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Andrei Busuioc, World Bank, Centre for Financial Reporting Reform
Workshop on IFRS and IFRS for SMEs
Minsk, May 23-24, 2011
IFRS overview – the main principles
and their business implications
Overview of IFRS as of January 1, 2011
High level & Non-technical
Overview designed for management
and other users who want to know the
main provisions of standards and their
implications for business
Introduction
Content of the framework Sets out the concepts that underlie financial statements
It is not an IFRS and it does not override the
requirements in IFRSs
Defines the objective of financial reporting; qualities of
financial information (so that it is useful-relevance &
faithful representation); defines elements of FS (assets,
liabilities, equity, income and expenses), and R&M
Business implications Used by preparers for judgment, especially if
transactions and events are not specifically covered by
specific standard
Helps users to understand these transactions
Conceptual Framework
Content Provides a starting point for financial reporting in
accordance with IFRSs
Aims to ensure that the information in an entity‟s first
IFRS financial statements and interim reports is
transparent and comparable over all periods presented
(need for 2 years)
Business implications Plan for transition
Accounting of some items need prior decision (e.g.
hedges)
Understand the impact on financial covenants (if exists) in
borrowings (e.g. leverage indicators)
IFRS 1 First time adoption
Content Recognition of share-based payment transactions in FS (i.e. when
shares, share options or other equity instruments are granted as
exchange fror goods and services) (employees or other parties)
Cash settlement – liability; Equity instrument settlement – recognized as
equity;
Fair value of good and services; if not possible – fair value of equity
instruments;
Some times – choice between cash or equity instrument – treatment
depends on whether there is a choice
Business implications employee share options were often not recognized in FS, or recognized
not at fair value; expenses associated with granting share options were
often omitted or understated;
Requires the effects of share-based payment transactions, including
employee share options to be recognized in P&L and statement of
financial position
IFRS 2 Share-based Payment
Content Aims to improve the relevance, reliability and comparability of
the information about business combinations and their effects
Acquirer is required to recognize acquired entity‟s assets and
liabilities at fair values; recognition of goodwill
Business implications Accounting is complex – frequently using of valuators
Recognition of identifiable assets (sometimes are not part of
assets of acquired entity)
Future losses and restructuring needed – not recognized
Transaction costs – expensed
Assets at fair value – influence over subsequent accounting
(e.g. higher amortization charges for the same assets)
IFRS 3 Business combinations
Content
Temporary, new insurance project
Specifies FR for insurance contracts issued by any entity
Accounting for reinsurance contracts issued or held by an entity
Catastrophe provisions or reserves not permitted
Insurance liability tests at the period-end (actuary)
Insurance liabilities - separately from reinsurance assets (no
offset)
Business implications
All entities that have insurance contracts
Financial assets – IAS 39, sometimes need for change in
accounting policies to match for financial liabilities (so that both
reflect changes in market conditions – e.g. interest rates)
Decision my management on how to satisfy high-level
disclosure principles by IFRS 4
IFRS 4 Insurance contracts
Content Non-current assets held for sale and discontinued operations must
be disclosed separately in FS
Accounting for assets for which amount will be recovered by sale
(not use) & presentation and disclosure of discontinued operations
Assets not depreciated (lower between selling amount less cost of
sale and carrying amount)
Discontinued operations (disposed or available for sale) – disclosed
separately in P&L and Cash flows
Business implications Assist readers of the financial statements in assessing the entity‟s
future results and cash flows
The classification of an asset as „held for sale‟ is based on actions
taken by management at or before the end of the reporting period
and management‟s expectation that a sale will be achieved
IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations
Content for expenditures incurred in exploration for and evaluation of
mineral resources before the technical feasibility and commercial
