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IFRS: Oractical implementation guide and workbook

  1. 1. Wiley I FRSPractical ImplementationGuide and Workbook Second EditionAbbas Ali Mirza Magnus Orrell Graham J. Holt JOHN WILEY & SONS, INC.
  2. 2. Wiley I FRSPractical ImplementationGuide and Workbook Second Edition
  3. 3. Wiley I FRSPractical ImplementationGuide and Workbook Second EditionAbbas Ali Mirza Magnus Orrell Graham J. Holt JOHN WILEY & SONS, INC.
  4. 4. Portions of this book have their origins in copyrighted materials from the International Accounting StandardsBoard. These are noted by reference to the specific pronouncements, except for certain of the definitionsintroduced in bold type, which appear in a separate section at the beginning of each chapter. Completecopies of the international standards are available from the IASB. Copyright © International AccountingStandards Board, 30 Cannon Street, London EC4M 6XH, United Kingdom.This book is printed on acid-free paper. ∞Copyright © 2008 by John Wiley & Sons, Inc. All rights reserved.Published by John Wiley & Sons, Inc., Hoboken, New JerseyPublished simultaneously in Canada.No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or byany means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permittedunder Section 107 or 108 of the 1976 United States Copyright Act, without either the prior writtenpermission of the Publisher, or authorization through payment of the appropriate per-copy fee to theCopyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978)750-8400, fax (978)750-4470,or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to thePermissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201)748-6011,fax (201)748-6008, or online at http://www.wiley.com/go/permission.Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts inpreparing this book, they make no representations or warranties with respect to the accuracy or completenessof the contents of this book and specifically disclaim any implied warranties of merchantability or fitness fora particular purpose. No warranty may be created or extended by sales representatives or written salesmaterials. The advice and strategies contained herein may not be suitable for your situation. You shouldconsult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss ofprofit or any other commercial damages, including but not limited to special, incidental, consequential, orother damages.For general information on our other products and services, please contact our Customer Care Departmentwithin the US at 800-762-2974, outside the US at 317-572-3993 or fax 317-572-4002.Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may notbe available in electronic books. For more information about Wiley products, visit our Web site atwww.wiley.com.ISBN: 978-0470-17022-9Printed in the United States of America10 9 8 7 6 5 4 3 2 1
  5. 5. CONTENTSChapter Title Page No. 1 Introduction to International Financial Reporting Standards ............................. 1 2 IASB Framework ............................................................................................... 8 3 Presentation of Financial Statements (IAS 1) .................................................... 13 4 Inventories (IAS 2) ............................................................................................ 27 5 Cash Flow Statements (IAS 7) ........................................................................... 35 6 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8) ..... 51 7 Events After the Balance Sheet Date (IAS 10) .................................................. 61 8 Construction Contracts (IAS 11) ....................................................................... 67 9 Income Taxes (IAS 12) ...................................................................................... 77 10 Segment Reporting (IAS 14) ............................................................................. 94 Appendix: Operating Segments (IFRS 8) ................................................................. 103 11 Property, Plant, and Equipment (IAS 16) .......................................................... 108 12 Leases (IAS 17) ................................................................................................. 117 13 Revenue (IAS 18) .............................................................................................. 129 14 Employee Benefits (IAS 19) .............................................................................. 137 15 Accounting for Government Grants and Disclosure of Government Assistance (IAS 20) ........................................................................................ 151 16 The Effects of Changes in Foreign Exchange Rates (IAS 21) ........................... 159 17 Borrowing Costs (IAS 23) ................................................................................. 170 18 Related-Party Disclosures (IAS 24) ................................................................... 176 19 Accounting and Reporting by Retirement Benefit Plans (IAS 26) .................... 186 20 Consolidated and Separate Financial Statements ( IAS 27) ............................... 193 21 Investments in Associates (IAS 28) ................................................................... 202 22 Financial Reporting in Hyperinflationary Economies (IAS 29) ........................ 210 23 Interests in Joint Ventures (IAS 31) ................................................................... 215 24 Financial Instruments: Presentation (IAS 32) ................................................... 221 25 Financial Instruments: Recognition and Measurement (IAS 39) ...................... 236 26 Earnings Per Share (IAS 33) .............................................................................. 286 27 Interim Financial Reporting (IAS 34) ................................................................ 299 28 Impairment of Assets (IAS 36) .......................................................................... 304 29 Provisions, Contingent Liabilities, and Contingent Assets (IAS 37) ................. 317 30 Intangible Assets (IAS 38) ................................................................................. 330 31 Investment Property (IAS 40) ............................................................................ 345 32 Agriculture (IAS 41) .......................................................................................... 353 33 First-Time Adoption of International Financial Reporting Standards (IFRS 1) 362 34 Share-Based Payments (IFRS 2) ........................................................................ 382 35 Business Combinations (IFRS 3) ....................................................................... 402 36 Insurance Contracts (IFRS 4) ............................................................................ 421 37 Noncurrent Assets Held for Sale and Discontinued Operations (IFRS 5) ......... 428 38 Exploration for and Evaluation of Mineral Resources (IFRS 6) ........................ 440 39 Financial Instruments: Disclosures (IFRS 7) .................................................... 448 Index .................................................................................................................................... 461
  6. 6. FOREWORD TO THE FIRST EDITION by the Chairman of IASB I and my fellow Board members at the International Accounting Standards Board (IASB) are committedto developing high quality, understandable, and enforceable global accounting standards that meet the de-mands for comparable and transparent information in the world’s capital markets. Recently we completed awork program to develop and issue a stable platform of such standards. Those standards, the InternationalFinancial Reporting Standards (IFRS), are now being implemented in a large number of countries around theworld. This is a major achievement on the road towards the global acceptance of a single set of accountingstandards. The responsibility for achieving high quality financial reporting, however, does not rest solely withIASB. Our role is limited to providing the set of standards that entities should apply to achieve high quality,comparable, and transparent financial reporting. For IFRS to be properly understood, implemented, and ap-plied in practice, education and training of all relevant parties—including financial statement preparers,auditors, regulators, financial analysts, and other users of financial statements as well as accountingstudents—is essential. This book should be a helpful tool in this regard. The approach of the book is to discuss core conceptsand other key elements of the standards and to provide training material in the form of worked case studiesand questions to support successful learning of the material. Consequently, the book should be useful forstudents who prepare for professional exams and for financial statement preparers, auditors, regulators, fi-nancial analysts, and other users of financial statements who in their work need to be familiar with the stan-dards. The book should help practitioners and students alike understand, implement, and apply the key ele-ments of the standards. Sir David Tweedie Chairman of IASB December 2005
  7. 7. FOREWORD TO THE FIRST EDITION by the Secretary General of IOSCO In recent years much has been written about International Financial Reporting Standards (IFRS) so it isopportune that a publication such as this would be released at this time particularly since this initiative helpsto bring such clarity and focus to the debate. Globalization is taking place at an ever more rapid pace. As cross-border financial activity increases,capital markets become more dependent on each other. As financial markets become ever more interdepend-ent, there is a greater need for the development of internationally recognized and accepted standards dealingwith capital market regulation. The development of IFRS can be seen within this broader framework. They represent an especially use-ful instrument designed to promote a stable and more secure international regulatory environment. At thesame time, IFRS deliver on accounting and disclosure objectives as well as the pursuit of improved transpar-ency of global financial reporting. For the International Organization of Securities Commissions (IOSCO), the development and subsequentprogress of IFRS represents a priority outcome. The organization has been a key stakeholder with an activeinvolvement in the process of setting the standards and in continually assessing their quality. This involvement reflects a long history of commitment by IOSCO to efforts aimed at strengthening theintegrity of international markets through the promotion of high quality accounting standards, including rig-orous application and enforcement. At the same time, there is an obligation of international standard setters to be responsive to concernsover the application and interpretation of the standards. This is a key complement to the success of IFRS andone which we take seriously. Ultimately, accounting standards setting is a continuous process that must respond to changes and devel-opments in the markets and the information needs of investors. Indeed, it has always been the case that ef-fective financial reporting is fundamental to investor confidence as well as good corporate governance. In the long term, the adoption of IFRS in many countries and their use in numerous cross-border trans-actions will help to bring about these high quality global accounting standards by providing transparent andcomparable information in financial reports. Although as an international standards setter IOSCO is not in position to endorse external publications,we have always recognized that by helping to promote clear information about the IFRS, publications such asthis one serve a particularly useful function both as an educational opportunity and also to encourage confi-dence in these standards. On that basis it is most welcome. Philippe Richard IOSCO Secretary General March 2006
