Introduction to IFRS

and
Conceptual Framework
 2

Overview
 IFRS Basics: Concepts, Principles and Rules
 Purpose, structure, scope and use of IFRS
 IASB: The Standard Setting Process
 Authoritative IFRS pronouncements: Books
 Financial Reporting proclamation and Regulation
 AABE and its road map
 Similarities and Differences between IFRS and Previous
GAAP
 Benefits and Challenges of IFRS
 3

What is IFRS?
 IFRS: International Financial Reporting Standards
 single-set of high quality
 globally accepted and enforced set of standards that require
 high quality, transparent and Comparable information in
financial statements
 IFRSs are Issued by IASB [International Accounting
Standards Board]
 IFRS
 Standards that require Measurement, Recognition, Presentation
and Disclosure
 Framework Based: Concepts,
4

Principles and Rules

• Conceptual Framework establish the concepts
• Principles relates IFRS requirements to the
concepts in the Conceptual Framework
• Rules justify reasons why some IFRS requirements
do not maximize those concepts (e.g. application of
the cost constraint)

Concepts Principles Rules

 Purpose, Structure, Scope and Use
5

of IFRS

 IFRS guide the preparation of General Purpose Financial

Reports
 General purpose financial reporting
 aims to provide useful financial information about the reporting entity
to primary users who cannot require the reporting entity to provide
information directly to them.
 Special purpose financial reporting
 responds to the requirements of users that have the authority to require
the reporting entity to provide the information that they need for their
purposes directly to them. Examples include:
 prudential regulation reporting requirements
 tax reporting requirements
 Why IFRS?
6

 Global
 IFRS Primary Users are Investors and Creditors
 Capital providers are now playing at a global market
 National standards don’t work on a global market
 Cross boarder business is hindered by national standards
 Local
 There were no national standards
 Nor there were officially adopted standards
 GAAP was not defined
 US GAAP but not updated
 7
IASB: The Standard Setting Process7

• IFRS is a single set of accounting standards

developed and maintained by the IASB
• (Superseded IASC 2001 onwards),
• a standard setting body of the IFRS Foundation
• a public interest organization.
• IASB is based in London
 8

The IASB’s Objective 8

develop, in the public interest, a single set of

high quality, understandable, enforceable and
globally accepted financial reporting Standards.
 require high quality, transparent and comparable information in

financial statements
 9

Standards development process

 Authoritative Pronouncements
10

10

IFRS Versions: There are 2

1. Full International Financial
Reporting Standards: Full IFRS
2. IFRS for SMEs: International
Financial Reporting Standards for
Small and Medium Sized Entities.
 IASB Books
11

IASB publishes IFRS in 3 books every year

 Red Book
 Blue Book
 Green Book

Each book is published as 2 books

12
 13

Authoritative Pronouncements
 IFRS the Full Version
 sets out recognition, measurement, presentation and disclosure requirements
for general purpose financial statements of profit seeking entities
 Intended to Public Interest Entities and include:
 Conceptual Framework for Financial Reporting: Not a standard.
 IFRS 1-16=16 Standards [Issued by IASB from 2001]
 IAS 1-41=24 Standards [Issued by IASC 1973-2001]
 Both are IFRSs. Effective from January 2016 up to now there are
40 standards.
 IFRIC: IFRS Interpretation Committee’s interpretations. IFRIC 1-
21=21
 SIC: IFRC Standing Interpretation Committee interpretations: SIC 7-
32=10 SICs
Conceptual Framework
14
 Authoritative Pronouncements 15
15

 IFRS for SMEs Version

 Intended to SMEs, private entities or entities with no public
accountability.
 Based on full IFRS with modifications
 Relevance, Appropriateness or need
 Cost-benefit considerations

 How small is small?

