Accounting principles and applicability of IFRS
Course Schedule
Accounting principles and applicability of IFRS
This topic summary deals with accounting principles and applicability of IFRS. View a brief Overview of this topic or a more detailed Summary of the key accounting requirements and business implications of this topic.
- Standards and interpretations
- Exposure drafts and discussion papers
- PwC views
- PwC comment letter on Conceptual framework exposure draft
- External guidance
- EFRAG and other national standard setters issue bulletins regarding the IFRS conceptual framework:
- The role of the business model in financial reporting
- The role of a conceptual framework.
- PwC views
- PwC comment letter on the discussion paper: A review of the conceptual framework for financial reporting
- PwC guidance
- International Manual of Accounting chapter 1, Accounting principles and applicability of IFRS
- Tools practice aids and publications
- IASB press release and snapshot on exposure draft of Conceptual framework (May 2015)
- Steve Cooper (IASB) article on prudence (June 2015)
- IFRS classroom training on IASB framework, principles and policies
- IFRS classroom training on overview of IASB and IFRSs
- IASB updates' by topic on Conceptual framework
The concepts underlying accounting practices under IFRS are set out in the IASB's 'Conceptual Framework for Financial Reporting’ issued in September 2010 (the Framework). It supersedes the ‘Framework for the preparation and presentation of financial statements’ (the Framework (1989)). The Conceptual Framework covers:
- Objectives of general purpose financial reporting, including information about a reporting entity’s economic resources and claims.
- The reporting entity (in the process of being updated).
- Qualitative characteristics of useful financial information of relevance and faithful representation and the enhancing qualitative characteristics of comparability, verifiability, timeliness and understandability.
- The remaining text of the 1989 Framework (in the process of being updated), which includes:
- Underlying assumption, the going concern convention.
- Elements of financial statements, including financial position (assets, liabilities and equity) and performance (income and expenses).
- Recognition of elements, including probability of future benefit, reliability of measurement and recognition of assets, liabilities, income and expenses.
- Measurement of elements, including a discussion on historical cost and its alternatives.
- Concepts of capital and its maintenance.
The IASB has issued an exposure draft on the areas of the Conceptual Framework that are being updated, including: elements of financial statements, recognition and derecognition, the distinction between equity and liabilities, measurement, presentation and disclosure, and fundamental concepts (including prudence, business model, unit of account, going concern and capital maintenance).
Summary of key requirements
2.1 The IFRS Foundation (which is an independent, not–for–profit private sector organisation) oversees the International Accounting Standards Board (IASB). The governance and oversight of the activities undertaken by the IFRS Foundation and its standard-setting body rests with its Trustees, who are also responsible for safeguarding the independence of the IASB and ensuring the financing of the organisation. The Trustees are publicly accountable to a Monitoring Board of public authorities.
2.1.1 The Accounting Standards Advisory Forum (ASAF) was set up in 2013 as a result of a comprehensive review of the organisation’s strategy. The ASAF formalises and streamlines the relationship between the IFRS foundation and the IASB with representatives from across the global standard-setting community. The ASAF serve as a technical advisory body, brining regional perspectives to the IASB’s technical work and offer feedback on the most important issues of the day. The Trustees will review the ASAF and its membership after two years.
IASB
2.2 The IASB has authority to set IFRS and to approve Interpretations. [Constitution para 32]. It is also responsible for ensuring that due process is in place for international accounting standard-setting. The due process is set out in brief in the Constitution and is expressed more fully in the IASB’s ‘Preface to International Financial Reporting Standards’ (the Preface). The process for setting an international standard is as follows:
- Identifying and reviewing the issues related to the topic and considering the application of the Framework.
- Studying national accounting requirements and practice and exchanging views with national standard-setters.
- Consulting the the IFRS Advisory Council (see below) about the advisability of adding the topic to the IASB’s agenda.*
- Forming an advisory group to give advice to the IASB on the project.
- Publishing for public comment a discussion document.
- Publishing for public comment an exposure draft approved by at least nine votes of the IASB, including any dissenting opinions held by IASB members (*) and a basis for conclusions.
- Publishing within an exposure draft a basis for conclusions.
- Considering all comments received within the comment period on discussion documents and exposure drafts.*
- Considering the desirability of holding a public hearing or conducting field tests.
- Approving a standard by at least nine votes of the IASB and including in the published standard any dissenting opinions (*) and a basis for conclusions explaining the steps in the IASB’s due process and how the IASB dealt with public comments on the exposure draft.
- Publishing within a standard a basis for conclusions explaining, among other things, the steps in the IASB’s due process and how the IASB dealt with public comments on the exposure draft and the dissenting view of any IASB member.