  8. 8. PREFACE This is indeed an exciting time to prepare an updated and expanded edition of this book. Since theissuance of the first edition, International Financial Reporting Standards (IFRS) have continued to extend itsreach as the recognized set of accounting standards in an increasing number of jurisdictions around the globe.This trend is set to continue. More countries have announced their intention to adopt IFRS in the next fewyears. Furthermore, the November 15, 2007 announcement by the US Securities and Exchange Commission(SEC) to allow foreign private issuers to enter the US capital market using IFRS-compliant financialstatements (without reconciling to US GAAP) came as a surprise to many in international financial circlesand was considered a historic move on the part of the US SEC; this favorable nod by the US SEC to theIASB standards may undoubtedly result in even greater momentum for further acceptance of IFRS globally.With such extraordinary achievements to its credit the IASB feels confident that more and more globalplayers will sooner or later convert to IFRS. In fact, major economic players such as Canada and India havealready announced their plans to go the “IFRS route” by 2011. Commenting on how many more countriesare expected to adopt IFRS by 2011, Sir David Tweedie, chairman of the IASB, remarked, “we reckon byabout 2011 there’ll be 150—all the major economies” (Accountancy, January 2008). Compared with the first edition, we have expanded the book by including extracts from publishedfinancial statements illustrating the application of IFRS. This will help readers better understand how theprinciples may be applied in practice. Additionally, we have updated the book to incorporate briefexplanations of new and revised pronouncements, in particular IFRS 8, Operating Segments, and the revisedIFRS 2, IFRS 3, IAS 1, IAS 23, IAS 27, and IAS 32 as well as IFRICs 10 to 14. We received a good deal of positive feedback and praise from readers of the first edition. With thechanges to this second edition, we hope that readers will find this edition even more useful in navigating thecomplex and changing landscape of IFRS. We continue to invite suggestions and comments for futureeditions. As with the first edition, any views expressed in this publication are ours alone and do notnecessarily represent those of the firms or organizations of which we are part. Abbas Ali Mirza Magnus Orrell Graham Holt February 2008
  9. 9. ACKNOWLEDGMENTS This book would not have seen the light of the day without the help of so many wonderful people aroundthe globe who have helped us to put it together. This IFRS workbook project was conceived andconceptualized way back in 1998, but due to certain unanticipated issues that surfaced later, the project wasdropped, only to be revived in 2005. We would be remiss in our duties if we did not thank the editors at JohnWiley & Sons, Inc., USA, who had implicit faith in our abilities and greatly helped us in giving shape to thiscreative endeavor. In particular, we wish to place on record our sincere appreciation of the help provided tous by the following individuals of John Wiley & Sons: Robert Chiarelli, for his patronage of this bookproject; John De Remigis, for his stewardship of this book project from its incubation stages in 1998 to itscompletion in 2006 and for his perseverance for these many years; Judy Howarth and Brandon Dust, for theirable guidance and patience; Natasha Andrews-Noel and Pam Reh and their editorial staff, for their creativeand valuable editorial comments and assistance; and the staff of the marketing department for theiroutstanding marketing plans and ideas. We also wish to place on record our sincere appreciation of the untiring efforts of Ms. Liesel Knorr, thecurrent president of the German Accounting Standards Board and formerly technical director of theInternational Accounting Standards Committee (IASC), the predecessor body to the IASB, for her thoroughtechnical review of the entire manuscript. Her invaluable comments have all been taken into account inwriting this book. We are also grateful to all our friends and colleagues who helped us during the preparation of this book. Abbas Ali Mirza wishes to place on record his sincere gratitude for all the constructive suggestionsoffered to him by his friends in conceptualizing the idea of such a workbook on IFRS during its formativestages. Furthermore, for their unstinting support, creative ideas, and invaluable contributions, he also wishesto thank his peers and mentors, in particular: Omar Fahoum, chairman and managing partner, Deloitte &Touche (M.E.); Graham Martins, partner, Pannell Kerr Forster, United Arab Emirates; Dr. Barry J. Epstein,partner, Russell Novak & Co., LLP, USA, his longtime coauthor of the other IFRS book published by JohnWiley & Sons, Inc., (Wiley: IFRS); and all his partners and colleagues from Deloitte & Touche (M.E.),including but not limited to Joe El Fadl, Graham Lucas, Anis Sadek, Musa Dajani, Ghassan Jaber, IndikaWijayarathne, Vikas Takhtani, Hala Khalid, Shivani Agarwal, Nisreen Ghulam and Umme Kulsoom Soni. Magnus Orrell extends his special thanks to his wife, Kristin Orrell, as well as to Andrew Spooner ofDeloitte & Touche LLP in the United Kingdom and Bengt-Allan Mettinger, accounting consultant inThailand, who all read earlier versions of the material in this book relating to financial instruments andprovided many valuable comments and suggestions. Graham Holt wishes to thank all the special people who have directly and indirectly helped him inpreparing this book. (They know he is grateful.)
  10. 10. ABOUT THE AUTHORS Abbas Ali Mirza is a partner at Deloitte & Touche (M.E.) based in Dubai and handles audits of majorinternational and local clients of the firm. At Deloitte he is also responsible for regional functions, such astechnical consultation on complex accounting and auditing issues. Abbas heads the Learning function forDeloitte, Middle East, and is a member of the Global firm’s EMEA Learning Executive. He has had adistinguished career in accounting, auditing, taxation, and business consulting and has worked forinternational audit and consulting firms in the United States of America, the Middle East, and India. Abbas isa frequent principal/keynote speaker at major global conferences on International Financial ReportingStandards (IFRS) and has chaired world-class events on accounting, such as the World Accounting Summitheld in Dubai under the auspices of the United Nations Conference on Trade and Development (UNCTAD).He has coauthored another book on IFRS published by John Wiley & Sons, Inc., Wiley: IFRS. He holds orhas held many positions of repute in the accounting profession globally including • 21st Session Chairman, United Nations’ Intergovernmental Working Group of Experts on International Standards on Accounting & Reporting (ISAR), to which position he was elected at the UNCTAD in Geneva in November 2004 • Member of the Developing Nations Permanent Task of the International Federation of Accountants (IFAC), recently renamed IFAC’s Developing Nations Committee • Member of the Accounting Standards Committee, Securities and Exchange Board of India (SEBI), India • Chairman of Auditors’ Group, Dubai Chamber of Commerce and Industry (DCCI) • Technical Adviser to the Gulf Co-operation Council Accounting and Auditing Organization (GCCAAO) • Member of the Consultative Group of Experts on Corporate Governance Disclosures, United Nations Conference on Trade & Development (UNCTAD) • Member of the Consultative Group of Experts on Corporate Social Responsibility, United Nations Conference on Trade & Development (UNCTAD) Magnus Orrell is a partner at Deloitte & Touche LLP in Wilton, Connecticut (USA). His focus is onfinancial instrument accounting issues under both IFRS and United States generally accepted accountingprinciples (GAAP). Prior to joining Deloitte in 2003, he served in various international standard-setting andregulatory roles. For three years, he was a project manager at the International Accounting Standards Board(IASB) in London, the United Kingdom, playing a key role in IASB’s work to develop and improve theinternational accounting standards for financial instruments. The prior three years, he served as a member ofthe Secretariat of the Basel Committee on Banking Supervision at the Bank for International Settlements(BIS) in Basel, Switzerland, working with senior central bank and banking regulatory officials from aroundthe world in formulating regulatory views and policies on financial reporting and disclosure issues. Earlieron in his career, he was an official of the European Commission in Brussels, Belgium, and an accountingspecialist at the Financial Supervisory Authority (Finansinspektionen) in Stockholm, Sweden, respectively.Apart from being a Certified Public Accountant (CPA) in the State of Connecticut, he also holds theChartered Financial Analyst (CFA) designation conferred by the CFA Institute (formerly the Association forInvestment Management and Research), the Certified Internal Auditor (CIA) designation conferred by theInstitute of Internal Auditors (IIA), and the Certified Financial Risk Manager (FRM) designation conferredby the Global Association of Risk Professionals (GARP). Additionally, the IIA has awarded him its WilliamS. Smith Certificate of Excellence for outstanding performance on the CIA exam. He also holds a number ofacademic degrees, including a Degree and Master of Science in business administration and economics(Sweden), a Degree of Master of Laws (Sweden), and a Master of Accounting and Financial Management(United States). He has been a frequent speaker at seminars, conferences, and executive-level meetings inmany countries in the Americas, Europe, and Asia, and has authored articles in both accountancy and financeperiodicals. Graham Holt qualified as a Chartered Accountant (Institute of Chartered Accountants in England &Wales) with Price Waterhouse and is a fellow of the Association of Chartered Certified Accountants(ACCA). He holds B.Com and MA Econ qualifications also. As a current ACCA examiner, he has beenprominent in the development of their IFRS stream and their examination scheme. He is a principal lecturerat the Manchester Metropolitan University Business School, where he is director of Professional Courses.Graham has given lectures on IFRS throughout the world and has many publications in the subject area. Hehas also been involved in running training courses on IFRS.
