What are International Financial Reporting Standards (IFRS)?
International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (lASB) that is becoming the global standard for the preparation of public company financial statements.
Table of Contents
- 1 What are International Financial Reporting Standards (IFRS)?
- 2 International Accounting Standards Board (TASB)
- 3 Objectives of lASB
- 4 Role of lASB
- 5 IIFRS Advisory Council
- 6 International Financial Reporting Standards (IFRS) Foundation
- 7 International Financial Reporting Standards (IFRS)
- 7.1 First-time Adoption of International Financial Reporting Standards (IFRS 1)
- 7.2 Share Based Payment (IFRS 2)
- 7.3 Business Combination (IFRS 3)
- 7.4 Insurance Contracts (IFRS 4)
- 7.5 Non-current Assets Held for Sale and Discontinued Operations (IFRS 5)
- 7.6 Exploration for and Evaluation of Mineral Resources (IFRS 6)
- 7.7 Financial Instruments; Disclosures (IFRS 7)
- 7.8 Operating Segments (IFRS 8)
- 7.9 Financial Instruments (IFRS 9)
- 7.10 Consolidated Financial Statements (IFRS)
- 7.11 Joint Arrangements (IFRS 11)
- 7.12 Disclosure of Interests in Other Entities (IFRS )
- 7.13 Fair Value Measurement IFRS 13
IFRS is a refined system of financial reporting which is going to benefit all the stakeholders in the coming years, together with improved corporate governance and increased free flow of capital across the globe.
IFRS is sometimes confused with International Accounting Standards (IAS), which are older standards that IFRS has now replaced. The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements.
IFRS provides general guidance for the preparation of financial statements, rather than setting miles for industry-specific reporting. The IFRS Foundation is the legal entity under which the Intemational Account- Standards Board (lASB) operates.
International Accounting Standards Board (TASB)
Objectives of lASB
Role of lASB
IIFRS Advisory Council
International Financial Reporting Standards (IFRS) Foundation
The IFRS Foundation is the legal entity under which the International Accounting Standards Foundation is Board the new (IASB) name of operates. The International Foundation Accounting is governed by Standards by a board Committee of 22 t(IASC), trustees. approved IFRS in January 2010.
International Financial Reporting Standards (IFRS)
These are the International Financial Reporting Standards which are discussed below briefly:
First-time Adoption of International Financial Reporting Standards (IFRS 1)
This IFRS was issued on 1 January 2013. The objective of this IFRS is to ensure that a covered it’s by first those IFRS financial statements, statements, and contain its high interim quality financial information reports that: for part
- Is of the transparent period for users and comparable over all periods presented.
- Provides a suitable starting point for accounting in accordance with International Financial Reporting Standards (IFRSs).
- Can be generated at a cost that does not exceed the benefits.
An entity shall prepare and present an opening IFRS statement of financial position at the date to transition to IFRSs. This is the starting point for its accounting in accordance with IFRSs.
An entity shall use the same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first financial statements. Those accounting policies shall comply with each IFRS effective at the end of its first IFRS reporting periods.
The IFRS requires disclosure that explains how the transition from previous GAAP to IFRSs affected the entity’s reported financial position, financial performance, and cash flows.
IFRS 2 was issued on 1 January 2012. The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a share-based payment transaction.
The IFRS requires an entity to recognize share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. There are no exceptions to the I.FRS, other than for transactions to which other Standards apply.
This also applies to transfers of equity instruments of the entity’s parent; or equity instruments of another entity in the same group as the entity, to parties that have supplied goods or services to the entity.
The IFRS prescribes various disclosure requirements to ·enable users of financial statements to understand:
- The nature and extent of share-based payment arrangements that existed during the period.
- How the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined,
- The effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position.
Business Combination (IFRS 3)
This states that all business combinations are accounted for using purchase accounting, with limited expectations. A business combination 1s to banging together of separate entities or businesses into one reporting entity. A business can be operated managed for the purpose of providing returns to investors or lower costs.
An entity in its development stage can meet the definition of a business. In some Cfises the legal subsidiary is identified as the acquirer for accounting purposes (reverse acquisition). The date of acquisition is the date on which effective control is transferred to the acquirer.