* Mandated by the Constitution.
The IFRS Interpretations Committee
2.3 The IFRS Interpretations Committee (formerly the International Financial Reporting Issues Committee (IFRIC)) works on emerging issues that require attention before an international standard can be amended or issued.
It is a committee of the IASB, whose duties include the interpretation of international accounting standards where conflicting or unsatisfactory interpretations have emerged and to give timely guidance on issues that have not yet been addressed by international standards. It does not issue standalone accounting standards. Interpretations are, however, authoritative.
The IFRS Advisory Council
2.4 The IFRS Advisory Council (formerly the Standards Advisory Council or ‘SAC’) was set up to provide a formal forum for participation by those with wider accountancy interests that may not be represented on the Board. The IFRS Advisory Council’s role is to provide broad strategic advice on the IASB's agenda priorities and insight into the possible benefits and costs of particular projects. The IFRS Advisory Council must be consulted on any major projects that the IASB undertakes and on any changes to the Constitution.
Objectives
2.5 The IASB’s objectives are fourfold:
- To develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the various capital markets of the world and other users of the information to make economic decisions.
- To promote the use and rigorous application of those standards.
- In fulfilling the objectives above, to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies.
- To work actively with national standard-setters to bring about convergence of national accounting standards and IFRSs to high quality solutions.
Purpose of IFRS
2.6 IFRSs are designed with the general purpose financial statements of profit-orientated entities in mind. IFRSs may, however, also be useful for non-profit orientated entities. General purpose financial statements give information about financial performance, position and cash flow that is useful for making economic decisions by a range of users, including shareholders, creditors, employees and the general public.
2.7 A complete set of financial statements includes a balance sheet, a statement of comprehensive income, a statement of changes in equity, a cash flow statement, a list of accounting policies and notes to the financial statements. The scope of individual IFRSs is set out in the particular standards.
Framework
2.8 IFRS operates under the IASB's Conceptual Framework for Financial Reporting. The main headings of the IASB’s Framework are:
- Foreword, including the status of the conceptual framework project.
- Introduction, including comments on the purpose and scope of the Framework. .
- Objectives, usefulness and limitations of general purpose financial reporting, including information about a reporting entity’s economic resources, claims and changes in resources and claims.
- The reporting entity, which is still to be added.
- Qualitative characteristics of useful financial information of relevance and faithful representation and the enhancing qualitative characteristics of comparability, verifiability, timeliness and understandability.
- The remaining text of the Framework (1989), not yet updated, including:
- Underlying assumption, the going concern convention.
- Elements of financial statements, including financial position (assets, liabilities and equity) and performance (income and expenses).
- Recognition of elements, including probability of future benefit, reliability of measurement and recognition of assets, liabilities, income and expenses.
- Measurement of elements, including an inconclusive discussion on historical cost and its alternatives.
- Concepts of capital and its maintenance, including a further inconclusive discussion on financial as opposed to physical capital maintenance.
- Basis for conclusions
- Table of concordance, reflecting how the contents of the Framework (1989) and the Framework correspond.
Objectives of financial statements
2.9 The IASB identifies the objective of general purpose financial reporting as being the provision of “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. Those decisions involve buying, selling or holding equity and debt financial instruments, and providing or settling loans and other forms of credit”.
Underlying assumption
2.10 There is a single assumption underlying financial statements, going concern.
Qualitative characteristics of useful financial information
2.11 In order for financial information to be useful, it must be relevant and faithfully represent what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. Relevance and faithful representation are considered to be the fundamental qualitative characteristics of financial information. Neither a faithful representation of an irrelevant phenomenon nor an unfaithful representation of a relevant phenomenon helps users make good decisions.
2.12 Relevance suggests the ability to influence users' economic decisions by helping or confirming the evaluation of events of the past, present or future. Materiality is a subsidiary concept of relevance.
2.13 To be useful, information must not only present relevant effects of transactions and other events and conditions, but it must also faithfully represent the effects of transactions and other events and conditions that it purports to represent. To be a perfectly faithful representation three characteristics would need to be present, namely, completeness, neutrality, and freedom from error. The IASB’s objective is to maximise those qualities to the extent possible.
2.14.1 Completeness refers to the inclusion of all information necessary for a user to understand the transactions and other events and conditions being depicted, including all necessary descriptions and explanations. In some instances completeness “may also entail explanations of significant facts about the quality and nature of the items, factors and circumstances that might affect their quality and nature, and the process used to determine the numerical depiction”.
