Paper: 02, Accounting & Financial Analysis

Module: 19, International Financial Reporting Standards-I

Prof. S P Bansal
Principal Vice Chancellor
Investigator Maharaja Agrasen University, Baddi

Prof YoginderVerma
Pro–Vice Chancellor
Co-Principal Investigator Central University of Himachal Pradesh. Kangra.
H.P.

Dr. O.P Verma

Paper Coordinator Department of Commerce
Himachal Pradesh University shimla

Dr Sanjeet Sharma
Assistant Professor
Content Writer Department of Commerce
Govt College Nadaun (HP)

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 Items Description of Module
Subject Name Management
Paper Name Accounting & Financial Analysis
Module Title International Financial Reporting Standards-I
Module Id Module No-19
Pre- Requisites International Financial Reporting Standards
Objectives Need & Importance of IFRS
Keywords IFRS , IASB , IAS, IFRICs, SICs

QUADRANT-I
Module-19 International Financial Reporting Standards-I
1. Learning objectives
2. Introduction
3. Accounting Standard
4. International Financial Reporting Standards (IFRS)
5. Features in IFRS
6. Background of IFRS
7. Adoption of IFRS
8. Objectives of IFRS
9. Financial statements under the IFRS
10. Importance of IFRS
11. Limitations of IFRS
12. Summary
LEARNING OBJECTIVES:
This module helps to understand the concept of International Financial Reporting Standards. After
studying this module the students may able to
 Understand the objective, need and importance of International Financial Reporting Standards.
 Explain characteristics of the International Financial Reporting Standards.
 To recognize financial statements required under the IFRS.
 Get basic knowledge of International Financial Reporting Standards.

INTRODUCTION
The process of globalization and a rising phenomenon of foreign associate companies have resulted in
increased movements of companies from one country to another. The need for development of
international accounting standards arise to bring harmony in financial reporting worldwide. Accounting
standards and principles differ from country to country because these are affected by economic, political,
legal, social and cultural systems of the country in which these are developed. Due to different accounting
standards and principles in different countries credibility of accounting reports lose when these reports are
prepared according to these standards and principles.

ACCOUNTING STANDARD

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An accounting standard is simply a selected set of accounting policies or broad guidelines which are
issued by an accounting body for the preparation and presentation of financial statements. Accounting
standards are the norms of accounting policies and practices to guide the treatment of transactions and
events in the accounting process.

Accounting Selected set of For the preparation

standard accounting policies or and presentation of
broad guidelines financial statements

The adoption and application of accounting standards ensures uniformity, comparability and qualitative
improvement in the preparation and presentation of financial statements. The following are the causes of
development of accounting standards.
 to reduce or eliminate confusing or ambiguous terms and practices
 Uniform presentation of accounts
 to avoid manipulation of accounting results

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

Accounting is language of business. International Financial Reporting Standards (IFRS) has been
developed to make accounting as a common globally accepted language for business affairs. International
Financial Reporting Standards (IFRS) is a set of accounting standards which is developed by International
Accounting Standards Board (IASB). International Accounting Standards Board (IASB) is an
independent, not-for-profit organization. International Financial Reporting Standards (IFRS) makes an
attempt that accounts of companies can be easily understandable and comparable all over the word.
International financial reporting standards (IFRS) are a set of generally accepted accounting principles
(GAAP) which provide guidelines to companies for preparation and presentation of financial statements.
Financial statements are important source of information which is published annually by company. These
are useful to various stakeholders such as shareholders, debtors, clients, employees and governments in
understanding a company's financial performance. The need of International Financial Reporting
Standards (IFRS) arises due to growing international shareholding and trade. International Financial
Reporting Standards (IFRS) are the rules or principles which are used by accountants to maintain books
of accounts of a company. Further, books of accounts prepared according to these are relevant, reliable,
understandable, and comparable. These are very important for multinational companies which are
dealings in number of counties. In many countries national accounting standards has been replaces by
International Financial Reporting Standards (IFRS).
Simply, International Financial Reporting Standards are guidelines which govern the reporting of
accounting transactions. The aim of IFRS is to provide a worldwide framework for companies to prepare
and present their financial statements. Thus, IFRS are general guidance which is related with preparation
and presentation of financial statements. The term 'International Financial Reporting Standards' (IFRSs)
can be defined in two ways
 Narrow meaning
 Broad meaning
NARROW MEANING
In narrow sense IFRSs includes only the 'International Financial Reporting Standards issued by the IASB.

