International Financial Reporting Standards
From Wikipedia, the free encyclopedia
International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. They are the rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable and relevant as per the users internal or external. |San Fransisco IFRS, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies and IFRIC 7 Applying the Restatement Approach under IAS 29, are authorized in terms of the historical cost paradigm. IAS 29 and IFRIC 7 are authorized in terms of the units of constant purchasing power paradigm.
IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. However, it has been debated whether or not de facto harmonization has occurred. Standards that were issued by IASC (the predecessor of IASB) are still within use today and go by the name International Accounting Standards (IAS), while standards issued by IASB are called IFRS. IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new International Accounting Standards Board (IASB) took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards "International Financial Reporting Standards".
Criticisms of IFRS are (1) that they are not being adopted in the US (see GAAP), (2) a number of criticisms from France and (3) that IAS 29 Financial Reporting in Hyperinflationary Economies had no positive effect at all during 6 years in Zimbabwe's hyperinflationary economy. The IASB offered responses to the first two criticisms, but has offered no response to the last criticism while IAS 29 was as of March 2014 being implemented in its original ineffective form in Venezuela and Belarus.
Objective of financial statements
Financial statements are a structured representation of the financial positions and financial performance of an entity. The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management's stewardship of the resources entrusted to it.
To meet this objective, financial statements provide information about an entity's:
This information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.
The following are the general features in IFRS:
Qualitative characteristics of financial information
Fundamental qualitative characteristics of financial information include:
Enhancing qualitative characteristics include:
Elements of financial statements
The elements directly related to the measurement of the statement of financial position include:
The financial performance of an entity is presented in the statement of comprehensive income, which consists of the income statement (Statement of Profit/Loss) and the statement of other comprehensive income (usually presented in two separate statements). Financial performance includes the following elements (which are recognised in the income statement or other comprehensive income as required by the applicable IFRS standard):
Results recognised in other comprehensive income are limited to the following specific circumstances:
The statement of changes in equity consists of a reconciliation of the changes in equity in which the following information is provided:
Notes to the Financial Statements: These shall (a) present information about the basis of preparation of the financial statements and the specific accounting policies used; (b) disclose the information required by IFRSs that is not presented elsewhere in the financial statements; and (c) provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them.
Recognition of elements of financial statements
An item is recognized in the financial statements when:
In some cases specific standards add additional conditions before recognition is possible or prohibit recognition altogether.
An example is the recognition of internally generated brands, mastheads, publishing titles, customer lists and items similar in substance, for which recognition is prohibited by IAS 38. In addition research and development expenses can only be recognised as an intangible asset if they cross the threshold of being classified as 'development cost'.
Whilst the standard on provisions, IAS 37, prohibits the recognition of a provision for contingent liabilities, this prohibition is not applicable to the accounting for contingent liabilities in a business combination. In that case the acquirer shall recognise a contingent liability even if it is not probable that an outflow of resources embodying economic benefits will be required.
International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international.
Concepts of capital and capital maintenance
Concepts of capital
Par. 102. A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.
Par. 103. The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements. Thus, a financial concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital. If, however, the main concern of users is with the operating capability of the entity, a physical concept of capital should be used. The concept chosen indicates the goal to be attained in determining profit, even though there may be some measurement difficulties in making the concept operational.
Concepts of capital maintenance and the determination of profit
Par. 104. The concepts of capital in paragraph 102 give rise to the following two concepts of capital maintenance:
(a) Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.
(b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.
The concepts of capital in paragraph 102 give rise to the following three concepts of capital during low inflation and deflation:
The concepts of capital in paragraph 102 give rise to the following three concepts of capital maintenance during low inflation and deflation:
Par. 105. The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured; it is a prerequisite for distinguishing between an entity's return on capital and its return of capital; only inflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Hence, profit is the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses exceed income the residual amount is a loss.
Par. 106. The physical capital maintenance concept requires the adoption of the current cost basis of measurement. The financial capital maintenance concept, however, does not require the use of a particular basis of measurement. Selection of the basis under this concept is dependent on the type of financial capital that the entity is seeking to maintain.
Par. 107. The principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity. In general terms, an entity has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit.
Par. 108. Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. They may not be recognised as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity.
Par. 109. Under the concept of physical capital maintenance when capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. All price changes affecting the assets and liabilities of the entity are viewed as changes in the measurement of the physical productive capacity of the entity; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit.
Par. 110. The selection of the measurement bases and concept of capital maintenance will determine the accounting model used in the preparation of the financial statements. Different accounting models exhibit different degrees of relevance and reliability and, as in other areas, management must seek a balance between relevance and reliability. This Framework is applicable to a range of accounting models and provides guidance on preparing and presenting the financial statements constructed under the chosen model. At the present time, it is not the intention of the Board of IASC to prescribe a particular model other than in exceptional circumstances, such as for those entities reporting in the currency of a hyperinflationary economy. This intention will, however, be reviewed in the light of world developments.
