IFRS

Unit 1

INTERNATIONAL FINANCIAL REPORTING STANDARDS

Introduction

"Standards" in accounting literature used to be generally known as

principles a few years back standards are considered to be written statements
issued by various professional and expert institute.

IAS was issued between 1973 and 2001 by the board of international
accounting standards committee (IASC). On April 1 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
Interpretation Committee Standards SICs. the IASB has continued to develop
standards calling the new standards International Financial Reporting Standards
(IFRS)

MEANING OF ACCOUNTING STANDARD

Accounting standard is a principle that guides and standardize accounting

practices. the Generally Accepted Accounting Principles (GAAP) is a group of
accounting standards widely accepted in the field of accounting necessary so
financial statements is meaningful across a wide variety of business and industries.

In other words accounting standard is a guideline for financial accounting

such as how a firm prepares and presents its business income, expenses, sets and
liabilities and may be in accordance to standard set by the International Accounting
Standards Board (IASB)
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MEANING OF IFRS

IFRS is a set of accounting standards developed by an independent, not for profit

organization called International Accounting Standards Board IASB

The goal of IFRS is to provide a global framework for how public companies
prepare and disclose their financial statements. IFRS provides general guidance
for the preparation of financial statements, rather than setting rules for industry
specific reporting.

ASSUMPTIONS OF IFRS

IFRS are principles based, while generally accepted accounting principles are
rule based, IFRS do not prescribe any form of preparing the financial statements.
Fair value is considered for showing assets and liabilities in the balance sheet
under IFRS, unlike, GAAP is based on the historical cost concept.

THE FOLLOWING ARE ASSUMPTIONS IN IFRS ARE

1. ACCRUAL ASSUMPTION: the transactions are recorded in the books of

accounts on accrual basis that is as and when they occur and not when the
settlement of transactions takes place.

2. GOING CONCERN ASSUMPTION: it is assumed that life of a business is

infinite that is the entity will continue its operations for an indefinite period.

3. FAIR VALUE: assets should be reflected at current that is fair value.

4. CONSTANT PURCHASING POWER ASSUMPTION: it means value of

capital be adjusted to inflation in the economy at the end of the financial year.

SCOPE OF IFRS

The IASB achieves its objectives primarily by developing and publishing

IFRSs and promoting the use of those standards in general purpose financial
statements and other financial reporting. Other financial reporting comprises
information provided outside financial statements that assists in the interpretation
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IFRS

of a complete set of financial statements or improves users’ ability to make

efficient economic decisions. In developing IFRSs, the IASB works with national
standard-setters to promote and facilitate adoption of IFRSs through convergence
of national accounting standards and IFRSs. IFRSs set out recognition,
measurement, presentation and disclosure requirements for the transactions and
events that are important in general purpose financial statements. They may also
set out specific requirements for transactions and events that are in particular
industries. IFRSs are based on the Conceptual Framework, which addresses the
concepts underlying the information presented in general purpose financial
statements.

NEED FOR IFRS

IFRS is needed for the following purpose

1. REDUCTION IN INFORMATION COST TO ECONOMY.

Today, there are many opportunities for companies to trade across border and
the raise capital globally. If the companies following local GAAP, the foreign
investors pursue the presence of accounting risk in statement. The financial
statement prepared in different GAAP, affects the financial ratio, which is a key
factor in lending decision by bankers and for compliance with the debt convenient.

2. PRESENTATION OF FINANCIAL STATEMENT.

If IFRS is adopted, then it would provide consistent presentation of financial

statement along with uniform measures for recognition, measurement and
disclosures of financial transaction. It will lower complication in taxing global
income, has the taxes levied on the total income of the companies, the company
along with its foreign subsidiary follows similar accounting principle and practice.

3. COMPARISON.

Following different state of accounting standard, comparing financial

statement of companies operating in same industry in different country difficult,
has the same transaction may be treated in different way. With IFRS, MNCs and
analyst community would experience is in comparing financial statement of
companies located and functioning in different geography.

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4. LISTING ON FOREIGN STOCK EXCHANGE:

The companies following local accounting standard are facing problem in

getting its stock listed on cross-border stock exchange. With adoption of IFRS, the
companies will no longer required to prepare its financial statement under different
GAAP and make the task of listing shares on foreign stock exchange easier

AN OVERVIEW OF GAAP VS. IFRS

Accounting standards are critical to ensuring a company’s financial

information and statements are accurate and can be compared to the data reported
by other organizations.

