Understanding IFRS Fundamentals E-Book

Nandakumar Ankarath

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 837

Veröffentlichungsjahr: 2010

Beschreibung

A one-stop resource for understanding and applying current International Financial Reporting Standards The move to International Financial Reporting Standards (IFRS) is the single most important initiative in the financial reporting world, with more than 100 countries requiring or allowing the use of IFRS for the preparation of financial statements by publicly held companies. It is expected that by 2011, more than 150 countries will be converting to it. It's clear that IFRS is here to stay--get the expert advice you need to properly implement IFRS with Understanding IFRS Fundamentals: International Financial Reporting Standards. Filled with easy-to-follow examples and case studies, Understanding IFRS Fundamentals: International Financial Reporting Standards is your handy resource to all things IFRS, presenting: * Authoritative advice and simple explanations of IFRS standards * Topical arrangement of issues of common interest to financial statement preparers and users * Extracts from published financial statements illustrating practical implications for applying IFRS * Guidance for finance professionals in more than 100 countries that have either adopted or adapted to IFRS * Simple explanations of complex standards A practical reference with the answers to your issues of interest, Understanding IFRS Fundamentals: International Financial Reporting Standards serves as an essential resource for when you need information in a hurry. Stay on track and focused with the straightforward guidance in Understanding IFRS Fundamentals: International Financial Reporting Standards.

Leseprobe

Table of Contents

Title Page

Copyright Page

PREFACE

ABOUT THE AUTHORS

Introduction

Chapter 1 - INTRODUCTION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

THE NEED FOR A COMMON SET OF ACCOUNTING AND FINANCIAL REPORTING STANDARDS

WHAT ARE IFRS?

A BRIEF HISTORY OF THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC)

A BIRD’S EYE-VIEW OF THE STANDARDS PROMULGATED BY THE IASC AND INTERPRETATIONS ...

THE BIRTH OF THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)

GOVERNANCE AND STRUCTURE OF THE IASC FOUNDATION, IASB, IFRIC, AND THE SAC

POPULARITY AND ACCEPTANCE OF IFRS WORLDWIDE

FAVORABLE AND HISTORIC BREAKTHROUGHS IN THE UNITED STATES

THE WAY FORWARD

Chapter 2 - IASB FRAMEWORK

OBJECTIVE OF FINANCIAL STATEMENTS

UNDERLYING ASSUMPTIONS

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

CONSTRAINTS AND TRADE-OFFS BETWEEN DIFFERENT QUALITATIVE CHARACTERISTICS

ELEMENTS OF FINANCIAL STATEMENTS

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

Chapter 3 - PRESENTATION OF FINANCIAL STATEMENTS (IAS 1)

INTRODUCTION

OBJECTIVES

SCOPE

KEY TERMS (AS PROVIDED IN IAS 1)

COMPLETE SET OF FINANCIAL STATEMENTS

GENERAL REQUIREMENTS OF IAS 1

STATEMENT OF COMPREHENSIVE INCOME

DISCLOSURE OF ACCOUNTING POLICIES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS MARKS & SPENCERS GROUP PLC, Annual ...

Chapter 4 - INVENTORIES (IAS 2)

INTRODUCTION

SCOPE

KEY TERMS

BASIS OF VALUATION

COST MEASUREMENT

NET REALIZABLE VALUE

EXPENSE RECOGNITION

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 5 - STATEMENT OF CASH FLOWS (IAS 7)

INTRODUCTION

KEY TERMS

PRESENTATION OF A STATEMENT OF CASH FLOWS

Chapter 6 - ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS ...

INTRODUCTION

KEY TERMS

SELECTION AND APPLICATION OF ACCOUNTING POLICIES

CONSISTENCY OF ACCOUNTING POLICIES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 7 - EVENTS AFTER THE REPORTING PERIOD (IAS 10)

INTRODUCTION

KEY TERMS

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 8 - CONSTRUCTION CONTRACTS (IAS 11)

INTRODUCTION

KEY TERMS

CONTRACT OPTIONS

CONTRACT REVENUE

CONTRACT COST

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 9 - INCOME TAXES (IAS 12)

INTRODUCTION

KEY TERMS

TAX BASE

RECOGNITION AND MEASUREMENT OF CURRENT TAX LIABILITIES AND CURRENT TAX ASSETS

RECOGNITION OF DEFERRED TAX LIABILITIES AND DEFERRED TAX ASSETS

ACCOUNTING FOR DEFERRED TAX

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 10 - PROPERTY, PLANT, AND EQUIPMENT (IAS 16)

INTRODUCTION

SCOPE

KEY TERMS

RECOGNITION

MEASUREMENT AT RECOGNITION

ELEMENTS OF COST

MEASUREMENT OF COST

MEASUREMENT AFTER RECOGNITION

DERECOGNITION

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 11 - LEASES (IAS 17)

INTRODUCTION

KEY TERMS

CLASSIFICATION OF LEASES

LEASES IN THE FINANCIAL STATEMENT OF LESSEES

LEASES IN THE FINANCIAL STATEMENT OF LESSORS

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 12 - REVENUE (IAS 18)

INTRODUCTION

SCOPE

KEY TERMS

MEASUREMENT OF REVENUE

IDENTIFICATION OF A TRANSACTION

REVENUE ON SALE OF GOODS

REVENUE FROM RENDERING OF SERVICES

INTEREST, ROYALTIES, AND DIVIDENDS

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 13 - EMPLOYEE BENEFITS (IAS 19)

INTRODUCTION

SCOPE

KEY TERMS

TYPES OF EMPLOYEE BENEFITS

SHORT-TERM EMPLOYEE BENEFITS

POSTEMPLOYMENT BENEFIT PLANS

Recognition and Measurement

DEFINED CONTRIBUTION PLANS

DEFINED BENEFIT PLANS

OTHER LONG-TERM EMPLOYEE BENEFITS

TERMINATION BENEFITS

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 14 - ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ...

INTRODUCTION

KEY TERMS

RECOGNITION OF GOVERNMENT GRANTS

PRESENTATION OF GRANTS RELATED TO ASSETS

PRESENTATION OF GRANTS RELATED TO INCOME

REPAYMENT OF GOVERNMENT GRANTS

EXCERPTS FROM PUBLISHED FINANCIAL STATMENTS

Chapter 15 - THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES (IAS 21)

INTRODUCTION

SCOPE

KEY TERMS

IDENTIFICATION OF FUNCTIONAL CURRENCY

NET INVESTMENT IN A FOREIGN OPERATION

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 16 - BORROWING COSTS (IAS 23)

INTRODUCTION

KEY TERMS

RECOGNITION

BORROWING COSTS ELIGIBLE FOR CAPITALIZATION

COMMENCEMENT OF CAPITALIZATION

SUSPENSION OF CAPITALIZATION

CESSATION OF CAPITALIZATION

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 17 - RELATED-PARTY DISCLOSURES (IAS 24)

INTRODUCTION

KEY TERMS

SUBSTANCE OVER FORM

RECENT AMENDMENTS TO THE STANDARD (NOVEMBER 2009)

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 18 - ACCOUNTING AND REPORTING BY RETIREMENT BENEFIT PLANS (IAS 26)

