IFRS Policies and Procedure Tips

IFRS Policies and Procedure Tips

1. Understand the principles: Familiarize yourself with the International Financial Reporting Standards (IFRS) and their underlying principles. This will help you grasp the purpose and objectives of the standards and enable you to apply them effectively.
2. Develop a comprehensive framework: Establish a clear and concise framework for your organization's IFRS policies and procedures. This framework should outline the key principles, processes, and responsibilities related to financial reporting under IFRS.
3. Stay updated: Keep yourself up-to-date with the latest developments and amendments to IFRS. Regularly review and monitor changes in standards to ensure that your policies and procedures are aligned with the most current requirements.
4. Tailor to your organization: Customize your IFRS policies and procedures to suit the specific needs and characteristics of your organization. Consider factors such as industry-specific requirements, size, complexity, and geographical location.
5. Document and communicate: Document your IFRS policies and procedures in a clear and concise manner. Make sure they are easily accessible to relevant stakeholders within your organization. Regularly communicate any updates or changes to ensure consistent understanding and implementation.
6. Establish controls: Implement robust internal controls to ensure compliance with IFRS policies and procedures. This includes establishing segregation of duties, performing regular reviews and reconciliations, and conducting comprehensive testing of financial data and systems.
7. Training and awareness: Provide training and ongoing education to employees involved in financial reporting. This will help them understand the principles of IFRS, interpret and apply the standards correctly, and maintain consistency in financial reporting practices.
8. Monitor and review: Continuously monitor the effectiveness of your IFRS policies and procedures. Regularly review and assess their impact on financial reporting quality, efficiency, and compliance. Identify areas for improvement and take corrective actions as necessary.

By following these tips, you can enhance the effectiveness of your organization's IFRS policies and procedures, ensure accurate and reliable financial reporting, and maintain compliance with international standards.

The IFRS Hierarchy

Overview

• International Financial Reporting Standards (IFRS):
  • Standards and rules for financial reporting established and approved by the International Accounting Standards Board (IASB).
  • IASB succeeded the International Accounting Standards Committee (IASC) in 2001.
  • Both IAS (International Accounting Standards) and IFRS hold the same status.
  • Interpretive literature issued by SIC (Standards Interpretation Committee) and IFRIC (International Financial Reporting Interpretations Committee) are also considered.

Conceptual Framework

• Inheritance: IASB adopted the IASC’s Framework for the Preparation and Presentation of Financial Statements.
• Origin: Derived from the US GAAP conceptual framework, particularly those parts completed in the 1970s.
• Objective: To provide information about the financial position, performance, and changes in the financial position of an enterprise that is useful for economic decision-making by a wide range of users.
• Primary Concern: The information needs of investors are paramount; meeting their needs generally satisfies other users’ needs as well.

Financial Statement Users' Needs

• Key Evaluations:
  • Ability to generate cash.
  • Timing and certainty of cash generation.
• Financial Position Influences:
  • Economic resources controlled by the entity.
  • Financial structure.
  • Liquidity and solvency.
  • Capacity to adapt to environmental changes.

Hierarchical Structure of IFRS

1. IFRS and IAS: Core standards and rules for financial reporting.
2. Interpretive Literature:
   • SIC (Standards Interpretation Committee): Provides interpretations on existing standards.
   • IFRIC (International Financial Reporting Interpretations Committee): Offers guidance on new or complex issues.
3. Framework for the Preparation and Presentation of Financial Statements: Provides the conceptual basis and objectives for financial reporting.
4. User Needs Focus: Primarily investor needs, presumed to cover other users’ needs.

Key Takeaways

• The IFRS hierarchy ensures that financial reporting is comprehensive, transparent, and meets the needs of various users, especially investors.
• The framework and interpretive literature support the application and consistency of the standards.
• Emphasis on the ability to generate cash and adapting to changes ensures that the financial statements provide relevant and reliable information.

