business combination

1. Chapter 1: Introduction to accounting
standards and standard setting mechanism
1.1. Introduction
1.2. Harmonization and convergence
1.3. IASB framework and IFRS
1.4. Principles-based vs. rules-based accounting
1.5. Convergence of IAS and U.S. GAAP
1.6. Types of differences between IFRS and US GAAP

2. 1.1. Introduction
The primary objective of accounting is to provide information
that is useful in making good decisions, and as a result of
good decisions societal prosperity and welfare is maximized.
Accounting is sometimes called the “language of business.”

3. Why Is Accounting Important?
• Accounting is the information system that:
• Measures business activities
• Processes the information into reports
• Communicates the results to decision makers
1-3

4. Process
Accounting
Cycle
Input
Economic
Activities
Output
Financial
Information
Accounting
Accounting
Information system
Service activity
Analytical descriptive discipline
Financial performance
Financial position
Liquidity, etc
Demand for information
Supply of information

5. 1.2. Harmonization and convergence
Reasons for Accounting Diversity
Legal
System
Tax Regimes
Inflation
Culture
Financial
Providers
Political
and
Economic
Ties
All these interact!!!
11-5
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6. International Harmonization
“Harmonization”: Reducing differences in accounting
practices across countries.
Harmonization efforts have been ongoing for decades, and
originally the International Accounting Standards
Committee (IASC) led the movement .
In 1987, the International Organization of Securities
Commissions (IOSCO) joined the effort.
Since 2001, the process has been led by the International
Accounting Standards Board (IASB)
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7. IFRS
The IFRS Foundation is a:
• not-for-profit,
• public interest organization
• established to develop a single set of:
high-quality,
understandable,
enforceable and
globally accepted accounting standards—IFRS
Standards—and
to promote and facilitate adoption of the
standards.

8. International Accounting Standards Board (IASB)
International Accounting Standards Committee
established in 1973
IASB superseded IASC in April 2001.
14-member board
(12 full-time, 2 part-time)
49 International Accounting Standards (IAS’s) and
International Financial Reporting Standards (IFRS’s)
issued as of July 2009.
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9. International Accounting Standards Board (IASB)
About the 14 Board Members…
• Technical competence is the most important selection criterion
• Required member backgrounds:
• At least five must have practiced auditing
• Three must have prepared financial statements
• Three must have been statement users
• One must be an academic
• Meetings of the IASB are held in public and by webcast.
• IASB engages with stakeholders around the world, including:
• Investors
• Analysts
• Regulators
• Business leaders
• Accounting standard-setters
• Accountancy profession
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10. International Financial Reporting Standards (IFRSs)
 In April 2001, the IASB adopted all of the IASs (issued by the IASC), and
announced that its standards would be called “International Financial
Reporting Standards” (IFRSs)
 The IASB has sole responsibility for establishing IFRSs (“IASB GAAP”)
 IASB has no enforcement authority!!
 All publicly traded companies in the EU have been required to use IFRSs
since January 1, 2005 when preparing their consolidated financial
statements
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11. 1.3. IASB Framework and IFRS
The Conceptual Framework of Financial Reporting
Conceptual Framework sets out the concepts that underlie
IFRS financial statements
• It comprises of:
a) The objective of general purpose financial reporting
b) Qualitative characteristics
c) Elements of financial statements
d) Recognition
e) Measurement
f) Presentation and disclosure
• Other concepts all flow from the objective
11

12. Purpose of the Conceptual Framework
• To assist IASB in setting and revising standards
• To assist preparers to make the judgements that are necessary
to apply IFRSs
• To assist auditors and regulators assess judgments of preparers
• To assist users to consider those judgments when using IFRS
financial information to inform their decisions
• To assist in understanding of standard-setting by IFRS
• To reduce conflicts between Framework and Standards
12

