international financial reporting

Module name: International Financial Reporting

Title of the assignment:

Student Name

Submission date

ContentsThe regulatory and conceptual framework of financial reporting as set by the IASB..................................3

Disclosure and measurement of financial instruments...............................................................................6

Initial recognition.....................................................................................................................................8

Subsequent measurement......................................................................................................................8

Impairment..............................................................................................................................................9

Disclosures of financial instruments............................................................................................................9

Information relating to the significance of the financial instruments of the company..........................10

Information in relation to the nature and extent of risk arising from financial instruments of the company................................................................................................................................................11

Accounting for leases................................................................................................................................12

Operating leases....................................................................................................................................13

Finance lease.........................................................................................................................................13

Reference..................................................................................................................................................14

International Financial Reporting

The regulatory and conceptual framework of financial reporting as set by the IASB Currently in global perspective there are two organizations who provide guidance and issue Accounting and financial reporting standards. Those are International Accounting standard board (IASB) and Financial Accounting Standard Board (FASB). In particular most of the countries such as UK European countries Asian countries Canada uses the financial reporting standards issued by IASB while USA is using its own financial reporting standards published by FASB.

However IASB and FASB are currently working in a joint project of convergence of financial reporting standards.

The objective of IASB is to “Develop a single set of high quality, Understandable, enforceable, and globally accepted financial reporting standards based upon clearly articulated principles.”

(Source, WWW.IFRS.org)

The IASB was founded on 1 march 2001 as the predecessor of International Accounting Standard committee (IASC).

The IASB is controlled by a board of members which comprise 15 members. Those members are selected as a panel of experts whom include standard setters in countries, academic staff and users of financial statements around the world.

The conceptual framework for financial reporting was first introduced in 1989 by the previous body of IASB, the conceptual framework establish the underlying concepts for preparation and presentation of financial statements for the use of external stake holders.

The conceptual framework deals with following areas,

The financial reporting objectives The qualitative characteristics of financial information which are useful The recognition, measurement and definition of items from which financial

statements are derived. Concepts of capital and capital maintenance.

Further the conceptual framework assists to,

Prepares of financial statements when adopting financial reporting standards Auditors when expressing an opinion as to whether the financial statements were

prepared in accordance with applicable financial reporting framework


Those who use financial statements for interpreting financial information contained in the financial statements.

All stakeholders who are interested of activities of IASB.

It can be noted that in order to facilitate the financial reporting function conceptual framework identifies several key stakeholders as user groups those include

Investors Government Lenders Public Suppliers Employees

Due to the requirements in the current environment IASB and FASB has started a joint program to develop a new conceptual framework with the objective of creating a sound foundation for future accounting standards that are principles-based, internationally consistent and internationally converged.

Accordingly the new conceptual framework consist of following chapters

1. The objective of general purpose financial reporting2. The reporting Entity3. Qualitative characteristics of use full financial information4. Underlying assumption5. The elements of financial statements6. Recognition of elements of financial statements7. Measurement of elements of financial statements8. Concepts of capital and capital maintenance

Conceptual frame work states that the objective of general purpose financial reporting is to provide information to existing and potential investors which are useful.

The conceptual framework further states that for the financial information to be use full the financial information needs to contain following qualitative factors.

Relevance Faithfull representations


In order to present relevant and faithfully represented information the financial information needs to have following characteristics.

o Comparability

o Verifiability

o Timeliness

o understandability

The framework discuss two underlying assumption that needs to maintain when preparing financial statements. Those are

o Going concern assumption

o Accrual basis of accounting

The framework recognize key elements in the financial statements as follows,

The elements relates to the financial position of the company and included in the balance sheet

o Assets

o Liabilities

o Equity

Elements relates to financial performance of the entityo Income

o Expenses

With regard to recognition and measurement of elements of financial statements framework states that if the key elements meets the following criteria those can be recognized as one of elements in the financial statements.

It is probable that any future economic benefit related to the item will flow to or from the reporting entity

The cost or value of the element can be measured reliably.

Further the framework provide several bases where entities can use to measure the elements of the financial statements as follows,

o Historical cost basis

o Present value

o Realizable value

o Current cost


Disclosure and measurement of financial instruments

As per the pronouncements of IASB the applicable standard for the measurement of financial instruments is IAS 39 financial instruments – recognition and measurement and IFRS 7 deals with the disclosure requirements of financial instruments. Apart from IAS 39 there are several financial reporting standards that deals with specific financial instruments those are.

IAS 27 Consolidated and separate financial statements IAS 28 Investments in Associates IAS 31 Investments in Joint ventures IAS 17 leases IAS 19 Employee benefits IFRS 4 insurance contracts

With regard to recognition and disclosure of financial instruments IAS 39 financial instruments recognition and measurement provide overall guidance.