IFRS financial statements consist of (IAS1.8)
Comparative information is required for the prior reporting period (IAS 1.36). An entity preparing IFRS accounts for the first time must apply IFRS in full for the current and comparative period although there are transitional exemptions (IFRS1.7).
On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements. The main changes from the previous version are to require that an entity must:
The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is permitted.
Criticisms of IFRS
In 2012 the US Securities and Exchange Commission Staff issued a 127-page report of potential issues with IFRS that would need to be addressed before adoption by the United States. The staff of the IFRS Foundation provided a detailed answer on the main criticisms in the SEC staff report.
A number of criticisms were voiced in the beginning of 2013 in the French media to which the IASB Board member Philippe Danjou responded in his document 'An Update on International Financial Reporting Standards (IFRSs).' 
It is widely acknowledged that IAS 29 Financial Reporting in Hyperinflationary Economies had no positive effect during the six years it was implemented during hyperinflation in Zimbabwe.  This led people[who?] to ask the purpose of IAS 29. As of March 2014, IAS 29 was being implemented in its original ineffective form in Venezuela and Belarus. It was suggested to the IASB in 2012[by whom?] that IAS 29 should be corrected to require daily indexation which would result in effective constant purchasing power accounting and would stabilize the non-monetary economy during hyperinflation. The IASB has offered no response to date (March 2014) to this criticism and has not yet altered IAS 29 to require daily indexation.
IFRS are used in many parts of the world, including the South Korea, European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, Chile, Philippines, South Africa, Singapore and Turkey, but not in the United States. Please refer to PricewaterhouseCoopers' "IFRS by country" publication for a detailed explanation of the level of IFRS adoption per country. 140 Jurisdiction profiles are available online.
It is generally expected that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by reducing the costs of comparing alternative investments and increasing the quality of information. Companies are also expected to benefit, as investors will be more willing to provide financing. Companies that have high levels of international activities are among the group that would benefit from a switch to IFRS. Companies that are involved in foreign activities and investing benefit from the switch due to the increased comparability of a set accounting standard. However, Ray J. Ball has expressed some skepticism of the overall cost of the international standard; he argues that the enforcement of the standards could be lax, and the regional differences in accounting could become obscured behind a label. He also expressed concerns about the fair value emphasis of IFRS and the influence of accountants from non-common-law regions, where losses have been recognized in a less timely manner.
To assess progress towards the goal of a single set global accounting standards, the IFRS Foundation has developed and posted profiles about the use of IFRSs in individual jurisdictions. These were based on information from various sources. The starting point was the responses provided by standard-setting and other relevant bodies to a survey that the IFRS Foundation conducted. Currently, profiles are completed for 124 jurisdictions, including all of the G20 jurisdictions plus 104 others. Eventually, the plan is to have a profile for every jurisdiction that has adopted IFRSs, or is on a programme toward adoption of IFRSs.
The Australian Accounting Standards Board (AASB) has issued 'Australian equivalents to IFRS' (A-IFRS), numbering IFRS standards as AASB 1–8 and IAS standards as AASB 101–141. Australian equivalents to SIC and IFRIC Interpretations have also been issued, along with a number of 'domestic' standards and interpretations. These pronouncements replaced previous Australian generally accepted accounting principles with effect from annual reporting periods beginning on or after 1 January 2005 (i.e. 30 June 2006 was the first report prepared under IFRS-equivalent standards for June year ends). To this end, Australia, along with Europe and a few other countries, was one of the initial adopters of IFRS for domestic purposes (in the developed world). It must be acknowledged, however, that IFRS and primarily IAS have been part and parcel of accounting standard package in the developing world for many years since the relevant accounting bodies were more open to adoption of international standards for many reasons including that of capability.
The AASB has made certain amendments to the IASB pronouncements in making A-IFRS, however these generally have the effect of eliminating an option under IFRS, introducing additional disclosures or implementing requirements for not-for-profit entities, rather than departing from IFRS for Australian entities. Accordingly, for-profit entities that prepare financial statements in accordance with A-IFRS are able to make an unreserved statement of compliance with IFRS.
The AASB continues to mirror changes made by the IASB as local pronouncements. In addition, over recent years, the AASB has issued so-called 'Amending Standards' to reverse some of the initial changes made to the IFRS text for local terminology differences, to reinstate options and eliminate some Australian-specific disclosure. There are some calls for Australia to simply adopt IFRS without 'Australianising' them and this has resulted in the AASB itself looking at alternative ways of adopting IFRS in Australia.
