Applying International Financial Reporting Standards
This summary covers
- Chapters 1,3,4,5,8,9,10,11,12,13,15,18,19 of "Applying IFRS standards" by Picker et al (4th printing)
- All accompanying slides
- Any notes from the lectures.
In addition, a handy overview of all standards is enclosed within the document.
All rights go their respective owner...
Corporate Financial Reportnn 2018:
Applying IFRS standards (4th edition)
Picker et al.
Subject mater:
- Chapters: 1,3,4,5,8,9,10,11,12,13,15,18,19
- Note: chapter 18 was not covered in lectures, neither are there slides available.
- Slides + Notes
Part I: Introduction to IFRS, Background and Concepts
Chapter 1: Introducton to internatonaa accountng
1.1
In 1972 the Internatonaa Accountng Standard Commitee (IASC) was founded by 9 countries. However, the IASC had
it’s shortcominns, which lead to a review of operatons. This lead to a smaller, full-tme Internatonaa Accountng
Standard Board (IASB). At frst the board adopted AIS standards which, over tme, became Internatonaa Financiaa
Reportng Standard (IFRS).
[Read throunh structure AISB]
The IFRS Interpretatons Commitee reviews:
- Financial reportnn Issues that are not (yet) covered in IFRS;
- Issues with confictnn interpretatons of IFRS
If either of these issues occur, the Commitee is tasked with fndinn a consensus and oferinn authoritatve nuidance.
These interpretatons are not seen as standards but are of equivalent status to the standards issued by the IASB. The
IASB also has a formal advisory body for consultancy. Examples are: IFRS Advisory Council, Capital Markets Advisory
Commitee, Emerninn Economies nroup, Global rreparers forum, SME Interpretatons nroup.
1.2
In 2010, the Conceptual Framework for Financial reportnn (OR FRAMEWORK). Was created by the IASB and FASB. The
purpose of the framework is to provide coherent principles to assist in: preparinn the fnancial statement, applyinn
accountnn standards in situatons when there is none, forminn the auditor’s opinion and interpret the informaton of
the FS by users. The framework consists of defnitons, reconniton criteria and measurement methods that are applied
in the fnancial reportnn. Which can be separated in:
- Chapter 1: Objectve of fnancial reportnn
- Chapter 2: Reportnn Entty
- Chapter 3: Qualitatve characteristcs of useful fnancial reportnn
- Chapter 4: the framework itself (reconniton, measurement, concepts, assumptons)
The neneral purpose of fnancial reportnn is to provide fnancial informaton about the reportnn entty that is useful
to present and potental stakeholders. The second chapter “reportnn entty” is stll work in pronress.
1.3
Financial informaton is useful if it possesses the fundamental characteristcs:
- Reaevance: Informaton is of relevance if it infuences (potental) decision-makinn, has either predictve or
confrmatory value or both, makes a diference whether the user uses the informaton or not.
- Faithfua repre entaton: Informaton is faithfully represented if: it is complete, neutral and free of error.
In additon: there are Enhancing characteri tc s that discriminate useful and useless informaton.
- Comparabiaity: enables users to identfy similarites and diference between (e.n.) companies.
- Verifiabiaity: informaton can be verifed independently, to assure faithful representaton.
- Timeaine : Informaton is available at the rinht tme (and thus can infuence decisions)
- Under tandabiaity: Users can understand the meaninn of informaton.
Accordinn to the conceptual framework, there is always a trade-of between costs and informaton. In neneral, the
benefts of informaton should be nreater than the costs.
1.4
The framework always retains a “Goinn Concern Assumptonn” which means that the entty will contnue to operate for
the foreseeable future. If there is no noinn concern assumpton, the IFRS cannot provide nuidance on preparinn the
,fnancial statement (think of a fre-sale, in case of bankruptcy the value of an asset cannot be estmated accordinn to
IFRS).
1.5
The conceptual Framework identfes and defnes elements of the fnancial statement.
Elements renardinn fnancial positon:
A et : resource controlled by the entty as a result of past event from which future economic benefts are
expected to result in an infow to the entty
Liabiaite : a present oblinaton of the entty arisinn from past events, the setlement of which is expected to result
in an outlow from the entty of resources embodyinn economic benefts
Equity: the residual in assets of the entty afer deductnn all liabilites.
Elements renardinn fnancial performance
Income: Increases in economic benefts durinn the accountnn period in the form of infows or enhancements of
assets or decreases of liabilites that result in increases in equity, other than relatnn to contributons from equity
partcipants.
Expen e : decreases of economic benefts durinn the accountnn period in the form of outlows or depletons of
assets or incurrences of liabilites that result in decreases in equity, other than those relatnn to distributons to
equity partcipants.
