International Financial Reporting Standards
International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. They are the rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable and relevant as per the users internal or external.
IFRS, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies and IFRIC 7 Applying the Restatement Approach under IAS 29, are authorized in terms of the historical cost paradigm. IAS 29 and IFRIC 7 are authorized in terms of the units of constant purchasing power paradigm.
IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. However, it has been debated whether or not de facto harmonization has occurred. Standards that were issued by IASC (the predecessor of IASB) are still within use today and go by the name International Accounting Standards (IAS), while standards issued by IASB are called IFRS. IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new International Accounting Standards Board (IASB) took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards "International Financial Reporting Standards".
In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework.
Criticisms of IFRS are (1) that they are not being adopted in the US (see GAAP), (2) a number of criticisms from France and (3) that IAS 29 Financial Reporting in Hyperinflationary Economies had no positive effect at all during 6 years in Zimbabwe's hyperinflationary economy. The IASB offered responses to the first two criticisms, but has offered no response to the last criticism while IAS 29 is currently (March 2014) being implemented in its original ineffective form in Venezuela and Belarus.
Objective of financial statements
Financial statements are a structured representation of the financial positions and financial performance of an entity. The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management's stewardship of the resources entrusted to it.
To meet this objective, financial statements provide information about an entity's:
- income and expenses, including gains and losses;
- contributions by and distributions to owners in their capacity as owners; and
- cash flows.
The following are the general features in IFRS:
- Fair presentation and compliance with IFRS: Fair presentation requires the faithful representation of the effects of the transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework of IFRS.
- Going concern: Financial statements are present on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.
- Accrual basis of accounting: An entity shall recognise items as assets, liabilities, equity, income and expenses when they satisfy the definition and recognition criteria for those elements in the Framework of IFRS.
- Materiality and aggregation: Every material class of similar items has to be presented separately. Items that are of a dissimilar nature or function shall be presented separately unless they are immaterial.
- Offsetting: Offsetting is generally forbidden in IFRS. However certain standards require offsetting when specific conditions are satisfied (such as in case of the accounting for defined benefit liabilities in IAS 19 and the net presentation of deferred tax liabilities and deferred tax assets in IAS 12 ).
- Frequency of reporting: IFRS requires that at least annually a complete set of financial statements is presented. However listed companies generally also publish interim financial statements (for which the accounting is fully IFRS compliant)for which the presentation is in accordance with IAS 34 Interim Financing Reporting.
- Comparative information: IFRS requires entities to present comparative information in respect of the preceding period for all amounts reported in the current period's financial statements. In addition comparative information shall also be provided for narrative and descriptive information if it is relevant to understanding the current period's financial statements. The standard IAS 1 also requires an additional statement of financial position (also called a third balance sheet) when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. This for example occurred with the adoption of the revised standard IAS 19 (as of 1 January 2013) or when the new consolidation standards IFRS 10-11-12 were adopted (as of 1 January 2013 or 2014 for companies in the European Union).
- Consistency of presentation: IFRS requires that the presentation and classification of items in the financial statements is retained from one period to the next unless:
- it is apparent, following a significant change in the nature of the entity's operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in IAS 8; or
- an IFRS standard requires a change in presentation.
Qualitative characteristics of financial information
Fundamental qualitative characteristics of financial information include:
- Faithful representation
Enhancing qualitative characteristics include:
Elements of financial statements
The elements directly related to the measurement of the statement of financial position include:
- Asset: An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
- Liability: A liability is a present obligation of the entity arising from the past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits, i.e. assets.
- Equity: Nominal equity is the nominal residual interest in the nominal assets of the entity after deducting all its liabilities in nominal value.
The financial performance of an entity is presented in the statement of comprehensive income, which consists of the income statement (Statement of Profit/Loss) and the statement of other comprehensive income (usually presented in two separate statements). Financial performance includes the following elements (which are recognised in the income statement or other comprehensive income as required by the applicable IFRS standard):
- Revenues: increases in economic benefit during an accounting period in the form of inflows or enhancements of assets, or decrease of liabilities that result in increases in equity. However, it does not include the contributions made by the equity participants (for example owners, partners or shareholders).
- Expenses: decreases in economic benefits during an accounting period in the form of outflows, or depletions of assets or incurrences of liabilities that result in decreases in equity. However, these don't include the distributions made to the equity participants.
