1

INTRODUCTION TO
IFRS AND
THE CONCEPTUAL
FRAMEWORK
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PART I
INTRODUCTION TO
IFRS
 Learning Objectives
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AT T H E C O M P L E T I O N O F T H I S TO P I C , Y O U W I LL
BE AB LE TO :
Understand the essence and spread of IFRS
Describe the structure of IASB
List the current pronouncements that constitute IFRS

Identify the basic differences between IFRS and US GAAP

Describe the Ethiopian new legal requirements related to
financial reporting
Describe the conceptual framework of IFRS
 What is IFRS?
4

 IFRS is a globally recognized set of Standards for the preparation of

financial statements by business entities.
 Application of IFRSs are believed to result in financial reports of
high quality i.e, comparable, understandable, reliable and relevant
to users.
 144+ countries already use IFRS.
 More judgment is needed for IFRS implementation
 IFRSs are applied to financial information prepared to meet the
needs of (primary users) existing and potential investors, lenders
and other creditors who cannot require information from the entity
 CONT…
5

 IFRS Standards prescribe:

 the items that should be recognized as assets, liabilities,
income and expense;
 how to measure those items;

 how to present them in a set of financial statements; and

 related disclosures about those items.

 Benefits of adopting IFRS
6

 IFRS leads to improved comparability and reliability of

financial statements
 The increased transparency promised by IFRS could
substantially reduce the agency problem
 It could cause an increase in the efficiency of
contracting between firms and lenders.

 A platform for wider investment choice

 Enhanced business development.
 Benefits of adopting IFRS…
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 Adoption of IFRS would significantly reduce cost of capital of firms
• Lower cost of information,
• Increased value relevance of accounting information,

• Greater marketability of shares, and

• Reduced information asymmetry between managers and

shareholders
Investors will have more confidence in the information presented
using IFRS
Management gets better and easier information on how to direct the
business
Accounting professionals & other stakeholders also benefit from IFRS
 The application of IFRS in Ethiopia
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Since most of the countries in the world are following IFRS,

Ethiopia should not isolate itself.

Consequently, very recently, the government of Ethiopia issued a

proclamation called “Financial Report Proclamation of Ethiopia:
847/2014” and Council of Ministers Regulation 332/2014.
 The application of IFRS in Ethiopia…
9
The proclamation requires:
Commercial (business) organizations to follow:
 International Financial Reporting Standards (IFRS),
or
 International Financial Reporting Standards for
Small and Medium Enterprises (IFRS for SME)
Charities and societies to follow International Public
Sector Accounting Standards (IPSAS)
Public auditors to follow International Standards for
Auditing.
 The application of IFRS in Ethiopia…
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Public interest entity (PIE) should use the full IFRS.

A PIE is a reporting entity that is of significant public
relevance because of the nature of its business, its size,
its number of employees.
PIE also includes banks, insurance companies, and any
other financial institutions and public enterprises.

Small or medium enterprises (SME) = Not public

interest entity
 The application of IFRS in Ethiopia…
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IRFS for SMEs

 Final standard issued 9 July 2009

 230 pages (vs. 3,000+ in full IFRS)

 Simplified IFRSs, but built on an IFRS foundation

 Completely stand-alone and divided into 39 Sections

 Designed specifically for SMEs

 Internationally recognized
 The application of IFRS in Ethiopia…
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How simplified
1) Some topics in IFRSs omitted if irrelevant to private entities such as
Earnings per share;
Interim reporting & Segment reporting;
Insurance (since, because of public accountability, such entities would be
prohibited from using IFRS for SMEs in any event) etc
2) Where IFRSs have options, include only simpler option
Example:
 Use of the cost-amortization-impairment model for PPE and intangibles
is required; the revaluation model set forth by IAS 16, PPE, and IAS
38, Intangible Assets, is not allowed.
 Immediate expensing of borrowing costs is required; the capitalization
model stipulated under revised IAS 23 is not deemed appropriate for
SMEs.
 The application of IFRS in Ethiopia…
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3) Recognition and measurement simplifications

4) Reduced disclosures
5) Simplified drafting
 The application of IFRS in Ethiopia…
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Who are SMEs?

