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An older set of standards stating how particular types of transactions and other events should be reflected in financial statements. In the past, international accounting standards (IAS) were issued by the Board of the International Accounting Standards Committee (IASC).
Since 2001, the new set of standards has been known as the international financial reporting standards (IFRS) and has been issued by the International Accounting Standards Board (IASB).
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IASC has no authority to require compliance with its accounting standards. However, many countries require the financial statements of publicly-traded companies to be prepared in accordance with IAS.
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A set of international accounting and reporting standards that will help to harmonize company financial information, improve the transparency of accounting, and ensure that investors receive more accurate and consistent reports. Statements of International Accounting Standards issued by the Board of the International Accounting Standards Committee (IASC) between 1973 and 2001 are designated International Accounting Standards. The International Accounting Standards Board (Iasb) announed in April 2001 that its accounting standards would be designated International Financial Reporting Standards (IFRS). Also in April 2001, the IASB announced that it would adopt all of the International Accounting Standards issued by the IASC.
Comparable, transparent, and reliable financial information is fundamental for the smooth functioning of capital markets. In the global arena, the need for comparable standards of financial reporting has become paramount because of the dramatic growth in the number, reach, and size of multinational corporations, foreign direct investments, cross-border purchases and sales of securities, as well as the number of foreign securities listings on the stock exchanges. However, because of the social, economic, legal, and cultural differences among countries, the accounting standards and practices in different countries vary widely. The credibility of financial reports becomes questionable if similar transactions are accounted for differently in different countries.
To improve the comparability of financial statements, harmonization of accounting standards is advocated. Harmonization strives to increase comparability between accounting principles by setting limits on the alternatives allowed for similar transactions. Harmonization differs from standardization in that the latter allows no room for alternatives even in cases where economic realities differ.
The international accounting standards resulting from harmonization efforts create important benefits. Investors and analysts benefit from enhanced comparability of financial statements. Multinational corporations benefit from not having to prepare different reports for different countries in which they operate. Stock exchanges benefit from the growth in the listings and volume of securities transactions. The international standards also benefit developing or other countries that do not have a national standard-setting body or do not want to spend scarce resources to undertake the full process of preparing accounting standards.
The most important driving force in the development of international accounting standards is the International Accounting Standards Committee (IASC), an independent private-sector body formed in 1973. The broad objective of the IASC is to further harmonization of accounting practices through the formulation of accounting standards and to promote their worldwide acceptance.
One hundred and forty-three professional accounting organizations in one hundred and four countries are IASC members. The IASC Board, presently consisting of sixteen member organizations, is responsible for establishing accounting and disclosure standards. The board follows due process in setting accounting standards, thus allowing for a great deal of consultation and discussion and ensuring that all interested parties can express their views at several points in the standard-setting process. The final standard requires approval by at least twelve member organizations.
On May 24, 2000, a new structure for IASC was approved unanimously by its membership. Under the new structure, IASC will be established as an independent organization that will have two main bodies, the Trustees and the Board. The Trustees will appoint the board members, exercise oversight and raise the funds needed, whereas the board will have sole responsibility for setting accounting standards. It is expected that the new structure would come into effect on January 1, 2001.
The IASC has issued forty International Accounting Standards (IASs) to date covering a range of topics, such as inventories, depreciation, research and development costs, income taxes, segment reporting, leases, business combinations, investments, earnings per share, interim financial reporting, intangible assets, employee benefits, impairment of assets, and financial instruments. It has also issued a Framework for the Preparation and Presentation of Financial Statements that sets forth the concepts underlying the preparation and presentation of financial statements for external users.
International Accounting Standards initially tended to be too broad, allowing many alternative accounting treatments to accommodate country differences. This was a serious weakness in achieving the objective of comparability. To gain acceptability of its standards, in 1989 the IASC undertook a project (called the Comparability Project) aimed at enhancing comparability of financial statements by reducing the alternative treatments. An important part of this effort was its work plan to produce a comprehensive core set of high-quality Standards (Core Standards project). The IASC has completed its Core Standards project, and the revised standards are a significant improvement over the earlier ones.