2.14.2 Neutrality refers to a lack of bias in the selection or presentation of financial information. It is not slanted, weighted, emphasised, de-emphasised or otherwise manipulated to increase the probability that financial information will be received favourably or unfavourably by users. Neutrality does not mean information with no purpose or no influence on behaviour. [Framework para QC 14]. The characteristics of prudence and conservatism are excluded from faithful representation because both are inconsistent with the concept of neutrality.
2.14.3 Faithful representation does not mean that the information is accurate in all respects. Free from error means there are no errors or omissions in the description of the effects of transactions and other events and conditions, and the process used to produce the reported information has been selected and applied with no errors in the process. “In this context, free from error does not mean perfectly accurate in all respects. For example, an estimate of an unobservable price or value cannot be determined to be accurate or inaccurate. However, a representation of that estimate can be faithful if the amount is described clearly and accurately as being an estimate, the nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an appropriate process for developing the estimate”.
Enhancing qualitative characteristics
2.15 The Framework considers the qualitative characteristics of comparability, verifiability, timeliness and understandability enhance the usefulness of information that is relevant and faithfully represented. These characteristics may also help determine which of two ways should be used to depict a transaction or other event or condition if both are considered equally relevant and faithfully represented.
Elements of financial statements
2.16 There are two main groups of elements of financial statements. The first is associated with measuring an entity’s financial position: assets, liabilities and equity. The second is those elements that relate to measuring an entity’s performance: income and expenses. Within these main categories there are sub-classifications, for example, expenses by function or nature, assets and liabilities by degree of liquidity.
Recognition
2.17 The IASB's Framework calls for recognition of elements when:
- it is probable that any future economic benefit associated with the item will flow to or from the entity; and
- the item has a cost or value that can be measured with reliability.
2.18 The Framework takes an asset and liability approach rather than focusing on matching of income and expenses. This is borne out by the recognition criterion for income and expenses: “Income is recognised in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means, in effect, that recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities…”.
Measurement
2.19 The Framework is entirely non-prescriptive when it comes to measurement. It notes that a number of different measurement bases are used in practice, including historical cost, current cost, realisable value and present value.
2.20 The Framework notes that it is a financial concept of capital maintenance (see below) that is adopted by most entities
Accounting conventions
2.21 All accounting systems depend on the capital maintenance concept adopted, the basis used to value assets and the unit of measurement used. Capital maintenance concepts, asset valuation bases and the units of measurement used can be combined in different ways to create different accounting conventions. The more common conventions are historical cost, modified historical cost, fair value convention, current purchasing power and current cost.
Capital maintenance
2.22 There are at least two different concepts of capital maintenance: operating capital maintenance and financial capital maintenance. Operating capital maintenance, although it can be measured in a variety of different ways, generally seeks to ensure that the business' physical operating capacity is preserved. Financial capital maintenance attempts to conserve the value of the funds that shareholders have invested in the business. Financial capital maintained can either be the monetary value of capital attributable to shareholders or a value adjusted by a general purchasing power index to maintain capital as a fund of real purchasing power.
Valuation basis
2.23 The measurement of profit is also affected by the valuation basis chosen. There are a variety of valuation bases, including historical cost, current cost and market value or fair value.
Unit of measurement
2.24 The unit of measurement chosen affects how profit is determined. Reporting can be in nominal currency or in units of constant purchasing power.
Updating the Framework
2.25 For the areas of the Conceptual Framework that are being updated, the IASB has published an exposure draft in May 2015. The IASB focused on those areas that have caused it problems in practice or that needed updating to reflect concepts developed by the IASB in other projects.
These include:
- definitions of assets, liabilities, income and expenses;
- recognition and derecognition;
- measurement;
- the distinction between equity and liabilities;
- profit or loss and other comprehensive income (OCI);
- providing information regarding management’s stewardship and re-introducing the concept of prudence;
- presentation and disclosure; and
- fundamental concepts (including business model, unit of account, going concern and capital maintenance).
The IASB has the authority to set IFRS and to approve interpretations of those standards.
IFRSs are intended to be applied by profit-orientated entities. These entities' financial statements give information about performance, position and cash flow that is useful to a range of users in making financial decisions. These users include shareholders, creditors, employees and the general public.
A complete set of financial statements includes a:
- Balance sheet.
- Statement of comprehensive income.
- Cash flow statement.
- Statement of changes in equity.
- Description of accounting policies.
- Notes to the financial statements.
Sub Code | FA004 |
Start Date | Sun,Mar,6,2022 |
End Date | Thu,Mar,10,2022 |
Duration | 5 Days |
Fee(US$) | 3250 |
Location | Al-Khobar, KSA |
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