 Nature vs Quantity Threshold

 Only 1 standard with 35 sections

 LIST OF IFRSs
16

16
Standard Standard Name Effective Date
IFRS 1 First-time Adoption of International Financial Reporting Standards 1 July 2009
IFRS 2 Share-based Payment 1 January 2005
IFRS 3 Business Combinations 1 July 2009
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 1 January 2005
IFRS 6 Exploration for and Evaluation of Mineral Resources 1 January 2006
IFRS 7 Financial Instruments - Disclosures 1 January 2007
IFRS 8 Operating Segments 1 January 2009
IFRS 9 Financial Instruments 1 January 2015
IFRS 10 Consolidated Financial Statements 1 January 2013
IFRS 11 Joint Arrangements 1 January 2013
IFRS 12 Disclosure of Interests in Other Entities 1 January 2013
IFRS 13 Fair Value Measurement 1 January 2013
IFRS 14 Regulatory Deferral Accounts 1 January 2016
IFRS 15 Revenue from Contracts with Customers 1 January 2018

IFRS 16 Leases 1 January 2019

IFRS 17 Insurance Contract 1 January 2020

 LIST OF IFRSs 17

17
Standard Standard Name Effective Date
IAS 1 Presentation of Financial Statements 1 January 2005
IAS 2 Inventories 1 January 2005
IAS 7 Statement of Cash Flows 1 January 1994
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 1 January 2005

IAS 10 Events After the Reporting Period 1 January 2005

IAS 12 Income Taxes 1 January 1998
IAS 16 Property, Plant and Equipment 1 January 2005
IAS 17 Leases 1 January 2005
IAS 19* Employee Benefits 1 January 2013
IAS 20 Accounting for Government Grants and Disclosure of Government 1 January 1984
Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates 1 January 2005
IAS 23 Borrowing Costs 1 January 2009
IAS 24 Related Party Disclosures 1 January 2011
 LIST OF IFRSs 18

Standard Standard Name Effective Date

IAS 26 Accounting and Reporting by Retirement Benefit Plans 1 January 1988

IAS 27* Separate Financial Statements 1 January 2013

IAS 28 * Investments in Associates and Joint Ventures 1 January 2013

IAS 29 Financial Reporting in Hyperinflationary Economies 1 January 2007

IAS 32 Financial Instruments - Presentation 1 January 2005

IAS 33 Earnings per Share 1 January 2005

IAS 34 Interim Financial Reporting 1 January 1999

IAS 36 Impairment of Assets 1 January 2004

IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1 January 1999

IAS 38 Intangible Assets 31 March 2004

IAS 40 Investment Property 1 January 2005

IAS 41 Agriculture 1 January 2003

 Financial Reporting Proclamation
19

and Regulation

Ethiopia issued a financial reporting law on

December 5, 2014 which requires the use of
IFRS by commercial businesses operating in
Ethiopia.
Proclamation No. 847/2014
Regulation No. 332/2014
 Financial Reporting Proclamation and
20

Regulation
The proclamation requires:
 Commercial organizations to follow
 International Financial Reporting Standards (IFRS),
or
 International Financial Reporting Standards for
Small and Medium Enterprises (IFRS for SME)
 Charities and societies to follow International Public
Sector Accounting Standards (IPSAS)
 Auditors to follow International Standards for Auditing.
 Financial Reporting Proclamation and
21

Regulation

 Public interest entity (PIE) should use the full IFRS.

A PIE is a reporting entity that is of significant public
relevance because of the nature of its business, its size, its
number of employees.
 PIE also includes banks, insurance companies, and any
other financial institutions and public enterprises.
 Structure, strategic plan, and roadmap of
22

AABE

 Accounting and Auditing Board of Ethiopia is established

by Regulation No. 332/2014
 It is an autonomous government organ accountable to
MOFEC.
 It is headed by the Director General
 It has 12-member Board of Directors
 AABE duties
23

 Issue standards and directives relating to financial reporting and

auditing and ensure their compliance.
 Receive and register financial statements of reporting entities
 Review and monitor the accuracy and fairness of FS to enforce
compliance with the reporting standards
 Register and license Auditors and Accountants
 Accreditation for Professional Association
 24

AABE duties Cont.