IASC standards are not mandatory. However, the acceptability of IASs has been on the rise, with an increasing number of companies stating that they prepare financial reports in accordance with IASs. Many countries endorse IASs as their own standards with or without modifications, and many stock exchanges accept IASs for cross-border listing purposes. For example, the Arab Society of Certified Accountants, comprising twenty-two Arab nations, has signed a declaration supporting IASs as the national accounting standards in all its member countries. Some European countries are developing legislation to allow not only foreign but also domestic companies to use IASs in their consolidated financial statements.
In the United States as of mid-2000, IASs are not an acceptable basis for financial statements filed with the Securities and Exchange Commission (SEC). Although the SEC has expressed support for the IASC's objective of developing accounting standards for financial statements used in cross-border offering, it has also stated that such standards must be comprehensive, possess high quality, and be subject to rigorous interpretation and application. The SEC is under increasing pressure to make U.S. capital markets more accessible to non-U.S. issuers.
Internationally, the International Organization of Securities Commissions (IOSCO), an organization comprised of securities regulators from more than eighty countries, as of mid-2000 is considering the endorsement of IASs for cross-border capital raising and listing purposes in all global markets.
Many other organizations also play an important role in the march toward international accounting standards. Among the more important are those discussed below.
IFAC. The International Federation of Accountants is a worldwide association formed in 1977 to develop the accounting profession, harmonize its auditing practices, and reduce differences in the requirements to qualify as a professional accountant in its member countries. It currently has a membership of one hundred and forty-three national professional organizations in one hundred and four countries representing more than 2 million accountants. The IFAC issues International Standards on Auditing (ISA) aimed at harmonizing auditing practices globally. The IFAC Council also appoints country representatives on the IASC Board (thirteen in total).
UN. Several organizations within the United Nations have been involved in international accounting standards. Its Group of Experts prepared a four-part report in 1976, "International Standards of Accounting and Reporting for Transnational Corporations." The report listed financial and nonfinancial items that should be disclosed by multinational corporations to host governments. More recently, it has worked to promote the harmonization of accounting standards by discussing and supporting best practices in a variety of areas, including environmental disclosures.
OECD. The Organization for Economic Cooperation and Development formed in 1960 currently has twenty-nine of the world's developed, industrialized countries as its members. A valuable contribution of the OECD is its surveys of accounting practices in member countries and its assessment of the diversity or conformity of such practices. Its Working Group on Accounting Standards supports efforts by regional, national, and international bodies promoting accounting harmonization. In 1998, the OECD issued "Principles of Corporate Governance" that support the development of high-quality, internationally recognized standards that can serve to improve the comparability of information between countries.
EU. The European Union, the powerful regional alliance of fifteen nations, aims to bring about a common market that allows free mobility of people, capital, and goods among member countries. To promote the cross-country economic integration, the EU has made significant progress in the harmonization of laws and regulations. Its Commission (European Commission) establishes standardization and harmonization of corporate and accounting rules through the issuance of Directives. Directives incorporate uniform rules (to be implemented exactly in all member states), minimum rules (which may be strengthened by individual governments), and alternative rules (which members can choose from). Directives are mandatory in that each member country has the obligation to incorporate them into its respective national law. However, each country is free to choose the form and method of implementation and also to add or delete options.
The Fourth and Seventh Directives deal exclusively with accounting issues. The Fourth Directive, adopted in 1978, covers financial statements, their contents, method of presentation, valuation methods, and disclosure of information. The Seventh Directive, adopted in 1983, requires worldwide consolidated financial statements regardless of the location of the parent company. Given the large variety of alternatives for consolidation permitted in member countries prior to its issuance, the Seventh Directive is regarded as a major development toward harmonization. The European Commission announced in 1995 its decision to rely heavily on IASC to produce results that meet the needs of capital markets. It is also investigating the possibility of requiring all member states to require listed companies to report under IASs.
NAFTA. The North American Free Trade Agreement was formed in 1993 among Canada, Mexico, and the United States to create a common market. It will phase out duties on most goods and services and promote free movement of professionals, including accountants, among the three countries. There are projects under way to analyze the similarities and differences between financial reporting and accounting standards of the member countries of NAFTA.