viability of extracting the mineral resources is demonstrable
These are excluded from the standards dealing with long-term
assets
Issued as short-term measure to fill the gap in IFRS
On recognition, exploration and evaluation assets are measured
at cost
Business implications In most cases previous accounting policies for such items can be
used
Impairment – sometimes higher then required by IAS 36
Disclosure and presentation – identify and explain such assets
IFRS 6 Exploration for and Evaluation of
Mineral Resources
Content Requires disclosures that enable users to evaluate:
significance of FI and risks for the entity‟s financial
position and performance, including how the risks are
managed
Business implications The significance of financial instruments for an entity‟s
financial position and performance will be disclosed
The extent of the entity‟s exposure to and
management of risks arising from financial
instruments will be available to users of its financial
statements – for better decisions about risks and
returns
IFRS 7 Financial Instruments: Disclosures
Content disclosure of information about an entity‟s operating
segments
geographical areas in which it operates, major customers
identifiable segments for which information is available and
decisions on allocation of resources are made
Reporting assets, liabilities, profit and losses for segments
Business implications Multinationals – diversified and information is of better use
by segments vs. consolidated
View of entity as it is seen by management
Further explanation about segments may be added in
management commentary
IFRS 8 Operating Segments
Content how an entity should classify and measure financial assets and
financial liabilities
IFRS 9 will ultimately replace IAS 39 (the project: Phase 1:
Classification and measurement; Phase 2: Impairment methodology;
and Phase 3: Hedge accounting)
Mandatory only after Jan 1, 2013
IFRS 9 requires all financial assets to be classified on the basis of
the entity‟s business model for managing the financial assets and
the contractual cash flow characteristics of the financial asset
Business implications Use of business model – elimination of classification rules required
by IAS 39
Single impairment method – improved ability for users to assess
cash flows and associated risk
IFRS 9 Financial Instruments
Content overall requirements for the presentation of financial
statements, guidelines for their structure and minimum
requirements for their content
R&M and disclosure of specific items – in other
standards
Business implications Compliance with standards – fair presentation
No items as “extraordinary”
Assets current and non-current – liquidity
Information about management judgments on amounts
and basis for estimation – should be available for users
IAS 1 Presentation of Financial Statements
Content defines inventories (all except work in progress on construction,
financial instruments, biological assets and agricultural produce at
point of harvest)
requirements for the recognition - asset or expense
measurement of inventories – at lower between cost and net
realizable value; FIFO or weighted average
disclosures about inventories
Business implications LIFO is not permitted
In some jurisdiction measurement for tax purposes – the same as
in financial reporting
The same cost formula for items of similar nature (geographical
location or different tax rules are not a justification for different
formula for similar items)
IAS 2 Inventories
Content A statement of cash flows is required as part of a complete set of
financial statements: operating, investment and financing
activities
The statement of cash flows provides information about changes
in cash and cash equivalents: direct and indirect methods
Business implications Requires disclosures about the historical changes in cash and
cash equivalents of an entity (bank overdraft on demand may be
defined as not financing activity – cash equivalent)
Assisting users to assess the ability of the entity to generate cash
and cash equivalents and the needs of the entity to utilize those
cash flows
Management commentary – additional explanation
IAS 7 Statement of Cash Flows
Content Criteria for selecting and changing accounting policies
Accounting treatment and disclosure of changes in
accounting policies, changes in accounting estimates
and corrections of errors
Business implications Profit or loss for the current period does not include the
effects of changes in accounting policies and correction
of errors. Prior periods are adjusted so that they are
comparable with the current period
The effect of new standards must be considered early.
