IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

TOPICS INCLUDED
IFRS 7
IFRS 8
IFRS 9
IFRS 10
IFRS 11
IFRS 12
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IFRS 7 to IFRS 12 are a series of International Financial Reporting Standards (IFRS) issued by
the International Accounting Standards Board (IASB) that provide guidelines and requirements
for various aspects of financial reporting and disclosure. These standards are designed to
improve transparency and comparability in financial statements, making it easier for investors
and other stakeholders to understand a company's financial position and performance. Here's an
overview of each of these standards:
 IFRS 7 - Financial Instruments: Disclosures: IFRS 7 focuses on the disclosure
requirements for financial instruments. It requires entities to provide extensive
information in their financial statements about the nature and extent of risks associated
with financial instruments. Key disclosures include information about the credit risk,
liquidity risk, and market risk. It also covers the fair value measurement of financial
instruments.
 IFRS 8 - Operating Segments: IFRS 8 establishes principles for reporting information
about operating segments in the financial statements. Companies are required to disclose
information about their operating segments, such as revenues, expenses, and profit or
loss, if they are regularly reviewed by the chief operating decision maker to allocate
resources and assess performance.
 IFRS 9 - Financial Instruments: IFRS 9 is a comprehensive standard that addresses the
classification, measurement, and impairment of financial instruments. It introduces a new
expected credit loss model for the impairment of financial assets and revises the
classification and measurement of financial instruments. It also provides guidance on
hedge accounting.
 IFRS 10 - Consolidated Financial Statements: IFRS 10 provides guidance on how to
determine whether an entity should consolidate another entity in its financial statements.
It introduces the concept of control as the basis for consolidation and outlines the criteria
for assessing control over other entities.
 IFRS 11 - Joint Arrangements: IFRS 11 provides guidance on how to account for joint
arrangements, such as joint ventures and joint operations. It requires entities to account
for their involvement in joint arrangements using the equity method or proportionate
consolidation, depending on the level of control they have over the arrangement.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

 IFRS 12 - Disclosure of Interests in Other Entities: IFRS 12 focuses on the disclosure

requirements for an entity's interests in subsidiaries, joint arrangements, associates, and
unconsolidated structured entities. It requires extensive disclosures about an entity's
involvement in other entities to provide a better understanding of the risks and returns
associated with these investments.

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**IFRS 7 - Financial Instruments: Disclosures** is an international accounting standard issued
by the International Accounting Standards Board (IASB). It primarily focuses on enhancing
transparency and providing comprehensive disclosures related to financial instruments in the
financial statements of entities. Here are some key points about IFRS 7:

**Objective**:
The main objective of IFRS 7 is to ensure that users of financial statements have access to
relevant and timely information about an entity's exposure to risks associated with financial
instruments and the nature and extent of those financial instruments.

**Scope**:
IFRS 7 applies to all entities that have financial instruments, including both recognized and
unrecognized financial instruments, in their financial statements. It encompasses a wide range of
financial instruments, such as loans, receivables, investments in equity and debt securities,
derivatives, and more.

**Key Disclosure Requirements**:

The standard requires entities to disclose comprehensive information about financial instruments,
including:

1. **Risk Disclosures**: Entities must disclose qualitative and quantitative information about
the risks they face due to financial instruments. This includes credit risk, liquidity risk, and
market risk. The disclosures should provide insights into how these risks are managed.

2. **Fair Value Measurement**: For financial instruments measured at fair value, entities must
disclose the methods and significant assumptions used in determining fair values. This helps
users understand how fair values are arrived at.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

3. **Hedge Accounting**: If an entity engages in hedge accounting, it must disclose information

about its hedging activities, including the nature of the hedged items, the risk management
objectives, and the effectiveness of hedges.

4. **Sensitivity Analysis**: Entities may be required to provide sensitivity analyses to show

how changes in key assumptions would affect their financial instruments' fair values and
financial performance.

5. **Categorization and Measurement**: Entities must disclose the classification of their

financial instruments into categories like held-to-maturity, available-for-sale, or held for trading,
and provide information on the measurement basis (amortized cost or fair value).

6. **Capital Management**: If capital management is a key aspect of an entity's operations,

IFRS 7 mandates disclosure of an entity's objectives, policies, and processes for managing
capital.

**Enhancing Transparency**:
IFRS 7 significantly contributes to the transparency of financial reporting by ensuring that users
have access to relevant information about an entity's financial instruments and the associated
risks. This transparency is particularly important for investors, creditors, and other stakeholders
who rely on financial statements to make informed decisions.