Other organizations. Some regional organizations—such as the Association of Southeast Asian Nations (ASEAN), Community of Sovereign States, Economic Cooperation Organization (ECO), Baltic Council, Asia Pacific Economic Cooperation (APEC), Confederation of Asian and Pacific Accountants (CAPA), and Nordic Federation of Accountants (NFA)—have made efforts toward harmonizing accounting and disclosure standards. G4—a group of standard-setting bodies in Australia, Canada, the United Kingdom, and the United States, has also started playing an important role in the harmonization of international accounting standards.
The process of harmonizing international accounting standards has come a long way on a path that has been far from smooth. While some critics still doubt the need and feasibility of such standards, it is becoming increasingly clear that the question is not whether but when the Inter national Accounting Standards will be required and followed by business and other entities worldwide. The likely endorsement by the IOSCO and SEC will make that time sooner rather than later.
(See also: International Federation of Accountants)
Bibliography
International Accounting Standards Committee (IASC). http://www.iasc.org.uk. (April 2000).
McGregor, Warren. (1999). "An Insider's View of the Current State and Future Direction of International Accounting Standard Setting." Accounting Horizons June: 159-168.
Pactor, Paul. (1998). "International Accounting Standards: The World's Standards by 2002." The CPA Journal July: 14-21.
Saudagardan, Shahrokh. (2001). International Accounting: A User Perspective. Cincinnati, OH: South-Western College Publishing.
Zeff, Stephen A. (1998). "The IASC's Core Standards: What Will the SEC Do?" Journal of Financial Statement Analysis Fall: 67-78.
[Article by: MAHENDRA GUJARATHI]
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International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB).
Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the board of the International Accounting Standards Committee (IASC). In April 2001 the IASB adopted all IAS and continued their development, calling the new standards IFRS.
IFRS are used in many parts of the world, including the European Union, Hong Kong, Australia, Russia, South Africa, Singapore and Pakistan. Nearly 100 countries currently require or permit the use of, or have a policy of convergence with, IFRSs.[1]
For a current overview see IAS PLUS's list of all countries that have adopted IFRS.
The Australian Accounting standards, previous to 1 January 2005, were based around accounting standards developed by the Australian Accounting Standards Board (AASB). As a result of pressure towards international harmonisation, the AASB had been working towards a convergence between the Australian Standards and the IFRS. From 1 January 2005, the Australian equivalent of IFRS have been fully implemented as AASB 101 - 141. It is a requirement that all reporting entities adopt the standards as they have replaced the previous Australian generally accepted accounting principles.
Due to the accounting standards operating halfway through the year, the requirements can be summarised as follows:
All publicly traded EU companies have been required to prepare their consolidated accounts using IFRS since 2005. Prior to 2005 there were around 350 publicly listed companies that used IFRS — since 2005 the figure has been around 7,000.
In order to be approved for use in the EU, standards must be endorsed by the Accounting Regulatory Committee (ARC), which includes representatives of member state governments and is advised by a group of accounting experts known as the European Financial Reporting Advisory Group. As a result IFRS as applied in the EU may differ from that used elsewhere.
Parts of the standard IAS 39: Financial Instruments: Recognition and Measurement were not originally approved by the ARC. IAS 39 was subsequently amended, removing the option to record financial liabilities at fair value, and the ARC approved the amended version. The IASB is working with the EU to find a way to an acceptable way to remove a remaining anomaly in respect of hedge accounting.
As the standards are part of European law the approved standards and approved subsequent changes must be published in the Official Journal of the European Union. On October 13, 2003 the first publication of the standards was included in PB L 261. Changes to the earlier published IAS and IFRS can be monitored using the webpage of the Directorate Internal Market of the European Union on the implementation of the IAS in the European Union.
From 2007 companies traded on the Alternative Investment Market in the UK will be required to prepare their accounts using IFRS.
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 Ministery of Finance of Russian Federation aiming to align accounting practices with IFRS. Despite of these efforts essential differences between national accounting standards and IFRS remain. From 2004 all commercial banks are obliged to prepare financial statements in accordance with both national accounting standards and IFRS. Full transition to IFRS is delayed and is expected to take place from 2010.
Turkish Accounting Standards Board translated IFRS into Turkish in 2006. As of 31 December 2006 Turkish companies listed in Istanbul Stock Exchange are required to prepare IFRS reports.