An entity must disclose the impact of standards that
have been issued but are not yet effective
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors
Content Specifies when an entity should adjust its financial statements for
events after the reporting period. Requires disclosures about the
date when the financial statements were authorized for issue and
about events after the reporting period
Adjustments – depending on whether the condition existed at the
reporting date or not
Business implications Dividends declared after reporting date – not recognized as
liability
Disclosure of material non-adjusting events (e.g. business
combination, discontinued operation, fire)
Going concern basis for FS – is not applicable even if the
decision to liquidate is taken after reporting date
IAS 10 Events after the Reporting Period
Content accounting treatment of revenue and costs associated with
construction contracts
applies to contractors, including those providing services directly
related to a construction project, such as project managers and
architects
Percentage of completion method for costs and revenues
If outcome cannot be estimated – costs recognized as they occur and
revenues in the amounts of costs (zero profit)
Business implications Timing of recognition influences profits
Contracts – long term
Profit is recognized as the work progresses; expected losses-
immediately
Judgment involved in determining stage of completion – good
information is needed
IAS 11 Construction Contracts
Content Prescribes the accounting treatment for income taxes
Tax consequences of:
• transactions and events of the current period recognized in FS
• future recovery of the carrying amount of assets in SoFP
• future settlement of the carrying amount of liabilities in SoFP
Deferred tax - all differences between the carrying amount of assets and
liabilities in the statement of financial position, and the tax base of assets and
liabilities
A deferred tax asset or liability arises if recovery (settlement) of assets
(liabilities) affects the amount of future tax payments
Business implications The tax expense in the profit or loss will be an aggregate of current tax and
deferred tax for the year
IAS 12 requires an explanation of the difference between tax expense and tax
at the applicable tax rate on accounting profit
IAS 12 Income Taxes
Content tangible assets for more than one accounting period, used in the
production or supply, or for administration. Assets rented to others also
included, but not investment property (IAS 40)
Recognized at cost less depreciation or fair value (revaluation)
Useful life (may be different for components)
Business implications Judgment on useful life (thus influence on P&L)
Costs of future removal/restoration are included in PP&E
Items for safety or environmental need – recognized if these are
necessary to gain benefits from using other assets
If significant elements/parts are replaced regularly – these are
depreciated separately; Day-to-day service – expense
Annual depreciation depends on estimated useful life
Annual review for impairment
IAS 16 Property, Plant and Equipment
Content
In accounting –finance leases or operating
leases
Classification of leases - extent to which risks
and rewards incidental to ownership of a leased
asset lie with the lessor or the lessee
Business implications
Judgment – finance or operating lease
Recognition of a finance lease in the statement
of financial position affects the entity‟s gearing
(debt to equity ratio) and return on total assets
IAS 17 Leases
Content accounting for revenue from sale of goods, rendering
services, use of assets yielding interest, royalties and
dividends
Some other revenues in other standards (e.g. IAS 11)
Main issue – when to recognise – significant risks and
rewards transfer
Business implications Careful consideration on timing
Examples: sales with later delivery; sales with installation
and the right of return; consignment sales; sale and
repurchase; sales of product with an agreement to provide
future services; commitment fees for loans; etc.
IAS 18 Revenue
Content accounting for and disclosure of employee benefits by employers
(except those from IFRS 2 on share-based payments and IAS 26
on benefit plans)
All benefits, including short-term: wages, leaves, etc. and long-
term: post-employment pensions, life insurance;
A liability and an expense – recognized when the service is
provided for all future payments;
Post-employment- defined contribution or defined benefit;
Business implications Risks associated with future benefits (e.g. define benefit-linked to
future salaries) – recognized at present
Judgment whether contribution or benefit plan (benefit – default)
Judgment for profit-sharing obligation
IAS 19 Employee Benefits
Content Transfers of resources for certain conditions
If assets are created – deferred income, and then in profit
or loss over life of the asset
If costs related – recognized when the costs inccurred
If there are no costs to compensate - recognized in
revenue
Business implications Disclosure is designed to facilitate comparison of entity‟s
financial statements with other entities
Judgment – whether an entity will comply with conditions
attached to a grant
IAS 20 Accounting for Government Grants
and Disclosure of Government Assistance
Content how to account for foreign currency transactions and foreign
operations, and how to translate financial statements into a
presentation currency
Functional currency, other – at spot exchange rates
Monetary items – spot rate
Non-monetary – the rate of the date when their value was
determined
IF FS in non-functions currency – assets and liabilities at closing
rate; income and expenses – transactions rate
Business implications Judgment for determination of functional currency
In multinationals – common currency
Hyperinflation – IAS 29 (cannot avoid by using another currency)
IAS 21 The Effects of Changes in Foreign
Exchange Rates
Content Capitalization of borrowing costs that are directly
attributable to the acquisition, construction or
production of an asset that takes a substantial time to
get ready for its intended use or sale (qualifying
asset)
Business implications Borrowing costs – included in the cost of asset and
depreciated as the asset is used – and by this
influence profits
All the other interest is expensed
IAS 23 Borrowing Costs