Small or medium enterprise is:
 A reporting entity, and
 is not a public interest entity

IFRS for SMEs is intended for entities that do not

have public accountability.
 The application of IFRS in Ethiopia…
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 Accounting and Audit Board of Ethiopia (AABE)

established and took responsibility to guide and dictate
the implementation of IFRS
 Adoption: Complete adherence to the IFRS. (Highly
encouraged by IASB)
 Adaptation: Customizing the standard to specific need of
the country. (Highly discouraged by IASB)
 The application of IFRS in Ethiopia…
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Even though IFRS is required for a certain type of

institutions, the companies are not applying the
standards properly

The required companies are also facing many

challenges such as lack of proper instruction, lack of
availability of specialists and need for training
 Difference between IFRS and US GAAP
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Great strides have been made by the FASB and the

IASB to converge the content of IFRS and U.S. GAAP.
There is continued support for the objective of a single
set of high-quality, globally accepted accounting
standards.
 Principles-Based vs. Rules-Based Standards
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IFRS are referred to as being principles-based standards

 Provide core principles (objectives) with minimum
guidance.
 They are more loosely framed, allowing for professional
judgment to be applied
 The judgments are expected to be consistent with clear
conceptual framework
US GAAP are referred to as being rules-based standards:
They are more prescriptive
Provide a rule for every situation
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Inventory costing method

 US GAAP allows LIFO method
 IFRS doesn’t allow LIFO method
Reversal of inventory write-downs
 US GAAP doesn’t allow
 IFRS allows
Valuation of property, plant, and equipment
 U.S.GAAP: Cost less accumulated depreciation
 IFRS: Cost less accumulated depreciation (or) fair
value(revaluation)
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Valuation of intangible assets

 U.S GAAP: Cost less accumulated amortization.
Revaluation prohibited
 IFRS: Cost less accumulated amortization (or) fair
value(revaluation)
Research and development expenditures
 U.S GAAP: Expensed in the period incurred
 IFRS:
 Research: expensed in the period incurred
 Development: that meet specified criteria: capitalized
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Contingencies
 U.S. GAAP: accrue if it is probable and can be reasonably
estimated. GAAP defines probable as “likely to occur” (a
higher threshold of occurrence than under IFRS)
 IFRS: threshold for “probable” is defined as “more likely
than not” (greater than 50%)
Valuation of long-term contingencies
 U.S.GAAP: present value—only when timing of cash
flows is certain
 IFRS: present value—time value of money is material
 22
Cash inflows from interest and dividends received
 U.S. GAAP: operating cash flows
 IFRS: either operating or investing cash flows
Cash outflows for interest payments
 U.S. GAAP: operating cash flows
 IFRS: either operating or financing cash flows
Disclosure of noncash activities
 U.S. GAAP: Reported either on the face of the statement of
cash flows or in a disclosure note
 IFRS: Disallows presentation on the face of the statement
and requires reporting in a disclosure note
 IASB and IFRS
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IFRS is developed by the International Accounting

Standards Board (IASB), which operates under the
oversight of the IFRS Foundation.
IASB was formerly called International Accounting
Standards Committee (IASC)
IASB is based in London
IFRS Comprises

International Accounting
Standards (IAS) -28

International Financial
Reporting Standards (IFRS)-
16

Standing Interpretations
Committee (SIC)- 8

International Financial
Reporting Interpretations
Committee (IFRIC)- 18
 International Accounting Standards (IAS)
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IAS 1: Presentation of Financial Statements

IAS 2: Inventories
IAS 7: Statement of Cash Flows
IAS 8: Accounting Policies, Changes in Accounting
Estimates and Errors
IAS 10: Events after the Reporting Period
 26

IAS 11: Construction Contracts (will be superseded

by IFRS 15 as of 1 January 2018)
IAS 12: Income Taxes
IAS 16: Property, Plant and Equipment
IAS 17: Leases
IAS 18: Revenue (will be superseded by IFRS 15 as
of 1 January 2018)
IAS 19: Employee Benefits
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IAS 20: Accounting for Government Grants and
Disclosure of Government Assistance
IAS 21: The Effects of Changes in Foreign Exchange
Rates
IAS 23: Borrowing Costs
IAS 24: Related Party Disclosures
IAS 26: Accounting and Reporting by Retirement
Benefit Plans
IAS 27: Separate Financial Statements
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IAS 28: Investments in Associates and Joint Ventures

IAS 29: Financial Reporting in Hyperinflationary
Economies
IAS 32: Financial Instruments: Presentation
IAS 33: Earnings per Share
IAS 34: Interim Financial Reporting
IAS 36: Impairment of Assets
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IAS 37: Provisions, Contingent Liabilities and

