F7-01 International Financial Reporting Standards

Session 1
International Financial
Reporting Standards
FOCUS
This session covers the following content from the ACCA Study Guide.
A. The Conceptual and Regulatory Framework for

Financial Reporting
3. Specialised, not-for-profit and public sector entities
a) Distinguish between the primary aims of not-for-profit and public sector
entities and those of profit-oriented entities.
b) Discuss the extent to which International Financial Reporting Standards
(IFRSs) are relevant to specialised, not-for-profit and public sector entities.
4. Regulatory framework
a) Explain why a regulatory framework is needed, also including the
advantages and disadvantages of IFRS over a national regulatory
framework.
b) Explain why accounting standards on their own are not a complete
regulatory framework.
d) Describe the IASB's standard setting process, including revisions to and
interpretations of Standards.
e) Explain the relationship of national standard setters to the IASB in respect
of the standard setting process.
Session 1 Guidance
Read through this session carefully, taking into account why the IASB was created and its standing
today in the world of financial reporting.
Keep up-to-date on the IASB work programme by regularly visiting the IASB website
www.iasb.co.uk (s.2.4).
Understand how the IASB functions and its role in harmonising accounting throughout the
world (s.3.3).
(continued on next page)

F7 Financial Reporting Becker Professional Education | ACCA Study System
Ali Niaz - friend4ever0306@yahoo.com

VISUAL OVERVIEW
Objective: To introduce sources of authority in international financial reporting.
ACCOUNTING PRINCIPLES
What is GAAP?
Sources of GAAP
Statute and Standards
European Union
IFRS v Local GAAP
IASB NOT-FOR-PROFIT
ORGANISATIONS
Background
Primary Objectives
Objectives
Value for Money
Standard Setting
Accounting
Projects and Work Program
IFRS
GAAP Hierarchy
Scope
International Harmonisation
Session 1 Guidance
Note that all listed companies within the European Union (EU) are now required to file their
consolidated accounts under IFRS.
Understand how the objectives of a not-for-profit organisation might differ from that of a
profit-oriented business (s.4).
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Session 1 International Financial Reporting Standards F7 Financial Reporting
1 Accounting Principles
1.1 What is GAAP?

GAAP (generally accepted accounting principles) is a general
term for a set of financial accounting standards and reporting
guidelines used to prepare accounts in a given environment.*
The term may or may not have legal authority in a given
*UK GAAP, US GAAP
country. are more specific
It is a dynamic concept. It changes with time in accordance statements.
with changes in the business environment.
1.2 Sources of GAAP

1.2.1 Regulatory Framework
The body of rules and regulations, from whatever source,
which an entity must follow when preparing accounts in a
particular country for a particular purpose, for example:
Statute (e.g. Companies Acts)
Accounting standards.
Statements issued by professional accounting bodies which

lay down rules on accounting for different issues, for
example:
International Financial Reporting Standards (IFRSs)
Financial Reporting Standards (UK FRSs)
Financial Accounting Standards (US FASs).
1.2.2 Other Sources

Best practice, that is, methods of accounting developed by
companies in the absence of rules in a specific area.
Industry groups, such as:
The Oil Industry Accounting Committee (OIAC)
British Bankers' Association (BBA).
1.3 Role of Statute and Standards

Some countries have a very legalistic approach to drafting
financial statements. The legal rules are detailed and
specific and the system is more geared to the production of
a profit figure for taxation purposes.
The structure of US
Some countries adopt an approach by which statute provides
GAAP is very much
a framework of regulation and standards then fill in the
rules-based, whereas
blanks. For example in the UK: that of IFRS is
Statute: Companies Acts 2006; principles-based.
Standards: Financial Reporting Standards (FRSs)
Statements of Standard Accounting
Practice (SSAPs)
Urgent Issues Task Force consensus
pronouncements (UITFs).
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F7 Financial Reporting Session 1 International Financial Reporting Standards
Some countries have relatively little in the way of statute and