The two main sets of accounting standards followed by businesses are

GAAP and IFRS.

GAAP, also referred to as US GAAP, is an acronym for Generally Accepted

Accounting Principles. This set of guidelines is set by the Financial Accounting
Standards Board (FASB) and adhered to by most US companies.

IFRS stands for International Financial Reporting Standards. These

principles are dictated by the International Accounting Standards Board (IASB)
and followed in many countries outside the US.

Deciding which set of standards to use depends on whether your company

operates in the US or internationally. Work is being done to converge GAAP and
IFRS, but the process has been slow going.

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Comparison chart

GAAP IFRS
Generally Accepted Accounting International Financial
Stands for
Principles Reporting Standards

Universal financial reporting

method that allows
Standard guidelines and structure
Introduction international businesses to
for typical financial accounting.
understand each other and
work together.

Over 110 countries, including

Used in United States
those in the European Union

Revenue or expenses, assets or

Performance Revenue or expenses, assets
liabilities, gains, losses,
elements or liabilities
comprehensive income

Required Balance sheet, income statement, Balance sheet, income

documents in statement of comprehensive statement, changes in equity,
financial income, changes in equity, cash cash flow statement,
statements flow statement, footnotes footnotes

Inventory Last-in, first-out; first-in, first-out; First-in, first-out or weighted-

Estimates or weighted-average cost average cost

Inventory Permitted under certain

Prohibited
Reversal criteria

US GAAP (or FASB) framework Under IFRS, company

has no provision that expressly management is expressly
Purpose of
requires management to consider required to consider the
the
the framework in the absence of a framework if there is no
framework
standard or interpretation for an standard or interpretation for
issue. an issue.

Objectives of In general, broad focus to provide In general, broad focus to

financial relevant info to a wide range of provide relevant info to a

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GAAP IFRS
statements stakeholders. GAAP provides wide range of stakeholders.
separate objectives for business and IFRS provides the same set of
non-business entities. objectives for business and
non-business entities.

The "going concern" assumption is IFRS gives prominence to

Underlying
not well-developed in the US underlying assumptions such
assumptions
GAAP framework. as accrual and going concern.

Relevance, reliability,
comparability and Relevance, reliability,
understandability. GAAP comparability and
establishes a hierarchy of these understandability. The IASB
Qualitative
characteristics. Relevance and framework (IFRS) states that
characteristics
reliability are primary qualities. its decision cannot be based
Comparability is secondary. upon specific circumstances
Understandability is treated as a of individual users.
user-specific quality.

The IFRS framework defines

The US GAAP framework defines an asset as a resource from
Definition of
an asset as a future economic which future economic
an asset
benefit. benefit will flow to the
company.

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THE KEY DIFFERENCES BETWEEN GAAP VS. IFRS

While GAAP and IFRS share many similarities, there are several contrasts,
beyond the regions in which they’re applied. Here are four key differences between
GAAP and IFRS.

1. THE BALANCE SHEET

The way a balance sheet is formatted is different in the US than in other

countries. Under GAAP, current assets are listed first, while a sheet prepared under
IFRS begins with non-current assets.

The two standards also dictate different approaches to ordering categories on

the balance sheet. GAAP calls for accounts to be listed in the order of liquidity—or
how quickly and easily they can be converted to cash. The items are arranged in
descending order (most liquid to least liquid): current assets, non-current assets,
current liabilities, non-current liabilities, and owners’ equity.

Under IFRS, the order is reversed (least liquid to most liquid): non-current
assets, current assets, owners’ equity, non-current liabilities, and current liabilities.

2. THE CASH FLOW STATEMENT

A company’s cash flow statement is also prepared differently under GAAP

and IFRS. This is most acutely seen in how interest and dividends are classified.

GAAP prescribes that interest paid and interest received should be classified
as operating activities, while international standards are a bit more flexible. Under
IFRS, a firm can choose its own policy for classifying interest based on what it
considers to be appropriate. Interest paid can be placed in either the operating or
financing section of the cash flow statement, and interest received in the operating
or investing sections.

