Module name: International Financial Reporting            Title of the assignment:                     Student Name       ...
ContentsThe regulatory and conceptual framework of financial reporting as set by the IASB ...................................
The regulatory and conceptual framework of financial reporting as setby the IASBCurrently in global perspective there are ...
Those who use financial statements for interpreting financial information       contained in the financial statements.    ...
In order to present relevant and faithfully represented information the financialinformation needs to have following chara...
Disclosure and measurement of financial instrumentsAs per the pronouncements of IASB the applicable standard for the measu...
Further IAS 39 explains that derivative also considered as financial instruments.    Such derivatives may be             ...
Held to maturity investmentsThese are non derivative financial assets with fixed or determinable payments and theentity in...
Financial assets or liabilities designated as hedging instruments or hedge items       are subject to the measurement unde...
Information relating to the significance of the financial instruments of thecompany   1. Balance sheet      This requires ...
Interest income recognized to income statements from such impaired              financial assets.   3. Other disclosures  ...
Accounting for leasesThe IASB has issued IAS 17 leases with regard to accounting for leases. Further IASBsubsequently issu...
Operating leasesThe accounting treatment for operating lease for both lessor and lessee is simple.Accordingly the lessee s...
Reference       Alexander, D. & A. Britton, (2004) Financial Reporting, (7th ed.), Thomson       Atrill, P. & E. McLaney, ...
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International financial reporting

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International financial reporting

  1. 1. Module name: International Financial Reporting Title of the assignment: Student Name Submission date
  2. 2. ContentsThe regulatory and conceptual framework of financial reporting as set by the IASB .................................. 3Disclosure and measurement of financial instruments ................................................................................ 6 Initial recognition ...................................................................................................................................... 8 Subsequent measurement........................................................................................................................ 8 Impairment ............................................................................................................................................... 9Disclosures of financial instruments ............................................................................................................. 9 Information relating to the significance of the financial instruments of the company.......................... 10 Information in relation to the nature and extent of risk arising from financial instruments of the company.................................................................................................................................................. 11Accounting for leases .................................................................................................................................. 12 Operating leases ..................................................................................................................................... 13 Finance lease........................................................................................................................................... 13Reference .................................................................................................................................................... 14International Financial Reporting Page 2
  3. 3. The regulatory and conceptual framework of financial reporting as setby the IASBCurrently in global perspective there are two organizations who provide guidance andissue Accounting and financial reporting standards. Those are International Accountingstandard board (IASB) and Financial Accounting Standard Board (FASB). In particularmost of the countries such as UK European countries Asian countries Canada uses thefinancial reporting standards issued by IASB while USA is using its own financialreporting standards published by FASB.However IASB and FASB are currently working in a joint project of convergence offinancial reporting standards.The objective of IASB is to “Develop a single set of high quality, Understandable,enforceable, and globally accepted financial reporting standards based upon clearlyarticulated principles.”(Source, WWW.IFRS.org)The IASB was founded on 1 march 2001 as the predecessor of International AccountingStandard committee (IASC).The IASB is controlled by a board of members which comprise 15 members. Thosemembers are selected as a panel of experts whom include standard setters in countries,academic staff and users of financial statements around the world.The conceptual framework for financial reporting was first introduced in 1989 by theprevious body of IASB, the conceptual framework establish the underlying concepts forpreparation and presentation of financial statements for the use of external stakeholders.The conceptual framework deals with following areas, The financial reporting objectives The qualitative characteristics of financial information which are useful The recognition, measurement and definition of items from which financial statements are derived. Concepts of capital and capital maintenance.Further the conceptual framework assists to, Prepares of financial statements when adopting financial reporting standards Auditors when expressing an opinion as to whether the financial statements were prepared in accordance with applicable financial reporting frameworkInternational Financial Reporting Page 3
