20 International Financial Reporting Standards-II

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LEARNING OBJECTIVES:

 

This module helps to understand the basic structure of International Financial Reporting Standards. After studying this module the students may able to understand the Components of International Financial Reporting Standards. They will also get knowledge of interpretations originated from the International Financial Reporting Interpretations Committee (IFRICs) and Standing Interpretations Committee.Further, they will able to explain various International Financial Reporting Standards (IFRSs) and International Accounting Standards (IASs).

 

INTRODUCTION

 

Financial Reporting Standards (IFRS) is a set of accounting standards which is developed by International Accounting Standards Board (IASB). 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.

 

COMPONENTS OF IFRS

 

The components of IFRS can be divided in to parts

 

Standards

 

Standards prescribe rules or accounting treatments for various individual items or elements of financial statements.

  • International Financial Reporting Standards (IFRSs) 2
  • International Accounting Standards (IASs)

 

Interpretations

 

Interpretations supplement IAS / IFRS standards. They deal with more specific situations not covered in the standard itself, or issues that arose after publishing of certain IFRS.

  • Interpretations originated from the International Financial Reporting Interpretations Committee (IFRICs)
  • Standing Interpretations Committee (SICs)

 

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On the basis of above it can be concluded that IFRSs the include the following components:

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

 

INTERNATIONAL ACCOUNTING STANDARDS

 

IASs are the standards issued before 2001. Sometimes IFRS is confused with IAS (International Accounting Standards), which were older standards issued by International Accounting Standards Committee (IASC). International Accounting Standards Committee (IASC) was established in 1973. The following table summarizes all IAS whether withdrawn or still in place. Those withdrawn or superseded by other standards are also cleared in the table.

 

List of International Accounting Standards

 

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    IASs are the standards issued before 2001.

IASs means International Accounting Standards,which were older standards issued by International Accounting StandardsCommittee (IASC).
  1. INTERNATIONAL FINANCIAL REPORTING STANDARDS

IFRSs are the standards issued after 2001. International Accounting Standards Committee (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. The following table summarizes all IFRS issued till the date.

 

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IFRSs are the standards issued

 

• After 2001.

• By International Accounting Standards Board (IASB).
  1. INTERPRETATIONS FROM THE INTERNATIONAL FINANCIAL REPORTING INTERPRETATIONS COMMITTEE (IFRICS)

 + Following table presents Interpretations from the International Financial Reporting Interpretations Committee (IFRICs):

 

List of Interpretations from the International Financial Reporting Interpretations Committee (IFRICs)

 

4.  INTERPRETATIONS FROM STANDING INTERPRETATIONS COMMITTEE (SICS)

 

SIC were issued before 2001. Following tables reveals interpretations from Standing Interpretations Committee (SICs):

 

List of Interpretations from Standing Interpretations Committee (SICs)

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Interpretations supplement IAS / IFRS standards. Interpretations from

 

·         IFRIC were issued after 2001

·         SIC were issued before 2001.

 

 

IFRS AND IAS IN BRIEF

IFRS and IAS in Brief are given as below

 

OVERVIEW OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

International Financial Reporting Standards are explained in brief as below

 

IFRS 1 First-time Adoption of International Financial Reporting Standards:

  • Prescribes the procedures for the first-time adopters: IFRS 1 prescribes the procedures that an entity must follow while adopting IFRSs for the first time for preparing its financial statements.
  • Specifies exemptions: Further, it also specifies exemptions that are available to the business entity from the general requirement to comply with each IFRS effective at the end of its first reporting period.

 

IFRS 2 Share-based Payment: IFRS 2 describes the rules that should be used for reporting the share-based payment transactions (including transactions with employees or other parties) in entity’s financial statements.

 

IFRS 3 Business Combinations: IFRS 3 deals with business combinations and prescribes accounting rules that should be adopted when an acquirer obtains control of a business by acquisition or merger. IFRS 3 clarifies

 

  • how to identify business combination and
  • Prescribes the acquisition method for its accounting.

 

IFRS 4 Insurance Contracts: IFRS 4 is the standard dealing with all insurance contracts (including reinsurance contracts). It defines the rules of financial reporting for insurance contracts (including reinsurance contracts) by entity (for example, any insurance company).

 

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

 

  • Provides conditions when the entity shall classify a non-current asset or a disposal group as held for sale.
  • Make clear about how to account for non-current assets held for sale.
  • Explains the term ―discontinued operation‖
  • Specify disclosures required for discontinued operations and disposals of non-current assets.

 

IFRS 6 Exploration for and Evaluation of Mineral Resources: IFRS 6 clarifies

 

  • Financial reporting of the expenditures incurred for the exploration and evaluation of mineral resources.
  • Prescribes that exploration and evaluation assets should be measured at cost.
  • information about the significance of financial instruments for financial position and performance of an entity,
  • the nature and extent of risks arising from those financial instruments,

 

IFRS 8 Operating Segments: IFRS 8 applies to those entities whose debt or equity instruments are traded in a public market and provides the information that an entity must disclose about its business activities

  • operating segments,
  • products and services,
  • the geographical areas in which it operates and
  • its major customers.
  • recognition, classification, measurement and de recognition of financial instruments;
  • hedge accounting rules.
  • When investor controls the investee
  • Requirements for the preparation and presentation of consolidated financial statements. IFRS 11 Joint Arrangements:

 

IFRS 11 outlines principles for reporting of entities that jointly control an arrangement. Joint arrangements are arrangements in which two or more parties have joint control.

 

IFRS 12 Disclosure of Interests in Other Entities IFRS 12 is a consolidated disclosure standard. It describes disclosures that shall be provided in the financial statements with regard to interests in

 

  • subsidiaries,
  • joint arrangements,
  • associates or unconsolidated structured entities.
  • the framework for fair value measurement
  • Disclosures about fair value measurement.

