International Financial Reporting Standards

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.

Structure of IFRS

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:

 International Financial Reporting Standards (IFRS) - standards issued after 2001

 International Accounting Standards (IAS) - standards issued before 2001
 Interpretations originated from the International Financial Reporting Interpretations Committee
(IFRIC)-
(IFRIC)- issued after 2001
 Standing Interpretations Committee (SIC) - issued before 2001

There is also a Framework for the Preparation and Presentation of Financial Statements which
describes some of the principles underlying IFRS.

Framework

The Framework for the Preparation and Presentation of Financial Statements states basic principles for
IFRS.

Objective of financial statements

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,and to provide the current financial status of the entity to its
shareholders and public in general.

Underlying assumptions

The underlying assumptions used in IFRS are:

 Accrual basis - the effect of transactions and other events are recognised when they occur, not as
cash is received or paid
 Going concern - the financial statements are prepared on the basis that an entity will continue in
operation for the foreseeable future

Qualitative characteristics of financial statements

The Framework describes the qualitative characteristics of financial statements as being

  Understandability
 Relevance
 Reliability and
 Comparability.

Elements of financial statements

The Framework sets out the statement of financial position (balance sheet) as comprising:-

 Assets - resources controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity
 Liabilities - a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits
 Equity - the residual interest in the assets of the entity after deducting all its liabilities

and the statement of comprehensive income (income statement) as comprising:

 Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or reductions in liabilities.
 Expenses are decreases in such economic benefits.

Recognition of elements of financial statements

An item is recognised in the financial statements when:

 it is probable that a future economic benefit will flow to or from an entity and
 when the item has a cost or value that can be measured with reliability.

Measurement of the Elements of Financial Statements

Measurement is how the responsible accountant determines the monetary values at which items are to be
valued in the income statement and balance sheet. The basis of measurement has to be selected by the
responsible accountant.

Accountants employ different measurement bases to different degrees and in varying combinations. They
include, but are not limited to:

 Historical cost

 Current cost

 Realisable (settlement) value

 Present value

Historical cost is the measurement basis chosen by most accountants.[1]

 Concepts of Capital and Capital Maintenance[2]

Concepts of Capital

A financial concept of capital, e.g. invested money or invested purchasing power, means capital is the net
assets or equity of the entity.

A physical concept of capital means capital is the productive capacity of the entity.

Concepts of Capital Maintenance and the Determination of Profit

Financial capital maintenance could be measured in either nominal monetary units or constant purchasing
power units.

Physical capital is maintained when productive capacity at the end is greater than at the start of the
period.

The main difference between the two concepts is the way asset and liability price change effects are
treated.

Profit is the excess after the capital at the start of the period has been maintained.

With nominal monetary units, the profit would be the increase in nominal capital.

With units of constant purchasing power, the profit for the period would be the increase in invested
purchasing power. Only increases greater than the inflation rate would be taken as profit. Increases up to
the level of inflation maintain capital and would be taken to equity. [3]

Features of IFRS

References

References to IFRS standards are given in the standard convention, for example (IAS1.14) refers to
paragraph 14 of IAS1, Presentation of Financial Statements.

Content of financial statements

IFRS financial statements consist of (IAS1.8)

 a balance sheet
 income statement
 either a statement of changes in equity(SOCE) or a statement of recognised income or expense
("SORIE")
 a cash flow statement
 notes, including a summary of the significant accounting policies
 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).

On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements. The main
changes from the previous version are to require that an entity must:

 present all non-owner changes in equity (that is, 'comprehensive income' ) either in one statement
of comprehensive income or in two statements (a separate income statement and a statement of
comprehensive income). Components of comprehensive income may not be presented in the
statement of changes in equity.
 present a statement of financial position (balance sheet) as at the beginning of the earliest
comparative period in a complete set of financial statements when the entity applies an accounting
policy retrospectively or makes a retrospective restatement.
 disclose income tax relating to each component of other comprehensive income.
 disclose reclassification adjustments relating to components of other comprehensive income.

IAS 1 changes the titles of financial statements as they will be used in IFRSs:

 'balance sheet' will become 'statement of financial position'

 'income statement' will become 'statement of comprehensive income'
 'cash flow statement' will become 'statement of cash flows'.

The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is
permitted.

Consolidated financial statements

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 all
balances, transactions, income and expenses with other group members are eliminated.