Results recognised in other comprehensive income are limited to the following specific circumstances:
- Remeasurements of defined benefit assets or liabilities (as defined in the standard IAS 19)
- Increases or decreases in the fair value of financial assets classified as available for sale (with the exception of impairment losses)(as defined in the standard IAS 39)
- Increases or decreases resulting from the application of a revaluation of property, plant and equipment or intangible assets
- Exchange differences resulting from the translation of foreign operations (subsidiary, associate, joint arrangement or branch of a reporting entity, the activities of which are conducted in a country or currency other than those of the reporting entity) according to the standard IAS 21
- the portion of the gain or loss on the hedging instrument in a cash flow hedge (or a hedge of a net investment in a foreign operation, as this is accounted similarly ) that is determined to be an effective hedge
The statement of changes in equity consists of a reconciliation of the changes in equity in which the following information is provided:
- total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non-controlling interests;
- for each component of equity, the effects of retrospective application or retrospective restatement recognised in accordance with IAS 8; and
- for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from:
- Operating cash flows: the principal revenue-producing activities of the entity and are generally calculated by applying the indirect method, whereby profit or loss is adjusted for the effects of transaction of a non-cash nature, any deferrals or accruals of past or future cash receipts or payments, and items of income or expense associated with investing or financing cash flows.
- Investing cash flows: the acquisition and disposal of long-term assets and other investments not included in cash equivalents. These represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities.
- Financing cash flows: activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. These are important because they are useful in predicting claims on future cash flows by providers of capital to the entity.
Notes to the Financial Statements: These shall (a) present information about the basis of preparation of the financial statements and the specific accounting policies used; (b) disclose the information required by IFRSs that is not presented elsewhere in the financial statements; and (c) provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them.
Recognition of elements of financial statements
- it is probable future economic benefit will flow to or from an entity.
- the resource can be reliably measured
In some cases specific standards add additional conditions before recognition is possible or prohibit recognition altogether.
An example is the recognition of internally generated brands, mastheads, publishing titles, customer lists and items similar in substance, for which recognition is prohibited by IAS 38. In addition research and development expenses can only be recognised as an intangible asset if they cross the threshold of being classified as 'development cost'.
Whilst the standard on provisions, IAS 37, prohibits the recognition of a provision for contingent liabilities, this prohibition is not applicable to the accounting for contingent liabilities in a business combination. In that case the acquirer shall recognise a contingent liability even if it is not probable that an outflow of resources embodying economic benefits will be required.
International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international.
Concepts of capital and capital maintenance
Concepts of capital
Par. 102. A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.
Par. 103. The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements. Thus, a financial concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital. If, however, the main concern of users is with the operating capability of the entity, a physical concept of capital should be used. The concept chosen indicates the goal to be attained in determining profit, even though there may be some measurement difficulties in making the concept operational.
Concepts of capital maintenance and the determination of profit
Par. 104. The concepts of capital in paragraph 102 give rise to the following two concepts of capital maintenance:
(a) Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.
(b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.
The concepts of capital in paragraph 102 give rise to the following three concepts of capital during low inflation and deflation:
- (A) Physical capital. See paragraph 102&103
- (B) Nominal financial capital. See paragraph 104.
- (C) Constant item purchasing power financial capital. See paragraph 104.
The concepts of capital in paragraph 102 give rise to the following three concepts of capital maintenance during low inflation and deflation:
- (1) Physical capital maintenance: optional during low inflation and deflation. Current Cost Accounting model prescribed by IFRS. See Par 106.
- (2) Financial capital maintenance in nominal monetary units (Historical cost accounting): authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104 (a) Historical cost accounting. Financial capital maintenance in nominal monetary units per se during inflation and deflation is a fallacy: it is impossible to maintain the real value of financial capital constant with measurement in nominal monetary units per se during inflation and deflation.
- (3) Financial capital maintenance in units of constant purchasing power (Capital Maintenance in Units of Constant Purchasing Power): authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104(a). Capital Maintenance in Units of Constant Purchasing Power is prescribed during hyperinflation in IAS 29: i.e. the restatement of Historical Cost or Current Cost period-end financial statements in terms of the period-end monthly published Consumer Price Index. Only financial capital maintenance in units of constant purchasing power (Capital Maintenance in Units of Constant Purchasing Power) in terms of a daily index per se can automatically maintain the real value of financial capital constant at all levels of inflation and deflation in all entities that at least break even in real value—ceteris paribus—for an indefinite period of time. This would happen whether these entities own revaluable fixed assets or not and without the requirement of more capital or additional retained profits to simply maintain the existing constant real value of existing shareholders' equity constant. Financial capital maintenance in units of constant purchasing power requires the calculation and accounting of net monetary losses and gains from holding monetary items during low inflation and deflation. The calculation and accounting of net monetary losses and gains during low inflation and deflation have thus been authorized in IFRS since 1989.
