IASB and IFRS: Accounting Principles Explained

• Accounting's environment is composed of fluctuating social, economic, political, and legal influences.
• Accounting objectives and practices today differ from the past, due to the fluctuating environment.
• Accounting theory changes to meet demands.
• Three special considerations regarding the evolution of accounting are; recognition that people use limited resources, acceptance of society's ethical/current property concepts, and entrusting custodianship/control of property to managers of complex economics from owners/investors.
• Accounting helps identify efficient and inefficient users of resources.
• Accounting recognizes the need for accounting standards as practice rules for disclosures, measurements, and contents in financial statements.
• Accounting measures and reports to absentee investors by presenting financial data for owner-manager use.
• Four accounting disciplines exist: financial, managerial, tax and not-for-profit.
• Broadly, two groups of users exist for accounting information: internal and external.
• Internal users use accounting information for planning, controlling operations, and business decisions.
• Managerial accounting measures and delivers information to internal users.
• External users make decisions on behalf of their own best interest and includes stockholders, bankers, etc.
• Financial accounting provides relevant information to external users.
• The IASB is the main international standard-setting organization.
• The IASB issues international financial reporting standards (IFRS).
• IFRS are currently compulsory/permitted in over 149 countries.
• IFRS specifies how companies should maintain their records and expenses.
• The international standard-setting structure consists of IFRS Foundation, IASB, IFRS Advisory Council, and IFRS interpretations committee.
• The IFRS Foundation oversees the IASB, IFRS Advisory Council, and IFRS Interpretations Committee.
• The IASB develops high-quality and enforceable IFRS based on public interest.
• The IFRS advisory council provides advice and counsel.
• The IFRS interpretations committee is an interpretative body for answering standards applications.
• The Monitoring Board includes leaders from the European Commission, the Japanese Financial Services Agency, the US Securities and Exchange Commission, the IOSCO, and the Chinese ministry of finance.

IASB Major Pronouncements

• International financial reporting standards.
• Conceptual framework for financial reporting.
• International financial reporting standards interpretations
• Standards issued by IASB are referred to as International Financial Reporting Standards (IFRS).
• To date the IASB as issued 17 standards; business combinations, share-based payments, and leases.
• Before 2001, the International Accounting Standards Committee set the international standard; issued International Accounting Standards (IAS).
• Many of the 41 IASs given by the committee were amended or superseded by the IASB.
• IAS that remain are under the umbrella of IFRS.
• The conceptual framework's goals is to: assist the IASB in developing and revising consistent IFRS concepts, create consistent policies for areas not covered by standards or with an accounting policy choice, and to help others understand/interpret IFRS.
• The three levels of the conceptual framework are 1) Objectives of Financial Reporting, 2) Qualitative Characteristics and Elements of Financial Statements, and 3) Recognition, Measurement, and Disclosure Concepts.

First Level of the Conceptual Framework

• The objective of financial reporting is the framework for the accounting foundation.
• By providing financial information, potential lenders, equity investors, and creditors can make resource decision making.

Second Level of the Conceptual Framework

• Characteristics of accounting information explain financial statements.
• It forms a bridge between why accounting is used (the objective) and how accounting is used (recognition, measurement, presentation).
• Qualitative characteristics distinguish information that is more useful from information that is less useful for making decisions.
• Accounting information must be able to make a difference in a decision to be relevant.
• Financial information has predictive value if it serves as an input to predict investor's expectations of the future.
• Relevant information helps users confirm/correct expectations.
• Information is only material if its omission influences financial information decisions.
• If numbers and descriptions truly existed or happened, financial representation is faithful.
• Completeness means that all the necessary information is provided for financial representation.
• Neutrality means a company cannot choose information to favor one party over another.
• Using information free of error, will create a more faithful and accurate representation of financial information.
• Information is considered comparable, if it is measured and reported in a similar way for other companies.
• Verifiability occurs, if using the same measurements, independent measurers will have similar results.
• Timeliness means that decision makers should obtain the information, before it loses influence on decisions.
• Users can see the significance of information, when it is easily understood.
• An asset is a resource controlled by an entity from events where economic benefits are expected to flow.
• A liability's settlement from past events will cause an outflow from the company resources.
• Equity is the remaining assets after subtracting liabilities.
• Income increases economic benefits gained in the accounting period.
• Expenses reduce economic benefits during the accounting period.

Third Level of the Conceptual Framework

• Recognition, measurement and disclosure concepts explain how companies should state financial events.
• Economic entity requires that the entity must be separate from the activities of its owner.
• Going concern assumes the the business will have a long life.
• Monetary unit includes transaction data that can be expressed in terms of money.
• Periodicity implies that an entity can divide economic activities into time periods.
• Accrual basis of accounting implies transactions are recorded in periods they occurred.
• Four accounting principles involved in recording transactions: measurement, revenue recognition, expense recognition, and full disclosure.
• Historical cost accounting means reporting assets and liabilities based on the price of acquisition.
• The price that would be obtained to sell an asset is defined as "fair value".
• Revenue is recognized within the accounting period in which the performance of obligation is satisfied.
• Expenses are recognized at the period they contribute to the revenue.
• Companies must disclose information so that results can be seen in financial statements and supplementary information.
• Companies should weigh the costs of providing information against benefits when using it.
• Rule-making bodies use cost-benefit analysis before making final requirements.
• Benefits gained by the cost, must exceed costs to be associated with it.
• IFRS in IAS presentation covers rules for content, structure and statements.
• Objective: financial statements provide financial performance data and cash flow of a company.
• To meet objectives, financial statements must provide information about assets, liabilities, equity, income, expenses, cash flows, distributions, and owner contributions.
• Financial statements consists of; balance sheet, income statement, statement of cash flows, statement of changes in equity, significant accounting policies, and comparative information.

Explore the role of managerial accounting. Identify external users of accounting information. Understand IFRS, IASB and its advisory council. Learn about the fundamental qualitative characteristics.