Qualitative Characteristics of Financial Statements

Financial statements should embody certain qualitative characteristics to be useful for users. These characteristics ensure the information provided is beneficial for decision-making.

Primary Qualitative Characteristics

1. Understandability:
   • Information should be clear and comprehensible to users with a reasonable knowledge of business and economic activities.
2. Relevance:
   • Information must be relevant to the decision-making needs of users.
   • It should influence the economic decisions of users by helping them evaluate past, present, or future events or confirming or correcting their past evaluations.
3. Reliability:
   • Information must be free from material error and bias.
   • It should present faithfully what it purports to represent.
4. Comparability:
   • Users should be able to compare the financial statements of an entity over time to identify trends in its financial position and performance.
   • Comparability also refers to the ability to compare financial statements between different entities.

Components of Reliability

• Representational Faithfulness:
  • Financial information must accurately reflect the transactions and events it represents.
• Substance Over Form:
  • Transactions and events are accounted for and presented in accordance with their substance and economic reality, not merely their legal form.
• Completeness:
  • All information necessary for a user to understand the financial position, performance, and changes in financial position of the entity must be included.
• Neutrality:
  • Information should be free from bias and should not be manipulated to achieve a predetermined outcome.
• Prudence:
  • The inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.

Constraints and Trade-offs

• Cost/Benefit Constraint:
  • The cost of providing financial information should not exceed the benefits that can be derived from its use.
• Trade-offs:
  • In practice, achieving an optimal balance among the qualitative characteristics often involves trade-offs. For example, increasing relevance might lead to a decrease in reliability and vice versa.

Fair Presentation and True and Fair View

• IAS 1, Presentation of Financial Statements:
  • Requires financial statements to present fairly the financial position, financial performance, and cash flows of the reporting entity.
  • Fair presentation is achieved by faithful representation of the effects of transactions, events, and conditions.

Key Terms and Definitions

• Asset:
  • A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
• Liability:
  • A present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying future benefits.
• Equity:
  • The residual interest in the assets of the enterprise after deducting liabilities.

Recent Changes

• IAS 1 Revision (2007):
  • Eliminated the term "balance sheet," replacing it with "statement of financial position."
  • Introduced the requirement for a "statement of comprehensive income," aligning with the approach under US GAAP.

Measurement Reliability

• Assets and liabilities must have a cost or value that can be measured reliably to be recognized in the financial statements. The Framework acknowledges this as a fundamental requirement for recognition.

IAS 20, which deals with government grants, has faced significant criticism and is being considered for revision or elimination. One of the main concerns is that it allows government grants to be treated as deferred credits and amortized to earnings. However, this treatment does not align with the definition of a liability according to the Framework.

Another example is IFRS 3, which requires the immediate release of negative goodwill to the income statement in a business combination. In contrast, IAS 22 treats negative goodwill as a deferred credit, which does not meet the criteria for recognition as a liability.

Both the FASB and IASB now prioritize analyzing reporting issues based on their impact on assets and liabilities. The ongoing revenue recognition project exemplifies this approach. It proposes that when an entity receives an order and has a legally enforceable contract to supply goods or services, it recognizes both an asset (the right to receive future revenue) and a liability (the obligation to fulfill the order). Depending on the measurement of these assets and liabilities, some earnings may be recognized at that point. This represents a departure from existing IFRS, where executory contracts are rarely recognized and cannot be the basis for recognizing earnings.

The current version of the IASB Framework does not extensively address measurement issues. It briefly mentions the availability of various measurement bases, with historical cost being the most commonly used.

The three paragraphs addressing this issue briefly note the availability of various measurement bases, highlighting historical cost as the most prevalent. Revaluation of tangible fixed assets, for instance, is entirely permissible under IFRS. Practically, IFRS adopts a mixed-attribute model, primarily anchored in historical cost. However, it necessitates the use of value in use (the present value of expected future cash flows from the asset's use within the entity) for impairment, and fair value (market value) for some financial instruments, biological assets, business combinations, and investment properties.