In summary, IFRS 7 plays a crucial role in financial reporting by requiring entities to provide
comprehensive disclosures about their financial instruments, risk exposures, and risk
management practices. It promotes transparency and helps stakeholders better understand the
complexities and risks associated with an entity's financial instruments. Compliance with IFRS 7
is essential for entities that prepare financial statements following International Financial
Reporting Standards.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

**IFRS 8 - Operating Segments** is an international accounting standard issued by the

International Accounting Standards Board (IASB) that deals with the reporting of an entity's
operating segments in its financial statements. Here are the key points to know about IFRS 8:

**Objective**:
The primary objective of IFRS 8 is to require entities to provide information in their financial
statements that is useful to users for evaluating the nature and financial effects of the entity's
operating segments. It aims to improve transparency and make it easier for stakeholders to assess
an entity's performance.

**Scope**:
IFRS 8 applies to all entities, whether they are profit-oriented or not, that prepare financial
statements in accordance with International Financial Reporting Standards (IFRS). It does not
apply to an entity's consolidated financial statements, where the focus is on the group as a whole.

**Key Requirements**:
The standard requires entities to disclose information about their operating segments, including:

1. **Identification of Operating Segments**: Entities must identify their operating segments

based on the way their internal management evaluates performance and allocates resources.
These segments should be the primary basis for assessing the entity's performance.

2. **Segment Information**: Entities should disclose specific financial and descriptive

information about each operating segment. This includes revenue, profit or loss, assets,
liabilities, and other measures used by management.

3. **Aggregation of Segments**: Operating segments with similar economic characteristics can

be aggregated for reporting purposes if certain criteria are met. However, the information
disclosed should not be obscured by aggregation.

4. **Information About Products and Services**: If an entity operates in different lines of

business or provides various products and services, it should disclose additional information to
help users understand its operating segments.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

5. **Geographic Information**: Entities should also provide information about the geographic
areas in which they operate if this information is regularly provided to the chief operating
decision maker and is material to understanding the entity's operations.

**Benefits**:
IFRS 8 enhances transparency in financial reporting by requiring entities to provide detailed
information about their operating segments. This information is valuable to investors, analysts,
and other stakeholders because it helps them evaluate the performance and risk profile of
different parts of the entity's business. It provides a clearer picture of how an entity is managed
and where it generates its revenue and profits.

In summary, IFRS 8 - Operating Segments is an important accounting standard that focuses on

segment reporting in financial statements. It aims to ensure that users of financial statements
have
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

**IFRS 9 - Financial Instruments** is a significant international accounting standard issued by

the International Accounting Standards Board (IASB). It addresses the classification,
measurement, and impairment of financial instruments. Here's a brief overview of IFRS 9:

**Objective**:
The main objective of IFRS 9 is to establish principles for the classification and measurement of
financial assets and financial liabilities, as well as the impairment of financial assets. The
standard aims to provide a more transparent and forward-looking approach to accounting for
financial instruments, reducing complexity and improving the usefulness of financial statements.

**Key Components**:

1. **Classification and Measurement**:

IFRS 9 introduces a more principles-based approach to classify financial assets into three main
categories:

- **Amortized Cost**: This category is for financial assets held to collect contractual cash
flows where the objective is to hold the asset for the collection of those cash flows.

- **Fair Value through Other Comprehensive Income (FVOCI)**: This category is for assets
held for purposes other than trading but for which changes in fair value are recorded in other
comprehensive income.

- **Fair Value through Profit or Loss (FVTPL)**: This category is for financial assets held for
trading or designated as such. Changes in fair value are recorded in profit or loss.

2. **Hedge Accounting**:
IFRS 9 introduces improvements to hedge accounting, aligning it more closely with an entity's
risk management activities. These changes reduce the volatility in financial statements associated
with hedging instruments.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

3. **Impairment**:
The standard introduces an expected credit loss (ECL) model for recognizing impairment
losses on financial assets. This means that entities are required to recognize expected credit
losses earlier than under the previous incurred loss model. The ECL model is forward-looking
and takes into consideration both historical and forward-looking information.

**Benefits**:

- **Enhanced Transparency**: IFRS 9 provides a more transparent and relevant representation

of an entity's financial position by requiring the timely recognition of expected credit losses on
financial assets.

- **Better Risk Management**: The standard promotes better alignment between accounting and
risk management practices, helping entities make more informed decisions about their financial
instruments.

- **Reduced Complexity**: IFRS 9 simplifies the classification and measurement of financial

instruments by providing clearer guidance and reducing the number of categories.

- **Improved Hedge Accounting**: The changes in hedge accounting reduce accounting

mismatches and provide a more faithful representation of risk management activities.

