Accounting (Basics) - Lecture 13
INTERNATIONAL FINANCIAL REPORTING STANDARDS – CONCEPTUAL FRAMEWORK.


Content
nInternational Financial Reporting Standards
n Conceptual framework of IFRS
2

International Accounting Standards Board
nThe International Accounting Standards Board (IASB) is the independent, accounting
standard-setting body of the IFRS Foundation. nThe IASB was founded on April 1, 2001, as the
successor to the International Accounting Standards Committee (IASC). nIt is responsible for
developing International Financial Reporting Standards (IFRS), previously known as International
Accounting Standards (IAS) and promoting the use and application of these standards.
n
3

IFRS
nThe International Financial Reporting Standards, usually called the IFRS Standards, are standards
issued by the IFRS Foundation and the International Accounting Standards Board (IASB) to provide a
common global language for business affairs so that company accounts are understandable and
comparable across international boundaries. nThey are a consequence of growing international
shareholding and trade and are particularly important for companies that have dealings in several
countries. nThey are progressively replacing many different national accounting standards.
4

IFRS
nThey 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. nIFRS,
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. nIAS 29 and IFRIC 7 are authorized in terms of the units of constant purchasing power
paradigm.
5

IFRS
nIFRS began as an attempt to harmonize accounting across the European Union but the value of
harmonization quickly made the concept attractive around the world. nHowever, it has been debated
whether or not de facto harmonization has occurred. nStandards 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.
6

IFRS
nIAS were issued between 1973 and 2001 by the Board of the International Accounting Standards
Committee (IASC). nOn 1 April 2001, the new International Accounting Standards Board (IASB) took
over from the IASC the responsibility for setting International Accounting Standards. nDuring its
first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards
(SICs). nThe IASB has continued to develop standards calling the new standards "International
Financial Reporting Standards".
7

IFRS
nCriticisms of IFRS are
q(1) that they are not being adopted in the US
q(2) a number of criticisms from France and
q(3) that IAS 29 Financial Reporting in Hyperinflationary Economies had no positive effect at all
during 6 years in Zimbabwe's hyperinflationary economy.
q
qThe 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.
n
8

Regulation – IASB (nature, objectives)
nThe International Accounting Standards Board (IASB) was established in 2001 as part of the
International Accounting Standards Committee (IASC) Foundation. nThe objectives of the IASC
Foundation and of the IASB are: a)to develop  a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent and comparable
information in financial statements and other financial reporting to help participants in the
world’s capital markets and other users make economic decisions;
9

Regulation – IASB (nature, objectives)
b)to promote the use and rigorous application of those standards;
c)to take account of the special needs of SM entities and emerging economies; and
d)to bring about convergence of national accounting standards and IAS and IFRS to high quality
solutions.
n
10

Regulation – IASB (functions)
nIASB is the standard-setting body of the IASC Foundation - it is responsible for approving IFRS
(including Interpretations) and related documents, such as the Framework for the Preparation and
Presentation of Financial Statements, exposure drafts and discussion documents. nThe IASB achieves
its objectives primarily by developing and publishing IFRS and promoting the use of those standards
in general purpose financial statements and other financial reporting.
11

Regulation – IASB (functions)
nIAS and related Interpretations, which were adopted before IFRS were developed, remain applicable
with the same authority as IFRS, unless and until they are amended or withdrawn by the IASB.
n
n
12

Regulation - IFRS
nIFRS set out recognition, measurement, presentation and disclosure requirements dealing with
transactions and other events and conditions that are important in general purpose financial
statements.
nIFRS are based on the Framework.
nThe objective of the Framework is to facilitate the consistent and logical formulation of IFRS.
nIt also provides a basis for the use of judgment in resolving accounting issues.
13

Regulation - IFRS
nIFRS are designed to apply to the general purpose financial statements and other financial
reporting of all profit-oriented entities. nThe objective of financial statements is to provide
information about the financial position, performance and cash flows of an entity that is useful to
those users in making economic decisions.
n
n
14

