International Accounting Standards Overview

IAS- International Accounting Standards & IFRS- International Financial Reporting Standards

• IAS and IFRS are international accounting standards
• Chiara Saccon presented an overview of these standards

IFRS Conceptual Framework

• It provides a framework for financial reporting
• An overview of the framework given by Chiara Saccon

IASB Conceptual Framework: Objectives

• The objective of financial reporting is to 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.
• This involves decisions about buying, selling, or holding equity and debt instruments and providing or setting loans.
• Focus is on information needs of capital providers (investors and creditors).

IASB Conceptual Framework: Qualitative Characteristics

• Fundamental Characteristics:
  • Relevance (Materiality): Information must be important to make decisions.
  • Faithful Representation: Information must be complete, neutral, and free from errors.
• Enhancing Characteristics:
  • Comparability: Information should be comparable across different entities and periods.
  • Verifiability: Information should be capable of being independently confirmed by others.
  • Timeliness: Information should be available in time to be useful in decisions.
  • Understandability: Information should be presented in a clear and concise manner.

IASB Framework (2018) - Elements of Financial Statements

• Asset: A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
• Liability: A present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty or responsibility that the entity has no practical ability to avoid.
• Income: Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
• Expenses: Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.

IASB Conceptual Framework (2018) - Recognition

• Recognition (inclusion in financial report) of the elements (that meet definitions) is appropriate if it results in both:
  • Relevant information about assets, liabilities, equity, income, and expenses.
  • Faithful representation of those items.

IASB Framework - Measurement of Elements

• This section defines the various measurement bases available, including:
  • Historical cost (as a measurement base).
  • Current cost measurement basis, including fair value, value in use, and current value.
  • Fair value. Fair value is the amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction.

IASB definition, recognition, and measurement stages

• The stages are (definition), (recognition), (measurement).

IAS 1 - Presentation of Financial Statements

• The standard prescribes the basis for presentation of general-purpose financial statements to ensure comparability between the entity's financial statements of previous periods and those of other entities.
• Includes financial statements structure and content.

IAS 1 - Structure and Content

• Components of financial statements include the statement of financial position (BS), statement of comprehensive income, statement of changes in equity, statement of cash flow, and notes.

IAS 1 - Statement of Financial Position (BS)

• Structure and Content: No prescribed format or order. Minimum content includes a list of items with sufficiently different nature or function. Additional line items, headings, and subtotals should also be included. Further subclassifications of line items can be disclosed in the balance sheet or notes.

• Minimum content for Balance Sheet: lists specific items, such as property, plant and equipment, investment property, and intangible assets.

IAS 1 - Structure and Content (continued)

• Methods of presentation:

  • Current/non-current distinction (preferred).
  • Based on liquidity (if reliable and more relevant).

• Current vs. Non-Current distinctions: Specific criteria for classifying assets and liabilities as current or non-current, depending on the nature of the assets and their expected timing of realisation or settlement.

• Important disclosures include those assets and liabilities that are expected to be realised or settled within 12 months after the reporting period.

IAS 1 - Income Statement:

• Structure and content: Additional line items, headings, and subtotals to accurately present financial performance may be required. The nature and materiality of the entity's operations may lead to other adjustments.
• Expenses analysis by nature (or function) are necessary.

IAS 1 - Income Statement (continued): Income Statement minimum content

• Income statement minimum content includes revenues, finance costs, share of profit or loss of associates & JV, tax expense, post-tax gain or loss on discontinued operations, disposal of assets/liabilities, profit or loss (allocation to non-controlling interests, the parent entity).

IAS 1 - Income Statement Evolution

• A trend in the past focused on the income statement and final profit figures (mostly from a creditor perspective).
• However, other changes in assets and liabilities contribute meaningful information. This has prompted an evolution to include a statement of recognised gains and losses (and others).

IAS 1 - Statement of Changes in Equity

• Presents the changes in equity of the entity during a period, including components of comprehensive income and the effect of transactions such as contributions, distributions of dividends, profit or loss transfers.

IAS 1 - Statement of Comprehensive Income

• A single statement of profit or loss with comprehensive income is presented or; two statements presenting the components of profit or loss and comprehensive income separately. A standard format is identified for these statements.

IAS 1 - Statement of Other Comprehensive Income

• Shows changes in the entity's equity during the reporting period that are not included in profit or loss. Examples include changes in revaluation surplus, actuarial gains and losses on defined benefit plans, and gains and losses from the translation of foreign currency financial statements.

IAS 16, 38 - Measurement of Tangible and Intangible Assets

• Tangible and intangible assets differ in their recognition and measurement requirements.
• Tangible assets often pose simpler recognition and measurement issues given their physical substance and readily ascertainable costs.
• Intangible assets, which lack physical substance, require a focus on the probable future economic benefits and reliable cost measurements.

IAS 16 - Measurement of Tangible Assets (at Recognition)

• The cost comprises: purchase price, costs directly attributable (delivery/installation), initial estimates of dismantling and restoration.

IAS 16 - Tangible Assets

• Tangible assets include property, plant, and equipment, (PPE) such as land, buildings, plant, machinery, and equipment.

IAS 38 - Intangible Assets

• Intangible assets don't have physical substance; examples include research & development, patents, licenses, trademarks, brand names, and software.

Recognition of Fixed Assets

• Tangible recognition is typically easier since physical identification and valuation is possible. Capitalizing intangible assets is required if purchased from another entity, otherwise determining a reliable cost measurement is difficult.

IAS 16 - Depreciation of Tangible Assets

• Depreciable amount (cost - residual value) is allocated systematically over useful life, with appropriate methods employed to fairly reflect the consumption of economic benefits.