Acquisition accounting and goodwill

All business combinations are accounted for by applying the purchase method, requiring that one entity is
identified as acquirer (IFRS3.17).
(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

Property, plant and equipment (PPE) 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 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). Depreciation of PPE
used for development activities may be included in the cost of an intangible asset recognised in
accordance with IAS38 Intangible Assets (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 such as "reducing balance"
are used if assets are used proportionately more in some periods than others (IAS16.56).
(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
unless (IAS39.9 and 46):

 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), which is similar in principal to
lower of cost or market (LOCOM) in US GAAP.
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) 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 (debtors) and payables (creditors)

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 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).
59).
Borrowing

Borrowing is stated at amortised cost using the effective interest rate 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).
(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).
(IAS37.72).
Revenue

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

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 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:-

 finance leases, being a lease which transfers substantially all the risks and rewards incidental to
ownerships to the lessee. Finance leases are recognised on the balance sheet as an asset (the asset
being leased) and as a liability (liability to the lessor) (IAS17.4, 20 and 25)
 operating leases, being 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).
 IASB is developing a discussion paper for November 2008 regarding convergence of the accounting
standards for lessees. No longer would there be categories of 'finance' and 'operating' leases (IAS 17),
instead the current finance lease model would be applied to all leases. The new accounting standard
would be finalized in 2011.

Fair value

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

Amortised cost uses the effective interest method to provide a constant rate of return on an asset or
liability until maturity (IAS39.9).
IASB current projects

The IASB publishes a work plan setting out projects in progress[4]. Much of its work is directed at
convergence with US GAAP.
GAAP.

Adoption of IFRS

IFRS are used in many parts of the world, including the European Union,
Union, Hong
Kong,
Kong, Australia,
Australia,Malaysia,
Malaysia, Pakistan,
Pakistan, India,
India, GCC countries,
countries, Russia,
Russia, South Africa,
Africa, Singapore and Turkey.
Turkey. As of
August 27, 2008, more than 100 countries around the world, including all of Europe, currently require or
permit IFRS reporting. Approximately 85 of those countries require IFRS reporting for all domestic, listed
companies.[5]

For a current overview see IAS PLUS's list of all countries that have adopted IFRS.

Australia

The Australian Accounting Standards Board (AASB) has issued 'Australian equivalents to IFRS' (A-IFRS),
numbering IFRS standards as AASB 1-8 and IAS standards as AASB 101 - 141. Australian equivalents to SIC
and IFRIC Interpretations have also been issued, along with a number of 'domestic' standards and
interpretations. These pronouncements replaced previous Australian generally accepted accounting
principles with effect from annual reporting periods beginning on or after 1 January 2005 (i.e. 30 June 2006
was the first report prepared under IFRS-equivalent standards for June year ends). To this end, Australia,
along with Europe and a few other countries, was one of the initial adopters of IFRS for domestic purposes.

The AASB has made certain amendments to the IASB pronouncements in making A-IFRS, however these
generally have the effect of eliminating an option under IFRS, introducing additional disclosures or
implementing requirements for not-for-profit entities, rather than departing from IFRS for Australian
entities. Accordingly, for-profit entities that prepare financial statements in accordance with A-IFRS are
able to make an unreserved statement of compliance with IFRS.

The AASB continues to mirror changes made by the IASB as local pronouncements. In addition, over recent
years, the AASB has issued so-called 'Amending Standards' to reverse some of the initial changes made to
the IFRS text for local terminology differences, to reinstate options and eliminate some Australian-specific
disclosure. There are some calls for Australia to simply adopt IFRS without 'Australianising' them and this
has resulted in the AASB itself looking at alternative ways of adopting IFRS in Australia.

Canada

The use of IFRS will be required in 2011 for Canadian publicly accountable profit-oriented enterprises. This
includes public companies and other “profit-orientated enterprises that are responsible to large or diverse
groups of shareholders.”

European Union

All listed EU companies have been required to use IFRS since 2005.

In order to be approved for use in the EU, standards must be endorsed by the Accounting Regulatory
Committee (ARC), which includes representatives of member state governments and is advised by a group
of accounting experts known as the European Financial Reporting Advisory Group. As a result IFRS as
applied in the EU may differ from that used elsewhere.
 Parts of the standard IAS 39: Financial Instruments: Recognition and Measurement were not originally
approved by the ARC. IAS 39 was subsequently amended, removing the option to record financial liabilities
at fair value, and the ARC approved the amended version. The IASB is working with the EU to find an
acceptable way to remove a remaining anomaly in respect of hedge accounting.
accounting.
Russia

The government of Russia has been implementing a program to harmonize its national accounting
standards with IFRS since 1998. Since then twenty new accounting standards were issued by the Ministry
of Finance of the Russian Federation aiming to align accounting practices with IFRS. Despite these efforts
essential differences between national accounting standards and IFRS remain. Since 2004 all commercial
banks have been 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 2011.

Turkey

Turkish Accounting Standards Board translated IFRS into Turkish in 2006. Since 2006 Turkish companies
listed in Istanbul Stock Exchange are required to prepare IFRS reports.

Singapore

In Singapore the Accounting Standards Committee (ASC) is in charge of standard setting. Singapore
closely models its Financial Reporting Standards (FRS) according to the IFRS, with appropriate changes
made to suit the Singapore context. Before a standard is enacted, consultations with the IASB are made to
ensure consistency of core principles [6].