rely largely on standards (e.g. the US).*
At present there are a number of working parties trying to
converge US GAAP and IFRS standards and eliminate or *Although there is
minimise the differences between them. no accounting statute
The SEC now allows companies which prepare their accounts as such in the US, a
in accordance with IFRS to list their shares on US stock body of the federal
markets without providing a reconciliation to US GAAP. government called
the Securities and
1.4 Role of the European Union Exchange Commission
(SEC) oversees
The common industrial policy of the EU calls for the creation the accounting
of a unified business environment, including harmonisation of regulations issued
financial reporting. by the profession.
The SEC can veto
This is pursued though the issue of directives to member states.
accounting treatments
These are instructions to enact legislation in specified areas. and demand that
Examples of the enactment of directives include the following: regulation be enacted
in new areas.
DIRECTIVE
4th 7th 8th
Country (form and content of (group accounts) (regulation of auditors)
company accounts)
*The UK Companies
UK* Companies Act 1985 Companies Act 1989 Companies Act 1989 Acts were consolidated
into the Companies Act
"Handelsgesetzbuch" (HGB) 2006.
Germany
(the Third Book of the Commercial Code)
France "Code de commerce" Acts Acts
New member states of the EU (and aspiring applicants)

include the provisions of the EU directives into their
own legislation as a preparatory step for membership in
the EU.
The EU originally stated that IFRSs were compatible with EU
directives. There is considerable divergence, however, in
GAAP between member states.
Further to the IOSCO endorsement (International Organisation of

Securities Commissions; see later), all listed EU companies were
required to publish consolidated financial statements in compliance
with IFRS with effect from 1 January 2005.

The 2005 deadline was extended to 2007 for companies

traded on a US stock exchange and prepared under US GAAP
and for companies which had issued only debt, not equity, in
regulated markets.
Additionally, member states are allowed to extend the
application of IFRSs to:
unlisted companies;
individual accounts of publicly traded companies; and
other companies and limited liability partnerships.
UK government bodies were required to apply IFRS to their

accounts in the financial year 2008/09, although this deadline
was extended for some government departments.
1.5 IFRS v Local GAAP

Over the past 10 years, many countries have adopted
IFRS as their accounting framework with local GAAP either
disappearing or only being used for private entities.
Other countries in which no local GAAP existed have adopted
IFRS "upfront" and no form of local GAAP is required.
There are advantages for countries adopting IFRS as their
GAAP but, at the same time, there are disadvantages.
1.5.1 Advantages
One international model for all.*
Improved quality and credibility provides access to global
funds.
Reduces training costs; accountants only need to learn one *If the US accepts
model. IFRS for use by US
Recognised globally. companies, then it is
possible that US GAAP
1.5.2 Disadvantages as a local GAAP could
disappear eventually
Cost to convert from local GAAP. and that may well pave
Reluctance to change. the way for the rest
of the world to accept
May be a requirement for both statutory and IFRS accounts.
just one GAAP, which
Perception of difficulty. would be IFRS.

2 IASB
2.1 Background
The International Accounting Standards Board (IASB) was
formed to take over the work of the International Accounting
Standards Committee (IASC) in April 2001.
The IASC was an independent private sector body set up by
accountancy bodies in 1973.
The IASC had complete autonomy in the setting of international
accounting standards and in the issue of discussion documents
on international accounting issues from 1981.
2.2 Objectives
The IASB's Mission Statement sets out its objectives: To
develop, in the public interest, a single set of high-quality,
understandable and enforceable global reporting standards
that require high-quality, transparent and comparable
information in financial statements.* *In other words, the
to promote the use of rigorous application of those IASB's objective is
to assist participants
standards;
in the world's capital
to take account of the needs of a range of sizes and types markets and other
of entities in diverse economic settings (e.g. emerging users of financial
economies); and statements in making
to promote and facilitate adoption of IFRSs through the economic decisions.
convergence of national accounting standards and IFRS.
2.3 Standard Setting

IFRSs are developed through an international due process
which involves:*
accountants, financial analysts and other users of financial The International
statements; Forum of Accounting
Standard Setters
the business community;
(IFASS) (formerly
stock exchanges; known as National
regulatory and legal authorities; Standard-setters,
academics; and
NSS) is a grouping of
national accounting
other interested individuals and organisations throughout standard-setters from
the world. around the world, plus
other organisations
that have a close
involvement in
financial reporting
issues.

