OVREVIEW OF IFRS

1. OVREVIEW OF IFRS
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Prepared by Mr..Abdi Hassen

2. What is IFRS?
 International Financial Reporting standards are accounting standards
that two bodies: International Accounting Standard Committee
(IASC) from 1973 to 2001 and International Accounting Standard
Board (IASB) since 2001. Accounting standards developed by IASC
are called International Accounting Standards (IASs)while those
developed by IASB are called International Financial Reporting
Standards (IFRS). IASB adopted the IAS developed by IASC and
continued developing other standards, and, currently, both IAS and
IFRS are termed as IFRS.
 IFRS is a globally recognized set of Standards for the preparation of
financial statements by business entities.
 Those Standards prescribe:
 the items that should be recognized as assets, liabilities, income and
expense how to measure those items;
 how to present them in a set of financial statements; and related
disclosures about those items.
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3. Principles-Based vs. Rules-Based Standards
IFRS are referred to as being principles-based standards
◦ Provide core principles (objectives) with minimum
guidance.
◦ They are more loosely framed, allowing for professional
judgment to be applied
◦ The judgments are expected to be consistent with clear
conceptual framework.
◦ Results in accounting that is more flexible to deal with
unique economic and business circumstances
◦ Some argue that allowing professional judgment
introduces bias.
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4. US GAAP are referred to as being rules-based standards:
 They are more prescriptive
 Provide a rule for every situation
 Body of knowledge too large and complicated
 Although more guidance is a comfort to some, it
becomes difficult to ensure that the standards are all
consistent.
 More on the difference between IFRS and US GAAP
later
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5. Why IFRS?
 Investors are acting on a global market !!
 National standards don’t work on a global
market
 Cross boarder business is hindered by
national standards
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6. Benefits of IFRS
 Credibility of local market to foreign investors
 More cross-border investment
 Efficient capital allocation
 Comparability across political boundaries
 Facilitates global education and training
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7. Benefit of IFRS to companies!
 Lower cost of capital
 Facilitates raising capital abroad
 Integrated IT systems
 One set of books + easier consolidation
 Better understanding of financial statements from
business partners abroad
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8. IFRS Adoption
 More than 110 countries
 International support to have global accounting
standards
G20
WB
IMF
Basel Committee,
International Organization of Securities
Commissions
International Federation of Accountants
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9. IFRS in Ethiopia
 Ethiopia passed a financial reporting law in 2014
which requires the use of IFRS by commercial
businesses operating in Ethiopia.
 Proclamation No. 847/2014
 Regulation No. 332/2014
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10. The proclamation requires:
 Commercial organizations to follow
 International Financial Reporting Standards
(IFRS), or
 International Financial Reporting Standards for
Small and Medium Enterprises (IFRS for SME)
 Charities and societies to follow International Public
Sector Accounting Standards (IPSAS)
 Public auditors to follow International Standards for
Auditing.
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11.  Public interest entity (PIE) should use the full IFRS.
 A PIE is a reporting entity that is of significant public
relevance because of the nature of its business, its
size, its number of employees.
 PIE also includes banks, insurance companies, and any
other financial institutions and public enterprises.
 Small or medium enterprises (SME)= Not public
interest entity
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12. Structure, strategic plan, and roadmap of
AABE
 Accounting and Auditing Board of Ethiopia is
established by Regulation No. 332/2014
 It is an autonomous government organ accountable
to MOFEC.
 It is headed by the Director General
 It has 12-member Board of Directors
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13. AABE duties (among others)
 Issue standards and directives relating to financial
reporting and auditing and ensure their compliance.
