Accounting 2
Lecture no 3
Prepared by:
Jan Hájek
IFRS





IFRS stands for International Financial Reporting
Standards.
As indicated within the title, these standards are aimed at
a global practice.
Ultimately, the goal is to achieve a single set of highquality, common accounting standards used around the
world.
These standards are the result of a convergence of
international viewpoints.
These standards are for publicly accountable entities.
 Small and medium-sized entities (SMEs) that do not have public
accountability may use a simplified version of IFRS known as IFRS
for SMEs.
 IFRS for SMEs has recently been accepted for non-SEC registrants
by the AICPA as an acceptable alternative reporting standard to US
GAAP; however, it is not yet common practice.
Importance of IFRS

Under IFRS 1, First-time Adoption of International Financial
Reporting Standards, there is a variety of exemptions and options
that the preparer may elect to utilize in the adoption process that
need to be assessed to best position the company.

The IFRS adoption and convergence efforts impact much more than
just the accounting function. Additional functions that are impacted
include the following:
○
○
○
○
○
○
○
Information systems
Tax
Treasury
Investor relations
Sales
Human resources
Mergers and acquisitions
Importance of IFRS



Knowledge of IFRS provides an ability to practice accounting in
the global marketplace.
Through convergence efforts, US GAAP continues to become
more aligned with IFRS.
US practice of IFRS currently exists in the following ways:
 Foreign multinationals that report using IFRS have US operations.
While some of these entities file IFRS financials with regulators of
foreign exchanges, some file with the SEC as foreign private
investors (FPIs) under IFRS as well.
 US multinational companies have foreign operations that are
required to report using IFRS.
 Many US companies are making assessments of the potential impact
of adopting IFRS and IFRS convergence efforts on their current
operations.
Importance of IFRS
Given the level of IFRS knowledge expected by
US practitioners today, the AICPA is including
IFRS in the content specifications for the
Certified Public Accountant exam beginning
January 1, 2011. (as in Czech republic –
accounting 1 and 2)
IFRS Implementation (2005)
IFRS or fixed date for implementation
U.S. GAAP and/or convergence intended
Convergence plans
No/unknown convergence plans
6
IFRS Implementation (2009)
IFRS permitted or required
U.S. GAAP and/or convergence intended
Convergence plans
No/unknown convergence plans
7
IFRS Implementation

Korea

Japan
China
 India


Brazil

Canada
Mexico
 U.S.

2011: IFRS mandatory for listed
businesses – 2009: IFRS permitted
Large publicly-traded companies given option to earlyadopt IFRS for years ending March 31, 2010
Convergence with IFRS with some differences
Convergence with IFRS for public interest entities for
2011
Listed companies and banks required to use
IFRS starting from 2010, IFRS to be
incorporated into Brazilian GAAP
2011: Reporting under IFRS for publiclyaccountable entities, private companies permitted to
use IFRS
2012: Working to converge Mexican GAAP with IFRS
2015 or 2016 ???
8
IAS/IFRS in the world
9
IFRS/US GAAP Convergence
Plan

Norwalk Agreement (September 2002)
 FASB and IASB pledged to make their existing
financial reporting standards fully compatible and
coordinate future work programs to ensure
compatibility is maintained

Memorandum of Understanding between
FASB and IASB (February 2006)
 Commitment to achieve convergence
 Sets guidelines on how to approach the task
 Outlined standard setting goals to be
accomplished by the end of 2008

Updated Memorandum of Understanding
(September 2008, November 2009)
 Presents standard setting goals to be
accomplished by June 2011
10
Use of IFRS by Foreign Private
Issuers

December 2007
 SEC issued final rule permitting foreign private issuers
to file financial statements in accordance with IFRS as
issued by IASB (SEC Release No. 33-8879)
○ Financial statements required to contain explicit and
unreserved statement of compliance with IFRS as issued
by IASB
○ Audit report required to opine on application of
IFRS as issued by IASB
 No reconciliation to U.S. GAAP needed
11
SEC Proposed Roadmap for Potential Adoption
of IFRS by All U.S. Public Companies

