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IFRS Standards

IFRS Standards. Overview Reading: Chapter 6. Conceptual Framework. Very close to the US FASB framework for accounting Published in 1989. Conceptual Framework. Fair Presentation. Accruals (and matching) Going Concern. Relevance. Reliability. Faithful representation Economic substance

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IFRS Standards

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  1. IFRS Standards Overview Reading: Chapter 6

  2. Conceptual Framework • Very close to the US FASB framework for accounting • Published in 1989

  3. Conceptual Framework Fair Presentation Accruals (and matching) Going Concern Relevance Reliability Faithful representation Economic substance Neutrality Prudence (conservatism) Completeness Comparability (and consistency) Timeliness Understandability (and materiality) Notice relationship Prudence: exercise a degree of caution in front of uncertainty

  4. Financial Statements • IAS 1 requires: • Balance sheet • Income statement • Statement of Change in Equity • IAS 8: • Choice of accounting policies • Accounting for changes in accounting policies • Dealing with accounting errors

  5. Key Standards • IAS 18: Defining Revenues • Assets: • IAS 16: Property Plant and Equipment • IAS 40: Investment Property • Not occupied by the owner • IAS 38: Intangible Assets • Research expenses cannot be capitalised • Internally generated goodwill, brands, etc. cannot be capitalised (capitalised only in the event of a transaction which provides a reliable measure) • Development expenses can be capitalised under certain conditions • IAS 2: Inventory • No LIFO!

  6. Valuation of Assets Cost Models (Gains deferred or never recognised as income) Value Models (Gains and losses to income) Market Value Entity-Specific Revalued (Reserves – Never in income) Value in Use (DCF) Fair Value Net Realisable Value Historical (Gains deferred) Inventory (IAS 2) PPE (IAS 16) Intangibles (IAS 38) Held-to-Maturity Investments (IAS 39) Investment Property (IAS 40) PPE (IAS 16) Intangibles (IAS 38) Impaired Assets (IAS 36) Other investments (IAS 39) Investment Property (IAS 40) Inventories (IAS 2) Impaired Assets (IAS 36) Biological Assets (IAS 41) Only for a whole class of assets

  7. Leases • IAS 17 • Strict distinction between operating and capital/finance lease • Operating lease = rental • Any other -> should be capitalised • Frowns upon the 90% rule • For example, why a difference in accounting treatment between 88 and 92% of fair value? • Recommendation to capitalise

  8. Financial Instruments • IAS 32 • Should all be valued at fair value, except: • No reliable fair value (e.g. unlisted share) • Those intended to be held to maturity • Non-traded loans originated by the entreprise (e.g. loans made by banks) • In these cases -> cost • For fair value accounting: • Gains and losses recognised to income • Some exceptions • IAS 39: Give a full fair value system option!

  9. Mixed Valuations • Parker and Nobes stress that some assets are covered by different standards • Example of a piece of land that rises in value: • IAS16/40 suggest using a cost basis, gain is deferred until sale • IAS16 revaluation: never recognised (reserve) • IAS40: immediate recognition of fair value • !!!

  10. Liabilities • Provisions • IAS37 • Need to be a real liability to a third party • Provision pour risques et charges: ok • Provision pour charge constatee d’avance: no • Employee benefits • Bonuses, pensions, etc. • Should be recorded when likely and measurable • Complicated when commitment is make on future salary levels • Discounted value of obligation less any fund set for that purpose! • Deferred Tax • Should be accounted for

  11. Impact of IFRS The European Case

  12. Impact of IFRS • Conversion to IFRS is a major issue today in Europe • Consolidated traded group need to publish their financial statements according to IFRS • Key questions: • Impact on bottom line (net income, EPS)? • Impact of management and financial policies?

  13. Pearson

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