13. a) Objective of financial reporting
• Objective: Provide financial information about the reporting entity
that is useful to
►present and potential equity investors,
►lenders, and
►other creditors
• in making decisions about providing resources to the entity.
• Note: other aspects of the Conceptual Framework flow logically from
the objective (Conceptual Framework Objective 1)
• Conceptual Framework sets out the concepts that underlie financial
statements.
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14. Objective of General Purpose Financial Reporting
• To provide information about
 Economic resources and claims (SFP)
 Changes in economic resources and claims (SPLOCI)
 Financial performance reflected by past cash flows
(SCF)
 Changes in economic resources and claims not
resulting from financial performance (SCE)
14

15. b) Qualitative Characteristics of Useful Financial Information
• Fundamental
 Relevance
 Faithful representation
• Enhancing
 Comparability
 Verifiability
 Timeliness
 Understandability
15

16. • Relevance: Capable of making a difference in users’ decisions
predictive value
confirmatory value
materiality (entity-specific).
• Faithful representation: Faithfully represents the phenomena
it purports to represent
completeness (depiction including numbers and words)
neutrality (unbiased)
free from error (ideally)
16
Qualitative Characteristics of Useful Financial Information

17. • Comparability: like things look alike; different things look
different.
• Verifiability: knowledgeable and independent observers could
reach consensus, but not necessarily complete agreement, that
a depiction is a faithful representation.
• Timeliness: having information available to decision-makers in
time to be capable of influencing their decisions.
• Understandability: Classify, characterize, and present
information clearly and concisely.
17
Qualitative Characteristics of Useful Financial Information

18. 18
Qualitative Characteristics of Useful Financial Information

19. c) Elements of Financial Statements
Asset
• resource controlled by the
entity
• result of past event
• expected inflow of economic
benefits
Liability
• present obligation
• arising from past event
• expected outflow of economic
benefits
Equity = assets less liabilities
Income
• recognised increase in
asset/decrease in liability in
current reporting period
• that result in increased equity
except contributions from
owners
Expense
• recognised decrease in
asset/increase in liability in
current reporting period
• that result in decreased equity
except distributions to owners
19

20. d) Recognition
1.Year end procedures
2.Routine procedures for transactions and events
• The actual recording (journalizing) of a transaction or event
• Recognise element when:
1. The element satisfies definition
2. meets the recognition criteria
• probable that benefits will flow to/from the entity
• has cost or value that can be measured reliably
• Element will be derecognized when it fails to satisfy the definition
and recognition criteria above:
• Complete elimination from books
• Reclassification adjustments
20

21. • What does probable mean?
It means “more likely than not”
The meaning of probable is determined at the standards level.
Therefore, inconsistent use across IFRSs (usually more than
50%).
• What does measure reliably mean?
 To a large extent, financial reports are based on estimates,
judgements and models rather than exact depictions.
21

22. e)Measurement
• Measurement is the process of determining monetary amounts at which
elements are:
• Recognised (Initial Measurement) and
• Carried (Subsequent Measurement)
• To a large extent, financial reports are based on estimates, judgements
and models rather than exact depictions.
22

23. Measurement methods include
• 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.
• Fair value: the price that would received from sale of an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
23

24. Disclosure
• Means giving detail about specific transactions or events that are
either:
• already recognized in the FS; or
• not recognized in the financial statements but yet are considered material
• Disclosure:
• On the face of Financial Statements
• In the notes to Financial Statements
24

25. Underlying assumptions of financial reporting:
 Going concern, and
 Accruals accounting
25
Underlying Assumptions

26. Overview of IFRS
What is IFRS?
 IFRS: International Financial Reporting Standards:
◦ Are single-set of high quality
◦ Are Globally accepted and Enforced set of standards that require
◦ Aim at high quality, transparent and Comparable Information in
Financial Statements
◦ Are issued by IASB [International Accounting Standards Board]
• Those Standards prescribe:
the items that should be recognized as assets, liabilities, income and
expense
how to measure those items;
how to present them in a set of financial statements; and
related disclosures about those items.
26

27. Overview of IFRS
• IFRS Standards are set by the IFRS Foundation’s standard-setting body,
the International Accounting Standards Board.
• High quality, financial information is the lifeblood of capital markets.
• Our mission statement
Our mission is to bring:
• transparency,
• accountability and
• efficiency
to financial markets around the world by developing IFRS Standards.
Our work serves the public interest by fostering trust, growth and long-
term financial stability in the global economy.

