lect-4 ifrs frame work

8/2/2019 Lect-4 IFRS Frame Work

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IFRS FRAME WORK

Dr R Soundara Rajan


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IFRS Constituents

International accounting standard Board-London

IFRS includes all the constituents

IFRS Standards 1-9

International AccountingStandards IAS 1-41

International Financial

Reporting InterpretationsCommittee IFRIC -16

Standing InterpretationsCommittee SIC-11

Interpretations


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IFRS Broad Frame work

Every standard has following sections tofacilitate Reading, interpretations andapplications

Description ExplanationIntroduction Brief Highlight

Standards Main Content

Basis of conclusions (BC) Reasons for conclusions

Implementation Guidelines ( IG) Rules and guidelines

Illustrative Examples ( IE) Examples for implementations


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Process

Stage-1- Identification of Accounting Issues and the needfor regulation. Called Agenda Setting

Stage-2 Plan the elements relating toagenda Project Planning

Stage-4 PrepareExposure Drafts

and make it opento Public forcomments

Stage-5

IncorporateComments andpublish standards

Stage-3 Publish

discussion Paper-broad frame work

and issues

Stage-6 Review


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International Financial Reporting InterpretationCommittee

IFRIC issues interpretations to standards (IASs and IFRSs.

Replaced former standing committee SIC in

2002 Mission - - To interpret the application of IASs

and IFRSs and provide timely guidance onfinancial reporting issues not specifically

adressed in IASs and IFRs, in the context ofIASB frame work and undertake other task ofthe IASB

Presently there are 16 IFRICs and deal with

issues where the standard lack guidance


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Striking features of IFRS

Principle based as compared to Rule based GAAP

Treatment based on economic substance than legal form

Substance over form is an accountingprinciple used "to ensurethat financial statements give a complete, relevant and accurate

picture of transactions and events". If an entity practices the'substance over form' concept, the financial statements will showthe financial reality of the entity (economic substance), rather thanthe legal form of transactions .

A redeemable preference share which is redeemed forfixed or determinable amount on future date is insubstance a liability and should be classified as such. [IAS 32] . However Sch VI of companies ACT Requires

Redeemable Preference share as a part of equity ( Rulebased)
http://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Generally_accepted_accounting_principleshttp://en.wikipedia.org/wiki/Financial_statementhttp://en.wikipedia.org/wiki/Economic_substancehttp://en.wikipedia.org/wiki/Economic_substancehttp://en.wikipedia.org/wiki/Economic_substancehttp://en.wikipedia.org/wiki/Economic_substancehttp://en.wikipedia.org/wiki/Economic_substancehttp://en.wikipedia.org/wiki/Financial_statementhttp://en.wikipedia.org/wiki/Financial_statementhttp://en.wikipedia.org/wiki/Financial_statementhttp://en.wikipedia.org/wiki/Generally_accepted_accounting_principleshttp://en.wikipedia.org/wiki/Accounting


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Example of substance overform A lease might not transfer ownership to the leasee but the leasee

has to record the leased items as an asset if it intends to use it formajor portion of its useful life or where the present value of leasepayment is fairly equal to the fair value of the asset, etc.

Although legally the leasee is not the owner, so the leased item isnot his asset, but from the perspective of the underlying economicsthe leasee is entitled to the benefits embedded in the use of theitem and hence it has to be recorded as an asset.

A company is short of cash, so it sells its machinery to the bankand obtains it back on a lease. It is called sale and leaseback.Although the legal ownership has transferred but the underlyingeconomics remain the same and hence under the substance over

form principle the sale and subsequent leaseback are consideredone transaction.

If two companies swap their inventories they will not be allowed torecord sales because not sales has occurred even if they haveentered into valid enforceable contracts.

http://en.wikipedia.org/wiki/Substance_over_form


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Examples of substance over form

issues

Company A is essentially an agent forCompany B, and so should only record a saleon behalf of Company B in the amount of the

related commission. However, Company Awants its sales to appear larger, so it recordsthe entire amount of a sale as revenue.

