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Introduction
International Financial Reporting Standards (IFRS) are the world-wide accounting
standards which consists of
1) Standards (IFRS statements & IAS standards)
2) Interpretations (IFRS imprementations)
3) the Framework
adopted by the International Accounting
Standards Board (IASB).
IFRS is adapted by more than 12,000 companies in more than 100 countries.
In a survey conducted recently by the International Federation of Accountants
(IFAC), a large majority of accounting leaders from around the world agreed
that a single set of international standards is important for economic
growth.
Of the 143 leaders from 91 countries who responded, 90
percent reported that a single set of international financial reporting
standards was “very important” or “important” for economic growth in their
countries (http://www.ifac.org/globalsurvey).
IFRS will affect almost every aspect of a company’s
operations, everything from its information technology systems, to its tax
reporting requirements, to the way it tracks stock-based compensation.
1 Conponent of IFRS
Many of the standards forming part of IFRS are known by the
older name of International Accounting Standards (IAS). IAS were issued between
1973 and 2001 by the board of the International Accounting
Standards Committee (IASC). In April 2001 the IASB adopted all IAS and
continued their development, calling the new standards IFRS.
International Financial Reporting Standards comprise:
1) International Financial Reporting Standards (IFRS) -
standards issued after 2001
2) International Accounting Standards (IAS) - standards issued before 2001
3) Interpretations originated from the International Financial Reporting Interpretations
Committee (IFRIC) - issued after 2001
4) Standing Interpretations Committee (SIC) - issued before 2001
There is also a Framework for the Preparation and
Presentation of Financial Statements which describes of the principles
underlying IFRS.
2 Concept of IFRS
Perhaps the greatest difference between IFRS and U.S. GAAP is that IFRS
provides much less overall detail. As an example, IFRS fit into one book,
about two inches thick, while the three FASB paperbacks of pronouncements
plus the paperback version of the FASB Emerging Issues Task Force consensuses
measure about nine inches thick, and that doesn’t include all of the authoritative
literature.
In the absence of a Standard or an Interpretation that
specifically applies to a transaction, management must use its judgment in
developing and applying an accounting policy that results in information that
is relevant and reliable. In making that judgment, IAS 8.11 requires management
to consider the definitions, recognition criteria, and measurement concepts for
assets, liabilities, income, and expenses in the Framework. This elevation of
the importance of the Framework was added in the 2003 revisions to IAS 8.
International Accounting Standard IAS 8, paragraph 11
provides:
In making the judgment, management shall refer to, and
consider the applicability of, the following sources in descending order:
(a) The requirements and guidance in Standards and
Interpretations dealing with similar and related issues; and
(b) The definitions, recognition criteria and measurement
concepts for assets, liabilities, income and expenses in the Framework.
3 Outline of main IFRS
(1) Financial Statement
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 present all non-owner changes in equity (that is, 'comprehensive
income' ) either in one statement of comprehensive income or in two statements
(a separate income statement and a statement of comprehensive income).
Components of comprehensive income may not be presented in the statement
of changes in equity.
Entity must present a statement of financial position (balance sheet) as
at the beginning of the earliest comparative period in a complete set of
financial statements when the entity applies an accounting
'Balance sheet' will become 'Statement of financial
position'
'Income statement' will become 'Statement of comprehensive income'
'Cash flow statement' will become 'Statement of cash flows'.
The revised IAS 1 is effective for annual periods beginning
on or after 1 January 2009. Early adoption is permitted.
2) Business combinations
All business combinations are accounted for by applying the
purchase method, requiring that one entity is identified as acquirer
(IFRS3.17).
The acquiring entity assesses the fair value of the separate
assets, liabilities and contingent liabilities in the business it has acquired.
This can include identification of intangible assets (goodwill), for example
customer relationships, which are not commonly recognized except on
acquisitions (IFRS3.36)
The difference between the cost of the business combination and the fair
value of the assets and liabilities acquired represents goodwill (IFRS3.51).
Goodwill is not subject to amortization, but is assessed for impairment
at least annually (IFRS3.54 and IAS36.10). Impairment is charged to the
income statement (IAS36.60). Impairment provisions on goodwill are not
subsequently reversed (IAS36.124)
(3)
Property, plant and equipment (PPE)
Property, plant and equipment (PPE) is measured initially at
cost (IAS16.15). Cost can include borrowing costs directly attributable to the
acquisition, construction or production if the entity opts to adopt such a
policy consistently (IAS23.11).
Property, plant and equipment may be revalued to fair value
if the entire class of assets to which it belongs is so treated (for example,
the revaluation of all freehold properties) (IAS16.31 and 36). Surpluses on
revaluation are recognized directly to equity, not in the income statement;
deficits on revaluation are recognized as expenses in the income statement
(IAS16.39 and 40).
Depreciation is charged to write off the cost or valuation of the asset
over its estimated useful life down to the recoverable amount (IAS16.50).
The cost of depreciation is recognized as an expense in the income statement
unless it is included in the carrying amount of another asset (IAS16.48).
Depreciation of PPE used for development activities may be
included in the cost of an intangible asset recognized in accordance with IAS38
Intangible Assets (IAS16.49). The depreciation method and recoverable amount is
reviewed at least annually (IAS16.61). In most cases the method is
"straight line", with the same depreciation charge from the date when
an asset is brought into use until it is expected to be sold or no further
economic benefits obtained from it, but other patterns of depreciation such as
"reducing balance" are used if assets are used proportionately more
in some periods than others (IAS16.56).
(4) Inventories
Inventory is stated at the lower of cost and net realizable
value (IAS2.9), which is similar in principle to lower of cost or market
(LOCOM) in US
GAAP.