 Receive and register financial statements of
reporting entities
 Review and monitor the accuracy and fairness of FS
to enforce compliance with the reporting standards
 Register and license public auditors
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14.  Oversee professional accountancy bodies
 Establish, publish and review a code of professional
conduct and ethics for certified public accountants
and certified auditors
 Conduct or arrange for the conduct of professional
examination for the purpose of registering certified
public accountants
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15. AABE Roadmap to IFRS Implementation
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16. Date What is expected
July 7, 2017  Mandatory reporting by financial institutions
and large public enterprises
 Adoption of IFRS by PIE (other than financial
institutions and large public enterprises) and
IPSAS by Charities and Societies.
July 7, 2018 PIE (other than financial institutions and large
public enterprises) and IPSAS by Charities and
Societies issue IFRS and IPSAs based financial
statements respectively
July 7, 2019 Small and Medium-sized Entities in Ethiopia issue
IFRS based financial statements
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17. IASB and IFRS
 IFRS is developed by the International
Accounting Standards Board (IASB),
which operates under the oversight of
the IFRS Foundation.
 IASB was formerly called International
Accounting Standards Committee
(IASC)
 IASB is based in London
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18. How IASB Works
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19. Standards development process
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20. List of Applicable IFRS
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22. IFRS Comprises
International Accounting
Standards (IAS) - 41
International Financial
Reporting Standards (IFRS)-16
Standing Interpretations
Committee (SIC)- 8
International Financial
Reporting Interpretations
Committee (IFRIC)- 18
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23. International Accounting Standards (IAS)
 IAS 1: Presentation of Financial Statements
 IAS 2: Inventories
 IAS 7: Statement of Cash Flows
 IAS 8: Accounting Policies, Changes in Accounting
Estimates and Errors
 IAS 10: Events after the Reporting Period
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24.  IAS 11: Construction Contracts (will be superseded
by IFRS 15 as of 1 January 2018)
 IAS 12: Income Taxes
 IAS 16: Property, Plant and Equipment
 IAS 17: Leases
 IAS 18: Revenue (will be superseded by IFRS 15 as of
1 January 2018)
 IAS 19: Employee Benefits
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25.  IAS 20: Accounting for Government Grants and
Disclosure of Government Assistance
 IAS 21: The Effects of Changes in Foreign Exchange
Rates
 IAS 23: Borrowing Costs
 IAS 24: Related Party Disclosures
 IAS 26: Accounting and Reporting by Retirement
Benefit Plans
 IAS 27: Separate Financial Statements
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26.  IAS 28: Investments in Associates and Joint Ventures
 IAS 29: Financial Reporting in Hyperinflationary
Economies
 IAS 32: Financial Instruments: Presentation
 IAS 33: Earnings per Share
 IAS 34: Interim Financial Reporting
 IAS 36: Impairment of Assets
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27.  IAS 37: Provisions, Contingent Liabilities and
Contingent Assets
 IAS 38: Intangible Assets
 IAS 39: Financial Instruments: Recognition and
Measurement (will be superseded by IFRS 9 as
of 1 January 2018)
 IAS 40: Investment Property
 IAS 41: Agriculture
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28. International Financial Reporting Standards
 IFRS 1: First-time Adoption of International Financial
Reporting Standards
 IFRS 2: Share-based Payment
 IFRS 3: Business Combinations
 IFRS 4: Insurance Contracts
 IFRS 5: Non-current Assets Held for Sale and
Discontinued Operations
 IFRS 6: Exploration for and Evaluation of Mineral
Resources
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29.  IFRS 7: Financial Instruments: Disclosures
 IFRS 8: Operating Segments
 IFRS 9: Financial Instruments (will replace IAS 39 as
of 1 January 2018)