Due process normally involves the following steps (those in

bold are required under the terms of the IFRS Foundation's
Constitution):
*A basis for
conclusions is usually
included within an
ED and the published
standard. Any
dissenting opinions
("alternative views") of
IASB board members
must be included
within an ED and the
published standard.
The basis of the
IASB's conclusions,
which summarises the
Board's considerations,
is also published for
comment.
2.3.1 Discussion Papers

The IASB may develop and publish discussion documents,
usually called discussion papers, for public comment.
A discussion paper:
sets out the problem, the scope of the project and the
financial reporting issues;
discusses research findings and relevant literature; and
presents alternative solutions to the issues under
consideration and the arguments and implications relative
to each.
Following the receipt and review of comments, the IASB
develops and publishes an exposure draft, which is also for
public comment.

2.3.2 Exposure Draft

An exposure draft invites comment on any aspect of specific
questions and the proposed IFRS.
It sets out the proposed standards and transitional provisions.
2.3.3 Voting
The publication of a Standard, an exposure draft or a final IFRIC

interpretation requires approval by 10 of the IASB's 16 members
(nine if fewer members are sitting).
All other decisions, including the issue of a discussion paper,

require a simple majority of the IASB members present at
a meeting (which must be attended by at least 60% of the
members).
2.3.4 Comment Period

Within the IASB's constitution, the comment period is for a
"reasonable period".*
Typically this is for 90 or 120 days. The minimum comment *A "reasonable period"
period for an exposure draft is 60 days. must allow, for example,
for the translation of
2.4 Projects and Work Program documents.
2.4.1 Work Program

The IASB's current work program includes:*
financial instruments (IAS 39 replacement);
revenue recognition; and
leases.
*The project timetable is constantly changing. For example,

replacing IAS 39 is considered more urgent as it is related to the
financial crisis and less urgent projects have been put back (e.g.
financial statement presentation and conceptual framework).
Current projects also include the convergence of IFRSs

with FASB.*
*Although exposure drafts and discussion papers are not examinable

it is important to appreciate that IFRSs are not static.

Long-term projects with the FASB include:

financial statement presentation;
conceptual framework (in four phases);
leases; and
revenue recognition.
Other projects include:

government grants;
accounting policies; and
income taxes.
The IASB now also issues an annual improvement standard

which is intended to deal with non-urgent, minor amendments The improvements
to standards. The changes are split into two types, those standard is not an
resulting in accounting changes and those which are examinable document
terminology or editorial changes. in its own right.
2.4.2 Public information

The aim of the IASB is to make its deliberations, activities and
intentions as transparent and open as possible.
Extensive information on the IASB and its activities is available
on the IASB's website at www.IASB.org. This includes all
discussion documents, exposure drafts, public comments, *An example
current activities and timetables of IASB and IFRS IC meetings. publication, "IFRSA
IASB and IFRS IC meetings are open to the public and may be Briefing for Chief
received as a webcast through the IASB website. Executives, Audit
Committees and
IASB Update and IFRS IC Update are issued after every IASB Boards of Directors
and IFRS IC meeting detailing the issues discussed and the provides summaries
conclusions reached. of all current IFRSs
Various publications are issued from time to time to assist in in "non-technical
the understanding of the work of the IASB and in IFRS.* language".