Cost comprises all costs of purchase, costs of conversion
and other costs incurred in bringing items to their present location and
condition (IAS2.10). Where individual items are not identifiable, the "first in
first out" (FIFO) or weighted average cost
formula is used. "Last in first out" (LIFO) is not acceptable
(IAS2.25).
Net realizable value is the estimated selling price less the
costs to complete and costs to sell.
(5) Vacation accrual
Employee costs are recognized when an employee has rendered
service during an accounting period (IAS19.10). This requires accruals for
short-term compensated absences such as vacation (holiday) pay (IAS19.11).
Profit sharing and bonus plans require accrual when an entity has an obligation
to make such payments at the reporting date (IAS19.17).
(6) Stock option
Where an entity receives goods or services in return for the
issue of its own shares or equity instruments it accounts for the fair value of
those goods or services as an expense or as an asset (IFRS2.7). Where it offers
options and other share based incentives to its employees it is required to
assess the market value of the instruments when they are first granted and then
to charge the cost over the period in which the benefit vests (IFRS2.10).
(7) Provisions
Provisions are liabilities of uncertain timing or amount
(IAS37.10). Provisions are recognized when an entity has, at the balance sheet
date, a present obligation as a result of a past event, when it is probable
that there will be an outflow of resources (for example a future cash payment)
and when a reliable estimate can be made of the obligation (IAS37.14).
Restructuring provisions are recognized when an entity has a detailed plan for
the restructuring and has raised an expectation amongst those affected that it
will carry out the restructuring (IAS37.72).
(8) Revenue
Revenue is measured at the fair value of consideration
received or receivable (IAS18.9).
Revenue for the sale of goods cannot be recognized until the
entity has transferred to the buyer the significant risks and rewards of
ownership of the goods (IAS18.14).
Revenue for rendering of services is accounted for to the
extent that the stage of completion of the transaction can be measured reliably
(IAS18.20).
(9) Income tax
Taxes payable in respect of current and prior periods are recognized
as a liability to the extent they are unpaid at the balance sheet date (IAS
12.12).
Deferred tax liabilities are recognized for taxable
temporary differences at the balance sheet date which will result in tax
payable in future periods (for example, where tax deductions 'capital
allowances' have been claimed for capital items before the equivalent
depreciation expense has been charged to the income statement) (IAS 12.15).
Deferred tax assets are recognized for deductible temporary differences at the
balance sheet date (for example, tax losses which can be used in future
periods) if it is probable that there will be future taxable profits against
which they can be offset (IAS 12.24, IAS 12.34).
There are exceptions to the recognition of deferred taxes in
relation to goodwill (for deferred tax liabilities), the initial recognition of
assets and liabilities in some cases and in relation to investments and
interests in subsidiaries, branches, jointly controlled entities and associates
providing certain criteria are met (IAS 12.15, IAS 12.24, IAS 12.39, IAS
12.44).
(10) Joint ventures
Joint ventures are investments other than subsidiaries where
the investor has a contractual arrangement with one or more other parties to
undertake an economic activity that is subject to joint control (IAS31.3).
Joint ventures may be accounted for using either proportionate
consolidation, accounting for the investor's share of the assets, liabilities,
income and expenses of the joint venture (IAS31.30) or equity method. The
investment is stated initially at cost and adjusted thereafter for the
investor's share of post-acquisition changes in net assets. The income statement
includes the investor's share of profit or loss of the investment (IAS31.38).
Associates are investments, other than joint ventures and
subsidiaries, in which the investor has a significant influence (the power to
participate in financial and operating policy decisions) (IAS28.2). It is
presumed that this will be the case if the investment is greater than 20% of
the investee unless it can be clearly demonstrated not to be the case (IAS28.
6). Associates are accounted for using the equity method.
Investments other than subsidiaries, joint ventures and
associates are accounted for at their fair values unless (IAS39.9 and 46):
1) They have fixed or determinable maturity periods and are
expected to be held to maturity, in which case they are stated at amortized
cost (providing a constant rate of return until maturity; or
2) There is no reliable market value, in which case they are measured at
cost.
(11) Leasing
(accounting by lessees)
Leases are classified:-
finance leases, being a lease which transfers substantially
all the risks and rewards incidental to ownerships to the lessee. Finance
leases are recognized on the balance sheet as an asset (the asset being leased)
and as a liability (liability to the lessor) (IAS17.4, 20 and 25)
operating leases, being a lease other than a finance lease. An expense
is recognized in the income statement over the time period that the asset
is used (IAS17.4 and 33).
IASB is developing a discussion paper for November 2008 regarding convergence
of the accounting standards for lessees. No longer would there be categories
of 'finance' and 'operating' leases (IAS 17), instead the current finance
lease model would be applied to all leases. The new accounting standard
would be finalized in 2011.
(12) Cash flow statements
IFRS cash flow statements show movements in cash and cash
equivalents. This includes cash on hand and demand deposits, short term liquid
investments readily convertible to cash and overdrawn bank balances where these
readily fluctuate from positive to negative (IAS7.6 to 9). IFRS cashflow
statements do not need to show movements in borrowings or net debt.
Cash flow statements may be presented using either a direct
method, in which major classes of cash receipts and cash payments are
disclosed, or using the indirect method, whereby the profit or loss is adjusted
for the effect of non-cash adjustments (IAS7.18).
Items on the cash flow statement are classified as operating
activities, investing activities and financing (IAS7.10).
4 Adoption of IFRS
IFRS are used more than 100 countries around the world.
The Accounting Standards Board of Japan has agreed to resolve all inconsistencies
between the current JP-GAAP and IFRS by 2011. (https://www.asb.or.jp/asb/top_e.do)
Appendix 1 List of IFRS statements
The following IFRS statements are
currently issued:
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