IFRS FRAME WORK

Dr R Soundara Rajan

IFRS Constituents

International accounting standard BoardLondon IFRS includes all the constituentsFinancial International
IFRS Standards 1-9

International Accounting Standards IAS 1-41

Reporting Interpretations Committee IFRIC -16 Standing Interpretations Committee SIC-11 Interpretations

IFRS Broad Frame work

Every standard has following sections to facilitate Reading, interpretations and applications
Description Introduction Standards Basis of conclusions (BC) Implementation Guidelines ( IG) Explanation Brief Highlight Main Content Reasons for conclusions Rules and guidelines

Illustrative Examples ( IE)

Examples for implementations

Process
Stage-1- Identification of Accounting Issues and the need for regulation. Called Agenda Setting

Stage-2 Plan the elements relating to agenda Project Planning

Stage-3 Publish discussion Paperbroad frame work and issues

Stage-4 Prepare Exposure Drafts and make it open to Public for comments

Stage-5 Incorporate Comments and publish standards

Stage-6 Review

International Financial Reporting Interpretation Committee

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 on financial reporting issues not specifically adressed in IASs and IFRs, in the context of IASB frame work and undertake other task of the IASB Presently there are 16 IFRICs and deal with issues where the standard lack guidance

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 accounting principle used "to ensure that 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 show A redeemable of the entity (economic substance), for the financial realitypreference share which is redeemed rather than fixed or determinable amount on future date is in the legal form of transactions .
substance 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 ( Rule based)

Example of substance over form

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 for major portion of its useful life or where the present value of lease payment is fairly equal to the fair value of the asset, etc. Although legally the leasee is not the owner, so the leased item is not his asset, but from the perspective of the underlying economics the leasee is entitled to the benefits embedded in the use of the item and hence it has to be recorded as an asset. A company is short of cash, so it sells its machinery to the bank and obtains it back on a lease. It is called sale and leaseback. Although the legal ownership has transferred but the underlying economics remain the same and hence under the substance over form principle the sale and subsequent leaseback are considered one transaction. If two companies swap their inventories they will not be allowed to record sales because not sales has occurred even if they have entered into valid enforceable contracts.
http://en.wikipedia.org/wiki/Substance_over_form

Examples of substance over form issues

Company A is essentially an agent for Company B, and so should only record a sale on behalf of Company B in the amount of the related commission. However, Company A wants its sales to appear larger, so it records the entire amount of a sale as revenue. Company D creates bill and hold paperwork to legitimize the sale of goods to customers where the goods have not yet left the premises of Company D.

Striking features of IFRS

Under IFRS Historical cost is abandoned and current cost is used- concept of fair value accounting Pro Cons
Fair value increases transparency of impact of market forces Unrealized gains and losses from one accounting period to another leading distortion

Restates fair value on date of BS

Match liabilities and assets difficult

One mans fair value is different from another

Striking features of IFRS

Presentation of Financial statements IAS[1]

Clear Segmentation on current and non current assets and liabilities. At present liquidity basis as per companies Act Statement of other comprehensive income and Statement of changes in equity Functional grouping is preferred such as Administrative expenses, Production Expenses, Selling and distribution expenses in IFRS No concept of extraordinary or exceptional income as in AS5. All transaction are considered normal. Material items may be disclosed separately but can not be termed as extraordinary or exceptional

Striking features of IFRS

IFRS stringent disclosure of:

Critical judgment in applying accounting policies Key sources of estimation uncertainty that have significant risk Information that enables users to evaluate entity objectives, policies, and process of managing capital

Measure assets and liabilities in functional currencies . Functional currency is the currency of primary environment in which entity operates which may be different from local currency of a country. Indian entities prepare in Indian rupees.