  11. 11. 1 INTRODUCTION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS1. INTRODUCTIONInternational Accounting Standards (IAS), now renamed International Financial Reporting Stan-dards (IFRS), are gaining acceptance worldwide. This section discusses the extent to which IFRSare recognized around the world and includes a brief overview of the history and key elements ofthe international standard-setting process.2. WORLDWIDE ADOPTION OF IFRS2.1 In the last few years, the international accounting standard-setting process has been able toclaim a number of successes in achieving greater recognition and use of IFRS.2.2 A major breakthrough came in 2002 when the European Union (EU) adopted legislation thatrequires listed companies in Europe to apply IFRS in their consolidated financial statements. Thelegislation came into effect in 2005 and applies to more than 8,000 companies in 30 countries, in-cluding countries such as France, Germany, Italy, Spain, and the United Kingdom. The adoptionof IFRS in Europe means that IFRS has replaced national accounting standards and requirements asthe basis for preparing and presenting group financial statements for listed companies in Europe.2.3 Outside Europe, many other countries also have been moving to IFRS. By 2005, IFRS hadbecome mandatory in many countries in Africa, Asia, and Latin America. In addition, countriessuch as Australia, Hong Kong, New Zealand, Philippines, and Singapore had adopted nationalaccounting standards that mirror IFRS. According to one estimate, about 80 countries requiredtheir listed companies to apply IFRS in preparing and presenting financial statements in 2008.Many other countries permit companies to apply IFRS. Countries that have Adopted IFRS Countries in which some or all companies are required to apply IFRS or IFRS-based standards are listed below. Africa: Botswana, Egypt, Ghana, Kenya, Malawi, Mauritius, Mozambique, Namibia, South Africa, Tanzania Americas: Bahamas, Barbados, Brazil (2010), Canada (2011), Chile (2009), Costa Rica, Dominican Republic, Ecuador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Nicaragua, Panama, Peru, Trinidad and Tobago, Uruguay, Venezuela Asia: Armenia, Bahrain, Bangladesh, Georgia, Hong Kong, India (2011), Israel, Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Lebanon, Nepal, Oman, Philippines, Qatar, Singapore, South Korea (2011), Sri Lanka (2011), Tajikistan, United Arab Emirates Europe: Austria, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malta, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Russia, Serbia, Slovakia, Slovenia, Spain, Sweden, Turkey, Ukraine, United Kingdom Oceania: Australia, Fiji, New Zealand, Papua New Guinea
  12. 12. 2 Wiley IFRS: Practical Implementation Guide and Workbook2.4 The adoption of standards that require high-quality, transparent, and comparable informationis 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 lo-cated in different parts of the world. In an increasingly global economy, the use of a single set ofhigh-quality accounting standards facilitates investment and other economic decisions across bor-ders, increases market efficiency, and reduces the cost of raising capital. IFRS are increasinglybecoming the set of globally accepted accounting standards that meet the needs of the world’sincreasingly integrated global capital markets.3. REMAINING EXCEPTIONS3.1 Measured in terms of the size of their capital markets, the most significant remaining excep-tions to the global recognition of IFRS are the United States (US) and Japan. In these countries,entities continue to be required to follow local accounting standards. However, IFRS areincreasing in importance also in these countries.3.2 The International Accounting Standards Board (IASB), the body in charge of setting IFRS,works closely with the national accounting standard-setting bodies in these countries—the USFinancial Accounting Standards Board (FASB) and the Accounting Standards Board of Japan(ASBJ)—to converge (that is, narrow the differences between) local accounting standards andIFRS.3.3 In the US, the domestic securities regulator (Securities and Exchange Commission, SEC) hasdropped its prior requirement for non-US companies that raise capital in US markets to prepare areconciliation of their IFRS financial statements to US Generally Accepted Accounting Principles(US GAAP). This means that non-US companies raising capital in US markets no longer arerequired to reconcile their IFRS financial statement to US GAAP beginning with financial yearsending after November 15, 2007.3.4 The SEC is currently considering whether to permit US companies to use IFRS instead of USGAAP in preparing their financial statements. This is in response to the recognition that theworld’s rapidly integrating capital markets would benefit from having a set of globally acceptedaccounting standards and that IFRS have become the primary contender for that title. Additionally,many question why US companies should continue to be required to use US GAAP when non-UScompanies are permitted to raise capital in US markets without reconciling their IFRS financialstatements to US GAAP. It is currently anticipated that the SEC may issue a proposal in 2008 or2009 to allow US companies to choose between IFRS or US GAAP.4. THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTEEFrom 1973 until 2001, the body in charge of setting the international standards was the Interna-tional Accounting Standards Committee (IASC). The principal significance of IASC was to en-courage national accounting standard setters around the world to improve and harmonize nationalaccounting standards. Its objectives, as stated in its Constitution, were to • Formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and obser- vance • Work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements4.1 IASC and the Accounting ProfessionIASC always had a special relationship with the international accounting profession. IASC wascreated in 1973 by agreement between the professional accountancy bodies in nine countries, and,from 1982, its membership consisted of all those professional accountancy bodies that were mem-bers of the International Federation of Accountants (IFAC), that is, professional accountancy bod-ies in more than 100 countries. As part of their membership in IASC, professional accountancybodies worldwide committed themselves to use their best endeavors to persuade governments,standard-setting bodies, securities regulators, and the business community that published financialstatements should comply with IAS.
