Chapter one

Introduction to IFRS: IASB Framework

 Introduction
 International Financial Reporting Standards (IFRS) are a set of
international accounting standards stating how particular types of
transactions and other events should be reported in financial
statements. IFRS are issued by the International Accounting
Standards Board (IASB), and they specify exactly how
accountants must maintain and report their accounts.

 IFRS were established in order to have a common accounting

language, so business and accounts can be understood from
company to company and country to country.
 Introduction

 The adoption of standards that require high-

quality, transparent, and comparable information is

welcomed by investors, creditors, financial
analysts, and other users of financial statements.

 Without common standards, it is difficult to

compare financial information prepared by entities
located in different parts of the world.
 Introduction

 In an increasingly global economy, the

use of a single set of high-quality
accounting standards facilitates investment
and other economic decisions across
borders, increases market efficiency, and
reduces the cost of raising capital
 Con,t

 IFRS is a globally recognized set of Standards for the preparation

of financial statements by business entities. Those Standards
prescribe:

• the items that should be recognized as assets, liabilities, income and

expense

• how to measure those items;

• how to present them in a set of financial statements; and

• related disclosures about those items.

 Benefits of IFRS Standards

 IFRS Standards address the 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.
 Con,t
 IFRS Standards strengthen accountability by
reducing the information gap between the
providers of capital and the people to whom they
have entrusted their money. As a source of
globally comparable information, IFRS Standards
are also of vital importance to regulators around
the world.
 Con,t

 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.
 Benefits of IFRS
 Transparency:
– Enhances international comparability and quality of information
– Enables market participants to make informed decision
 Accountability:
– Reducing the information gap between the providers of capital and
the people to whom they have entrusted their money.
– vital importance to regulators around the world.
 Efficiency:
– Helps investors to identify opportunities and risks across the world,
– For businesses, the use of a single, trusted accounting language
lowers the cost of capital and reduces international reporting costs.
 Objectives of IFRS

 To standardize accounting methods and procedures.

 To lay down for preparation and presentation of financial reports.

 To establish benchmark for evaluating the quality of financial

statements prepared by the enterprises.

 To ensure the users of financial statements get creditable financial

information.

 To attain international level in the related areas.

 HOW ARE IFRS DEVELOPED?

• IFRS is developed by the IASB

• It is supported by an external IFRS Advisory Council, an
Accounting Standards Advisory Forum (ASAF) of national standard-
setters and an IFRS Interpretations Committee (the ‘Interpretations
Committee’) to offer guidance when divergence in practice occurs.
• It follows a thorough, open, participatory and transparent due
process.
• Engages with investors, regulators, business leaders and the global
accountancy profession at every stage of the process.
2-12

Con,t

 The due process includes:

– opportunities for public comment at various stages in the

development of a Standard;

– IASB deliberations at meetings that are open to public observation

and are webcast; and

– public availability of all of the agenda papers that form the basis for
the IASB’s deliberations as well as all of the comments received
from interested parties.

– collaborates with the worldwide standard-setting community..

Structure of IFRS Foundation
 HOW ARE IFRS DEVELOPED?
 International Financial Reporting Standards (IFRSs) are
developed through an international consultation process, the "due
process", which involves interested individuals and organisations
from around the world. The due process comprises six stages,
with the Trustees of the IFRS Foundation having the opportunity
to ensure compliance at various points throughout:
1. Setting the agenda
2. Planning the project
3. Developing and publishing the discussion paper
4. Developing and publishing the exposure draft
5. Developing and publishing the standard
6. After the standard is issued
Cont..
Standards development process
Standards development process
 Objectives of the IASB

 The objectives of the IASB are:

(a) to develop, in the public interest, a single set of high quality,

understandable, enforceable and globally accepted financial
reporting standards based on clearly articulated principles. These
standards should require high quality, transparent and comparable
information in financial statements and other financial reporting
to help investors, other participants in the various capital markets
of the world and other users of financial information make
economic decisions;
 Cont…

(b) to promote the use and rigorous application of those

standards;

(c) in fulfilling the objectives associated with (a) and (b), to take
account of, as appropriate, the needs of a range of sizes and
types of entities in diverse economic settings;

(d) to promote and facilitate the adoption of IFRSs, being the

standards and interpretations issued by the IASB, through
the convergence of national accounting standards and IFRSs.
 Differences between IFRS and GAAP

 International Financial Reporting Standards (IFRS) is the

accounting method that’s used in many countries across the
world. It has some key differences from the Generally Accepted
Accounting Principles (GAAP) implemented in the United
States.