28. Overview of IFRS
• IFRS Standards bring transparency:
• by enhancing the international comparability and
• quality of financial information,
• enabling investors and other market participants to make informed
economic decisions.
• IFRS Standards strengthen accountability:
• by reducing the information gap between the providers of capital and the
people to whom they have entrusted their money.
• Our Standards provide information needed to hold management to account.
• As a source of globally comparable information, IFRS Standards are also
of vital importance to regulators around the world.

29. Overview of IFRS
 IFRS Standards contribute to economic efficiency
• by helping investors to identify opportunities and risks across
the world,
• thus improving capital allocation
• For businesses, the use of a single, trusted accounting
language lowers the cost of capital and reduces international
reporting costs.

30. 30
List of Applicable IFRS

31. IFRS Comprises
International Accounting Standards (IAS)
-24
International Financial Reporting
Standards (IFRS)-17
Standing Interpretations Committee
(SIC)- 5
International Financial Reporting
Interpretations Committee (IFRIC)- 13

32. 1) IAS 1: Presentation of Financial Statements
2) IAS 2: Inventories
3) IAS 7: Statement of Cash Flows
4) IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
5) IAS 10: Events after the Reporting Period
6) IAS 11: Construction Contracts (have been superseded by IFRS 15 as of
1 January 2018)
7) IAS 12: Income Taxes
8) IAS 16: Property, Plant and Equipment
32
International Accounting Standards (IAS)

33. 9) IAS 17: Leases (has been superseded by IFRS 16 as of 1 January 2019)
10)IAS 18: Revenue (has been superseded by IFRS 15 as of 1 January 2018)
11)IAS 19: Employee Benefits
12)IAS 20: Accounting for Government Grants and Disclosure of
Government Assistance
13)IAS 21: The Effects of Changes in Foreign Exchange Rates
14)IAS 23: Borrowing Costs
15)IAS 24: Related Party Disclosures
16)IAS 26: Accounting and Reporting by Retirement Benefit Plans
17)IAS 27: Separate Financial Statements
33
International Accounting Standards (IAS)

34. 18)IAS 28: Investments in Associates and Joint Ventures
19)IAS 29: Financial Reporting in Hyperinflationary Economies
20)IAS 32: Financial Instruments: Presentation
21)IAS 33: Earnings per Share
22)IAS 34: Interim Financial Reporting
23)IAS 36: Impairment of Assets
34
International Accounting Standards (IAS)

35. 24)IAS 37: Provisions, Contingent Liabilities and Contingent Assets
25)IAS 38: Intangible Assets
26)IAS 39: Financial Instruments: Recognition and Measurement (has
been superseded by IFRS 9 as of 1 January 2018)
27)IAS 40: Investment Property
28)IAS 41: Agriculture
 IAS 11, 17, 18 and 39 have been replaced by IFRS 15, 16, 15 and 9
respectively.
35
International Accounting Standards (IAS)

36. 1) IFRS 1: First-time Adoption of International Financial Reporting Standards
2) IFRS 2: Share-based Payment
3) IFRS 3: Business Combinations
4) IFRS 4: Insurance Contracts (has been superseded by IFRS 17 as of 1
January 2021)
5) IFRS 5: Non-current Assets Held for Sale and Discontinued Operations
6) IFRS 6: Exploration for and Evaluation of Mineral Resources
7) IFRS 7: Financial Instruments: Disclosures
8) IFRS 8: Operating Segments
9) IFRS 9: Financial Instruments (will replace IAS 39 as of 1 January 2018)
36
International Financial Reporting Standards