Content Disclosures about related parties and transactions with related
parties
Aims to ensure that FS contain the disclosures necessary to
draw attention to the possibility that its financial position and
P&L may have been affected by the existence of related parties
and by transactions and outstanding balances with such parties
Business implications Related party may affect entity‟s position or performance
through transactions or without transactions
No need to disclose fair value of transactions
Disclosures can state that transactions are on arms‟ length if
there is evidence for that
IAS 24 Related Party Disclosures
Content applicable to FS of retirement benefit plans (pension plans)
Different requirements for defined contributions or defined
benefit plans
Investments of a plan – at fair value
Present value of expected payments by defined benefit plan –
using current or projected level of salaries
Business implications Judgment on whether defined contribution or defined benefit
plan (hybrids – defined benefits plan)
Defined benefit - under- or overfunded – disclose clearly how
the promised benefits will be paid
Investments market value – influence over net assets –
explanation may be needed
IAS 26 Accounting and Reporting by Retirement
Benefit Plans
Content addresses consolidated FS
accounting for investments in subsidiaries, jointly controlled entities
and associates, when the investor presents separate FS
Aims to enhance the relevance, reliability and comparability of the
information that a parent entity provides for a group of entities under
its control
Group is treated as single entity
Business implications Judgment - whether control exists
Applies to all businesses, even if they have a different kind of
business
If different reporting dates – subsidiary prepares additional set of FS
Uniform accounting policies in the group
IAS 27 Consolidated and Separate
Financial Statements
Content Associate – if there is significant influence – participation in policy
decisions
Usually 20-50% of equity, but sometimes influence can be with
less
Equity method – initially at cost, then adjusted fro post-acquisition
changes in equity, distributions of profits received – reduce
carrying amount
Some exemptions – fair value – IAS 39 or IFRS 5 (held for sale)
Business implications Judgment - whether significant influence exists
No exemptions if there are restrictions for dividend transfers – but
in that case judgment on whether there is significant influence
IAS 28 Investments in Associates
Content functional currency is the currency of a hyperinflationary
economy – 3 years over 100% inflation
FS reflect at the end of period – use of price indexes
Disclosures for restatements, including price indexes,
whether FS are prepared on historic costs or current costs
Business implications Restatement needed – purchasing power of currency is
reducing
Using other functional currencies
When multiple price indexes are available – use general price
index
IAS 29 Financial Reporting in Hyperinflationary
Economies
Content The essential element of a joint venture is a contractual
arrangement, which establishes joint control of an economic
activity
Specifies the accounting and reporting of joint ventures
Either proportional consolidation or equity method (some
exceptions in cases where IFRS 9, IAS 39, IFRS 5, IAS 27)
Business implications Investors must exercise judgement in the context of all available
information to determine if they exert joint control over an investee
The venturer should consider whether severe long-term restrictions
that impair the joint venture‟s ability to transfer funds to the
venturer, taken with other factors, indicate that the venturer does
not have joint control
IAS 31 Interests in Joint Ventures
Content Presentation of financial instruments (R&M and disclosure – IAS 39 and
IFRS 7)
principles for presenting financial instruments as liabilities or equity &
for offsetting financial assets and financial liabilities
Compound instruments – split into elements of liability and equity
(convertible notes)
Offset – only if there is legal right to offset
Business implications Some financial instruments have legal form of equity, but substance of
liability – recognized as liabilities (shares with mandatory redemption –
liabilities;
Classification of instrument has an impact on how the interest,
dividends and other similar items are treated – either in equity or P&L
(e.g. if shares are classified as liability, dividends are reflected in P&L)
IAS 32 Financial Instruments: Presentation
Content deals with the calculation and presentation of earnings per share
(EPS)
Applicable for listed entities
Requires presentation of basic EPS and diluted EPS (dilution –
assumption if some options or conversions are made, or new shares
are issued upon satisfaction of certain conditions)
For easy comparison between entities or for entity over time
Different accounting policies by various entities are not taken into
account
Business implications EPS is an important measure of performance
Diluted EPS – is measure of potential effects of dilution (potential
increase of EPS is not taken into account)
IAS 33 Earnings per Share
Content interim financial report is a complete or condensed set of FS for a
period shorter than a financial year
minimum content of an interim financial report and the principles
for recognition and measurement in complete or condensed FS
for an interim period
statement of financial position, statement of comprehensive
income, statement of cash flows, statement of changes in equity,
and selected explanatory material
Information from most recent annual report is not repeated
Business implications Interim reports permit to report on entity‟s capacity to generate
positive cash flows and earnings
Users better understand management commentaries about
seasonal or cyclical nature of operations
IAS 34 Interim Financial Reporting
Content An asset must not be carried in the FS at more than the highest amount
to be recovered through its use or sale
If carrying amount exceeds recoverable amount – an asset is impaired –
impairment loss
Applicable also to cash-generating units, CGU (groups of assets)
Recoverable amount is higher between fair value less cost of sale OR
value in use (assessed as present value of future cash flows generated)
Business implications Many indicators of impairment – market conditions, interest rates, plans
to discontinue, etc.
