By: Echo Chen, Jacob Eye, Kaylee Carpenter & Shu-Yuan Young What is IFRS? Standards and Interpretations adopted by the International Accounting Standards Board (IASB). They comprise: International Financial Reporting Standards; International Accounting Standards (IAS) Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC). IFRS vs. GAAP The key difference between IFRS and GAAP is that IFRS provides much less overall detail and industry-specific instructions. Effective Date An entity shall apply this IFRS if its first IFRS financial statements are for a period beginning on or after January 1, 2009. Although earlier application is permitted. IFRS Financial Statements include: Statement of Financial Position Statement of Comprehensive Income Statement of Cash Flow Statement of Changes in Equity Notes to Financial Statements IAS 1:54 lists the minimum line items that must be presented: (a) property, plant and equipment; (l) provisions; (b) investment property; (m) financial liabilities (excluding (c) intangible assets; amounts shown under (k) and (l)); (d) financial assets (excluding (n) liabilities and assets for current amounts shown under (e), (h) and tax, as defined in IAS 12 Income (i)); Taxes; (e) investments accounted for using (o) deferred tax liabilities and the equity method; deferred tax assets, as defined in (f) biological assets; IAS 12; (p) liabilities included in disposal (g) inventories; groups classified as held for sale in (h) trade and other receivables; accordance with IFRS 5; (i) cash and cash equivalents; (q) non-controlling interests, (j) the total of assets classified as presented within equity; and held for sale and assets included in (r) issued capital and reserves disposal groups classified as held attributable to owners of the parent. for sale in accordance with IFRS 5 Non-current Assets Held for Sale Other line items, headings and and Discontinued Operations; subtotals should be presented when the information is relevant in (k) trade and other payables; understanding the entity‟s financial position. (IAS 1.55) An entity should present current and non- current assets, and current and non-current liabilities, as separate classifications in its statement of financial position…except when a presentation based on liquidity provides information that is reliable and more relevant. When that exception applies, an entity shall present all assets and liabilities in order of liquidity. (IAS 1.60) An entity that supplies good and/or services would generally classify assets and liabilities using current or non-current distinctions. (IAS 1.62) An entity not supplying good and services, such as financial institutions, would provide more relevant and reliable presentation by listing in order of liquidity. (IAS 1.63). Entities are also able to present a mixed basis of presentation and list some assets and liabilities as current/non-current and others in order of liquidity. (IAS 1.64) Make sure you are presenting the most reliable and relevant information in the financial statements by choosing the correct presentation. IAS Definitions: Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm‟s length transaction. Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. (IAS 16) Accounting models for property, plant & equipment: Cost- after recognition of an asset, the item shall be carried at its cost less accumulated depreciation and any accumulated impairment losses. (IAS 16.30) Revaluation- after recognition of an asset whose fair value can be measured reliably can be carried at a revalued amount, which is its fair value at the date of the revaluation less any subsequent accumulated depreciation or impairment losses. Revaluations will be made with sufficient regularity to ensure that they carrying amount does not differ materially from that that would be determined using fair value at the end of the reporting period. (IAS 16.31) Frequency depends on volatility. Volatile assets may need to be revaluated on a yearly basis, while less volatile assets may only need to be revaluated every 3-5 years. (IAS 16.34) When one PP&E item is revalued, that entire class of PP&E must be revalued also. (IAS 16.36) When the carrying value is increased, the increase is recognized in other comprehensive income, accumulated under the heading “Revaluation Surplus.” (IAS 16.39) If the value decreases, the decrease is recognized under profit & loss. (IAS 16.40) When the asset is derecognized, the revaluation surplus may be transferred to retained earnings. (IAS 16.41) IAS Definition of Intangibles: ◦ An identifiable, non-monetary asset without physical substance. Important notes on Intangibles: ◦ Internally generated goodwill is not an asset. (IAS 38.48) ◦ No Intangibles from research can be recognized. (IAS 38.54) ◦ Intangibles from development can only be recognized under certain conditions. (IAS 38.57) Intangibles can also be carried under either the cost or revaluation model like PP&E. For revaluation purposes, fair value is determined by reference to an active market. (IAS 38.74 & 75) An entity shall present all items of income and expense recognized in a period: ◦ (a) in a single statement of comprehensive income, or ◦ (b) in two statements: a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income). (IAS 1.81) IAS 1.82 As a minimum, the statement of comprehensive income shall include line items that present the following amounts for the period: ◦ (a) revenue; ◦ (b) finance costs; ◦ (c) share of the profit or loss of associates and joint ventures accounted for using the equity method; ◦ (d) tax expense; ◦ (e) a single amount comprising the total of: (i) the post-tax profit or loss of discontinued operations (ii) the post-tax gain or loss recognized on the disposal of the assets constituting the discontinued operation; ◦ (f) profit or loss; ◦ (g) each component of other comprehensive income classified by nature; ◦ (h) share of the other comprehensive income of associates and joint ventures accounted for using the equity method; and ◦ (i) total comprehensive