  13. 13. Chapter 1 / Intro to International Financial Reporting Standards 34.2 IASC BoardThe members of IASC (i.e., professional accountancy bodies around the world) delegated the re-sponsibility for all IASC activities, including all standard-setting activities, to the IASC Board. TheBoard consisted of 13 country delegations representing members of IASC and up to four other or-ganizations appointed by the Board. The Board, which usually met four times per year, was sup-ported by a small secretariat located in London, the United Kingdom.4.3 The Initial Set of Standards Issued by IASCIn its early years, IASC focused its efforts on developing a set of basic accounting standards. Thesestandards usually were worded broadly and contained several alternative treatments to accommo-date the existence of different accounting practices around the world. Later these standards came tobe criticized for being too broad and having too many options.4.4 Improvements and Comparability ProjectBeginning in 1987, IASC initiated work to improve its standards, reduce the number of choices,and specify preferred accounting treatments in order to allow greater comparability in financialstatements. This work took on further importance as securities regulators worldwide started to takean active interest in the international accounting standard-setting process.4.5 Core Standards Work Program4.5.1 During the 1990s, IASC worked increasingly closely with the International Organization ofSecurities Commissions (IOSCO) on defining its agenda. In 1993, the Technical Committee ofIOSCO held out the possibility of IOSCO endorsement of IASC Standards for cross-border listingand capital-raising purposes around the world and identified a list of core standards that IASCwould need to complete for purposes of such an endorsement. In response, IASC in 1995 an-nounced that it had agreed on a work plan to develop the comprehensive set of core standardssought after by IOSCO. This effort became known as the Core Standards Work Program.4.5.2 After three years of intense work to develop and publish standards that met IOSCO’s crite-ria, IASC completed the Core Standards Work Program in 1998. In 2000, the Technical Committeeof IOSCO recommended securities regulators worldwide to permit foreign issuers to use IASCStandards for cross-border offering and listing purposes, subject to certain supplemental treatments.4.6 International Accounting Standards and SIC InterpretationsDuring its existence, IASC issued 41 numbered Standards, known as International AccountingStandards (IAS), as well as a Framework for the Preparation and Presentation of Financial State- 1ments. While some of the Standards issued by the IASC have been withdrawn, many are still inforce. In addition, some of the Interpretations issued by the IASC’s interpretive body, the so-calledStanding Interpretations Committee (SIC), are still in force. List of IAS Still in Force for 2007 Financial Statements IAS 1, Presentation of Financial Statements IAS 2, Inventories IAS 7, Cash Flow Statements IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors IAS 10, Events After the Balance Sheet Date IAS 11, Construction Contracts IAS 12, Income Taxes IAS 14, Segment Reporting IAS 16, Property, Plant, and Equipment IAS 17, Leases IAS 18, Revenue IAS 19, Employee Benefits1 IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, is the most recent standard to be withdrawn.
  14. 14. 4 Wiley IFRS: Practical Implementation Guide and Workbook IAS 20, Accounting for Government Grants and Disclosure of Government Assistance IAS 21, The Effects of Changes in Foreign Exchange Rates IAS 23, Borrowing Costs IAS 24, Related-Party Disclosures IAS 26, Accounting and Reporting by Retirement Benefit Plans IAS 27, Consolidated and Separate Financial Statements IAS 28, Investments in Associates IAS 29, Financial Reporting in Hyperinflationary Economies IAS 31, Interests in Joint Ventures IAS 32, Financial Instruments: Presentation IAS 33, Earnings per Share IAS 34, Interim Financial Reporting IAS 36, Impairment of Assets IAS 37, Provisions, Contingent Liabilities and Contingent Assets IAS 38, Intangible Assets IAS 39, Financial Instruments: Recognition and Measurement IAS 40, Investment Property IAS 41, Agriculture List of SIC Interpretations Still in Force for 2007 Financial Statements SIC 7, Introduction of the Euro SIC 10, Government Assistance—No Specific Relation to Operating Activities SIC 12, Consolidation—Special-Purpose Entities SIC 13, Jointly Controlled Entities—Nonmonetary Contributions by Venturers SIC 15, Operating Leases—Incentives SIC 21, Income Taxes—Recovery of Revalued Nondepreciable Assets SIC 25, Income Taxes—Changes in the Tax Status of an Entity or Its Shareholders SIC 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease SIC 29, Disclosure—Service Concession Arrangements SIC 31, Revenue—Barter Transactions Involving Advertising Services SIC 32, Intangible Assets—Web Site Costs5. THE INTERNATIONAL ACCOUNTING STANDARDS BOARD5.0.1 In 2001, fundamental changes were made to strengthen the independence, legitimacy, andquality of the international accounting standard-setting process. In particular, the IASC Board wasreplaced by the International Accounting Standards Board (IASB) as the body in charge of settingthe international standards. Key Differences between IASC and IASB The IASB differs from the IASC Board, its predecessor body, in several key areas: • Unlike the IASC Board, the IASB does not have a special relationship with the international accounting profession. Instead, IASB is governed by a group of Trustees of diverse geographic and functional backgrounds who are independent of the accounting profession. • Unlike the members of the IASC Board, members of the IASB are individuals who are appointed based on technical skill and background experience rather than as represen- tatives of specific national accountancy bodies or other organizations. • Unlike the IASC Board, which only met about four times a year, the IASB Board usually meets each month. Moreover, the number of technical and commercial staff working for IASB has increased significantly as compared with IASC. (Similar to IASC, the headquarters of the IASB is located in London, the United Kingdom.) The interpretive body of the IASC (SIC), has been replaced by the International Financial Re- porting Interpretations Committee (IFRIC).
  15. 15. Chapter 1 / Intro to International Financial Reporting Standards 55.0.2 The name of the organization that comprises both the IASB and its Trustees is theInternational Accounting Standards Committee Foundation (“the IASC Foundation”). Theobjectives of the IASC Foundation, as stated in its Constitution, are (a) To develop, in the public interest, a single set of high-quality, understandable, and enforce- able global accounting standards that require high-quality, transparent, and comparable in- formation in financial statements and other financial reporting to help participants in the various capital markets of the world and other users of the information to make economic decisions; (b) To promote the use and rigorous application of those standards; and (c) In fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and (d) To bring about convergence of national accounting standards and International Financial Reporting Standards to high-quality solutions.5.0.3 At its first meeting in 2001, IASB adopted all outstanding IAS issued by the IASC as itsown Standards. Those IAS continue to be in force to the extent they are not amended or withdrawnby the IASB. New Standards issued by IASB are known as IFRS. When referring collectively toIFRS, that term includes both IAS and IFRS. List of IFRS IFRS 1, First-time Adoption of International Financial Reporting Standards IFRS 2, Share-Based Payment IFRS 3, Business Combinations IFRS 4, Insurance Contracts IFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations IFRS 6, Exploration for and Evaluation of Mineral Resources IFRS 7, Financial Instruments: Disclosures IFRS 8, Operating Segments5.0.4 One of the initial projects undertaken by IASB was to identify opportunities to improve theexisting set of Standards by adding guidance and eliminating inconsistencies and choices. The im-proved Standards, adopted in 2003, form part of IASB’s so-called stable platform of Standards foruse in 2005 when a significant number of countries around the world moved from national ac-counting requirements to IFRS, such as all the countries in the European Union.5.0.5 In 2006, IASB announced that it would not require the application of any new IFRS or ma-jor amendments to existing standards before 2009. That is, IASB is continuing to issue new IFRSand amendments, but those will not come into force before 2009. This provides four years ofstability in the IFRS platform and provides a target date for adoption of IFRS for countries thathave yet to adopt IFRS. The stable platform does not apply to new Interpretations, which mayhave effective dates before 2009.5.1 Structure and Governance5.1.1 TrusteesThe governance of IASB rests with the Trustees of the IASC Foundation (the “IASC FoundationTrustees” or, simply, the “Trustees”). The Trustees have no involvement in IASB’s standard-setting activities. Instead, the Trustees are responsible for broad strategic issues, budget, andoperating procedures, as well as for appointing the members of IASB.5.1.2 The BoardThe Board is responsible for all standard-setting activities, including the development and adoptionof IFRS. The Board has 14 members from around the world who are selected by the Trusteesbased on technical skills and relevant business and market experience. The Board, which usuallymeets once a month, has 12 full-time members and 2 part-time members. The Board members are
