Applying International Financial Reporting Standards
This document contains an overview of all lectures slides which are covered during the classes, furthermore I sometimes added more information about certain tables and examples. Note that this document does not contain seminars! It should be used as a base for your learning. Eventually you need to ...
International Financial Reporting Standards extensive summery
General information about document:
This extensive summary contains everything discussed in the lectures. Sometimes I added information to the slides
and made it more ‘readable’.
Note that this is not a short summary of an IAS/IFRS standard. I think accounting standards are not there to be
summarized as they are really complex. This document is to help you learn the lecture slides.
Furthermore, this document does only contain mostly the theoretical part, so no seminars! The seminars are there
to practice and therefore I don’t think it is necessary to include those here, as it is self-study. I also want to bring to
the attention that all examples used in the lectures slides are included. My advice to you is to redo them yourself to
get the best knowledge.
The best way to learn IFRS is to practice. So this document can be used as a basis of your learning!
All information is included as all lectures slides are in this document with sometimes some extra information about
graphs / exercises.
Finally, I spend a lot of time making this document, so it would be kind to not share this document. It took me a lot
of hours to make… I would also like to address, if you have advice on this document, please let me know! I am able
to change things in the documents and re-share them with you.
1
, 1 Lecture week 1 - IASB conceptual framework
In week 1 we take a look at the IASB and the conceptual framework, and shifting this discussion to the
presentational issues of the financial statements under the IFRS standards, in particular we look at the requirements
of international standard 1 with the focus on equity and standard 2, focusing on inventories. The material in this
presentation is covered in chapter 1 and 2 of the textbook.
The board of IFRS
On the right there is a structure of the IFRS foundation. The
International accounting standards board (IASB) is the principal body
of the IFRS foundation, there are 16 members participating in this
board. The responsibility they have is:
(1). Developing and issuing IFRS and exposure drafts.
(2). Approve interpretations develop by the IFRIC
(3). Provide high quality solutions to financial reporting issues and
promote convergence. developing additional new standards.
Its important approve interpretation of the IFRS standards and provide solutions in the case where
certain items and practices are not gathered by existing IFRS standards. There are two more bodies that
work together with the board, these are the advisory council and the IFRS IC. 10 of the 16 members of
the board need to approve changes.
Process of Standard Setting – IASB
- The process of development of an IFRS will generally include the following:
Form a Steering committee or advisory group to give
advice on major projects.
Develop and publish a discussion document (draft
statement of principles) on major projects.
Following receipt of comments on the initial discussion
document, the IASB will develop and publish an exposure
draft.
Following receipt of comments on the Exposure Draft,
the IASB will approve and issue a final standard.
Following this, each draft statement of principles, discussion paper
and exposure draft of a standard is issued for public comment
(normally 90 days). Following this 90 days the final standard is going to be achieved.
2
,The IFRS Interpretation Committee
The IFRS interpretations Committee is the Interpretative body of the IFRS foundation. The work of the
interpretations committee is aimed at reaching consensus on the appropriate accounting treatment
(IFRIC Interpretations) and providing authoritative guidance on those issues.
These interpretations cover both:
- Newly identified financial reporting issues not specifically dealt with within IFRS.
- Issues where unsatisfactory or conflicting interpretations have developed, or seem likely to
develop in the absence of authoritative guidance.
IFRSIC consists of 14 voting members from different countries, they are appointed by trustees of the
IFRS foundation. This board are subject to IASB approval and have the same authority as a standard
issued by the IASB.
The IFRS Advisory Council
The IFRS Advisory Council is the formal advisory body to the IASB and the Trustees of the IFRS
foundation. It is comprised of a wide range of representatives from user groups, preparers, financial
analysts, academics, auditors etc. which are affected by and interested in the IASB’s work. Members are
appointed by Trustees.
This Advisory Council provides advice on single projects with a particular emphasis on practical
application and implementation issues, including matters relating to existing standards.
Conceptual Framework for Financial Reporting
The conceptual framework provides a way to navigate
a thru a principal based approach in developing
accounting standards rather than we have in for
example the US GAAP.
They are based on rules, the problem with this is that
there is always a way to not obey the rules. The IASB
has a principal approach based on economic substance
of the transaction in order to make decision how to
disclose information.
Instead of looking at particular rules that have been
developed. The framework has underlying concepts
and principals for the financial statements.
3
,A principles-based approach
IFRS reflect a principles-based approach to developing accounting standards, rather than a rules-based
approach. This approach is focused on establishing general principles derived from the Framework,
reflecting the recognition, measurement and reporting requirements for the transactions covered by the
Standards. Thus, IFRS tend to limit additional guidance, encouraging professional judgment in applying
the general principles to transactions specific to an entity or industry.
What is the IASB conceptual framework?
The framework is the foundation on which IFRS standards are built. It is sets out the underlying concepts
used to prepare IFRS standards (IFRSs).
