19 International Financial Reporting Standards-I

Sanjeet Sharma

LEARNING OBJECTIVES:

This module helps to understand the concept of International Financial Reporting Standards. After studying this module the students may able to

Understand the objective, need and importance of International Financial Reporting Standards.
Explain characteristics of the International Financial Reporting Standards.
To recognize financial statements required under the IFRS.
Get basic knowledge of International Financial Reporting Standards.

INTRODUCTION

The process of globalization and a rising phenomenon of foreign associate companies have resulted in increased movements of companies from one country to another. The need for development of international accounting standards arise to bring harmony in financial reporting worldwide. Accounting standards and principles differ from country to country because these are affected by economic, political, legal, social and cultural systems of the country in which these are developed. Due to different accounting standards and principles in different countries credibility of accounting reports lose when these reports are prepared according to these standards and principles.

ACCOUNTING STANDARD

An accounting standard is simply a selected set of accounting policies or broad guidelines which are issued by an accounting body for the preparation and presentation of financial statements. Accounting standards are the norms of accounting policies and practices to guide the treatment of transactions and events in the accounting process.

The adoption and application of accounting standards ensures uniformity, comparability and qualitative improvement in the preparation and presentation of financial statements. The following are the causes of development of accounting standards.

· to reduce or eliminate confusing or ambiguous terms and practices

· Uniform presentation of accounts

· to avoid manipulation of accounting results

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

Accounting is language of business. International Financial Reporting Standards (IFRS) has been developed to make accounting as a common globally accepted language for business affairs. International Financial Reporting Standards (IFRS) is a set of accounting standards which is developed by International Accounting Standards Board (IASB). International Accounting Standards Board (IASB) is an independent, not-for-profit organization. International Financial Reporting Standards (IFRS) makes an attempt that accounts of companies can be easily understandable and comparable all over the word. International financial reporting standards (IFRS) are a set of generally accepted accounting principles (GAAP) which provide guidelines to companies for preparation and presentation of financial statements. Financial statements are important source of information which is published annually by company. These are useful to various stakeholders such as shareholders, debtors, clients, employees and governments in understanding a company’s financial performance. The need of International Financial Reporting Standards (IFRS) arises due to growing international shareholding and trade. International Financial Reporting Standards (IFRS) are the rules or principles which are used by accountants to maintain books of accounts of a company. Further, books of accounts prepared according to these are relevant, reliable, understandable, and comparable. These are very important for multinational companies which are dealings in number of counties. In many countries national accounting standards has been replaces by International Financial Reporting Standards (IFRS).

Simply, International Financial Reporting Standards are guidelines which govern the reporting of accounting transactions. The aim of IFRS is to provide a worldwide framework for companies to prepare and present their financial statements. Thus, IFRS are general guidance which is related with preparation and presentation of financial statements. The term ‘International Financial Reporting Standards’ (IFRSs) can be defined in two ways

· Narrow meaning

· Broad meaning

NARROW MEANING

In narrow sense IFRSs includes only the ‘International Financial Reporting Standards issued by the IASB.

BROAD MEANING

In broad sense, IFRSs includes

International Financial Reporting Standards (IFRSs)
International Accounting Standards (IASs)
Interpretations originated from the International Financial Reporting Interpretations Committee (IFRICs)
Interpretations originated from the Standing Interpretations Committee (SICs)

FEATURES IN IFRS

The following are the general features in IFRS:

1. Faithful presentation: IFRS provide fair or faithful representation of the financial statements. IFRS ensures that financial statements are presenting true and fair view of an entity. For this IFRS introduced the concept of fair value measurement.

2. Going concern: IFRS is based on the assumption of going concern and financial statements are presented on a going concern basis.

3. Accrual basis of accounting: IFRS is based on the accrual basis accounting. According to this assumption income, expenses, assets, liabilities and equity are recorded when they occur rather when settled.

4. Materiality: International Financial Reporting Standards provide due consideration to Materiality. Material items should be presented separately.

5. Frequency of reporting: IFRS provides that

· at least annually a complete set of financial statements should be presented.

· However listed companies generally also publish interim financial statements

6. Comparative information: IFRS provides that comparative information in respect of the previous period should be presented in the current period’s financial statements.

Consistency of presentation: IFRS requires consistency in the presentation and classification of items in the financial statements from one period to the next.