  4. 4. Those who use financial statements for interpreting financial information contained in the financial statements. All stakeholders who are interested of activities of IASB. It can be noted that in order to facilitate the financial reporting function conceptual framework identifies several key stakeholders as user groups those include Investors Government Lenders Public Suppliers EmployeesDue to the requirements in the current environment IASB and FASB has started a jointprogram to develop a new conceptual framework with the objective of creating a soundfoundation for future accounting standards that are principles-based, internationallyconsistent and internationally converged.Accordingly the new conceptual framework consist of following chapters 1. The objective of general purpose financial reporting 2. The reporting Entity 3. Qualitative characteristics of use full financial information 4. Underlying assumption 5. The elements of financial statements 6. Recognition of elements of financial statements 7. Measurement of elements of financial statements 8. Concepts of capital and capital maintenanceConceptual frame work states that the objective of general purpose financial reporting isto provide information to existing and potential investors which are useful.The conceptual framework further states that for the financial information to be use fullthe financial information needs to contain following qualitative factors. Relevance Faithfull representationsInternational Financial Reporting Page 4
  5. 5. In order to present relevant and faithfully represented information the financialinformation needs to have following characteristics. o Comparability o Verifiability o Timeliness o understandabilityThe framework discuss two underlying assumption that needs to maintain whenpreparing financial statements. Those are o Going concern assumption o Accrual basis of accountingThe framework recognize key elements in the financial statements as follows, The elements relates to the financial position of the company and included in the balance sheet o Assets o Liabilities o Equity Elements relates to financial performance of the entity o Income o ExpensesWith regard to recognition and measurement of elements of financial statementsframework states that if the key elements meets the following criteria those can berecognized as one of elements in the financial statements. It is probable that any future economic benefit related to the item will flow to or from the reporting entity The cost or value of the element can be measured reliably. Further the framework provide several bases where entities can use to measure the elements of the financial statements as follows, o Historical cost basis o Present value o Realizable value o Current costInternational Financial Reporting Page 5
  6. 6. Disclosure and measurement of financial instrumentsAs per the pronouncements of IASB the applicable standard for the measurement offinancial instruments is IAS 39 financial instruments – recognition and measurementand IFRS 7 deals with the disclosure requirements of financial instruments. Apart fromIAS 39 there are several financial reporting standards that deals with specific financialinstruments those are. IAS 27 Consolidated and separate financial statements IAS 28 Investments in Associates IAS 31 Investments in Joint ventures IAS 17 leases IAS 19 Employee benefits IFRS 4 insurance contractsWith regard to recognition and disclosure of financial instruments IAS 39 financialinstruments recognition and measurement provide overall guidance.Measurement of financial instrumentsAs explained in IAS 32 financial instruments, financial instrument is a any kind of acontract which gives a rise to a financial asset of a one company while financial liabilityor a equity instrument of another entity.Common examples for financial instruments can be outlined below, Financial assets o Cash o Trade receivables and other receivables o Debt and equity securities such as investments in equity shares, preference shares and debentures. o Commercial papers S Financial liabilities o Trade payables o Demand and time deposits in banks o Debentures Equity instruments o Equity Share capital o ReservesInternational Financial Reporting Page 6
  7. 7. Further IAS 39 explains that derivative also considered as financial instruments. Such derivatives may be  Forward contracts  Interest rate swaps  Futures  Options  Caps and floorsFinancial assets are classified in to four types and recognition and measurement ofthose are different to each other. Those four types of financial assets are Financial assets at fair value through profit or lossThese are financial assets which were designated to carry at fair value at the initialrecognition or financial assets which are held for trading by the organization. Allfinancial assets and derivatives acquired with the intention of sell in the short term areclassified as financial assets at fair value through profit and loss. Available for sale financial assetsThese are financial assets other than derivative and designated as available for salefinancial assets in the initial recognition and any other financial asset that has not beenclassified as, o Financial assets at fair value through profit and loss o Loans and receivables o Held for trading financial assets Loans and receivablesThese are non derivative financial assets with fixed or determinable payments andwhich has not been quoted in an active market and other than held for trading orclassified as available for sale financial assets or financial assets at fair value throughprofit or loss. Standard further states that any loans and receivable financial asset thatdo not recover substantial amount of its initial capital other than due to a deterioration ofcredit needs to be classified as available for sale financial asset.International Financial Reporting Page 7
