Day 1 s1 underlying ifrs concepts introduction and conceptual framework ia8 1 and i

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Outline
 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

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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

Framework Based: Concepts, Principles and
Rules
Principles RulesConcepts
• 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)
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Purpose, Structure, Scope and 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

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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

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IASB: The Standard Setting 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
• (Superseded the IASC Foundation
from 2010 onwards)-
• a public interest organization.
• IASB is based in London
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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
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Standards development process
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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.
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 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 SICs11

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 IFRS for SMEs Version
– Intended to SMEs, private entities or entities with
no public accountability.
– Based on full IFRS with modifications
 Relevance, Appropriateness or need
 Cost-benefit considerations
– How small is small?
 Nature vs Quantity Threshold
– Only 1 standard with 35 sections
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Ethiopia issued a financial reporting law on
December 5, 2014 which requires the use of
IFRS by commercial businesses operating in
Ethiopia.
 Proclamation No. 847/2014
 Regulation No. 332/2014
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Financial Reporting Proclamation and
Regulation

The proclamation requires:
 Commercial organizations to follow
 International Financial Reporting Standards
(IFRS), or
 International Financial Reporting Standards
for Small and Medium Enterprises (IFRS for
SME)
 Charities and societies to follow International
Public Sector Accounting Standards (IPSAS)
 Public auditors to follow International Standards
for Auditing.15
Regulation

 Public interest entity (PIE) should use the full IFRS.
 A PIE is a reporting entity that is of significant
public relevance because of the nature of its
business, its size, its number of employees.
 PIE also includes banks, insurance companies, and
any other financial institutions and public
enterprises.
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Regulation

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
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AABE duties
 Issue standards and directives relating to financial
reporting and auditing and ensure their
compliance.
 Receive and register financial statements of
reporting entities
 Review and monitor the accuracy and fairness of
FS to enforce compliance with the reporting
standards
 Register and license public auditors
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 Oversee professional accountancy bodies
 Establish, publish and review a code of
professional conduct and ethics for certified
public accountants and certified auditors
 Conduct or arrange for the conduct of
professional examination for the purpose of
registering certified public accountants
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Date What is expected
July 7, 2017  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, 2018 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, 2019 Small and Medium-sized Entities in Ethiopia issue
IFRS based financial statements
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Conceptual Framework for
Financial Reporting

Conceptual Framework provides…
 a cohesive understanding of IFRSs
– Framework facilitates consistent and logical
formulation of IFRSs
 a basis for judgement in applying IFRSs
– Framework established the concepts that
underlie the estimates, judgments and models
on which IFRS financial statements are based
 a basis for continuously updating IFRS
knowledge and IFRS competencies
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Conceptual Framework
 Concepts underlying 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
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Objective of financial reporting
“Provide financial information about the
reporting entity that is useful to existing and
potential investors, lenders and other
creditors in making decisions about providing
resources to the entity.”
Those decisions involve buying, selling or holding
equity and debt instruments, and providing or
settling loans or other forms of credit
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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
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Fundamental qualitative
characteristics
 Relevance
– predictive value
– confirmatory value
– materiality, entity-specific
 Faithful representation (replaces reliability)
– completeness
– neutrality
– free from error
27

Enhancing qualitative
characteristics
 Comparability
 Verifiability
 Timeliness
 Understandability
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Elements
Asset
 resource controlled by
the entity
 result of past event
 expected inflow of
economic benefits
Liability
 present obligation
 arising from past event
 expected outflow of
economic benefits
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…
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Measurement concepts
 Measurement is the process of determining
monetary amounts at which elements are
recognised and carried. (¶4.54)
 To a large extent, financial reports are based on
estimates, judgements and models rather than
exact depictions. The Framework establishes
the concepts that underlie those estimates,
judgements and models (¶OB11)
 IASB guided by objective and qualitative
characteristics when specifying measurements.
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Recognition
 The concept: recognise element (eg asset)
when
– probable that benefits will flow to/from the
entity
– has cost or value that can measured reliably
(see ¶4.38)
 The principle
– recognise elements (eg asset) when they
satisfy the definition and recognition criteria
(see ¶ IAS1.28)
 Applying the principle (see individual IFRSs)31

Underlying assumptions of financial reporting:
 Going concern, and
 Accruals accounting
32

Presentation of Financial
Statements: IAS 1

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Related Standards
 IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations
 IFRS 7 Financial Instruments: Disclosures
 IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors

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Purpose and Components of
Financial Statements
 Comparable statements more useful
 IAS 1 looks to enhance comparability
 Applies to general purpose financial
statements
– Meets the needs of most users
– “Financial statements are a structured
representation of the financial position and
financial performance of the entity.”