 

OVERVIEW OF INTERNATIONAL ACCOUNTING STANDARDS International Accounting Standards are explained in brief as below

 

IAS 1 Disclosure of Accounting Policies: it defines basis for presentation of financial statements. IAS 1 defines a complete set of general purpose financial statements that contains 5 basic components:

 

1.  Statement of financial position;

2.  Statement of profit or loss and other comprehensive income;

3.  Statement of changes in equity;

4.  Statement of cash flows; and

5.  Notes with summary of significant accounting policies and other explanatory information.

 

IAS 2 Valuations and Presentation of Inventories: IAS 2

 

  • defines Inventories
  • Specifies what the cost of inventories shall comprise
  • Basis of valuation of inventories
  • Disclosure of inventories

 

IAS 7 Cash Flow Statement: IAS 7 explains the requirements for presenting information about historical changes in cash and cash equivalents of an entity by means of statement of cash flows during the period.

 

IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors: IAS 8 prescribes the

 

  • Criteria for selecting and changing accounting policies
  • the accounting and disclosure of changes in accounting policies, changes in accounting estimates and correction of errors.
  • rules when an entity should adjust its financial statements for events after the reporting period
  • together with the necessary disclosures.
  • Accounting treatment of revenue and costs associated with construction contracts.
  • the primary issue is allocation of contract revenue and contract costs into the individual periods in which construction work is performed.
  • income taxes
  • including deferred taxes.

 

IAS 16 – Property, Plant and Equipment: IAS 16 deals with accounting treatment of property, plant and equipment with focus on

  • recognition of assets,
  • determination of their carrying amounts or revalued amounts,
  • depreciation charge and impairment losses to be recognized.

 

IAS 17 – Leases: IAS 17 prescribes

  • accounting policies to be applied in relation to finance and operating leases
  • for both lessees and lessors.

 

IAS 18 – Revenue: IAS 18 prescribes the accounting treatment for revenues that arise from various types of transactions, such as

  • sale of goods,
  • rendering of services or
  • receiving interest,
  • dividends and royalties.

 

IAS 19 – Employee Benefits: IAS 19 prescribes the accounting treatment and disclosures for all types of employee benefits. An entity shall recognize

  • appropriate liability when employee has provided service in exchange for benefits to be paid in the future; and
  • expense when entity consumes the benefit from service provided by employee.

 

IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance:

IAS 20 prescribes the

 

  • accounting treatment of various government grants and other form of government assistance
  • together with related disclosure requirements.

 

IAS 21 – The Effects of Changes in Foreign Exchange Rates: IAS 21 prescribes

 

  • how to include foreign currency transactions and foreign operations in the financial statements of an entity and
  • how to translate financial statements into a presentation currency.
  • It defines which exchange rates to use and how to report the effect of changes in exchange rates in the financial statements.

 

IAS 23 – Borrowing Costs: IAS 23 prescribes the accounting treatment of borrowing costs that may include

  • interest expense,
  • finance charges in respect of finance leases,
  • exchange differences from foreign currency borrowings regarded as an adjustment of interest costs, etc.
  • number of disclosures for related party transactions so that financial statements contain the information that entity’s financial position and profit or loss may have been affected by the existence of related parties,
  • transactions and outstanding balances with them.

 

IAS 26 – Accounting and Reporting by Retirement Benefit Plans: IAS 26 prescribes

  • measurement rules and
  • necessary disclosures for reporting of retirement benefits plans (pension schemes, retirement benefit schemes, etc.).

 

IAS 27 –Separate Financial Statements: IAS 27 prescribes the rules for preparing separate financial statements

  • investments in subsidiaries,
  • joint ventures and
  • associates

 

IAS 28 – Investments in Associates and Joint Ventures: IAS 28 prescribes

  • accounting for investments in associates (in which an entity exercises significant influence) and
  • specifies application of equity method for accounting of investments in associates as well as investments in joint ventures

 

IAS 29 – Financial Reporting in Hyperinflationary Economies: IAS 29 prescribes rules for financial reporting of any entity whose functional currency is the currency of hyperinflationary economy.

 

IAS 32 – Financial Instruments: Presentation: IAS 32 establishes principles for

  • presenting financial instruments as liabilities or equity and
  • for offsetting financial assets and financial liabilities.

 

IAS 33 – Earnings per Share: IAS 33 prescribes

  • principles for the determination and presentation of earnings per share in order to improve performance comparison between different entities, or between different reporting periods of the same entity.
  • applies to all entities whose share are publicly traded or are in process of issuing securities to public.
  • minimum content of an interim financial report and
  • the principles for recognition and measurement in complete or condensed financial statements for an interim period.
  • ensure that entity’s assets are carried at no more than their recoverable amount.
  • prescribes how to recognize an impairment loss

 

IAS 37 – Provisions, Contingent Liabilities and Contingent Assets: IAS 37 provides the recognition criteria and measurement basis of

  • provisions,
  • contingent liabilities and
  • contingent assets,

together with necessary disclosures about their nature, timing and amount.

 

IAS 38 – Intangible Assets: IAS 38 prescribes the accounting treatment for intangible assets that are not dealt with specifically in another IAS / IFRS.

 

IAS 39 – Financial Instruments: Recognition and Measurement: IAS 39 establishes principles for

 

  • recognizing and measuring financial liabilities and
  • some contracts to buy or sell non-financial items.

 

IAS 40 – Investment Property: IAS 40 prescribes the

  • accounting treatment for investment property and
  • related disclosure requirements.

 

IAS 41 – Agriculture

 

IAS 41 prescribes the accounting treatment and disclosures related to agricultural activity.

 

SUMMARY

 

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. IFRSs include the following components:

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