Updated Visiting Delegation January 2013 PDF

International Financial Reporting Standards
International Financial
Reporting Standards
The views expressed in this presentation are those of the presenter,

not necessarily those of the IASB or IFRS Foundation.
© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Outline 2
• Why global standards?

• The progress
• Structure and governance
• Understanding principle-based standards
• Common misunderstandings
• IASB’s active agenda
1
Why global standards?
Information supply chain 4
Corporate
Auditing
governance (ISAs)
(Ethics codes)
Capital
Preparers
providers
Accounting
standards Enforcement
(IFRSs & the IFRS for SMEs)
2
The reality 5
• Global markets require global standards

• Economies now transcend national borders
• Accounting and auditing needs strengthening
• High Quality information facilitates the allocation of
global capital
“We reaffirm our objective to achieve a single set of high

quality global accounting standards”
G20 Leaders Communique, Cannes 2011
© FRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Creating a level playing field 6
Investor
confidence
“good” financial
statements
Comparability, consistency,
efficiency across global markets
Global Accounting Standards
Global accounting standards will provide the bedrock on

which to build a stronger, more resilient financial system
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
3
Benefits of global standards 7
• Efficient allocation of capital globally

– attracting investment through transparency
– reducing the cost of capital
– increasing world-wide investment
• Reducing costs and increasing efficiency
– facilitates standardising information systems
– eliminates wasteful reconciliations
– audit efficiencies
– education and training
The progress
4
Global markets: growing & diversifying 9
Global Market Domestic

Global Market
Share 2001
Capitalisation
11% (US$ Trillions)
60
4%
29% 52%
40
4% USA
2010
Americas
EMEA 20
18% China
31%
Asia
15%
0
9% 2001 2010
27%
Progress towards global accounting standards 10
• 100+ countries now require or permit IFRS
• From 2012, 3/4 of G20 require IFRS

G20 Members requiring use of IFRS Adoption year
Argentina 2012
Australia 2005
Brazil 2010
Canada 2011
European Union 2005
France 2005
Germany 2005
Italy 2005
Mexico 2012
Republic of Korea 2011
Russia 2012
South Africa 2005
Turkey 2005
United Kingdom 2005
© FRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
5
Fortune Global 500 reporting trends 11
Fortune 500 members reporting basis: Based on

announced plans (%)
70
60
50
40 IFRS*
30 US GAAP
National GAAP
20
10
0
2011 2013 2015 (inc Japan)
*or word for word equivalent
Structure and
governance
6
How do we operate? 13
Monitoring Board
• An independent standard-
setting board
IFRS Foundation
Trustees of the IFRS
• overseen by diverse body Foundation
of trustees IFRS
Advisory
• publically accountable to a Council
Standard-setting
activities
Monitoring Board of capital International Accounting
Standards Board
market authorities (IASB)
• Working in the public

Operational
interest activities
The vision 14
…one single set of high

quality global accounting standards..
..used in the global

capital markets.
7
The corner stones of IFRS
development 15
Independence Accountability
Legitimacy
The standard setting process 16
Research
Standards-level
Programme Programme
Possible
Initial Post-
problem Exposure Final
assessme Discussion implementation
with Draft Standard
Final
nt and Paper
Discussion review
financial Standard
research Paper
reporting
Maintenance
IFRS Interpretations Committee
No action
required ED
Annual Narrow focus

Improvements amendments
Interpretations
8
Use of IFRSs – the ideal 17
Ideally, adopt IFRSs as the reporting framework:

• IFRSs as issued by the IASB in full
• Audit report and basis of presentation note refer to
conformity with IFRSs
• Without local ‘endorsement’
Use of IFRSs means all standards and all
interpretations
• Sometimes the ideal is hard to achieve
Use of IFRSs – variations from ideal 18
Problems with local ‘endorsement’:

• Urge to tinker
• Time delay
• Politicisation
• Cost
• What does audit report refer to?
• If not IFRSs, will users understand?
• If carve-out, what is the replacement standard?
9
Understanding principle-
based standards
What does principle-based mean? 20
• There is overwhelming support for principle-based

accounting standards
• But what does principle-based mean?
In this presentation
• an IFRS requirement is principle-based only when it
is consistent with the concepts in the IASB’s
Conceptual Framework
10
Framework-based
IFRS understanding… 21
• relate each IFRS requirements to the concepts

in Conceptual Framework
• understand why some IFRS requirements do
not maximise those concepts (eg application of
the cost constraint)
Concepts Principles Rules

