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![What is IFRS?
IFRS: International Financial Reporting Standards
single-set of high quality
globally accepted and enforced set of standards that
require
high quality, transparent and Comparable information in
financial statements
IFRSs are Issued by IASB [International Accounting
Standards Board]
IFRS
Standards that require Measurement, Recognition,
Presentation and Disclosure
3](https://image.slidesharecdn.com/aintconceptualframeworkfinal-210322071120/85/A-int-amp-conceptual-framework-final-3-320.jpg)
![13
Authoritative Pronouncements
IFRS the Full Version
sets out recognition, measurement, presentation and disclosure
requirements for general purpose financial statements of profit seeking
entities
Intended to Public Interest Entities and include:
Conceptual Framework for Financial Reporting: Not a standard.
IFRS 1-16=16 Standards [Issued by IASB from 2001]
IAS 1-41=24 Standards [Issued by IASC 1973-2001]
Both are IFRSs. Effective from January 2016 up to now there
are 40 standards.
IFRIC: IFRS Interpretation Committee’s interpretations. IFRIC 1-
21=21
SIC: IFRC Standing Interpretation Committee interpretations:
SIC 7-32=10 SICs](https://image.slidesharecdn.com/aintconceptualframeworkfinal-210322071120/85/A-int-amp-conceptual-framework-final-13-320.jpg)
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A int & conceptual framework final
- 1. Introduction to IFRS and ConceptualFramework
- 2. Overview IFRS Basics:Concepts, Principles and Rules Purpose, structure, scope and use of IFRS IASB: The Standard Setting Process Authoritative IFRS pronouncements: Books Financial Reporting proclamation and Regulation AABE and its road map Similarities and Differences between IFRS and Previous GAAP Benefits and Challenges of IFRS 2
- 3. What is IFRS? IFRS: International Financial Reporting Standards single-set of high quality globally accepted and enforced set of standards that require high quality, transparent and Comparable information in financial statements IFRSs are Issued by IASB [International Accounting Standards Board] IFRS Standards that require Measurement, Recognition, Presentation and Disclosure 3
- 4. 4 Framework Based: Concepts, Principlesand Rules Principles Rules Concepts • Conceptual Framework establish the concepts • Principles relates IFRS requirements to the concepts in the Conceptual Framework • Rules justify reasons why some IFRS requirements do not maximize those concepts (e.g. application of the cost constraint)
- 5. Purpose, Structure, Scopeand Use of IFRS IFRS guide the preparation of General Purpose Financial Reports General purpose financial reporting aims to provide useful financial information about the reporting entity to primary users who cannot require the reporting entity to provide information directly to them. Special purpose financial reporting responds to the requirements of users that have the authority to require the reporting entity to provide the information that they need for their purposes directly to them. Examples include: prudential regulation reporting requirements tax reporting requirements 5
- 6. Why IFRS? Global IFRS Primary Users are Investors and Creditors Capital providers are now playing at a global market National standards don’t work on a global market Cross boarder business is hindered by national standards Local There were no national standards Nor there were officially adopted standards GAAP was not defined US GAAP but not updated 6
- 7. 7 7 IASB: The StandardSetting Process • IFRS is a single set of accounting standards developed and maintained by the IASB • (Superseded IASC 2001 onwards), • a standard setting body of the IFRS Foundation • a public interest organization. • IASB is based in London
- 8. 8 8 The IASB’s Objective develop,in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting Standards. require high quality, transparent and comparable information in financial statements
- 9.
- 10. 10 10 Authoritative Pronouncements IFRS Versions:There are 2 1. Full International Financial Reporting Standards: Full IFRS 2. IFRS for SMEs: International Financial Reporting Standards for Small and Medium Sized Entities.
- 11. IASB Books IASB publishesIFRS in 3 books every year Red Book Blue Book Green Book Each book is published as 2 books 11
- 12.