15
Regulation - IFRS vs. GAAP
US GAAP
IFRS
•rules-based
•procedure-oriented
•principles-based
•objective-oriented

IFRS Assets
nIFRS guidance for assets recognizes as assets:
a)The future economic benefit of an asset is its potential to contribute, directly or indirectly,
to the flow of cash and cash equivalents to the entity. Those cash flows may come from using the
asset or from disposing of it. b)Many assets, for example property, plant and equipment, have a
physical form. However, physical form is not essential to the existence of an asset. Some assets
are intangible.
n
n
16

IFRS Assets
c)In determining the existence of an asset, the right of ownership is not essential. Thus, for
example, property held on a lease is an asset if the entity controls the benefits that are expected
to flow from the property.
n
n
17

IFRS liabilities
nIFRS guidance for liabilities recognizes as liabilities:
a)An essential characteristic of a liability is that the entity has a present obligation to act or
perform in a particular way. The obligation may be either a legal obligation or a constructive
obligation: i.A legal obligation is legally enforceable as a consequence of a binding contract or
statutory requirement.
18

IFRS liabilities
ii.A constructive obligation is an obligation that derives from an entity’s actions when by an
established pattern of past practice, published policies or a sufficiently specific current
statement, the entity has indicated to other parties that it will accept particular
responsibilities, and, as a result, the entity has created a valid expectation on the part of those
other parties that it will discharge (fulfill) those responsibilities.
n
19

IFRS liabilities
b)The settlement of a present obligation usually involves the payment of cash, transfer of other
assets, provision of services, the replacement of that obligation with another obligation, or
conversion of the obligation to equity. An obligation may also be extinguished by other means, such
as a creditor waiving or forfeiting its rights.
n
n
20

IFRS Equity
nIFRS guidance for equity recognizes as equity:
a)Equity is the residual of recognized assets minus recognized liabilities. b)It may be
subclassified in the statement of financial position. For example, in a corporate entity,
subclassifications may include funds contributed by shareholders, retained earnings and gains or
losses recognized directly in equity.
n
Sep 21, 2015
21

Performance
nPerformance is the relationship of the income and expenses of an entity during a reporting period.
nIFRS permits entities to present performance in a single financial statement (a statement of
comprehensive income) or in two financial statements (an income statement and a statement of
comprehensive income). nTotal comprehensive income and profit or loss are frequently used as
measures of performance or as the basis for other measures, such as return on investment or
earnings per share.
22

Performance
nIFRS defines income and expenses as follows:
a)Income is increases in economic benefits during the reporting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity investors. The definition of income encompasses both
revenue and gains:
n
23

Performance
i.Revenue is income that arises in the course of the ordinary activities of an entity and is
referred to by a variety of names including sales, fees, interest, dividends, royalties and rent.
ii.Gains are other items that meet the definition of income but are not revenue. When gains are
recognized in the statement of comprehensive income, they are usually displayed separately because
knowledge of them is useful for making economic decisions.
24

Performance
b)Expenses are decreases in economic benefits during the reporting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity, other
than those relating to distributions to equity investors. The definition of expenses encompasses
losses as well as those expenses that arise in the course of the ordinary activities of the entity.
n
25

Performance
i.Expenses that arise in the course of the ordinary activities of the entity include, for example,
cost of sales, wages and depreciation. They usually take the form of an outflow or depletion of
assets such as cash and cash equivalents, inventory, or property, plant and equipment.
ii.Losses are other items that meet the definition of expenses and may arise in the course of the
ordinary activities of the entity. When losses are recognized in the statement of comprehensive
income, they are usually presented separately because knowledge of them is useful for making
economic decisions.
n
26

Recognition and measurement of assets, liabilities, income and expenses. Accrual basis
n
nRecognition is the process of incorporating in the financial statements an item that meets the
definition of an asset, liability, income or expense and satisfies the following criteria: a)it is
probable that any future economic benefit associated with the item will flow to or from the entity
b)the item has a cost or value that can be measured reliably
27

Recognition and measurement of assets, liabilities, income and expenses. Accrual basis
n
nMeasurement is the process of determining the monetary amounts at which an entity measures assets,
liabilities, income and expenses in its financial statements. Measurement involves the selection of
a basis of measurement. Two common measurement bases are:
a)Historical cost:
i.for assets - it is the amount of cash or cash equivalents paid or the fair value of the
consideration given to acquire the asset at the time of its acquisition.
b)
28

