1. Module name: International Financial Reporting
Title of the assignment:
Student Name
Submission date

2. Contents
The regulatory and conceptual framework of financial reporting as set by the IASB .................................. 3
Disclosure and measurement of financial instruments ................................................................................ 6
Initial recognition ...................................................................................................................................... 8
Subsequent measurement........................................................................................................................ 8
Impairment ............................................................................................................................................... 9
Disclosures of financial instruments ............................................................................................................. 9
Information relating to the significance of the financial instruments of the company.......................... 10
Information in relation to the nature and extent of risk arising from financial instruments of the
company.................................................................................................................................................. 11
Accounting for leases .................................................................................................................................. 12
Operating leases ..................................................................................................................................... 13
Finance lease........................................................................................................................................... 13
Reference .................................................................................................................................................... 14
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3. The regulatory and conceptual framework of financial reporting as set
by the IASB
Currently in global perspective there are two organizations who provide guidance and
issue Accounting and financial reporting standards. Those are International Accounting
standard board (IASB) and Financial Accounting Standard Board (FASB). In particular
most of the countries such as UK European countries Asian countries Canada uses the
financial reporting standards issued by IASB while USA is using its own financial
reporting standards published by FASB.
However IASB and FASB are currently working in a joint project of convergence of
financial reporting standards.
The objective of IASB is to “Develop a single set of high quality, Understandable,
enforceable, and globally accepted financial reporting standards based upon clearly
articulated principles.”
(Source, WWW.IFRS.org)
The IASB was founded on 1 march 2001 as the predecessor of International Accounting
Standard committee (IASC).
The IASB is controlled by a board of members which comprise 15 members. Those
members are selected as a panel of experts whom include standard setters in countries,
academic staff and users of financial statements around the world.
The conceptual framework for financial reporting was first introduced in 1989 by the
previous body of IASB, the conceptual framework establish the underlying concepts for
preparation and presentation of financial statements for the use of external stake
holders.
The conceptual framework deals with following areas,
The financial reporting objectives
The qualitative characteristics of financial information which are useful
The recognition, measurement and definition of items from which financial
statements are derived.
Concepts of capital and capital maintenance.
Further the conceptual framework assists to,
Prepares of financial statements when adopting financial reporting standards
Auditors when expressing an opinion as to whether the financial statements were
prepared in accordance with applicable financial reporting framework
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4. Those who use financial statements for interpreting financial information
contained in the financial statements.
All stakeholders who are interested of activities of IASB.
It can be noted that in order to facilitate the financial reporting function
conceptual framework identifies several key stakeholders as user groups those
include
Investors
Government
Lenders
Public
Suppliers
Employees
Due to the requirements in the current environment IASB and FASB has started a joint
program to develop a new conceptual framework with the objective of creating a sound
foundation for future accounting standards that are principles-based, internationally
consistent and internationally converged.
Accordingly the new conceptual framework consist of following chapters
1. The objective of general purpose financial reporting
2. The reporting Entity
3. Qualitative characteristics of use full financial information
4. Underlying assumption
5. The elements of financial statements
6. Recognition of elements of financial statements
7. Measurement of elements of financial statements
8. Concepts of capital and capital maintenance
Conceptual frame work states that the objective of general purpose financial reporting is
to provide information to existing and potential investors which are useful.
The conceptual framework further states that for the financial information to be use full
the financial information needs to contain following qualitative factors.
Relevance
Faithfull representations
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5. In order to present relevant and faithfully represented information the financial
information needs to have following characteristics.
o Comparability
o Verifiability
o Timeliness
o understandability
The framework discuss two underlying assumption that needs to maintain when
preparing financial statements. Those are
o Going concern assumption
o Accrual basis of accounting
The framework recognize key elements in the financial statements as follows,
The elements relates to the financial position of the company and included in the
balance sheet
o Assets
o Liabilities
o Equity
Elements relates to financial performance of the entity
o Income
o Expenses
With regard to recognition and measurement of elements of financial statements
framework states that if the key elements meets the following criteria those can be
recognized as one of elements in the financial statements.
It is probable that any future economic benefit related to the item will flow to or
from the reporting entity
The cost or value of the element can be measured reliably.
Further the framework provide several bases where entities can use to measure
the elements of the financial statements as follows,
o Historical cost basis
o Present value
o Realizable value
o Current cost
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6. Disclosure and measurement of financial instruments
As per the pronouncements of IASB the applicable standard for the measurement of
financial instruments is IAS 39 financial instruments – recognition and measurement
and IFRS 7 deals with the disclosure requirements of financial instruments. Apart from
IAS 39 there are several financial reporting standards that deals with specific financial
instruments those are.
IAS 27 Consolidated and separate financial statements
IAS 28 Investments in Associates
IAS 31 Investments in Joint ventures
IAS 17 leases
IAS 19 Employee benefits
IFRS 4 insurance contracts
With regard to recognition and disclosure of financial instruments IAS 39 financial
instruments recognition and measurement provide overall guidance.