 IFRS 10: Consolidated Financial Statements
 IFRS 11: Joint Arrangements
 IFRS 12: Disclosure of Interests in Other Entities
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30.  IFRS 13: Fair Value Measurement
 IFRS 14: Regulatory Deferral Accounts
 IFRS 15: Revenue from Contracts with
Customers (will replace IAS 11 and IAS 18 as of
1 January 2018)
 IFRS 16: Leases (replaces IAS 17 as of January 1,
2019)
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31. IFRS Interpretations Committee Interpretations
 IFRIC 1: Changes in Existing Decommissioning,
Restoration and Similar Liabilities
 IFRIC 2: Members’ Shares in Co-operative Entities
and Similar Instruments
 IFRIC 4: Determining whether an Arrangement
contains a Lease (will be superseded by IFRS 16 as of
1 January 2019)
 IFRIC 5: Rights to Interests arising from
Decommissioning, Restoration and Environmental
Rehabilitation Funds
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32.  IFRIC 6: Liabilities arising from Participation in a
Specific Market – Waste Electrical and Electronic
Equipment
 IFRIC 7: Applying the Restatement Approach under
IAS 29 Financial Reporting in Hyperinflationary
Economies
 IFRIC 9: Reassessment of Embedded Derivatives
 IFRIC 10: Interim Financial Reporting and Impairment
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33.  IFRIC 12: Service Concession Arrangements
 IFRIC 13: Customer Loyalty Programmes (will be
superseded by IFRS 15 as of 1 January 2018)
 IFRIC 14: IAS 19 – The Limit on a Defined
Benefit Asset, Minimum Funding Requirements
and their Interaction
 IFRIC 15: Agreements for the Construction of
Real Estate (will be superseded by IFRS 15 as of
1 January 2018)
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34.  IFRIC 16: Hedges of a Net Investment in a Foreign
Operation
 IFRIC 17: Distributions of Non-cash Assets to Owners
 IFRIC 18: Transfer of Assets from Customers (will be
superseded by IFRS 15 as of 1 January 2018)
 IFRIC 19: Extinguishing Financial Liabilities with
Equity Instruments
 IFRIC 20: Stripping Costs in the Production Phase of a
Surface Mine
 IFRIC 21: Levies
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35. Standing Interpretations Committee
Interpretations (SIC)
 SIC-7: Introduction of the Euro
 SIC-10: Government Assistance – No Specific
Relation to Operating Activities
 SIC-15: Operating Leases – Incentives (will be
superseded by IFRS 16 as of 1 January 2019)
 SIC-25: Income Taxes – Changes in the Tax Status of
an Entity or its Shareholders
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36.  SIC-27: Evaluating the Substance of Transactions
Involving the Legal Form of a Lease (will be
superseded by IFRS 16 as of 1 January 2019)
 SIC-29: Service Concession Arrangements:
Disclosures
 SIC-31: Revenue – Barter Transactions Involving
Advertising Services (will be superseded by IFRS 15
as of 1 January 2018)
 SIC-32: Intangible Assets – Web Site Costs
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37. Difference between IFRS and US GAAP
 Great strides have been made by the FASB and
the IASB to converge the content of IFRS and
U.S. GAAP.
 There is continued support for the objective of
a single set of high-quality, globally accepted
accounting standards.
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38. Virtually identical standards
 share-based payments,
 segment reporting,
 business combinations,
 consolidated financial statements,
 fair value measurement,
 joint arrangements,
 investment entities, and
 revenue
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39. Unsuccessful joint projects
 leases,
 Insurance,
 Financial instruments,
 Conceptual framework
 Major differences between IFRS and US GAAP are
as follows:
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40.  Inventory costing method
 US GAAP allows LIFO method
 IFRS doesn’t allow LIFO method
 Reversal of inventory write-downs
 US GAAP doesn’t allow
 IFRS allows
 Valuation of property, plant, and equipment
 U.S.GAAP: Cost less accumulated depreciation
 IFRS: Cost less accumulated depreciation (or) fair
value(revaluation)
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41.  Valuation of intangible assets
 U.S GAAP: Cost less accumulated amortization.