Brazil has already adopted IFRS for all companies whose securities are publicly traded and for most financial institutions whose securities are not publicly traded, for both consolidated and separate (individual) company financial statements.
The use of IFRS became a requirement for Canadian publicly accountable profit-oriented enterprises for financial periods beginning on or after 1 January 2011. This includes public companies and other "profit-oriented enterprises that are responsible to large or diverse groups of shareholders."
In 2002 the European Union agreed that from 1 January 2005 International Accounting Standards / International Financial Reporting Standards would apply for the consolidated accounts of the EU listed companies.
In order to be approved for use in the EU, standards must be endorsed by the Accounting Regulatory Committee (ARC), which includes representatives of member state governments and is advised by a group of accounting experts known as the European Financial Reporting Advisory Group. As a result, IFRS as applied in the EU may differ from that used elsewhere.
Parts of the standard IAS 39: Financial Instruments: Recognition and Measurement were not originally approved by the ARC. IAS 39 was subsequently amended, removing the option to record financial liabilities at fair value, and the ARC approved the amended version. The IASB is working with the EU to find an acceptable way to remove a remaining anomaly in respect of hedge accounting. The World Bank Centre for Financial Reporting Reform is working with countries in the ECA region to facilitate the adoption of IFRS and IFRS for SMEs.
Whilst the IASB set the effective dates for the new consolidation standards IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities at 1 January 2013, the ARC decided to delay the mandatory effective date for the companies listed in the European Union by one year. The standards therefore only became effective on 1 January 2014.
The European Commission has launched a general analysis of the impacts of 8 years of use of international financial reporting standards (IFRSs) in the EU for preparers and users of financial statements from the private sector. The study will include an overall assessment of whether the Regulation 1606/2002 of the European Parliament and the Council ('IAS Regulation') has met the two-fold initial objectives of ensuring a high degree of transparency and comparability of the financial statements of European companies and an efficient functioning of the market, in comparison with the situation before IFRS implementation in 2005. It will also include a cost-benefit analysis and an assessment and analysis of the benefits and drawbacks brought by the IAS Regulation for different stakeholder groups.
Ghana transitioned from the Ghana Accounting Standards (GAS) to adopt the IFRS on January 1, 2007. As of 2008 and beyond, a legislative injunction has been imposed on the Bank of Ghana to prepare financial statements in accordance with IFRS; thereby making it mandatory for all public entities in the country.
The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April 2016 in a phased manner. There is a roadmap issued by MCA for adoption of IFRS.
Reserve Bank of India has stated that financial statements of banks need to be IFRS-compliant for periods beginning on or after 1 April 2011.
The ICAI has also stated that IFRS will be applied to companies above INR 1000 crore (INR 10 billion) from April 2011. Phase wise applicability details for different companies in India:
Phase 1: Opening balance sheet as at 1 April 2011*
a. Companies whose shares or other securities are listed on a stock exchange outside India
b. Companies, whether listed or not, having net worth of more than INR 1000 crore (INR 10 billion)
Phase 2: Opening balance sheet as at 1 April 2012*
Companies not covered in phase 1 and having net worth exceeding INR 500 crore (INR 5 billion)
Phase 3: Opening balance sheet as at 1 April 2014*
Listed companies not covered in the earlier phases * If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year.
On 22 January 2010, the Ministry of Corporate Affairs issued the road map for transition to IFRS. It is clear that India has deferred transition to IFRS by a year. In the first phase, companies included in Nifty 50 or BSE Sensex, and companies whose securities are listed on stock exchanges outside India and all other companies having net worth of INR 10 billion will prepare and present financial statements using Indian Accounting Standards converged with IFRS. According to the press note issued by the government, those companies will convert their first balance sheet as at 1 April 2011, applying accounting standards convergent with IFRS if the accounting year ends on 31 March. This implies that the transition date will be 1 April 2011. According to the earlier plan, the transition date was fixed at 1 April 2010.
The press note does not clarify whether the full set of financial statements for the year 2011–12 will be prepared by applying accounting standards convergent with IFRS. The deferment of the transition may make companies happy, but it will undermine India's position. Presumably, lack of preparedness of Indian companies has led to the decision to defer the adoption of IFRS for a year. This is unfortunate that India, which boasts for its IT and accounting skills, could not prepare itself for the transition to IFRS over last four years. But that might be the ground reality.
The minister for Financial Services in Japan announced in late June 2011 that mandatory application of the IFRS should not take place from fiscal year-ending March 2015; five to seven years should be required for preparation if mandatory application is decided; and to permit the use of U.S. GAAP beyond the fiscal year ending 31 March 2016.