3 International Financial Reporting Standards
IFRSs are a major international GAAP. They are widely used and
accepted as a basis for the preparation of financial statements across
many jurisdictions.
3.1 GAAP Hierarchy

In descending order of authoritativeness:
IFRS, including any appendices that form part of the
Standard* *The term IFRSs
Interpretations includes all standards
and interpretations
Appendices to an IFRS that do not form part of the Standard
approved by the IASB
Implementation guidance issued by the IASB. and IASs and SICs
All Standards and Interpretations issued under the previous issued by the IASC.
constitution (i.e. IASs and SICs) continue to be applicable
unless and until they are amended or withdrawn.
3.2 Scope
3.2.1 General Purpose Financial Statements
IFRSs apply to the published financial statements of all profit-
oriented entities (i.e. those engaged in commercial, industrial
and financial activities).
Entities may be corporate or organised in other forms
(e.g. mutual cooperatives or partnerships). IFRSs may
also be appropriate to not-for profit activities, government
business enterprises and other public sector entities.
IFRSs apply to all "general purpose financial statements"
(i.e. those aimed at the common information needs of a wide
range of users).
IFRSs apply to both individual entity and consolidated financial
statements.
Any limitation on the applicability of specific IFRSs is made
clear in the "scope" section to the standard.
An IFRS applies from a date specified in the standard and is
not retroactive unless indicated to the contrary.
3.2.2 Benchmark and Allowed Alternative Treatments

In some IASs, the IASC permitted two accounting treatments
for like transactions and events:
one was designated the benchmark treatment;
the other was the allowed alternative treatment.
The perceived advantage of allowing two treatments (in cases

in which there is an allowed alternative) was that it increased
the acceptability of the standard. *Consequently the
However, like transactions and events need to be accounted IASB intends not to
permit choices in
for and reported in a consistent way to ensure true
accounting treatment.
comparability of financial statements.*

All standards which previously allowed a choice between the

benchmark and allowed alternative have now been revised
and the terms benchmark and allowed alternative have been
withdrawn from use.
However, some standards still have options available:

IAS 16 Property, Plant and Equipment allows assets to be valued
either using a cost or revaluation model.
IFRS 3 Business Combinations allows non-controlling interest to
be valued in one of two ways.
3.3 Role in International Harmonisation

The IASB has had considerable influence on the harmonisation
of financial reporting:
through adoption by multinationals and local regulators; and
through working with the International Organisation of
Securities Commissions (IOSCO).
3.3.1 Adoption
IFRSs are used:
as national requirements or as the basis for national
requirements;
as an international benchmark for countries developing their
own requirements;
by regulatory authorities and companies; and
by large multinationals for the purpose of raising finance on
international capital markets.
3.3.2 IOSCO
The members of the International Organisation of Securities
Commissions are securities commissions and other stock
exchange regulators. Harmonisation of financial reporting
standards has been high on IOSCO's agenda for many years.
In 1993, IOSCO agreed a list of core standards needed for use
in financial statements for listing purposes.
Although many were already dealt with by IASs, the IASC
needed to amend some existing standards, complete existing
projects and start new ones (e.g. on financial instruments).
This was IASC's "core program".
The "core program" was completed in 1999 and in 2000,
IOSCO endorsed the "IASC 2000 standards" for use in the
preparation of financial statements for cross-border offerings
and listings.
This endorsement meant that IOSCO recommended that its
members allow entities quoted on the stock exchanges of the
world to adopt IFRS for filing purposes. (It was not binding.)

3.3.3 Use Around the World

More than 120 countries are reported to be either permitting
or requiring the use of IFRS, for example:
Bangladesh, Brazil, Czech Republic, Estoniaall listed
companies, including domestic, must follow IFRS. *The range and
European Union, European Economic Area member states extent of use of IFRS
all domestic listed companies were required to adopt IFRS varies around the
on or before 1 January 2005. world. Clearly this is
Russia, Ukraine, KazakhstanIFRS is required for banks.
constantly changing.
For example, the
In Canada, IFRS is required for fiscal years beginning on or original schedule for
after 1 January 2011 for all publicly accountable entities (i.e. mandatory adoption
not only listed companies) and permitted for private sector in Japan in 2015 has
companies. already been put back
IFRS financial statements are not currently permitted in, for to 2016 and may be
put back even further
example, China, Pakistan, Saudi Arabia, Malaysia or Indonesia.
rather than place an
However, a convergence project is ongoing with Indonesia additional burden on
(with some newly revised standards already effective and entities affected by the
compliance expected in 2012) and China has substantially tsunami of 2011.
converged national standards.*
3.3.4 Impact of Endorsement on US Listings