Par. 105. The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured; it is a prerequisite for distinguishing between an entity's return on capital and its return of capital; only inflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Hence, profit is the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses exceed income the residual amount is a loss.
Par. 106. The physical capital maintenance concept requires the adoption of the current cost basis of measurement. The financial capital maintenance concept, however, does not require the use of a particular basis of measurement. Selection of the basis under this concept is dependent on the type of financial capital that the entity is seeking to maintain.
Par. 107. The principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity. In general terms, an entity has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit.
Par. 108. Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. They may not be recognised as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity.
Par. 109. Under the concept of physical capital maintenance when capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. All price changes affecting the assets and liabilities of the entity are viewed as changes in the measurement of the physical productive capacity of the entity; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit.
Par. 110. The selection of the measurement bases and concept of capital maintenance will determine the accounting model used in the preparation of the financial statements. Different accounting models exhibit different degrees of relevance and reliability and, as in other areas, management must seek a balance between relevance and reliability. This Framework is applicable to a range of accounting models and provides guidance on preparing and presenting the financial statements constructed under the chosen model. At the present time, it is not the intention of the Board of IASC to prescribe a particular model other than in exceptional circumstances, such as for those entities reporting in the currency of a hyperinflationary economy. This intention will, however, be reviewed in the light of world developments.
IFRS financial statements consist of (IAS1.8)
- a Statement of Financial Position
- a Statement of Comprehensive Income separate statements comprising an Income Statement and separately a Statement of Comprehensive Income, which reconciles Profit or Loss on the Income statement to total comprehensive income
- a Statement of Changes in Equity (SOCE)
- a Cash Flow Statement or Statement of Cash Flows
- notes, including a summary of the significant accounting policies
Comparative information is required for the prior 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).
On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements. The main changes from the previous version are to require that an entity must:
- present all non-owner changes in equity (that is, 'comprehensive income' ) either in one Statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the Statement of changes in equity.
- present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies the new standard.
- present a statement of cash flow.
- make necessary disclosure by the way of a note.
The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is permitted.
Criticisms of IFRS
In 2012 the US Securities and Exchange Commission Staff issued a 127-page report stating reasons why not to adopt IFRS in the United States.
A number of criticisms were voiced in the beginning of 2013 in the French media to which the IASB Board member Philippe Danjou responded in his document 'An Update on International Financial Reporting Standards (IFRSs).'
It is widely acknowledged that IAS 29 Financial Reporting in Hyperinflationary Economies had no positive effect during the six years it was implemented during hyperinflation in Zimbabwe. This led people to ask the purpose of IAS 29. IAS 29 is currently (March 2014) being implemented in its original ineffective form in Venezuela and Belarus. It was suggested to the IASB in 2012 that IAS 29 should be corrected to require daily indexation which would result in effective Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) and would stabilize the non-monetary economy during hyperinflation. The IASB has offered no response to date (March 2014) to this criticism and has not yet corrected IAS 29 to require daily indexation.
IFRS are used in many parts of the world, including the South Korea, European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, Chile, Philippines, South Africa, Singapore and Turkey, but not in the United States. Please refer to PricewaterhouseCoopers' "IFRS by country" publication for a detailed explanation of the level of IFRS adoption per country. 140 Jurisdiction profiles are available online.
It is generally expected that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by reducing the costs of comparing alternative investments and increasing the quality of information. Companies are also expected to benefit, as investors will be more willing to provide financing. Companies that have high levels of international activities are among the group that would benefit from a switch to IFRS. Companies that are involved in foreign activities and investing benefit from the switch due to the increased comparability of a set accounting standard. However, Ray J. Ball has expressed some skepticism of the overall cost of the international standard; he argues that the enforcement of the standards could be lax, and the regional differences in accounting could become obscured behind a label. He also expressed concerns about the fair value emphasis of IFRS and the influence of accountants from non-common-law regions, where losses have been recognized in a less timely manner.