Framework-based
IFRS understanding provides… 22
• a cohesive understanding of IFRSs

– Framework facilitates consistent and logical
formulation of IFRSs
• a basis for judgement in applying IFRSs
– Framework established the concepts that underlie
the estimates, judgements and models on which
IFRS financial statements are based
• a basis for continuously updating IFRS
knowledge and IFRS competencies
11
Role of the Conceptual Framework 23
• IASB uses Framework to set standards

– enhances consistency across standards
– enhances consistency across time as Board
members change
– provides benchmark for judgments
• IFRS Interpretations Committee uses Framework to
interpret IFRSs when there is no IFRS requirement
• Preparers use Framework to develop accounting
policies in the absence of specific standard
– IAS 8 hierarchy
The IASB’s Conceptual Framework 24
• Framework sets out agreed concepts that

underlie IFRS financial reporting
– the objective of general purpose financial
reporting
– qualitative characteristics
– elements of financial statements
– recognition
– measurement
– presentation and disclosure
Other concepts all flow from the objective
12
Objective of financial reporting 25
Provide 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
• Investors’, lenders’ and other creditors’ expectations

about returns depend on their assessment of the
amount, timing and uncertainty of (the prospects
for) future net cash inflows to the entity.
– Decisions by investors about buying, selling or holding equity
and debt instruments depend on the returns that they expect
from an investment in those instruments, eg dividends,
principal and interest payments or market price increases.
– Decisions by lenders about providing or settling loans and
other forms of credit depend on the principal and interest
payments or other returns that they expect.
13
• To assess an entity’s prospects for future net cash

inflows, existing and potential investors, lenders and
other creditors need information about:
– the resources of the entity;
– claims against the entity; and
– how efficiently and effectively the entity's management
and governing board have discharged their
responsibilities to use the entity's resources
– eg protecting the entity's resources from
unfavourable effects of economic factors such as
price and technological changes
Qualitative characteristics 28
• If financial information is to be useful, it must be

relevant and faithfully represent what it
purports to represent (ie fundamental qualities).
– Financial information without both relevance and
faithful representation is not useful, and it cannot
be made useful by being more comparable,
verifiable, timely or understandable.
• The usefulness of financial information is
enhanced if it is comparable, verifiable, timely
and understandable (ie enhancing qualities—
less critical but still highly desirable)
14
Pervasive constraint 29
• It is consistent with the Conceptual Framework

for an IFRS requirement not to maximise the
objective of financial reporting when the costs of
doing so would exceed the benefits.
Examples—economics 30
Is the expenditure on the medical research center:

(a) donation to university;
(b) joint arrangement with university; or
(c) Open Safari’s assets and Open Safari’s
research and development expenditure?
15
Examples—economics continued 31
Is Open Safari’s successful bid at auction in 20X9 for the black

rhinos:
(a) provision of a service;
(b) purchase of inventory; or
(c) purchase of biological asset for use in agricultural
activity?
Is Open Safari’s successful bid at auction in 20X9 for the white

rhinos
(a) provision of a service;
(b) purchase of inventory; or
(c) purchase of biological asset for use in agricultural
activity?
Elements—concepts 32
Asset Equity = assets less liabilities

Income
• resource controlled
• recognised increase in
by the entity … asset/decrease in liability in
• expected inflow of current reporting period
economic benefits • that result in increased
equity except…
Liability Expense
• present obligation … • recognised decrease in
asset/increase in liability in
• expected outflow of current reporting period
economic benefits • that result in decreased
equity except…
16
Examples—identifying assets 33
Are the following items Open Safari’s assets?

For each item below choose 1 of: (a) yes; (b) no, no
controlled resource; or (c) no, no expected FEBs.
• Sealands—fish, whales etc in the sea
• Freelands—pre-existing wild animals
• WoXy Safaris—bees
• Open Safari—assembled workforce
• Animals captured on Freelands and released
on Sealands
Examples—identifying assets continued 34
Are the following items Open Safari’s assets?