The US SEC is a prominent member of IOSCO. It used to
require a full schedule 20F reconciliation of equity and profit
to a US GAAP basis. This reconciliation is no longer required
if the entity prepares financial statements in accordance with
IFRS.
In 2010, the SEC indicated that it would make a decision
in 2011 about the use of global standards by US public
companies following completion of the SEC's IFRS work plan
and the convergence projects agreed to by FASB and the IASB.
In 2011, FASB and the IASB completed five projects. Inter
alia, this resulted in the issue of IFRS 10 Consolidated
Financial Statements. However, this has given rise to
new proposals to define investment entities as a separate
type of entity which would be exempt from the accounting
requirements of IFRS 10.

3.3.5 Convergence
The IASB Constitution envisages a "partnership" between
the IASB and National Standard Setters (NSSs) as they work
together to achieve the convergence of accounting standards
world-wide.*
*NSSs include the
Convergence is a gradual process by which local GAAP accounting standards
approaches and is replaced with IFRS. As a step-by-step boards of Australia
transition process it: (AASB), Germany
gives more time for preparation; and (DRSC), UK (ASB) and
reduces the potentially negative effect on companies trading US (FASB).
their shares.
The main effects on financial statements of adopting IFRS
include:
greater use of fair value as a measurement basis;
considerably greater disclosure; and
the need for more narrative to explain its complexities.
Major areas of differences between local GAAP and IFRS may
be classified, for example, between those which are:
fully related to day-to-day accounting (e.g. IAS 16 Property,
Plant and Equipment);
partially related to day-to-day accounting (e.g. IAS 19
Employee Benefits); and
related to consolidation (e.g. IFRS 3 Business
Combinations).

4 Not-for-Profit Organisations
Not all organisations' primary objectives are to make a profit.
Many not-for-profit
Specialised organisations, not-for-profit and public sector
organisations and
entities have other functions to perform in the economy.
public sector entities
These types of organisations still enter into economic follow a value for
transactions and have accounting issues to handle. The money approach
question is, do these organisations need to comply fully to how they perform
with IFRS? their services.
4.1 Primary Objectives

Most of these types of organisations do not have as their
primary objective the making of profits. In many cases, these
organisations are providing a service for the community as a
whole. Among their many objectives, national governments
seek to provide health, education and policing to all members
of the community; they do not seek to make a profit from
giving these services.
Other organisations such as charities and many museums do
not have profit as their primary objective; they again seek
to provide a service to various groups within the local and
international community.
4.2 Value for Money

Value for money considers the "3 Es":
1. Economythe organisation looks to minimise the cost of
inputs.
2. Efficiencythe organisation looks to maximise outputs in
proportion to the cost of inputs.
3. Effectivenessthe organisation has managed to perform
its objectives.
4.3 Accounting
Most of these types of organisations enter into accounting
transactions leading to the requirement for the transactions
to be recorded by one means or another. Accruals accounting
is used by the majority of these organisations; cash-based
accounting, however, is still used in some public sector
institutions.
The International Federation of Accountants (IFAC) has
published International Public Sector Accounting Standards
prescribing the accounting treatment to be followed by public
sector bodies. These standards are derived from IFRS, with
adaptations being made to put them in a public sector context
when appropriate. The preface to these standards states that
the conceptual framework of the IASB is still relevant in public
sector accounting.
Charitable organisations cannot do as they please with their
funds; they must produce accounting records showing the
stewardship of the funds which have been entrusted to them.
They are required to follow a form of best practice in respect
of their accounting transactions.