To assess progress towards the goal of a single set global accounting standards, the IFRS Foundation has developed and posted profiles about the use of IFRSs in individual jurisdictions. These were based on information from various sources. The starting point was the responses provided by standard-setting and other relevant bodies to a survey that the IFRS Foundation conducted. Currently, profiles are completed for 124 jurisdictions, including all of the G20 jurisdictions plus 104 others. Eventually, the plan is to have a profile for every jurisdiction that has adopted IFRSs, or is on a programme toward adoption of IFRSs.
The Australian Accounting Standards Board (AASB) has issued 'Australian equivalents to IFRS' (A-IFRS), numbering IFRS standards as AASB 1–8 and IAS standards as AASB 101–141. Australian equivalents to SIC and IFRIC Interpretations have also been issued, along with a number of 'domestic' standards and interpretations. These pronouncements replaced previous Australian generally accepted accounting principles with effect from annual reporting periods beginning on or after 1 January 2005 (i.e. 30 June 2006 was the first report prepared under IFRS-equivalent standards for June year ends). To this end, Australia, along with Europe and a few other countries, was one of the initial adopters of IFRS for domestic purposes (in the developed world). It must be acknowledged, however, that IFRS and primarily IAS have been part and parcel of accounting standard package in the developing world for many years since the relevant accounting bodies were more open to adoption of international standards for many reasons including that of capability.
The AASB has made certain amendments to the IASB pronouncements in making A-IFRS, however these generally have the effect of eliminating an option under IFRS, introducing additional disclosures or implementing requirements for not-for-profit entities, rather than departing from IFRS for Australian entities. Accordingly, for-profit entities that prepare financial statements in accordance with A-IFRS are able to make an unreserved statement of compliance with IFRS.
The AASB continues to mirror changes made by the IASB as local pronouncements. In addition, over recent years, the AASB has issued so-called 'Amending Standards' to reverse some of the initial changes made to the IFRS text for local terminology differences, to reinstate options and eliminate some Australian-specific disclosure. There are some calls for Australia to simply adopt IFRS without 'Australianising' them and this has resulted in the AASB itself looking at alternative ways of adopting IFRS in Australia.
Brazil has already adopted IFRS for all companies whose securities are publicly traded and for most financial institutions whose securities are not publicly traded, for both consolidated and separate (individual) company financial statements.
The use of IFRS became a requirement for Canadian publicly accountable profit-oriented enterprises for financial periods beginning on or after 1 January 2011. This includes public companies and other "profit-oriented enterprises that are responsible to large or diverse groups of shareholders."
In 2002 the European Union agreed that from 1 January 2005 International Accounting Standards / International Financial Reporting Standards would apply for the consolidated accounts of the EU listed companies.
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 an acceptable way to remove a remaining anomaly in respect of hedge accounting. The World Bank Centre for Financial Reporting Reform is working with countries in the ECA region to facilitate the adoption of IFRS and IFRS for SMEs.
Whilst the IASB set the effective dates for the new consolidation standards IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities at 1 January 2013, the ARC decided to delay the mandatory effective date for the companies listed in the European Union by one year. The standards therefore only became effective on 1 January 2014.
The European Commission has launched a general analysis of the impacts of 8 years of use of international financial reporting standards (IFRSs) in the EU for preparers and users of financial statements from the private sector. The study will include an overall assessment of whether the Regulation 1606/2002 of the European Parliament and the Council ('IAS Regulation') has met the two-fold initial objectives of ensuring a high degree of transparency and comparability of the financial statements of European companies and an efficient functioning of the market, in comparison with the situation before IFRS implementation in 2005. It will also include a cost-benefit analysis and an assessment and analysis of the benefits and drawbacks brought by the IAS Regulation for different stakeholder groups.
Ghana transitioned from the Ghana Accounting Standards (GAS) to adopt the IFRS on January 1, 2007. As of 2008 and beyond, a legislative injunction has been imposed on the Bank of Ghana to prepare financial statements in accordance with IFRS; thereby making it mandatory for all public entities in the country.
The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April 2016 in a phased manner. There is a roadmap issued by MCA for adoption of IFRS.
Reserve Bank of India has stated that financial statements of banks need to be IFRS-compliant for periods beginning on or after 1 April 2011.