 Oversee professional accountancy bodies

 Establish, publish and review a code of professional conduct and ethics for

certified public accountants and certified auditors

 Conduct or arrange for the conduct of professional examination for the purpose

of registering certified public accountants

AABE Roadmap
25
 26

Date What is expected

July 7, 2018  Mandatory reporting by financial institutions and
large public enterprises
 Adoption of IFRS by PIE (other than financial
institutions and large public enterprises) and IPSAS
by Charities and Societies.

July 7, 2019 PIE (other than financial institutions and large public
enterprises) and IPSAS by Charities and Societies issue
IFRS and IPSAs based financial statements
respectively
July 7, 2020 Small and Medium-sized Entities in Ethiopia issue
IFRS based financial statements
 Similarities and Difference between
27

IFRS and US GAAP

 FASB and the IASB has been working to harmonize and

converge the content of IFRS and U.S. GAAP.

Successful Convergence Projects Unsuccessful Projects

 share-based payments,  leases,
 segment reporting,  Insurance,
 business combinations,  Financial instruments,
 consolidated financial statements,  Conceptual framework
 fair value measurement,
 joint arrangements,
 investment entities, and
 revenue
 28

Continued
 Inventory costing method
US GAAP allows LIFO method
IFRS doesn’t allow LIFO method
 Reversal of inventory write-downs
 US GAAP doesn’t allow
 IFRS allows
 Valuation of property, plant, and equipment
 U.S.GAAP: Cost less accumulated depreciation
 IFRS: Cost less accumulated depreciation (or) fair
value(revaluation)
 29

Continued
 Valuation of intangible assets
 U.S GAAP: Cost less accumulated amortization.
Revaluation prohibited
 IFRS: Cost less accumulated amortization (or) fair
value(revaluation)
 Research and development expenditures
 U.S GAAP: Expensed in the period incurred
 IFRS:
 Research: expensed in the period incurred

 Development: that meet specified criteria: capitalized

 30

Continued
 Contingencies
 U.S. GAAP: accrue if it is probable and can be
reasonably estimated. GAAP defines probable as “likely
to occur” (a higher threshold of occurrence than under
IFRS)
 IFRS: threshold for “probable” is defined as “more likely
than not” (greater than 50%)
 Valuation of long-term contingencies
 U.S.GAAP: present value—only when timing of cash
flows is certain
 IFRS: present value—time value of money is material
 31

 Treatment of convertible debt

 U.S. GAAP: entire issue price is recorded as a
liability
 IFRS: convertible debt is divided into its liability
(bonds) and equity (conversion option) elements
 32

Benefits of IFRS
 Credibility of local market to foreign investors

 More cross-border investment

 Efficient capital allocation

 Comparability across political boundaries

 Facilitates global education and training

 33

Benefit of IFRS to companies!

 Lower cost of capital

 Facilitates raising capital abroad
 Integrated IT systems
 One set of books + easier consolidation
 Better understanding of financial statements from
business partners abroad
 34

Challenges of IFRS Adoption

 Graduates were trained in GAAP than IFRS. Shortage of

well trained Professionals.
 Absence of Valuation experts in ascertaining fair values
 Absence of Structured Markets
 Lack of Institutional vehicles that guide through Implementation
 Cost of Implementation
Conceptual Framework for
Financial Reporting
 36

Conceptual Framework provides…

a cohesive understanding of IFRSs
 Framework facilitates consistent and logical formulation of IFRSs

a basis for judgement in applying IFRSs

 Framework established the concepts that underlie the estimates, judgments and
models on which IFRS financial statements are based

a basis for continuously updating IFRS knowledge and IFRS

competencies
 Conceptual Framework
37

 Concepts underlying general purpose financial information

 Framework sets out agreed concepts that underlie IFRS financial
reporting
 theobjective of general purpose financial reporting
 qualitative characteristics
 elements of financial statements
 recognition
 measurement
 presentation and disclosure
 Other concepts all flow from the objective
 38

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.”