The same goes for dividends. GAAP specifies that dividends paid be
accounted for in the financing section, and dividends received in the operating
section. When following IFRS standards, companies have a choice of how they
categorize dividends. Dividends paid can be put in either the operating or financing
section, and dividends received in the operating or investing section.

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To summarize, here’s a detailed breakdown of how the two standards differ

in their treatment of interest and dividends.

3. ASSET REVALUATION

When an asset experiences a reduction in value due to market or

technological factors—which in turn, causes it to fall below its current value in a
company’s account—it’s classified as a loss on impairment. While impairment is
often permanent, an asset’s value can increase after this loss has been recognized if
the elements that caused it no longer exist.

GAAP and IFRS handle this ensuing rise in value differently. The rules of
GAAP do not allow for an asset’s value to be written back up after it’s been
impaired. IFRS standards, however, permit that certain assets can be revaluated up
to their original cost and adjusted for depreciation.

4. INVENTORY VALUATION METHODS

GAAP and IFRS contrast in how they handle inventory valuation, too. Three
methods that companies use to value inventory are FIFO, LIFO, and weighted
inventory.

FIFO stands for First In First Out. This inventory valuation method follows
the natural flow of inventory, assuming that the first items in inventory (i.e. the
oldest) are the first sold.

LIFO, or Last In First Out, takes the opposite approach of FIFO. Under this
method, the last items to arrive in inventory (i.e. the newest) are assumed to be the
first sold.

Weighted average looks at the weighted average cost of items remaining in

inventory at the time of an associated sale, which yields a figure that can then be
used to value ending inventory and the related cost of goods sold.

In the US, under GAAP, all of these approaches to inventory valuation are
permitted, while IFRS allows for the FIFO and weighted average methods to be
used, but not LIFO.

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GAAP VS IAS

1. GAAP are the more generic accounting rules that every country holds,
and are directly influenced by the different accounting boards of each jurisdiction,
whereas, IAS is the specific set of internationally recognized accounting standards,
set by the IAS Committee.

2. GAAP, in itself, is locally based, while the IAS is globally recognized,

and some of its rules or standards are incorporated in the GAAPs of many
countries.

1. Comparison Table Between IAS and IFRS

Parameter of
IAS IFRS
Comparison

IAS stands for International IFRS stands for International

Stands for
Accounting Standards. Financial Reporting Standards.

The standards of IAS were

The standards of IFRS were
Published in published between 1973 and
published after 2001.
2001.

The standards of IAS were

The standards of IFRS were
issued by the International
Issued by issued by the International
Accounting Standards
Accounting Standards Board.
Committee.

The IAS does not contain rules The IFRS is new and contains
regarding identifying, rules regarding identifying,
Rules measuring, presenting and measuring, presenting and
disclosing of all non-current disclosing of all non-current
assets for sale. assets for sale.

Total The total IAS are 41. The total IFRS are 9.

In case of a contradiction, the

In cases of a contradiction, the
Contradiction principles of IFRS are taken
principles of IAS are dropped.
into consideration.

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International Financial Reporting Standards (IFRS) IFRS

1. IFRS1: First-time Adoption of International Financial Reporting Standards

2. IFRS 2: Share-based Payment

3. IFRS 3: Business Combinations

4. IFRS 4: Insurance Contracts

5. IFRS 5: Non-current Assets Held for Sale and Discontinued Operations

6. IFRS 6: Exploration for and Evaluation of Mineral Assets

7. IFRS 7: Financial Instruments: Disclosures

8. IFRS 8: Operating Segments

9. IFRS 9: Financial Instruments

10. IFRS 10: Consolidated Financial Statements

11. IFRS 11: Joint arrangements

12. IFRS 12: Disclosure of Interest in other entities

13. IFRS 13: Fair Value Measurements

14. IFRS 14: Regulatory Deferral Accounts

15. IFRS 15: Revenue from Contracts with Customer

16. IFRS 16: Leases

17. IFRS 17: Insurance Contracts

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International Accounting Standards (IAS)