 As an accounting professional or business owner, it’s vital to

know the variations of these accounting methods, in order to
successfully manage your company globally, as well as
domestically. Here are the top differences between IFRS and
GAAP accounting:
 1. Locally vs. Globally

 As mentioned, the IFRS is a globally accepted

standard for accounting, and is used in more than 140
countries. On the other hand, GAAP is exclusively
used within the United States and has a different set of
rules for accounting than most of the world. This can
make it more complicated when doing business
internationally.
 2. Rules vs. Principles

 One major difference between accounting practices in GAAP

and IFRS is that GAAP is rule-based while IFRS is principle-
based. Principle-based accounting allows for different
interpretation of the same transactions, where rule-based GAAP
follows a set of rules in preparing financial statements – this
means there is no room for error. In other words, GAAP
standards are extremely strict in accounting practices and
disclosure requirements, whereas IFRS practices are less
restrictive;
 3. Inventory Methods

 Under GAAP, a company is allowed to use the Last In,

First Out (LIFO) method for inventory estimates.
However, under IFRS, the LIFO method for inventory is
not allowed. The Last In, First Out valuation for
inventory does not reflect an accurate flow of inventory
in most cases, and thus results in reports of unusually
low income levels.
 4. Inventory Reversal

 In addition to having different methods for tracking

inventory, IFRS and GAAP accounting also differ when
it comes to inventory write-down reversals. GAAP
specifies that if the market value of the asset increases,
the amount of the write-down cannot be reversed. Under
IFRS, however, in this same situation, the amount of the
write-down can be reversed. In other words, GAAP is
overly cautious of inventory reversal and does not
reflect any positive changes in the marketplace.
 5. Development Costs

 A company’s development costs can be capitalized

under IFRS, as long as certain criteria are met. This
allows a business to leverage depreciation on fixed
assets. With GAAP, development costs must be
expensed the year they occur and are not allowed to be
capitalized.
 6. Intangible Assets

 When it comes to intangible assets, such as research and

development or advertising costs, IFRS accounting really
shines as a principle-based method. It takes into account
whether an asset will have a future economic benefit as a
way of assessing the value. Intangible assets measured
under GAAP are recognized at the fair market value and
nothing more.

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 7. Income Statements

 Under IFRS, extraordinary or unusual items are

included in the income statement and not segregated.
Meanwhile, under GAAP, they are separated and shown
below the net income portion of the income statement.
 8. Classification of Liabilities

 The classification of debts under GAAP is split between

current liabilities, where a company expects to settle a
debt within 12 months, and noncurrent liabilities, which
are debts that will not be repaid within 12 months. With
IFRS, there is no differentiation made between the
classification of liabilities, as all debts are considered
noncurrent on the balance sheet
 9. Fixed Assets

 When it comes to fixed assets, such as property, furniture

and equipment, companies using GAAP accounting must
value these assets using the cost model. The cost model
takes into account the historical value of an asset minus
any accumulated depreciation. IFRS allows a different
model for fixed assets called the revaluation model,
which is based on the fair value at the current date minus
any accumulated depreciation and impairment losses.
 10. Quality Characteristics
 Finally, one of the main differentiating factors between
IFRS and GAAP is the qualitative characteristics to how
the accounting methods function. GAAP works within a
hierarchy of characteristics, such as relevance,
reliability, comparability and understandability, to make
informed decisions based on user-specific
circumstances. IFRS also works with the same
characteristics, with the exception that decisions cannot
be made on the specific circumstances of an individual.
 The IASB Conceptual Framework

 This Conceptual Framework sets out the concepts that underlie

the preparation and presentation of financial statements for
external users. The purpose of the Conceptual Framework is:

(a) to assist the Board in the development of future IFRSs and in its
review of existing IFRSs;

(b) to assist the Board in promoting harmonization of regulations,

accounting standards and procedures relating to the presentation of
financial statements by providing a basis for reducing the number
of alternative accounting treatments permitted by IFRSs;
 Cont…
(c) to assist national standard-setting bodies in developing national
standards;

(d) to assist preparers of financial statements in applying IFRSs and

in dealing with topics that have yet to form the subject of an IFRS;

(e) to assist auditors in forming an opinion on whether financial

statements comply with IFRSs;

(f) to assist users of financial statements in interpreting the

information contained in financial statements prepared in
compliance with IFRSs; and
(g) to provide those who are interested in the work of the IASB with
information about its approach to the formulation of IFRSs..
 Role of Conceptual Framework

 Conceptual Framework sets out agreed concepts that

underlie financial reporting

objective, qualitative characteristics, element definitions.

