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International Financial Reporting Standards, Dubai, June 2009

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  • 1. International Financial Reporting Standards, Dubai, June 2009 Stuart Frearson International Financial Reporting Standards, Dubai, June 2009
  • 2. International Financial Reporting Standards, Dubai, June 2009 The Program this morning 1 st June Morning Session 9.00 am Stuart Frearson Registration 9.30am – 10 am
    • Participant objectives and expectations
    • Action planning
    10am –11am
    • Introduction to IFRS
    • The IASB and its IFRS
    • Application of IFRS
    • Update on current projects of the IASB
    11am – 11.15am TEA BREAK 11.15 – 12.30pm
    • IFRS basic principles
    • Framework for the preparation and presentation of financial statements
    • Financial statement elements: assets, liabilities, equity, income and expenses
    • Measurement and recognition principles (including discussion of fair value accounting)
  • 3.
    • Introductions
    • Participant objectives and expectations
    • Action planning
    International Financial Reporting Standards, Dubai, June 2009
  • 4. International Financial Reporting Standards, Dubai, June 2009
    • Introduction to IFRS
    • The IASB (International Accounting Standards Board) and its IFRS
    • Application of IFRS
    • Update on current projects of the IASB
    • They have a good website for further research and information: www.iasb.org
  • 5.
    • They have a good website for further research and information: www.iasb.org
    • Another very good website for looking up the standards is Deloitte’s www.iasplus.com
    International Financial Reporting Standards, Dubai, June 2009 Introduction to IFRS . . .
  • 6.
    • About the IASB
    • The IASB (International Accounting Standards Board) is an independent standard-setting board, appointed and overseen by a geographically and professionally diverse group of  Trustees of the IASC Foundation who are accountable to the public interest .
    • It is supported by an external advisory council ( SAC ) and an interpretations committee ( IFRIC ) to offer guidance where divergence in practice occurs.
    • The Trustees appoint the 14 Board members , who come from nine countries and have a variety of functional backgrounds. According to the IASC Foundation Constitution , Board members must:
    • comprise a group of people representing, within that group, the best available combination of technical skills and background experience of relevant international business and market conditions in order to contribute to the development of high quality, global accounting standards.
    • The IASB  co-operates with national accounting standard-setters to achieve convergence in accounting standards around the world.
    International Financial Reporting Standards, Dubai, June 2009
  • 7. The IASB is based in London and looks like this: International Financial Reporting Standards, Dubai, June 2009
  • 8. International Financial Reporting Standards, Dubai, June 2009 The 14 Board Members Sir David Tweedie U.K. Gilbert Gélard France Thomas E Jones  U.K. Amaro Luiz de Oliveira Gomes Brazil Professor Mary E Barth U.S. Prabhakar Kalavacherla (‘PK’) U.S. / India Stephen Cooper U.K. James J Leisenring U.S. Philippe Danjou France Warren McGregor Australia Jan Engström Sweden John Smith U.S. Robert P Garnett South Africa Tatsumi Yamada Japan Gilbert Gélard France Zhang Wei-Guo China
  • 9. The IASB’s mission is to develop, in the public interest, a single set of high quality, understandable international financial reporting standards (IFRSes) for general purpose financial statements. International Financial Reporting Standards, Dubai, June 2009
  • 10. Application of IFRS
    • They are, as issued, recommendations and statements of suggested good practice.
    • They are frequently enacted into legislation or made compulsory in participating countries.
    • They then apply to any entities reporting financial positions and movements covered by that legislation.
    International Financial Reporting Standards, Dubai, June 2009
  • 11. Current Projects of the IASB
    • The 2008 Constitution Review
    • The Constitution of the IASC Foundation was originally approved in May 2000 and requires the Trustees to undertake a constitutional review every five years.
    • The Trustees announced the creation of a Monitoring Board and the expansion of the IASB to 16 member, giving more consideration to the geographical composition of the IASB.
    •  
    • Financial Crisis related projects
    • Derecognition
    • Consolidation
    • Fair value measurement guidance
    • Financial instruments (IAS 39 replacement)
    International Financial Reporting Standards, Dubai, June 2009 … /… Financial instruments - passage of rights, liabilities, control Update IAS 27 and recommendations to one IFRS Assorted clarifications in the light of the financial crisis
  • 12.
    • New standards
    • Revenue recognition [DP, comments due 19 June 2009]
    • Leases [DP, comments due 17 July 2009]
    • Income taxes [ED, comments due by 31 July 2009]
    • Emissions trading schemes
    • Financial statement presentation
    • FI with characteristics of equity
    • IFRS for SMEs
    • Insurance contracts
    • Joint ventures
    • Management commentary
    • Post-employment benefits (incl. pensions)
    • Rate-regulated activities
    International Financial Reporting Standards, Dubai, June 2009 Current Projects of the IASB … /…
  • 13. Tea Break International Financial Reporting Standards, Dubai, June 2009
  • 14. IFRS Basic Principles
    • Framework for the preparation and presentation of financial statements
    • Financial statement elements: assets, liabilities, equity, income and expenses
    • Measurement and recognition principles (including discussion of fair value accounting)
    International Financial Reporting Standards, Dubai, June 2009
  • 15. Framework for the Preparation and Presentation of Financial Statements
    • The IASB's 1989 Framework for the Preparation and Presentation of Financial Statements describes the basic concepts by which financial statements are prepared. The Framework serves as a guide to the Board in developing accounting standards and to resolving accounting issues that are not addressed directly in an International Accounting Standard or International Financial Reporting Standard or Interpretation.