Those decisions involve buying, selling or holding equity and debt

instruments, and providing or settling loans or other forms of credit
 Objective of financial
39

reporting
 Primary users

 provide resources, but cannot demand information

 common information needs

 Assess the prospects for future net cash inflows

 buy, sell, hold

 efficient and effective use of resources

 Fundamental qualitative 40

characteristics
 Relevance

 predictive value
 confirmatory value
 materiality, entity-specific
 Faithful representation (replaces reliability)
 completeness

 neutrality

 free from error

 Enhancing qualitative
41

characteristics

 Comparability

 Verifiability

 Timeliness

 Understand ability
 Example 1:
42

errors and changes in policies and estimates

 Objective

 Concepts including qualitative characteristics

 faithful representation
 comparability

 Rules

 impracticable exception
 specified disclosures
 43

Pervasive constraint

 Cost

 It is consistent with the Framework for an IFRS

requirement not to maximise the qualitative
characteristics of financial information when the costs of
doing so would exceed the benefits.
 44
Example 2: Transitional provisions
new or amended IFRSs

 The concepts = objective and qualitative characteristics, particularly

comparability

 The principle = retrospective application of new accounting policy

 The rule = transitional provisions for new and amended IFRSs
 application of the cost constraint
 Elements
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
45
Equity = assets less liabilities
Income
 recognised increase in
asset/decrease in liability in
current reporting period
 that result in increased equity
except…
Expense
 recognised decrease in
asset/increase in liability in
current reporting period
 that result in decreased equity
except…
 46

Identifying an entity’s assets

What do you think?
 Is the public road to its factory an asset of the manufacturer?
 Are Ethiopian wolves an asset of a Bale Mountains National Park-
based photographic safari operator?
 Are the hived bees assets of a Robe-based honey farmer?
 Is an unpatented but secret formula for a premium product an asset
of the knowing entity?
 47

Identifying an entity’s assets

What do you think?
 Are Ethiopian coffee brands an asset?
 Does your answer depend on whether the brand was internally generated,
purchased or acquired in a business combination?
 Company A owns 60% of Company B; Company B owns 60% of
Company C
 are the assets of Company C assets of Company B?
 are the assets of Company C assets of Company A?
 Financial position
48

The concepts
 Information about the nature and amounts of an entity’s economic
resources and claims against the reporting entity help users identify
the reporting entity’s financial strengths and weaknesses (see OB12–
OB14).
 help assess entity’s prospects for future cash flows, its liquidity and solvency, its
needs for additional financing and how successful it is likely to be in obtaining
financing.

 Definition of asset, liability and equity (4.4)

 Financial performance The49

concepts
 Financial performance during a period, reflected by changes in its
economic resources and claims (other than by obtaining additional
resources directly from investors and creditors), is useful in
assessing the entity’s past and future ability to generate net cash
inflows (see OB18)

 Accrual basis of accounting (depicts the effects of transactions and other

events and circumstances on a reporting entity’s economic resources and claims
in the periods in which those effects occur (see ¶OB17)
 Example 3 50

Biological asset in agricultural

activity
 The concepts: see the previous slide

 The principle: A gain or loss arising from a change in fair value less costs to sell of a

biological asset shall be included in profit or loss for the period (IAS 41.26)

 The limited exception: inability at initial recognition to measure fair value reliably

then cost-depreciation-impairment model (IAS 41.27)

 51

Measurement concepts
 Measurement is the process of determining monetary amounts at which elements

are recognised and carried. (4.54)

 To a large extent, financial reports are based on estimates, judgements and models

rather than exact depictions. The Framework establishes the concepts that underlie

those estimates, judgements and models (OB11)

 IASB guided by objective and qualitative characteristics when specifying measurements.