Issued November 2008

Identified “milestones” to be achieved before IFRS
decision

Potential SEC decision in 2011, with potential IFRS
adoption beginning with years ending on or after
December 15
 2014 for large accelerated filers
 2015 for accelerated filers
 2016 for other filers
12
Commission Statement in Support of Convergence
and Global Accounting Standards (“2010 Statement”)
 The 2010 Statement was issued by the SEC
on February 24, 2010

SEC directed the Staff of the Office of the
Chief Accountant of the SEC with appropriate
consultation with other divisions and offices to
develop and execute a Work Plan

The purpose of the Work Plan is to consider
specific areas and factors relevant to a SEC
determination in 2011 of whether, and if so,
when, and how the U.S. should be transitioned
to a system incorporating IFRS
13
US GAAP – IFRS convergence
14
Is IFRS different than US
GAAP?

There are differences between IFRS and US GAAP
but they are more alike than different for most
commonly encountered transactions.

IFRS is largely grounded in the same principles as
US GAAP.

The US and international standard setters are
currently working on convergence projects to better
align the standards and reduce these differences.
Is IFRS better than US GAAP?

It cannot be stated that IFRS is better (or of higher quality) than US
GAAP nor that US GAAP is better (or of higher quality) than IFRS.
Neither set of standards is perfect.

This is evidenced by the convergence efforts where changes are being
made to both sets of standards and are not one-sided.

Some could say that the international standard setters have had the
following advantages in their standard setting:




Being able to obtain a greater amount of global perspective.
Being able to draw upon the latest standards.
Being able to remedy perceived problems identified in practice.
Having an annual improvement process to enhance the clarity and consistency of
IFRS, which continues to consider more current thinking and practice.
 Being able to focus more intently on a principles orientation.
Is IFRS better than US GAAP?
Principles Based vs. Rules
Based


As mentioned previously, both US GAAP and IFRS
are largely grounded in the same principles.
As a general rule, however, IFRS standards are
broader with less rules and limited interpretive
guidance.
 The international standard setters prefer to leave
implementation of the principles embodied in the
standards to preparers and auditors and its interpretive
body.