In summary, IFRS 9 is a comprehensive standard that addresses the classification, measurement,

and impairment of financial instruments. It brings transparency, consistency, and forward-
looking aspects to financial reporting, benefiting both preparers and users of financial statements.
Compliance with IFRS 9 is crucial for entities following International Financial Reporting
Standards.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

**IFRS 10 - Consolidated Financial Statements** is an international accounting standard issued

by the International Accounting Standards Board (IASB). It provides guidance on how an entity
should prepare and present its consolidated financial statements when it controls one or more
other entities. Here's a brief overview of IFRS 10:

**Objective**:
The primary objective of IFRS 10 is to establish a single framework for the preparation and
presentation of consolidated financial statements. It defines the principles of control and outlines
the criteria for determining when an entity should consolidate another entity's financial
statements.

**Key Concepts**:

1. **Control**:
IFRS 10 introduces the concept of control as the basis for consolidation. Control exists when
an entity has the power to direct the activities of another entity to generate returns and has
exposure or rights to variable returns from its involvement with that entity. Control is assessed
based on facts and circumstances, and it is not solely determined by the ownership of voting
rights.

2. **Consolidation**:
When an entity controls one or more other entities, it is required to prepare consolidated
financial statements. These consolidated financial statements present the group as a single
economic entity, combining the assets, liabilities, revenues, expenses, and cash flows of the
parent and its subsidiaries.

3. **Special Purpose Entities (SPEs)**:

IFRS 10 provides specific guidance on the consolidation of Special Purpose Entities (SPEs). It
focuses on the substance of control rather than the legal form. If the reporting entity controls an
SPE, it must consolidate the SPE's financial statements.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

ADVANTAGES OF CONSOLIDATED FINANCIAL STATEMENTS

Consolidated financial statements offer several simple advantages for both companies and their
stakeholders:

 Information About Overall Profit: Consolidated financial statements provide a

comprehensive view of the group's overall profitability. By combining the financial
results of all subsidiaries, stakeholders can see the total revenue, expenses, and profit or
loss generated by the entire group. This holistic perspective is especially important for
investors and creditors assessing the group's financial performance.
 Easy to Know the Financial Position of the Holding Company: Consolidated financial
statements make it easier to understand the financial position of the holding or parent
company within the group. These statements show the assets, liabilities, and equity of the
holding company after considering its investments in subsidiaries. This transparency aids
in evaluating the holding company's financial strength and performance.
 Easy to Know Minority Interest: Minority interest, also known as non-controlling
interest, represents the ownership stakes in subsidiaries that are not controlled by the
parent company. Consolidated financial statements clearly disclose minority interest,
allowing stakeholders to identify the portion of equity in subsidiaries that belongs to
external investors. This information is crucial for assessing the rights of minority
shareholders.
 Better Decision-Making: Consolidated financial statements support better decision-
making for both investors and management. Investors can make more informed choices
regarding investment and portfolio management by having a complete view of the
group's financial health. Management can use the consolidated data to assess the
performance of subsidiaries, allocate resources effectively, and develop strategic plans.
 Risk Assessment: Evaluating the group's overall financial risk is simplified through
consolidated financial statements. These statements provide a consolidated view of the
group's assets, liabilities, and exposures to various risks. Stakeholders can assess the
group's ability to manage risk and withstand economic challenges, which is critical for
risk management and investment decisions.
 Comparability: Consolidated financial statements allow for easy comparison of financial
performance across subsidiaries and reporting periods. This comparability helps
stakeholders identify trends, evaluate the effectiveness of strategies, and benchmark the
group's performance against industry standards. It simplifies the analysis of the group's
financial history.

In summary, IFRS 10 - Consolidated Financial Statements provides a comprehensive framework

for the preparation and presentation of consolidated financial statements when an entity controls
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

one or more other entities. It places a strong emphasis on the concept of control, leading to more
consistent and transparent financial reporting. Compliance with IFRS 10 is essential for entities
following International Financial Reporting Standards.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

**IFRS 11 - Joint Arrangements** is an international accounting standard issued by the

International Accounting Standards Board (IASB). It provides guidance on how entities should
account for joint arrangements, which are cooperative business arrangements where two or more
parties share control over an activity or asset. Here's a brief overview of IFRS 11:

**Objective**:
The primary objective of IFRS 11 is to establish principles for the accounting and reporting of
joint arrangements to ensure that financial statements accurately reflect the economic substance
of these cooperative activities. It replaces IAS 31 and SIC-13.

**Key Concepts**:

1. **Joint Arrangements**:
IFRS 11 classifies joint arrangements into two main types: joint operations and joint ventures.
The classification is based on the rights and obligations of the parties involved.