Both FASB and IASB are actively revisiting their conceptual frameworks to refine, update, and harmonize them into a common framework for developing accounting standards. This truly international initiative involves concurrent deliberations by IASB and FASB, supported by a unified staff team. A joint discussion paper, released in mid-2006, emphasized the qualitative characteristics of financial statement information. Subsequent aspects of the multiphase conceptual framework project have since been addressed. An Exposure Draft for the project's first phase is anticipated by late 2007, with early-stage exposure literature for subsequent phases expected to be published over the next several years.

The existing Framework serves as a valuable resource for IASB members and staff during their discussions. It is expected that individuals providing feedback on exposure drafts will align their arguments with the principles outlined in the Framework. However, it is important to note that the Framework is not intended to be directly utilized by preparers and auditors for all accounting decisions.

In 2003, the IASB introduced a hierarchy of accounting rules in the revision of IAS 8. This hierarchy establishes a set of guidelines for preparers to follow when addressing accounting issues. According to this hierarchy, the most authoritative guidance is provided by IFRS. Therefore, preparers are advised to seek guidance from IFRS when determining appropriate accounting methods.

1. Initially, when applicable, the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as well as the Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) should be referred to in relation to a particular transaction or condition.
2. In situations where there is no directly applicable standard, careful judgment should be exercised to formulate and implement an accounting policy that addresses the informational needs of users and ensures reliability. The resulting financial statements should faithfully represent the financial position, financial performance, and cash flows of the reporting entity. Additionally, they should reflect the economic substance of transactions, events, and conditions, rather than solely focusing on their legal form. It is important for the financial statements to be neutral, prudent, and complete in all material respects.
3. If it is not feasible to develop an accounting policy using the aforementioned standards, the preparer should consider recent pronouncements from other standard-setting bodies that follow a similar conceptual framework. Furthermore, other accounting literature and industry practices that do not contradict higher-level guidance can also be consulted. In our opinion, the most valuable source for assistance in this regard is the Generally Accepted Accounting Principles (GAAP) in the United States, as it contains a vast amount of detailed application guidance. It is worth noting that the development of IFRS was significantly influenced by US GAAP standards.
4. Only when the aforementioned steps do not provide a satisfactory resolution, should the preparer refer directly to the conceptual framework provided by the International Accounting Standards Board (IASB). In such cases, attempts should be made to draw conclusions regarding specific applications that have not been formally addressed in established standards.

In essence, if a particular subject is not covered by International Financial Reporting Standards (IFRS), the preparer should refer to the national Generally Accepted Accounting Principles (GAAP). The most suitable choice in this case would be US GAAP, primarily because it is the most comprehensive set of standards and is widely understood in the global capital market. Additionally, using US GAAP eliminates the need for reconciliation items on the Form 20-F for foreign SEC registrants, although the SEC is likely to remove the reconciliation requirement if foreign private issuers adhere to full IFRS as established by the International Accounting Standards Board (IASB).

Considering the expressed intention of converging IFRS and US GAAP, it would be illogical to seek guidance from any other set of standards, unless US GAAP also lacks clarity on the specific matter.

When conducting research on IFRS, the first step is to review the Concepts and Examples sections in the relevant resources. If this initial review does not provide a sufficiently detailed answer, a more comprehensive source of summarized IFRS information, such as Wiley IFRS 2008, can be consulted. Wiley IFRS 2008 offers a broader Concepts section and provides a list of authoritative pronouncements, along with page references for a more thorough discussion of the issues.

If these approaches still do not yield a clear answer to an IFRS problem, readers are encouraged to examine selected IFRS source documents. In the event that these documents do not provide a satisfactory solution, it is advisable to seek insights from other entities operating in the same industry to identify alternative approaches. If all else fails, resorting to basic accounting theory or consulting with a technical expert at a public accounting firm can help resolve the issue.

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