  16. 16. 6 Wiley IFRS: Practical Implementation Guide and Workbookfrom a mix of backgrounds, including auditors, preparers of financial statements, users of financialstatements, and academics. The IASC Foundation Trustees are currently considering whether toexpand the number of Board members from 14 to Standards Advisory CouncilIASB is advised by the Standards Advisory Council (SAC). It has about 40 members appointed bythe Trustees and provides a forum for organizations and individuals with an interest in internationalfinancial reporting to provide advice on IASB agenda decisions and priorities. Members currentlyinclude chief financial and accounting officers from some of the world’s largest corporations andinternational organizations, leading financial analysts and academics, regulators, accounting stan-dard setters, and partners from leading accounting firms.5.1.4 International Financial Reporting Interpretations Committee (IFRIC)IASB’s interpretive body, IFRIC, is in charge of developing interpretive guidance on accountingissues that are not specifically dealt with in IFRSs or that are likely to receive divergent or unac-ceptable interpretations in the absence of authoritative guidance. IFRIC members are appointed bythe Trustees. The Trustees recently proposed to increase the size of IFRIC from 12 to 14 membersto achieve greater diversity of members with practical experience in the application of IFRS andanalysis of financial statements using IFRS. List of IFRIC Interpretations IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 2, Members’ Shares in Cooperative Entities and Similar Instruments IFRIC 3, Emission Rights (withdrawn) IFRIC 4, Determining Whether an Arrangement Contains a Lease IFRIC 5, Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6, Liabilities Arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment IFRIC 7, Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperin- flationary Economies IFRIC 8, Scope of IFRS 2 IFRIC 9, Reassessment of Embedded Derivatives IFRIC 10, Interim Financial Reporting and Impairment IFRIC 11, IFRS 2—Group and Treasury Share Transactions IFRIC 12, Service Concession Arrangements IFRIC 13, Customer Loyalty Programmes IFRIC 14, IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interaction5.1.5 Standard-Setting Due ProcessAs part of its due process in developing new or revised Standards, the Board publishes an ExposureDraft of the proposed Standard for public comment in order to obtain the views of all interestedparties. It also publishes a “Basis for Conclusions” to its Exposure Drafts and Standards to explainhow it reached its conclusions and to give background information. When one or more Boardmembers disagree with a Standard, the Board publishes those dissenting opinions with the Stan-dard. To obtain advice on major projects, the Board often forms advisory committees or other spe-cialist groups and may also hold public hearings and conduct field tests on proposed Standards.List of Outstanding Exposure Drafts of Proposed New IFRSProposed IFRS, Small and Medium-Sized Entities, February 2007ED 9, Joint Arrangements, September 2007
  17. 17. Chapter 1 / Intro to International Financial Reporting Standards 7List of Outstanding Exposure Drafts of Proposed Amendments to Existing StandardsAmendments to IAS 37, Provisions, Contingent Liabilities and Contingent Assets, June 2005Amendments to IFRS 2, Vesting Conditions and Cancellations, February 2006Amendments to IAS 24, State-Controlled Entities and the Definition of a Related Party, February 2007Amendments to IAS 39, Exposures Qualifying for Hedge Accounting, September 2007Proposed Improvements to IFRS, October 2007Amendments to IFRS 2 and IFRIC 11, Group Cash-Settled Share-Based Payment Transactions, December 2007Amendments to IFRS 1 and IAS 27, Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate, December 2007List of Outstanding Draft InterpretationsIFRIC D21, Real Estate Sales, July 2007IFRIC D22, Hedges of a Net Investment in a Foreign Operation, July 2007
  18. 18. 2 IASB FRAMEWORK1. INTRODUCTION1.1 The Framework for the Preparation and Presentation of Financial Statements (the “Frame-work”) sets out the concepts that underlie the preparation and presentation of financial statements,that is, the objectives, assumptions, characteristics, definitions, and criteria that govern financialreporting. Therefore, the Framework is often referred to as the “conceptual framework.” TheFramework deals with (a) The objective of financial statements (b) Underlying assumptions (c) The qualitative characteristics that determine the usefulness of information in financial statements (d) The definition, recognition, and measurement of the elements from which financial state- ments are constructed (e) Concepts of capital and capital maintenance1.2 The Framework does not have the force of a Standard. Instead, its purposes include, first, toassist and guide the International Accounting Standards Board (IASB) as it develops new or re-vised Standards and, second, to assist preparers of financial statements in applying Standards andin dealing with topics that are not addressed by a Standard. Thus, in case of a conflict between theFramework and a specific Standard, the Standard prevails over the Framework. Practical Insight In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event, or condition, IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, requires management to use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgment, management is required to refer to, and consider the applicability of, in descending order: (a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and (b) the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. Thus, the Framework serves as a guide for preparers to re- solve accounting issues in the absence of more specific requirements.2. OBJECTIVE OF FINANCIAL STATEMENTSThe objective of financial statements is to provide information about the financial position, per-formance, and changes in financial position of an entity that is useful to a wide range of users inmaking economic decisions (e.g., whether to sell or hold an investment in the entity). Users includepresent and potential investors, employees, lenders, suppliers and other trade creditors, customers,governments and their agencies, and the public. Because investors are providers of risk capital, it ispresumed that financial statements that meet their needs will also meet most of the needs of otherusers.3. UNDERLYING ASSUMPTIONSNormally, two assumptions underlying the preparation and presentation of financial statements arethe accrual basis and going concern.3.1 Accrual Basis3.1.1 When financial statements are prepared on the accrual basis of accounting, the effects oftransactions and other events are recognized when they occur (and not as cash or its equivalent is
  19. 19. Chapter 2 / IASB Framework 9received or paid), and they are recorded in the accounting records and reported in the financialstatements of the periods to which they relate.3.1.2 The accrual basis assumption is also addressed in IAS 1, Presentation of Financial State-ments, which clarifies that when the accrual basis of accounting is used, items are recognized asassets, liabilities, equity, income, and expenses (the elements of financial statements) when theysatisfy the definitions and recognition criteria for those elements in the Framework.3.2 Going Concern3.2.1 When financial statements are prepared on a going concern basis, it is assumed that the en-tity has neither the intention nor the need to liquidate or curtail materially the scale of its opera-tions, but will continue in operation for the foreseeable future. If this assumption is not valid, thefinancial statements may need to be prepared on a different basis and, if so, the basis used is dis-closed.3.2.2 The going concern assumption is also addressed in IAS 1, which requires management tomake an assessment of an entity’s ability to continue as a going concern when preparing financialstatements.4. QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTSQualitative characteristics are the attributes that make the information provided in financial state-ments useful to users. According to the Framework, the four principal qualitative characteristics are (1) Understandability (2) Relevance (3) Reliability (4) Comparability4.1 Understandability“Understandability” refers to information being readily understandable by users who have a rea-sonable knowledge of business and economic activities and accounting and a willingness to studythe information with reasonable diligence.4.2 Relevance4.2.1 “Relevance” refers to information being relevant to the decision-making needs of users.Information has the quality of relevance when it influences the economic decisions of users byhelping them evaluate past, present, or future events or confirming, or correcting, their past evalua-tions. The concept of relevance is closely related to the concept of materiality. The Frameworkdescribes materiality as a threshold or cut-off point for information whose omission or misstate-ment could influence the economic decisions of users taken on the basis of the financial statements.4.2.2 The concept of materiality is further addressed in IAS 1, which specifies that each materialclass of similar items shall be presented separately in the financial statements and that items of adissimilar nature or function shall be presented separately unless they are immaterial. Under theconcept of materiality, a specific disclosure requirement in a Standard or an Interpretation need notbe met if the information is not material.4.3 Reliability4.3.1 “Reliability” refers to information being free from material error and bias and can be de-pended on by users to represent faithfully that which it either purports to represent or could rea-sonably be expected to represent. According to the Framework, to be reliable, information must • Be free from material error • Be neutral, that is, free from bias • Represent faithfully the transactions and other events it either purports to represent or could reasonably be expected to represent (representational faithfulness). If information is to repre- sent faithfully the transactions and other events that it purports to represent, the Framework specifies that they need to be accounted for and presented in accordance with their substance and economic reality even if their legal form is different (substance over form).