BACKGROUND OF IFRS

International Accounting Standards Committee (IASC) was established in 1973. Later on, IASC was replaced by International Accounting Standards Board (IASB) in the year 2001. The IASB has the power to develop IFRSs and to approve interpretations of those standards. International Accounting Standards Board (IASB) presently issues International Financial Reporting Standards (IFRS). Sometimes IFRS is confused with IAS (International Accounting Standards), which were older standards that IFRS has replaced.

ADOPTION OF IFRS

The origin of IFRS began in the European Union with purpose of to harmonize business accounting across the European Union. This idea of IFRS was attractive and quickly spread globally. Presently, IFRS are adopted and used in many parts of the world, including the

· European Union,

· Hong Kong,

· India,

· Malaysia,

· Pakistan,

· GCC countries,

· Russia,

· Turkey,

· Philippines,

· South Africa,

· Australia

· Singapore,

· Chile,

but not in the United States. The United States has not yet decided about IFRS and the Securities and Exchange Commission (SEC) is in the process of deciding whether to adopt the IFRS in America or not. Currently, about 120 countries use IFRS in some way, further more countries expected to adopt IFRS by 2015.

OBJECTIVES OF IFRS:

The main purpose of the IFRS is to bring transparency, accountability and efficiency to global reporting system. The main objectives of the International Financial Reporting Standards (IFRS) are given as below

Transparency

IFRS make attempts to bring transparency in reporting system accounting. These focus on

· enhancing the global comparability

· improving quality of financial information,

· Enabling investors and other stakeholders to take qualitative decisions.

Accountability

IFRS also aims at strengthening accountability by

· reducing the information gap between the providers and users of capital

· Important to regulators around the world.

· helping investors to identify opportunities and risks around the world,

· Improving capital allocation.

· Reducing international reporting costs.

ACCOUNTING STANDARD: An accounting standard is simply a selected set of accounting policies or guidelines issued by an accounting body for the preparation and presentation of financial statements.

IFRS: IFRSs includes

· International Financial Reporting Standards (IFRSs)

· International Accounting Standards (IASs)

· Interpretations originated from the International Financial Reporting Interpretations Committee (IFRICs)

· Standing Interpretations Committee (SICs)

FEATURES IN IFRS: Include

· based on assumptions of Going concern, Accrual basis of accounting and Materiality

· Consistent and Faithful presentation

· Comparative information

OBJECTIVES OF IFRS: main objectives of the International Financial Reporting Standards (IFRS) are to achieve efficiency, strengthening accountability and bring transparency in financial reporting.

FINANCIAL STATEMENTS UNDER THE INTERNATIONAL FINANCIAL REPORTING

STANDARDS (IFRS)

Financial statements

Financial statement means a statement which provides necessary financial information about an organization. Financial statements are prepared on the basis of some accounting principles. Financial statements are prepared with objective of providing information about the profitability and financial position of an entity and help various stake holders in making economic decisions. These users include shareholders, creditors, employees and the general public.

Information under Financial statements

IFRSs are applied by profit-orientated entities. Financial statements under IFRS provide information about the following important concepts:

· assets;

· liabilities;

· equity;

· income

· expenses

· Other information such as cash flows.

Annual reports required under IFRS

Following are the annual reports or financial statements which are required under IFRS:

1. Statement of Financial Position:

· Statement of Financial Position is also known as a balance sheet.

· IFRS reveals the ways in which the components of a balance sheet should be reported.

· provide the minimum scope of information to be presented

Elements of Statement of Financial Position

The, following elements as a minimum, should be presented on the face of the balance sheet or complete

Statement of Financial Position:

Element	Description
Assets	·	property, plant and equipment; investment property;
	·	intangible assets;
	·	financial assets;
	· investments accounted for using the equity method;
	·	biological assets;
	· deferred tax assets; current tax assets;
	· inventories; trade and other receivables;
	· Cash and cash equivalents.
Equity	·	issued capital to the parent’s owners
	· reserves attributable to the parent’s owners;
	· non-controlling interest
Liabilities	·	deferred tax liabilities; current tax liabilities

	·	financial liabilities;
	·	provisions;
	· trade and other payables
Assets and liabilities held for sale	·	Non-current assets held for sale and discontinued operations

Classification of assets and Liabilities

Statement of Financial Position should be classified on following basis

· Current and non-current assets

· current and non-current liabilities

2. Statement of comprehensive income:

· Disclose an entity’s financial performance over a specific period.