US GAAP contains underlying principles as well but
is more specific and rules oriented with far more
“bright lines,” comprehensive implementation
guidance and industry interpretations.
Is IFRS better than US GAAP?
Principles oriented:
►
►
Your parents tell
you to do your best
to get good grades.
If you do not get
good grades, they
will consider the
substance of your
reasons.
Rules oriented:
►
Your parents tell you
to get C or above.
►
They provide you
with 15 contingencies
that might justify
acceptance of
anything lower than
C.
IASB
International Accounting Standards Board (IASB):
 The IASB develops IFRS.
 The IASB is an independent group of 15 full-time
members.
 The board intends to expand to 16 members by 2012.
 These members are appointed by the trustees.
IASB
• International Accounting Standards Board (IASB)
– Independent, privately funded accounting standard
setter based in London
– Responsibility to develop International Financial
Reporting Standards (IFRSs) (previously International
Accounting Standards (IASs)
• The objectives are:
– To develop a single set of accounting standards
» High quality, understandable, global and enforceable
– To promote their use and rigorous application
– To work actively with national standard setters
» To bring about convergence of national accounting
standards and IFRSs
20
IFRS Foundation - Structure
Monitoring
Board
IFRS
Foundation
IFRS
Advisory
Council
International
Accounting
Standards
Board (IASB)
IFRS
and
IFRS for SMEs
IFRS
Interpretations
Committee
IFRS Foundation - Structure
Monitoring
Board
IFRS
Foundation
IFRS
Advisory
Council
International
Accounting
Standards
Board (IASB)
IFRS
and
IFRS for SMEs
IFRS
Interpretations
Committee
The IFRS Foundation is
a not-for-profit
organization that
oversees the
development of the
IASB’s international
reporting standards for
general financial
statements.
IFRS Foundation - Structure
This group
assists in
nominating
and
appointing
individuals
to IFRS
Foundation
trustee
positions.
Monitoring
Board
IFRS
Foundation
IFRS
Advisory
Council
International
Accounting
Standards
Board (IASB)
IFRS
Interpretations
Committee
IFRS
and
IFRS for SMEs
Information provided by www.IFRS.org
IFRS Foundation - Structure
Monitoring
Board
IFRS
Foundation
IFRS
Advisory
Council
International
Accounting
Standards
Board (IASB)
The IFRS Advisory
Council is the IASB’s
forum for consultation
with representatives from
user groups, preparers,
financial analysts,
academics, auditors,
regulators and
professional accounting
bodies.
IFRS
and
IFRS for SMEs
IFRS
Interpretations
Committee
IFRS Foundation - Structure
Monitoring
Board
IFRS
Foundation
IFRS
Advisory
Council
International
Accounting
Standards
Board (IASB)
IFRS
and
IFRS for SMEs
IFRS
Interpretations
Committee
The IFRS Interpretations
Committee releases
interpretations (IFRICs) on
newly identified financial
reporting issues not dealt
with in an IFRS and
unsatisfactory or conflicting
interpretations in areas
without appropriate
authoritative guidance.
IFRS History
► In 2000, the initial 14 members are appointed to the IASB.
Proposal
to create
an
accounta
nts’
internatio
nal study
group
The
IASC
expands
► In 2002, the IASB begins promulgating standards as IFRS from IAS. The
SIC becomes the IFRIC. The European Union endorses IFRS for 2005
adoption.
► In 2002, the Norwalk Agreement is executed between the IASB and FASB.
► In 2005, the SEC published a roadmap (Roadmap) for elimination of a US
GAAP reconciliation for FPIs.
► In 2006, the FASB and IASB published a Memorandum of Understanding, to
set forth priorities in their joint work program.
1960s 1970s 1980s 1990s
► In 1994, the IASC Advisory
Council is formed to provide
oversight of IASC.
► The IASC is
formed in 1973.
► The IASC
begins
promulgating
International
Accounting
Standards (IAS).
► In 1997, the Standards
Interpretations Committee (SIC)
is formed
► In 1999, the IASC is
restructured to form a new
board: the IASB.
► FASB agrees to work on a joint
earnings-per-share project.
2000s
► In 2007, the SEC eliminated the US
GAAP reconciliation for FPIs.
► In 2008, the SEC published a proposed
Roadmap anticipating the mandatory
adoption of IFRS in the US.
► In 2009, the FASB and IASB reaffirmed
their commitment to the MOU.
► In 2010, the SEC established a Work
Plan for its 2011 IFRS adoption
decision.
IFRS Standards setting process

Main steps
1. Setting the agenda
2. Planning the project
3. Developing and publishing the Discussion Paper (DP)
4. Developing and publishing the Exposure Draft (ED)
5. Developing and publishing the Standard
6. Process after the standard is issued
28
The standard setting process
Active Projects
9-15 months
Discussion
Paper (DP)
Comment
analysis
9-15 months
Exposure Comment
Draft (ED) analysis
Agenda
decision
12-18 months
IFRS
published
Effective
Date
Feedback
statement
Research
Standard
Setter /
EFRAG
Others
Round
table
Two year
post implementation
review
29
The standard setting process
30
The standard setting process
31
A comparison of standard-setting
processes

The IASB standard-setting process is almost identical to that of the
FASB. The following are steps the FASB takes to create a standard:

The FASB receives requests/recommendations for possible projects and
reconsideration of existing standards from various sources.

The FASB Chairman decides whether to add a project to the technical
agenda, subject to oversight by the Foundation and after consultation with
FASB members.

The FASB deliberates the various issues identified at one or more public
meetings.