37. 10) IFRS 10: Consolidated Financial Statements
11) IFRS 11: Joint Arrangements
12) IFRS 12: Disclosure of Interests in Other Entities
13) IFRS 13: Fair Value Measurement
14) IFRS 14: Regulatory Deferral Accounts
15) IFRS 15: Revenue from Contracts with Customers (will replace IAS 11 and IAS 18 as of
1 January 2018)
16) IFRS 16: Leases (replaces IAS 17 as of January 1, 2019)
17) IFRS 17: Insurance Contracts (replaces IFRS 4 as of January 1, 2021)
37
International Financial Reporting Standards

38. 1) IFRIC 1: Changes in Existing Decommissioning, Restoration and Similar
Liabilities
2) IFRIC 2: Members’ Shares in Co-operative Entities and Similar
Instruments
3) IFRIC 4: Determining whether an Arrangement contains a Lease (has
been superseded by IFRS 16 as of 1 January 2019)
4) IFRIC 5: Rights to Interests arising from Decommissioning, Restoration
and Environmental Rehabilitation Funds.
5) IFRIC 6: Liabilities arising from Participation in a Specific Market –
Waste Electrical and Electronic Equipment.
6) IFRIC 7: Applying the Restatement Approach under IAS 29 Financial
Reporting in Hyperinflationary Economies
38
IFRS Interpretations Committee Interpretations (IFRIC)

39. 7) IFRIC 9: Reassessment of Embedded Derivatives
8) IFRIC 10: Interim Financial Reporting and Impairment
9) IFRIC 12: Service Concession Arrangements
10) IFRIC 13: Customer Loyalty Programmes (has been superseded by
IFRS 15 as of 1 January 2018)
11) IFRIC 14: IAS 19 – The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction
12) IFRIC 15: Agreements for the Construction of Real Estate (has been
superseded by IFRS 15 as of 1 January 2018)
39
IFRS Interpretations Committee Interpretations (IFRIC)

40. 13)IFRIC 16: Hedges of a Net Investment in a Foreign Operation
14)IFRIC 17: Distributions of Non-cash Assets to Owners
15)IFRIC 18: Transfer of Assets from Customers (has been superseded by
IFRS 15 as of 1 January 2018)
16)IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments
17)IFRIC 20: Stripping Costs in the Production Phase of a Surface Mine
18)IFRIC 21: Levies
40
IFRS Interpretations Committee Interpretations (IFRIC)

41. 1) SIC-7: Introduction of the Euro
2) SIC-10: Government Assistance – No Specific Relation to Operating Activities
3) SIC-15: Operating Leases – Incentives (has been superseded by IFRS 16 as of
1 January 2019)
4) SIC-25: Income Taxes – Changes in the Tax Status of an Entity or its
Shareholders
5) SIC-27: Evaluating the Substance of Transactions Involving the Legal Form of
a Lease (has been superseded by IFRS 16 as of 1 January 2019)
41
Standing Interpretations Committee Interpretations (SIC)

42. 6) SIC-29: Service Concession Arrangements: Disclosures
7) SIC-31: Revenue – Barter Transactions Involving Advertising Services
(has been superseded by IFRS 15 as of 1 January 2018)
8) SIC-32: Intangible Assets – Web Site Costs
42
Standing Interpretations Committee Interpretations (SIC)

43. 1.4. Principles-Based vs. Rules-Based Accounting
Standards
IFRS are referred to as being principles-based standards
• Provide core principles (objectives) with minimum guidance.
• Results in accounting that is more flexible to deal with unique
economic and business circumstances
• The judgments are expected to be consistent with clear conceptual
framework
• They are more loosely framed, allowing for professional judgment to
be applied
• Some argue that allowing professional judgment introduces bias
43