Measurement of financial instruments
As explained in IAS 32 financial instruments, financial instrument is a any kind of a
contract which gives a rise to a financial asset of a one company while financial liability
or a equity instrument of another entity.
Common examples for financial instruments can be outlined below,
Financial assets
o Cash
o Trade receivables and other receivables
o Debt and equity securities such as investments in equity shares,
preference shares and debentures.
o Commercial papers
S
Financial liabilities
o Trade payables
o Demand and time deposits in banks
o Debentures
Equity instruments
o Equity Share capital
o Reserves
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7. Further IAS 39 explains that derivative also considered as financial instruments.
Such derivatives may be
 Forward contracts
 Interest rate swaps
 Futures
 Options
 Caps and floors
Financial assets are classified in to four types and recognition and measurement of
those are different to each other. Those four types of financial assets are
Financial assets at fair value through profit or loss
These are financial assets which were designated to carry at fair value at the initial
recognition or financial assets which are held for trading by the organization. All
financial assets and derivatives acquired with the intention of sell in the short term are
classified as financial assets at fair value through profit and loss.
Available for sale financial assets
These are financial assets other than derivative and designated as available for sale
financial assets in the initial recognition and any other financial asset that has not been
classified as,
o Financial assets at fair value through profit and loss
o Loans and receivables
o Held for trading financial assets
Loans and receivables
These are non derivative financial assets with fixed or determinable payments and
which has not been quoted in an active market and other than held for trading or
classified as available for sale financial assets or financial assets at fair value through
profit or loss. Standard further states that any loans and receivable financial asset that
do not recover substantial amount of its initial capital other than due to a deterioration of
credit needs to be classified as available for sale financial asset.
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8. Held to maturity investments
These are non derivative financial assets with fixed or determinable payments and the
entity intends to and has the ability to hold the investment to maturity and do not meet
the definition of loans and receivable and are not classified as held for trading or
financial assets at fair value through profit or loss at initial recognition.
With regard to financial liabilities the standard identifies two types of financial liabilities.
Those are
Financial liabilities at fair value through profit or loss
These are financial liabilities either designated as fair value through profit or loss at the
point of initial recognition or financial liabilities classified as held for trading such as
those short term borrowings.
Other financial liabilities which are measured at amortized cost using effective
interest rate method.
IAS 39 financial instruments recognition and measurement states that companies
should recognize financial assets and financial liabilities in the financial statements
when and only when the company became a party to the contractual provisions of the
contract.
Initial recognition and subsequent measurement of these financial assets can be
described below,
Initial recognition
Standard requires initially all the financial assets to be recognized at fair value in the
financial statements of the company. When measuring fair value company needs to
take in to consideration the transaction cost involved in.
Subsequent measurement
Standard further guided to measure the financial assets subsequent to the initial
recognition at fair value. Further standard provide some exceptions in this regard.
Held to maturity investments, loans and receivables and non derivative financial
liabilities needs to be recognized at amortized cost computed using effective
interest rate method.
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9. Financial assets or liabilities designated as hedging instruments or hedge items
are subject to the measurement under the guide lines of hedge accounting
described in the standard.
Investments made in equity securities without reliable fair value measurement
information needs to be carried at cost in the financial statements after initial
recognition.
Impairment
A financial asset or group of financial assets is said to be impaired and impairment loss
is recognized only if there are objective evidence available as a result of one or more
event occurred as a result of a event that occurred after the initial recognition.
Accordingly at each balance sheet date company needs to evaluate whether there are
any objective evidence of impairment is exist and if such evidence is available as at the
balance sheet date entity needs to carry out a detailed impairment computation in order
to determine whether any impairment needs to be recognized in the income statements
of the company.
The impairment is measured as the difference between the carrying value of the asset
and present value of future cash flows generated through asset discounting at the
financial assets originally effective interest rate.
Disclosures of financial instruments
IASB has published IFRS 7 with regard to the disclosure requirements of financial
instruments.
IFRS 7 requires companies to disclose 2 main categories of disclosures. Those are,
Information relating to the significance of the financial instruments of the
company
Information in relation to the nature and extent of risk arising from financial
instruments of the company.
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10. Information relating to the significance of the financial instruments of the
company
1. Balance sheet
This requires the companies to disclose significant financial instruments in the
balance sheet for following categories.
Financial assets measured at fair value through profit or loss
Held to maturity investments
Loans and receivables
Available for sale financial assets
Financial liabilities measured at fair value through profit or loss
Financial liabilities that were measured at amortized cost
Further standard requires following disclosure also to be made
Reclassification of financial instruments
Information relation to the financial assets pledge as collateral
Information about compound financial instruments
2. Income statement and equity
The standard requires disclosing income, expenses, losses and gains
attributable to following categories,
Financial assets measured at fair value through profit or loss
Held to maturity investments
Loans and receivables
Available for sale financial assets
Financial liabilities measured at fair value through profit or loss
Financial liabilities that were measured at amortized cost
Further standard requires following disclosure also to be made
Interest income and expense for financial instruments that were not carried
at fair value through profit of loss.