  20. 20. 10 Wiley IFRS: Practical Implementation Guide and Workbook • Be complete within the bounds of materiality and cost4.3.2 Related to the concept of reliability is prudence, whereby preparers of financial statementsshould include a degree of caution in exercising judgments needed in making estimates, such thatassets or income are not overstated and liabilities or expenses are not understated. However, theexercise of prudence does not justify the deliberate understatement of assets or income, or the de-liberate overstatement of liabilities or expenses, because the financial statements would not beneutral and, therefore, not reliable.4.4 Comparability4.4.1 “Comparability” refers to information being comparable through time and across entities.To achieve comparability, like transactions and events should be accounted for similarly by an en-tity throughout an entity, over time for that entity, and by different entities.4.4.2 Consistency of presentation is also addressed in IAS 1. It specifies that the presentation andclassification of items in the financial statements, as a general rule, shall be retained from one pe-riod to the next, with specified exceptions.4.5 ConstraintsIn practice, there is often a trade-off between different qualitative characteristics of information. Inthese situations, an appropriate balance among the characteristics must be achieved in order to meetthe objective of financial statements. Examples Examples of trade-offs between qualitative characteristics of information follow: • There is a trade-off between reporting relevant information in a timely manner and taking time to ensure that the information is reliable. If information is not reported in a timely manner, it may lose its relevance. Therefore, entities need to balance relevance and reliability in determining when to provide information. • There is trade-off between benefit and cost in preparing and reporting information. In principle, the benefits derived from the information by users should exceed the cost for the preparer of providing it. • There is a trade-off between providing information that is relevant, but is subject to measurement uncertainty (e.g., the fair value of a financial instrument), and providing information that is reliable but not necessarily relevant (e.g., the historical cost of a financial instrument).5. ELEMENTS OF FINANCIAL STATEMENTS5.1 The Framework describes the elements of financial statements as broad classes of financialeffects of transactions and other events. The elements of financial statements are • Assets. 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. • Liabilities. A liability is a present obligation of the entity arising from past events, the settle- ment of which is expected to result in an outflow from the entity of resources embodying economic benefits. • Equity. Equity is the residual interest in the assets of the entity after deducting all its liabili- ties. • 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 eq- uity, other than those relating to contributions from equity participants. • Expenses. 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.5.2 According to the Framework, an item that meets the definition of an element should be rec-ognized (i.e., incorporated in the financial statements) if (a) It is probable that any future economic benefit associated with the item will flow to or from the entity; and (b) The item has a cost or value that can be measured with reliability.
  21. 21. Chapter 2 / IASB Framework 11The Framework notes that the most common measurement basis in financial statements is histori-cal cost, but that other measurement bases are also used, such as current cost, realizable orsettlement value, and present value.6. CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE6.1 The Framework distinguishes between a financial concept of capital and a physical conceptof capital. Most entities use a financial concept of capital, under which capital is defined in mone-tary terms as the net assets or equity of the entity. Under a physical concept of capital, capital isinstead defined in terms of physical productive capacity of the entity.6.2 Under the financial capital maintenance concept, a profit is earned if the financial amount ofthe net assets at the end of the period exceeds the financial amount of net assets at the beginning ofthe period, after excluding any distributions to, and contributions from, owners during the period.Under the physical capital maintenance concept, a profit is instead earned if the physical productivecapacity (or operating capability) of the entity (or the resources or funds needed to achieve thatcapacity) at the end of the period exceeds the physical productive capacity at the beginning of theperiod, after excluding any distributions to, and contributions from, owners during the period. Recent Developments In October 2004, IASB added a project to its agenda to develop a new framework. This proj- ect is conducted jointly with the US Financial Accounting Standards Board (FASB). The ob- jective is to develop a common conceptual framework that brings together and improves upon the existing frameworks of IASB and FASB. In July 2006, IASB and FASB published a con- sultative document that contains drafts of the first two chapters of an enhanced framework. These chapters define the objective of financial reporting and the qualitative characteristics of decision-useful financial information. At the time of writing, IASB and FASB were continu- ing their discussions on these issues and other aspects of the new framework. In addition, they have conducted roundtable discussions with constituent groups on measurement issues. IASB and FASB plan to publish portions of the new framework as they are finalized and withdraw the equivalent sections in the current text. A completed framework is not expected before 2010. To stay current in this area, readers should monitor development on this project.
  22. 22. 12 Wiley IFRS: Practical Implementation Guide and WorkbookMULTIPLE-CHOICE QUESTIONS (c) Qualitative characteristics are nonquantita- tive aspects of an entity’s position and per-1. What is the authoritative status of the Frame- formance and changes in financial position.work? (d) Qualitative characteristics measure the ex- (a) It has the highest level of authority. In case tent to which an entity has complied with all of a conflict between the Framework and a relevant Standards and Interpretations. Standard or Interpretation, the Framework overrides the Standard or Interpretation. Answer: (a) (b) If there is a Standard or Interpretation that 5. Which of the following is not a qualitative char- specifically applies to a transaction, it over- acteristic of financial statements according to the rides the Framework. In the absence of a Framework? Standard or an Interpretation that specifi- (a) Materiality. cally applies, the Framework should be fol- (b) Understandability. lowed. (c) Comparability. (c) If there is a Standard or Interpretation that (d) Relevance. specifically applies to a transaction, it over- rides the Framework. In the absence of a Answer: (a) Standard or an Interpretation that specifi- 6. When should an item that meets the definition of cally applies to a transaction, management an element be recognized, according to the Frame- should consider the applicability of the work? Framework in developing and applying an (a) When it is probable that any future eco- accounting policy that results in information nomic benefit associated with the item will that is relevant and reliable. flow to or from the entity. (d) The Framework applies only when IASB (b) When the element has a cost or value that develops new or revised Standards. An en- can be measured with reliability. tity is never required to consider the Framework. (c) When the entity obtains control of the rights or obligations associated with the item.Answer: (c) (d) When it is probable that any future eco-2. What is the objective of financial statements nomic benefit associated with the item willaccording to the Framework? flow to or from the entity and the item has a (a) To provide information about the financial cost or value that can be measured with reli- position, performance, and changes in finan- ability. cial position of an entity that is useful to a Answer: (d) wide range of users in making economic de- cisions. (b) To prepare and present a balance sheet, an income statement, a cash flow statement, and a statement of changes in equity. (c) To prepare and present comparable, rele- vant, reliable, and understandable informa- tion to investors and creditors. (d) To prepare financial statements in accor- dance with all applicable Standards and In- terpretations.Answer: (a)3. Which of the following are underlying assump-tions of financial statements? (a) Relevance and reliability. (b) Financial capital maintenance and physical capital maintenance. (c) Accrual basis and going concern. (d) Prudence and conservatism.Answer: (c)4. What are qualitative characteristics of financialstatements according to the Framework? (a) Qualitative characteristics are the attributes that make the information provided in finan- cial statements useful to users. (b) Qualitative characteristics are broad classes of financial effects of transactions and other events.