- 13. 13 Authoritative Pronouncements IFRSthe Full Version sets out recognition, measurement, presentation and disclosure requirements for general purpose financial statements of profit seeking entities Intended to Public Interest Entities and include: Conceptual Framework for Financial Reporting: Not a standard. IFRS 1-16=16 Standards [Issued by IASB from 2001] IAS 1-41=24 Standards [Issued by IASC 1973-2001] Both are IFRSs. Effective from January 2016 up to now there are 40 standards. IFRIC: IFRS Interpretation Committee’s interpretations. IFRIC 1- 21=21 SIC: IFRC Standing Interpretation Committee interpretations: SIC 7-32=10 SICs
- 14.
- 15. 15 15 Authoritative Pronouncements IFRSfor SMEs Version Intended to SMEs, private entities or entities with no public accountability. Based on full IFRS with modifications Relevance, Appropriateness or need Cost-benefit considerations How small is small? Nature vs Quantity Threshold Only 1 standard with 35 sections
- 16. 16 16 LIST OF IFRSs StandardStandard Name Effective Date IFRS 1 First-time Adoption of International Financial Reporting Standards 1 July 2009 IFRS 2 Share-based Payment 1 January 2005 IFRS 3 Business Combinations 1 July 2009 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 1 January 2005 IFRS 6 Exploration for and Evaluation of Mineral Resources 1 January 2006 IFRS 7 Financial Instruments - Disclosures 1 January 2007 IFRS 8 Operating Segments 1 January 2009 IFRS 9 Financial Instruments 1 January 2015 IFRS 10 Consolidated Financial Statements 1 January 2013 IFRS 11 Joint Arrangements 1 January 2013 IFRS 12 Disclosure of Interests in Other Entities 1 January 2013 IFRS 13 Fair Value Measurement 1 January 2013 IFRS 14 Regulatory Deferral Accounts 1 January 2016 IFRS 15 Revenue from Contracts with Customers 1 January 2018 IFRS 16 Leases 1 January 2019 IFRS 17 Insurance Contract 1 January 2020
- 17. 17 17 LIST OF IFRSs StandardStandard Name Effective Date IAS 1 Presentation of Financial Statements 1 January 2005 IAS 2 Inventories 1 January 2005 IAS 7 Statement of Cash Flows 1 January 1994 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 1 January 2005 IAS 10 Events After the Reporting Period 1 January 2005 IAS 12 Income Taxes 1 January 1998 IAS 16 Property, Plant and Equipment 1 January 2005 IAS 17 Leases 1 January 2005 IAS 19* Employee Benefits 1 January 2013 IAS 20 Accounting for Government Grants and Disclosure of Government Assistance 1 January 1984 IAS 21 The Effects of Changes in Foreign Exchange Rates 1 January 2005 IAS 23 Borrowing Costs 1 January 2009 IAS 24 Related Party Disclosures 1 January 2011
- 18. 18 LIST OF IFRSs StandardStandard Name Effective Date IAS 26 Accounting and Reporting by Retirement Benefit Plans 1 January 1988 IAS 27* Separate Financial Statements 1 January 2013 IAS 28 * Investments in Associates and Joint Ventures 1 January 2013 IAS 29 Financial Reporting in Hyperinflationary Economies 1 January 2007 IAS 32 Financial Instruments - Presentation 1 January 2005 IAS 33 Earnings per Share 1 January 2005 IAS 34 Interim Financial Reporting 1 January 1999 IAS 36 Impairment of Assets 1 January 2004 IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1 January 1999 IAS 38 Intangible Assets 31 March 2004 IAS 40 Investment Property 1 January 2005 IAS 41 Agriculture 1 January 2003
- 19. Ethiopia issued afinancial reporting law on December 5, 2014 which requires the use of IFRS by commercial businesses operating in Ethiopia. Proclamation No. 847/2014 Regulation No. 332/2014 19 Financial Reporting Proclamation and Regulation
- 20. The proclamation requires: Commercialorganizations to follow International Financial Reporting Standards (IFRS), or International Financial Reporting Standards for Small and Medium Enterprises (IFRS for SME) Charities and societies to follow International Public Sector Accounting Standards (IPSAS) Auditors to follow International Standards for Auditing. 20 Financial Reporting Proclamation and Regulation
- 21. Public interest entity(PIE) should use the full IFRS. A PIE is a reporting entity that is of significant public relevance because of the nature of its business, its size, its number of employees. PIE also includes banks, insurance companies, and any other financial institutions and public enterprises. 21 Financial Reporting Proclamation and Regulation
- 22. Structure, strategic plan,and roadmap of AABE Accounting and Auditing Board of Ethiopia is established by Regulation No. 332/2014 It is an autonomous government organ accountable to MOFEC. It is headed by the Director General It has 12-member Board of Directors 22
- 23. AABE duties Issuestandards and directives relating to financial reporting and auditing and ensure their compliance. Receive and register financial statements of reporting entities Review and monitor the accuracy and fairness of FS to enforce compliance with the reporting standards Register and license Auditors and Accountants Accreditation for Professional Association 23