Revaluation prohibited
 IFRS: Cost less accumulated amortization (or) fair
value(revaluation)
 Research and development expenditures
 U.S GAAP: Expensed in the period incurred
 IFRS:
 Research: expensed in the period incurred
 Development: that meet specified criteria: capitalized
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42.  Contingencies
U.S. GAAP: accrue if it is probable and can be
reasonably estimated. GAAP defines probable as
“likely to occur” (a higher threshold of occurrence
than under IFRS)
IFRS: threshold for “probable” is defined as “more
likely than not” (greater than 50%)
 Valuation of long-term contingencies
U.S.GAAP: present value—only when timing of
cash flows is certain
IFRS: present value—time value of money is
material
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43.  Treatment of convertible debt
 U.S. GAAP: entire issue price is recorded as a
liability
 IFRS: convertible debt is divided into its liability
(bonds) and equity (conversion option) elements
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44.  Distinction between debt and equity for
preferred stock
U.S. GAAP: most preferred stock is included
in stockholders’ equity, with the dividends
reported as a reduction in retained earnings
IFRS: most preferred stock is reported as
debt, with the dividends reported in the
income statement as interest expense
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45.  Reacquired shares:
 IFRS does not permit retirement of shares
 U.S. GAAP: All buybacks are treated as treasury
stock
 Cash outflows for interest payments
 U.S. GAAP: operating cash flows
 IFRS: either operating or financing cash flows
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46.  Cash inflows from interest and dividends received
U.S. GAAP: operating cash flows
IFRS: either operating or investing cash flows
 Disclosure of noncash activities
U.S. GAAP: Reported either on the face of the
statement of cash flows or in a disclosure note
IFRS: Disallows presentation on the face of the
statement and requires reporting in a disclosure
note
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47.  Discontinued operations
U.S. definition is broader than its international
counterpart
IFRS considers a component to be primarily either
a major line of business or geographical area of
operations
 Extraordinary items
 U.S. GAAP: provides separate reporting
 IFRS: recording or disclosure not allowed
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48. Conceptual Framework
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49. Conceptual Framework sets out the concepts that
underlie IFRS financial statements
 It comprises of:
 the objective of general purpose financial
reporting
 qualitative characteristics
 elements of financial statements
 recognition
 measurement
 presentation and disclosure
◦ Other concepts all flow from the objective
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50. Purpose of the Conceptual Framework
• To assist IASB in setting and revising standards
• To assist preparers to make the judgements that are
necessary to apply IFRSs
• To assist auditors and regulators assess judgments of
preparers
• To assist users to consider those judgments when using
IFRS financial information to inform their decisions
• To assist in understanding of standard-setting by IFRS
• To reduce conflicts between Framework and Standards
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51. Objective of General Purpose Financial
Reporting
“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”
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52.  To provide information about
 Economic resources and claims (SFP)
 Changes in economic resources and claims
(SPLOCI)
 Financial performance reflected by past
cash flows (SCF)
 Changes in economic resources and claims
not resulting from financial performance
(SCE)
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53. Qualitative Characteristics of Useful
Financial Information
 Fundamental
 Relevance
 Faithful representation
 Enhancing
 Comparability
 Verifiability
 Timeliness
 Understandability
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54. 54
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55.  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)
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56.  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, characterize, and present
information clearly and concisely
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57. Elements of financial statements
Asset
 resource controlled by the
entity
 result of past event
 expected inflow of
economic benefits
Liability
 present obligation
 arising from past event
 expected outflow of
economic benefits
Equity = assets less liabilities
Income
 recognised increase in
asset/decrease in liability in
current reporting period
 that result in increased
equity except contributions
from owners
Expense
 recognised decrease in
asset/increase in liability in
current reporting period
 that result in decreased
equity except distributions
to owners
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58. Recognition
 Accrual basis of accounting used
 Recognise element when:
◦ The element satisfies definition
◦ probable that benefits will flow to/from the entity
◦ has cost or value that can be measured reliably
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59. ◦ What does probable mean?
It means “more likely than not”
The meaning of probable is determined at the
standards level. Therefore, inconsistent use
across IFRSs (usually more than 50%)
◦ What does measure reliably mean?