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BROAD MEANING
In broad sense, IFRSs includes
 International Financial Reporting Standards (IFRSs)
 International Accounting Standards (IASs)
 Interpretations originated from the International Financial Reporting Interpretations Committee
(IFRICs)
 Interpretations originated from the Standing Interpretations Committee (SICs)

'International
Financial
Reporting
Standards

Narrow meaning Broad meaning

'International 'International International International Standing

Financial Reporting Financial Reporting Accounting Financial Reporting Interpretations
Standards Standards Standards (IASs) Interpretations Committee (SICs)
Committee
(IFRICs)

Issued after 2001 Issued after 2001 Issued before 2001 Issued after 2001 Issued before 2001

FEATURES IN IFRS
The following are the general features in IFRS:
1. Faithful presentation: IFRS provide fair or faithful representation of the financial statements. IFRS
ensures that financial statements are presenting true and fair view of an entity. For this IFRS introduced
the concept of fair value measurement.
2. Going concern: IFRS is based on the assumption of going concern and financial statements are
presented on a going concern basis.
3. Accrual basis of accounting: IFRS is based on the accrual basis accounting. According to this
assumption income, expenses, assets, liabilities and equity are recorded when they occur rather when
settled.
4. Materiality: International Financial Reporting Standards provide due consideration to Materiality.
Material items should be presented separately.
5. Frequency of reporting: IFRS provides that
 at least annually a complete set of financial statements should be presented.
 However listed companies generally also publish interim financial statements
6. Comparative information: IFRS provides that comparative information in respect of the previous
period should be presented in the current period's financial statements.

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7. Consistency of presentation: IFRS requires consistency in the presentation and classification of items
in the financial statements from one period to the next.

BACKGROUND OF IFRS
International Accounting Standards Committee (IASC) was established in 1973. Later on, IASC was
replaced by International Accounting Standards Board (IASB) in the year 2001. The IASB has the power
to develop IFRSs and to approve interpretations of those standards. International Accounting Standards
Board (IASB) presently issues International Financial Reporting Standards (IFRS). Sometimes IFRS is
confused with IAS (International Accounting Standards), which were older standards that IFRS has
replaced.

Year Body Issued

1970 Britain, Canada, the U.S. Established Accounting
International Study Group (AISG)

1973 accounting professional organizations of International

Netherlands, Canada, Australia, Mexico, Japan, Accounting
France and New Zealand formed the International Standard (IAS)
Accounting Standards Committee (IASC) (between 1973 and
2001)

2001 New (IASB) International Accounting Standard IFRS.

Board took over from the IASC the responsibility
for setting International Accounting Standards.
ADOPTION OF IFRS
The origin of IFRS began in the European Union with purpose of to harmonize business accounting
across the European Union. This idea of IFRS was attractive and quickly spread globally. Presently,
IFRS are adopted and used in many parts of the world, including the
 European Union,
 Hong Kong,
 India,
 Malaysia,
 Pakistan,
 GCC countries,
 Russia,
 Turkey,
 Philippines,
 South Africa,
 Australia,
 Singapore,
 Chile,
but not in the United States. The United States has not yet decided about IFRS and the Securities and
Exchange Commission (SEC) is in the process of deciding whether to adopt the IFRS in America or
not. Currently, about 120 countries use IFRS in some way, further more countries expected to adopt IFRS
by 2015.
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OBJECTIVES OF IFRS:
The main purpose of the IFRS is to bring transparency, accountability and efficiency to global reporting
system. The main objectives of the International Financial Reporting Standards (IFRS) are given as below

Transparency

Objectives of IFRS

Efficiency Accountability

Transparency
IFRS make attempts to bring transparency in reporting system accounting. These focus on
 enhancing the global comparability
 improving quality of financial information,
 Enabling investors and other stakeholders to take qualitative decisions.
Accountability
IFRS also aims at strengthening accountability by
 reducing the information gap between the providers and users of capital
 Important to regulators around the world.
Efficiency
IFRS makes efforts to achieve efficiency by
 helping investors to identify opportunities and risks around the world,
 Improving capital allocation.
 Reducing international reporting costs.