For example, the Framework gives the basic definition of an asset. The definitions of
different types of assets in the IASs are then based on this definition, for example PPE (IAS 16),
investment property (IAS 40). Etc.
Consistency is achieved because all the standards are based on the same concepts.
Purpose of the IFRS framework
The framework’s purposes are:
(1) The framework describes the basic concepts that underlie the preparation and presentation
of financial statements for external users.
(2) it serves as a guide to the board in developing future IFRSs and;
(3) as a guide to resolving accounting issues that are not addressed directly in an IAS or IFRS or
Interpretation.
In the absence of a standards, that specifically applies to a transaction, management must use its
judgement in developing and applying an accounting policy by consulting the Framework.
In a Limited number of cases there may be a conflict between the framework and a requirement within
a standard. Where there is a conflict, the requirements of the standard prevail over those of the
framework.
The objective of general purpose financial reporting
The objective of financial reporting focuses on the information needs of capital providers.
“The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in making
decision about providing resources to the entity”
The framework explains that the primary users to whom financial reporting is directed, are those that
must rely on general purpose financial reports for much of the information on which they base their
decisions.
(The information needs of an investor meets the needs
of the other stakeholders to the maximum extent,
regulators are omitted from the primary users list as
they have power to demand information they need.
Primary users need information about the
“amount, timing, and uncertainty of future net
cash inflows of the entity” but also how
effectively and efficiently management has
discharged their responsibilities to use the
entity’s existing resources.
4
,Information about changes in an entity’s economic
resources and claims resulting from events and
transactions other than financial performance, such as
the issue of equity instruments or distributions of cash
or other assets to shareholders is necessary to
complete the picture of the total change in the entity’s
economic resources and claims.
So basically, the financial statement is based on four
different components.
1. The balance sheet, which is the SFP, statement of financial position
2. The income statement and OCI, which is the SCI, statement of comprehensive income
3. The statement of cash flows
4. The statement of equity changes, which is the SOCIE.
Qualitative characteristics of useful financial information
The qualitative characteristics of useful financial reporting identify the types of information are likely to
be most useful to users in making decisions about the reporting entity on the basis of information in the
financial report.
Financial information is USEFUL when it is relevant
and represents faithfully hat it purpose to
represent (Fundamental qualitative
characteristics.)
The usefulness of financial information is
ENHANCED if it is comparable, verifiable, timely
and understandable. (Enhancing qualitative
characteristics)
Fundamental qualitative characteristics.
1. Relevance
- Relevant information has predictive value, confirmatory value, or both and is therefore
capable of making a difference to decisions made by investors, lenders and other creditors.
- Financial information has predictive value if it can be used as an input to processes used to
predict future outcomes. It has confirmatory value if it provides feedback about previous
predictions.
a) Materiality
Materiality is an entity-specific aspect of relevance in the framework 2010,
rather than a stand-alone concept.
Information is material if omitting it or misstating it could influence
decisions based on the information.
Immaterial information does not affect decisions. Consequently, immaterial
information is not relevant.
5
,2. Faithful Representation
- Events must be accounted for AND presented in accordance with their substance and
economic reality and not their legal form.
a) Completeness
information is complete if a user can understand the phenomenon being
depicted. This may require descriptions and explanations as well as a numerical
depiction.
b) Neutrality
Information is neutral if it is without bias in its selection or presentation.
It is not intentionally overstated, understated , emphasized or
deemphasized.
0- Neutral does not mean that the information does not have an impact
on decisions.
0- It is not designed in a way that intentionally leads the user to make an
economic decision that the preparer would like them to make (purely
factual)
c) Free from error
Free from error does not mean perfectly accurate. It means that there are no
errors in the process used to produce the information and no errors in its
description
Enhancing qualitative characteristics.
1. Comparability
- Information about a reporting entity is more useful if it can be compared with a similar
information about other entities and with similar information about the same entity for
another period or another date.
comparability enables users to identify and understand similarities, and differences among, items.
Consistent application of methods to prepare financial statements helps to achieve comparability.
2. Verifiability
- Verifiability means that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is a faithful
representation (directly i.e. counting cash or indirectly i.e. FIFO or WA valuation)
3. Timeliness
- Timeliness means that information is available to decision-makers in time to be capable of
influencing their decisions.
4. Understandability
- Classifying, characterizing and presenting information clearly and concisely makes it
understandable.
- Information that maybe difficult to understand is made more useful by explaining it as clearly
as possible.
While some phenomena are inherently complex and cannot be made easy to understand, to exclude such
information would make financial reports incomplete and potentially misleading.
- Financial reports are prepared for users who have reasonable knowledge of business and
economic activities and who review and analyses the information with diligence.
Cost is a pervasive constraint on the information that can be provided by general purpose financial
reporting. Reporting such information imposes costs and those costs should be justified by the benefits
of reporting that information.
6
,Elements of the financial statement
Assets: a present economic resource controlled by the
entity as a result of past events
Liabilities: a present obligation of the entity to transfer an
economic resource as a result of past events
The probability criterion removed.