· Single statement: Statement of comprehensive income can be prepared in the form of one statement, or

· Two statements: Statement of comprehensive income can also be separated into statements of Profit and loss and a statement of other income, including property and equipment.

· finance costs;

· share of the profit or loss of associates and joint ventures;

· tax expense;

· the profit or loss of discontinued operations;

· profit or loss;

· share of other comprehensive income of associates and joint ventures accounted;

· the profit or loss attributable to non-controlling interest and that attributable to owners .

3. Statement of Changes in Equity:

· Statement of Changes in Equity is also known with name of statement of retained earnings;

· This statement reveals the changes that are taking place in earnings or profit of a company for in a particular financial period.

· the total amounts attributable to the parent’s owners and

· to non-controlling interest.

4. Statement of cash follows: Cash flow statement is a statement which shows sources and uses of cash in the organization. Statement of cash follows shows cash flow into three parts

· Operating cash follows,

· Investing cash follows,

· Financing cash follows.

5. Notes, accounting policies and other explanatory information

Further, in addition to above reports, following are the additional statements which are

· Notes to financial statements- present information about the basis for the preparation of the financial statements

· Summary of its accounting policies.

· Separate account reports for subsidiaries.

· Show the information required by IFRSs which are not provided in the financial statements,

relevant for understanding the information contained in the financial statements

The notes are an important part of the financial statements under IFRS. Notes provide information which is not disclosed in the ‘primary’ financial statements.

FEATURES OF IFRS FINANCIAL STATEMENTS

IFRS financial statements have certain features in common. Information in IFRS financial statements has these characteristics:

1. Relevant: The information provided by financial statements should relevant for all users of the statements for making decisions about a company.

2. Reliable: Financial statements should be complete and free from bias and material error.

3. Comparable: Financial statements should be comparable over

· Time i.e. one period to the another or

· for two different entities

4. Timely: Financial statements should make information available to users timely.

5. Understandable: The information presented in financial statements should be understandable.

IMPORTANCE OF IFRS

IFRS is the set of accounting standard or guidelines. Presently, IFRS is becoming the global standard for preparation of financial statements. More than 150 countries have adopted the IFRS as accounting standards in some way. Further, most of the countries are on the way of adopting these. The importance of IFRS can be cleared with points given below.

In present scenario companies are working in different countries. For presentation and preparation of accounts they have to follow generally accepted accounting principal (GAAP) of that country. So comparison of financial statement of two companies working in different countries is difficult. IFRS make international comparisons as easy.

2. Harmonization of accounting and reporting system

One of the most important factor about the IFRS has been the standardization of financial reporting and to develop a single set of qualitative, understandable and enforceable universal accounting standards. This will provide stable platform for international accounting.

3. High Quality and transparency:

IFRS is based upon principal based philosophy not on rule based philosophy. Main benefit of principal based philosophy is that it provides equality and transparency. IFRS always prefer substance over the legal form. This improves the quality and transparency of the financial statement. Further, there is minimum scope of manipulation.

4. Benefits to investors

IFRS provides following benefits to investors in the following ways:

· Provide accurate, timely, understandable and comprehensive information: The first benifit is that IFRS promise more accurate, understandable, timely and comprehensive financial statement information.

· Helps new or small investors: helps new or small investors by making the reporting standards simpler

· Reduces the cost for investors By eliminating the fees of analysts, IFRS reduces the cost for investors.

· Reduces the risk: Higher information quality reduces the risk to investors from buying and owning shares

· cost of investments is usually lower

5. Timely Loss recognition

One of the key features of IFRS is recognizing the loss immediately. It benefits the investors and other stakeholders within the company.

6. More Cross Border transactions and investments:

IFRS as a single set of global accounting standard creates the trust between the investors, buyer, lenders and suppliers, etc. The foreign investor can easily trust on the financial statement of any company. Thus, he can make investment easily. This results in increase in cross border transactions and investments.

7. Easy to understand and apply

IFRS is principle based Standards and easy to understand and apply.

8. Reflect the changes

International Financial Reporting Standards make continuous efforts to update the existing concepts according to the changes which are taking place in markets, business practices and the economic environment.

9. Reduces the cost of preparing the consolidated financial statements

Due to increasing globalization of financial markets and of companies, the use of a single set of financial reporting standards across countries also reduces the cost of preparing the consolidated financial statements.

10. Especially important for large companies

IFRS are especially important for large companies that have subsidiaries in different countries. Adopting IFRS i.e. a single set of global standards will simplify accounting procedures by allowing a company to use one reporting language.