 IASB uses Conceptual Framework to set standards

which:-

enhances consistency across standards

enhances consistency over time as Board members change

provides benchmark for judgments

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 The IASB Framework

 The IASB Framework addresses:

• The objective of financial reporting.

• The qualitative characteristics of useful financial

information of the reporting entity.

• The definition, recognition and measurement of the

elements from which financial statements are
constructed.

• Concepts of capital and capital maintenance

Components of the Conceptual Framework

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 Objective of Financial Reporting

 Provide financial information about the reporting entity that is

useful to existing and potential investors, lenders and other

creditors in making decisions about providing resources to the
entity. The users need information about the resources of the entity

 to assess an entity's prospects for future net cash inflows

 effectively and efficiently management has discharged their

responsibilities to use the entity's existing resources
 Objective of Financial Reporting
 Investors’, lenders’ and other creditors’ expectations about returns
depend on their assessment of the amount, timing and uncertainty
of (the prospects for) future net cash inflows to the entity.

Decisions by investors about buying, selling or holding equity and

debt instruments depend on the returns that they expect from an
investment in those instruments, eg dividends, principal and
interest payments or market price increases.

Decisions by lenders about providing or settling loans and other

forms of credit depend on the principal and interest payments or

other returns that they expect.
 Objective of Financial Reporting
 To assess an entity’s prospects for future net cash inflows,
existing and potential investors, lenders and other creditors need
information about:

the resources of the entity

claims against the entity and

how efficiently and effectively the entity's management and

governing board have discharged their responsibilities to use the
entity's resources

Eg: Protecting the entity's resources from unfavourable effects of

economic factors such as price and technological changes
 Cont……………………….
 The IASB sees the main need of such providers of capital as being
information to enable them to assess:

􀁸 the prospects for future net cash inflows to an entity. This is

because all decisions made by such providers of capital (whether
equity investors, lenders or other creditors) depend on their
assessment of the amount, timing and uncertainty of (i.e. the
prospects for) the entity’s future net cash inflows;

􀁸 the resources of, and claims against, the entity.

􀁸 how efficiently and effectively the entity’s management and

governing board have discharged their responsibilities to use the
entity’s resources. 2-39
 Characteristics Of Financial Reporting
 The Conceptual Framework states that the types of information
likely to be most useful to providers of capital are identified by
various qualitative characteristics. it comprising:
􀁸 Two ‘fundamental qualitative characteristics’
a. relevance
b. faithful representation
 􀁸 Four ‘enhancing qualitative characteristics:
a. comparability
b. Verifiability
c. timeliness
d. understandability
 Fundamental qualitative characteristics

 Relevance: capable of making a difference in users’ decisions

predictive value

confirmatory value

materiality (entity-specific)

 Faithful representation: faithfully represents the phenomena it

purports to represent

completeness (depiction including numbers and words)

neutrality (unbiased)

free from error (ideally)

 Fundamental qualitative characteristics

 Financial information has predictive value if it can be

used as an input to processes employed by users to
predict future outcomes. Financial information need not
be a prediction or forecast to have predictive value.
 Financial information with predictive value is employed
by users in making their own predictions.
 Financial information has confirmatory value if it
provides feedback about (confirms or changes) previous
evaluations.
 Fundamental qualitative characteristics

 The predictive value and confirmatory value of financial

information are interrelated. Information that has predictive value
often also has confirmatory value. For example, revenue
information for the current year, which can be used as the basis for
predicting revenues in future years, can also be compared with
revenue predictions for the current year that were made in past
years. The results of those comparisons can help a user to correct
and improve the processes that were used to make those previous
predictions.
2-43
 Fundamental qualitative characteristics
 Information is material if omitting it or misstating it could
influence decisions that users make on the basis of financial
information about a specific reporting entity. In other words,
materiality is an entity-specific aspect of relevance based on the
nature or magnitude, or both, of the items to which the information
relates in the context of an individual entity’s financial report.
Consequently, the Board cannot specify a uniform quantitative
threshold for materiality or predetermine what could be material in
a particular situation.

2-44
 Fundamental qualitative characteristics

 Financial reports represent economic phenomena in

words and numbers. To be useful, financial information
must not only represent relevant phenomena, but it must
also faithfully represent the phenomena that it purports
to represent. To be a perfectly faithful representation, a
depiction would have three characteristics. It would be
complete, neutral and free from error. The Board’s
objective is to maximise those qualities to the extent
possible. 2-45
 Enhancing Qualitative Characteristics
 Comparability: Information is more useful if it can be compared
with similar information about other entities and information
about the same entity for another period.