[Read through buaaet !!]
1.6
The framework contains criteria for the reconniton of the previous items. Recogniton is a process of incorporatnn an
item in the fnancial statement that meets the defniton of an element and satsfes the criteria for reconniton. An
item is reconnized when:
- The item at fie the definiton a given
- It i probabae that the item give an future economic benefit (po itve or negatve) from/to the entty
- The item ha a co t or vaaue that can be mea ured with reaiabiaity
1.7
Mea urement: is a process of determininn the monetary amounts at which the elements of the fnancial statement
are reconnized and valued in the balance sheet, and income statement. Basis of measurement are:
- Hi toric Co t: value of an Asset/Liability at the moment of acquisiton.
- Current Co t: value of an Asset/Liability at the current moment
- Reaaizabae or etaement vaaue: value of an Asset/Liability if sold durinn normal business.
- Pre ent vaaue: sum of discounted future cashfows of an Asset/Liability
[Read through 1.8 & 1.9]
Note aecture:
Most stakeholders of the company are users of the Financial Statement. However, there is always some informaton
Asymmetry involved. A hinh asymmetry may lead to hinher risks. Examples of this are adver e eaecton (one of the
partes has a informaton advantane) or moraa hazard (one of the partes can see their actons in fulfllinn a contract,
where others cannot). Accountnn standards may help tackle this problem.
- Informaton Economic Per pectve: the more informatve an accountnn rule (set of standards), the more
reducton of asymmetries. Which lead to lower costs of capital. (Relevance and decision usefulness)
- Contractng Per pectve: the more informatve an accountnn rule, the lower the contractnn costs (Reliability
and stewardship)
- Normatve per pectve: leads to other recommendatons.
, Chapter 3: Fair vaaue
3.1
[oad definiton fair vaaue]
Fair Vaaue: is the amount for which an asset could be exchanne or liability setled, between knowledneable and willinn
partes in an arm’s lennth transacton. The Fair Value concept is a key measurement under IFRS. However in the past
IFRS nave limited and/or confictnn nuidance across standards to measure at fair value. The fair value measurement
was reviewed in order to:
- Establish one sinnle source of nuidance for all fair value measurements (to reduce complexity and improve
consistency)
- Clarify the defniton of fair value and related nuidance in order to communicate the measurement objectve
more clearly
- Enhance disclosures about fair value to enable users of the FS to assess the extend to which fair value is used
(and which inputs are used to derive the fair value).
In 2011 the Fair Value Measurement was introduced with IFRS 13, and created a neneral uniform framework for
applyinn fair value measurement to both IFRS and US-GAAr. (General Accepted Accountnn rrinciples)
The main goaa of IFRS 13 was to defne fair value, set out 1 framework for measurinn fair value, require disclosures
about fair value measurement.
3.2
The fair vaaue is now defined as: “The price that would be received to sell an asset or paid to transfer a liability in an
orderly transacton between market partcipants at the measurement daten The diference was not that larne but
issued nonetheless to:
- Explicitly specify that fair value requires an exit price
- To provide clarity renardinn ‘setlinn’
- To clarify that fair value is the price at the measurement date
- To clarify that fair value is a market-based measurement.
Current Exit price: The price that would be received to sell an asset or paid to transfer a liability
Orderay Tran acton : A transacton where, there is exposure to the market for a period before the measurement date
to allow actons associated with transactons involvinn assets or liabilites.
Tran acton Co t : costs associated with the sale of an asset or liability in the principal (or advantaneous market)
where the costs are essental in order to complete the transacton.
Tran portaton Co t : costs associated with the movement of an asset to it’s principal (or most advantaneous) market.
- Both Transacton and transportaton costs are taken into account when determininn the Advantaneous market
- But the transacton costs are irrelevant when measurinn the fair value.
3.3
When measurinn the fair value, the entty has to determine:
- Identfy the Asset or Liability
- Identfy the principal or most advantaneous market
- Identfy the market partcipants
- Determine the appropriate valuaton techniques and inputs.
However, there are specifc requirements when it comes to: Non-fnancial assets, liabilites and equity instruments,
fnancial instruments bearinn risks.
When identfyinn the asset or liability it is important to know: what the object is (unit of account), if there are any
restrictons and the conditon & locaton of the object.
When identfyinn the principal or most advantaneous market it is important to know:
- Is there a principaa market (market with the nreatest volume and level of actvity for the asset or liability).
- If there is no principal market, which market is the most advantaneous for the asset or liability.
Advantageou market: the market that would maximise the amount received/paid afer deductnn
transacton and transportaton costs.
When identfyinn the market partcipants, it is important to keep in mind that:
- They are independent and therefore not related
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