Fee based income and related expenses
Amount of impairment of financial assets recognized for each class of
financial assets
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11. Interest income recognized to income statements from such impaired
financial assets.
3. Other disclosures
Accounting policies of the company adopted for financial instruments
Information about the hedge accounting applied by the company
Information relating to the fair value of financial asset and financial liabilities of
each class together with,
o Carrying amount
o Information as to how the fair value was measured
o Information relating to if fair value cannot be measured reliably.
Information in relation to the nature and extent of risk arising from financial
instruments of the company.
Under this there are two types of disclosures needs to be made
1. Qualitative disclosures
Exposure to risk for each class of financial instrument
Policies and processes of management in relation to the identified risks for
each class of financial instrument
Any changes taken place for qualitative disclosures from previous year.
2. Quantitative disclosures
The data relating to company’s exposure to risks as at the balance sheet
date
Disclosures with regard to market risk, credit risk and liquidity risk and the
ways in which such risks are managed by the company.
Concentration of risks
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12. Accounting for leases
The IASB has issued IAS 17 leases with regard to accounting for leases. Further IASB
subsequently issued following interpretations in relation to leases.
IFRIC 4 determining whether an arrangement contains a lease
SIC 27 Evaluating the substance of transaction in the legal form of a lease
SIC 15 operating leases
As per the standard there are two types of leases available in the market. Those are
1. Operating leases
2. Finance leases
Operating lease defined as a lease other than a finance lease. Accordingly
finance lease is defined as a lease arrangement whereby all the risks and
rewards relating to ownership are substantially transferred to the lessee.
That is instead of considering this legally the lessee bears all the risks and
rewards relating to the lease contract and therefore lease asset is recognized as
a asset in the books of lessee while lessor treated it as a disposal of assets.
It should be noted that the transaction was treated in this manner by considering
the substance of the transaction even though the legal ownership of the asset
remains with the lessor.
Following situations are considered when determining whether asset is classified
as a operating lease or finance lease.
At the end of the lease period the ownership of the asset is transferred to
the lessee
The lessee is having the option to purchase the leased asset at the end of
the lease period at a price less that the fair value of the leased asset as at
the balance sheet date.
The lease agreement covers the significant part of use full life of the
assets irrespective of the fact whether the ownership of the asset is
transferred to lessee.
The leased asset is a special in nature and therefore only lessor can use
the asset without major modifications.
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13. Operating leases
The accounting treatment for operating lease for both lessor and lessee is simple.
Accordingly the lessee should recognize the lease rental paid to lessor as an expense
in the year in which such rental was incurred. The lessor should recognize such rental
as rental income from operating leases while maintaining the in the year in which such
rental was incurred. The lessor should recognize such rental as rental income from
operating leases while maintaining the value of the assets in the financial statements.
Finance lease
Even though the legal ownership of the asset is not transferred to the lessee under a
finance lease considering the substance of the transaction the leased asset is
recognized in the books of lessee. Accordingly the lessee should recognize the asset in
the balance sheet by creating a lease rental payable to the balance sheet.
The double entries can be elaborated as follows,
1. Recognition of lease asset in the books of lessee
Property plant & Equipments Dr
Interest in suspense Dr
Lease creditor Cr
2. Repayment of lease installments
Lease creditor Dr
Cash Cr
3. Recognition of interest in suspense to income statements
Income statement Dr
Interest in suspense Cr
In the books of lessor the assets should be de recognized and the disposal profit needs
to be identified to the income statements. Further the different between the carrying
value of the asset and the purchase price needs to be recognized as a unearned
income and should transfer to income statement upon the receipt of lease rentals in the
future periods. Moreover if any gain or loss arising from the disposal such gain or loss
needs to be recognized to the income statement in the year which the disposal has
taken place.
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14. Reference
Alexander, D. & A. Britton, (2004) Financial Reporting, (7th ed.), Thomson
Atrill, P. & E. McLaney, (2002) Financial Accounting for Non-specialists,(3rd
ed.) Prentice Hall
Black G., (2003) Students’ Guide to Accounting and Financial Reporting
Standards, (9th ed.) Prentice Hall,
Lewis, R. & D. Pendrill, (2004) Advanced Financial Accounting, (7th ed.),
Prentice Hall,
IASB,2001, International accounting Standards 39 Financial instruments
recognition and measurement, IASCF
IASB,2001, International accounting Standards 32 Financial instruments
presentation, IASCF
IASB,2001, International financial Reporting standards 7 Financial instrument
disclosures, IASCF
Ernst & Young 2012, Ernst & Young LLP 2012, united kingdom, <
http://www.ey.com/> viewed on 6, April 2012.
Deloitte global services limited 2012, Deloitte global services limited, United Kingdom, <
http://www. iasplus, com/> viewed on 6, April 2012.
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