Applying International Financial Reporting Standards
This document is a summary of the book 'Applying IFRS Standards' (fourth edition) by Picket et al., used in the course 'Financial Accounting and Reporting' in the Master Accountancy, Tilburg University. The document covers all chapters required by the course, and includes useful tables and examples.
,Chapter 1
The International Accounting Standards Board (IASB)
The IASB develops accounting standards. In 1989, the IASC, the predecessor to the IASB,
adopted the Framework for the Preparation and Presentation of Financial Statements (The
Framework).
The conceptual framework
The mentioned framework was replaced by the Conceptual Framework for Financial Reporting
(The conceptual framework), developed jointly by the IASB and FASB in 2010.
Here, the standard-setting structure of the IASB is presented:
The IASB is responsible to the IFRS Foundation.
1
,The purpose of a conceptual framework is to provide a coherent set of principles:
● To assist standard setters to develop a consistent set of accounting standards for the
preparation of financial statements
● To assist preparers of financial statements in the application of accounting standards and in
dealing with topics that are not the subject of an existing applicable accounting standard
● To assist auditors in forming an opinion about compliance with accounting standards
● To assist users in the interpretation of information in financial statements.
The current Conceptual Framework comprises four chapters:
- Chapter 1: The objective of general purpose financial reporting
- Chapter 2: The reporting entity
- Chapter 3: The qualitative characteristics of useful financial reporting
- Chapter 4: The Framework (leftover bits of the old one that have not been amended yet)
The objective of financial reporting
The IASB's Conceptual Framework deals only with the objective of general purpose financial
reporting; that is, financial reporting intended to meet the information needs common to a range
of users who are unable to command the preparation of reports tailored to satisfy their own
particular needs.
The objective is to 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.
This objective reflects several value judgements made by the IASB about the role of financial
statements, which are described in the Basis for Conclusions section. This section includes the
following arguments:
● Financial statements should reflect the perspective of the entity rather than the perspective
of the entity's equity investors.
● The key users of financial statements are capital providers — existing and potential
investors and lenders. An entity obtains economic resources from capital providers in
exchange for claims on those resources. Because of these claims, capital providers have
the most critical and immediate need for economic information about the entity.
These parties also have common information needs. The focus on these users of
information, as opposed to other potential users (such as government, regulatory bodies,
employees and customers), is a narrowing of the user groups in comparison to the groups
considered in the former version of the IASB Conceptual Framework
Before the objective of general purpose financial reporting can be implemented in practice, the
basic qualitative characteristics of financial reporting information need to be specified.
2
, The reporting entity
This part of the Conceptual Framework is still in progress and needs to be added by the IASB.
The qualitative characteristics of useful financial information
This part gives an answer to the question: What characteristics should financial information
have in order to be included in general purpose financial reporting?
For financial information to be decision useful, it must possess two fundamental qualitative
characteristics:
1. Relevance
Information is relevant if:
● it is capable of making a difference in the decisions made by the capital providers as
users of financial information
● it has predictive value, confirmatory value or both. Predictive value occurs where the
information is useful as an input into the users' decision models and affects their
expectations about the future. Confirmatory value arises where the information
provides feedback that confirms or changes past or present expectations based on
previous evaluations.
● it is capable of making a difference whether the users use it or not. It is not necessary
that the information has actually made a difference in the past or will make a difference
in the future.
Materiality is an entity-specific aspect of the relevance of information. Information is
material if its omission or misstatement could influence the decisions that users make about
a specific reporting entity.
Materiality is a relative matter: what is material for one entity may be immaterial for another.
The materiality of an item depends on its relative size and on its nature.
2. Faithful representation / reliability
Faithful representation is attained when the depiction of an economic phenomenon is
complete, neutral and free from material error.
- A depiction is complete if it includes all information necessary for faithful representation
- Neutrality is the absence of bias intended to attain a predetermined result. Providers of
information should not influence the making of a decision or judgement to achieve a
predetermined result
- As information is provided under conditions of uncertainty and judgements must be made,
there is not necessarily certainty about the information provided. It may be necessary to
disclose information about the degree of uncertainty in the information in order that the
disclosure attains faithful representation.
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