Recognition and measurement of assets, liabilities, income and expenses. Accrual basis
n
ii.for liabilities - it is the amount of proceeds of cash or cash equivalents received or the fair
value of non-cash assets received in exchange for the obligation at the time the obligation is
incurred, or in some circumstances (for example, income tax) the amounts of cash or cash
equivalents expected to be paid to settle the liability in the normal course of business.
nAmortized historical cost is the historical cost of an asset or liability plus or minus that
portion of its historical cost previously recognized as expense or income.
n
29

Recognition and measurement of assets, liabilities, income and expenses. Accrual basis
b)
b)
b)Fair value – it is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction.
nAn entity shall prepare its financial statements, except for cash flow information, using the
accrual basis of accounting. On the accrual basis, items are recognized as assets, liabilities,
equity, income or expenses when they satisfy the definitions and recognition criteria for those
items.
n
30

Recognition in financial statements
nAn entity shall recognize an asset in the statement of financial position when it is probable that
the future economic benefits will flow to the entity and the asset has a cost or value that can be
measured reliably. nAn asset is not recognized when expenditure has been incurred for which it is
considered not probable that economic benefits will flow to the entity beyond the current reporting
period. nInstead such a transaction results in the recognition of an expense in the statement of
comprehensive income.
31

Recognition in financial statements
nAn entity shall not recognize a contingent asset as an asset. nHowever, when the flow of future
economic benefits to the entity is virtually certain, then the related asset is not a contingent
asset, and its recognition is appropriate.
32

Recognition in financial statements
nAn entity shall recognize a liability in the statement of financial position when: a)the entity
has an obligation at the end of the reporting period as a result of a past event, b)it is probable
that the entity will be required to transfer resources embodying economic benefits in settlement,
and
c)the settlement amount can be measured reliably.
33

Recognition in financial statements
nA contingent liability is either a possible but uncertain obligation or a present obligation that
is not recognized because it fails to meet one or both of recognition conditions. nThe recognition
of income results directly from the recognition and measurement of assets and liabilities. nAn
entity shall recognize income in the statement of comprehensive income when an increase in future
economic benefits related to an increase in an asset or a decrease of a liability has arisen that
can be measured reliably.
n
n
n
34

Recognition in financial statements
nThe recognition of expenses results directly from the recognition and measurement of assets and
liabilities. An entity shall recognize expenses in the statement of comprehensive income when a
decrease in future economic benefits related to a decrease in an asset or an increase of a
liability has arisen that can be measured reliably. nTotal comprehensive income is the arithmetical
difference between income and expenses. It is not a separate element of financial statements, and a
separate recognition principle is not needed for it.
35

Recognition in financial statements
nProfit or loss is the arithmetical difference between income and expenses other than those items
of income and expense that IFRS classifies as items of other comprehensive income. It is not a
separate element of financial statements, and a separate recognition principle is not needed for
it.
n
36

Initial and subsequent measurement in financial statements
n
nAt initial recognition an entity shall measure assets and liabilities at historical cost. nDuring
subsequent measurement it is necessary to distinguish between financial and non-financial assets
and liabilities. Basic financial assets and basic financial liabilities are subsequently measured
at amortized cost less impairment.
n
37

Initial and subsequent measurement in financial statements
n
nMost non-financial assets that an entity initially recognized at historical cost are subsequently
measured on other measurement bases. For example: a)An entity measures property, plant and
equipment at the lower of depreciated cost and recoverable amount. b)An entity measures inventories
at the lower of cost and selling price less costs to complete and sell. c)An entity recognizes an
impairment loss relating to non-financial assets that are in use or held for sale.
n
38

Initial and subsequent measurement in financial statements. Offsetting
n
n
nMeasurement of assets at those lower amounts is intended to ensure that an asset is not measured
at an amount greater than the entity expects to recover from the sale or use of that asset. nMost
liabilities other than financial liabilities are measured at the best estimate of the amount that
would be required to settle the obligation at the reporting date. nAn entity shall not offset
assets and liabilities, or income and expenses, unless required or permitted by IFRS.
n
n
39