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International Financial Reporting Standards
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB).[1] They constitute a standardised way of describing the company’s financial performance and position so that company financial statements are understandable and comparable across international boundaries.[2] They are particularly relevant for companies with shares or securities listed on a public stock exchange.
IFRS have replaced many different national accounting standards around the world but have not replaced the separate accounting standards in the United States where US GAAP is applied.
History
The International Accounting Standards Committee (IASC) was established in June 1973 by accountancy bodies representing ten countries. It devised and published International Accounting Standards (IAS), interpretations and a conceptual framework. These were looked to by many national accounting standard-setters in developing national standards.[3]
In 2001 the International Accounting Standards Board (IASB) replaced the IASC with a remit to bring about convergence between national accounting standards through the development of global accounting standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards "International Financial Reporting Standards" (IFRS).[4]
In 2002 the European Union (EU) agreed that, from 1 January 2005, International Financial Reporting Standards would apply for the consolidated accounts of the EU listed companies, bringing about the introduction of IFRS to many large entities. Other countries have since followed the lead of the EU.
Adoption
IFRS Standards are required in more than 140 jurisdictions and permitted in many parts of the world, including South Korea, Brazil, the European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, Chile, Philippines, Kenya, South Africa, Singapore and Turkey.
To assess progress towards the goal of a single set global accounting standards, the IFRS Foundation has developed and posted profiles about the use of IFRS Standards in individual jurisdictions. These are based on information from various sources. The starting point was the responses provided by standard-setting and other relevant bodies to a survey that the IFRS Foundation conducted. As of August 2019, profiles are completed for 166 jurisdictions, with 166 jurisdictions requiring the use of IFRS Standards.[5]
Due to the difficulty of maintaining up-to-date information in individual jurisdictions, three sources of information on current worldwide IFRS adoption are recommended:
Ray J. Ball described the expectation by the European Union and others that IFRS adoption worldwide would be beneficial to investors and other users of financial statements, by reducing the costs of comparing investment opportunities and increasing the quality of information.[8] Companies are also expected to benefit, as investors will be more willing to provide financing. Companies that have high levels of international activities are among the group that would benefit from a switch to IFRS Standards. Companies that are involved in foreign activities and investing benefit from the switch due to the increased comparability of a set accounting standard.[9] However, Ray J. Ball has expressed some scepticism of the overall cost of the international standard; he argues that the enforcement of the standards could be lax, and the regional differences in accounting could become obscured behind a label. He also expressed concerns about the fair value emphasis of IFRS and the influence of accountants from non-common-law regions, where losses have been recognised in a less timely manner.[8]
US Generally Accepted Accounting Principles
US Generally Accepted Accounting Principles remains separate from IFRS. The Securities Exchange Committee (SEC) requires the use of US GAAP by domestic companies with listed securities and does not permit them to use IFRS; US GAAP is also used by some companies in Japan and the rest of the world.
In 2002 IASB and the Financial Accounting Standards Board (FASB), the body supporting US GAAP, announced a programme known as the Norwalk Agreement that aimed at eliminating differences between IFRS and US GAAP.[10] In 2012 the SEC announced that it expected separate US GAAP to continue for the foreseeable future but sought to encourage further work to align the two standards.[11][12]
IFRS is sometimes described as principles-based, as opposed to a rules-based approach in US GAAP; so in US GAAP there is more instruction in the application of standards to specific examples and industries.[13]
Conceptual Framework for Financial Reporting
The Conceptual Framework serves as a tool for the IASB to develop standards. It does not override the requirements of individual IFRSs. Some companies may use the Framework as a reference for selecting their accounting policies in the absence of specific IFRS requirements.[14]
Objective of financial statements
The Conceptual Framework states that the primary purpose of financial information is to be useful to existing and potential investors, lenders and other creditors when making decisions about the financing of the entity and exercising rights to vote on, or otherwise influence, management's actions that affect the use of the entity's economic resources.[15]
Users base their expectations of returns on their assessment of:
Qualitative characteristics of financial information
The Conceptual Framework for Financial Reporting defines the fundamental qualitative characteristics of financial information to be:[16]
The Framework also describes and qualitative characteristics:
Elements of financial statements
The Conceptual Framework defines the elements of financial statements to be:- [17]
Recognition of elements of financial statements
An item is recognized in the financial statements when:[18]
In some cases specific standards add additional conditions before recognition is possible or prohibit recognition altogether.