The ICAI has also stated that IFRS will be applied to companies above INR 1000 crore (INR 10 billion) from April 2011. Phase wise applicability details for different companies in India:
Phase 1: Opening balance sheet as at 1 April 2011*
i. Companies which are part of NSE Index – Nifty 50
ii. Companies which are part of BSE Index – Sensex 30
a. Companies whose shares or other securities are listed on a stock exchange outside India
b. Companies, whether listed or not, having net worth of more than INR 1000 crore (INR 10 billion)
Phase 2: Opening balance sheet as at 1 April 2012*
Companies not covered in phase 1 and having net worth exceeding INR 500 crore (INR 5 billion)
Phase 3: Opening balance sheet as at 1 April 2014*
Listed companies not covered in the earlier phases * If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year.
On 22 January 2010, the Ministry of Corporate Affairs issued the road map for transition to IFRS. It is clear that India has deferred transition to IFRS by a year. In the first phase, companies included in Nifty 50 or BSE Sensex, and companies whose securities are listed on stock exchanges outside India and all other companies having net worth of INR 10 billion will prepare and present financial statements using Indian Accounting Standards converged with IFRS. According to the press note issued by the government, those companies will convert their first balance sheet as at 1 April 2011, applying accounting standards convergent with IFRS if the accounting year ends on 31 March. This implies that the transition date will be 1 April 2011. According to the earlier plan, the transition date was fixed at 1 April 2010.
The press note does not clarify whether the full set of financial statements for the year 2011–12 will be prepared by applying accounting standards convergent with IFRS. The deferment of the transition may make companies happy, but it will undermine India's position. Presumably, lack of preparedness of Indian companies has led to the decision to defer the adoption of IFRS for a year. This is unfortunate that India, which boasts for its IT and accounting skills, could not prepare itself for the transition to IFRS over last four years. But that might be the ground reality.
Transition in phases
Companies, whether listed or not, having net worth of more than INR 5 billion will convert their opening balance sheet as at 1 April 2013. Listed companies having net worth of INR 5 billion or less will convert their opening balance sheet as at 1 April 2014. Un-listed companies having net worth of Rs5 billion or less will continue to apply existing accounting standards, which might be modified from time to time. Transition to IFRS in phases is a smart move.
The transition cost for smaller companies will be much lower because large companies will bear the initial cost of learning and smaller companies will not be required to reinvent the wheel. However, this will happen only if a significant number of large companies engage Indian accounting firms to provide them support in their transition to IFRS. If, most large companies, which will comply with Indian accounting standards convergent with IFRS in the first phase, choose one of the international firms, Indian accounting firms and smaller companies will not benefit from the learning in the first phase of the transition to IFRS.
It is likely that international firms will protect their learning to retain their competitive advantage. Therefore, it is for the benefit of the country that each company makes judicious choice of the accounting firm as its partner without limiting its choice to international accounting firms. Public sector companies should take the lead and the Institute of Chartered Accountants of India (ICAI) should develop a clear strategy to diffuse the learning.
Size of companies
The government has decided to measure the size of companies in terms of net worth. This is not the ideal unit to measure the size of a company. Net worth in the balance sheet is determined by accounting principles and methods. Therefore, it does not include the value of intangible assets. Moreover, as most assets and liabilities are measured at historical cost, the net worth does not reflect the current value of those assets and liabilities. Market capitalisation is a better measure of the size of a company. But it is difficult to estimate market capitalisation or fundamental value of unlisted companies. This might be the reason that the government has decided to use 'net worth' to measure size of companies. Some companies, which are large in terms of fundamental value or which intend to attract foreign capital, might prefer to use Indian accounting standards convergent with IFRS earlier than required under the road map presented by the government. The government should provide that choice.
The minister for Financial Services in Japan announced in late June 2011 that mandatory application of the IFRS should not take place from fiscal year-ending March 2015; five to seven years should be required for preparation if mandatory application is decided; and to permit the use of U.S. GAAP beyond the fiscal year ending 31 March 2016.