income. Revenue is the gross inflow of economic benefits (during the period) arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. (IAS 18.7) Revenue should be measured at the fair value of the consideration received or receivable. (IAS 18.9) Revenue from the sale of goods shall be recognized when all the following conditions have been satisfied(IAS 18.14): ◦ the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; ◦ the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; ◦ the amount of revenue can be measured reliably; ◦ it is probable that the economic benefits associated with the transaction will flow to the entity; ◦ the costs incurred or to be incurred in respect of the transaction can be measured reliably. An entity shall classify its expenses based on ◦ their nature or ◦ their function within the entity Whichever provides information that is reliable and more relevant. (IAS 1.99) Analysis by the „nature of expense‟ method. ◦ For example, depreciation, purchases of materials, transport costs, employee benefits and advertising costs Analysis by the „function of expense‟ or „cost of sales‟ ◦ For example, the costs of distribution or administrative activities. ◦ At a minimum, an entity discloses its cost of sales under this method separately from other expenses. (IAS 1.103) The choice between the function of expense method and the nature of expense method depends on historical and industry factors and the nature of the entity. IFRS requires management to select the presentation that is reliable and more relevant. However, additional disclosure is required when the function of expense classification is used, because information on the nature of expenses is useful in predicting future cash flows, . (IAS 1.105) An entity shall not present any items of income or expense as extraordinary items ◦ Not in the statement of comprehensive income ◦ Not in the separate income statement ◦ Not in the notes. (IAS 1.87) The components of other comprehensive income include: ◦ changes in revaluation surplus ◦ actuarial gains and losses on defined benefit plans ◦ gains and losses arising from translating the financial statements of a foreign operation ◦ gains and losses on remeasuring available-for- sale financial assets ◦ gains and losses in a cash flow hedge The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities. Operating activities are the principal revenue- producing activities of the entity and other activities that are not investing or financing activities. An entity shall report cash flows from operating activities using either:(IAS7-17 to 20) (a) the direct method (b) the indirect method. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.(IAS7-16) Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. (IAS7-17) Reporting cash flows on a net basis (IAS7-22) Foreign currency cash flows (IAS7-26) Interest and dividends (IAS7-31) Taxes on income (IAS7-35) Disclosures (IAS7-48) An entity shall present a statement of changes in equity showing in the statement: a. total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non-controlling interests; b. for each component of equity, the effects of retrospective application or retrospective restatement recognised in accordance with IAS 8; and c. deleted d. for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from: (i) profit or loss; (ii) each item of other comprehensive income; and (iii) transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control. An entity shall present, either in the statement of changes in equity or in the notes, the amount of dividends recognised as distributions to owners during the period, and the related amount per share. The notes shall: a. present information about the basis of preparation of the financial statements and the specific accounting policies used in accordance with paragraphs 117–124; b. disclose the information required by IFRSs that is not presented elsewhere in the financial statements; and c. provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them. An entity normally presents notes in the following order, to assist users to understand the financial statements and to compare them with financial statements of other entities: a. statement of compliance with IFRSs (see paragraph 16); b. summary of significant accounting policies applied (see paragraph 117); c. supporting information for items presented in the statements of financial position and of comprehensive income, in the separate income statement (if presented), and in the statements of changes in equity and of cash flows, in the order in which each statement and each line item is presented; and d. other disclosures, including: (i) contingent liabilities (see IAS 37) and unrecognised contractual commitments, and (ii) non-financial disclosures, eg the entity‟s financial risk management objectives and policies (see IFRS 7). An entity shall disclose in the summary of significant accounting policies: a. the measurement basis (or bases) used in preparing the financial statements, and b. the other accounting policies used that are relevant to an understanding of the financial statements. Advantages Same basis with foreign competitors, easy to make comparison Easy to consolidate the parent‟s company and the foreign subsidiaries Disadvantages Effectiveness of GAAP will be lost Discourage the domestic public companies which have no significant market outside the US Epstein, Barry, and Eva Jermakowicz. Interpretation and Application of International Financial Reporting Standards. New Jersey: Wiley, 2009. Kirk, Robert. IFRS: A Quick Reference Guide. Massachusetts:CIMA, 2009. International Accounting Standards Committee Foundation. 2009. http://www.iasb.org/IFRSs/IFRS.htm. Export Import Bank of Bangladesh Limited. 2009. http://www.eximbankbd.com. American Institute of Certified Public Accountants. 2009. http://www.ifrs.com. Van Greuning, Hennie. International Financial Reporting Standards: A Practical Guide. Washington, D.C.: The World Bank, 2006.
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