INTRODUCTION

SCOPE

KEY TERMS

DEFINED CONTRIBUTION PLANS VERSUS DEFINED BENEFIT PLANS

DEFINED CONTRIBUTION PLANS

DEFINED BENEFIT PLANS

ADDITIONAL DISCLOSURES REQUIRED BY THIS STANDARD

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 19 - CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS (IAS 27)

INTRODUCTION

KEY TERMS

PRESENTATION AND SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS

PROCESS OF CONSOLIDATION

LOSS OF CONTROL

ACCOUNTING FOR INVESTMENTS IN SEPARATE FINANCIAL STATEMENTS

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 20 - INVESTMENT IN ASSOCIATES (IAS 28)

INTRODUCTION

KEY TERMS

SIGNIFICANT INFLUENCE

EQUITY METHOD

METHOD OF ACCOUNTING

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 21 - FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES (IAS 29)

INTRODUCTION

SCOPE

KEY TERMS

RESTATEMENT OF FINANCIAL STATEMENTS

RESTATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF CASH FLOWS

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 22 - INTERESTS IN JOINT VENTURES (IAS 31)

SCOPE

KEY TERMS

TYPES OF JOINT VENTURES

JOINTLY CONTROLLED OPERATIONS

JOINTLY CONTROLLED ASSETS

JOINTLY CONTROLLED ENTITIES

FINANCIAL STATEMENTS OF THE VENTURER

DISCLOSURES

PROPOSED AMENDMENTS TO IAS 31

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 23 - FINANCIAL INSTRUMENTS: PRESENTATION (IAS 32)

INTRODUCTION

SCOPE

FINANCIAL ASSETS

FINANCIAL LIABILITIES

EQUITY INSTRUMENTS

PRESENTATION OF LIABILITIES AND EQUITY

COMPOUND FINANCIAL INSTRUMENTS

TREASURY SHARES

PURCHASED AND WRITTEN OPTION TO BUY/SELL OWN EQUITY

PUTTABLE INSTRUMENTS

OFFSETTING FINANCIAL ASSETS AND LIABILITIES

INTEREST, DIVIDENDS, LOSSES, AND GAINS

TRANSACTION COSTS OF AN EQUITY ISSUE

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 24 - EARNINGS PER SHARE (IAS 33)

INTRODUCTION

SCOPE

KEY TERMS

MEASUREMENT

DILUTED EARNINGS PER SHARE

ANTIDILUTION

BONUS ISSUE

RIGHTS ISSUE

INCREASING RATE PREFERENCE SHARES

PRESENTATION

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 25 - INTERIM FINANCIAL REPORTING (IAS 34)

INTRODUCTION

SCOPE

KEY TERMS

CONTENTS OF AN INTERIM FINANCIAL REPORT

PERIODS FOR WHICH INTERIM FINANCIAL REPORTS ARE REQUIRED

SELECTED EXPLANATORY NOTES

MATERIALITY

ACCOUNTING POLICIES

MEASUREMENT OF INTERIM FINANCIAL REPORT INCOME TAX EXPENSE

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 26 - IMPAIRMENT OF ASSETS (IAS 36)

INTRODUCTION

SCOPE

EXCLUSIONS

KEY TERMS

IDENTIFICATION OF ASSETS THAT MAY BE IMPAIRED

CALCULATION OF RECOVERABLE AMOUNT

CALCULATION OF FAIR VALUE LESS COSTS TO SELL

CALCULATION OF VALUE IN USE

SELECTION OF DISCOUNT RATE

RECOGNITION OF AN IMPAIRMENT LOSS

CASH-GENERATING UNITS

IMPAIRMENT OF GOODWILL

REVERSAL OF AN IMPAIRMENT LOSS

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 27 - PROVISIONS, CONTINGENT LIABILITIES, AND CONTINGENT ASSETS (IAS 37)

INTRODUCTION

SCOPE

KEY TERMS

RECOGNITION OF A PROVISION

MEASUREMENT OF PROVISIONS

REMEASUREMENT OF PROVISIONS

RESTRUCTURINGS

CONTINGENT LIABILITIES

CONTINGENT ASSETS

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 28 - INTANGIBLE ASSETS (IAS 38)

INTRODUCTION

SCOPE

KEY TERMS

INTANGIBLE ASSETS

RECOGNITION

INITIAL RECOGNITION FOR RESEARCH AND DEVELOPMENT COSTS

INITIAL MEASUREMENT

INTANGIBLE ASSETS WITH FINITE LIVES

INTANGIBLE ASSETS WITH INDEFINITE LIVES

SUBSEQUENT EXPENDITURE

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 29 - FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT (IAS 39)

INTRODUCTION

CLASSIFICATION OF FINANCIAL ASSETS

FINANCIAL ASSET OR FINANCIAL LIABILITY AT FAIR VALUE THROUGH PROFIT OR LOSS

RECOGNITION PRINCIPLES

MEASUREMENT PRINCIPLES

REGULAR-WAY PURCHASE OR SALE CONTRACT

ACCOUNTING FOR FINANCIAL LIABILITIES

LOAN COMMITMENTS

FINANCIAL GUARANTEE

DERIVATIVES

FAIR VALUE MEASUREMENT

RECLASSIFICATION

IMPAIRMENT AND UNCOLLECTIBILITY OF FINANCIAL ASSETS

EMBEDDED DERIVATIVES

HEDGE ACCOUNTING

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 30 - INVESTMENT PROPERTY (IAS 40)

INTRODUCTION

KEY TERMS

SCOPE

MEASUREMENT OF INVESTMENT PROPERTY

TRANSFERS TO AND FROM INVESTMENT PROPERTY

DISPOSALS

DISCLOSURES

FAIR VALUE AND COST MODEL

EXCERPTS FROM UNPUBLISHED FINANCIAL STATEMENTS

Chapter 31 - AGRICULTURE (IAS 41)

INTRODUCTION

SCOPE

KEY TERMS

RECOGNITION AND MEASUREMENT

GAINS AND LOSSES

GOVERNMENT GRANTS

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 32 - FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ...

INTRODUCTION

SCOPE

KEY TERMS

EXCEPTIONS TO THE FIRST-TIME ADOPTION RULE

OPENING IFRS STATEMENT OF FINANCIAL POSITION

ADJUSTMENTS REQUIRED IN PREPARING THE OPENING IFRS STATEMENT OF FINANCIAL POSITION

ACCOUNTING POLICIES

REPORTING PERIOD

OPTIONAL EXEMPTIONS FROM OTHER IFRS

MANDATORY EXCEPTIONS TO RETROSPECTIVE APPLICATION OF OTHER IFRS

PRESENTATION AND DISCLOSURE

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 33 - SHARE-BASED PAYMENTS (IFRS 2)

INTRODUCTION

SCOPE

KEY TERMS

ACCOUNTING FOR EQUITY-SETTLED SHARE-BASED PAYMENTS

ACCOUNTING FOR CASH-SETTLED TRANSACTIONS

ACCOUNTING FOR TRANSACTIONS THAT CAN BE SETTLED THROUGH CASH OR ISSUANCE OF SHARES

DISCLOSURE

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 34 - BUSINESS COMBINATIONS (IFRS 3)