Company D creates bill and hold paperwork tolegitimize the sale of goods to customerswhere the goods have not yet left the premisesof Company D.
http://www.accountingtools.com/commission-definitionhttp://www.accountingtools.com/bill-and-holdhttp://www.accountingtools.com/customer-definitionhttp://www.accountingtools.com/customer-definitionhttp://www.accountingtools.com/bill-and-holdhttp://www.accountingtools.com/commission-definition


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Under IFRS Historical cost is abandoned andcurrent cost is used- concept of fair valueaccountingPro Cons

Fair value increasestransparency of impact ofmarket forces

Unrealized gains and lossesfrom one accounting periodto another leading distortion

Restates fair value on dateof BS

Match liabilities and assetsdifficult

One mans fair value isdifferent from another


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Presentation of Financial statements IAS[1]

Clear Segmentation on current and non currentassets and liabilities. At present liquidity basis as percompanies Act

Statement of other comprehensive income andStatement of changes in equity

Functional grouping is preferred such asAdministrative expenses, Production Expenses,

Selling and distribution expenses in IFRS No concept of extraordinary or exceptional income as

in AS5. All transaction are considered normal. Materialitems may be disclosed separately but can not betermed as extraordinary or exceptional


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IFRS stringent disclosure of:

Critical judgment in applying accounting policies

Key sources of estimation uncertainty that havesignificant risk

Information that enables users to evaluate entityobjectives, policies, and process of managing capital

Measure assets and liabilities in functionalcurrencies . Functional currency is the currency of

primary environment in which entity operateswhich may be different from local currency of acountry. Indian entities prepare in Indian rupees.


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IFRS requires annual reassessment of usefullife of assets. Earlier the depreciation wasstopped once asset is retired from active life.

In IFRS depreciation allowed till the asset isactive and until actual de-recognition of asset

IFRS mandates component Accounting- eachmajor part of an item of equipment with costthat is significant in relation to total cost of anitem


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Genesis of IFRS

Initial period all MNCs and global companiesprepared Separate FS for each country as per

GAAP.

GAPP evolved from IAS issued by InternationalAccounting Standard Committee [ IASC ] from1973-2001.

Total IAS-1 to IAS 41

1973-2001

2001

IASC after 27 yearsrestructured as

International accountingStandard Board

IASB

IASC

FormulatedIAS

Accounting standard issuedby ICAI

Accordance with Company

Law, SEBI Guidelines

IASBFormulated

IFRS

ICAI made convergedstandards


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From IAS to IFRS

1973InternationalAccountingStandard

Committee2000

2001InternationalAccounting

Standards Board

Future

International Accountingstandards [IAS]

SICInterpretatio

n[IAS]

International Accountingstandards [IAS]

IFRICInterpretatio

nsIAS

INTERNATIONAL FINANCIAL REPORTING STANDARDS [IFRS]


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Advantages of Adopting IFRS

Better Information to investors

Common Basis of comparison

Clarity and Productivity asmakers use their own judgment

and not rule based

Access tointernational

capital

Bench markingwith global

Peers

ConsistentReportingEscapeMultiplereporting

Reflect truevalue

Reflection


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Meaning Of convergence

Comply with the requirement of IFRS Comply means not word by word adoption-

Example replacing true and fair for presently

fairly IASB accepts in its statement of best practices

:

Working relation between IASB and standardsetters-

adding additional disclosure requirements ,removing optional treatments do not create

non compliance with IFRS


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Transition

Comparative Period

IFRS Opening Balance Sheet

As on April 2010

First IFRS FinancialStatement

Reporting date March 31, 2012


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Entities covered underconvergence