The Board issues an ED. In some projects, a DP may be issued to obtain
input at an early stage that is used to develop the ED.

The FASB staff analyzes comment letters, public roundtable discussion and
any other information.

The FASB redeliberates the proposed provisions at public meetings.

The FASB issues an Accounting Standards Update describing amendments
to the Accounting Standards Codification.
.
Information provided by www.fasb.org
Cooperation of FASB and IASB


The FASB and IASB have been working together on
convergence since 2006.
The following is a list of the major convergence efforts
being focused on at this time :
 Consolidation
 Fair value measurement
 Financial instruments
 Financial statement presentation (presentation of OCI)
 Leases
 Revenue recognition

The aggressive timeline and the total coverage of the
projects under convergence will have a significant impact
on US accounting practice over the next several years.
What is the outlook for IFRS
adoption?
► SEC Chairman, Mary Shapiro, stated in December 2010 that the SEC
would allow a minimum of four years to adjust if it mandates the use of
IFRS. This would mean the use of IFRS in 2015 at the earliest.
► Other timing factors being contemplated by the SEC:
►
►
►
Use of all standards by all users at once which is referred to as
the big bang approach.
Staggered or conditional use of the standards and variation by
user group including the potential of early adoption.
A separate convergence project is focused on the
implementation timing of standards that result from the
major convergence projects currently underway.
Methods of implementing IFRS
►
The SEC decision to mandate the use of IFRS is generally
described as a decision to adopt IFRS. However, there are
several manners in which the US could move forward to IFRS
that are not considered to be adoption in the pure sense.
► In October 2010, the SEC provided a progress report identifying
that most jurisdictions do not fully adopt IFRS with no
mechanism for making changes to the standards. Rather most
jurisdictions follow either a convergence or endorsement
approach.
► Adoption: A jurisdiction practices under IFRS as issued with no
modifications.
► Convergence: A jurisdiction practices under national standards with
efforts to converge differences with IFRS standards over time.
► Endorsement: A jurisdiction reviews each IFRS standard as issued and
determines whether the standard should be endorsed for practice with or
without modification.
IFRS in European Union
Lisbona – The European
Council decided to
accelerate the process of
harmonization of
Accounting rules and
established the deadline
of 2005 for the adoption
of common accounting
principles
23 March 2002
The European Council of
Ministers approved the
regulation that would require all
EU companies listed on a
regulated market to prepare
accounts in accordance with
International Accounting
Standards for accounting periods
beginning on or after 1 January
2005.
(Regulation EU n. 1606/2002)
19 July 2002
The EU
Commission
endorses the
International
accounting
Standards in
European Union.
2003 - 2004
All EU companies
listed on regulated
markets in the EU
to use endorsed
IAS for
consolidated
accounts.
2005-2006
36
IFRS in European Union
IAS Regulation (1606/2002/EC)
•
•
Directly applicable in all Member States
Fast , no national variations
•
All EU companies listed on regulated markets in the EU to
use endorsed IAS for consolidated accounts as from 2005
•
Non-EU issuers outside the scope
 (But: Equivalence under Prospectus and Transparency Directives)
•
Optional extension of the scope:
– unlisted companies
– individual accounts
37
IFRS in European Union
•
“Objective is to get political and legal endorsement of IAS
•
Criteria
– IAS not contrary to “true and fair view” principle of Accounting
Directives
– IAS must be conducive to public good (competitiveness and
convergence)
– IAS must be understandable, relevant, reliable and comparable
38
IFRS in European Union
IASB
European
Commission
European
Parlament
EFRAG
Council
Interest Group
ARC
39
IFRS in European Union
Time frame (more than 7 months)
3 months
3 months
2weeks
Translation
s
IASB
approval
ARC
opinion
Parlament
Council
Publication
in the Official
Journal
Endorsed
by the EC
40
Endorsement mechanism
EFRAG
41
Endorsement mechanism
EFRAG rule
42
Endorsement mechanism
43
Conceptual Framework for
IFRS