    International Financial Reporting Standards, Dubai, June 2009
  • 16.
    • The Framework:
    •  
    • Defines the objective of financial statements;
    • Identifies the qualitative characteristics that make information in financial statements useful and
    • Defines the basic elements of financial statements and the concepts for recognising and measuring them in financial statements.
    International Financial Reporting Standards, Dubai, June 2009
    • The Framework does not necessarily apply to special purpose financial reports such as reports to tax authorities, reports to governmental regulatory authorities, prospectuses prepared in connection with securities offerings, and reports prepared in connection with business combinations.
    • The principal classes of users of financial statements are present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the general public. All of these categories of users rely on financial statements to help them in decision making.
    • Common to all of these user groups is their interest in the ability of an enterprise to generate cash and cash equivalents and of the timing and certainty of those future cash flows.
    •   The Framework notes that financial statements cannot provide all the information that users may need to make economic decisions. For one thing, financial statements show the financial effects of past events and transactions, whereas the decisions that most users of financial statements have to make relate to the future.
  • 17. Financial statement elements: assets, liabilities, equity, income and expenses
    • We continue with the IASB Framework document which sets out clearly the elements they foresee and why:
    International Financial Reporting Standards, Dubai, June 2009
  • 18. International Financial Reporting Standards, Dubai, June 2009
    • The objective of financial statements is to provide information about the:
    • financial position (Balance Sheet)
    • performance and (Profit and Loss Account)
    • changes in financial position (Cashflow Statement)
    • of an enterprise that is useful to a wide range of users in making economic decisions
    • Accruals basis
    • Going Concern
    • Relevance
    • Reliability
    • Comparability
    • Understandability
    • The elements directly related to financial position (balance sheet) are:
    •   Assets
    • Liabilities
    • Equity
    • The elements directly related to performance (income statement) are:
    •   Income
    • Expenses
    • The cash flow statement reflects both income statement elements and changes in balance sheet elements.
  • 19. International Financial Reporting Standards, Dubai, June 2009 Definitions of the elements relating to financial position Assets. An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Liabilities. A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Equity. Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. Definitions of the elements relating to performance Income. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Expense. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
  • 20. International Financial Reporting Standards, Dubai, June 2009 Measurement and recognition principles (including discussion of fair value accounting)
    • 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)
  • 21. International Financial Reporting Standards, Dubai, June 2009
    • Recognition is a difficult topic. The IASB is still issuing discussion papers. It favours defining an:
    • Asset and from that flows
    • Revenue and
    • Liability recognition.
    • The IASB says:
    • “ 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. ”
    Measurement and recognition principles (contd.)
  • 22. International Financial Reporting Standards, Dubai, June 2009 But it proposes a new definition: An asset is a present economic resource to which the entity has a present right or other privileged access.   a. Present means that both the economic resource and the right or other privileged access to it exist on the date of the financial statements.   b. An economic resource is something that has positive economic value. It is scarce and capable of being used to carry out economic activities such as production and exchange. It can contribute to producing cash inflows or reducing cash outflows, directly or indirectly, alone or together with other economic resources. Economic resources include non-conditional contractual promises that others make to the entity, such as promises to pay cash, deliver goods, or render services. Rendering services includes standing ready to perform or refraining from engaging in activities that the entity could otherwise undertake.   c. A right or other privileged access enables the entity to use the present economic resource directly or indirectly and precludes or limits its use by others. Rights are legally enforceable or enforceable by equivalent means (such as by a professional association).   Other privileged access is not enforceable, but is otherwise protected by secrecy or other barriers to access.
  • 23. International Financial Reporting Standards, Dubai, June 2009 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 enterprise of resources embodying economic benefits. Measurement and recognition principles (contd.)
    • But what is revenue (i.e., “Turnover” in the Profit and Loss account)?
    • Seems obvious, but still an ongoing debate, due to
    • “ Aggressive earnings management”,
    • Long-term ongoing contracts,
    • Complex financial instruments
  • 24. International Financial Reporting Standards, Dubai, June 2009
    • There seem to be as many standards as there are standard setters
    • FRS 5
    • UITF 40
    • US GAAP
    • UK GAAP
    • IASB Exposure Draft
    • . . . . . . .
    • Normally common sense prevails
    • The IASB approach is to create an asset of what is owed for a sales transaction and that defines the revenue.