Debt, equity listed or inthe process of listing in

India or abroad

A

Turn Over excludingother income

exceeds Rs 100 crore

B

Holding or asubsidiary of entity

mentioned in A or B

Public deposits andborrowing more than Rs 25

crores at any time preceding

accounting year

Bank, Financialinstitution , mutualfund or insurance

agency


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Role of accounting standardboard

Determine whether

each IFRS meetsspecified criteria setout in locallegislation /regulation

Determine

Endorse after

changes such asremoving optionaltreatment andadditionaldisclosures whereappropriate

Endorsethe IFRS

Get it approved by

National Advisorycommittee onaccountingstandards

[NACAS]

Approval


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Categorization Of IFRS by ICAI

Category ICategory IA

IFRS which do nothave any

differences with

the correspondingIAS

Category IBIFRS which haveminor differences

with thecorresponding IAS

Category IIIFRS which mayrequire some timeto reach a level ofpreparedness by

Industry and

professionals I viewof existingeconomic

environment andother factors

Category III AIFRS having minor

differences withcorresponding IASthat should have

taken up with IASB

Category III BIFRS having majordifferences with

corresponding IASthat should have

taken up with IASB orshould be removed by

ICAI

Category IVIFRS

adoption ofwhich

wouldrequire

changes inLaws and

regulations

Category VIFRS corresponding to which no Indian Accounting

Standards are required for time being.

IAS 29 FR in Hyper Inflationary Economics


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IFRS Vs GAAP

IFRS GAAPBasis of accounting Modified Historical cost

Emphasis on Fair ValueHistorical Cost. FA other thanIntangible Assets can berevalued

Fair Presentation Addl disclosure whennecessary

Compliance with standard

Compliance with Law andStandards

No departure

Substance Over Form According to Substance According to substance thanlegal form

Contents of FS Two Years balance sheet,P&L,CF, Changes in Equity,

Accounting Policies andnotes

Two Years BS, P&L andaccounting Policies and

NotesConsolidated FS and relatedNotesFS include CFS

Reporting Currency Functional CurrencyEntities also can present in

different currency

Sch VI in Rupees


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REVIEW QUESTIONSFROM

Dr Friendly Computer


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Basics

What is IFRS mean?

International Financial Reporting Standard

What is key financial statement mean ?

Used for Analysis P&L, BS, CFS

And Statement of owners Equity( NewRequirement)

What do you understand by income statement ? Presents information on the financial results of the

companys business activity over a period of time

How much revenue generated and What cost it

incurred


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Basics

What Is Balance sheet?

Discloses What a company Owns and what itOwes.

What is owners equity?Owners equity portion belonging to share holders

or owners of business

Residual interest in assets after deducting

liabilities

Assets= Liability + Owners Equity

What is cash Flow Statement?

Discloses sources and uses of cash


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Schedule VI and BS

What is the basis of presentation of BS asper Sch VI ?

Presentation is based upon : (a) The balanced format

in which the sum of the amounts for liabilities and equity areadded together to illustrate that assets equal liabilities plusequity.

(b) The report form i.e. top to bottom or the vertical form.

Classification of assets and liabilities:

(a) Classification is based upon current and non-currentassets/liabilities method.

(b) Similar nature of assets/liabilities are grouped into line items.


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Diagrammatic representation of bodiesassociated with IFRS

Briefly describe the bodies associatedwith IFRS


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Review IFRS

1. What is the objective of Financial statement ?a. Provide information about the financial position ,

performance and changes in financial of the entity

b.

Useful to wide range of users for economic decisionsc. Financial reporting requires policy choices and

estimates. The judgment varies from one preparer toanother. Hence standards requires consistency

d. To show the results of stewardship of management

However the financial statement need not provide all

Information that the user may require to arrive atdecision as

they contain only financial information and not the non

financial information


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Assignment

What is the basis of accounting ?

Explain the concept of True and fairpresentation

Explain the concepts

Substance over form

Principle based Vs Rule based

Contents of Financial statement Reporting Currency

lect-4 ifrs frame work

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