INTRODUCTION

SCOPE

KEY TERMS

INDENTIFYING A BUSINESS COMBINATION

FAIR VALUE OF CONSIDERATION

MEASUREMENT PERIOD

DISCLOSURES

EXTRACTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 35 - INSURANCE CONTRACTS (IFRS 4)

INTRODUCTION

SCOPE

INSURANCE CONTRACT

EXAMPLES OF INSURANCE CONTRACTS

CONTRACTS THAT ARE NOT CLASSIFIED AS INSURANCE CONTRACTS

EMBEDDED DERIVATIVES

UNBUNDLING OF DEPOSITS

TEMPORARY EXEMPTION FROM APPLICATION OF IAS 8

BUSINESS ACQUISITIONS

DEFERRED ACQUISITION COSTS

LIABILITY ADEQUACY TEST

CHANGE IN ACCOUNTING POLICIES

DISCRETIONARY PARTICIPATION FEATURES

DISCLOSURES

EXTRACTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 36 - NONCURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (IFRS 5)

INTRODUCTION

KEY TERMS

SCOPE

WHEN TO RECLASSIFY

ASSETS HELD FOR SALE

DISPOSAL GROUP ASSETS

DISCONTINUED OPERATIONS

MEASUREMENT OF NONCURRENT ASSETS HELD FOR SALE OR DISPOSAL GROUP

CHANGES IN CLASSIFICATION OF HELD FOR SALE

DISCLOSURES

EXTRACTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 37 - EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES (IFRS 6)

INTRODUCTION

SELECTION AND APPLICATION OF ACCOUNTING POLICIES

KEY TERMS

ACCOUNTING FOR E&E COSTS

MEASUREMENT AFTER INITIAL RECOGNITION AND PRESENTATION

IMPAIRMENT

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 38 - FINANCIAL INSTRUMENTS: DISCLOSURES (IFRS 7)

INTRODUCTION

SCOPE

SIGNIFICANT ACCOUNTING POLICIES RELATING TO FINANCIAL INSTRUMENTS

DISCLOSURES FOR DERECOGNITION OF FINANCIAL ASSETS

COLLATERAL

IMPAIRMENT ALLOWANCE

DISCLOSURES IN THE STATEMENT OF COMPREHENSIVE INCOME

HEDGE ACCOUNTING DISCLOSURES

FAIR VALUE DISCLOSURES

DISCLOSURES IN LIEU OF FAIR VALUE DISCLOSURES

FAIR VALUE HIERARCHY-BASED DISCLOSURES

RISK DISCLOSURES

LIQUIDITY RISK DISCLOSURE THROUGH MATURITY ANALYSIS

QUANTITATIVE LIQUIDITY RISK DISCLOSURES

DISCLOSURE OF MARKET RISK SENSITIVITY ANALYSIS

RISK DISCLOSURES OF INSURANCE CONTRACTS UNDER IFRS 4.39(D)

EXCERPTS FROM FINANCIAL STATEMENTS

Chapter 39 - OPERATING SEGMENTS (IFRS 8)

INTRODUCTION

SCOPE

CORE PRINCIPLE

CHIEF OPERATING DECISION MAKER (CODM)

IDENTIFYING SEGMENTS USING IFRS 8

IDENTIFYING OPERATING SEGMENTS

REPORTABLE SEGMENTS

MEASUREMENT OF SEGMENT INFORMATION

DISCLOSURES

EXCERPTS FROM PUBLISHED FINANCIAL STATEMENTS

Chapter 40 - FINANCIAL INSTRUMENTS (IFRS 9)

INTRODUCTION

CLASSIFICATION ISSUES

CLASSIFICATION AT A GLANCE

BUSINESS MODEL

NATURE OF CONTRACTUAL CASH FLOWS

PREPAYMENTS

EXTENSION OF THE CONTRACTUAL TERM OF DEBT INSTRUMENTS

CHANGE IN TIMING AND AMOUNT OF THE CONTRACTUAL CASH FLOWS

RECOGNITION OF FINANCIAL ASSETS

MEASUREMENT OF FINANCIAL ASSETS

MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION

EMBEDDED DERIVATIVES

CASE OF OPTIONALLY CONVERTIBLE DEBENTURE IN THE HANDS OF INVESTOR

CASE OF COMPULSORILY CONVERTIBLE DEBENTURES

RECLASSIFICATION

GAINS OR LOSSES ON FINANCIAL ASSETS

INVESTMENT IN UNQUOTED EQUITY SHARES

TRANSITION PROVISIONS

Chapter 41 - INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) FOR SMES

INTRODUCTION

SECTION 1, CHARACTERISTICS OF A SME

SECTION 2, CONCEPTS AND PRINCIPLES UNDERLYING THE PREPARATION OF FINANCIAL STATEMENTS

SECTIONS 3 THROUGH 8, PRESENTATION OF FINANCIAL STATEMENTS

SECTION 9, CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

SECTION 10, ACCOUNTING POLICIES, ESTIMATES, AND ERRORS

SECTIONS 11 AND 12, FINANCIAL INSTRUMENTS

SECTION 13, INVENTORIES

SECTION 14, INVESTMENTS IN ASSOCIATES

SECTION 15, INVESTMENTS IN JOINT VENTURES

SECTION 16, INVESTMENT PROPERTY

SECTION 17, PROPERTY, PLANT, AND EQUIPMENT

SECTION 18, INTANGIBLE ASSETS OTHER THAN GOODWILL

SECTION 19, BUSINESS COMBINATIONS AND GOODWILL

SECTION 20, LEASES

SECTION 21, PROVISIONS AND CONTINGENCIES

SECTION 22, LIABILITIES AND EQUITY

SECTION 23, REVENUE

SECTION 24, GOVERNMENT GRANTS

SECTION 25, BORROWING COSTS

SECTION 26, SHARE-BASED PAYMENT

SECTION 27, IMPAIRMENT OF ASSETS

SECTION 28, EMPLOYEE BENEFITS

SECTION 29, INCOME TAXES

SECTION 30, FOREIGN EXCHANGE TRANSLATION

SECTION 31, HYPERINFLATIONARY ECONOMY

SECTION 32, EVENTS AFTER THE END OF THE REPORTING PERIOD

SECTION 33, RELATED PARTIES

SECTION 34, SPECIALIZED ACTIVITIES

SECTION 35, TRANSITION TO IFRS FOR SMES

INDEX

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ISBN: 978-0-470-39914-9

PREFACE

The International Financial Reporting Standards (IFRS) are now adopted in more than 100 countries. The recent decision of the U.S. Securities and Exchange Commission (SEC) to allow foreign private issuers to list their securities on U.S. stock exchanges using IFRS (without reconciling to U.S. GAAP) and the expectation that more than 150 countries will have adopted IFRS by 2011 has made it incumbent upon accounting and finance professionals, bankers, regulators, educators, and trainers to understand and apply IFRS.

We embarked on this project because there was an urgent need for an easy-to-understand IFRS book; most books covering the accounting standards contained explanations and interpretations of complex technical issues from standards.

In this book, we have explained in simple terms the most important parts of these complex standards through easy-to-follow examples and case studies. It also provides a quick source of reference to find answers to issues of interest to financial statement preparers, users, and analysts. We have also included extracts from published financial statements to illustrate practical implications of applying IFRS.