Contingent Assets
IAS 38: Intangible Assets
IAS 39: Financial Instruments: Recognition and
Measurement (will be superseded by IFRS 9 as of 1
January 2018)
IAS 40: Investment Property
IAS 41: Agriculture
 International Financial Reporting Standards
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IFRS 1: First-time Adoption of International Financial

Reporting Standards
IFRS 2: Share-based Payment
IFRS 3: Business Combinations
IFRS 4: Insurance Contracts
IFRS 5: Non-current Assets Held for Sale and
Discontinued Operations
IFRS 6: Exploration for and Evaluation of Mineral
Resources
 31

IFRS 7: Financial Instruments: Disclosures

IFRS 8: Operating Segments
IFRS 9: Financial Instruments (will replace IAS 39 as
of 1 January 2018)
IFRS 10: Consolidated Financial Statements
IFRS 11: Joint Arrangements
IFRS 12: Disclosure of Interests in Other Entities
 32

IFRS 13: Fair Value Measurement

IFRS 14: Regulatory Deferral Accounts
IFRS 15: Revenue from Contracts with Customers (will
replace IAS 11 and IAS 18 as of 1 January 2018)
IFRS 16: Leases (replaces IAS 17 as of January 1,
2019)
 33

Part II
CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
 Purpose of the Conceptual Framework
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Conceptual Framework sets out the concepts that underlie
IFRS financial statements
Purpose of conceptual framework:
 To assist IASB in setting new standards and reviewing existing ones.
 enhances consistency across standards
 enhances consistency over time as Board members change
 To serve as a basis for harmonisation
 To assist national standard-setters
 To assist preparers, auditors and users
 Preparers use Conceptual Framework to develop accounting policies
in the absence of specific standard or interpretation
 Development of Conceptual Framework
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Conceptual Framework sets out the concepts that

underlie IFRS financial statements
It comprises of:
Level 1: the objective of general purpose financial
reporting
Level 2: fundamental concepts: qualitative
characteristics & elements of financial statements
Level 3: recognition, measurement, presentation and
disclosure
Other concepts all flow from the objective
 Level 1 Objectives of GPFR
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 General Purpose Financial Reporting (GPFR)
 aims to provide useful financial information about the reporting
entity to primary users (Existing and potential Investors, lenders
and other creditors) who cannot require the reporting entity to
provide information directly to them.
 Special purpose financial reporting
 responds to the requirements of users that have the authority to
require the reporting entity to provide the information that they
need for their purposes directly to them.
Examples include:
 Ethiopian Revenue and Customs Authority
 Objectives of GPFR….(Cont’d)
37
IFRS is designed for general purpose financial reporting by profit-
oriented entities,
IFRSs focus on information needs of (primary users) existing and
potential investors, lenders and other creditors who cannot require
information from the entity
Primary users need information:
√ to assess the reporting entity’s prospects for future net cash inflows
√ To assess how effectively and efficiently management has discharged
their responsibilities to use the entity's existing resources (i.e.,
stewardship).
√ To make decisions to buy, hold, sell equity and debt instruments or to
provide a loan or to require settlement of a loan.
 General Purpose Financial statements
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Provide information about:

 Economic resources and claims (Statement of Financial Position)
 Changes in economic resources and claims resulting from
financial performance (Statement of Profit or Loss & Other
Comprehensive Income)
 Changes in economic resources and claims not resulting from
financial performance (Statement of Changes in Equity)
 Financial performance reflected by past cash flows (Statement of
Cash Flows)
N.B. The conceptual framework makes it clear that the financial
reporting should be based on the accrual basis of accounting.
SECOND LEVEL: FUNDAMENTAL CONCEPTS

Qualitative Characteristics of Accounting

Information
IASB identified the Qualitative Characteristics of accounting
information that distinguish better (more useful) information
from inferior (less useful) information for decision-making
purposes.

LO 4
Qualitative characteristics: General purpose financial reporting

Qualities IFRS
ILLUSTRATION 2-2
Relevance: capable of making a difference fundamental
Hierarchy of Accounting
Qualities

Faithful representation: complete, neutral and free fundamental

from error

Understandability enhancing
Timeliness enhancing
Comparability: like things look alike; different enhancing
things look different
Verifiability (direct or indirect): consensus, but not enhancing
necessarily complete agreement, that a depiction is
a faithful representation
LO 4
 Fundamental qualitative characteristics
41
 If financial information is to be useful, it must be relevant and
faithfully represent what it purports to represent (i.e. fundamental
qualities).
 Financial information without both relevance and faithful
representation is not useful, and it cannot be made useful by being
more comparable, verifiable, timely or understandable.
a) Relevance: capable of making a difference in users’ decisions
 predictive value (input to predict future cash flows)
 confirmatory value (confirm/disconfirm prior cash flow
expectations)
 materiality
 Materiality
42