    • A problem area is long term service contracts where there are still differing views
  • 25. International Financial Reporting Standards, Dubai, June 2009 Fair Value Accounting The IASB has faced pressure from politicians and was recently asked by the G20 leaders to align their fair-value measurements with U.S. GAAP. So they said: Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
  • 26. International Financial Reporting Standards, Dubai, June 2009 Fair Value Accounting Here’s the problem: “ Following banks' massive writedowns at the start of the credit crisis, some critics blamed FAS 157 for creating a brand-new wave of mark-to-market accounting. In truth, the U.S. standard only defines fair value for companies already using it and provides a framework for measurement according to a three-step hierarchy. Under the third level, assets that are thinly traded or traded not at all are held up against "unobservable inputs." It is under this method that fair-value critics say the accounting standard creates too much volatility and leads to a pro-cyclical, downward effect on the economy.”
  • 27. International Financial Reporting Standards, Dubai, June 2009
    • Fair Value Accounting requires the presenter of Financial Statements to put a value on assets and liabilities as close to open market (’fair’) value as possible.
    • This is fine for, say, Plant and machinery, Motor vehicles or Stock or Receivables in a normal commercial or industrial context.
    • What about Pension Liabilities?
    • What about Investments or Financial Assets held by Banks at Cost?
  • 28. International Financial Reporting Standards, Dubai, June 2009
  • 29. International Financial Reporting Standards, Dubai, June 2009 The Program this afternoon 1.30 – 3.00 pm Stuart Frearson
    • Financial statement presentation
    • Balance sheet
    • Income statement
    After-noon Session 3pm – 3.15pm TEA BREAK 3.15pm – 4pm
    • Financial statement presentation
    • Statement of Changes in Equity or Statement of Recognised Income and Expenses (SORIE)
    • Cashflow statement: choice
    • between direct and indirect method
  • 30. International Financial Reporting Standards, Dubai, June 2009
    • Financial statement presentation
    • Balance sheet
    • Income statement
    I have, as a handout for you, a set of IFRS-compliant (hopefully) published Accounts. These are based on a KPMG standard layout. I intend these as a practical example and basis for discussion. I also have, as an Excel spreadsheet, if we have time, a detailed Trial Balance for a construction company for you to try to knock into shape as a Balance Sheet and P&L Account and discuss.
  • 31. International Financial Reporting Standards, Dubai, June 2009 Tea Break International Financial Reporting Standards, Dubai, June 2009
  • 32. International Financial Reporting Standards, Dubai, June 2009
    • Financial statement presentation
    • Statement of Changes in Equity or
    • Statement of Recognised Income and Expenses (SORIE)
    Proposals for a complete set of financial statements The IASB proposes that a complete set of financial statements should comprise statements of: • financial position ( opening balance sheet ) as at the beginning of the period; • financial position as at the end of the period ( closing balance sheet ) • recognised income and expense for the period ( profit and loss account + “SORIE” ); • changes in equity for the period ; • cash flows for the period; and • notes , comprising a summary of significant accounting policies and other explanatory information. Each of the statements to be presented with equal prominence.
  • 33. International Financial Reporting Standards, Dubai, June 2009
    • The aim of the rather odd Statement of Changes in Equity and ‘SORIE’ pair is to separate owner-movements in equity and non-owner movements of equity.
    • In the SCE go any owner-movements, such as
    • Share issues
    • Capital changes
    • Legally required movements on reserves
    • Any other interactions with shareholders or owners
    • that would otherwise need to appear in the Income
    • Statement
    • In the Income Statement (P&L Account) go all the non-owner movements in equity. Thus if the entity sells something at a profit, it increases its equity. But there are no ownership changes.
    • The question floated by the IASB is whether the Income Statement should be split into two parts . . . . . . . . . . .
  • 34. International Financial Reporting Standards, Dubai, June 2009 ‘ SORIE’ continued . . . . . . . The Income Statement would contain the Profit and Loss Account as we know it. The SORIE would contain any ‘odd’ movements such as • changes in revaluation surplus • gains and losses arising from translating the financial statements of a foreign operation • gains and losses on remeasuring available-for-sale financial assets • the effective portion of gains and losses on hedging instruments in a cash flow hedge • actuarial gains and losses on defined benefit plans Basically because various IASes have required these to be shown separately!
  • 35. International Financial Reporting Standards, Dubai, June 2009
      • Cashflow statement: choice between direct and indirect method
    • The Cashflow Statement is required to report all of the cashflows during the period, classified by
    • Operating,
    • Investing and
    • Financing activities.
    • Operating activities are defined as the principal revenue-producing activities of the enterprise
    • Investing activities are defined as the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
    • Financing activities are defined as activities that result in changes in the size and composition of the equity capital and borrowings of the enterprise..
  • 36. International Financial Reporting Standards, Dubai, June 2009 In the presentation of the cash flow statement under the Indirect method the cash flows from operating activities are derived from profit or loss for the period. E.g.: Profit for the period X Addback: depreciation X other non-cash movements X X Cash generated from Operations X In the Direct method, reference is not made to the profit or loss, Thus: Cash receipts from customers X Cash paid to suppliers and employees (X) Cash generated from Operations X