United States and convergence with US GAAP

In 2002 at a meeting in Norwalk, Connecticut,

Connecticut, the IASB and the US Financial Accounting Standards
Board agreed to harmonize 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 program of topics on which the two bodies will seek to achieve convergence by
2008.

US companies registered with the United States Securities and Exchange Commission must file financial
statements prepared in accordance with US GAAP. Until 2007, foreign private issuers were required to file
financial statements prepared either (a) under US GAAP or (b) in accordance with local accounting
principles or IFRS with a footnote reconciling from local principles or IFRS to US GAAP. This reconciliation
imposed extra expense on companies which are listed on exchanges both in the US and another country.
From 2008, foreign private issuers are additionally permitted to file financial statements in accordance
with IFRS as issued by the IASB without reconciliation to US GAAP.[7] There is broad expectation among U.S.
companies that the SEC will move to allow or require them to use IFRS in the near future and a growing
acceptance of that scenario, according to Controllers' Leadership Roundtable survey data.[8]

In August 2008, the SEC announced a timetable that would allow some companies to report under IFRS as
soon as 2010 and require it of all companies by 2014.[9]

List of IFRS statements

The following IFRS statements are currently issued:

 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
 IFRS 7 Financial Instruments: Disclosures
 IFRS 8 Operating Segments
 IAS 1:
1: Presentation of Financial Statements.
 IAS 2:
2: Inventories
 IAS 7:
7: Cash Flow Statements
 IAS 8:
8: Accounting Policies, Changes in Accounting Estimates and Errors
 IAS 10:
10: Events After the Balance Sheet Date
 IAS 11:
11: Construction Contracts
 IAS 12:
12: Income Taxes
 IAS 14:
14: Segment Reporting (superseded by IFRS 8 on January 1, 2008)
 IAS 16:
16: Property, Plant and Equipment
 IAS 17:
17: Leases
 IAS 18:
18: Revenue
 IAS 19:
19: Employee Benefits
 IAS 20:
20: Accounting for Government Grants and Disclosure of Government Assistance
 IAS 21:
21: The Effects of Changes in Foreign Exchange Rates
 IAS 23:
23: Borrowing Costs
 IAS 24:
24: Related Party Disclosures
 IAS 26:
26: Accounting and Reporting by Retirement Benefit Plans
 IAS 27:
27: Consolidated Financial Statements
 IAS 28:
28: Investments in Associates
 IAS 29:
29: Financial Reporting in Hyperinflationary Economies
 IAS 31:
31: Interests in Joint Ventures
 IAS 32:
32: Financial Instruments: Presentation (Financial instruments disclosures are in IFRS 7
Financial Instruments: Disclosures, and no longer in IAS 32)
 IAS 33:
33: Earnings Per Share
 IAS 34:
34: Interim Financial Reporting
 IAS 36:
36: Impairment of Assets
 IAS 37:
37: Provisions,
Provisions, Contingent Liabilities and Contingent Assets
 IAS 38:
38: Intangible Assets
 IAS 39:
39: Financial Instruments: Recognition and Measurement
 IAS 40:
40: Investment Property
 IAS 41:
41: Agriculture

List of Interpretations

 Preface to International Financial Reporting Interpretations (Updated to January 2006)

 IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities (Updated to
January 2006)
 IFRIC 7 Approach under IAS 29 Financial Reporting in Hyperinflationary Economies (Issued February
2006)
 IFRIC 8 Scope of IFRS 2 (Issued February 2006)
 IFRIC 9 Reassessment of Embedded Derivatives (Issued April 2006)
 IFRIC 10 Interim Financial Reporting and Impairment (Issued November 2006)
 IFRIC 11 IFRS 2-Group and Treasury Share Transactions (Issued November 2006)
 IFRIC 12 Service Concession Arrangements (Issued November 2006)

 SIC 7 Introduction of the Euro (Updated to January 2006)

 SIC 10 Government Assistance-No Specific Relation to Operating Activities (Updated to January
2006)
 SIC 12 Consolidation-Special Purpose Entities (Updated to January 2006)
 SIC 13 Jointly Controlled Entities-Non-Monetary Contributions by Venturers (Updated to January
2006)
 SIC 15 Operating Leases-Incentives (Updated to January 2006)
 SIC 21 Income Taxes-Recovery of Revalued Non-Depreciable Assets (Updated to January 2006)
 SIC 25 Income Taxes-Changes in the Tax Status of an Entity or its Shareholders (Updated to January
2006)
 SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease (Updated to
January 2006)
 SIC 29 Disclosure-Service Concession Arrangements (Updated to January 2006)
 SIC 31 Revenue-Barter Transactions Involving Advertising Services (Updated to January 2006)
 SIC 32 Intangible Assets-Web Site Costs (Updated to January 2006)