For each item below choose 1 of: (a) yes; (b) no, no
controlled resource; or (c) no, no expected FEBs.
• Auction 20X9—black rhino purchased
• Auction 20X9—white rhino purchased
• Open Safari brand
• WoXy brand
• Open Safari website
• Contract to sell timber at fixed price (assume
timber prices are falling)
17
Classification concepts—assets 35
• Different types of economic resources affect a user’s

assessment of the reporting entity's prospects for future
cash flows differently.
– some future cash flows result directly from existing
economic resources (eg accounts receivable and
investment property).
– other cash flows result from using several resources in
combination to produce and market goods or services to
customers (eg PPE and intangible assets). Although
those cash flows cannot be identified with individual
economic resources (or claims), users of financial
reports need to know the nature and amount of the
resources available for use in a reporting entity’s
operations. (CF.OB14)
© IFRS
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Cannon Street
Street || London
London EC4M
EC4M 6XH
6XH || UK.
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www.ifrs.org
Classification of assets 36
• Different assets exhibit different characteristics (nature) and

can be held for a variety of uses (use) in order to generate
future economic benefits
• Nature and use determine the classification of assets
• IFRSs defines a number of assets
• For some assets significant judgement is required to
determine their classification
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
18
Examples—asset classification 37
Which IFRS classification of asset?

For each item below choose 1 of:
(a) inventory; (b) PPE; (c) intangible; (d) investment
property; (e) biological asset in agricultural activity; or (f)
financial asset
• Freelands—land
• WoXy—land planted with plantation
• Sealands—land
• WoXy—bees
• WoXy—quaggas
Examples—asset classification continued 38
Which IFRS classification of asset?

For each item below choose 1 of: (a) inventory; (b)PPE;
(c) intangible; (d) investment property; (e)biological
asset in agricultural activity; or (f)financial asset
• Sealands—introduced caged animals
• Sealands—introduced fenced animals
• WoXy + Freelands—tourist carrying elephants
and horses
• Sealands—casino equipment
• purchased customer list
19
Judgements and estimates (IAS 40) 39
• It is sometimes be difficult to determine which

IFRS applies to a particular asset
• Quaggas on WoXY
• Elephants on Freelands
• Rhinos on Sealands
• Important disclosures in IAS1.122
Asset recognition concepts 40
An asset is recognised when:

• it is probable that any future economic benefit
associated with the item will flow to the entity; and
• the item has a cost or value that can be measured
with reliability.
For some items that satisfy the definition of an asset,

significant judgement is required to evaluate whether such
items satisfy the recognition criteria. Individual IFRSs provide
principles and application guidance.
20
Recognition questions 41
What does probable mean?

The meaning of probable is determined at the
standards level. Therefore, inconsistent use
across IFRSs
What does measure reliably mean?

To a large extent, financial reports are based on
estimates, judgements and models rather than
exact depictions.
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Recognition of development cost

(IAS 38) 42
An intangible asset arising from the development phase of an internal

project must be recognised if, and only if, an entity can demonstrate all of
the following:
a. the technical feasibility of completing the intangible asset so that it will
be available for use or sale.
b. its intention to complete the intangible asset and use or sell it.
c. its ability to use or sell the intangible asset.
d. how the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the existence
of a market for the output of the intangible asset or the intangible asset
itself or, if it is to be used internally, the usefulness of the intangible
asset.
e. the availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
f. its ability to measure reliably the expenditure attributable to the
intangible asset during its development.
21
Examples—recognition 43
Recognise the asset?

For each item below choose 1 of: (a) yes; (b) no,
FEBs not probable; or (c) no, cannot measure
with reliability
• Open Safari brand
• WoXy brand
• Expenditures to restore WoXy brand
• Goodwill on acquiring WoXy
• Contract to sell timber at a fixed price at
specified future date (timber prices falling)
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6XH | |UK.
UK.www.ifrs.org
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Unit of account 44
• The concept—unit of account is the level at

which an asset is aggregated or disaggregated
for recognition purposes.
• Most IFRS do not prescribe the unit of account
therefore judgement is required in applying
recognition criteria to an entity’s specific
circumstances.
22
Examples—unit of account 45
How many separate items for recognition?

• WoXy—elephants
(a)‘herd’ as a whole
(b)individual elephants
• WoXy—bees
(a)all 500 swarms collectively
(b)each swarm
(c) individual bees
Examples—unit of account continued 46
How many separate items for recognition?