 52

Measurement section of Framework

 Measurement section of Framework is weak―only lists some
measurement methods used in practice:
 historical cost: cash paid or fair value of consideration given

 current cost: cash that would be paid if acquired now

 realisable (settlement) value: cash that could be obtained by selling the asset
now

 present value: present discounted value of future net cash inflows that the item
is expected to generate

 market value: listed but not described in Framework. For fair value see IFRS
13 Fair Value Measurements
 53

Measurement Model
 Judging relevance 54

Applying IFRS requires relevance judgements. For example when:

 Judging relevance requires primarily determining which alternative
provides information that better enables primary users to make their
own projections of the reporting entity’s future cash flows?
 Judging relevance 55

Applying IFRS requires relevance judgements. For example when:

 Judging relevance requires primarily determining which alternative
provides information that better enables primary users to make their
own projections of the reporting entity’s future cash flows?
 56

Judging relevance: example

Day 1: you pay $1,000,000 to construct a car manufacturing

plant in Country A (A).

Day 2: the market value of your plant quadruples when vast

quantities of oil are unexpectedly discovered in A

Day 3: your competitor builds a plant in A: cost = $4,000,000.

 Judging relevance
57

The cost of each car that you build is:

- $100 if you use the cost model; or
- $300 if you use the revaluation model.
The cost of your competitor’s cars = $300 each.
Cars sell at $250 each in A.
Question 1: for each car sold economically are you ‘making’

(1) $150 profit; or (2) $50 loss

Question 2: which model provides more relevant information?
(2) cost model; or (2) revaluation model
 58

Comparability
What do you think?
 Which of the following measurements achieves greatest
comparability?
 Choose 1 of:
1) cash accounting (no accruals; no remeasurements);
2) historical cost accounting (no depreciation; no impairment);
3) cost-impairment accounting (no depreciation);
4) cost-depreciation-impairment accounting;
5) fair value accounting (without some assets, e.g. brands); or
6) fair value accounting (with all assets).
 59

Recognition
 The concept: recognise element (eg asset) when
 probable that benefits will flow to/from the entity
 has cost or value that can measured reliably

(see ¶4.38)
 The principle
 recognise elements (eg asset) when they satisfy the
definition and recognition criteria (see ¶ IAS1.28)
 Applying the principle (see individual IFRSs)

What does probable mean?

 60

De recognition of assets
• Derecognition of an asset refers to when an asset previously
recognised by an entity is removed from the entity’s
statement of financial position
 derecognition requirements are specified at the standards level.
 derecognition does not necessarily occur when the asset no longer satisfies the
conditions specified for its initial recognition (i.e. derecognition does not
necessarily coincide with the loss of control of the asset )

 IASB guided by objective, qualitative characteristics and elements

 61

Presentation and disclosure

 Presentation: financial statements portray financial effects of
transactions and events by:
 grouping into broad classes (the elements, egg asset)
 sub-classify elements (egg assets sub-classified by their nature or function in
the business)
 IAS 1
 application of IFRSs with additional disclosures when necessary results in a
fair presentation (faithful representation of transactions, events and
conditions)
 do not offset assets & liabilities or income & expenses
 IASB guided by objective and qualitative characteristics
 62

Underlying assumptions of financial

reporting:
Going concern, and
Accruals accounting
 63

Common misunderstandings
The Framework does NOT… Clarification—the Framework
includes

include a matching concept accrual basis of accounting—recognise

elements when satisfy definition and
recognition criteria

include prudence/conservatism concept neutrality concept

include an element other comprehensive only the following elements—asset,

income (or a concept for OCI) liability, equity, income and expense
 64

Common misunderstandings continued

Misunderstanding Clarification
Principles are necessarily less rigorous Rules are the tools of financial
than rules engineers

There are few judgements and estimates Inventory, egg allocate joint costs and
in cost-based measurements production overheads
PP&E, egg costs to dismantle/restore
site, useful life, residual value,
depreciation method
Provisions, egg uncertain timing and
amount of expected future cash flows
Thank You
Questions and Discussion