STOP QUICK REVISION

ACCOUNTING STANDARD: An accounting standard is simply a selected set of
accounting policies or guidelines issued by an accounting body for the preparation and
presentation of financial statements.
IFRS: IFRSs includes
 International Financial Reporting Standards (IFRSs)
 International Accounting Standards (IASs)
 Interpretations originated from the International Financial Reporting Interpretations
Committee (IFRICs)
 Standing Interpretations Committee (SICs)
FEATURES IN IFRS: Include
 based on assumptions of Going concern, Accrual basis of accounting and Materiality
 Consistent and Faithful presentation
 Comparative information

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 OBJECTIVES OF IFRS: main objectives of the International Financial Reporting
Standards (IFRS) are to achieve efficiency, strengthening accountability and bring
transparency in financial reporting.

FINANCIAL STATEMENTS UNDER THE INTERNATIONAL FINANCIAL REPORTING

STANDARDS (IFRS)
Financial statements
Financial statement means a statement which provides necessary financial information about an
organization. Financial statements are prepared on the basis of some accounting principles. Financial
statements are prepared with objective of providing information about the profitability and financial
position of an entity and help various stake holders in making economic decisions. These users include
shareholders, creditors, employees and the general public.
Information under Financial statements
IFRSs are applied by profit-orientated entities. Financial statements under IFRS provide information
about the following important concepts:
 assets;
 liabilities;
 equity;
 income
 expenses
 Other information such as cash flows.
Annual reports required under IFRS
Following are the annual reports or financial statements which are required under IFRS:
1. Statement of Financial Position:
 Statement of Financial Position is also known as a balance sheet.
 IFRS reveals the ways in which the components of a balance sheet should be reported.
 provide the minimum scope of information to be presented
Elements of Statement of Financial Position
The, following elements as a minimum, should be presented on the face of the balance sheet or complete
Statement of Financial Position:
Element Description
Assets  property, plant and equipment; investment property;
 intangible assets;
 financial assets;
 investments accounted for using the equity method;
 biological assets;
 deferred tax assets; current tax assets;
 inventories; trade and other receivables;
 Cash and cash equivalents.
Equity  issued capital to the parent’s owners
 reserves attributable to the parent’s owners;
 non-controlling interest
Liabilities  deferred tax liabilities; current tax liabilities

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  financial liabilities;
 provisions;
 trade and other payables
Assets and liabilities  Non-current assets held for sale and discontinued operations
held for sale
Classification of assets and Liabilities
Statement of Financial Position should be classified on following basis
 Current and non-current assets
 current and non-current liabilities
2. Statement of comprehensive income:
 Disclose an entity’s financial performance over a specific period.
 Single statement: Statement of comprehensive income can be prepared in the form of one
statement, or
 Two statements: Statement of comprehensive income can also be separated into statements of
Profit and loss and a statement of other income, including property and equipment.
Elements of Statement of comprehensive income
Statement of comprehensive income includes the following elements revenue;
 finance costs;
 share of the profit or loss of associates and joint ventures;
 tax expense;
 the profit or loss of discontinued operations;
 profit or loss;
 share of other comprehensive income of associates and joint ventures accounted;
 the profit or loss attributable to non-controlling interest and that attributable to owners .
3. Statement of Changes in Equity:
 Statement of Changes in Equity is also known with name of statement of retained earnings;
 This statement reveals the changes that are taking place in earnings or profit of a company for in a
particular financial period.
Elements of Statement of Changes in Equity
Total income for the period should be showed separately
 the total amounts attributable to the parent’s owners and
 to non-controlling interest.
4. Statement of cash follows: Cash flow statement is a statement which shows sources and uses of cash
in the organization. Statement of cash follows shows cash flow into three parts
 Operating cash follows,
 Investing cash follows,
 Financing cash follows.
5. Notes, accounting policies and other explanatory information
Further, in addition to above reports, following are the additional statements which are
 Notes to financial statements- present information about the basis for the preparation of the
financial statements
 Summary of its accounting policies.
 Separate account reports for subsidiaries.
 Show the information required by IFRSs which are not provided in the financial statements,