- **Joint Operations**: In a joint operation, the parties have rights to the assets and obligations
for the liabilities of the arrangement. They recognize their share of the assets, liabilities,
revenues, and expenses in their financial statements.

- **Joint Ventures**: In a joint venture, the parties have rights to the net assets of the
arrangement. They recognize their investments in the joint venture using the equity method.

2. **Equity Method for Joint Ventures**:

Under IFRS 11, entities that have interests in joint ventures account for those interests using
the equity method. This means recognizing the investment initially at cost and subsequently
adjusting it for the entity's share of the joint venture's post-acquisition changes in equity.

3. **Disclosure Requirements**:
IFRS 11 prescribes extensive disclosure requirements for entities involved in joint
arrangements. This includes information about the nature and extent of an entity's interest in joint
arrangements, the nature of the joint arrangement, and the significant judgments and assumptions
made.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

**Benefits**:

- **Clarity and Consistency**: IFRS 11 provides a clear and consistent framework for
accounting for joint arrangements, eliminating some of the inconsistencies and complexities
associated with the previous standards.

- **Alignment with Economic Reality**: The standard ensures that the accounting treatment
reflects the economic substance of the joint arrangement, improving transparency and the quality
of financial reporting.

- **Improved Disclosure**: IFRS 11's disclosure requirements enhance transparency by

providing stakeholders with detailed information about an entity's involvement in joint
arrangements.

In summary, IFRS 11 - Joint Arrangements is an accounting standard that aims to provide a clear
and consistent framework for accounting for joint arrangements. It classifies these arrangements
into joint operations and joint ventures, with specific accounting treatments for each type.
Compliance with IFRS 11 is essential for entities involved in joint arrangements and ensures that
financial statements accurately represent the nature and economic reality of these cooperative
activities.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

**IFRS 12 - Disclosure of Interests in Other Entities** is an international accounting standard

issued by the International Accounting Standards Board (IASB). It primarily focuses on the
disclosure requirements for an entity's interests in subsidiaries, joint arrangements, associates,
and unconsolidated structured entities. Here's a brief overview of IFRS 12:

**Objective**:
The primary objective of IFRS 12 is to provide transparency and comprehensive information
about an entity's interests in other entities. It ensures that financial statement users have access to
relevant and detailed disclosures that help them understand the risks, returns, and other
significant aspects associated with these investments.

**Key Concepts**:

1. **Scope**:
IFRS 12 applies to entities that have interests in subsidiaries, joint arrangements, associates,
and unconsolidated structured entities. These entities can take various forms, including
corporations, partnerships, and trusts.

2. **Required Disclosures**:
IFRS 12 mandates that entities provide detailed disclosures about their interests in other
entities, including:

- **Significant Judgments and Assumptions**: Entities must disclose judgments and

assumptions made in determining the consolidation or equity accounting methods for
subsidiaries, associates, and joint ventures.

- **Nature of Interests**: Entities should provide information about the nature of their interests
in each type of entity (subsidiaries, joint arrangements, associates, unconsolidated structured
entities).

- **Risks and Returns**: Detailed information about an entity's exposure to the risks and
returns associated with its investments in other entities should be disclosed. This includes
information about the financial performance and financial position of these investees.
IFRS AND US GAAP UNIT 3 – IFRS 7 TO IFRS 12

- **Significant Restrictions**: If there are significant restrictions on an entity's ability to

access or use assets or settle liabilities within a subsidiary, associate, or joint venture, those
restrictions must be disclosed.

- **Investment in Associates**: Specific disclosures about investments in associates, such as

the equity method applied, are required.

3. **Aggregation**: IFRS 12 allows entities to aggregate information in a way that is relevant

for assessing the nature and financial effects of their interests in other entities. However, the
information should not be obscured by aggregation.

**Benefits**:

- **Enhanced Transparency**: IFRS 12 significantly enhances the transparency of financial

reporting by requiring entities to provide comprehensive and relevant information about their
interests in other entities. This transparency helps stakeholders make more informed decisions.

- **Improved Risk Assessment**: Detailed disclosures about risks and returns associated with
investments in other entities enable stakeholders to assess an entity's exposure and evaluate the
impact on its financial position and performance.

- **Better Informed Decision-Making**: Investors, creditors, and other users of financial

statements benefit from the information provided in IFRS 12, which aids in making better-
informed investment, lending, and strategic decisions.

In summary, IFRS 12 - Disclosure of Interests in Other Entities is an essential standard that

ensures entities provide comprehensive disclosures about their interests in subsidiaries, joint
arrangements, associates, and unconsolidated structured entities. Compliance with IFRS 12 is
crucial for entities following International Financial Reporting Standards to provide transparency
and facilitate informed decision-making by stakeholders.