IAS 38 - Amortization of Intangible Assets

• Amortisation (finite useful life) and accounting treatment of assets with indefinite useful life, which aren't amortized(but are reviewed periodically to identify any potential change in useful life).

Impairment - Loss of Value

• Carrying amount of an asset may exceed its recoverable amount (due to rapid economic obsolescence or physical damage) as an accounting impairment
• This is determined by the higher of the value-in-use and net realizable values (DCF and selling price) as detailed in IAS 36.

Tangible/Intangible Assets - Measurement after Recognition

• Cost model: The asset is carried at cost less accumulated depreciation and accumulated impairment losses.
• Revaluation model: Assets are carried at their fair value at the revaluation date, minus subsequent depreciation and impairment losses. Revaluation is important to maintain the assets at their fair market value.

Arguments for Cost or Revaluation Models

• Historical cost is a simpler, cheaper method, but may not be the most relevant to economic decisions.
• Fair value is more relevant, but involves greater subjectivity in valuation. Active markets provide better support for reliable fair value estimations.

IAS 2 - Inventories

• Inventories are assets held:
  • For sale in the ordinary course of business.
  • In the process of production for such sale.
  • As raw materials or supplies in the production process.
• Inventory categories: Finished goods, work in progress, raw materials, etc

IAS 2 - Inventory Valuation

• Inventory valuation is crucial for income and balance sheet statements, and affects profitability. There is an important matching process of the value of the inventory used with sales.

IAS 2 - Inventory Valuation Criterion

• Inventories must be measured at the lower of cost and net realisable value.

IAS 2 - Cost – Input Value

• Cost comprises purchase price and costs to bring inventory to its current location and condition, including direct costs (direct labor, material, production overhead). Indirect costs (factory management, administration) aren't included in cost.

Cost - input value (continued)

• Issues arise in determining costs when multiple similar units are acquired at different times and costs, requiring the use of suitable cost formulas.

IAS 2 - Cost Formula (FIFO, Weighted-Average)

• Specific identification, FIFO (first-in, first-out), and weighted-average cost can be used to allocate costs to inventory (when items are interchangeable).

IAS 2 - Net Realizable Value

• Net realizable value is the estimated selling price less costs to make the sale, such as completion, marketing, and distribution costs.

IFRS Inventory Valuation

• IFRS standards dictate that inventories should be measured at the lower of cost and net realizable value. Examples are provided to demonstrate the application of lower of cost and NRV criteria to valuation methods.

Financial Assets, Liabilities, & Equity

• Financial Assets: Assets that arise from a contractual right to receive cash or another financial asset. Includes tangible assets such as inventory, PPE, and intangible assets; it also includes financial assets such as cash, receivables, and investments. Current and non-current classifications are important.

• Investments : Investments can be current or non-current, depending on whether they are for continuing use or trading purposes.

• Cash: Easily recognizable and measurable; important to distinguish cash versus investment.

• Receivables: Represents a contractual right to receive cash; measured at their nominal amounts less allowances for bad debts; long-term receivables are valued at present value.

• Financial Instruments: Instruments that typically include debt (e.g., bonds) and equity (e.g., shares) instruments; instruments that can potentially facilitate tradability with other entities. Debt instruments have a maturity date. equity instruments may or may not.

Financial Instruments (continued)

• Investors can purchase debt instruments with an intention of holding until maturity or selling them. Equity instruments can be traded without a specified maturity.
• Classification of instruments based on an intention to sell or to hold them until maturity, or as investments for trading purposes.

Investments on financial assets

• Financial Assets Held to Maturity: Valued at cost, gains/losses are recorded only at the time of sale in the income statement.
• Financial Assets Available for Sale: Valued at fair value, unrealized gains/losses are recorded in the OCI (other comprehensive income).
• Financial Assets Held for Trading: Valued at fair value, unrealized gains/losses are recorded in the profit or loss statement.

Liabilities

• Liabilities are present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow of resources from the entity.

• Payables/creditors are categorized as current and non-current. Include important details about the creditors identity, the due date and amount. They are typically valued at face value except in unusual circumstances.

Liabilities: Provisions

• Liabilities of uncertain timing or amount (best estimate). Examples include provisions for pensions, cleaning/dismantling expenses, repair costs of warranted products.

Equity

• Equity represents the ownership interest in an entity's assets remaining after deducting liabilities.

Equity: Components

• Lists of components such as subscribed capital, share premium, legal reserve, and profit/loss reserves.

Equity: Subscribed Capital

• Subscribed capital is the authorized share capital subscribed by shareholders, with a nominal value (or par value) which is often displayed per share. Subscribed capital not yet paid can be displayed as a receivable. Shares bought back from the public and held by the company are categorized as treasury shares and often presented in the accounting reports as a negative value in equity.

Equity: Share Premium

• The difference between the selling price and the nominal value/par value of an issued share, is called share premium, presented as a credit.

Equity: Reserves (Legal Reserve)

• Reserve legally mandated to be set aside by law, usually 5% of profits until it equals 20% of share capital in some countries. This legal reserve acts as a buffer, protecting creditors.

Equity: Reserves (Profit or Loss)

• Retained profits (or reserves) are the profit elements not transferred to any other form of reserve but retained for use in the company.

Measurement of Inventories in detail

• How to measure the cost of the inputs value
• Different situations that result in the use of various cost formulas, such as: FIFO (First In, First Out), LIFO (Last-In, First Out), WA (Weighted Average).
• Criteria for valuation (cost), or using net realizable value (output value).

Explore the key concepts of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as introduced by Chiara Saccon. This quiz also covers the objectives and qualitative characteristics essential for effective financial reporting. Learn how these standards aid investors and creditors in decision-making.