Department of Finance & Accountancy

Faculty of Business Studies

ACC 3123: International Accounting
International Financial Reporting Standards
Handout -No-04

International Financial Reporting Standards

International Financial Reporting Standards, usually called IFRS, are standards issued by

the IFRS Foundation and the International Accounting Standards Board (IASB) to provide a
common global language for business affairs so that company accounts are understandable
and comparable across international boundaries.

Definition of IFRS

IFRS is short for International Financial Reporting Standard is a globally adopted method of
financial reporting issued by International Accounting Standard Board (IASB). Formerly, it is
known as International Accounting Standard (IAS). The standard is used for the
preparation and presentation of the financial statement i.e. balance sheet, income statement,
cash flow statement, changes in equity and footnotes, etc.

IFRS ensures comparability and understandability of international business. It is aimed to

provide users with information about the financial position, performance, profitability and
liquidity of the company, to help them in making rational economic decisions.

Definition of GAAP

Generally Accepted Accounting Principles or GAAP refers to the standard framework,

principles and procedures used by the companies for financial accounting. The principles are
issued by Financial Accounting Standard Board (FASB). It is a set of accounting standards
that consist of standard ways and rules for recording and reporting of the financial data i.e.
balance sheet, income statement, cash flow statement, etc. The framework is adopted by
publicly traded companies and a maximum number of private companies in the United States.

GAAP principles are updated at periodical intervals to meet with current financial
requirements. It ensures the transparency and consistency of the financial statement. The

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information provided as per GAAP by the financial statement is helpful to the economic
decision makers such as investors, creditors, shareholders, etc.

At present around 120 countries has adopted IFRS as a framework to govern accounting
statement. With the adoption of IFRS, the presentation of financial statement will be better,
easier and similar to the overseas competitors.

Benefits of IFRS Standards

IFRS Standards address this challenge by providing a high quality, internationally recognized
set of accounting standards that bring transparency, accountability and efficiency to financial
markets around the world.

IFRS Standards bring transparency by enhancing the international comparability and quality

of financial information, enabling investors and other market participants to make informed
economic decisions.

IFRS Standards strengthen accountability by reducing the information gap between the

providers of capital and the people to whom they have entrusted their money. Our Standards
provide information that is needed to hold management to account. As a source of globally
comparable information, IFRS Standards are also of vital importance to regulators around the
world.

And IFRS Standards contribute to economic efficiency by helping investors to identify

opportunities and risks across the world, thus improving capital allocation. For businesses,
the use of a single, trusted accounting language lowers the cost of capital and reduces
international reporting costs.

IAS 1 - Presentation of Financial Statements

Objective

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This standard prescribes the guide lines to be used by the entity, in the presentation of general
purpose financial statements, to make sure that financial statement of the entity are
comparable both with its previous periods financial statement and with the financial
statements of the other entity. For this purpose, it provides overall requirements for the
structure and contents of financial statements along with some general features.
Scope
The requirements of this standard are applicable to all the general purpose financial
statements (individual and consolidated both) which are prepared and presented in
accordance' with 'International Financial .Reporting Standards (IFRSs).
General Purpose Financial Statements
These are financial statements which are prepared and presented to satisfy the information
needs of the general users, who are not able to require the reporting entity to prepare
accounting reports according to their particular information needs.

Qualitative characteristics of financial information

Fundamental qualitative characteristics of financial information include:

 Relevance
 Faithful representation

Enhancing qualitative characteristics include:

 Comparability
 Verifiability
 Timeliness
 Understandability
Complete Set of Financial Statements
The complete set of financial statements entails the following:
 Statement of profit or loss and other comprehensive income
 Statement of financial position
 Statement of changes in equity
 Statement of cash flows
 Notes to accounts
 Comparative year information

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Recognition of elements of financial statements

An item is recognized in the financial statements when:[

 It is probable future economic benefit will flow to or from an entity.

 the resource can be reliably measured

In some cases specific standards add additional conditions before recognition is possible or
prohibit recognition altogether.

International Financial Reporting Standards (IFRSs)

These are accounting standards and related Interpretations, which are issued and regulated by
the International Accounting Standards Board (IASB) and these encompasses:
 International Financial Reporting Standards (IFRS)
 International Accounting Standards (IAS)
 Interpretations issued by IFRIC and
 Interpretations issued by SIC
General Features
Fair Presentation
This standard requires that the financial. Performance, financial position and cash flows of an
entity should be fairly presented.
Going Concern
At the end of each reporting period, when entity will prepare its financial statements, the
management is required to assess of whether the entity has ability to continue its business as a
going concern.
Accrual Basis of Accounting
The entity is required to report all the events and transactions in the financial statements in
the period to which these relate except for the cash flows.
Consistency of Presentation
The entity should use the same accounting policies in the preparation and presentation of
financial statements for the similar events and transactions, from one period to the next in
order to ensure the comparability of financial statements unless the change is required by the
circumstance laid down in IAS 8.