We have received immense support and assistance on this project from several people around the world. We express our sincere appreciation and gratitude to Ian Hague, a Principal with the Accounting Standards Board (AcSB) in Toronto, Canada, for his detailed review of the entire manuscript. The various amendments to the IFRS that came into effect during the time of writing this book required quite a few chapters to be rewritten and amended. We will be failing in our duties if we did not thank John DeRemigis and the editorial and marketing staff of John Wiley & Sons for their tremendous patience in bearing with the delay in meeting the initial deadlines set for publication. We also thank Abbas Ali Mirza, Partner with Deloitte Middle East who has been our inspiration for his valuable guidance and unstinting support.

We are also grateful to all our family, friends, and colleagues who contributed in their own way to ensure the completion of this book.

All the views expressed in this publication are ours and do not represent those of the firms or organizations of which we are part.

Nandakumar Ankarath Dr. T.P. Ghosh Kalpesh J. Mehta Dr. Yass A. Alkafaji

ABOUT THE AUTHORS

Nandakumar Ankarath is a Fellow Member of The Institute of Chartered Accountants of India and a Senior Partner with Moore Stephens, Chartered Accountants, United Arab Emirates. Ankarath has over 25 years of postqualification experience in auditing, accounting, financial and management consultancy in various business environments in India, Bahrain, and the United Arab Emirates. He has also served as a member of the Committee on Accounting Standards for Local Bodies formed by the governing body of the Institute of Chartered Accountants of India to formulate accounting standards for local bodies, autonomous bodies, and nonprofit organizations in India.

Dr. T.P. Ghosh is a professor of accounting and finance at Management Development Institute, India, and a visiting professor of Wollongong University in Dubai, United Arab Emirates. Dr. Ghosh, who has served as the Director of Studies of the Institute of Chartered Accountants of India, New Delhi, has authored two important reference books for accounting professionals that include Accounting Standards & Corporate Accounting Practices, 8th edition, 2008.

Dr. Yass A. Alkafaji is an Associate Professor of Accounting at the American University of Sharjah, United Arab Emirates. Dr. Alkafaji, who was the founder of Alkafaji & Associates, Ltd., a Chicago-based public accounting firm, has been a faculty member at Mississippi State University, Bowling Green State University, and Northeastern Illinois University in the United States. He has also been published in various journals including the International Journal of Accounting, Accounting Research Journal, International Journal of Management, and Managerial Auditing Journal.

Kalpesh J. Mehta is a Fellow Member of the Institute of Chartered Accountants of India and is a founding member of the CA Section at M.T. EDUCARE (P) LTD., a premier institution for imparting quality education in India. He is also a faculty member at the Institute of Chartered Accountants of India.

REVIEWER

Ian Hague is a Principal with the Accounting Standards Board (AcSB) in Toronto, Canada, and the Chair of the AcSB IFRS Advisory Committee that is leading the AcSB’s implementation of IFRS for Canadian publicly accountable enterprises. Ian is a Chartered Accountant in both Canada and in England and Wales and was with Deloitte in Toronto and in London, England, before joining the AcSB.

INTRODUCTION

International Financial Reporting Standards (IFRS) are presently being followed in more than 100 countries and it is expected that by 2011, more than 150 countries will have adopted them. The recent decision of the U.S. SEC to allow foreign private issuers to list their securities on U.S. stock exchanges using IFRS and without reconciling to U.S. GAAP has also made it incumbent upon accountants, finance professionals, analysts, and bankers, even in the United States, to become proficient in IFRS.

This large-scale global adoption of IFRS has created an urgent need for an easy-to-understand IFRS book.

Most books covering the accounting standards contain explanations and interpretations of complex technical issues from standards. What they do not contain is simple explanations of the most important parts of these complex standards through easy-to-follow examples and case studies. This book contains basic explanations of IFRS to demonstrate their practical application and provides

• A quick source of reference to find answers to issues of interest to financial statement preparers, users and analysts;

• An easy way to understand IFRS through simple explanations of the most important parts of IFRS standards;

• Easy-to-follow illustrations explaining IFRS standards, keeping in mind the layman; and

• Excerpts from published financial statements to illustrate practical implications of applying IFRS.

1

INTRODUCTION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

THE NEED FOR A COMMON SET OF ACCOUNTING AND FINANCIAL REPORTING STANDARDS

With the rampant rise of globalization, one would find it rather difficult to disagree with Thomas L. Friedman, the author of the world-renowned book, The World Is Flat, who said that right around the year 2000 we entered a new stage of globalization (a whole new era that he refers to as Globalization 3.0) which, according to him, is shrinking (figuratively, of course) the size of the world from small to tiny. Some people believe that this magical phenomenon of globalization has led to the emergence of a global village that we all live in.

With such a robust wave of globalization surging through the world, businesses across the globe cannot remain unaffected by it no matter how hard they try. With the advent of the World Wide Web and the knocking down of trade barriers across national boundaries through global initiatives such as the setting up of the World Trade Organization (WTO), international trade between businesses across the globe has become quite simple and attractive.

If we agree with the old adage, ”accounting is the language of business,” then business enterprises around the world cannot afford to be speaking in different languages to each other while exchanging and sharing financial results of their international business activities and also reporting the results of business and trade to their international stakeholders. As one school of thought believes, since business enterprises around the world are so highly globalized now and need to speak to each other in a common language of business, there is a real need for a single, universal set of accounting standards that would unify the accounting world and, more important, solve the problem of diversity of accounting practices across borders.

Historically, countries around the world have had their own national accounting standards (some countries have treasured these for whatever reason, most likely due to the pride of national sovereignty). However, with such a compulsion to be part of the globalization movement, wherein businesses across national boundaries are realizing that it is an astute business strategy to embrace the world as their workplace and marketplace, having different rules (standards) of accounting for the purposes of reporting financial results would not help them at all; rather, it would serve as an impediment to the smooth flow of information. Businesses, therefore, have realized that they need to talk to each other in a common language.

The adoption of accounting standards that require high-quality, transparent, and comparable information is welcomed by investors, creditors, financial analysts, and other users of financial statements. It is difficult to compare worldwide financial information without a common set of accounting and financial reporting standards. The use of a single set of high-quality accounting standards would facilitate investment and other economic decisions across borders, increase market efficiency, and reduce the cost of raising capital. International Financial Reporting Standards (IFRS) are increasingly becoming the set of globally accepted accounting standards that meet the needs of the world’s increasingly integrated global capital markets.

WHAT ARE IFRS?

IFRS are a set of standards promulgated by the International Accounting Standards Board (IASB), an international standard-setting body based in London. The IASB places emphasis on developing standards based on sound, clearly stated principles, from which interpretation is necessary (sometimes referred to as principles-based standards). This contrasts with sets of standards, like U.S. generally accepted accounting principles (GAAP), the national accounting standards of the United States, which contain significantly more application guidance. These standards are sometimes referred to as rules-based standards, but that is really a misnomer as U.S. standards also are based on principles—they just contain more application guidance (or rules). IFRS generally do not provide bright lines when distinguishing among circumstances in which different accounting requirements are specified. This reduces the chances of structuring transactions to achieve particular accounting effects.

