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Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the board of the International Accounting Standards Committee (IASC). In April 2001 the IASB adopted all IAS and continued their development, calling the new standards IFRS. ADOPTION OF IFRS IFRS are used in many parts of the world, including the European Union , Hong Kong , Australia , Russia , South Africa , Singapore and Pakistan . Nearly 100 countries currently require or permit the use of, or have a policy of convergence with, IFRSs. IASB:"IFRS around the world", http://www.iasb.org/About+Us/About+IASB/IFRS+Around+the+World.htm, '' Retrieved on 2007-02-06 For a current overview see IAS PLUS's list of all countries that have adopted IFRS. Australia The Australian Accounting standards, previous to 1 January 2005 , were based around accounting standards developed by the Australian Accounting Standards Board (AASB). As a result of pressure towards international harmonisation, the AASB had been working towards a convergence between the Australian Standards and the IFRS. From 1 January 2005 , the Australian equivalent of IFRS have been fully implemented as AASB 101 - 141. It is a requirement that all reporting entities adopt the standards as they have replaced the previous Australian generally accepted accounting principles. Due to the accounting standards operating halfway through the year, the requirements can be summarised as follows:
European Union All publicly traded EU companies have been required to prepare their consolidated accounts using IFRS since 2005. Prior to 2005 there were around 350 publicly listed companies that used IFRS — since 2005 the figure has been around 7,000. In order to be approved for use in the EU, standards must be endorsed by the Accounting Regulatory Committee (ARC), which includes representatives of member state governments and is advised by a group of accounting experts known as the European Financial Reporting Advisory Group. As a result IFRS as applied in the EU may differ from that used elsewhere. Parts of the standard IAS 39: Financial Instruments: Recognition and Measurement were not originally approved by the ARC. IAS 39 was subsequently amended, removing the option to record financial liabilities at fair value, and the ARC approved the amended version. The IASB is working with the EU to find a way to an acceptable way to remove a remaining anomaly in respect of hedge accounting. As the standards are part of European law the approved standards and approved subsequent changes must be published in the Official Journal of the European Union. On October 13th 2003 the first publication of the standards was included in PB L 261 . Changes to the earlier published IAS and IFRS can be monitored using the webpage of the Directorate Internal Market of the European Union on the implementation of the IAS in the European Union. From 2007 companies traded on the Alternative Investment Market in the UK will be required to prepare their accounts using IFRS. Russia The government of with IFRS since 1998. Since then twenty new accounting standards were issued by the Ministery of Finance of Russian Federation aiming to align accounting practices with IFRS. Despite of these efforts essential differences between and IFRS remain. From 2004 all commercial banks are obliged to prepare financial statements in accordance with both and IFRS. Full transition to IFRS is delayed and is expected to take place from 2010. Turkey Turkish Accounting Standards Board translated IFRS into Turkish in 2006. As of 31 December 2006 Turkish companies listed in Istanbul Stock Exchange are required to prepare IFRS reports. Convergence with US GAAP In 2002 at a meeting at Norwalk, Connecticut , the IASB and the US Financial Accounting Standards Board agreed to harmonise their agenda and work towards reducing differences between IFRS and US GAAP (the Norwalk Agreement). In February 2006 FASB and IASB issued a Memorandum of Understanding including a programme of topics on which the two bodies will seek to achieve convergence by 2008. The United States Securities And Exchange Commission currently requires all overseas companies listed in the US to prepare their results either under US GAAP or according to their local requirements with a footnote reconciling their local GAAP to US GAAP. This imposes expense on companies which are listed on exchanges both in the US and another country. The SEC has proposed a change to its rules to remove the reconciliation requirement for foreign issuers which prepare accounts under IFRS, indicatively from 2009.SEC: "SEC proposed rulemaking"http://www.sec.gov/spotlight/ifrsroadmap.htm, '' Retrieved on 2007-07-14 . US registered companies will still be required to use US GAAP. IASB CURRENT PROJECTS IASB: "IASB Work Plan" http://www.iasb.org/Current+Projects/IASB+Projects/IASB+Work+Plan.htm, '' Retrieved on 2007-04-19 Convergence projects with FASB
Projects under research
STRUCTURE OF IFRS IFRSs are considered a "principles-based" set of standards in that they establish broad rules as well as dictating specific treatments. International Financial Reporting Standards comprise:
There is also a ''Framework for the Preparation and Presentation of Financial Statements'' which describes some of the principles underlying IFRS List of IFRS Statements The following IFRS statements are currently issued:
Interpretations
FEATURES OF IFRS References References to IFRS standards given in the standard convention, for example (IAS1.14) refers to paragraph 14 of IAS1, Presentation of Financial Statements Content of financial statements IFRS financial statements consist of (IAS1.8)
Comparative information is provided for the previous reporting period (IAS 1.36). An entity preparing IFRS accounts for the first time must apply IFRS in full for the current and comparative period although there are transitional exemptions (IFRS1.7). Consolidated financial statements The ultimate parent company of a group must produce consolidated financial statements including all of its subsidiaries (IAS27.9). A subsidiary is an entity which is controlled by another entity; control is the power to govern the financial and operating policies (IAS27.4). In preparing consolidated financial statements, balances, transactions, income and expenses with other group members are eliminated (IAS27.24). Acquisition accounting and goodwill All business combinations are accounted for by applying the purchase method, requiring that one entity is identified as acquirer (IFRS3.17). The acquiring entity assesses the fair value of the separate assets, liabilities and contingent liabilities in the business it has acquired; this can include identification of intangible assets, for example customer relationships, which are not commonly recognised except on acquisitions (IFRS3.36) The difference between the cost of the business combination and the fair value of the assets and liabilities acquired represents goodwill (IFRS3.51). Goodwill is not subject to amortisation, but is assessed for impairment at least annually (IFRS3.54 and IAS36.10). Impairment is charged to the income statement. (IAS36. 60). Impairment provisions on goodwill are not subsequently reversed (IAS36.124). Property, plant & equipment Property, plant and equipment is measured initially at cost (IAS16.15). Cost can include borrowing costs directly attributable to the acquisition, construction or production if the entity opts to adopt such a policy consistently (IAS23.11). Property, plant and equipment may be revalued to fair value if the entire class of assets to which it belongs is so treated (for example, the revaluation of all freehold properties) (IAS16.31 and 36). Surpluses on revaluation are recognised directly to equity, not in the income statement; deficits on revaluation are recognised as expenses in the income statement (IAS16.39 and 40). Depreciation is charged to write off the cost or valuation of the asset over its estimated useful life to down to the recoverable amount (IAS16.50). The cost of depreciation is recognised as an expense in the income statement (IAS16.48). The depreciation method and recoverable amount is reviewed at least annually (IAS16.61). In most cases the method is “straight line”, with the same depreciation charge from the date when an asset is brought into use until it is expected to be sold or no further economic benefits obtained from it, but other patterns of depreciation are used if assets are used proportionately more in some periods than others (IAS16.56). Joint ventures, associates and other investments Joint ventures are investments other than subsidiaries where the investor has a contractual arrangement with one or more other parties to undertake an economic activity that is subject o joint control (IAS31.3). Joint ventures may be accounted for using either
Associates are investments, other than joint ventures and subsidiaries, in which the investor has a significant influence (the power to participate in financial and operating policy decisions) (IAS28.2). It is presumed that this will be the case if the investment is greater than 20% of the investee unless it can be clearly demonstrated not to be the case (IAS28. 6). Associates are accounted for using the equity method. Investments other than subsidiaries, joint ventures and associates are accounted for at their fair values unless (IAS39.9 and 46):-
Inventory (stock) Inventory is stated at the lower of cost and net realisable value (IAS2.9). Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing items to their present location and condition (IAS2.100. Where individual items are not identifiable, the “first in first out” (FIFO) method is used, such that cost represents the most recent items acquired. “Last in first out” (LIFO) is not acceptable (IAS2.25). Net realisable value is the estimated selling price less the costs to complete and costs to sell (IAS2.6). Receivables (debtors) and payables (creditors) Receivables and payables are recorded initially at fair value (IAS39.43). Subsequent measurement is stated at amortised cost (IAS39.46 and 47). In most cases, trade receivables and trade payables can be stated at the amount expected to be received or paid; however, it is necessary to discount a receivable or payable with a substantial credit period (see for example IAS18.11 for accounting for revenue). If a receivable has been impaired its carrying amount is written down its recoverable