Summary
IFRS is a principles-based set of accounting standards. They are widely used for the
preparation of financial statements across many jurisdictions.
IFRSs apply to the published financial statements of all profit-oriented entities.
All listed EU companies were required to publish consolidated financial statements in
compliance with IFRS with effect from 1 January 2005.
Recently, many countries have adopted IFRS as their accounting framework with local GAAP
either disappearing or only being used for private entities.
The IASB was formed to take over the work of the IASC in April 2001.
Publication of a Standard, exposure draft or final IFRIC requires approval by 10 of the
IASB's 16 members.
Not all organisations' primary objectives are to make a profit. Not-for-profit and public
sector entities have other functions to perform in the economy.
National governments, among their many objectives, seek to provide health, education and
policing to all members of the community.
Many not-for-profit organisations follow a value-for-money approach to how they perform
their services.
Session 1 Quiz
Estimated time: 15 minutes
1. State two sources of GAAP. (1.2)

2. Give three advantages to countries adopting IFRS. (1.5)
3. State the objectives of the IASB as set out in its mission statement. (2.2)
4. State the purpose of a discussion paper. (2.3.1)
5. State how long the comment period is for an exposure draft of a new accounting
standard (IFRS). (2.3.4)
6. State how long the comment period is for an exposure draft of a new IFRS. (2.3.4)
7. State the GAAP hierarchy. (3.1)
8. Name the body that the acronym IOSCO stands for. (3.3)
Study Question Bank

Estimated time: 45 minutes
Priority Estimated Time Completed
MCQs - Session 1 20 minutes
Q1 IASB 25 minutes

Session 1
NOTES

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Session 1

A. The Conceptual and Regulatory Framework for

(continued on next page)

Ali Niaz - friend4ever0306@yahoo.com

2014 DeVry/Becker Educational Development Corp. All rights reserved. 1-1

Ali Niaz - friend4ever0306@yahoo.com

1.1 What is GAAP?

1.2 Sources of GAAP

Statements issued by professional accounting bodies which

1.2.2 Other Sources

1.3 Role of Statute and Standards

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Ali Niaz - friend4ever0306@yahoo.com

Some countries have relatively little in the way of statute and

France "Code de commerce" Acts Acts

New member states of the EU (and aspiring applicants)

Further to the IOSCO endorsement (International Organisation of

2014 DeVry/Becker Educational Development Corp. All rights reserved. 1-3

Ali Niaz - friend4ever0306@yahoo.com

The 2005 deadline was extended to 2007 for companies

UK government bodies were required to apply IFRS to their

1.5 IFRS v Local GAAP

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Ali Niaz - friend4ever0306@yahoo.com

2.3 Standard Setting

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Ali Niaz - friend4ever0306@yahoo.com

Due process normally involves the following steps (those in

2.3.1 Discussion Papers

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2.3.2 Exposure Draft

The publication of a Standard, an exposure draft or a final IFRIC

All other decisions, including the issue of a discussion paper,

2.3.4 Comment Period

2.4.1 Work Program

*The project timetable is constantly changing. For example,

Current projects also include the convergence of IFRSs

*Although exposure drafts and discussion papers are not examinable

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Ali Niaz - friend4ever0306@yahoo.com

Long-term projects with the FASB include:

Other projects include:

The IASB now also issues an annual improvement standard

2.4.2 Public information

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Ali Niaz - friend4ever0306@yahoo.com

3 International Financial Reporting Standards

3.1 GAAP Hierarchy

3.2.2 Benchmark and Allowed Alternative Treatments

The perceived advantage of allowing two treatments (in cases

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All standards which previously allowed a choice between the

However, some standards still have options available:

3.3 Role in International Harmonisation

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3.3.3 Use Around the World

3.3.4 Impact of Endorsement on US Listings

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