According to one school of thought, since IFRS are primarily principles-based standards, the IFRS approach focuses more on the business or the economic purpose of a transaction and the underlying rights and obligations instead of providing prescriptive rules (or guidance). IFRS provides guidance in the form of principles.

This significant difference in approach to standard setting between IFRS and U.S. GAAP is the main reason that the length of the text of the IFRS is less than that of U.S. GAAP. U.S. GAAP extends more than 20,000 pages of accounting literature as opposed to IFRS, which is approximately 2,000 to 3,000 pages in length.

A BRIEF HISTORY OF THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC)

The International Accounting Standards Committee (IASC), the predecessor of the IASB, was established in 1973 and came into being through an agreement by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States. The objective behind setting up the IASC was to develop, in the public interest, accounting standards that would be acceptable around the world in order to improve financial reporting internationally. Over the years, the IASC saw several changes to its structure and functioning. For example, by the year 2000, IASC’s sponsorship grew from the original nine sponsors to 152 accounting bodies from 112 countries, that is, all professional accountancy bodies that were members of the International Federation of Accountants (IFAC). Such fundamental changes to the IASC may have helped it achieve the objective for which it was set up: changing the perception of the global standard setters about the international nature of participation in the standard-setting process. As part of their membership in IASC, professional accountancy bodies worldwide committed themselves to use their best endeavors to persuade governments, standard-setting bodies, securities regulators, and the business community that published financial statements to comply with IAS. This also drew the world’s attention to the fact that there exists a truly representative international accounting body that could ultimately qualify as a global standard setter and be able to develop a single set of accounting standards that would be acceptable to most, if not all, countries worldwide.

Over the years, the IASC worked hard to achieve the objective of developing accounting standards for the world. However, due to several factors (the most important one, according to one school of thought, being availability of national accounting standards in certain leading jurisdictions that were quite well developed and recognized by other leading jurisdictions as well) the standards promulgated by the IASC were unable to achieve the status of an international accounting standard setter whose standards were accepted by leading jurisdictions.

A BIRD’S EYE-VIEW OF THE STANDARDS PROMULGATED BY THE IASC AND INTERPRETATIONS COMMITTEE (SIC) THAT ARE STILL IN FORCE

During its existence, the IASC issued 41 standards, known as the International Accounting Standards (IAS), as well as a Framework for the Preparation and Presentation of Financial Statements. While some of the standards issued by the IASC have been since withdrawn or superseded (for example, IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, was withdrawn and IAS 22, Business Combinations, was superseded by IFRS 3, Business Combinations), many are still in force. In addition, some of the interpretations issued by the IASC’s interpretive body, the Standing Interpretations Committee (SIC), are still in force.

IAS Still in Force for 2009 Financial Statements

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

IAS 11, Construction Contracts

IAS 12, Income Taxes

IAS 16, Property, Plant, and Equipment

IAS 17, Leases

IAS 18, Revenue

IAS 19, Employee Benefits

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, Consolidated and Separate Financial Statements

IAS 28, Investments in Associates

IAS 29, Financial Reporting in Hyperinflationary Economies

IAS 31, Interests in Joint Ventures

IAS 32, Financial Instruments: Presentation

IAS 33, Earnings Per Share

IAS 34, Interim Financial Reporting

IAS 36, Impairment of Assets

IAS 37, Provisions, Contingent Liabilities and Contingent Assets

IAS 38, Intangible Assets

IAS 39, Financial Instruments: Recognition and Measurement

IAS 40, Investment Property

IAS 41, Agriculture

SIC Interpretations Still in Force for 2009 Financial Statements

SIC 7, Introduction of the Euro

SIC 10, Government Assistance—No Specific Relation to Operating Activities

SIC 12, Consolidation—Special-Purpose Entities

SIC 13, Jointly Controlled Entities—Nonmonetary Contributions by Ventures

SIC 15, Operating Leases—Incentives

SIC 21, Income Taxes—Recovery of Revalued Nondepreciable Assets

SIC 25, Income Taxes—Changes in the Tax Status of an Entity or Its Shareholders

SIC 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease

SIC 29, Disclosure—Service Concession Arrangements

SIC 31, Revenue—Barter Transactions Involving Advertising Services

SIC 32, Intangible Assets—Web Site Costs

THE BIRTH OF THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)

With tremendous pressure on the IASC to transform itself into a truly global standard-setting body by addressing some of the serious concerns of established standard setters around the world (grievances were time and again quoted in the international media as serious shortcomings of the IASC), in the year 2001, fundamental changes were made to strengthen the independence, legitimacy, and quality of the international accounting standard-setting process. In particular, the IASC Board was replaced by the International Accounting Standards Board (IASB) as the body in control of setting international accounting and financial reporting standards. This significant structural change to the manner in which the IASC functioned for several years since its inception was brought about as a result of the recommendations of the Strategy Working Party, which was specially formed to take a fresh look at the then-existing IASC’s structure and strategy. One dramatic change in the structure and functioning of the Board that is worthy of mention was the replacement of part-time volunteer board members who sat on the IASC Board with, for the most part, full-time IASB board members.

Based on the recommendations of the Strategy Working Party a new constitution was adopted effective July 1, 2000. Under these new rules of governance of the international standard-setting body was born the IASC Foundation. The name of the organization that comprises both the IASB and its Trustees is the International Accounting Standards Committee Foundation (IASC Foundation). The objectives of the IASC Foundation, as stated in its Constitution, are

a. To develop, in the public interest, 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 various capital markets of the world and other users of the information to make economic decisions;

b. To promote the use and rigorous application of those standards; and

c. In fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and

d. To bring about convergence of national accounting standards and International Financial Reporting Standards to high-quality solutions.

At its first meeting in 2001, the IASB adopted all outstanding IAS and SIC issued by the IASC as its own standards. Those IAS and SIC continue to be in force to the extent they are not amended or withdrawn by the IASB. New standards issued by the IASB are known as IFRS. New interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) are known as IFRIC Interpretations. When referring collectively to IFRS, that term includes IAS, SIC, IFRS, and IFRIC Interpretations.

GOVERNANCE AND STRUCTURE OF THE IASC FOUNDATION, IASB, IFRIC, AND THE SAC

IASC Foundation and the Trustees

The governance of IASC Foundation rests on the shoulders of the Trustees of the IASC Foundation (the IASC Foundation Trustees or, simply, the Trustees). The Trustees comprise 22 individuals who are chosen from around the world. In order to ensure a broad international representation, it is required that six Trustees are appointed from North America, six from Europe, six from Asia/Oceanic region, and four from any part of the world, subject to establishing overall geographical balance.

The Trustees are independent of the standard-setting activities (which is the primary responsibility of the Board members of the IASB). The Trustees, on the other hand, are responsible for broad strategic issues, such as

• Appointing the members of IASB, the IFRIC, and the Standards Advisory Council (SAC);

• Approving the budget of the IASC Foundation and determining the basis of funding it;

• Reviewing the strategy of the IASC Foundation and the IASB and its effectiveness including consideration, but not determination, of the IASB’s agenda (which if allowed may impair the Trustees’ independence of the standard-setting process);

• Establishing and amending operating procedures, consultative arrangements and due process for the IASB, the IFRIC, and the SAC;

• Approving amendments to its constitution after consulting the SAC and following the required due process;

• Fostering and reviewing the development of the educational programs and materials that are consistent with the objectives of the IASC Foundation; and

• Generally, exercising all powers of the IASC Foundation except those expressly reserved for IASB, the IFRIC, and the SAC.