 Verifiability: knowledgeable and independent observers could

reach consensus, but not necessarily complete agreement, that a
depiction is a faithful representation

 Timeliness: having information available to decision-makers in

time to be capable of influencing their decisions

 Understandability: Classify, characterize, and present

information clearly and concisely 2-46
 Elements of Financial Statements

 Asset
resource controlled by the entity
result of past event
expected inflow of economic benefits
 Liability
present obligation
arising from past event
expected outflow of economic benefits

2-47
 Elements of Financial Statements

 Income
recognized increase in asset/ decrease in liability in
current reporting period that result in increased.
 Expense
recognized decrease in asset/ increase in liability in
current reporting period that result in decreased

2-48
 Cont…………………….

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

• Asset is recognized in the balance sheet when it is

probable that the future economic benefits will flow to
the entity and the asset has a cost or value that can be
measured reliably.
2-49
 Elements of Financial Statements …

 Liability.

• A liability is a present obligation of the entity arising from past

events, the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits.

• A liability is recognised in the balance sheet when it is probable that

an outflow of resources embodying economic benefits will result
from the settlement of a present obligation and the amount at
which the settlement will take place can be measured reliably

2-50
 Elements of Financial Statements

 Income

Recognized when an increase in future economic benefits related

to an increase in an asset or a decrease of a liability has arisen that
can be measured reliably.

In effect, recognition of income occurs simultaneously with the

recognition of increases in assets or decreases in liabilities.

Ex: the net increase in assets arising on a sale of goods or services

or the decrease in liabilities arising from the waiver of a debt
payable.
2-51
 Elements of Financial Statements
 Expenses
Recognised when a decrease in future economic benefits
related to a decrease in an asset or an increase of a
liability has arisen that can be measured reliably.

In effect, that recognition of expenses occurs

simultaneously with the recognition of an increase in
liabilities or a decrease in assets .

Eg: the accrual of employee entitlements or the

depreciation of equipment 2-52
 Enhancing qualitative characteristics

 Comparability, verifiability, timeliness and

understandability are qualitative characteristics that
enhance the usefulness of information that is relevant
and faithfully represented.

 The enhancing qualitative characteristics may also help

determine which of two ways should be used to depict a
phenomenon if both are considered equally relevant and
faithfully represented.
2-53
 Enhancing qualitative characteristics
 Users’ decisions involve choosing between alternatives, for
example, selling or holding an investment, or investing in one
reporting entity or another. Consequently, information about a
reporting entity is more useful if it can be compared with similar
information about other entities and with similar information
about the same entity for another period or another date.

 Comparability is the qualitative characteristic that enables users to

identify and understand similarities in, and differences among,
items. Unlike the other qualitative characteristics, comparability
does not relate to a single item..
2-54
 Enhancing qualitative characteristics

 Consistency, although related to comparability, is not the

same. Consistency refers to the use of the same methods
for the same items, either from period to period within a
reporting entity or in a single period across entities.
Comparability is the goal; consistency helps to achieve
that goal.

2-55
 Enhancing qualitative characteristics

 Verifiability helps assure users that information

faithfully represents the economic phenomena it purports
to represent. Verifiability means that different
knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement,
that a particular depiction is a faithful representation.

2-56
 Enhancing qualitative characteristics

 Timeliness means having information available to

decision-makers in time to be capable of influencing
their decisions. Generally, the older the information is
the less useful it is. However, some information may
continue to be timely long after the end of a reporting
period because, for example, some users may need to
identify and assess trends.

2-57
 Enhancing qualitative characteristics

 Classifying, characterizing and presenting information

clearly and concisely makes it understandable. Some
phenomena are inherently complex and cannot be made
easy to understand. Excluding information about those
phenomena from financial reports might make the
information in those financial reports easier to
understand.

2-58
 Recognition

 Recognition is the process of incorporating in the

balance sheet or income statement an item that meets
the definition of an element and satisfies the following
criteria for recognition:-

It is probable that any future economic benefit

associated with the item will flow to or from the entity

The item's cost or value can be measured with

reliability.
2-59
 Measurement Concepts
 Measurement involves assigning monetary amounts at which the
elements of the financial statements are to be recognised and
reported.

 The Framework acknowledges that a variety of measurement

bases are used today to different degrees and in varying
combinations in financial statements, including:

Historical cost

Current cost

Net realisable (settlement) value

Present value (discounted) 2-60

 Measurement Concepts …
Historical cost is the measurement basis most commonly
used today, but it is usually combined with other
measurement bases.

 The Framework does not include concepts or principles

for selecting which measurement basis should be used
for particular elements of financial statements or in
particular circumstances.