 To a large extent, financial reports are based
on estimates, judgements and models rather
than exact depictions.
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60. Measurement
 Measurement is the process of determining
monetary amounts at which elements are
recognised and carried.
 To a large extent, financial reports are based on
estimates, judgements and models rather than
exact depictions.
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61. Measurement methods include
 Historical cost: cash paid or fair value of
consideration given
 Current cost: Cash that would be paid if acquired
now
 Realisable (settlement) value: cash that could be
obtained by selling the asset now
 Present value: present discounted value of future net
cash inflows that the item is expected to generate
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62. Constraints
◦ Cost vs. benefit: cost of information is 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.
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63. Underlying assumptions of financial reporting:
 Going concern, and
 Accruals accounting
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64. Financial Statements
 A statement of financial position as at the end
of the period
 A statement of profit or loss and other
comprehensive income for the period
 A statement of changes in equity for the period
 A statement of cash flows for the period
 Notes, comprising
◦ A summary of significant accounting policies
◦ Other explanatory information
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65. IASB Books
 IASB publishes IFRS in 3 books every year
 Red Book
 Blue Book
 Green Book
 Each book is published as 2 books
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66. Red book
 Standards with effective date after 1
January of the year the book refers to.
 It excludes standards that are being
replaced and/or superseded.
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67. Blue Book:
 Standards with an effective date before 1
January of the year the book refers to.
 It does not contain Standards with an
effective date after 1 January.
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68. Green Book:
 Standards issued at 1 July of the year the book
refers to, including standards with an effective
date after 1 July.
 It excludes standards that are being replaced
and/or superseded
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69. IFRS for SMEs
◦ Final standard issued 9 July 2009
◦ 230 pages (vs. 3,000+ in full IFRS)
◦ Simplified IFRSs, but built on an IFRS
foundation
◦ Completely stand-alone and divided into 39
Sections
◦ Designed specifically for SMEs
◦ Internationally recognized
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70. How simplified
1. Some topics in IFRSs omitted if irrelevant to
private entities
2. Where IFRSs have options, include only
simpler option
3. Recognition and measurement simplifications
4. Reduced disclosures
5. Simplified drafting
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71. Who are SMEs?
 Small or medium enterprise is:
 A reporting entity, and
 is not a public interest entity
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72. List of IFRS for SME
 Section 1: Small and Medium-sized Entities
 Section 2: Concepts and Pervasive Principles
 Section 3: Financial Statement Presentation
 Section 4: Statement of Financial Position
 Section 5: Statement of Comprehensive Income and
Income Statement
 Section 6: Statement of Changes in Equity and
Statement of Comprehensive Income and Retained
Earnings
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73.  Section 7: Statement of Cash Flows
 Section 8: Notes to the Financial Statements
 Section 9: Consolidated and Separate Financial
Statements
 Section 10: Accounting Policies, Estimates and Errors
 Section 11: Basic Financial Instruments
 Section 12: Additional Financial Instruments Issues
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74.  Section 13: Inventories
 Section 14: Investments in Associates
 Section 15: Investments in Joint Ventures
 Section 16: Investment Property
 Section 17: Property, Plant and Equipment
 Section 18: Intangible Assets other than
Goodwill
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75.  Section 19: Business Combinations and
Goodwill
 Section 20: Leases
 Section 21: Provisions and Contingencies
 Section 22: Liabilities and Equity
 Section 23: Revenue
 Section 24: Government Grants
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76.  Section 25: Borrowing Costs
 Section 26: Share-based Payment
 Section 27: Impairment of Assets
 Section 28: Employee Benefits
 Section 29: Income Tax
 Section 30: Foreign Currency Translation
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77.  Section 31: Hyperinflation
 Section 32: Events after the End of the
Reporting Period
 Section 33: Related Party Disclosures
 Section 34: Specialized Activities
 Section 35: Transition to the IFRS for SMEs
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