Lastly, in order to enhance public accountability of the IASC Foundation, while maintaining the operational independence of the IASC Foundation and the IASB, the Monitoring Board, a new body, was created in 2009. The Monitoring Board comprises capital market authorities (e.g., representatives of institutions such as the International Organization of Securities Commissions [IOSCO], the U.S. Securities and Exchange Commission [SEC], and the European Commission) and its responsibilities include participating in the appointment of the Trustees of the IASC Foundation, advising the Trustees in the fulfillment of their responsibilities, and holding meetings with the Trustees to discuss matters referred by the Monitoring Board to the IASC Foundation or the IASB.

International Accounting Standards Board (IASB)

The IASB is responsible for standard-setting activities, including the development and adoption of IFRS. The Board usually meets once a month and its meetings are open to the public—in person and via the Internet.

The IASB shall comprise 14 members appointed by the Trustees; 12 full-time members and 2 part-time members. With recent amendments to the constitution of the IASC Foundation, the size of the IASB is to be increased from 14 to 16 members by 2012.

Stringent criteria have been laid out in the IASC Foundation constitution for the appointment of IASB Board members. They are

• Demonstrated technical competency, knowledge of financial accounting and reporting, and ability to analyze,

• Effective communication skills,

• Awareness and understanding of the global economic environment,

• Ability to work in a congenial manner with other members and show respect, tact, and consideration for one another’s views and the views of the constituents, and

• Capability to take into consideration varied viewpoints presented, weighing the evidence presented in an impartial manner, and arriving at well-reasoned and supportable decisions in a timely fashion.

The Board members, who are appointed for a term up to five years, renewable once, are chosen from a mix of backgrounds, including auditors, preparers of financial statements, users of financial statements, and academics. The members of the IASB are usually individuals who possess professional competence, high levels of technical skills, and have diversity of international business and market experience; possessing such personal attributes would normally ensure that the Board members are able to contribute to the development of high-quality, global accounting standards.

The IASB has the complete responsibility for all IASB technical matters including preparation and issuing of IFRS and Exposure Drafts that precede issuance of the final standards (i.e., the IFRS).

IFRS Issued by the IASB to December 31, 2009

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, Noncurrent Assets Held for Sale and Discontinued Operations

IFRS 6, Exploration for and Evaluation of Mineral Resources

IFRS 7, Financial Instruments: Disclosures

IFRS 8, Operating Segments

IFRS 9, Financial Instruments

IFRS for SMEs1

Standards Advisory Council (SAC)

The Trustees appoint the members of the Standards Advisory Council (SAC). The primary responsibility of the SAC is to provide advice to the IASB on agenda decisions and priorities in the IASB’s work. The SAC provides a forum for organizations and individuals who have an interest in international financial reporting and who have diverse geographical and professional backgrounds.

The SAC shall comprise 30 or more members. Members are appointed for a three-year renewable term. Currently, the membership of the SAC includes chief financial and accounting officers from some of the world’s largest corporations and international organizations, leading financial analysts and academics, regulators, accounting standard setters, and partners from leading accounting firms.

International Financial Reporting Interpretations Committee (IFRIC)

The Trustees appoint the members of the International Financial Reporting Interpretation Committee (IFRIC). The IFRIC is the IASB’s interpretive body and is in charge of developing interpretive guidance on accounting issues that are not specifically dealt with in IFRS or that are likely to receive divergent or unacceptable interpretations in the absence of authoritative guidance. The Trustees select members of the IFRIC keeping in mind personal attributes such as technical expertise and diversity of international business and market experience in the practical application of IFRS and analysis of financial statements prepared in accordance with IFRS.

The IFRIC shall comprise 14 voting members. The Trustees, if they deem fit, may also appoint nonvoting observers representing regulatory bodies, who shall have the right to attend and speak at the meetings of the IFRIC. A member of the IASB, the Director of Technical Activities or another senior member of the IASB staff, or another appropriately qualified individual, shall be appointed by the Trustees to chair the IFRIC. The IFRIC shall meet as and when required, and 10 voting members present in person or by telecommunication shall constitute a quorum. Meetings of the IFRIC (and the IASB) are open to the public but certain discussions may be held in private at the discretion of the IFRIC. It is important to note that an IFRIC Interpretation requires the IASB’s approval before its final issuance.

IFRIC Interpretations Issued to December 31, 2009

IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 2, Members’ Shares in Cooperative Entities and Similar Instruments

IFRIC 3, Emission Rights (withdrawn)

IFRIC 4, Determining Whether an Arrangement Contains a Lease

IFRIC 5, Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

IFRIC 6, Liabilities Arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment

IFRIC 7, Applying the Restatement Approach Under IAS 29 Financial Reporting in Hyperinflationary Economies

IFRIC 8, Scope of IFRS 2 (withdrawn)

IFRIC 9, Reassessment of Embedded Derivatives

IFRIC 10, Interim Financial Reporting and Impairment

IFRIC 11, IFRS 2—Group and Treasury Share Transactions (withdrawn)

IFRIC 12, Service Concession Arrangements

IFRIC 13, Customer Loyalty Programs

IFRIC 14, IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interaction

IFRIC 15, Agreements for the Construction of Real Estate

IFRIC 16, Hedges of a Net Investment in a Foreign Operation

IFRIC 17, Distribution of Noncash Assets to Owners

IFRIC 18, Transfer of Assets from Customers

POPULARITY AND ACCEPTANCE OF IFRS WORLDWIDE

In the last few years, the popularity of IFRS has grown tremendously. The international accounting standard-setting process has been able to claim a number of successes in achieving greater recognition and use of IFRS.

A major breakthrough came in 2002 when the European Union (EU) adopted legislation that required listed companies in Europe to apply IFRS in their consolidated financial statements. The legislation came into effect in 2005 and applies to more than 8,000 companies in 30 countries, including countries such as France, Germany, Italy, Spain, and the United Kingdom. The adoption of IFRS in Europe means that IFRS has replaced national accounting standards and requirements as the basis for preparing and presenting group financial statements for listed companies in Europe, which is considered by many as a major milestone in the history of international accounting.

Outside Europe, many other countries also have been moving toward IFRS. By 2005, IFRS had become mandatory in many countries in Africa, Asia, and Latin America. In addition, countries such as Australia, Hong Kong, New Zealand, Philippines, and Singapore had adopted national accounting standards that mirror IFRS.

Today, IFRS are used in more than 100 countries. A significant number of Global Fortune 500 companies already use IFRS and this number is expected to increase by 2011 with further conversions to IFRS by major global players (most notably, Brazil, Canada, and India) and substantial convergence of local GAAPs in China and Japan to IFRS.