  23. 23. 3 PRESENTATION OF FINANCIAL STATEMENTS (IAS 1)1. INTRODUCTIONIAS 1 provides guidelines on the presentation of the “general purpose financial statements,”thereby ensuring comparability both with the entity’s financial statements of previous periods andwith those of other entities. It provides overall requirements for the presentation of financial state-ments, guidance on their structure, and the minimum requirements for their content. It also pre-scribes the components of the financial statements that together would be considered a complete setof financial statements.2. SCOPEThe requirements of IAS 1 are to be applied to all “general purpose financial statements” that havebeen prepared and presented in accordance with International Financial Reporting Standards(IFRS). “General purpose financial statements” are those intended to meet the needs of users whoare not in a position to demand reports that are tailored according to their information needs. IAS 1is not applicable to condensed interim financial statements prepared according to IAS 34. Addi-tional requirements for banks and similar financial institutions are contained in IAS 30, Disclosuresin the Financial Statements of Banks and Similar Financial Institutions. Modification of the pre-sentation requirements of the Standard may be required by nonprofit entities and those entitieswhose share capital is not equity.3. DEFINITIONS OF KEY TERMS Impracticable. Applying a requirement becomes impracticable when the entity cannot apply a requirement despite all reasonable efforts to do so. International Financial Reporting Standards (IFRS). Standards and interpretations adopted by the International Accounting Standards Board (IASB). They include (a) International Financial Reporting Standards (b) International Accounting Standards (c) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC) Material. An item is deemed to be material if its omission or misstatement would influence the economic decisions of a user taken on the basis of the financial statements. Materiality is determined based on the item’s nature, size, and/or the surrounding circumstances. Notes to financial statements. A collection of information providing descriptions and disag- gregated information relating to items included in the financial statements (i.e., balance sheet, income statement, statement of changes in equity, and cash flow statement), as well as those that do not appear in the financial statements but are disclosed due to requirements of IFRS. Practical Insight “Materiality” as a concept has been the subject of debate for years yet there are no clear-cut parameters to compute materiality. What would normally be expected to influence one per- son’s viewpoint may not necessarily influence another person’s economic decisions based on the financial statements. Furthermore, materiality is not only “quantitative” (i.e., measured in terms of numbers) but also “qualitative” (because it depends not only on the “size” of the item
  24. 24. 14 Wiley IFRS: Practical Implementation Guide and Workbook but also on the “nature” of the item). For instance, in some cases, transactions with “related parties” (as defined under IAS 24), although not material when the size of the transactions is considered, may be considered “material” because they are with related parties (This is where the “qualitative” aspect of the definition of the term “material” comes into play). Materiality is therefore a very subjective concept.4. PURPOSE OF FINANCIAL STATEMENTSFinancial statements provide stakeholders with information about the entity’s financial position,financial performance, and cash flows by providing information about its assets, liabilities, equity,income and expenses, other changes in equity, and cash flows.5. COMPONENTS OF FINANCIAL STATEMENTS Income and Income Statement expenses All changes in equity or changes Statement of Changes other than those in Equity with equity holders Components of Financial Statements Cash inflows & outflows from Cash Flow Statement operating, financing, and investing activities Significant Notes accounting policies & explanatory notes6. OVERALL CONSIDERATIONS6.1 Fair Presentation and Compliance with IFRS6.1.1 “Fair presentation” implies that the financial statements “present fairly” (or alternatively, insome jurisdictions [countries], present a “true and fair” view) of the financial position, financialperformance, and cash flows of an entity.6.1.2 “Fair presentation” requires faithful representation of the effects of transactions and otherevents and conditions in accordance with the definitions and recognition criteria for assets, liabili-ties, income, and expenses laid down in the IASB’s Framework. The application of IFRS, with ad-ditional disclosure where required, is expected to result in financial statements that achieve a “fairpresentation.”6.1.3 Under IAS 1, entities are required to make an explicit statement of compliance with IFRS intheir notes if their financial statements comply with IFRS.6.1.4 By disclosure of the accounting policies used or notes or explanatory material, an entitycannot correct inappropriate accounting policies. Practical Insight In practice, some entities believe that even if an inappropriate accounting policy were used in presenting the financial statements (say, use of “cash basis” as opposed to the “accrual basis” to account for certain expenses), as long as it is disclosed by the entity in notes to the financial statements, the problem would be rectified. Recognizing this tendency, IAS 1 categorically prohibits such shortcut methods from being employed by entities presenting financial state- ments under IFRS.
  25. 25. Chapter 3 / Presentation of Financial Statements (IAS 1) 156.1.5 In extremely rare circumstances, if management believes that compliance with a particularrequirement of the IFRS will be so misleading that it would conflict with the objectives of the fi-nancial statements as laid down in the IASB’s Framework, then the entity is allowed to depart fromthat requirement (of the IFRS), provided the relevant regulatory framework does not prohibit sucha departure. This is referred to as “true and fair override” in some jurisdictions. In such circum-stances, it is incumbent upon the entity that departs from a requirement of IFRS to disclose (a) That management has concluded that the financial statements present fairly the entity’s financial position, financial performance, and cash flows (b) That it has complied with all applicable Standards and Interpretations except that it has de- parted from a particular requirement to achieve fair presentation (c) The title of the Standard or the Interpretation from which the entity has departed, the nature of the departure, including the treatment that the Standard or Interpretation would require, the reason why that treatment would be misleading in the circumstances that it would con- flict with the objective of the financial statements set out in the Framework, and the treat- ment adopted (d) The financial impact on each item in the financial statements of such a departure for each period presented6.1.6 Furthermore, in the extremely rare circumstances when management concludes that com-pliance with the requirements in a Standard or Interpretation would be so misleading that it wouldconflict with the IASB’s Framework but where the relevant regulatory framework prohibits suchdeparture, the entity shall, to the maximum extent possible, reduce the perceived misleading as-pects of compliance by disclosing: the title of the Standard or Interpretation in question, the natureof the requirement, and the reason why management has concluded that complying with that re-quirement is so misleading that it conflicts with the IASB’s Framework, and, for each period pre-sented, the adjustments to each item in the financial statements that management has concludedwould be necessary to achieve a fair presentation.6.2 Going ConcernFinancial statements should be prepared on a going concern basis unless management intends toliquidate the entity or cease trading or has no realistic option but to do so. When upon assessment itbecomes evident that there are material uncertainties regarding the ability of the business to con-tinue as a going concern, those uncertainties should be disclosed. In the event that the financialstatements are not prepared on a going concern basis, that fact should be disclosed, together withthe basis on which they are prepared along with the reason for such a decision. In making the as-sessment about the going concern assumption, management takes into account all available infor-mation about the future, which is at least 12 months from the balance sheet date. Case Study 1 Facts XYZ Inc. is a manufacturer of televisions. The domestic market for electronic goods is currently not doing well, and therefore many entities in this business are switching to exports. As per the audited fi- nancial statements for the year ended December 31, 20XX, the entity had net losses of $2 million. At December 31, 20XX, its current assets aggregate to $20 million and the current liabilities aggregate to $25 million. Due to expected favorable changes in the government policies for the electronics industry, the entity is projecting profits in the coming years. Furthermore, the shareholders of the entity have ar- ranged alternative additional sources of finance for its expansion plans and to support its working needs in the next 12 months. Required Should XYZ Inc. prepare its financial statements under the going concern assumption? Solution The two factors that raise doubts about the entity’s ability to continue as a going concern are (1) The net loss for the year of $2 million
  26. 26. 16 Wiley IFRS: Practical Implementation Guide and Workbook (2) At the balance sheet date, the working capital deficiency (current liabilities of $25 million) ex- ceeds its current assets (of $20 million) by $5 million However, there are two mitigating factors: (1) The shareholders’ ability to arrange funding for the entity’s expansion and working capital needs (2) Projected future profitability due to expected favourable changes in government policies for the industry the entity is operating within Based on these sets of factors—both negative and positive (mitigating) factors—it may be possible for the management of the entity to argue that the going concern assumption is appropriate and that any other basis of preparation of financial statements would be unreasonable at the moment. However, if matters deteriorate further instead of improving, then in the future another detailed assessment would be needed to ascertain whether the going concern assumption is still valid.6.3 Accrual Basis of AccountingExcluding the cash flow statement, all other financial statements must be prepared on an accrualbasis, whereby assets and liabilities are recognized when they are receivable or payable rather thanwhen actually received or paid.6.4 Consistency of PresentationEntities are required to retain their presentation and classification of items in successive periodsunless an alternative would be more appropriate or if so required by a Standard.6.5 Materiality and AggregationEach material class of similar items shall be presented separately in the financial statements. Mate-rial items that are dissimilar in nature or function should be separately disclosed.6.6 OffsettingAssets and liabilities, income and expenses cannot be offset against each other unless required orpermitted by a Standard or an Interpretation. Measuring assets net of allowances, for instance, pre-senting receivables net of allowance for doubtful debts, is not offsetting. Furthermore, there aretransactions other than those that an entity undertakes in the ordinary course of business that do notgenerate “revenue” (as defined under IAS 18); instead they are incidental to the main revenue-generating activities. The results of these transactions are presented, when this presentation reflectsthe substance of the transaction or event, by netting any income with related expenses arising onthe same transactions. For instance, gains or losses on disposal of noncurrent assets are reported bydeducting from the proceeds on disposal the carrying amount of the assets and related selling ex-penses.6.7 Comparative Information6.7.1 Comparative information (including narrative disclosures) relating to the previous periodshould be reported alongside current period disclosure, unless otherwise required.6.7.2 In case there is a change in the presentation or classification of items in the financialstatements, the comparative information needs to be appropriately reclassified, unless it isimpracticable to do so.7. STRUCTURE AND CONTENT7.1 Identification of the Financial StatementsFinancial statements should be clearly identified from other information in the same publisheddocument (such as an annual report). Furthermore, the name of the entity, the period covered, pre-sentation currency, and so on also must be displayed prominently.7.2 Reporting PeriodFinancial statements should be presented at least annually. In all other cases, that is, when a periodshorter or longer than one year is used, the reason for using a different period and lack of totalcomparability with previous period information must be disclosed.