Striking features of IFRS

IFRS requires annual reassessment of useful life of assets. Earlier the depreciation was stopped once asset is retired from active life. In IFRS depreciation allowed till the asset is active and until actual de-recognition of asset IFRS mandates component Accounting- each major part of an item of equipment with cost that is significant in relation to total cost of an item

Genesis of IFRS
1973-2001
Initial period all MNCs and global companies prepared Separate FS for each country as per GAAP. GAPP evolved from IAS issued by International Accounting Standard Committee [ IASC ] from 1973-2001. Total IAS-1 to IAS 41 Accounting standard issued by ICAI Accordance with Company Law, SEBI Guidelines

IASC Formul ated IAS

2001
IASC after 27 years restructured as International accounting Standard Board IASB

IASB Formulated IFRS

ICAI made converged standards

From IAS to IFRS

1973 International Accounting Standard Committee 2000 2001 International Accounting Standards Board Future

International Accounting standards [IAS]

International Accounting standards [IAS]

[IAS]

SIC Interpretatio n

IAS

IFRIC Interpretatio ns

INTERNATIONAL FINANCIAL REPORTING STANDARDS [IFRS]

Advantages of Adopting IFRS

Better Information to investors Common Basis of comparison Consistent Reporting Escape Multiple reporting Reflect true value Reflection

Clarity and Productivity as makers use their own judgment and not rule based Access to international capital Bench marking with global Peers

Meaning Of convergence

Comply with the requirement of IFRS Comply means not word by word adoptionExample replacing true and fair for presently fairly IASB accepts in its statement of best practices : Working relation between IASB and standard settersadding additional disclosure requirements , removing optional treatments do not create non compliance with IFRS

Transition
Comparative Period IFRS Opening Balance Sheet
As on April 2010

First IFRS Financial Statement

Reporting date March 31, 2012

Entities covered under convergence

Debt, equity listed or in the process of listing in India or abroad A

Bank, Financial institution , mutual fund or insurance agency

Turn Over excluding other income exceeds Rs 100 crore B

Public deposits and borrowing more than Rs 25 crores at any time preceding accounting year

Holding or a subsidiary of entity mentioned in A or B

Role of accounting standard board

Determine whether each IFRS meets specified criteria set out in local legislation / regulation Endorse after changes such as removing optional treatment and additional disclosures where appropriate Get it approved by National Advisory committee on accounting standards [NACAS]

Determine

Endorse the IFRS

Approval

Categorization Of IFRS by ICAI

Category I
Category IA IFRS which do not have any differences with the corresponding IAS Category IB IFRS which have minor differences with the corresponding IAS

Category II
IFRS which may require some time to reach a level of preparedness by Industry and professionals I view of existing economic environment and other factors

Category III A
IFRS having minor differences with corresponding IAS that should have taken up with IASB

Categor y IV
IFRS adoption of which would require changes in Laws and regulations

Category III B
IFRS having major differences with corresponding IAS that should have taken up with IASB or should be removed by ICAI

Category V
IFRS corresponding to which no Indian Accounting Standards are required for time being. IAS 29 FR in Hyper Inflationary Economics

IFRS Vs GAAP
IFRS Basis of accounting Modified Historical cost Emphasis on Fair Value Addl disclosure when necessary Compliance with standard According to Substance Two Years balance sheet, P&L,CF, Changes in Equity, Accounting Policies and notes GAAP Historical Cost. FA other than Intangible Assets can be revalued Compliance with Law and Standards No departure According to substance than legal form Two Years BS, P&L and accounting Policies and Notes Consolidated FS and related Notes FS include CFS Sch VI in Rupees

Fair Presentation

Substance Over Form Contents of FS

Reporting Currency

Functional Currency Entities also can present in different currency

REVIEW QUESTIONS FROM

Dr Friendly Computer

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( New Requirement) 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

Basics

What Is Balance sheet?

Discloses

What a company Owns and what it

Owes.

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

Schedule VI and BS

What is the basis of presentation of BS as per Sch VI ?

Presentation is based upon :

(a) The balanced format

in which the sum of the amounts for liabilities and equity are added together to illustrate that assets equal liabilities plus equity.

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

Diagrammatic representation of bodies associated with IFRS

Briefly describe the bodies associated with IFRS

Review IFRS
1.

What is the objective of Financial statement ?

Provide information about the financial position , performance and changes in financial of the entity b. Useful to wide range of users for economic decisions c. Financial reporting requires policy choices and estimates. The judgment varies from one preparer to another. 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 at decision as they contain only financial information and not the non financial information
a.

Assignment

What is the basis of accounting ? Explain the concept of True and fair presentation Explain the concepts
Substance

over form Principle based Vs Rule based

Contents of Financial statement Reporting Currency