• Sealands—casino hotel
(a) collectively (building, casino equipment and
fittings)
(b) separate building from casino equipment, from
fittings
(c) separate building, multiple separate items of
casino equipment and multiple separate items of
fittings
(d) it depends…
23
Measurement
The views expressed in this presentation are those of the presenter, not
necessarily those of the IASB or IFRS Foundation
Measurement ‘concepts’ 48
• Measurement is the process of determining monetary

amounts at which elements are recognised and
carried. (CF.4.54)
• To a large extent, financial reports are based on
estimates, judgements and models rather than exact
depictions.
– The Conceptual Framework establishes the concepts that
underlie those estimates, judgements and models
(CF.OB11)
©©IFRS
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Street || London
London EC4M
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UK. www.ifrs.org
www.ifrs.org
24
Measurement ‘concepts’ continued 49
• Measurement part of Conceptual Framework is weak

• A number of different measurement bases are
employed to different degrees and in varying
combinations in financial statements, including
– historical cost
– current cost
– realisable (settlement) value
– present value (CF.4.55)
• IASB guided by objective and qualitative
characteristics when specifying measurements.
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Measurement ‘concepts’ continued 50
• Historical cost ‘concept’: Assets are recorded at the

amount of cash or cash equivalents paid or the fair
value of the consideration given to acquire them at the
time of their acquisition.
• Fair value concept: the price that would be received
to sell an asset (exit price) in an orderly transaction
(not a forced sale) between market participants
(market-based view) at the measurement date (current
price).
© IFRS
© IFRSFoundation
Foundation.| 30
30 Cannon
Cannon Street
Street || London
London EC4M
EC4M 6XH
6XH || UK.
UK. www.ifrs.org
www.ifrs.org
25
Judgements and estimates, cost 51
• Cost of some items includes significant

estimates
• what is cost?
• costs allocations
• cost of dismantling, removal, restoration
• costs of self constructed assets
Judgements and estimates depreciation 52
• Depreciation represents the consumption of the

assets service potential in the period. Measuring
requires:
• identifying significant components to be
depreciated separately
• estimating useful life and residual value
• identifying the depreciation method that reflects
most closely the consumption of the service
potential of the item of PPE
26
Judgements and estimates, fair value 53
• When using the most recent market transaction price to

measure fair value: identifying the most recent market
transaction price and evaluating whether economic
circumstances have changed significantly.
• When using market prices for similar assets: adjusting
the prices to reflect differences.
• When using sector benchmarks (eg the value of cattle
expressed per kilogram of meat): adjusting to reflect
differences.
• When using DCF model: estimating the expected future
net cash inflows and the discount rate.
Examples—
measurement ‘economics’ 54
Which currency is Open Safari’s functional

currency?
Choose one of (a) to (f) below:
(a) Euro
(b) British pound
(c) South African rand
(d) Africanian Zollar
(e) US dollar
(f) Any currency that Open Safari chooses
27
Examples—
measurement ‘economics’ continued 55
• Why did the IASB conclude that it would be

highly unlikely that an entity can justify a
change in accounting policy for investment
property from the fair value model to the cost
model?
• Why did the IASB conclude that fair value
measurement was most appropriate
measurement attribute for biological assets in
agricultural activity?
• What is the ‘economics’ of depreciation?
Example—measurement at initial
recognition 56
At what amount are the animals released on

Sealands (captured on Freelands) measured
when first recognised?
(a) nil
(b) expenditure on capture
(c) expenditure on relocation
(d) expenditure on capture and relocation
(e) capture date fair value
(f) capture date fair value less estimated costs to
sell
28
Example—depreciation 57
Residual value of spacecraft at 31/12/20Y0?

(a) nil
(b) CU10 million
(c) CU10 million less expected costs of disposal
(d) amount would get on 31/12/20Y0 less estimated
costs of disposal, if already 5 years old and in the
condition expected at the end of 20Y5.
(e) amount would get on 31/12/20Y0 less estimated
costs of disposal, if already flown 100 flights and in
condition expected after 100 flights.
(f) present value of CU10 million less estimated costs of
disposal.
Example—depreciation continued 58
Must any components of the spacecraft be

depreciated separately?
(a) no
(b) yes, the inspection component must be depreciated
separately from the other components of the
spacecraft (ie 2 components).
(c) yes, the inspection component and the soft
furnishings component must each be depreciated
separately from the other components (ie 3
components).
29
Which depreciation method must be used for

the spacecraft?
(a) management choose depreciation method.
(b) straight line method for both the inspection
component and other component.
(c) units of production method for both the inspection
(d) revenue-based depreciation for both the inspection
(e) straight line for the inspection component and units
of production (based on the number of flights) for
other component.
At 31/12/20Y0 spacecraft’s useful life is?