In 2002 at a meeting at Norwalk, Connecticut, the IASB and the US Financial Accounting Standards Board agreed to harmonise their agenda and work towards reducing differences between IFRS and US GAAP (the Norwalk Agreement). In February 2006 FASB and IASB issued a Memorandum of Understanding including a programme of topics on which the two bodies will seek to achieve convergence by 2008.
The United States Securities and Exchange Commission currently requires all overseas companies listed in the US to prepare their results either under US GAAP or according to their local requirements with a footnote reconciling their local GAAP to US GAAP. This imposes expense on companies which are listed on exchanges both in the US and another country. The SEC has proposed a change to its rules to remove the reconciliation requirement for foreign issuers which prepare accounts under IFRS, indicatively from 2009.[2] US registered companies will still be required to use US GAAP.
IFRSs are considered a "principles-based" set of standards in that they establish broad rules as well as dictating specific treatments.
International Financial Reporting Standards comprise:
There is also a Framework for the Preparation and Presentation of Financial Statements which describes some of the principles underlying IFRS
The following IFRS statements are currently issued:
References to IFRS standards given in the standard convention, for example (IAS1.14) refers to paragraph 14 of IAS1, Presentation of Financial Statements
IFRS financial statements consist of (IAS1.8)
Comparative information is provided for the previous reporting period (IAS 1.36). An entity preparing IFRS accounts for the first time must apply IFRS in full for the current and comparative period although there are transitional exemptions (IFRS1.7).
The ultimate parent company of a group must produce consolidated financial statements including all of its subsidiaries (IAS27.9). A subsidiary is an entity which is controlled by another entity; control is the power to govern the financial and operating policies (IAS27.4). In preparing consolidated financial statements, balances, transactions, income and expenses with other group members are eliminated (IAS27.24).
All business combinations are accounted for by applying the purchase method, requiring that one entity is identified as acquirer (IFRS3.17).
The acquiring entity assesses the fair value of the separate assets, liabilities and contingent liabilities in the business it has acquired; this can include identification of intangible assets, for example customer relationships, which are not commonly recognised except on acquisitions (IFRS3.36)
The difference between the cost of the business combination and the fair value of the assets and liabilities acquired represents goodwill (IFRS3.51). Goodwill is not subject to amortisation, but is assessed for impairment at least annually (IFRS3.54 and IAS36.10). Impairment is charged to the income statement. (IAS36. 60). Impairment provisions on goodwill are not subsequently reversed (IAS36.124).
Property, plant and equipment is measured initially at cost (IAS16.15). Cost can include borrowing costs directly attributable to the acquisition, construction or production if the entity opts to adopt such a policy consistently (IAS23.11).
Property, plant and equipment may be revalued to fair value if the entire class of assets to which it belongs is so treated (for example, the revaluation of all freehold properties) (IAS16.31 and 36). Surpluses on revaluation are recognised directly to equity, not in the income statement; deficits on revaluation are recognised as expenses in the income statement (IAS16.39 and 40).
Depreciation is charged to write off the cost or valuation of the asset over its estimated useful life to down to the recoverable amount (IAS16.50). The cost of depreciation is recognised as an expense in the income statement (IAS16.48). The depreciation method and recoverable amount is reviewed at least annually (IAS16.61). In most cases the method is “straight line”, with the same depreciation charge from the date when an asset is brought into use until it is expected to be sold or no further economic benefits obtained from it, but other patterns of depreciation are used if assets are used proportionately more in some periods than others (IAS16.56).
Joint ventures are investments other than subsidiaries where the investor has a contractual arrangement with one or more other parties to undertake an economic activity that is subject o joint control (IAS31.3).
Joint ventures may be accounted for using either
Associates are investments, other than joint ventures and subsidiaries, in which the investor has a significant influence (the power to participate in financial and operating policy decisions) (IAS28.2). It is presumed that this will be the case if the investment is greater than 20% of the investee unless it can be clearly demonstrated not to be the case (IAS28. 6). Associates are accounted for using the equity method.
Investments other than subsidiaries, joint ventures and associates are accounted for at their fair values unless (IAS39.9 and 46):-
Inventory is stated at the lower of cost and net realisable value (IAS2.9).
Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing items to their present location and condition (IAS2.100. Where individual items are not identifiable, the “first in first out” (FIFO) method is used, such that cost represents the most recent items acquired. “Last in first out” (LIFO) is not acceptable (IAS2.25).