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  relevant for understanding the information contained in the financial statements
The notes are an important part of the financial statements under IFRS. Notes provide information which
is not disclosed in the ‘primary’ financial statements.
FEATURES OF IFRS FINANCIAL STATEMENTS
IFRS financial statements have certain features in common. Information in IFRS financial statements has
these characteristics:

Relevant

Verifiable Reliable

Features of
IFRS financial
statements
Timely Comparable

Understandable

1. Relevant: The information provided by financial statements should relevant for all users of the
statements for making decisions about a company.
2. Reliable: Financial statements should be complete and free from bias and material error.
3. Comparable: Financial statements should be comparable over
 Time i.e. one period to the another or
 for two different entities
4. Timely: Financial statements should make information available to users timely.
5. Understandable: The information presented in financial statements should be understandable.
STOP Quick Revision
Following are the annual reports or financial statements which are required under IFRS:
Statement Elements
1. Statement of Financial Position:  Assets
 Equity
 Liabilities
 Assets and liabilities held for sale
2. Statement of Comprehensive Income  finance costs;
 share of the profit or loss of associates
and joint ventures;
 tax expense;
 profit or loss of discontinued
operations

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3. Statement of Changes in Equity
4. Statement of Cash Follows
 share of income of associates and joint
ventures;
 the profit or loss attributable to non-
controlling interest and to owners;
 the total amounts attributable to the
parent’s owners and
 to non-controlling interest.
 Operating cash follows,
 Investing cash follows,
 Financing cash follows.

5. Notes, accounting policies and other  Notes to financial statements

explanatory information  Summary of its accounting policies.
 Show the information required by
IFRSs which are not provided in the
financial statements

IMPORTANCE OF IFRS
IFRS is the set of accounting standard or guidelines. Presently, IFRS is becoming the global standard for
preparation of financial statements. More than 150 countries have adopted the IFRS as accounting
standards in some way. Further, most of the countries are on the way of adopting these. The importance
of IFRS can be cleared with points given below.

Global
Easy to understand
Comparability
and apply

Harmonization of
accounting and Reflect the changes
reporting system

Importance Reduces the cost of

High Quality and of IFRS preparing the
transparency financial
statements

Benefits to
investors More Cross Border
transactions and
investments

Timely Loss
recognition Especially
important for large
companies
1. Global Comparability
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In present scenario companies are working in different countries. For presentation and preparation of
accounts they have to follow generally accepted accounting principal (GAAP) of that country. So
comparison of financial statement of two companies working in different countries is difficult. IFRS
make international comparisons as easy.
2. Harmonization of accounting and reporting system
One of the most important factor about the IFRS has been the standardization of financial reporting and to
develop a single set of qualitative, understandable and enforceable universal accounting standards. This
will provide stable platform for international accounting.
3. High Quality and transparency:
IFRS is based upon principal based philosophy not on rule based philosophy. Main benefit of principal
based philosophy is that it provides equality and transparency. IFRS always prefer substance over the
legal form. This improves the quality and transparency of the financial statement. Further, there is
minimum scope of manipulation.
4. Benefits to investors
IFRS provides following benefits to investors in the following ways:
 Provide accurate, timely, understandable and comprehensive information: The first benifit is
that IFRS promise more accurate, understandable, timely and comprehensive financial statement
information.
 Helps new or small investors: helps new or small investors by making the reporting standards
simpler
 Reduces the cost for investors By eliminating the fees of analysts, IFRS reduces the cost for
investors.
 Reduces the risk: Higher information quality reduces the risk to investors from buying and
owning shares
 cost of investments is usually lower
5. Timely Loss recognition
One of the key features of IFRS is recognizing the loss immediately. It benefits the investors and other
stakeholders within the company.
6. More Cross Border transactions and investments:
IFRS as a single set of global accounting standard creates the trust between the investors, buyer, lenders
and suppliers, etc. The foreign investor can easily trust on the financial statement of any company. Thus,
he can make investment easily. This results in increase in cross border transactions and investments.
7. Easy to understand and apply
IFRS is principle based Standards and easy to understand and apply.
8. Reflect the changes
International Financial Reporting Standards make continuous efforts to update the existing concepts
according to the changes which are taking place in markets, business practices and the economic
environment.
9. Reduces the cost of preparing the consolidated financial statements
Due to increasing globalization of financial markets and of companies, the use of a single set of financial
reporting standards across countries also reduces the cost of preparing the consolidated financial
statements.
10. Especially important for large companies