An example is the recognition of internally generated brands, mastheads, publishing titles, customer lists and items similar in substance, for which recognition is prohibited by IAS 38.[19] In addition research and development expenses can only be recognised as an intangible asset if they cross the threshold of being classified as 'development cost'.[20]
Whilst the standard on provisions, IAS 37, prohibits the recognition of a provision for contingent liabilities,[21] this prohibition is not applicable to the accounting for contingent liabilities in a business combination. In that case the acquirer shall recognise a contingent liability even if it is not probable that an outflow of resources embodying economic benefits will be required.[22]
Concepts of capital and capital maintenance
Concepts of capital maintenance are important as only income earned in excess of amounts needed to maintain capital may be regarded as profit. The Conceptual Framework describes the following concepts of capital maintenance:[23]
Most entities adopt a financial concept of capital maintenance. However, the Conceptual Framework does not prescribe any model of capital maintenance.
Requirements
Main article: Requirements of IFRS
Presentation of financial statements
IFRS financial statements consist of:[24]
Comparative information is required for the prior reporting period.
General features
The following are the general features in IFRS:
Cash flow statements
Cash flow statements in IFRS are presented as follows:[35][36]
Criticisms
In 2012, staff of the Securities and Exchange Commission (SEC) issued a report setting out observations on a potential adoption of IFRS in the United States. This included the following criticisms:-[37][38]
IASB staff have responded to these observations and concluded that there were no insurmountable obstacles for the adoption of IFRS by the United States.[39]
In 2013 IASB member Philippe Danjou listed ten common criticisms of IFRS. He sought to counter these, describing them as misconceptions[40]
Charles Lee, professor of accounting at Stanford Graduate School of Business, has also criticised the use of fair values in financial reporting.[41]
In 2019, H David Sherman and S David Young criticised the current state of financial reporting under IFRS and US GAAP:-[42]
Economic effects
Many researchers have studied the effects of IFRS adoption but results are unclear. For example, one study[43] uses data from 26 countries to study the economic consequences of mandatory IFRS adoption. It shows that, on average, even though market liquidity increases around the time of the introduction of IFRS, it is unclear whether IFRS mandate adoption is the sole reason of observed market effects. Firms’ reporting incentives, law enforcement, and increased comparability of financial reports can also explain the effects. The adoption of IFRS in the European Union is a special case because it is an element of wider reforms aiming to consolidate the economies of member countries. One study reports positive market effects for companies adopting IFRS but these positive effects occurred even before the transition took place.[44] Another study looked at the development of the stock market in Poland; it found positive effects associated with Poland joining the EU but no specific effect attributable to the IFRS.[45] Interestingly, member states maintain a large degree of independence in setting national accounting standards for companies that prefer to stay local.[46]
See also
References
  1. ^ Posner, Elliot (1 October 2010). "Sequence as explanation: The international politics of accounting standards". Review of International Political Economy. 17 (4): 639–664. doi​:​10.1080/09692291003723748​. ISSN 0969-2290. S2CID 153508571.
  2. ^ IASB. "Who we are". Retrieved 13 September 2019.
  3. ^ Deloitte. "International Accounting Standards Committee (IASC)". Retrieved 29 July 2019.
  4. ^ IASB. "Who we are, history". Retrieved 29 July 2019.
  5. ^ a b Profiles of the IFRS Foundation
  6. ^ World Bank Reports on the Observance of Standards and Codes
  7. ^ IFAC Member Organizations and Country Profiles
  8. ^ a b Ball R. (2006). [​https://www.academia.edu/2480000/International_Financial_Reporting_Standards_IFRS_pros_and_cons_for_investors |date=21 August 2010 }}. Accounting and Business Research
  9. ^ Bradshaw, M., et al (2010). Response to the SEC's Proposed Rule- Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRS) by U.S. Issuers. Accounting Horizons(24)1
  10. ^ FASB. "Convergence with the International Accounting Standards Board (IASB)". Retrieved 31 July 2019.
  11. ^ PwC. "IFRS in the US". Retrieved 31 July 2019.
