs of IFRS adoption will be significant but the anticipated costs of not adopting will be much more significant to the U.S. Capital Markets - A clear commitment and adoption date is needed, regardless whether it is 2014, 2015 or 2016 (i.e., a “date certain”) Recommendation to require only one prior year comparative [17]

Mary Schapiro, SEC Chair, provided an update on the SEC’s proposed roadmap during a meeting of the International Accounting Standards Committee Foundation (IASCF) on 6 July 2009. The SEC is continuing its detailed analysis of all comment letters and will readdress this issue in Fall 2009. [18]

[edit] India

The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April, 2011. This will be done by revising existing accounting standards to make them compatible with IFRS.

Reserve Bank of India has stated that financial statements of banks need to be IFRS-compliant for periods beginning on or after 1 April, 2011.

[edit] Japan

The Accounting Standards Board of Japan has agreed to resolve all inconsistencies between the current JP-GAAP and IFRS wholly by 2011. [19]

[edit] List of IFRS statements with full text links

The following IFRS statements are currently issued:

[edit] List of Interpretations with full text links

  • Preface to International Financial Reporting Interpretations (Updated to January 2006)([72]Full Text)
  • IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities (Updated to January 2006)([73]Full Text)
  • IFRIC 7 Approach under IAS 29 Financial Reporting in Hyperinflationary Economies (Issued February 2006)([74]Full Text)
  • IFRIC 8 Scope of IFRS 2 (Issued February 2006)([75]Full Text) - has been eliminated with Amendments issued to IFRS 2
  • IFRIC 9 Reassessment of Embedded Derivatives (Issued April 2006)([76]Full Text)
  • IFRIC 10 Interim Financial Reporting and Impairment (Issued November 2006)([77]Full Text)
  • IFRIC 11 IFRS 2-Group and Treasury Share Transactions (Issued November 2006)([78]Full Text) - has been eliminated with Amendments issued to IFRS 2
  • IFRIC 12 Service Concession Arrangements (Issued November 2006)([79]Full Text)
  • IFRIC 13 Customer Loyalty Programmes (Issued in June 2007)([80]Full Text)
  • IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (issued in July 2007)([81]Full Text)
  • IFRIC 15 Agreements for the Construction of Real Estate (issued in July 2008)
  • IFRIC 16 Hedges of a Net Investment in a Foreign Operation (issued in July 2008)
  • IFRIC 17 Distributions of Non-cash Assets (issued in November 2008)
  • IFRIC 18 Transfers of Assets from Customers (issued in January 2009)
  • SIC 7 Introduction of the Euro (Updated to January 2006)([82]Full Text)
  • SIC 10 Government Assistance-No Specific Relation to Operating Activities (Updated to January 2006)([83]Full Text)
  • SIC 12 Consolidation-Special Purpose Entities (Updated to January 2006)([84]Full Text)
  • SIC 13 Jointly Controlled Entities-Non-Monetary Contributions by Venturers (Updated to January 2006)([85]Full Text)
  • SIC 15 Operating Leases-Incentives (Updated to January 2006)([86]Full Text)
  • SIC 21 Income Taxes-Recovery of Revalued Non-Depreciable Assets (Updated to January 2006)([87]Full Text)
  • SIC 25 Income Taxes-Changes in the Tax Status of an Entity or its Shareholders (Updated to January 2006)([88]Full Text)
  • SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease (Updated to January 2006)([89]Full Text)
  • SIC 29 Disclosure-Service Concession Arrangements (Updated to January 2006)([90]Full Text)
  • SIC 31 Revenue-Barter Transactions Involving Advertising Services (Updated to January 2006)([91]Full Text)
  • SIC 32 Intangible Assets-Web Site Costs (Updated to January 2006)([92]Full Text)
  • SIC 33 Consolidation and equity method - Potential voting rights and allocation of ownership interests([93]Full Text)

[edit] Further reading

  • International Accounting Standards Board (2007): International Financial Reporting Standards 2007 (including International Accounting Standards (IAS(tm)) and Interpretations as at 1 January 2007), LexisNexis, ISBN 1422418138

[edit] See also

[edit] References

  1. ^ [1]Full texts of Standards
  2. ^ [2]IFRS and IAS Summaries - English (2009)
  3. ^ [3]Full text of the Framework
  4. ^ Deloitte Touche Tohmatsu. "The Framework for the Preparation and Presentation of Financial Statements".
  5. ^ [4]Full text of the Framework
  6. ^ [5]
  7. ^ [6]Full text of the Framework
  8. ^ [7]Full text of the Framework
  9. ^ IASB: "IASB Work Plan" http://www.iasb.org/Current+Projects/IASB+Projects/IASB+Work+Plan.htm, Retrieved on 19 April 2007
  10. ^ "SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily". U.S. Securities and Exchange Commission. 28 August 2008. http://www.sec.gov/news/press/2008/2008-184.htm. Retrieved 27 August 2008. 
  11. ^ "AcSB Confirms Changeover Date to IFRSs". Canadian Institute of Chartered Accountants. 13 February 2008. http://www.cica.ca/ifrs/media-room/media-releases/2008/pf_item2992.aspx. Retrieved 8 August 2009. 
  12. ^ http://www.deloitte.com/dtt/research/0,1015,cid%253D91491,00.html
  13. ^ Process of Prescribing Accounting Standards, http://www.ccdg.gov.sg/account.htm, ‘’ Retrieved on 29 February 2008
  14. ^ http://www.sec.gov/rules/final/2008/33-8879fr.pdf
  15. ^ https://www.ctlr.executiveboard.com/Public/documents/IFRSPressRelease.pdf
  16. ^ Epstein, Keith (28 August 2008). "An SEC Timetable for Global Accounting Rules". BusinessWeek. http://www.businessweek.com/bwdaily/dnflash/content/aug2008/db20080827_422492.htm. Retrieved 28 August 2008. 
  17. ^ http://www.sec.gov/comments/s7-27-08/s72708.shtml
  18. ^ http://www.complianceweek.com/blog/glimpses/2009/07/27/ifac-calls-for-reporting-roadmap/
  19. ^ http://www.asb.or.jp/html_e/asbj/pressrelease/pressrelease_20090313_e.pdf

[edit] External links

implementing IFRS, especially using SAP solutions

Retrieved from "http://en.wikipedia.org/wiki/International_Financial_Reporting_Standards"