Requirements of IFRS
Encyclopedia
This article lists some of the important requirements of International Financial Reporting Standards
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References to IFRS standards are given in the standard convention, for example (IAS1.10) refers to paragraph 10 of IAS1, Presentation of Financial Statements..
An entity which has changed an accounting policy must also include a statement of financial position (balance sheet) for the beginning of the comparative period.
Comparative information is provided for the previous reporting period (IAS 1.38). 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).
) of a group must present consolidated financial statements including all of its subsidiaries (IAS27.9). A 'subsidiary' is an entity which is controlled by its parent; 'control' is the power to govern the financial and operating policies (IAS27.4). In preparing consolidated financial statements all balances, transactions, income and expenses with other group members are eliminated (IAS27.20).
are accounted for by applying the purchase method, requiring that one entity is identified as acquirer (IFRS3.6).
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 (IFRS3.10)
The difference between the price paid (consideration) for the business combination and the fair value of the assets and liabilities acquired represents goodwill
(IFRS3.41). Goodwill is not subject to amortization
, but is assessed for impairment
at least annually (IAS36.10). Impairment loss, if any, is charged to the income statement (IAS36.60). Such losses are not subsequently reversed (IAS36.124).
directly attributable to the acquisition, construction or production (IAS23.8).
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 down to the recoverable amount (IAS16.50). The cost of depreciation is recognised as an expense in the income statement
, unless it is included in the carrying amount of another asset (IAS16.48); for example depreciation of PPE used for development activities may be included in the cost of an intangible asset
(IAS16.49). 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 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 (IAS39.9 and 46) unless:
'Cost' comprises all costs of purchase, costs of conversion and other costs incurred in bringing items to their present location and condition (IAS2.10). Where individual items are not identifiable, the "first in first out" (FIFO)
or weighted average
cost formula is used. "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.
(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 to its recoverable amount, being 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).
of consideration received or receivable (IAS18.9).
Revenue for sale of goods cannot be recognised until the entity has transferred significant risks and rewards of ownership of goods to the buyer (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).
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 'capital allowances' have been claimed for capital items before the equivalent depreciation expense has been charged to the income statement) (IAS 12.15). 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) if it is probable that there will be future taxable profits against which they can be offset (IAS 12.24, IAS 12.34).
There are exceptions to the recognition of deferred taxes in relation to goodwill (for deferred tax liabilities), the initial recognition of assets and liabilities in some cases and in relation to investments and interests in subsidiaries, branches, jointly controlled entities and associates providing certain criteria are met (IAS 12.15, IAS 12.24, IAS 12.39, IAS 12.44).
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 (IAS7.10).
The IASB has issued an exposure draft of a new standard for leases in 2010. No longer would there be categories of 'finance' and 'operating' leases (IAS 17). All leases would be recorded on the balance sheet as an asset (the right to use the asset) and a liability (the obligation to pay). The new accounting standard would be finalized in 2011.
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).
on an asset or liability until maturity (IAS39.9).
International Financial Reporting Standards
International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....
.
References to IFRS standards are given in the standard convention, for example (IAS1.10) refers to paragraph 10 of IAS1, Presentation of Financial Statements..
Presentation of financial statements
A complete set of IFRS financial statements comprises (IAS1.10):- a statement of financial position (balance sheetBalance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
) as at the end of the period; - a statement of comprehensive income for the period. This may be presented as a single statement or in two components; an income statementIncome statementIncome statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
(profit and loss account) and a statement of other comprehensive income. The statement of other comprehensive income would include gains or losses on property, plant and equipment and gains or losses arising from the translation of financial statements of foreign operations; - a statement of changes in equityStatement of retained earningsThe Statement of Retained Earnings are basic financial statements.The statements explain the changes in a company's retained earnings over the reporting...
for the period; - a statement of cash flowsCash flow statementIn financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing...
for the period; - notesNotes to the Financial StatementsNotes to financial statements are additional notes and information added to the end of financial statements to supplement the reader with more information. Notes to financial statements help the computation of specific items in the financial statements as well as provide a more comprehensive...
including a summary of significant accounting policies.
An entity which has changed an accounting policy must also include a statement of financial position (balance sheet) for the beginning of the comparative period.
Comparative information is provided for the previous reporting period (IAS 1.38). 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).
Consolidated financial statements
The ultimate parent (holding companyHolding company
A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
) of a group must present consolidated financial statements including all of its subsidiaries (IAS27.9). A 'subsidiary' is an entity which is controlled by its parent; 'control' is the power to govern the financial and operating policies (IAS27.4). In preparing consolidated financial statements all balances, transactions, income and expenses with other group members are eliminated (IAS27.20).
Acquisition accounting and goodwill
All business combinationsConsolidation (business)
Consolidation or amalgamation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group...
are accounted for by applying the purchase method, requiring that one entity is identified as acquirer (IFRS3.6).
The acquiring entity assesses the fair value
Fair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
of the separate assets, liabilities and contingent liabilities
Contingent Liabilities
Contingent liabilities are liabilities that may or may not be incurred by an entity depending on the outcome of a future event such as a court case. These liabilities are recorded in a company's accounts and shown in the balance sheet when both probable and reasonably estimable. A footnote to the...