The fair values of securities issued by the acquirer are determined at the date of exchange. Costs directly attributable to the acquisition may be internal costs but cannot be general administrative costs. There is no requirement for the directly attributable cost to be incremental.
Insurance Contracts (IFRS 4)
IFRS 4 was issued at 1 January ·2013_ The objective of this IFRS is to specify the financial reporting for insurance contracts by any entity that issues such contracts ( described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts.
In particular, this IFRS requires:
- Limited improvements to accounting by insurers for insurance contracts.
- The disclosure identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing, and uncertainty of future cash flows from insurance contracts.
An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
The IFRS applies to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs.
The IFRS permits an insurer to change its accounting policies for insurance contracts only if, as a result, its financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant.
In particular, an insurer cannot introduce any of the following practices, although it may continue using accounting policies that involve them:
- Measuring insurance liabilities on an undiscounted basis,
- Measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services.
- Using non-uniform accounting policies for the insurance liabilities of subsidiaries.
The IFRS requires disclosure to help users understand: (a) the amounts in the insurer’s financial statements that arise from insurance contracts, (b) The nature and extent of risks arising from insurance contracts.
Non-current Assets Held for Sale and Discontinued Operations (IFRS 5)
This IFRS was issued on 1 January 2013. The objective of this IFRS is to specify the accounting for assets held for sale and the presentation and disclosure of discontinued operations.
In particular, the IFRS requires:
- Assets that meet criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less cost to sell and depreciation on such assets to cease.
- A assets classfied as held for sale and the assets and liablities included within the disposal group classfied as held for sale to be presented separately in the statement of financial position.
- The result of discontinued operations to be presented separately in the statement of comprehensive income.
The IFRS: (a) Adopts the classification ‘held for sale. (b) Introduces the concept of a disposal group, being of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction.
(c) Classified an operation as discontinued at the date the operation meets the criteria to be classified as held for sale or when the entity has the disposal of the operation.
An entity shall classify a non-current asset ( or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.
A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale and (a) represents a separates major line of business or geographical area of operations, (b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or (c) is an acquired exclusively with a view to resale.
Exploration for and Evaluation of Mineral Resources (IFRS 6)
IFRS 6 was issued on 1 January 2012. The objective of this IFRS is to specify the financial reporting for the exploration for and evaluation of mineral resources. Exploration and evaluation expenditures are expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.
Exploration for and evaluation of mineral resources is the search for mineral resources, including minerals,, oil, natural gas, and similar nonregenerative resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource.
Exploration and evaluation assets are exploration and evaluation expenditures recognized as assets in accordance with the entity’s accounting policy. An entity shall determine an accounting policy for allocating exploration and evaluation assets to cash-generating units or groups of cash-generating units for the purpose of assessing ^ such assets for impairment.
Each cash-generating unit or group of units to which an exploration ‘ and evaluation asset is allocated shall not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments. An entity shall disclose information that identifies and explains the amounts recognized in its financial statements arising from the exploration for and evaluation of mineral resources.
Financial Instruments; Disclosures (IFRS 7)
This IFRS was issued on 1 January 2012. The objective of this IFRS is to require entities to provide disclosures in their financial statements that enable users to evaluate:
- The significance of financial instruments for the entity’s financial position and performance.
- The nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks The qualitative disclosures describe management’s objectives, policies and processes for managing those risks.
The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided intemally to the entity’s key management personnel. Together, these disclosures provide an overview of the entity’s use of financial instruments and the exposures to risks they create.
The IFRS applies to all entities, including entities that have few financial instruments (e.g. a manufacturer whose only financial instruments are accounts receivable and accounts payable) and those that have many financial instruments (e.g. a financial institution most of whose assets and liabilities are financial instruments).
When this IFRS requires disclosures by class of financial instrument, an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the statement of financial position.
Operating Segments (IFRS 8)
IFRS 8 was issued on 1 January 2013. An entity shall disclose information to enable~use of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.
This IFRS shall apply to:
- The separate or individual financial statements of an er .u}. (i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or (ii) that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market.
- The consolidated financial statements of a group with a parent: (i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or (ii) that files, or is in the process of filing, the consolidated financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market.
The IFRS requires an entity to report a measure of operating segment profit or loss and of segment assets. It also requires an entity to report a measure of segment liabilities and particular income and expense items if such measures are regularly provided to the chief operating decision-maker.