  8. 8. Held to maturity investmentsThese are non derivative financial assets with fixed or determinable payments and theentity intends to and has the ability to hold the investment to maturity and do not meetthe definition of loans and receivable and are not classified as held for trading orfinancial assets at fair value through profit or loss at initial recognition.With regard to financial liabilities the standard identifies two types of financial liabilities.Those are Financial liabilities at fair value through profit or lossThese are financial liabilities either designated as fair value through profit or loss at thepoint of initial recognition or financial liabilities classified as held for trading such asthose short term borrowings. Other financial liabilities which are measured at amortized cost using effective interest rate method.IAS 39 financial instruments recognition and measurement states that companiesshould recognize financial assets and financial liabilities in the financial statementswhen and only when the company became a party to the contractual provisions of thecontract.Initial recognition and subsequent measurement of these financial assets can bedescribed below,Initial recognitionStandard requires initially all the financial assets to be recognized at fair value in thefinancial statements of the company. When measuring fair value company needs totake in to consideration the transaction cost involved in.Subsequent measurementStandard further guided to measure the financial assets subsequent to the initialrecognition at fair value. Further standard provide some exceptions in this regard. Held to maturity investments, loans and receivables and non derivative financial liabilities needs to be recognized at amortized cost computed using effective interest rate method.International Financial Reporting Page 8
  9. 9. Financial assets or liabilities designated as hedging instruments or hedge items are subject to the measurement under the guide lines of hedge accounting described in the standard. Investments made in equity securities without reliable fair value measurement information needs to be carried at cost in the financial statements after initial recognition.Impairment A financial asset or group of financial assets is said to be impaired and impairment lossis recognized only if there are objective evidence available as a result of one or moreevent occurred as a result of a event that occurred after the initial recognition.Accordingly at each balance sheet date company needs to evaluate whether there areany objective evidence of impairment is exist and if such evidence is available as at thebalance sheet date entity needs to carry out a detailed impairment computation in orderto determine whether any impairment needs to be recognized in the income statementsof the company.The impairment is measured as the difference between the carrying value of the assetand present value of future cash flows generated through asset discounting at thefinancial assets originally effective interest rate.Disclosures of financial instrumentsIASB has published IFRS 7 with regard to the disclosure requirements of financialinstruments.IFRS 7 requires companies to disclose 2 main categories of disclosures. Those are, Information relating to the significance of the financial instruments of the company Information in relation to the nature and extent of risk arising from financial instruments of the company.International Financial Reporting Page 9
  10. 10. Information relating to the significance of the financial instruments of thecompany 1. Balance sheet This requires the companies to disclose significant financial instruments in the balance sheet for following categories. Financial assets measured at fair value through profit or loss Held to maturity investments Loans and receivables Available for sale financial assets Financial liabilities measured at fair value through profit or loss Financial liabilities that were measured at amortized cost Further standard requires following disclosure also to be made Reclassification of financial instruments Information relation to the financial assets pledge as collateral Information about compound financial instruments 2. Income statement and equity The standard requires disclosing income, expenses, losses and gains attributable to following categories, Financial assets measured at fair value through profit or loss Held to maturity investments Loans and receivables Available for sale financial assets Financial liabilities measured at fair value through profit or loss Financial liabilities that were measured at amortized cost Further standard requires following disclosure also to be made Interest income and expense for financial instruments that were not carried at fair value through profit of loss. Fee based income and related expenses Amount of impairment of financial assets recognized for each class of financial assetsInternational Financial Reporting Page 10