(a) 100 voyages for entire spacecraft.
(b) 150 voyages for entire spacecraft.
(c) 4 years for entire spacecraft.
(d) 5 years for entire spacecraft.
(e) service component = 2 years and other component =
150 voyages.
(f) service component = 2 years and other component =
100 voyages.
(g) service component = 2 years and other component =
4 years.
30
Examples—measurement after
recognition 61
How to measure fair value of

1. Sealands casino building?
2. WoXy plantation?
3. animals (eg buffaloes and rhinos on Sealands)?
Derecognition
31
Derecognition 63
• Derecognition occurs when a recognised item is

removed from the statement of financial position
• There is no explicit concept for derecognition in the
Conceptual Framework. Consequently:
• derecognition requirements are specified at the
Standards level
• inconsistencies exist between the derecognition
requirements of different IFRSs
• derecognition does not necessarily coincide with no
longer meeting the requirements specified for
recognition
Examples—derecognition 64
• When does Open Safari derecognise the

elephant bull released onto Freelands?
(a)when the bull is released
(b)when the bull first walks off Freelands
(c) when the bull dies
(d)never
32
Presentation and
disclosure
Presentation and disclosure

‘concepts’ 66
• Objective of financial reporting

• Financial statements portray financial effects of
transactions and events by:
– grouping into broad classes (the elements, eg asset)
– sub-classify elements (eg assets sub-classified by their
nature or function in the business)
• IAS 1
– need not provide a specific disclosure if the information
is not material
– application of IFRSs with additional disclosures when
necessary results in a fair presentation (faithful
representation of transactions, events and conditions)
– do not offset assets & liabilities or income & expenses
© IFRS
© IFRSFoundation
Foundation.| 30
30 Cannon
Cannon Street
Street || London
London EC4M
EC4M 6XH
6XH || UK.
UK. www.ifrs.org
www.ifrs.org
33
Examples—
measurement ‘economics’ 67
Which currency is Open Safari’s presentation

currency?
Choose one of (a) to (f) below:
(a) Euro
(b) British pound
(c) South African rand
(d) Africanian Zollar
(e) US dollar
(f) Any currency that Open Safari chooses
Common
misunderstandings
34
Common misunderstandings 69
The Framework does not… Rather, the Framework

includes…
include a matching concept accrual basis of accounting—
recognise elements when satisfy
definition and recognition criteria
include conservatism concept neutrality concept
include an element other only the following elements—

comprehensive income (or a asset, liability, equity, income
concept for OCI) and expense
mention management intent or
the business model
Common misunderstandings continued 70
Misunderstanding Clarification
Principles are necessarily less Rules are the tools of financial
rigorous than rules engineers
There are few judgements and Inventory, eg allocate joint costs
estimates in cost-based and production overheads
measurements PPE, eg costs to dismantle/restore
site, useful life, residual value,
depreciation method
Provisions, eg uncertain timing and
amount of expected future
cash flows
35
IASB’s active agenda
Thank you 72
36

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International Financial Reporting Standards

The views expressed in this presentation are those of the presenter,

• Why global standards?

Why global standards?

Information supply chain 4

• Global markets require global standards

“We reaffirm our objective to achieve a single set of high

© FRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Creating a level playing field 6

Global Accounting Standards

Global accounting standards will provide the bedrock on

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• Efficient allocation of capital globally

International Financial Reporting Standards

Global Market Domestic

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Progress towards global accounting standards 10

• 100+ countries now require or permit IFRS

• From 2012, 3/4 of G20 require IFRS

© FRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Fortune 500 members reporting basis: Based on

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

• Working in the public

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

…one single set of high

..used in the global

The standard setting process 16

Annual Narrow focus

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Ideally, adopt IFRSs as the reporting framework:

Use of IFRSs – variations from ideal 18

Problems with local ‘endorsement’:

What does principle-based mean? 20

• There is overwhelming support for principle-based

• relate each IFRS requirements to the concepts

Concepts Principles Rules

• a cohesive understanding of IFRSs

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• IASB uses Framework to set standards

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The IASB’s Conceptual Framework 24

• Framework sets out agreed concepts that

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Provide financial information about the reporting

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Objective of financial reporting 26

• Investors’, lenders’ and other creditors’ expectations

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• To assess an entity’s prospects for future net cash

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• If financial information is to be useful, it must be

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• It is consistent with the Conceptual Framework

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Is the expenditure on the medical research center:

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Is Open Safari’s successful bid at auction in 20X9 for the black

Is Open Safari’s successful bid at auction in 20X9 for the white

Asset Equity = assets less liabilities

Are the following items Open Safari’s assets?

Examples—identifying assets continued 34

Are the following items Open Safari’s assets?