Conceptual Framework sets out agreed
concepts that underlie financial reporting
 objective, qualitative characteristics, element
definitions, …

IASB uses Conceptual Framework to set
standards
 enhances consistency across standards
 enhances consistency over time as Board members
change
 provides benchmark for judgments

Preparers use Conceptual Framework to
develop accounting policies in the absence of
specific standard or interpretation
 IAS 8 hierarchy
Conceptual Framework for
IFRS
Provide financial information about the reporting
entity that is useful to existing and potential
investors, lenders and other creditors in making
decisions about providing resources to the entity
Note:
• other aspects of the Conceptual Framework flow
logically from the objective (CF.OB1)
• Conceptual Framework sets out the concepts that
underlie IFRS financial statements and assist the
IASB in the development of future IFRSs and in its
review of existing IFRSs (CF.Purpose and Status)
Conceptual Framework for
IFRS

Investors’, lenders’ and other creditors’
expectations about returns depend on their
assessment of the amount, timing and
uncertainty of (the prospects for) future net
cash inflows to the entity.
 Decisions by investors about buying, selling or holding
equity and debt instruments depend on the returns that
they expect from an investment in those instruments, eg
dividends, principal and interest payments or market
price increases.
 Decisions by lenders about providing or settling loans
and other forms of credit depend on the principal and
interest payments or other returns that they expect.
Conceptual Framework for
IFRS

To assess an entity’s prospects for future net
cash inflows, existing and potential investors,
lenders and other creditors need information
about:
 the resources of the entity;
 claims against the entity; and
 how efficiently and effectively the entity's
management and governing board have
discharged their responsibilities to use the entity's
resources
○ eg protecting the entity's resources from
unfavourable effects of economic factors such as
price and technological changes
Conceptual Framework for
IFRS

If financial information is to be useful, it must be
relevant and faithfully represent what it purports
to represent (ie fundamental qualities).
 Financial information without both relevance and faithful
representation is not useful, and it cannot be made useful by
being more comparable, verifiable, timely or understandable.

The usefulness of financial information is
enhanced if it is comparable, verifiable, timely
and understandable (ie enhancing qualities—less
critical but still highly desirable)
 Financial information that is relevant and faithfully
represented may still be useful even if it does not have any of
the enhancing qualitative characteristics.
Conceptual Framework for
IFRS

Relevance: capable of making a difference in
users’ decisions
 predictive value
 confirmatory value
 materiality (entity-specific)

Faithful representation: faithfully represents the
phenomena it purports to represent
 completeness (depiction including numbers and
words)
 neutrality (unbiased)
 free from error (ideally)
Note: faithful representation replaces reliability
Conceptual Framework for
IFRS
Comparability: like things look alike; different
things look different
 Verifiability: knowledgeable and independent
observers could reach consensus, but not
necessarily complete agreement, that a
depiction is a faithful representation
 Timeliness: having information available to
decision-makers in time to be capable of
influencing their decisions
 Understandability: Classify, characterise, and
present information clearly and concisely

Conceptual Framework for
IFRS

Reporting financial information imposes costs, and it is
important that those costs are justified by the benefits of
reporting that information.

Benefits include more efficient functioning of capital markets and a lower cost of capital
for the economy.
 Costs include collecting, processing, verifying and disseminating
financial information and the costs of analysing and interpreting the
information provided.

In applying the cost constraint, the IASB assesses
whether the benefits of reporting particular
information are likely to justify the costs incurred to
provide and use that information. Those
assessments are usually based on a combination of
quantitative and qualitative information.
Conceptual Framework for
IFRS

Reporting financial information that is relevant and
faithfully represents what it purports to represent
helps users to make decisions with more
confidence (ie financial information must possess
the fundamental qualitative characteristics).