LIMITATIONS OF IFRS

The International Financial Reporting Standard has many advantages but have some disadvantages also.

1. Cost to change the accounting system

· Some even entities have good accounting system but forced to incur the cost to change the new accounting system.

· The most noteworthy disadvantage of IFRS relate to the costs related to the changing the internal systems to make it compatible with the new reporting standards, training costs and etc.

2. Problems due to different Local rules, regulation and tax laws

Local rules, regulation and tax laws of the each country are different. In some cases, entities may require to prepare different financial statements for local laws and tax departments.

3. Creation of monopoly

One of the main disadvantages of converting to IFRS that it provides the IASB the monopoly power in setting the standards. IASB or IASC can not enforce the application of IFRS by all countries of the world.

4. Time consuming process

Even the companies and countries are incurring huge costs, the benefits of IFRS can not be seen until later point due to the fact that it takes some years for the harmonization.

5. Bring increased volatility

A fair value measurement is big issue which create problem in conversion to IFRS. This principle will bring increased volatility as the assets are reported.

6. Complicated and Not suitable for all type of organizations

· IFRS is quite complex and more complicated than the national accounting standards

· Not suitable for small and medium sized businesses.

STOP Quick Revision

IMPORTANCE OF IFRS: IFRS provides Global Comparability, Harmonization of accounting and reporting system, High transparency, Benefits to investors, Timely Loss recognition, Increase Cross Border investments, Easy to understand and apply, Reflect the changes and Reduces the cost of preparing the consolidated financial statements.

LIMITATIONS OF IFRS: Cost to change the new accounting system, Complicated and Not suitable for all type of organizations, Creation of monopoly, Time consuming process, Bring increased volatility, Problems due to different Local rules and regulation and tax laws

SUMMARY

The need for development of international accounting standards arise to bring harmony in financial reporting worldwide. Accounting standards and principles differ from country to country because these are affected by economic, political, legal, social and cultural systems of the country in which these are developed. Accounting is language of business. International Financial Reporting Standards (IFRS) has been developed to make accounting as a common globally accepted language for business affairs. International Financial Reporting Standards (IFRS) is a set of accounting standards which is developed by International Accounting Standards Board (IASB). International Accounting Standards Board (IASB) is an independent, not-for-profit organization. International Financial Reporting Standards (IFRS) makes an attempt that accounts of companies can be easily understandable and comparable all over the word. The main objectives of the International Financial Reporting Standards (IFRS) are to achieve efficiency, strengthening accountability and bring transparency in financial reporting. IFRS is the set of accounting standard or guidelines. Presently, IFRS is becoming the global standard for preparation of financial statements. More than 150 countries have adopted the IFRS as accounting standards in some way. Further, most of the countries are on the way of adopting these.

you can view video on International Financial Reporting Standards-I

Few suggested reading to learn more

Garg Kamal (2013)“Practical Guide to IFRS and Ind-AS” Bharat Law House.
Morley, Mike “IFRS Simplified: A fast and easy-to-understand overview of the new InternationalFinancial Reporting Standards” Nixon-Carre Ltd
Raiyani Jagadish R. “International Financial Reporting Standards (IFRS) & Indian Accounting Practices” New Century Publications.
Patel, Chintan N. and Bhupendra Mantri (2015) “Indian Accounting Standards (IND AS)”Taxmann.
Tulsian . P.C (2014) “Financial Accounting” Pearson Education India.
Lal, Jawahar and Seema Srivastava (2004) “Financial Accounting” S.Chand (G/L) & CompanyLtd.
Goyal, V.K. and Ruchi Goyal (2012) “Financial Accounting” PHI.
Maheshwari, S.N., Suneel K Maheshwari and Sharad K Maheshwari(2012) “Financial Accounting” Vikas Publishing House Pvt Ltd.
Monga, J.R. “Avanced Financial Accounting” Mayoor Paperbacks.
Bhattacharyya Asish K., (2012)” Essentials of Financial Accounting” PHI.
A Comparative Study of Ind AS (Indian Accounting Standards) and AS (Accounting Standards) (2015), Taxmann.
A Students Guide to IFRS (2012), Kaplan Publishing.

Points to Ponder

An accounting standard is simply a selected set of accounting policies or guidelines issued by an accounting body for the preparation and presentation of financial statements.
IFRSs includes International Financial Reporting Standards (IFRSs)