Net realisable value is the estimated selling price less the costs to complete and costs to sell (IAS2.6).
Receivables and payables are recorded initially at fair value (IAS39.43). Subsequent measurement is stated at amortised cost (IAS39.46 and 47). In most cases, trade receivables and trade payables can be stated at the amount expected to be received or paid; however, it is necessary to discount a receivable or payable with a substantial credit period (see for example IAS18.11 for accounting for revenue).
If a receivable has been impaired its carrying amount is written down its recoverable amount (the higher of value in use and its fair value less costs to sell). Value in use is the present value of cash flows expected to be derived from the receivable (IAS36.9 and 59). ...
Borrowing is stated at amortised cost using the effective interest method. This requires that the costs of arranging the borrowing are deducted from the principal value of debt and are amortised over the period of the debt (IAS39.46).
Provisions are liabilities of uncertain timing or amount (IAS37.10). Provisions are recognised when an entity has, at the balance sheet date, a present obligation as a result of a past event, when it is probable that there will be an outflow of resources (for example a future cash payment) and when a reliable estimate can be made of the obligation (IAS37.14). Restructuring provisions are recognised when an entity has a detailed plan for the restructuring and has raised an expectation amongst those affected that it will carry out the restructuring (IAS37.72).
Revenue is measured at the fair value of consideration received or receivable (IAS18.9).
Revenue for the sale of goods cannot be recognised until the entity has transferred to the buyer the significant risks and rewards of ownership of the goods (IAS18.14).
Revenue for rendering of services is accounted for to the extent that the stage of completion of the transaction can be measured reliably (IAS18.20).
Employee costs are recognised when an employee has rendered service during an accounting policy (IAS19.10). This requires accruals for short-term compensated absences such as vacation (holiday) pay (IAS19.11). Profit sharing and bonus plans require accrual when an entity has an obligation to make such payments at the reporting date (IAS19.17).
Where an entity receives goods or services in return for the issue of its own shares or equity instruments it accounts for the fair value of those goods or services as an expense or as an asset (IFRS2.7). Where it offers options and other share based incentives to its employees it is required to assess the market value of the instruments when they are first granted and then to charge the cost over the period in which the benefit vests (IFRS2.10).
Taxes payable in respect of current and prior periods are recognised as a liability to the extent they are unpaid at the balance sheet date (IAS12.12).
Deferred tax liabilities are recognised for taxable temporary differences at the balance sheet date which will result in tax payable in future periods (for example, where tax deductions have been claimed for capital expenditure before the cost of depreciation has been charged in the income statement) (IAS12.39). Deferred tax assets are recognised for deductible temporary differences at the balance sheet date (for example, tax losses which can be used in future periods) to the extent that it is probable that these will reverse in future and that there will be taxable profits against which they can be offset (IAS 12.44).
IFRS cash flow statements show movements in cash and cash equivalents. This includes cash on hand and demand deposits, short term liquid investments readily convertible to cash and overdrawn bank balances where these readily fluctuate from positive to negative (IAS7.6 to 9). IFRS cashflow statements do not need to show movements in borrowings or net debt.
Cash flow statements may be presented using either a direct method, in which major classes of cash receipts and cash payments are disclosed, or using the indirect method, whereby the profit or loss is adjusted for the effect of non-cash adjustments (IAS7.18).
Items on the cash flow statement are classified as operating activities, investing activities and financing activities (IAS7.10).
Leases are classified:-
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction (IFRS1 App A).
Amortised cost uses the effective interest method to provide a constant rate of return on an asset or liability until maturity (IAS39.9)
The Framework for the Preparation and Presentation of Financial Statements states basic principles for IFRS.
The framework states that the objective of financial statements is to provide information about the financial position, performance and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions.
The Framework can divide into the following sections:
The underlying assumptions used in IFRS are:
IFRS follows a balance sheet approach:-
Equity at year-end = calculation base on IFRS. Net profit = Equity at year-end minus Equity at the beginning of the year
The Framework describes the qualitative characteristics of financial statements as being
The Framework sets out the statement of financial position (balance sheet) as comprising:-
An item is recognised in the financial statements when:-
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