Montenegro gained independence from Serbia in 2006. Its accounting standard setter is the Institute of Accountants and Auditors of Montenegro (IAAM).:2 In 2005, IAAM adopted a revised version of the 2002 "Law on Accounting and Auditing" which authorized the use of IFRS for all entities.:18 IFRS is currently required for all consolidated and standalone financial statements, however, enforcement is not effective except in the banking sector.:18 Financial statements for banks in Montenegro are, generally, of high quality and can be compared to those of the European Union.:3 Foreign companies listed on Montenegro's two stock exchanges (Montenegro Stock Exchange and NEX Stock Exchange) are also required to apply IFRS in their financial statements. Montenegro does not have a national GAAP.:18 Currently, no Montenegrin translation of IFRS exists, and because of this Montenegro applies the Serbian translation from 2010.:20 IFRS for SMEs is not currently applied in Montenegro.:20
In Nepal the Accounting Standards Board (ASB) is in charge of standard setting. Nepal closely models its Financial Reporting Standards (FRS) according to the IFRS, with appropriate changes made to suit the Nepalese context. It has issued Nepal Financial Reporting Standards in 2013. The 2013 version of standards almost resembles IFRS with slight modification.
All listed companies must follow all issued IAS/IFRS except the following:
The government of Russia has been implementing a program to harmonize its national accounting standards with IFRS since 1998. Since then twenty new accounting standards were issued by the Ministry of Finance of the Russian Federation aiming to align accounting practices with IFRS. Despite these efforts essential differences between Russian accounting standards and IFRS remain. Since 2004 all commercial banks have been obliged to prepare financial statements in accordance with both Russian accounting standards and IFRS. Full transition to IFRS is delayed but starting 2012 new modifications making Russian GAAP converging to IFRS have been made. They notably include the booking of reserves for bad debts and contingent liabilities and the devaluation of inventory and financial assets.
Still, several differences between the two sets of account still remain. Major reasons for deviation between Russian GAAP and IFRS / US-GAAP (e.g. when the Russian affiliate of a larger group need to be consolidated to the mother company) are the following:
In Singapore the Accounting Standards Committee (ASC) is in charge of standard setting. Singapore closely models its Financial Reporting Standards (FRS) according to the IFRS, with appropriate changes made to suit the Singapore context. Before a standard is enacted, consultations with the IASB are made to ensure consistency of core principles.
All companies listed on the Johannesburg Stock Exchange have been required to comply with the requirements of International Financial Reporting Standards since 1 January 2005.
The IFRS for SMEs may be applied by 'limited interest companies', as defined in the South African Corporate Laws Amendment Act of 2006 (that is, they are not 'widely held'), if they do not have public accountability (that is, not listed and not a financial institution). Alternatively, the company may choose to apply full South African Statements of GAAP or IFRS.
South African Statements of GAAP are entirely consistent with IFRS, although there may be a delay between issuance of an IFRS and the equivalent SA Statement of GAAP (can affect voluntary early adoption).
(1) Phase I companies: listed companies and financial institutions supervised by the Financial Supervisory Commission (FSC), except for credit cooperatives, credit card companies and insurance intermediaries:
(2) Phase II companies: unlisted public companies, credit cooperatives and credit card companies:
(3) Pre-disclosure about the IFRS adoption plan, and the impact of adoption
To prepare properly for IFRS adoption, domestic companies should propose an IFRS adoption plan and establish a specific taskforce. They should also disclose the related information from 2 years prior to adoption, as follows:
(1) More efficient formulation of domestic accounting standards, improvement of their international image, and enhancement of the global rankings and international competitiveness of our local capital markets;
(2) Better comparability between the financial statements of local and foreign companies;
(3) No need for restatement of financial statements when local companies wish to issue overseas securities, resulting in reduction in the cost of raising capital overseas;
(4) For local companies with investments overseas, use of a single set of accounting standards will reduce the cost of account conversions and improve corporate efficiency.
Above is quoted from Accounting Research and Development Foundation, with the original"here" (PDF). (18.9 KB) .
The Banking Regulation and Supervision Agency and Capital Markets Board of Turkey translated IFRS into Turkish in 2002. Banks and Turkish companies listed on the Istanbul Stock Exchange are required to prepare IFRS reports since then. The Turkish Accounting Standards Board (called the Public Oversight Authority after 2011) also translated IFRS in 2005. The new Commercial Code came into force in 2012. The Public Oversight Authority is the only authorized board regarding auditing and financial reporting standards. Most businesses authorized by the Council of Ministers in addition to banks and Turkish companies listed on the Istanbul Stock Exchange are required to prepare IFRS reports since 2012.
Zimbabwe also adopted IFRS.