amount (the higher of value in use and its fair value less costs to sell). Value in use is the present value of cash flows expected to be derived from the receivable (IAS36.9 and 59). Borrowing Borrowing is stated at amortised cost using the effective interest method. This requires that the costs of arranging the borrowing are deducted from the principal value of debt and are amortised over the period of the debt (IAS39.46). Provisions Provisions are liabilities of uncertain timing or amount (IAS37.10). Provisions are recognised when an entity has, at the balance sheet date, a present obligation as a result of a past event, when it is probable that there will be an outflow of resources (for example a future cash payment) and when a reliable estimate can be made of the obligation (IAS37.14). Restructuring provisions are recognised when an entity has a detailed plan for the restructuring and has raised an expectation amongst those affected that it will carry out the restructuring (IAS37.72). Revenue Revenue is measured at the fair value of consideration received or receivable (IAS18.9). Revenue for the sale of goods cannot be recognised until the entity has transferred to the buyer the significant risks and rewards of ownership of the goods (IAS18.14). Revenue for rendering of services is accounted for to the extent that the stage of completion of the transaction can be measured reliably (IAS18.20). Employee costs Employee costs are recognised when an employee has rendered service during an accounting policy (IAS19.10). This requires accruals for short-term compensated absences such as vacation (holiday) pay (IAS19.11). Profit sharing and bonus plans require accrual when an entity has an obligation to make such payments at the reporting date (IAS19.17). Share-based payments Where an entity receives goods or services in return for the issue of its own shares or equity instruments it accounts for the fair value of those goods or services as an expense or as an asset (IFRS2.7). Where it offers options and other share based incentives to its employees it is required to assess the market value of the instruments when they are are first granted and then to charge the cost over the period in which the benefit vests (IFRS2.10). Income taxes Taxes payable in respect of current and prior periods are recognised as a liability to the extent they are unpaid at the balance sheet date (IAS12.12). Deferred tax liabilities are recognised for taxable temporary differences at the balance sheet date which will result in tax payable in future periods (for example, where tax deductions have been claimed for capital expenditure before the cost of depreciation has been charged in the income statement) (IAS12.39). Deferred tax assets are recognised for deductible temporary differences at the balance sheet date (for example, tax losses which can be used in future periods) to the extent that it is probable that these will reverse in future and that there will be taxable profits against which they can be offset (IAS 12.44). Cash flow statements IFRS cash flow statements show movements in cash and cash equivalents. This includes cash on hand and demand deposits, short term liquid investments readily convertible to cash and overdrawn bank balances where these readily fluctuate from positive to negative (IAS7.6 to 9). IFRS cashflow statements do not need to show movements in borrowings or net debt. Cash flow statements may be presented using either a direct method, in which major classes of cash receipts and cash payments are disclosed, or using the indirect method, whereby the profit or loss is adjusted for the effect of non-cash adjustments (IAS7.18). Items on the cash flow statement are classified as operating activities, investing activities and financing activities (IAS7.10). Leasing (accounting by lessees) Leases are classified:-
Fair value Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction (IFRS1 App A). Amortised cost Amortised cost uses the effective interest method to provide a constant rate of return on an asset or liability until maturity (IAS39.9) FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS Introduction The Framework for the Preparation and Presentation of Financial Statements states basic principles for IFRS. The framework states that the objective of financial statements is to provide information about the financial position, performance and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions. The Framework can divide into the following sections:
Underlying assumptions The underlying assumptions used in IFRS are:
Note that ''matching'' is not a fundamental assumption for IFRS. IFRS follows a balance sheet approach:- Equity at year-end = calculation base on IFRS. Net profit = Equity at year-end minus Equity at the beginning of the year Qualitative characteristics of financial statements The Framework describes the qualitative characteristics of financial statements as being
Elements of financial statements The Framework sets out the statement of financial position (balance sheet) as comprising:-
Recognition of elements of financial statements An item is recognised in the financial statements when:-
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