 Materiality is an entity specific aspect of relevance

based on the nature or magnitude, or both, of the
items to which the information relates in the context
of an individual entity’s financial report.
 Consequently, an entity need not:
apply its accounting policies to immaterial items;
and
disclose immaterial information.
 Fundamental qualities . . .
43

Faithful Representation:
 To be useful, financial information must not only be
relevant, it must also represent faithfully the phenomena
it purports to represent.
 Faithful representation includes:
 Completeness

 Neutrality, and

 Free from error

 Enhancing Characteristics
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a) Comparability: ability to identify similarities in, and

differences among, items.
b) Verifiability: independent observations would yield
essentially the same measure or conclusions.
c) Timeliness: information is provided in time to be
capable of influencing decisions.
d) Understandability: information is classified,
characterized and presented clearly and concisely.
 The cost constraint on useful financial reporting
45

 Reporting financial information imposes costs, and it is

important that those costs are justified by the benefits of
reporting that information.
 In applying the cost constraint, the standard-setter
(IASB or IPSASB) assesses whether the benefits of
reporting particular information are likely to justify the
costs incurred to provide and use that information.
 Elements of Financial Statements
46
Asset Income
 resource controlled by the  Recognized either in the form of
entity inflows/increase in
 result of past event asset/decrease in liability in
current reporting period that
 expected inflow of economic result in increased equity except
benefits contributions from owners
Liability Expense
 present obligation  Recognized either in the form of
 arising from past event outflows/decrease in
asset/increase in liability in
 expected outflow of economic
current reporting period that
benefits result in decreased equity except
Equity = assets less liabilities distributions to owners
 Recognition: assets and liabilities
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Assets or liability is recognized when:

 The element satisfies definition
 It is probable that any future economic benefits
associated with the item will flow to or from the entity;
and
 The item has a cost or value that can be measured with
reliability (i.e. complete, neutral and free from error)
 Cont…
48

 What does probable mean?

 It means “more likely than not”

 The meaning of probable is determined at the standards

level. Therefore, inconsistent use across IFRSs (usually
more than 50%)

 What does measure reliably mean?

 To a large extent, financial reports are based on
estimates, judgements and models rather than exact
depictions.
 When to derecognize assets and liabilities? the ‘concepts’

49
 Derecognition is the removal of all or part of a previously
recognised asset or liability from an entity’s statement of
financial position.
 derecognition is normally when:
√ The entity loses control of all or part of a recognised
asset or
√ the entity no longer has a present obligation for all or
part of a recognized liability.
 Level 3: recognition, measurement & disclosure concepts
50
 Underlying assumptions of financial reporting
 Recognition of the elements of financial statements
 Measurement: is the process of determining monetary amounts at
which elements are recognised and carried.
Measurement methods include:
 Historical cost: cash paid or fair value of consideration given
 Current cost: Cash that would be paid if acquired now
 Realisable (settlement) value: cash that could be obtained by selling
the asset now
 Present value: present discounted value of future net cash inflows
that the item is expected to generate
LO 5
 Constraints
52

Cost vs. benefit: cost of information is justified by the

benefits of reporting that information.
* Benefits include more efficient functioning of capital
markets and a lower cost of capital for the economy.
* Costs include collecting, processing, verifying and
disseminating financial information and the costs of
analysing and interpreting the information provided.
 Financial statements
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Underlying assumptions of financial reporting:
Going concern, and
Accruals accounting
A statement of financial position as at the end of the period
A statement of profit or loss and other comprehensive income
for the period
A statement of changes in equity for the period
A statement of cash flows for the period
Notes, comprising
 A summary of significant accounting policies
 Other explanatory information
 test your understanding
Identify which basic assumption of accounting is best
described in each item below.
(a) The economic activities of ABC Corporation are divided
into 12-month periods for the purpose of issuing annual Periodicity
reports.
(b) XYZ CO. does not adjust amounts in its financial Monetary
statements for the effects of inflation. Unit
(c) CBE reports current and non-current classifications in its
statement of financial position. Going Concern
(d) The economic activities of Parent Co. and its subsidiaries
are merged for accounting and reporting purposes. Economic
Entity

LO 6
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Thank you

Questions or Comments