It requires reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities, and other amounts disclosed for reportable segments to corresponding amounts in the entity’s financial statements.
Financial Instruments (IFRS 9)
IFRS 9 was issued in July 2014.IFRS 9 is built on a logical, single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics.
Built upon this is a forward-looking expected credit loss model that will result in more timely recognition of loan losses and is a single model that is applicable to all financial instruments subject to impairment accounting.
In addition, IFRS 9 addresses the so-called ‘own credit’ issue, whereby banks and others book gains through profit or loss as a result of the value of their own debt falling due to a decrease in creditworthiness when they have elected to measure that debt at fair value.
The Standard also includes an improved hedge accounting model together link the economics of risk management with its accounting treatment.
Consolidated Financial Statements (IFRS)
IFRS 10 was issued on 1 January 2013. The objective of this IFRS is to establish principles for the presentation and preparation of financial statements when an entity controls one or more other entities. To meet the objectives, this IFRS:
- Requires an entity ( the parent) that control one or more other entities (subsidiaries) to present consolidated financial Statements.
- Defines the principl of control, and establishes control as the basis for consolidation.
- Sets out how to apply the principle of control to identify whether an investor controls an investee and preparation of consolidated fianacial statements.
Consolidated financial statements are the financial statements of a group in which the assets, liabilities, equity, income, expense, and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.
The IFRS requires an entity that is a parent to present consolidated financial statements. The IFRS defines the principle of control and establishes control as the basis for determining which entities are consolidated financial statements.
When preparing consolidated financial statements, an entity must use uniform accounting policies for reporting transactions and other events in similar circumstances. Intragroup balances and transactions must be eliminated. Non-controlling interests in subsidiaries must be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.
Joint Arrangements (IFRS 11)
IFRS 11 was issued in May 2011. It establishes principles for the financial reporting by parties to a joint arrangement. IFRS 11 improves the accounting for joint arrangements by introducing a principle-based approach that requires a party to a joint arrangement to recognize its rights and obligations arising from the arrangement.
Such a principle-based approach will provide users with greater clarity about an entity’s involvement in its joint arrangements by increasing the verifiability, comparability, and understandability of the reporting of these arrangements.
The disclosure requirements allow users to gain a better understanding of the nature extent and financial effects of the activities that an entity carries out through joint arrangement. The disclosure requirements for joint arrangements have been placed in IFRS 12 Disclosure of Interests in Other Entities.
Disclosure of Interests in Other Entities (IFRS )
IFRS 12 applies to entities that have an interest in subsidiaries, joint arrangements, associates and unconsolidated structures entities.
IFRS 12 does not apply to:
- Post-employments benefit plans or other long-term emplyee benfit plans to which IAS 19 Employee benfits.
- Separate financial statements, where IAS 27 separate financial statements applies.
- An interest held by an entity that participates in, but does not have joint control or significant influence over, a joint arragement.
- Interest accounted for in accordance with IFRS 9 Financial Instruments, except for interest in an associate or joint venture measured at fair value as required by IAS 28 Investments in Associates and Joint Ventures.
Fair Value Measurement IFRS 13
IFRS 13 was issued on 1 January 2013. This IFRS (a) defines fair value, (b) sets out in a single IFRS a framework for measuring fair value, (c) requires disclosures about fair value measurements.
The IFRS applies to IFRS that require or permit fair value measurements or disclosures about fair value measurements ( and measurements, such as fair values less costs to sell, based on fair values or disclosures about those measurements), except in specified circumstances.
A fair value measurement assumes that a financial or non-financial liability or an entity’s own equity instrument (e.g. equity interest issued as consideration in a business combination) is transferred to a market participant at the measurement date.
The transfer of a liability or an entity’s own equity instruments assumes the follwing: (a) A liability would remain outstanding and the markets participants transferee would be required to fulfill the obligation.
The liability would not be settled with the counterparty or otherwise extinguished on the measurement date, (b) An entity’s own equity instrument would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument.
The instrument would not be canceled or otherwise extinguished on the measurement date.
An entity shall disclose information that helps users of its financial statements assess both of the following: (a) for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the statement of financial position after initial recognition, the valuation techniques and inputs used to develop those measurements, (b) for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period.
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