Value in use – judgment; market values should be used in valuations
where possible
Disclosures – key assumptions and estimates for recoverable amounts
of CGU that contain goodwill; and adverse effects of changes in
estimates and judgments
IAS 36 Impairment of Assets
Content Aims to ensure that appropriate recognition criteria and measurement
bases are applied to provisions, contingent liabilities and contingent
assets and that appropriate disclosures enable users to understand their
nature, timing and amount
Provision – the best estimate of cash needed to settle the liability in the
future (uncertain time or amount) – recognized in FS
Contingent liability – disclosed; contingent asset – disclosed only if
probability is high of it to happen
Business implications Provisions recognized, contingent liabilities not (only disclosed unless
their occurrence is remote)
Conditions to be met for recognition – no future expenses (present
obligation should exist)
Significant judgment about the amount, timing and risks of the cash flows
required to settle the obligation
IAS 37 Provisions, Contingent Liabilities
and Contingent Assets
Content R&M and disclosure of intangible assets
Assets identifiable that do not have physical form (Goodwill – IFRS
3) – future economic benefit and reliable cost
Internally generated goodwill –not recognized
R&D – recognized only if certain criteria are met
Usually at cost minus amortization; if at fair value – use of active
market information
If useful life is determined – amortized, if indefinite- annually
impairment test
Business implications Expenditure on internally generated intangible items will often be an
expense
There are few active markets for intangible assets. Therefore it will
be rare for an intangible asset to be revalued
IAS 38 Intangible Assets
Content principles for recognizing and measuring financial assets, financial
liabilities and some contracts to buy or sell non-financial items
Financial instrument – recognized if entity is part of contract
Measured – initially at fair value
Subsequent – amortized costs – if held to maturity or non-derivative (e.g.
loans and receivables); fair value – those held for trading or available for
sale;
Hedging accounting – hedging instrument and hedged item – both
recognized
Business implications All fin. Instruments are recognized, derivatives (forwards, swaps and
options)– fair value, or sometimes at cost (previously derivatives were not
recognized until settlement);
Complex standard – due to mix of fair value and cost
Hedge accounting only used if the hedge is demonstrated to be effective
IAS 39 Financial Instruments:
Recognition and Measurement
Content Land or buildings held for capital appreciation, rental or
An entity must adopt either the fair value model or the cost model for all
investment properties
If the cost model is used - the fair value must be disclosed
Initially - Cost (IAS 17) – lower between fair value and the present value of
minimum lease payments; subsequently – cost less depreciation or
impairment loss;
Fair value – re-measured at each reporting period – P&L; or disclosed if
cost model is used
Business implications If property interest by a lessee in operating lease is classified as Inv.Prop. –
fair value for all investment properties;
Use of independent valuation expert encouraged but not required
Choice of fair value or cost – effects on P&L
Change in accounting policies - if for better presentation (change of fair
value to cost is unlikely to be appropriate)
IAS 40 Investment Property
Content Accounting of agricultural activity
Biological assets transformation
Biological assets and agricultural produce at the point of
harvest – fair value less cost to sell
Changes in the value – P&L
Bio assets attached to land (trees) are measured separately
from land
Business implications Change in the physical attributes – recognition of increase or
decrease of economic benefit – biological growth measured as
it occurs
Usually – active markets for products
Sometimes – value in use – cash flows – judgment applied
IAS 41 Agriculture