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IAS 1 - Overview
 Statement of financial position
 Statement of comprehensive income (this may be
augmented by a separate income statement)
 Statement of changes in equity
 Statement of cash flows
 Notes including significant accounting policies and
explanatory information
 Statement of financial position at the beginning of
the earliest comparative period when an entity
applies an accounting policy retrospectively or
makes a retrospective restatement

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Fair Presentation and Compliance
with IFRSs
 Should present fairly - faithful representation
 Entity must:
– select and apply appropriate accounting policies keeping in
mind the IAS 8 hierarchy,
– present the information such that it provides, relevant,
comparable and understandable information, and
– provide additional disclosures where necessary.
 Note disclosures are not a substitute for proper
accounting
 In an extremely rare situations we may depart from
IFRS: Fair Presentation Override

Going Concern and Accrual Based
Accounting
 Accrual basis
 Going concern assumed
 If not – new basis of accounting
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Materiality
 Omissions or misstatements of items are
material if they could, individually or
collectively, influence the economic decisions
of users taken on the basis of the financial
statements.
 Materiality depends on the size and nature of
the omission or misstatement judged in the
surrounding circumstances. The size or
nature of the item, or a combination of both,
could be the determining factor.

Presentation
 Identify what is included
 Must display the following
1. the name of the entity
2. whether the financial statements are
consolidated or not
3. the date of the balance sheet or period covered
4. the reporting currency and
5. the level of rounding (e.g. $000s)
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Frequency of reporting,
comparability and consistency
 At a minimum – annual statements
 Comparative required unless IFRS permits or
requires otherwise
 At least two statements and a third if
retrospective application or restatement
 Presentation and classification should
generally stay the same
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Statement of Financial Position
 Information to be Presented in the
Statement of Financial Position
– Sufficiently different
 Based on size, function, nature and liquidity, nature,
timing
 Different measurement bases
– Specific items to be presented separately
– May present relevant subcategories
– Details on share capital
42

Current Assets and Liabilities
 Segregate current versus non
 Order of liquidity
 Combined
 Amounts beyond 12 months
43

Current Assets
 An entity classifies assets as current assets
when:
(a) it expects to realize the asset, or intends to sell or consume it, in its
normal operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realize the asset within twelve months after the reporting
period; or
(d) the asset is cash or a cash equivalent (as defined in IAS 7) unless
the asset is restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting period.
44

Current Liabilities
 An entity classifies liabilities as current
liabilities when:
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Statement of Profit or Loss and Other
Comprehensive Income
(a) revenue;
(b) finance costs;
(c) share of the profit or loss of associates and joint ventures accounted for using
the equity method;
(d) tax expense;
(e) a single amount comprising the total of:
(i) the post-tax profit or loss of discontinued operations and
(ii) the post-tax gain or loss recognized on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operation;
(f) profit or loss;
(g) each component of other comprehensive income classified by nature (excluding
amounts in (h));
(h) share of other comprehensive income of associates and joint ventures
accounted for using the equity method; and
(i) total comprehensive income.
46

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Total comprehensive income
 …the change in equity during a period
resulting from transactions and other events,
other than those changes resulting from
transactions with owners in their capacity as
owners.
 includes all components of profit or loss and
of other comprehensive income as noted
above

48
Other Comprehensive Income
1. changes in the revaluation surplus for property,
plant and equipment and intangible assets,
2. certain actuarial gains/losses on defined benefit
plans,
3. gains/losses arising on translation of financial
statements of foreign operations,
4. gains/losses arising from remeasuring available for
sale securities and
5. gains/losses on cash flow hedges.
(IASCF, IAS 1.7)

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Presentation of Profit or Loss
 Nature of Expense presentation
Revenue X
Other income X
Changes in inventories of finished goods and work in progress X
Raw materials and consumables used X
Employee benefits expense X
Depreciation and amortization expense X
Other expenses X
Total expenses (X)
Profit before tax X