1. IAS 1: Presentation of Financial Statements

2. IAS 2: Inventories

3. IAS 7: Statement of Cash Flows

4. IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors

5. IAS 10: Events After the Reporting Period

6. IAS 11: Construction Contracts

7. IAS 12: Income Taxes

8. IAS 16: Property, Plant and Equipment

9. IAS 17: Leases

10. IAS 18: Revenue

11. IAS 19: Employee Benefits

12. IAS20: Accounting for Government Grants and Disclosure of Government

Assistance

13. IAS 21: The Effects of Changes in Foreign Exchange Rates

14. IAA 23: Borrowing Costs

15. IAS 24: Related Party Disclosures

16. IAS 26: Accounting and Reporting by Retirement Benefit Plans

17. IAS 27: Consolidated and Separate Financial Statements

18. IAS 28: Investments in Associates

19. IAS 29: Financial Reporting in Hyperinflationary Economies

20. IAS 31: Interests In Joint Ventures

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21. IAS 32: Financial Instruments: Presentation

22. IAS 33: Earnings Per Share

23. IAS 34: Interim Financial Reporting

24. IAS 36: Impairment of Asset

25. IAS 37: Provisions, Contingent Liabilities and Contingent Assets

26. IAS 38: Intangible Assets

27. IAS 39: Financial Instruments: Recognition and Measurement

28. IAS 40: Investment Property

29. IAS 41: Agriculture

Note: IAS 3, 4, 5, 6, 9, 13, 14, 15, 22, 25, 30, 35 have been superseded

IFRIC

IFRIC Interpretations are developed by the IFRS Interpretations Committee

(previously the International Financial Reporting Interpretations
Committee, IFRIC) and are issued after approval by the International
Accounting Standards Board (IASB).

1. IFRIC 1: Changes in Existing Decommissioning, Restoration and Similar

Liabilities

2. IFRIC 2: Members' Shares in Co-operative Entities and Similar

Instruments

3. IFRIC 4: Determining Whether an Arrangement Contains a Lease

4. IFRIC 5: Rights to Interests Arising from Decommissioning, Restoration

and Environmental Rehabilitation Funds

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5. IFRIC 6: Liabilities Arising from Participating in a Specific Market -

Waste Electrical and Electronic Equipment

6. IFRIC 7: Applying the Restatement Approach under IAS 29 Financial

Reporting in Hyperinflationary Economies

7. IFRIC 10: Interim Financial Reporting and Impairment

8. IFRIC 12: Service Concession Arrangements

9. IFRIC 13: Customer Loyalty Programmers

10. IFRIC 14: The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction

11. IFRIC 15: Agreements for the Construction of Real Estate

12. IFRIC 16: Hedges of a Net Investment in a Foreign Operation

13. IFRIC 17: Distributions of Non-cash Assets to Owners

14. IFRIC 18: Transfers of Assets from Customers

15. IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments

Note: IFRIC 3, 8, 9 & 11 have since been withdrawn

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Structure of IFRS Foundation

The IFRS Foundation's three-tier structure
The IFRS Foundation has a three-tier governance structure, based on an
independent standard-setting Board of experts (International Accounting Standards
Board), governed and overseen by Trustees from around the world (IFRS
Foundation Trustees) who in turn are accountable to a monitoring board of public
authorities (IFRS Foundation Monitoring Board).

The IFRS Advisory Council provides advice and counsel to the Trustees and
the Board, whilst the Board also consults extensively with a range of
other standing advisory bodies and consultative groups.

1. Monitoring Board

The Monitoring Board was created in January 2009 with the aim of
'providing a formal link between the Trustees and public authorities' in order to
enhance the public accountability of the IFRS Foundation.

2. The Trustees of the IFRS Foundation

The Trustees are responsible for the governance and oversight of the IFRS
Foundation and the International Accounting Standards Board (Board).

The Trustees are not involved in any technical matters relating to IFRS
Standards. This responsibility rests solely with the Board. The Trustees are
accountable to the Monitoring Board, a body of publicly accountable market
authorities.

3. A) International Accounting Standards Board (Board)

Board members are responsible for the development and publication of IFRS
Standards, including the IFRS for SMEs Standard. The Board is also responsible
for approving Interpretations of IFRS Standards as developed by the IFRS
Interpretations Committee (formerly IFRIC).

B) IFRS Interpretations Committee

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IFRS

The IFRS Interpretations Committee (Interpretations Committee) is the

interpretative body of the International Accounting Standards Board (Board). The
Interpretations Committee works with the Board in supporting the application of
IFRS Standards.

The Interpretations Committee responds to questions about the application

of the Standards and does other work at the request of the Board.

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