- 24. Oversee professionalaccountancy bodies Establish, publish and review a code of professional conduct and ethics for certified public accountants and certified auditors Conduct or arrange for the conduct of professional examination for the purpose of registering certified public accountants 24 AABE duties Cont.
- 25.
- 26. Date What isexpected July 7, 2018 Mandatory reporting by financial institutions and large public enterprises Adoption of IFRS by PIE (other than financial institutions and large public enterprises) and IPSAS by Charities and Societies. July 7, 2019 PIE (other than financial institutions and large public enterprises) and IPSAS by Charities and Societies issue IFRS and IPSAs based financial statements respectively July 7, 2020 Small and Medium-sized Entities in Ethiopia issue IFRS based financial statements 26
- 27. Similarities and Difference betweenIFRS and US GAAP FASB and the IASB has been working to harmonize and converge the content of IFRS and U.S. GAAP. 27 Unsuccessful Projects leases, Insurance, Financial instruments, Conceptual framework Successful Convergence Projects share-based payments, segment reporting, business combinations, consolidated financial statements, fair value measurement, joint arrangements, investment entities, and revenue
- 28. Continued Inventory costingmethod US GAAP allows LIFO method IFRS doesn’t allow LIFO method Reversal of inventory write-downs US GAAP doesn’t allow IFRS allows Valuation of property, plant, and equipment U.S.GAAP: Cost less accumulated depreciation IFRS: Cost less accumulated depreciation (or) fair value(revaluation) 28
- 29. Continued Valuation ofintangible assets U.S GAAP: Cost less accumulated amortization. Revaluation prohibited IFRS: Cost less accumulated amortization (or) fair value(revaluation) Research and development expenditures U.S GAAP: Expensed in the period incurred IFRS: Research: expensed in the period incurred Development: that meet specified criteria: capitalized 29
- 30. Continued Contingencies U.S.GAAP: accrue if it is probable and can be reasonably estimated. GAAP defines probable as “likely to occur” (a higher threshold of occurrence than under IFRS) IFRS: threshold for “probable” is defined as “more likely than not” (greater than 50%) Valuation of long-term contingencies U.S.GAAP: present value—only when timing of cash flows is certain IFRS: present value—time value of money is material 30
- 31. Treatment of convertibledebt U.S. GAAP: entire issue price is recorded as a liability IFRS: convertible debt is divided into its liability (bonds) and equity (conversion option) elements 31
- 32. Benefits of IFRS Credibility of local market to foreign investors More cross-border investment Efficient capital allocation Comparability across political boundaries Facilitates global education and training 32
- 33. Benefit of IFRSto companies! Lower cost of capital Facilitates raising capital abroad Integrated IT systems One set of books + easier consolidation Better understanding of financial statements from business partners abroad 33
- 34. Challenges of IFRSAdoption Graduates were trained in GAAP than IFRS. Shortage of well trained Professionals. Absence of Valuation experts in ascertaining fair values Absence of Structured Markets Lack of Institutional vehicles that guide through Implementation Cost of Implementation 34
- 35. Conceptual Framework for FinancialReporting
- 36. 36 Conceptual Framework provides… acohesive understanding of IFRSs Framework facilitates consistent and logical formulation of IFRSs a basis for judgement in applying IFRSs Framework established the concepts that underlie the estimates, judgments and models on which IFRS financial statements are based a basis for continuously updating IFRS knowledge and IFRS competencies
- 37. Conceptual Framework Conceptsunderlying general purpose financial information Framework sets out agreed concepts that underlie IFRS financial reporting the objective of general purpose financial reporting qualitative characteristics elements of financial statements recognition measurement presentation and disclosure Other concepts all flow from the objective 37
- 38. 38 Objective of financial reporting “Providefinancial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.” Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans or other forms of credit
- 39. 39 Objective of financial reporting Primary users provide resources, but cannot demand information common information needs Assess the prospects for future net cash inflows buy, sell, hold efficient and effective use of resources
- 40. 40 Fundamental qualitative characteristics Relevance predictive value confirmatory value materiality, entity-specific Faithful representation (replaces reliability) completeness neutrality free from error
- 41.