Measurement of financial instruments

As explained in IAS 32 financial instruments, financial instrument is a any kind of a contract which gives a rise to a financial asset of a one company while financial liability or a equity instrument of another entity.

Common examples for financial instruments can be outlined below,

Financial assetso Cash

o Trade receivables and other receivables

o Debt and equity securities such as investments in equity shares,

preference shares and debentures.o Commercial papers

S Financial liabilities

o Trade payables

o Demand and time deposits in banks

o Debentures

Equity instrumentso Equity Share capital

o Reserves


Further IAS 39 explains that derivative also considered as financial instruments. Such derivatives may be

Forward contracts Interest rate swaps Futures Options Caps and floors

Financial assets are classified in to four types and recognition and measurement of those are different to each other. Those four types of financial assets are

Financial assets at fair value through profit or loss

These are financial assets which were designated to carry at fair value at the initial recognition or financial assets which are held for trading by the organization. All financial assets and derivatives acquired with the intention of sell in the short term are classified as financial assets at fair value through profit and loss.

Available for sale financial assets

These are financial assets other than derivative and designated as available for sale financial assets in the initial recognition and any other financial asset that has not been classified as,

o Financial assets at fair value through profit and loss

o Loans and receivables

o Held for trading financial assets

Loans and receivables

These are non derivative financial assets with fixed or determinable payments and which has not been quoted in an active market and other than held for trading or classified as available for sale financial assets or financial assets at fair value through profit or loss. Standard further states that any loans and receivable financial asset that do not recover substantial amount of its initial capital other than due to a deterioration of credit needs to be classified as available for sale financial asset.


Held to maturity investments

These are non derivative financial assets with fixed or determinable payments and the entity intends to and has the ability to hold the investment to maturity and do not meet the definition of loans and receivable and are not classified as held for trading or financial assets at fair value through profit or loss at initial recognition.

With regard to financial liabilities the standard identifies two types of financial liabilities. Those are

Financial liabilities at fair value through profit or loss

These are financial liabilities either designated as fair value through profit or loss at the point of initial recognition or financial liabilities classified as held for trading such as those short term borrowings.

Other financial liabilities which are measured at amortized cost using effective interest rate method.

IAS 39 financial instruments recognition and measurement states that companies should recognize financial assets and financial liabilities in the financial statements when and only when the company became a party to the contractual provisions of the contract.

Initial recognition and subsequent measurement of these financial assets can be described below,

Initial recognitionStandard requires initially all the financial assets to be recognized at fair value in the financial statements of the company. When measuring fair value company needs to take in to consideration the transaction cost involved in.

Subsequent measurementStandard further guided to measure the financial assets subsequent to the initial recognition at fair value. Further standard provide some exceptions in this regard.

Held to maturity investments, loans and receivables and non derivative financial liabilities needs to be recognized at amortized cost computed using effective interest rate method.


Financial assets or liabilities designated as hedging instruments or hedge items are subject to the measurement under the guide lines of hedge accounting described in the standard.

Investments made in equity securities without reliable fair value measurement information needs to be carried at cost in the financial statements after initial recognition.

Impairment

A financial asset or group of financial assets is said to be impaired and impairment loss is recognized only if there are objective evidence available as a result of one or more event occurred as a result of a event that occurred after the initial recognition. Accordingly at each balance sheet date company needs to evaluate whether there are any objective evidence of impairment is exist and if such evidence is available as at the balance sheet date entity needs to carry out a detailed impairment computation in order to determine whether any impairment needs to be recognized in the income statements of the company.

The impairment is measured as the difference between the carrying value of the asset and present value of future cash flows generated through asset discounting at the financial assets originally effective interest rate.

Disclosures of financial instruments

IASB has published IFRS 7 with regard to the disclosure requirements of financial instruments.

IFRS 7 requires companies to disclose 2 main categories of disclosures. Those are,

Information relating to the significance of the financial instruments of the company

Information in relation to the nature and extent of risk arising from financial instruments of the company.


Information relating to the significance of the financial instruments of the company

1. Balance sheetThis requires the companies to disclose significant financial instruments in the balance sheet for following categories.

Financial assets measured at fair value through profit or loss Held to maturity investments Loans and receivables Available for sale financial assets Financial liabilities measured at fair value through profit or loss Financial liabilities that were measured at amortized cost

Further standard requires following disclosure also to be made

Reclassification of financial instruments Information relation to the financial assets pledge as collateral Information about compound financial instruments

2. Income statement and equity

The standard requires disclosing income, expenses, losses and gains attributable to following categories,

Financial assets measured at fair value through profit or loss Held to maturity investments Loans and receivables Available for sale financial assets Financial liabilities measured at fair value through profit or loss Financial liabilities that were measured at amortized cost

Further standard requires following disclosure also to be made

Interest income and expense for financial instruments that were not carried at fair value through profit of loss.