Materiality and Aggregation

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The entity is required to present each material class of items separately in the financial
statements, unless these are immaterial.
Offsetting
The entity should not offset any assets and liabilities or any income and expense, except it is
required by an IFRS
Frequency of Reporting
An entity shall present a complete set of financial statements (including comparative 
information) at least annually. When an entity changes the end of its reporting period and
presents financial statements for a period longer or shorter than one year an entity shall
disclose, in addition to the period covered by the financial statements
(a) The reason for using a longer or shorter period, and 
(b) The fact that amounts presented in the financial statements are not entirely comparable.
Comparative Information
This standard requires an entity to disclose the comparative information in respect of the
previous accounting period similar to those amounts which are presented in the financial
statements of the current accounting period
Identification of Financial Statements
The financial statements of the entity should be identified and distinguished from the other
information using the following:
 The title of the entity presenting financial statements
 Whether these are the financial statements of an individual entity or consolidated
financial statements for the group of entities:
 The reporting date for which financial statements are presented
 The presentation currency for the amounts reported in financial statements
 The level of rounding up for the amounts reported in financial statements

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 Elements of financial statements

Statement of financial position 

 Asset: A present economic resource controlled by the entity as a result of past events
which are expected to generate future economic benefits.

 Liability: A present obligation of the entity to transfer an economic resource as a

result of past events
 Equity: Nominal equity is the nominal residual interest in the nominal assets of the
entity after deducting all its liabilities in nominal value.

Comprehensive Income statement

 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.

 Expenses: decreases in economic benefits during an accounting period in the form of

outflows, or depletions of assets or incurrence of liabilities that result in decreases in equity.

Statement of changes in equity 

 Changes in the elements of equity due to transaction with owners in the current
accounting period
 Changes in the elements of equity due to the total comprehensive income for the year
 Changes in the components of equity due to the change in accounting policy
 Changes in the components of the equity due to the requirement of a standard
Cash flow statement

 Operating cash flows

 Investing cash flows
 Financing cash flows

Notes
 Basis used by the entity for the preparation of the financial statements
 Accounting policies of the entity
 Disclosures required by the standards

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IAS 2: Inventories
Inventories what are they?
Held for resale:
 Held for sale in the ordinary course of business
Work in progress:
 In the process of production for sales.
Raw materials:
 Materials /supplies used in the production process.
Each of inventories valued at lowest level of:
1. Cost
Costs of purchase, cost of conversion and other cost incurred in bringing the inventories to
their present location and condition.
Purchase cost = purchase price + Delivery cost+ Import duties
Conversion cost = Direct labour + Direct Expenses + Share of production overhead
Other cost= consulting charges+ professional fee.

2. Net realizable value (NRV)

Net realizable value (NRV) is the amount we expect to gain from the sales of
inventory.

Expected Cost to complete Cost to sell Net realizable

selling price item for sale (ex-delivery = Value
  cost

Cost of information NRV information

In bringing an item of inventory to this current If the item were finished and sold we would
location and condition, the following cost were expect:
incurred: Selling price: LKR 320
Purchase price: LKR 250 Cost of complete: less LKR 10
Carriage in : LKR 10 Carriage out: less LKR 15
Import duties paid: LKR 20 LKR 95
Direct labour spent: LKR 30
LKR 310

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SOLUTION: inventory is valued at lower of cost and NRV LKR 295
ISA 2 does not allow for the capitalization:
a) The cost of abnormal levels of waste
b) Storage cost where the storage is not part of the production process
c) Administrative costs
d) Selling cost

Example 01

Calculate the net realizable value of inventory having following particulars:

Total Units 19,000

Estimated Selling Price per Unit 35

Units Damaged (Included in Total Units 700

Cost to Repair each Damaged Unit $6

Other Selling Costs per Unit $2

Solution

Good Damaged

Estimated Price per Unit $35 $35

– Repair Cost 6

– Other Selling Costs 2 2

NRV per Unit $33 $27

× Units 18,300 700

Net Realizable Value $603,900 $18,900

Total Net Realizable

$622,800
Value

Example 02

Rajan manufactures components for the retail industry. The inventory is currently valued at
cost.

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The cost structure of the equipment is as follows.
Cost per unit selling price per unit

Production process- 1st stage $1000 1050

Conversion cost- 2nd stage $500 -
Finished product $1500 1700
The selling cost are $10 per unit and Rajan has 100000 units at the 1 st stage of production and
200000 units of finished product.
Shortly after the year- end a competitor released a new model and this has resulted in rajan
having to reduce it selling price to 1450 for the finished product and 950 for the first stage
production.
Calculate the value of closing inventory to be included in Rajan’s financial statement as at
closing date.

Example 03

Thunder Limited had inventory with a cost of $10,000 at the end of the financial period, 31
December 2013. It estimated the net realizable value of this inventory was $9,000 at 31
December. One week later, the inventory was sold for $7,000.

If their financial statements were finalized on 14 February 2014, what value should be
assigned to this inventory?

Example 04

Shaw & Co., imported raw materials from China worth $100,000. They paid $8,000 as
import duties and $2,000 as import taxes (the import taxes were subsequently refunded by the
local government). They paid $15,000 for transportation of the materials from China and
another $2,000 as port handling charges for loading the materials at China.