  27. 27. Chapter 3 / Presentation of Financial Statements (IAS 1) 177.3 Balance Sheet7.3.1 Current and noncurrent assets and liabilities should be classified separately on the face ofthe balance sheet except in circumstances when a liquidity-based presentation provides morereliable and relevant information.7.3.2 Current assets. A current asset is one that is likely to be realized within the normaloperating cycle or 12 months after balance sheet date, held for trading purposes, or is cash or cashequivalent. All other assets are noncurrent.7.3.3 Current liabilities. A current liability is one that is likely to be settled within the normaloperating cycle or 12 months after balance sheet date, held for trading purposes, or there is nounconditional right to defer settlement for at least 12 months after balance sheet date. All otherliabilities are noncurrent.7.3.4 The minimum line items that should be included in the balance sheet are (a) Property, plant, and equipment (b) Investment property (c) Intangible assets (d) Financial assets [excluding amounts shown under (e), (h), and (i)] (e) Investments accounted for using the equity method (f) Biological assets (g) Inventories (h) Trade and other receivables (i) Cash and cash equivalents (j) Trade and other payables (k) Provisions (l) Financial liabilities [excluding amounts shown under (j) and (k)] (m) Liabilities and assets for current tax (n) Deferred tax liabilities and deferred tax assets (o) Minority interest, presented within equity (p) Issued capital and reserves attributable to equity holders of the parent7.3.5 Deferred tax assets (liabilities) cannot be classified as current assets (liabilities). Additionalline items are disclosed only if disclosure is relevant for further insight. Subclassifications of lineitems are required to be disclosed in either the balance sheet or the notes. Other such disclosuresinclude • Numbers of shares authorized, issued and fully paid, and issued but not fully paid • Par value • Reconciliation of shares outstanding at the beginning and the end of the period • Description of rights, preferences, and restrictions • Treasury shares, including shares held by subsidiaries and associates • Shares reserved for issuance under options and contracts • Description of the nature and purpose of each reserve within owners’ equity • Nature and purpose of each reserveEquivalent information would be disclosed by entities without share capital.
  28. 28. 18 Wiley IFRS: Practical Implementation Guide and Workbook7.3.6 Extracts from Published Financial Statements BARLOWORLD, Annual Report 2006 Consolidated Balance Sheet at September 30 Notes 2006 2005* 2004* Rm Rm Rm ASSETS Noncurrent assets 14,289 14,158 13,990 Property, plant, and equipment 2 8,299 7,922 7,706 Goodwill 3 3,005 2,485 2,433 Intangible assets 4 323 260 242 Investment in associates and joint ventures 5 749 518 319 Finance lease receivables 6 566 1,495 1,631 Long-term financial assets 7 597 655 893 Deferred taxation assets 8 750 823 766 Current assets 21,365 14,465 13,831 Vehicle rental fleet 2 3,441 2,196 1,887 Inventories 9 5,907 4,793 5,103 Trade and other receivables 10 7,026 5,859 5,232 Taxation 17 38 47 Cash and cash equivalents 11 2,134 1,399 1,443 Assets classified as held for sale 12 2,840 180 199 Total assets 35,654 28,623 27,821 EQUITY AND LIABILITIES Capital and reserves Share capital and premium 13 327 1,397 1,209 Other reserves 14 3,461 1,462 1,807 Retained income 14 9,881 8,627 7,501 Interest of shareholders of Barloworld Limited 13,669 11,486 10,517 Minority interest 14 691 644 718 Interest of all shareholders 14,360 12,130 11,235 Noncurrent liabilities 7,920 7,761 7,540 Interest-bearing 15 5,475 5,410 4,871 Deferred taxation liabilities 8 870 905 795 Provisions 16 468 383 503 Other noninterest bearing 17 1,107 1,063 1,371 Current liabilities 13,374 8,732 9,046 Trade and other payables 18 6,663 5,163 5,246 Provisions 16 536 480 493 Taxation 705 457 468 Amounts due to bankers and short-term loans 19 4,409 2,632 2,839 Liabilities directly associated with assets classified as held for sale 12 1,061 -- -- Total equity and liabilities 35,654 28,623 27,821 * Restated: Refer to Note 33.7.4 Income Statement7.4.1 All items that qualify as income or expense should be included in the profit or loss calcula-tion for the period, unless stated otherwise. The minimum line items to be included in the incomestatement are • Revenue • Finance costs • Share of the profit or loss of associates and joint ventures accounted for using the equity method • The total of the posttax profit or loss of discontinued operations, post-tax gain or loss recog- nized on the disposal of the assets or disposal group(s) constituting the discontinued opera- tion • Tax expense • Profit or loss
  29. 29. Chapter 3 / Presentation of Financial Statements (IAS 1) 197.4.2 Additionally, the income statement should disclose the share of profit attributable to minor-ity interests and equity shareholders of the parent.7.4.3 Items cannot be presented as extraordinary in either the income statement or the notes.7.4.4 Material income and expense should be disclosed separately with their nature and amount.Analysis of expenses can be classified on the basis of their nature or function.7.4.5 The amount of total and per-share dividends distributable to equity holders should be dis-closed in the income statement, the statement of changes in equity, or the notes.7.4.6 Extracts from Published Financial Statements NOKIA, Annual Report 2006 Consolidated Profit and Loss Accounts, IFRS Notes 2006 2005 2004 Financial year ended December 31 EURm EURm EURm Net sales 41,121 34,191 29,371 Cost of sales (27,742) (22,209) (18,179) Gross profit 13,379 11,982 11,192 Research and development expenses (3,897) (3,825) (3,776) Selling and marketing expenses 6 (3,314) (2,961) (2,564) Administrative and general expenses (666) (609) (611) Other income 7 522 285 343 Other expenses 7&8 (536) (233) (162) Amortization of goodwill 10 -- -- (96) Operating profit 2-10 5,488 4,639 4,326 Share of results of associated companies 15&33 28 10 (26) Financial income and expenses 11 207 322 405 Profit before tax 5,723 4,971 4,705 Tax 12 (1,357) (1,281) (1,446) Profit before minority interests 4,366 3,690 3,259 Minority interests 60) (74) (67) Profit attributable to equity holders of the parent 4,306 3,616 3,192 Earnings per share (for profit attributable to the equity holders of the parent) 30 Basic 1.06 0.83 0.69 Diluted 1.05 0.83 0.69 Average number of shares (1,000 shares) 30 Basic 4,062,833 4,365,547 4,593,196 Diluted 4,086,529 4,371,239 4,600,337 See notes to consolidated financial statements.7.5 Statement of Changes in Equity7.5.1 The entity is required to present a statement of changes in equity consisting of • Profit or loss for the period • Each item of income and expense for the period that is recognized directly in equity, and the total of those items • Total income and expense for the period, showing separately the total amounts attributable to equity holders of the parent and to minority interest • For each component of equity, the effects of changes in accounting policies and corrections of errors7.5.2 These amounts also may be presented either in the preceding statement or in the notes: • Capital transactions with owners • The balance of accumulated profits at the beginning and at the end of the period, and the movements for the period • A reconciliation between the carrying amount of each class of equity capital and each reserve at the beginning and end of the period, disclosing each movement