  12. ^ SEC. "A U.S. Imperative: High-Quality, Globally Accepted Accounting Standards". Retrieved 31 July 2019.
  13. ^ AICPA. "Is IFRS That Different From U.S. GAAP?". Retrieved 31 July 2019.
  14. ^ KPMG (29 March 2018). "Conceptual Framework – The new foundation for IFRS". Retrieved 27 August 2019.
  15. ^ Mazars (25 June 2018). "Key Features of the New IFRS Conceptual Framework". Retrieved 29 August 2019.
  16. ^ Deloitte. "Conceptual Framework for Financial Reporting 2018". Retrieved 29 August 2019.
  17. ^ International Accounting Standards Board (2010). Conceptual Framework for Financial Reporting, paragraph 4
  18. ^ Paragraph 4.38 of the Conceptual Framework of IFRS
  19. ^ Paragraph 63 of the IFRS standard IAS 38
  20. ^ Paragraphs 54 and 57 of the IFRS standard IAS 38
  21. ^ Paragraph 27 of the IFRS standard IAS 37
  22. ^ Paragraph 23 of the IFRS standard IFRS 3
  23. ^ IASB staff paper (April 2013). "Draft discussion paper: Capital maintenance" (PDF). Retrieved 5 September 2019.
  24. ^ International Accounting Standards Board (2007). IAS1, Presentation of Financial Statements, paragraph 10
  25. ^ Paragraph 15 of the standard IAS 1
  26. ^ Paragraph 25 of the standard IAS 1
  27. ^ Paragraph 28 of the standard IAS 1
  28. ^ Paragraph 29 of the standard IAS 1
  29. ^ Paragraph 32 of the standard IAS 1
  30. ^ Paragraph 57, 63 of the standard IAS 19
  31. ^ Paragraph 71 of the standard IAS 12
  32. ^ Paragraph 36 of the standard IAS 1
  33. ^ Paragraph 38 of the standard IAS 1
  34. ^ Paragraph 10f of the standard IAS 1
  35. ^ International Accounting Standards Board (2016). IAS 7, Statement of Cash Flows
  36. ^ Deloitte. "IAS 7 — Statement of Cash". Retrieved 5 September 2019.
  37. ^ SEC staff (13 July 2012). "Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers" (PDF). Retrieved 21 August 2019.
  38. ^ Emily Chasan, Wall Street Journal (13 July 2012). "SEC Staff Offers 127 Pages of Reasons Not to Adopt IFRS". Wall Street Journal. Retrieved 21 August 2019.
  39. ^ IASB (22 October 2012). "Analysis of SEC Final Staff Report" (PDF). Retrieved 21 August 2019.
  40. ^ Deloitte (6 February 2013). "Philippe Danjou answers 10 misconceptions about IFRS". Retrieved 21 August 2019.
  41. ^ Charles Lee (6 February 2013). "Why fair value isn't fair". Retrieved 21 August 2019.
  42. ^ H David Sherman and S David Young (1 July 2016). "Where financial reporting still fall short". Harvard Business Review. Retrieved 21 August 2019.
  43. ^ Daske, Holger; Hail, Luzi; Leuz, Christian; Verdi, Rodrigo (2013). "Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions". Journal of Accounting Research. 51 (3): 495–547. doi​:​10.1111/1475-679X.12005​. hdl:1721.1/88143. ISSN 0021-8456.
  44. ^ Klimczak, Karol (2011). "Market reaction to mandatory IFRS adoption: evidence from Poland". Accounting & Management Information Systems / Contabilitate Si Informatica de Gestiune. 10 (2): 228–248.
  45. ^ Dobija, Dorota; Klimczak, Karol Marek (2010). "Development of accounting in Poland: Market efficiency and the value relevance of reported earnings". The International Journal of Accounting. 45 (3): 356–374. doi​:​10.1016/j.intacc.2010.06.010​. ISSN 0020-7063. S2CID 155043665.
  46. ^ André, Paul (2017). "The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from European Countries". Accounting in Europe. 14 (1–2): 1–12. doi​:​10.1080/17449480.2017.1319965​. ISSN 1744-9480. S2CID 157333221.
Further reading
External links
Last edited on 13 June 2021, at 01:59
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