  11. 11. Interest income recognized to income statements from such impaired financial assets. 3. Other disclosures Accounting policies of the company adopted for financial instruments Information about the hedge accounting applied by the company Information relating to the fair value of financial asset and financial liabilities of each class together with, o Carrying amount o Information as to how the fair value was measured o Information relating to if fair value cannot be measured reliably.Information in relation to the nature and extent of risk arising from financialinstruments of the company.Under this there are two types of disclosures needs to be made 1. Qualitative disclosures Exposure to risk for each class of financial instrument Policies and processes of management in relation to the identified risks for each class of financial instrument Any changes taken place for qualitative disclosures from previous year. 2. Quantitative disclosures The data relating to company’s exposure to risks as at the balance sheet date Disclosures with regard to market risk, credit risk and liquidity risk and the ways in which such risks are managed by the company. Concentration of risksInternational Financial Reporting Page 11
  12. 12. Accounting for leasesThe IASB has issued IAS 17 leases with regard to accounting for leases. Further IASBsubsequently issued following interpretations in relation to leases. IFRIC 4 determining whether an arrangement contains a lease SIC 27 Evaluating the substance of transaction in the legal form of a lease SIC 15 operating leasesAs per the standard there are two types of leases available in the market. Those are 1. Operating leases 2. Finance leases Operating lease defined as a lease other than a finance lease. Accordingly finance lease is defined as a lease arrangement whereby all the risks and rewards relating to ownership are substantially transferred to the lessee. That is instead of considering this legally the lessee bears all the risks and rewards relating to the lease contract and therefore lease asset is recognized as a asset in the books of lessee while lessor treated it as a disposal of assets. It should be noted that the transaction was treated in this manner by considering the substance of the transaction even though the legal ownership of the asset remains with the lessor. Following situations are considered when determining whether asset is classified as a operating lease or finance lease. At the end of the lease period the ownership of the asset is transferred to the lessee The lessee is having the option to purchase the leased asset at the end of the lease period at a price less that the fair value of the leased asset as at the balance sheet date. The lease agreement covers the significant part of use full life of the assets irrespective of the fact whether the ownership of the asset is transferred to lessee. The leased asset is a special in nature and therefore only lessor can use the asset without major modifications.International Financial Reporting Page 12
  13. 13. Operating leasesThe accounting treatment for operating lease for both lessor and lessee is simple.Accordingly the lessee should recognize the lease rental paid to lessor as an expensein the year in which such rental was incurred. The lessor should recognize such rentalas rental income from operating leases while maintaining the in the year in which suchrental was incurred. The lessor should recognize such rental as rental income fromoperating leases while maintaining the value of the assets in the financial statements.Finance leaseEven though the legal ownership of the asset is not transferred to the lessee under afinance lease considering the substance of the transaction the leased asset isrecognized in the books of lessee. Accordingly the lessee should recognize the asset inthe balance sheet by creating a lease rental payable to the balance sheet.The double entries can be elaborated as follows, 1. Recognition of lease asset in the books of lessee Property plant & Equipments Dr Interest in suspense Dr Lease creditor Cr 2. Repayment of lease installments Lease creditor Dr Cash Cr 3. Recognition of interest in suspense to income statements Income statement Dr Interest in suspense CrIn the books of lessor the assets should be de recognized and the disposal profit needsto be identified to the income statements. Further the different between the carryingvalue of the asset and the purchase price needs to be recognized as a unearnedincome and should transfer to income statement upon the receipt of lease rentals in thefuture periods. Moreover if any gain or loss arising from the disposal such gain or lossneeds to be recognized to the income statement in the year which the disposal hastaken place.International Financial Reporting Page 13
  14. 14. Reference Alexander, D. & A. Britton, (2004) Financial Reporting, (7th ed.), Thomson Atrill, P. & E. McLaney, (2002) Financial Accounting for Non-specialists,(3rd ed.) Prentice Hall Black G., (2003) Students’ Guide to Accounting and Financial Reporting Standards, (9th ed.) Prentice Hall, Lewis, R. & D. Pendrill, (2004) Advanced Financial Accounting, (7th ed.), Prentice Hall, IASB,2001, International accounting Standards 39 Financial instruments recognition and measurement, IASCF IASB,2001, International accounting Standards 32 Financial instruments presentation, IASCF IASB,2001, International financial Reporting standards 7 Financial instrument disclosures, IASCF Ernst & Young 2012, Ernst & Young LLP 2012, united kingdom, < http://www.ey.com/> viewed on 6, April 2012. Deloitte global services limited 2012, Deloitte global services limited, United Kingdom, < http://www. iasplus, com/> viewed on 6, April 2012.International Financial Reporting Page 14

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