2-61
 Measurement Concepts …
 Historical cost ‘concept’
Assets are recorded at the amount of cash or cash
equivalents paid or the fair value of the consideration
given to acquire them at the time of their acquisition.

Liabilities are recorded at the amount of proceeds

received in exchange for the obligation, or in some
circumstances (for example, income taxes), at the
amounts of cash or cash equivalents expected to be paid
to satisfy the liability in the normal course of business.2-62
 Measurement Concepts …
 Fair value measurement concept
The concept, defined in IFRS 13, Fair value is the price
that would be received to sell an asset or paid to transfer
a liability (exit price) in an orderly transaction (not a
forced sale) between market participants (market-based
view) at the measurement date (current price).

Fair value is a market-based measurement (it is not an

entity-specific measurement)
2-63
 Measurement Concepts …

Consequently, the entity’s intention to hold an asset or

to settle or otherwise fulfill a liability is not relevant
when measuring fair value.

Information about an entity’s financial performance in a

period, reflected by changes in economic resources is
useful in assessing the entity’s past and future ability to
generate net cash inflows

2-64
 Measurement Concepts …

 Net realizable Value concept

• Net realizable value (of an asset): The estimated selling
price in the ordinary course of business less the
estimated costs of completion and the estimated costs
necessary to make the sale.

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 The cost constraint

 The IASB acknowledges that cost is a pervasive

constraint on the information provided by
financial reporting, and that the cost of
producing information must be justified by the
benefits that it provides.

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 Underlying assumption (going concern)

 Financial statements are normally prepared on the

assumption that the reporting entity is a going concern
and will continue in operation for the foreseeable future.

 Hence, it is assumed that the entity has neither the

intention nor the need to liquidate or curtail materially
the scale of its operations. If such an intention or need
exists, the financial statements may have to be prepared
on a different basis and, if so, the basis used is disclosed
2-67
 Cont……………………..

 The going concern assumption is also addressed

in IAS 1, which requires management to make an
assessment of an entity’s ability to continue as a
going concern when preparing financial
statements.

2-68
 Underlying assumption (Accrual Basis)

 When financial statements are prepared on the

accrual basis of accounting, the effects of
transactions and other events are recognized
when they occur (and not as cash or its equivalent
is received or paid), and they are recorded in the
accounting records and reported in the financial
statements of the periods to which they relate.
2-69
 Cont………………………..

 The accrual basis assumption is also addressed in IAS 1,

Presentation of Financial Statements, which clarifies
that when the accrual basis of accounting is used, items
are recognized as assets, liabilities, equity, income, and
expenses (the elements of financial statements) when
they satisfy the definitions and recognition criteria for
those elements in the Framework.

2-70
 Concepts of Capital and Capital Maintenance

 The Framework distinguishes between a financial

concept of capital and a physical concept of capital. Most
entities use a financial concept of capital, under which
capital is defined in monetary terms as the net assets or
equity of the entity. Under a physical concept of capital,
capital is instead defined in terms of physical productive
capacity of the entity.

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 Cont………………………

 Under the financial capital maintenance

concept, a profit is earned if the financial amount
of the net assets at the end of the period exceeds
the financial amount of net assets at the
beginning of the period, after excluding any
distributions to, and contributions from, owners
during the period.
2-72
 Cont………………………….

 Under the physical capital maintenance concept, a profit

is instead earned if the physical productive capacity (or
operating capability) of the entity (or the resources or
funds needed to achieve that capacity) at the end of the
period exceeds the physical productive capacity at the
beginning of the period, after excluding any
distributions to, and contributions from, owners during
the period.
2-73
 List of IRFS

 IFRS 1
First-time Adoption of International Financial
Reporting Standards

 IFRS 2

Share-based Payment

 IFRS 3

Business Combinations

2-74
 Cont…………….

 IFRS 4
Insurance Contracts

 IFRS 5

Non-current Assets Held for Sale and Discontinued

Operations

 IFRS 6

Exploration for and Evaluation of Mineral Resources

2-75
 Cont…………….

 IFRS 7
Financial Instruments: Disclosures

 IFRS 8

Operating Segments

 IFRS 9

Financial Instruments

2-76
 Cont…………….

 IFRS 10
Consolidated Financial Statements

 IFRS 11

Joint Arrangements

 IFRS 12

Disclosure of Interests in Other Entities

2-77
 Cont…………….

 IFRS 13
Fair Value Measurement

 IFRS 14

Regulatory Deferral Accounts

 IFRS 15

Revenue from Contracts with Customers

2-78
 Cont…………….

 IFRS 16
Leases

 IFRS 17

Insurance contracts

2-79