FAVORABLE AND HISTORIC BREAKTHROUGHS IN THE UNITED STATES

In the United States, since 2002, efforts have been underway to converge IFRS and U.S. GAAP; the earliest initiative was in the form of a well-known agreement entered into between the IASB and the U.S. standard setter (the FASB), referred to as the Norwalk Agreement. In the last few years, media reports are replete with news about the U.S. SEC developing an IFRS road map.

In November 2007, in a surprise move that is considered by some as the most significant nod of friendliness and an astounding move toward convergence in recent times, the U.S. SEC opened its doors to IFRS. This defining moment in the fast-tracked race of the IASB has helped gain global acceptance of the SEC’s standards. In fact, this is the first time in the history of United States standard setting that a non-U.S. set of accounting standards were allowed to be used for listings on U.S. stock exchanges without requiring mandatory reconciliation to U.S. GAAP. Before this groundbreaking announcement was made by the U.S. SEC, all foreign private issuers (FPIs) were required to reconcile to U.S. GAAP the financial statements that they file with the U.S. SEC if the financial statements were prepared using any standards other than U.S. GAAP. While this exception to file financial statements without reconciliation to U.S. GAAP was made in a limited manner by the U.S. SEC, that is, only in the case of foreign private issuers (FPIs), such an exception to using U.S. GAAP for purposes of listing on the largest capital market of the world is undoubtedly a major breakthrough for the IFRS, the only non-U.S. GAAP standards that can boast of this special treatment.

In August 2008, the U.S. SEC went a step forward with its acceptance of IFRS and proposed to relax its rules further and permit the use of IFRS by U.S. issuers (i.e., domestic companies in the United States) provided certain milestones are achieved leading to mandatory use of IFRS by U.S. issuers starting for fiscal years ending on or after December 15, 2014. The milestones that need to be addressed before mandatory adoption of IFRS in the United States are

• Improvements in accounting standards, in accordance with a memorandum of understanding established between the IASB and FASB;

• Funding and accountability of the IASC Foundation;

• Improvement in the ability to use interactive data for IFRS reporting; and

• Education and training on IFRS in the United States.

According to this road map to convergence, in 2011, the U.S. SEC will assess the progress of the these milestones and will decide whether to mandate the use of IFRS for U.S. issuers. If, after assessment, the U.S. SEC is satisfied with the achievements of the milestones, then U.S. issuers may be allowed to make the transition to IFRS as early as 2014.

The other good news is that under this new friendly approach to convergence with IFRS (which some refer to as the sudden urge to merge or converge with IFRS in the United States), more specifically, under the U.S. SEC IFRS road map, limited early use of IFRS has also been permitted for eligible entities; under this limited exception, certain U.S. issuers may even begin using IFRS soon. However, the final decisions in this regard are yet to be made as of this date.

THE WAY FORWARD

IFRS are clearly emerging as a global financial reporting benchmark and most countries have already started using them as their benchmark standards for listed companies. With the recent issuance of IFRS for SMEs, a stand-alone set of standards for private entities that do not have public accountability, the global reach of the IASB is further enhanced. However, if these international standards are not applied uniformly across the world due to interpretational differences, then their effectiveness as a common medium of international financial reporting will be in question. If different entities within the region apply them differently based on their interpretation of the standards, it would make global comparison of published financial statements of entities using IFRS difficult. Debate still rages amongst accountants and auditors globally on many burning and contentious accounting issues that need a common stand based on proper interpretation of these standards.

According to one school of thought, IFRS are emerging as the much-awaited answer to the “billion-dollar question” on the minds of accountants, financial professionals, financial institutions, and regulators, that is, which set of accounting standards would solve the conundrum of diversity in accounting practices worldwide by qualifying as a single or a common set of standards for the world of accounting to follow and rely upon?

Undoubtedly, for years, U.S. GAAP was leading this much-talked about international race to qualify as the most acceptable set of accounting standards worldwide. However, due to several reasons, including the highly publicized corporate debacles such as that at Enron in the United States, the global preference (or choice) of most countries internationally has now clearly tilted in favor of IFRS as the most acceptable set of international accounting and financial reporting standards worldwide.

With the current acceptance of IFRS in more than 100 countries (and with several more expected to adopt IFRS in the coming years), one can probably argue that IFRS could possibly qualify as an Esperanto of international accounting (Esperanto refers to the well-known universal language). However, some people still believe that the race for global acceptance of IFRS is not over yet. While more than 100 countries have adopted IFRS as their national accounting standards, there are some important jurisdictions in the financial world (such as the United States) that have not yet fully accepted IFRS for financial reporting of their domestic companies. Therefore, unless the United States, the largest economic superpower of the world for years now, accepts IFRS as its national GAAP (replacing U.S. GAAP), it may be difficult to call IFRS the world’s standards. There is, however, a strong possibility of the U.S. SEC’s accepting IFRS ultimately. Judging from the amazing change in attitude of the U.S. SEC, which has already allowed use of IFRS by foreign private issuers for filings on U.S. stock exchanges, one may expect—that is, if the SEC’s road map to convergence with IFRS goes through successfully without any glitches—that by the year 2014 (unless the date of convergence is extended further for whatever reason), the world of accounting may be rejoicing and celebrating under a strong common banner of a global set of accounting and financial reporting standards, namely, the IFRS. Some believe that the idea of a single set of standards for the world may be wishful thinking especially if the U.S. SEC’s road map is amended adversely. As things stand presently, however, it may be expected that there is a strong possibility of allowing the use of IFRS in the United States in some form or another.

2

IASBFRAMEWORK

The IASB Framework for the Preparation and Presentation of Financial Statements (the Framework) sets out the concepts that underlie the preparation and presentation of financial statements (i.e., the objectives, assumptions, characteristics, definitions, and criteria that govern financial reporting). Therefore, the Framework is often referred to as the conceptual framework.

The Framework deals with

1. The objective of financial statements

2. Underlying assumptions

3. The qualitative characteristics that determine the usefulness of information in financial statements

4. The definition, recognition, and measurement of the elements from which financial statements are constructed

5. Concepts of capital and capital maintenance

The Framework is not a standard nor does it have the force of a standard. Instead, its importance can be judged from the following purposes for which it is made available to users of the standards:

• To assist and guide the International Accounting Standards Board (IASB) as it develops new or revised standards;

• To assist national standard setters in developing their national standards on a consistent basis with international principles; and

• To assist preparers of financial statements in applying standards and in dealing with topics that are not addressed by a standard.

Thus, in case of a conflict between the Framework and a specific standard, the standard prevails.

OBJECTIVE OF FINANCIAL STATEMENTS

The objective of financial statements is to provide information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions such as an investor deciding whether to sell or hold an investment in the entity, or employees assessing an entity’s ability to provide benefits to them.

Users include present and potential investors, employees, lenders, suppliers, and other trade creditors, customers, governments and their agencies, and the public. Because investors are providers of risk capital, it is presumed that financial statements that meet their needs will also meet most of the needs of other users.

UNDERLYING ASSUMPTIONS

Two assumptions underlying the preparation and presentation of financial statements are: the accrual basis and going concern.

Accrual Basis

When financial statements are prepared on the accrual basis of accounting, the effects of transactions and other events are recognized when they occur (as opposed to when cash or its equivalent is received or paid), and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

The accrual basis assumption is also addressed in IAS 1, Presentation of Financial Statements, which clarifies that when the accrual basis of accounting is used, items are recognized as assets, liabilities, equity, income, and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Framework.