IFRS acknowledged that some IFRS standars do include a
probability criterion for recognising asset and liabilities.
The proposed change to the definiction of assets and
liabilities will leave these unaffected.
- Uncertainty is best dealt with in the recognition or measurement of items, rather than the
definition of assets or liabilities
Equity: The residual interest left after the liabilities
have been deducted from the assets.
Income: Increases in assets or decreases in
liabilities, that result in increases in equity,
other than those relating to contributions
from holders of equity claims
Expense: Decreases in assets or increases in
liabilities, that result in decreases in equity,
other than those relating to distributions to
equity participants.
Recognition & Derecognition of the elements in FS
Recognition criteria – an item should be recognised in the FS if it provides
users with useful financial information:
- Relevant information
- a faithful representation of the asset or liability, and resulting
income, expenses or equity movements.
Derecognition is the removal of some or all of an asset or liability from the
SFP when the entity:
- Loses control of the asset, or
- has no present obligation for the liability.
7
,Recognition
Recognition might not provide relevant
information if there is uncertainty over the
existence of the elemnt or if there is a low
probability of an inflow or outflow of economic
resources.
Derecognition
Accounting for derecognition should faithfully
represent the changes in an entity’s net assets,
which is achieved by:
- derecognisign any transferred, expired or
consumed component, and;
- recognising a gain or loss on the above,
and recognising any retained component.
Derecognition would not be appropriate if exposure to variations in the element’s economic benefits is
retained.
Measurement in the FS
There are four different ways of
measurement in the Financial
statements.
1. Historical cost
2. Fair value
3. Value in use
4. Current costs
8
, 2 Lecture week 1 – Presentation of financial statements (IAS 1)
Purpose of financial statements
- The general purpose of financial statements is to provide information about:
- The financial position,
- The financial performance and;
- cash flows of an entity
- Information given will assist users of financial statements in predicting the entity’s futurec ash flows
and, in particular, their timing and certainty.
- Financial statements also show the results of management’s stewardship of the resources entrusted to
it.
Fair presentation & Compliance with IFRSs
- Financial statements shall not be described as complying with IFRSs unless they comply with all the
requirements of IFRSs.
- Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used
or by notes of explanatory material
- in exteremely rare circumstances, when magenemtn concludes that compliance with a Standard would
be misleading, the entity shall departfrom the requirements (unless departure is prohibited from the
relevant regulatory framework) and disclose:
- The particular standard they are deprating from,
- nature of the departure, the reason why the treatment would be misleading & the treatment
adopted.
- the financial impact of the departure.
Going concern
Management should:
- Make an assessment of an entities ability to continue as a going concern (12 months from the
BS date)
- Prepare FS on a going concern basis unless they either intend to liquidate the entity or the
cease trading, or have nor ealistic alternatives but to do so.
- Disclose material uncertainties relating to events or condition that may cast significant doubt
upon the entities ability to continue as a going concern.
When financial statements are not prepared on a going concern bases:
- This fact should be disclosed
- Assets and liabilities should be valued at NRV (Nutrient reference value, e.g. the value an asset
will generate at a sale).
9
, Accrual & Matching
An entity must prepare its financial statement, excluding cash flow information, using the accrual basis
of accounting and also apply matching principle.
Accrual bases means that assets, liabilities, equity, income and expenses are recognised when they
satisfy the recognition criteria in the Framework:
- They are recognised when they occur (not when the cash is paid or received)
- They are recorded in the accounting period which they relate to.
Deferral: opposite of accruals, delaying recognition. For example recognition of revenues are on balance
sheet until they are earned in a later period. When they are earned they will move from the balance
accounts to the revenue.
Under the matching concept we note:
- Expenses are recognised on the basis of a direct association between costs incurred and earning
of specific items of income.
Consistency of presentation / Materiality an aggregation
The presentation and classification of items in the FS shall be retained from one period the the next
unless. Its important to keep consistency between periods. Only change is necessary when:
- a change will result in a more appropriate presentation or
- a change is required by standard or interpretation
Each material class of similar items should be presented seperately in the FS. Items of a dissimilar
nature should also be seperately presented or shall be presented seperately unless they are immaterial.
Offsetting / Comparative information
Assets and liabilities, and income and expenses, shall not be offset UNLESS it is permitted by a Standard
or an interpretation OR offsetting reflects the substance of the transaction or other event.
An example of this is that company A has an amount of accounts receivables from B and also a payable
amount to company B, these items should be reported seperately and not offset by eachother.
- Measuring assets net of valuation allowances is not offsetting e.g. doubtful debts allowances
on receivables. (for example total accounts receivables net is allowed. The provision of doubtfull
accounts is allowed to be deducted)
Comparative information shall be disclosed in respect of the previous period of ALL amounts reported
in the financial statements.
- When presentation/classification of items in the FS is amended (i.e. changed) the nature &
reason for the reclassification and the amount of each item reclassified shall be disclosed.
10
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