- 42. 42 Example 1: errors andchanges in policies and estimates Objective Concepts including qualitative characteristics faithful representation comparability Rules impracticable exception specified disclosures
- 43. 43 Pervasive constraint Cost It isconsistent with the Framework for an IFRS requirement not to maximise the qualitative characteristics of financial information when the costs of doing so would exceed the benefits.
- 44. Example 2: Transitionalprovisions new or amended IFRSs The concepts = objective and qualitative characteristics, particularly comparability The principle = retrospective application of new accounting policy The rule = transitional provisions for new and amended IFRSs application of the cost constraint 44
- 45. 45 Elements Asset resource controlledby the entity result of past event expected inflow of economic benefits Liability present obligation arising from past event expected outflow of economic benefits Equity = assets less liabilities Income recognised increase in asset/decrease in liability in current reporting period that result in increased equity except… Expense recognised decrease in asset/increase in liability in current reporting period that result in decreased equity except…
- 46. Identifying an entity’s assets Whatdo you think? Is the public road to its factory an asset of the manufacturer? Are Ethiopian wolves an asset of a Bale Mountains National Park-based photographic safari operator? Are the hived bees assets of a Robe-based honey farmer? Is an unpatented but secret formula for a premium product an asset of the knowing entity? 46
- 47. Identifying an entity’s assets Whatdo you think? Are Ethiopian coffee brands an asset? Does your answer depend on whether the brand was internally generated, purchased or acquired in a business combination? Company A owns 60% of Company B; Company B owns 60% of Company C are the assets of Company C assets of Company B? are the assets of Company C assets of Company A? 47
- 48. 48 Financial position The concepts Information about the nature and amounts of an entity’s economic resources and claims against the reporting entity help users identify the reporting entity’s financial strengths and weaknesses (see OB12–OB14). help assess entity’s prospects for future cash flows, its liquidity and solvency, its needs for additional financing and how successful it is likely to be in obtaining financing. Definition of asset, liability and equity (4.4)
- 49. 49 Financial performance The concepts Financial performance during a period, reflected by changes in its economic resources and claims (other than by obtaining additional resources directly from investors and creditors), is useful in assessing the entity’s past and future ability to generate net cash inflows (see OB18) Accrual basis of accounting (depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur (see ¶OB17)
- 50. 50 Example 3 Biological assetin agricultural activity The concepts: see the previous slide The principle: A gain or loss arising from a change in fair value less costs to sell of a biological asset shall be included in profit or loss for the period (IAS 41.26) The limited exception: inability at initial recognition to measure fair value reliably then cost-depreciation-impairment model (IAS 41.27)
- 51. 51 Measurement concepts Measurementis the process of determining monetary amounts at which elements are recognised and carried. (4.54) To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. The Framework establishes the concepts that underlie those estimates, judgements and models (OB11) IASB guided by objective and qualitative characteristics when specifying measurements.