Marketing expenses were $1,000 and the general administrative overheads amounted to
$2,000. What will be the value of inventories as per IAS 2?

Example 05

Zippy Machines is in the business of procuring a specific type of machine and sells them to
international markets. During the year, the Company bought four machines costing $120,000,
$140,000, $130,000 and $100,000 respectively.

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Example 06

Sticky Corp manufacturers and sells adhesive warning signs for workplaces. The stock of
signs was included in the closing inventory as of 31 December 2013 at a cost of $50 per pack.

During the final audit the auditors noted that the subsequent selling price for the inventory at
15th January 2014 was $40 per pack. Furthermore, inquiry reveals that during the physical
stock take, a water leakage has damaged the signs and glue. Accordingly in the following
week, Sticky Corp spent a total of $15 per pack for repairing and reapplying the glue to the
signs.

The net realizable value and inventory write-down (loss) amount to…

Example 07

Khewra Manufacturing was formed on 1 January 2015. The entity manufactures and sells a
single product and values it on a first-in, first-out basis.
One ton of raw material is processed into one ton of finished goods.
The following details relate to 2015.
Purchases of raw materials

Purchases: 1,000 tons of raw materials per week

Price: Rs.100, 000 per ton on 1 January, increasing to Rs.150, 000 per ton on 1 July

Import duties: Rs.10, 000 per ton

Transport from docks to factory: Rs.20, 000 per ton

Production costs
Production capacity: 1,500 ton per week

Variable costs: Rs.25, 000 per tone

Fixed costs: Rs.30, 000,000 per week

Sales details

Selling price: Rs.240,000 per ton

Delivery costs to customers: Rs.8, 000 per ton

Selling costs: Rs.4,000 per ton

Inventories at 31 December 2015

Raw materials: 2,000 ton

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Finished goods: 2,000 ton

There is a ready market for raw materials and the NRV of the raw materials is higher than its
cost. Required Calculate and disclose the value of inventories at 31 December 2015 in
accordance with IAS2.

IAS 16: property, plant and equipment

IAS 16 establishes principles for recognizing property, plant and equipment as assets,
measuring their carrying amounts, and measuring the depreciation charges and impairment
losses to be recognized in relation to them. Property, plant and equipment are tangible items
that:
 are held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes; and
 are expected to be used during more than one period.

The cost of an item of property, plant and equipment is recognized as an asset if, and
only if:

 it is probable that future economic benefits associated with the item will flow to the
entity; and
 the cost of the item can be measured reliably.

An item of property, plant and equipment is initially measured at its cost.

Cost includes:
 its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates;
 any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management;
and

The estimated costs of dismantling and removing the item and restoring the site on which it is
located, unless those costs relate to inventories produced during that period.

After recognition, an entity chooses either the cost model or the revaluation model as its
accounting policy and applies that policy to an entire class of property, plant and equipment:

 Under the cost model, an item of property, plant and equipment is carried at its cost
less any accumulated depreciation and any accumulated impairment losses.

 Under the revaluation model, an item of property, plant and equipment whose fair
value can be measured reliably is carried at a revalued amount, which is its fair value
at the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses

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 Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life. Depreciable amount is the cost of an asset, or other amount substituted for
cost, less its residual value. Each part of an item of property, plant and equipment with a
cost that is significant in relation to the total cost of the item is depreciated separately.
The depreciation charge for each period is recognized in profit or loss unless it is included
in the carrying amount of another asset. The depreciation method used reflects the pattern
in which the asset’s future economic benefits are expected to be consumed by the entity.
To determine whether an item of property, plant and equipment is impaired, an entity
applies IAS 36

EXAMPLE 1
On 1 March 20X0 Yucca Co acquired a machine from Plant Co under the following terms:
List price of machine 82000
Import duty 1500
Delivery fees 2050
Electrical installation cost 9500
Pre-production testing 4900
Purchase a five year maintenance contract with plant 7000

In addition to the above information Yucca Co was granted a trade discount of 10% on the
initial list price of the asset and a settlement discount of 5% if payment for the machine was
received within one month of purchase. Yucca Co paid for the plant on 25 March 20X0.

How should the above information be accounted for in the financial statements?

EXAMPLE 2

A machine was purchased on 1 April 20X0 for $120,000. It was estimated that the asset had a
residual value of $20,000 and a useful life of 10 years at this date. On 1 April 20X2 (two
years later) the residual value was reassessed as being only $15,000 and the useful life
remaining was considered to be only five years.

How should the asset be accounted for in the years ending 31 March 20X1/20X2/20X3?

EXAMPLE 3

Accounting for a revaluation

Assume on December 31, 2011 the company intends to switch to revaluation concept and
carries out a revaluation exercise which estimates the fair value of the building to be

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$200,000 as at December 31, 2011. The book value at the date is $150,000 and
revalued amount is $200,000 so an upward adjustment of $50,000 is required to building
account.

It is recorded through the following journal entry:

1 .For recording the revaluation surplus on the building. 

Building Account - Debit 50,000 

Revaluation Account -Credit         50,000

2. For transferring the revaluation surplus to the equity share capital. 

Revaluation Account - Debit 50,000

Equity Share Capital Account - Credit 50,000

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