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IFRS are especially important for large companies that have subsidiaries in different countries. Adopting
IFRS i.e. a single set of global standards will simplify accounting procedures by allowing a company to
use one reporting language.
LIMITATIONS OF IFRS
The International Financial Reporting Standard has many advantages but have some disadvantages also.
Cost to change the accounting system

Problems due to different Local rules and regulations

Complicated and Not suitable for all type of businesses

Disadvantages
of IFRS
Creation of monopoly

Time consuming process

Bring increased volatility

1. Cost to change the accounting system

 Some even entities have good accounting system but forced to incur the cost to change the new
accounting system.
 The most noteworthy disadvantage of IFRS relate to the costs related to the changing the internal
systems to make it compatible with the new reporting standards, training costs and etc.
2. Problems due to different Local rules, regulation and tax laws
Local rules, regulation and tax laws of the each country are different. In some cases, entities may require
to prepare different financial statements for local laws and tax departments.
3. Creation of monopoly
One of the main disadvantages of converting to IFRS that it provides the IASB the monopoly power in
setting the standards. IASB or IASC can not enforce the application of IFRS by all countries of the world.
4. Time consuming process
Even the companies and countries are incurring huge costs, the benefits of IFRS can not be seen until
later point due to the fact that it takes some years for the harmonization.
5. Bring increased volatility
A fair value measurement is big issue which create problem in conversion to IFRS. This principle will
bring increased volatility as the assets are reported.
6. Complicated and Not suitable for all type of organizations
 IFRS is quite complex and more complicated than the national accounting standards
 Not suitable for small and medium sized businesses.

STOP Quick Revision

IMPORTANCE OF IFRS: IFRS provides Global Comparability, Harmonization of
accounting and reporting system, High transparency, Benefits to investors, Timely Loss
recognition, Increase Cross Border investments, Easy to understand and apply, Reflect the
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 changes and Reduces the cost of preparing the consolidated financial statements.
LIMITATIONS OF IFRS: Cost to change the new accounting system, Complicated and
Not suitable for all type of organizations, Creation of monopoly, Time consuming process,
Bring increased volatility, Problems due to different Local rules and regulation and tax laws

SUMMARY
The need for development of international accounting standards arise to bring harmony in financial
reporting worldwide. Accounting standards and principles differ from country to country because these
are affected by economic, political, legal, social and cultural systems of the country in which these are
developed. Accounting is language of business. International Financial Reporting Standards (IFRS) has
been developed to make accounting as a common globally accepted language for business affairs.
International Financial Reporting Standards (IFRS) is a set of accounting standards which is developed by
International Accounting Standards Board (IASB). International Accounting Standards Board (IASB) is
an independent, not-for-profit organization. International Financial Reporting Standards (IFRS) makes an
attempt that accounts of companies can be easily understandable and comparable all over the word. The
main objectives of the International Financial Reporting Standards (IFRS) are to achieve efficiency,
strengthening accountability and bring transparency in financial reporting. IFRS is the set of accounting
standard or guidelines. Presently, IFRS is becoming the global standard for preparation of financial
statements. More than 150 countries have adopted the IFRS as accounting standards in some way.
Further, most of the countries are on the way of adopting these.

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