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 Function of Expense presentation:
Presentation of Profit or Loss

Statement of Changes in Equity
 This statement presents the following:
1. total comprehensive income
2. for each component of equity, the effects of
retrospective application/restatement
3. reconciliation between the carrying amount
of each component of equity at the
beginning and end of the period.
51

 Notes:
– augment the basic statements
– include information about the way they have been
prepared
– provide additional descriptive and supportive
information
– should be cross-referenced
– accounting policies
– key sources of estimation uncertainty
– nature and structure of an entity’s capital and how
it is managed52

Samples of and Excerpts from
Selected Statements
53

Samples of and Excerpts from
Selected Statements
54

55
Statement of Comprehensive Income

56

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Related Standards
 IAS 1 Presentation of financial statements

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IAS 7 - Overview
 Objective and scope
 Cash flows
 Reporting operating cash flows
 Reporting investing cash flows
 Reporting financing cash flows
 Specific items
 Disclosures

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IAS 7 – Objective and Scope
 IAS 7 objective: to provide a statement to
help investors assess the prospects for future
cash flows, and to confirm or change their
past expectations
 Statement provides historical information on
the entity’s operating, investing and financing
cash flows and how its cash balances have
changed in the period as a result

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IAS 7 – Cash Flows
 Cash and cash equivalents:
Cash on hand and on deposit and “short-
term, highly liquid investments that are
readily convertible to known amounts of cash
and which are subject to an insignificant risk
of changes in value”
 Can include bank overdrafts if part of cash
management activities and balance
fluctuates between positive and negative
amounts

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IAS 7 – Reporting Operating
Cash Flows
 Operating activities are the principal
revenue-producing activities; and those that
are not investing or financing activities
 Operating cash flows are important: surplus
cash flows needed to invest in increased
capacity, pay debt when due, and provide a
return to shareholders

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Cash Flows
Operating cash flows:
a) Cash received from customers for the sale
of goods and provision of services, or on
account of royalties, fees, or commissions
b) Cash payments to suppliers for goods and
services provided; and to and on behalf of
employees for their services
c) Cash received from or paid for financial
instruments held specifically for dealing or
trading purposes

64
Cash Flows
Two methods:
 Direct method
 Indirect method
 Either allowed although preference for direct
method

65
Cash Flows
 Direct method

66
Cash Flows
 Indirect method…same entity?

67
Cash Flows
Common adjustments to convert profit or
loss to cash from operations:
 Changes in working capital accounts
 Elimination of non-cash items
 Elimination of investing and financing items

68
IAS 7 – Reporting Investing
Cash Flows
Investing activities:
“the acquisition and disposal of long-term
assets and other investments not included in
cash equivalents”
Importance:
Is the entity maintaining its capacity and
increasing the potential for increased
operating cash flows in the future?

69
Cash Flows
Examples:
 Cash payments to acquire property, plant, and equipment;
intangibles; and other long-term assets, including capitalized
development costs
 Cash receipts from the disposal of items in (a)
 Cash payments to acquire debt and equity instruments of other
entities or interests in joint ventures; excluding investments held
for trading or in cash equivalents
 Cash receipts from the disposal of items in (c)
 Cash advances and loans to other parties and their cash
repayments
 Cash payments for and receipts from futures, forwards, options
and swaps unless they are held for trading or are classified as
financing flows.

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Cash Flows
 Example – Wienerberger AG, Austria

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IAS 7 – Reporting Financing
Cash Flows
Financing activities:
“result in changes in the size and composition
of the contributed equity and borrowings of
the entity”
Importance:
Financing cash flows change the capital
structure of the firm and affect the relative
interests of those with claims to future cash
flows of the entity

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IAS 7 – Reporting Financing
Cash Flows
 Example – Wienerberger AG, Austria

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IAS 7 – Specific Items
 No netting of inflows and outflows
 Interest and dividends received and interest
and dividends paid – choice of operating,
investing or financing flows as appropriate
 Income tax cash flows – generally operating
flows
 Non-cash transactions – not included in
statement; disclosed instead

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IAS 7 - Disclosures
 Operating, investing, financing flows
 Change in cash and cash equivalents
 Components of cash and cash equivalents
 Reconciliation of change to amounts on
statement of financial position
 Explanation of significant cash balances not
available for use

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