- 52. 52 Measurement section of Framework Measurement section of Framework is weak―only lists some measurement methods used in practice: historical cost: cash paid or fair value of consideration given current cost: cash that would be paid if acquired now realisable (settlement) value: cash that could be obtained by selling the asset now present value: present discounted value of future net cash inflows that the item is expected to generate market value: listed but not described in Framework. For fair value see IFRS 13 Fair Value Measurements
- 53.
- 54. Judging relevance Applying IFRSrequires relevance judgements. For example when: Judging relevance requires primarily determining which alternative provides information that better enables primary users to make their own projections of the reporting entity’s future cash flows? 54
- 55. Judging relevance Applying IFRSrequires relevance judgements. For example when: Judging relevance requires primarily determining which alternative provides information that better enables primary users to make their own projections of the reporting entity’s future cash flows? 55
- 56. Judging relevance: example Day1: you pay $1,000,000 to construct a car manufacturing plant in Country A (A). Day 2: the market value of your plant quadruples when vast quantities of oil are unexpectedly discovered in A Day 3: your competitor builds a plant in A: cost = $4,000,000. 56
- 57. Judging relevance The costof each car that you build is: - $100 if you use the cost model; or - $300 if you use the revaluation model. The cost of your competitor’s cars = $300 each. Cars sell at $250 each in A. Question 1: for each car sold economically are you ‘making’ (1) $150 profit; or (2) $50 loss Question 2: which model provides more relevant information? (1) cost model; or (2) revaluation model 57
- 58. Comparability What do youthink? Which of the following measurements achieves greatest comparability? Choose 1 of: 1) cash accounting (no accruals; no remeasurements); 2) historical cost accounting (no depreciation; no impairment); 3) cost-impairment accounting (no depreciation); 4) cost-depreciation-impairment accounting; 5) fair value accounting (without some assets, e.g. brands); or 6) fair value accounting (with all assets). 58
- 59. 59 Recognition The concept: recogniseelement (eg asset) when probable that benefits will flow to/from the entity has cost or value that can measured reliably (see ¶4.38) The principle recognise elements (eg asset) when they satisfy the definition and recognition criteria (see ¶ IAS1.28) Applying the principle (see individual IFRSs) What does probable mean?
- 60. 60 De recognition ofassets • Derecognition of an asset refers to when an asset previously recognised by an entity is removed from the entity’s statement of financial position derecognition requirements are specified at the standards level. derecognition does not necessarily occur when the asset no longer satisfies the conditions specified for its initial recognition (i.e. derecognition does not necessarily coincide with the loss of control of the asset ) IASB guided by objective, qualitative characteristics and elements
- 61. Presentation and disclosure Presentation: financial statements portray financial effects of transactions and events by: grouping into broad classes (the elements, egg asset) sub-classify elements (egg assets sub-classified by their nature or function in the business) IAS 1 application of IFRSs with additional disclosures when necessary results in a fair presentation (faithful representation of transactions, events and conditions) do not offset assets & liabilities or income & expenses IASB guided by objective and qualitative characteristics 61
- 62. Underlying assumptions offinancial reporting: Going concern, and Accruals accounting 62
- 63. Common misunderstandings The Frameworkdoes NOT… Clarification—the Framework includes include a matching concept accrual basis of accounting— recognise elements when satisfy definition and recognition criteria include prudence/conservatism concept neutrality concept include an element other comprehensive income (or a concept for OCI) only the following elements—asset, liability, equity, income and expense 63
- 64. Common misunderstandings continued Misunderstanding Clarification Principlesare necessarily less rigorous than rules Rules are the tools of financial engineers There are few judgements and estimates in cost-based measurements Inventory, egg allocate joint costs and production overheads PP&E, egg costs to dismantle/restore site, useful life, residual value, depreciation method Provisions, egg uncertain timing and amount of expected future cash flows 64
- 65.
- 66.