44. US GAAP are referred to as being rules-based standards:
• They are more prescriptive
• Provide a rule for every situation
• Body of knowledge too large and complicated
• Although more guidance is a comfort to some, it becomes difficult to
ensure that the standards are all consistent.
• More on the difference between IFRS and US GAAP later
44
Principles-Based vs. Rules-Based Standards

45. Approaches to Making Standard for GPFRs
Rules-Based vs. Principles-Based Comparison Summary
Attribute Rules-Based
Standards
Principles-Based
Standards
Conceptual
framework
Less reliance More reliance
Professional judgment Less reliance More reliance
Level of detailed
guidance
More Less
Amount of industry
specific guidance
Extensive Little

46. 1.5. Convergence of IAS and U.S. GAAP
Norwalk Agreement: FASB-IASB Convergence
In Norwalk, Connecticut, a joint meeting of FASB and IASB was held in
September 2002.
The “Norwalk Agreement” states that the two bodies will “use their best
efforts” to:
• Make existing financial reporting standards compatible “as soon as is
practicable” and
• Coordinate efforts to “ensure that once achieved, compatibility is
maintained”
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47. FASB-IASB Convergence
FASB initiatives include
• Short-term convergence project
• Joint projects
• Longer-term convergence research
• Liaison IASB member at FASB offices
• Monitoring of IASB projects
• Explicit consideration of convergence potential in FASB agenda
decisions
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48. FASB’s Short-term Convergence Project
Intended to remove individual accounting differences between IFRSs and
US GAAP that are not covered in broader projects and “for which a high
quality solution appears to be achievable in a short period of time.”
 US GAAP has changed in several ways over the past few years as a
result of this project.
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49. FASB-IASB Joint Projects
Business Combinations
• Establishing common procedures
Financial Statement Presentation
• Changing the format of the statements to enhance usefulness to the reader
Revenue Recognition
• Establish a single standard
Common Conceptual Framework
• To use as a basis for future standards
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50. Harmonization and Convergence
Status of IFRSs use around the world
• Since 2001, over 120 countries have required or permitted the use of
IFRSs.
• Remaining major economies have time lines to converge with or adopt
IFRSs in the near future.
• Next wave of new joiners in 2011/2012: Argentina, Canada, Mexico,
South Korea, etc
• Japan: IFRS permitted for a number of international companies since
2010; decision about mandatory adoption around 2012.
4/17/2024 50

51. 1.6. Types of differences between IFRS and US
GAAP
• Great strides have been made by the FASB and the IASB to converge the
content of IFRS and U.S. GAAP.
• There is continued support for the objective of a single set of high-quality,
globally accepted accounting standards.
51

52. • Virtually Identical Standards
• share-based payments,
• segment reporting,
• business combinations,
• consolidated financial statements,
• fair value measurement,
• joint arrangements,
• investment entities, and
• revenue
52
IFRS Vs. US GAAP

53. • Unsuccessful Joint Projects
• leases,
• Insurance,
• Financial instruments,
• Conceptual framework
53
IFRS Vs. US GAAP

54. • Inventory costing method
US GAAP allows LIFO method
IFRS doesn’t allow LIFO method
• Reversal of inventory write-downs
 US GAAP doesn’t allow
 IFRS allows
• Valuation of property, plant, and equipment
 U.S.GAAP: Cost less accumulated depreciation
IFRS: Cost less accumulated depreciation (or) fair value(revaluation)
54
IFRS Vs. US GAAP

55. • Valuation of intangible assets
 U.S GAAP: Cost less accumulated amortization. Revaluation
prohibited
 IFRS: Cost less accumulated amortization (or) fair value(revaluation)
• Research and development expenditures
 U.S GAAP: Expensed in the period incurred
 IFRS:
 Research: expensed in the period incurred
 Development: that meet specified criteria: capitalized
55
IFRS Vs. US GAAP

56. • 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%)
56
IFRS Vs. US GAAP

57. End of the Chapter
Q & A