IFRS requirements must be cost-beneficial

Applying the enhancing qualitative characteristics is
an iterative process that does not follow a
prescribed order. Sometimes, one enhancing
qualitative characteristic may have to be diminished
to maximise another qualitative characteristic.
Conceptual Framework for
IFRS




Asset: Resource controlled as a result of past events
and from which future economic benefits are expected
to flow
Liability: Present obligation arising from past events,
the settlement of which is expected to result in outflow
of resources embodying economic benefits
Equity: Assets minus liabilities
Income (expense): Increases (decreases) in economic
benefits during period from inflows or enhancements
(outflows or depletions) of assets (liabilities) or
decreases (incurrences) of liabilities from in increases
(decreases) in equity, other than contributions from
(distributions to) equity
Conceptual Framework for
IFRS

Accrual basis of accounting
 recognise element (eg asset) when satisfy
definition and recognition criteria

Recognise item that meets element definition
when
 probable that benefits will flow to/from the entity
 has cost or value that can measured reliably
Conceptual Framework for
Recognition
IFRS
What does probable mean?
The meaning of probable is determined at the
standards level. Therefore, inconsistent use
across IFRSs
What does measure reliably mean?
To a large extent, financial reports are based on
estimates, judgements and models rather than
exact depictions.
Measurement
concepts
Conceptual
Framework
for
IFRS
Measurement is the process of determining
monetary amounts at which elements are
recognised and carried. (CF.4.54)
 To a large extent, financial reports are based on
estimates, judgements and models rather than
exact depictions. The Framework establishes
the concepts that underlie those estimates,
judgements and models (CF.OB11)
 IASB guided by objective and qualitative
characteristics when specifying measurements.

Conceptual Framework
for
Presentation
and disclosure
IFRS


Objective of financial reporting
Presentation: financial statements portray financial
effects of transactions and events by:
 grouping into broad classes (the elements, eg asset)
 sub-classify elements (eg assets sub-classified by
their nature or function in the business)

IAS 1
 application of IFRSs with additional disclosures
when necessary results in a fair presentation (faithful
representation of transactions, events and
conditions)
 don’t offset assets & liabilities or income & expenses
Derecognition
of assets
Conceptual
Framework
for
IFRS
• Derecognition of an asset refers to when an
asset previously recognised by an entity is
removed from the entity’s statement of financial
position
 derecognition requirements are specified at the
standards level.
 derecognition does not necessarily occur when the asset
no longer satisfies the conditions specified for its initial
recognition (ie derecognition does not necessarily
coincide with the loss of control of the asset )

IASB guided by objective, qualitative
characteristics and elements
Common
‘conceptual’
Conceptual Framework for
misunderstandings
IFRS
The Framework does not…
Clarification—the
Framework includes
include a matching concept
accrual basis of accounting—
recognise elements when
satisfy definition and
recognition criteria
include prudence/conservatism neutrality concept
concept
include an element other
only the following elements—
comprehensive income (or a
asset, liability, equity, income
concept for OCI)
and expense
mention management intent or
business model
59
Conceptual Framework for
IFRS
Misunderstanding
Uniformity = comparability
Clarification
Comparability is achieved
when like things are
accounted for in the same
way.
Comparability is not achieve
when accounting rules
require unlike things be
accounted for in the same
way
Conceptual Framework for
IFRS
Misunderstanding
Clarification
There is a clear concept for the
historical cost of an item
The Framework provides only a
vague description—assets are
recorded at the amount of cash or
cash equivalents paid or the fair
value of the consideration given to
acquire them at the time of their
acquisition.
What is cost when:
- advance/deferred payment?
- purchased option exercised?
- contingent purchase price?
Conceptual Framework for
IFRS
Misunderstanding
Clarification
Principles are necessarily less
rigorous than rules
Rules are the tools of financial
engineers
There are few judgements and
estimates in cost-based
measurements
Inventory, eg allocate joint costs and
production overheads
PPE, eg costs to dismantle/restore
site, useful life, residual value,
depreciation method
Provisions, eg uncertain timing and
amount of expected future cash
flows