Fee based income and related expenses Amount of impairment of financial assets recognized for each class of

financial assets Interest income recognized to income statements from such impaired

financial assets.


3. Other disclosures

Accounting policies of the company adopted for financial instruments Information about the hedge accounting applied by the company Information relating to the fair value of financial asset and financial liabilities of

each class together with,o Carrying amount

o Information as to how the fair value was measured

o Information relating to if fair value cannot be measured reliably.

Information in relation to the nature and extent of risk arising from financial instruments of the company.Under this there are two types of disclosures needs to be made

1. Qualitative disclosures Exposure to risk for each class of financial instrument Policies and processes of management in relation to the identified risks for

each class of financial instrument Any changes taken place for qualitative disclosures from previous year.

2. Quantitative disclosures The data relating to company’s exposure to risks as at the balance sheet

date Disclosures with regard to market risk, credit risk and liquidity risk and the

ways in which such risks are managed by the company. Concentration of risks

Accounting for leases


The IASB has issued IAS 17 leases with regard to accounting for leases. Further IASB subsequently issued following interpretations in relation to leases.

IFRIC 4 determining whether an arrangement contains a lease SIC 27 Evaluating the substance of transaction in the legal form of a lease SIC 15 operating leases

As per the standard there are two types of leases available in the market. Those are

1. Operating leases2. Finance leases

Operating lease defined as a lease other than a finance lease. Accordingly finance lease is defined as a lease arrangement whereby all the risks and rewards relating to ownership are substantially transferred to the lessee.

That is instead of considering this legally the lessee bears all the risks and rewards relating to the lease contract and therefore lease asset is recognized as a asset in the books of lessee while lessor treated it as a disposal of assets.

It should be noted that the transaction was treated in this manner by considering the substance of the transaction even though the legal ownership of the asset remains with the lessor. Following situations are considered when determining whether asset is classified as a operating lease or finance lease.

At the end of the lease period the ownership of the asset is transferred to the lessee

The lessee is having the option to purchase the leased asset at the end of the lease period at a price less that the fair value of the leased asset as at the balance sheet date.

The lease agreement covers the significant part of use full life of the assets irrespective of the fact whether the ownership of the asset is transferred to lessee.

The leased asset is a special in nature and therefore only lessor can use the asset without major modifications.

Operating leases


The accounting treatment for operating lease for both lessor and lessee is simple. Accordingly the lessee should recognize the lease rental paid to lessor as an expense in the year in which such rental was incurred. The lessor should recognize such rental as rental income from operating leases while maintaining the in the year in which such rental was incurred. The lessor should recognize such rental as rental income from operating leases while maintaining the value of the assets in the financial statements.

Finance leaseEven though the legal ownership of the asset is not transferred to the lessee under a finance lease considering the substance of the transaction the leased asset is recognized in the books of lessee. Accordingly the lessee should recognize the asset in the balance sheet by creating a lease rental payable to the balance sheet.

The double entries can be elaborated as follows,

1. Recognition of lease asset in the books of lessee

Property plant & Equipments Dr Interest in suspense Dr Lease creditor Cr

2. Repayment of lease installments

Lease creditor Dr Cash Cr

3. Recognition of interest in suspense to income statements

Income statement Dr Interest in suspense Cr

In the books of lessor the assets should be de recognized and the disposal profit needs to be identified to the income statements. Further the different between the carrying value of the asset and the purchase price needs to be recognized as a unearned income and should transfer to income statement upon the receipt of lease rentals in the future periods. Moreover if any gain or loss arising from the disposal such gain or loss needs to be recognized to the income statement in the year which the disposal has taken place.


Reference

Alexander, D. & A. Britton, (2004) Financial Reporting, (7th ed.), Thomson

Atrill, P. & E. McLaney, (2002) Financial Accounting for Non-specialists,(3rd

ed.) Prentice Hall

Black G., (2003) Students’ Guide to Accounting and Financial Reporting

Standards, (9th ed.) Prentice Hall,

Lewis, R. & D. Pendrill, (2004) Advanced Financial Accounting, (7th

ed.),

Prentice Hall,

IASB,2001, International accounting Standards 39 Financial instruments

recognition and measurement, IASCF

IASB,2001, International accounting Standards 32 Financial instruments

presentation, IASCF

IASB,2001, International financial Reporting standards 7 Financial instrument

disclosures, IASCF

Ernst & Young 2012, Ernst & Young LLP 2012, united kingdom, <

http://www.ey.com/> viewed on 6, April 2012.

Deloitte global services limited 2012, Deloitte global services limited, United Kingdom, <

http://www. iasplus, com/> viewed on 6, April 2012.


international financial reporting

Economy & Finance