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 (IFRS3.10)
The difference between the price paid (consideration) for the business combination and the fair value of the assets and liabilities acquired represents goodwill
Goodwill (accounting)
Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps because the reputation the firm...
(IFRS3.41). Goodwill is not subject to amortization
Amortization
Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...
, but is assessed for impairment
Impairment
Impairment may refer to:* A medical condition that leads to disability* In accounting, a downward revaluation of fixed assets* In health, any loss or abnormality of physiological, psychological, or anatomical structure or function, whether permanent or temporary...
at least annually (IAS36.10). Impairment loss, if any, is charged to the income statement (IAS36.60). Such losses are not subsequently reversed (IAS36.124).
Property, plant and equipment
Property, plant and equipment (PPE) is measured initially at cost (IAS16.15). Costs include borrowing costsInterest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
directly attributable to the acquisition, construction or production (IAS23.8).
Property, plant and equipment may be revalued to fair value
Fair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
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
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
, not in the income statement; deficits on revaluation are recognised as expenses in the income statement (IAS16.39 and 40).
Depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
is charged to write off the cost or valuation of the asset over its estimated useful life down to the recoverable amount (IAS16.50). The cost of depreciation is recognised as an expense in the income statement
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
, unless it is included in the carrying amount of another asset (IAS16.48); for example depreciation of PPE used for development activities may be included in the cost of an intangible asset
Intangible asset
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset...
(IAS16.49). 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, associates and other investments
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 to joint control (IAS31.3).Joint ventures may be accounted for using either:
- proportionate consolidation, accounting for the investor's share of the assets, liabilities, income and expenses of the joint venture (IAS31.30).
- equity method. The investment is stated initially at cost and adjusted thereafter for the investor's share of post-acquisition changes in net assets. The income statement includes the investor's share of profit or loss of the investment (IAS31.38).
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 (IAS39.9 and 46) unless:
- they have fixed or determinable maturity periods and are expected to be held to maturity, in which case they are stated at amortised cost, providing a constant rate of return until maturity;
- there is no reliable market value, in which case they are measured at cost.
Inventory (stock)
Inventory is stated at the lower of cost and net realisable value (IAS2.9). This is similar in principle to lower of cost or market (LOCOM) in US GAAP.'Cost' comprises all costs of purchase, costs of conversion and other costs incurred in bringing items to their present location and condition (IAS2.10). Where individual items are not identifiable, the "first in first out" (FIFO)
FIFO and LIFO accounting
FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks....
or weighted average
Average cost
In economics, average cost or unit cost is equal to total cost divided by the number of goods produced . It is also equal to the sum of average variable costs plus average fixed costs...
cost formula is used. "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.
Receivables (debtors) and payables (creditors)
Receivables and payables are recorded initially at fair valueFair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
(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 to its recoverable amount, being the higher of value in use and its fair value
Fair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
(less costs to sell). 'Value in use' is the present value
Present value
Present value, also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk...
of cash flows expected to be derived from the receivable (IAS36.9 and 59).
Borrowing
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
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
Revenue is measured at fair valueFair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
of consideration received or receivable (IAS18.9).
Revenue for sale of goods cannot be recognised until the entity has transferred significant risks and rewards of ownership of goods to the buyer (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
Employee costs are recognised when an employee has rendered service during an accounting period (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).Share-based payment
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).Income taxes
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 (IAS 12.12).Deferred tax
Deferred tax
Deferred tax is an accounting concept , meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.- Temporary differences :Temporary differences are differences between...
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 'capital allowances' have been claimed for capital items before the equivalent depreciation expense has been charged to the income statement) (IAS 12.15). 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) if it is probable that there will be future taxable profits against which they can be offset (IAS 12.24, IAS 12.34).
There are exceptions to the recognition of deferred taxes in relation to goodwill (for deferred tax liabilities), the initial recognition of assets and liabilities in some cases and in relation to investments and interests in subsidiaries, branches, jointly controlled entities and associates providing certain criteria are met (IAS 12.15, IAS 12.24, IAS 12.39, IAS 12.44).
Cash flow statements
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 (IAS7.10).
Leasing (accounting by lessees)
Leases are classified in IFRS:- finance leaseFinance leaseA finance lease or capital lease is a type of lease. It is a commercial arrangement where:* the lessee will select an asset ;* the lessor will purchase that asset;...
, meaning a lease which transfers substantially all the risks and rewards incidental to ownerships to the lessee. Finance leases are recognized on the balance sheet as an asset (the asset being leased) and as a liability by the lessee and as a receivable by the lessor(IAS17.4, 20, 36). - operating lease, meaning a lease other than a finance lease. An expense is recognised in the income statement over the time period that the asset is used (IAS17.4 and 33).
The IASB has issued an exposure draft of a new standard for leases in 2010. No longer would there be categories of 'finance' and 'operating' leases (IAS 17). All leases would be recorded on the balance sheet as an asset (the right to use the asset) and a liability (the obligation to pay). The new accounting standard would be finalized in 2011.
Fair value
Fair valueFair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
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
Measurement at amortised cost uses the effective interest method to provide a constant rate of returnRate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
on an asset or liability until maturity (IAS39.9).