Montenegro gained independence from Serbia in 2006. Its accounting standard setter is the Institute of Accountants and Auditors of Montenegro (IAAM).:2 In 2005, IAAM adopted a revised version of the 2002 "Law on Accounting and Auditing" which authorized the use of IFRS for all entities.:18 IFRS is currently required for all consolidated and standalone financial statements, however, enforcement is not effective except in the banking sector.:18 Financial statements for banks in Montenegro are, generally, of high quality and can be compared to those of the European Union.:3 Foreign companies listed on Montenegro's two stock exchanges (Montenegro Stock Exchange and NEX Stock Exchange) are also required to apply IFRS in their financial statements. Montenegro does not have a national GAAP.:18 Currently, no Montenegrin translation of IFRS exists, and because of this Montenegro applies the Serbian translation from 2010.:20 IFRS for SMEs is not currently applied in Montenegro.:20
In Nepal the Accounting Standards Board (ASB) is in charge of standard setting. Nepal closely models its Financial Reporting Standards (FRS) according to the IFRS, with appropriate changes made to suit the Nepalese context. It has issued Nepal Financial Reporting Standards in 2013. The 2013 version of standards almost resembles IFRS with slight modification.
All listed companies must follow all issued IAS/IFRS except the following:
IAS 39 and IAS 41: Implementation of these standards has been held in abeyance by State Bank of Pakistan for Banks and DFIs
IFRS-1: Effective for the annual periods beginning on or after 1 January 2004. This IFRS is being considered for adoption for all companies other than banks and DFIs.
IFRS-9: Under consideration of the relevant Committee of the Institutes (ICAP & ICMAP). This IFRS will be effective for the annual periods beginning on or after 1 January 2013.
The government of Russia has been implementing a program to harmonize its national accounting standards with IFRS since 1998. Since then twenty new accounting standards were issued by the Ministry of Finance of the Russian Federation aiming to align accounting practices with IFRS. Despite these efforts essential differences between Russian accounting standards and IFRS remain. Since 2004 all commercial banks have been obliged to prepare financial statements in accordance with both Russian accounting standards and IFRS. Full transition to IFRS is delayed but starting 2012 new modifications making Russian GAAP converging to IFRS have been made. They notably include the booking of reserves for bad debts and contingent liabilities and the devaluation of inventory and financial assets.
Still, several differences between the two sets of account still remain. Major reasons for deviation between Russian GAAP and IFRS / US-GAAP (e.g. when the Russian affiliate of a larger group need to be consolidated to the mother company) are the following:
- Booking of payables in the General Ledger according to national accounting standards can only be made upon receipt of the actual acceptance protocol (good's receipt). Indeed, in Russia, in contrast to IFRS and US-GAAP, the invoice (outgoing or incoming) is not an official tax or accounting document and does not trigger any booking. There is also no provision to book in the General Ledger any expense for goods and services that according to a contract are effectively received but for whom documents are still not exchanged.
- There is no possibility under Russian GAAP to recognise the good-will as an intangible asset in the balance sheet of a company. This has a major consequence when a company is sold. Indeed, if a company (or part of it) is sold at a higher value than its book value (i.e. to account for the good-will value), the selling party need to pay tax at the relevant profit tax rate (20% in 2013) on the difference in value between selling and accounting value and the buyer has no possibility to ammortize the cost and deduct it from present and future revenues.
- There is no equivalent of IAS 37 in the Russian GAAP. Loans and monetary securities are not discounted, so the present value of such financial assets is not discounted for the relevant interest rates at the different maturities of the loans.
In Singapore the Accounting Standards Committee (ASC) is in charge of standard setting. Singapore closely models its Financial Reporting Standards (FRS) according to the IFRS, with appropriate changes made to suit the Singapore context. Before a standard is enacted, consultations with the IASB are made to ensure consistency of core principles.
All companies listed on the Johannesburg Stock Exchange have been required to comply with the requirements of International Financial Reporting Standards since 1 January 2005.
The IFRS for SMEs may be applied by 'limited interest companies', as defined in the South African Corporate Laws Amendment Act of 2006 (that is, they are not 'widely held'), if they do not have public accountability (that is, not listed and not a financial institution). Alternatively, the company may choose to apply full South African Statements of GAAP or IFRS.
South African Statements of GAAP are entirely consistent with IFRS, although there may be a delay between issuance of an IFRS and the equivalent SA Statement of GAAP (can affect voluntary early adoption).
- Adoption scope and timetable
(1) Phase I companies: listed companies and financial institutions supervised by the Financial Supervisory Commission (FSC), except for credit cooperatives, credit card companies and insurance intermediaries:
- A. They will be required to prepare financial statements in accordance with Taiwan-IFRS starting from 1 January 2013.
- B. Early optional adoption: Firms that have already issued securities overseas, or have registered an overseas securities issuance with
- the FSC, or have a market capitalization of greater than NT$10 billion, will be permitted to prepare additional consolidated financial statements in accordance with Taiwan-IFRS starting from 1 January 2012. If a company without subsidiaries is not required to prepare consolidated financial statements, it will be permitted to prepare additional individual financial statements on the above conditions.