Going Concern

When financial statements are prepared on a going concern basis, it is presumed that the entity will continue in operation for the foreseeable future. In other words, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations, in the foreseeable future, which, according to IAS1, is at least a period of twelve months from the end of the reporting period.

However, when significant doubts are cast on the ability of the entity to continue as a going concern, and thus such an assumption is not appropriate, the financial statements may need to be prepared on a different basis and, if so, that basis used is required to be disclosed.

The going concern assumption is also addressed in IAS 1, which requires management to make an assessment of an entity’s ability to continue as a going concern when preparing financial statements.

Example 1

Company ABC is based in Nation XYZ and is under extreme pressure from recession and global financial difficulties. It is finding it quite difficult to meet the financial covenants given to banks (i.e., undertakings that it agreed with banks when it borrowed funds for working capital purposes from them). As per these financial covenants, Company ABC is required to maintain a healthy financial position. The terms of bank loans to Company ABC specifically require that Company ABC, which is highly leveraged, maintain a positive equity at all times during the year and also produce a positive cash flow from its operating activities as reflected in its cash flow statement for the most recent reporting period.

During the current financial period, Company ABC makes a substantial net loss for the year which erodes its equity, and thus the entity could not maintain a positive balance in shareholders’ equity at the end of the financial period. Furthermore, as per the statement of cash flows for the current reporting period, it was unable to report a positive cash flow from operating activities. Such factors would normally raise doubts about the entity’s ability to continue as a going concern, thereby requiring it to disclose the uncertainties.

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

Qualitative characteristics are the attributes that make the information provided in a set of financial statements useful to users. According to the Framework, the four principal qualitative characteristics are

1. Understandability

2. Relevance

3. Reliability

4. Comparability

Understandability

Financial statements should provide information that is understood by users of financial statements. In other words, understandability refers to information being readily understandable by users of financial statements.

There are several end-users of financial statements. For instance, one of the users of information portrayed in a set of financial statements could be a layman who has invested in the shares of a public company (say, someone who is not a qualified financial professional and who has no knowledge of accounting and reporting standards). Another user of the financial statements could be a knowledgeable and trained financial analyst. Therefore, it would not be reasonable if the Framework required that financial statements need to be understandable by everyone. To put it differently, the requirement of the Framework is that the information contained in a set of financial statements should be

• Understandable by a user who has reasonable knowledge of business and economic activities and accounting; and

• A willingness to study the information with reasonable diligence.

Relevance

Information provided by a set of financial statements is considered relevant if it has the ability to influence users’ economic decisions and is provided to users in a timely manner to influence their decisions. Relevance refers to information being relevant to the decision-making needs of users.

Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present, or future events, or confirming or correcting their past evaluations. In order to be relevant, information should at least have the following two characteristics:

1. Predictive value: Many users of financial statements use historic information provided by financial statements to predict the entity’s future profitability and its cash flows.

2. Confirmative value: Many users of financial statements use the information provided by the financial statements to confirm their prior expectations of the entity’s performance or stewardship of the management.

The concept of relevance is closely related to the concept of materiality. The Framework describes materiality as a threshold or cutoff point for information whose omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.

The concept of materiality is further addressed in IAS 1, which specifies that each material class of similar items shall be presented separately in the financial statements and that items of a dissimilar nature or function shall be presented separately unless they are immaterial. Under the concept of materiality, a specific disclosure requirement in a standard or an interpretation need not be met if the information is not material.

Reliability

Information provided by financial statements may be relevant, but if it not reliable then it is of little use. According to the Framework, to be reliable, information must be

• Free from material error;

• Neutral, that is, free from bias;

• Represent faithfully the transactions and other events it either purports to represent or could reasonably be expected to represent (representational faithfulness). If information is to represent faithfully the transactions and other events that it purports to represent, the Framework specifies that they need to be accounted for and presented in accordance with their substance and economic reality even if their legal form is different (substance over form); and

• Be complete within the bounds of materiality and cost.

Related to the concept of reliability is prudence, whereby preparers of financial statements should include a degree of caution in exercising judgments needed in making estimates, such that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not justify the deliberate understatement of assets or income, or the deliberate overstatement of liabilities or expenses, because the financial statements would not be neutral and, therefore, not reliable.

Comparability

Comparability refers to information being comparable through time and across entities. To achieve comparability, like transactions and events should be accounted for similarly by an entity throughout an entity, over time for that entity, and by different entities.

Consistency of presentation is also addressed in IAS 1. It specifies that the presentation and classification of items in the financial statements, as a general rule, shall be retained from one period to the next, with specified exceptions.

CONSTRAINTS AND TRADE-OFFS BETWEEN DIFFERENT QUALITATIVE CHARACTERISTICS

In practice, there is often a trade-off between different qualitative characteristics of information. In these situations, an appropriate balance among the characteristics must be achieved in order to meet the objective of financial statements.

Example 2

Examples of trade-offs among qualitative characteristics of information are

1. There is a trade-off between reporting relevant information in a timely manner and taking time to ensure that the information is reliable. If information is not reported in a timely manner, it may lose its relevance. Therefore, entities need to balance relevance and reliability in determining when to provide information.

2. There is trade-off between benefit and cost in preparing and reporting information. In principle, the benefits derived from the information by users should exceed the cost for the preparer of providing it.

3. There is a trade-off between providing information that is relevant, but is subject to measurement uncertainty (e.g., the fair value of a financial instrument), and providing information that is reliable but not necessarily relevant (e.g., the historical cost of a financial instrument).

ELEMENTS OF FINANCIAL STATEMENTS

The Framework describes the elements of financial statements as broad classes of financial effects of transactions and other events. The elements of financial statements are

• Assets. An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

• Liabilities. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

• Equity. Equity is the residual interest in the assets of the entity after deducting all its liabilities.

• Income. Income is increases in economic benefits during the accounting 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 participants.

• Expenses. Expenses are decreases in economic benefits during the accounting 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 participants.

According to the Framework, an item that meets the definition of an element should be recognized (i.e., incorporated in the financial statements) if

1. It is probable that any future economic benefit associated with the item will flow to or from the entity; and

2. The item has a cost or value that can be measured with reliability.

The Framework notes that the most common measurement basis in financial statements is historical cost, but that other measurement bases are also used, such as current cost, realizable or settlement value, and present value.

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

The Framework distinguishes between a financial concept of capital and a physical concept of capital. Most entities use a financial concept of capital, under which capital is defined in monetary terms as the net assets or equity of the entity. Under a physical concept of capital, capital is instead defined in terms of physical productive capacity of the entity.

Under the financial capital maintenance concept, a profit is earned if the financial amount of the net assets at the end of the period exceeds the financial amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

Under the physical capital maintenance concept, a profit is instead earned if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

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PRESENTATION OF FINANCIAL STATEMENTS (IAS 1)

INTRODUCTION

IAS 1 sets out overall requirements for the presentation of general purpose financial statements, prescribes guidelines for their structure, and lays out the minimum requirements for their content and disclosure.

OBJECTIVES