(2) Phase II companies: unlisted public companies, credit cooperatives and credit card companies:
- A. They will be required to prepare financial statements in accordance with Taiwan-IFRS starting from 1 January 2019
- B. They will be permitted to apply Taiwan-IFRS starting from 1 January 2013.
(3) Pre-disclosure about the IFRS adoption plan, and the impact of adoption
To prepare properly for IFRS adoption, domestic companies should propose an IFRS adoption plan and establish a specific taskforce. They should also disclose the related information from 2 years prior to adoption, as follows:
- A. Phase I companies:
- (A) They will be required to disclose the adoption plan, and the impact of adoption, in 2011 annual financial statements, and in 2012 interim and annual financial statements.
- (B) Early optional adoption:
- a. Companies adopting IFRS early will be required to disclose the adoption plan, and the impact of adoption, in 2010 annual financial statements, and in 2011 interim and annual financial statements.
- b. If a company opts for early adoption of Taiwan-IFRS after 1 January 2011, it will be required to disclose the adoption plan, and the impact of adoption, in 2011 interim and annual financial statements commencing on the decision date.
- B. Phase II companies will be required to disclose the related information from 2 years prior to adoption, as stated above.
- To maintain the consistency of information declaration and supervision with other companies, the early adopted companies should still prepare individual and consolidated financial statements in accordance with domestic accounting standards.
- Year Work Plan
- Establishment of IFRS Taskforce
- Acquisition of authorization to translate IFRS
- Translation, review, and issuance of IFRS
- Analysis of possible IFRS implementation problems, and resolution thereof
- Proposal for modification of the related regulations and supervisory mechanisms
- Enhancement of related publicity and training activities
- IFRS application permitted for Phase I companies
- Study on possible IFRS implementation problems, and resolution thereof
- Completion of amendments to the related regulations and supervisory mechanisms
- Enhancement of the related publicity and training activities
- Application of IFRS required for Phase I companies, and permitted for Phase II companies
- Follow-up analysis of the status of IFRS adoption, and of the impact
- Follow-up analysis of the status of IFRS adoption, and of the impact
- Applications of IFRS required for Phase II companies
- Expected benefits
(1) More efficient formulation of domestic accounting standards, improvement of their international image, and enhancement of the global rankings and international competitiveness of our local capital markets;
(2) Better comparability between the financial statements of local and foreign companies;
(3) No need for restatement of financial statements when local companies wish to issue overseas securities, resulting in reduction in the cost of raising capital overseas;
(4) For local companies with investments overseas, use of a single set of accounting standards will reduce the cost of account conversions and improve corporate efficiency.
Above is quoted from Accounting Research and Development Foundation, with the original "here" (PDF). (18.9 KB) .
The Banking Regulation and Supervision Agency and Capital Markets Board of Turkey translated IFRS into Turkish in 2002. Banks and Turkish companies listed on the Istanbul Stock Exchange are required to prepare IFRS reports since then. The Turkish Accounting Standards Board (called the Public Oversight Authority after 2011) also translated IFRS in 2005. The new Commercial Code came into force in 2012. The Public Oversight Authority is the only authorized board regarding auditing and financial reporting standards. Most businesses authorized by the Council of Ministers in addition to banks and Turkish companies listed on the Istanbul Stock Exchange are required to prepare IFRS reports since 2012.
Zimbabwe also adopted IFRS.
- Logic School of Management (Approved learning center IAAP(UK) for IFRS coaching.)
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- Nepal Financial Reporting Standards
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- Paragraph 106 of the standard IAS 1
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- Paragraph 63 of the IFRS standard IAS 38
- Paragraphs 54 and 57 of the IFRS standard IAS 38
- Paragraph 27 of the IFRS standard IAS 37
- Paragraph 23 of the IFRS standard IFRS 3
- Smith, N.J. (2012) CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS, Ch. 1.22.2 Three Concepts of Capital Maintenance
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- The International Accounting Standards Board—Free access to all IFRS standards, news and status of projects in progress
- PwC IFRS page with news and downloadable documents
- The latest IFRS news and resources from the Institute of Chartered Accountants in England and Wales (ICAEW)
- Initial publication of the International Accounting Standards in the Official Journal of the European Union PB L 261 13-10-2003
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