IFRS Notes PDF

MEANING OF IFRS: IFRS is an acronym for International Financial Reporting Standards and covers full set of principles and rules on reporting of various items, transactions or situations in the financial statements. Often, they are referred to as “principles based” standards because...

MEANING OF IFRS: IFRS is an acronym for International Financial Reporting Standards and covers full set of principles and rules on reporting of various items, transactions or situations in the financial statements. Often, they are referred to as “principles based” standards because they describe principles rather than dictate rigid accounting rules for treatment of certain items. In simple words, IFRS are a set of International accounting standards, stating how particular types of transactions and other events should be reported in the financial statements. They are the guidelines and rules set by IASB which the company and organisation can follow while preparing their financial statements. IFRS are designed as a common global language for business affairs so the company accounts are understandable and comparable across international boundaries. OBJECTIVES OF IASB: To achieve convergence in accounting standards around the world To develop a single set of high quality, understandable, enforceable and globally accepted International Financial Reporting Standards (IFRS) (previously International Accounting Standards (IASs)) To develop financial reporting standards that provide a faithful portrayal of an entity’s financial position and performance in its financial statements  Those standards should serve investors and other market participants in making informed resource allocation and other economic decisions The confidence of all users of financial statements in the transparency and integrity of these statements is critically important for the effective functioning of capital markets, efficient capital allocation, global financial stability and sound economic growth To provide guidance on IFRS To promote the use of those standards STAGES OF IFRS: SETTING THE AGENDA The IASB receives requests from constituents to interpret, review or amendexisting IFRS Reviews such requests: ▪ the relevance to users of the information and the reliability of information thatcould be provided ▪ whether existing guidance is available ▪ the possibility of increasing convergence ▪ the quality of the standard to be developed ▪ resource constraints Sets agenda priorities STAGE 2: PROJECT PLANNING: IASB decides whether to: o conduct the project alone, or  o jointly with another standard-setter After considering the nature of the issues a working group is established The project manager draws up a project plan STAGE 3: DEVELOPMENT AND PUBLICATION OF DISCUSSION PAPER Although a discussion paper is not mandatory, the IASB normally publishes it as its first publication on any major new topic to explain the issue and solicit early comment from constituents. Typically, a discussion paper includes: a comprehensive overview of the issue possible approaches in addressing the issue the preliminary views of its authors or the IASB an invitation to comment STAGE 4: DEVELOPMENT AND PUBLICATION OF AN EXPOSURE DRAFT Publication of an exposure draft is a mandatory step in due process Irrespective of whether the IASB has published a discussion paper, anexposure draft is the IASB’s main vehicle for consulting the public STAGE 5: DEVELOPMENT AND PUBLICATION OF AN IFRS The development of an IFRS is carried out during IASB meetings, when the IASB considers the comments received on the  exposure draft. STAGE 6: PROCEDURES AFTER AN IFRS IS ISSUED After an IFRS is issued, the staff and the IASB members hold regular meetings with interested parties, including other standard- setting bodies, to help understand issues related to the implementation of IFRS. FEATURES OF IFRS: 1. IFRS are principle base standards as compared to the rule based GAAP: This means that they have distinct advantage that transactions cannot be manipulated easily. 2. IFRS lays down treatments based on the economic substance of various events and transactions rather than their legal form. 3. Fair value accounting: Under the IFRS, the historical cost concept has been abandoned and replaced by a current cost system for more accurate financial reporting. The concept of fair value accounting has taken over historical cost accounting in financial reporting to improve the relevance of the information contained in financial reports and getting the balance sheet right. 4. Format of financial statements: Presentation of financial statements is significantly different from presentation of financial statements in GAAP, which follows the Schedule III of the Companies Act, 2013. For example, IFRS requires clean segregation of assets and liabilities into current and non-current groups. At present, the liquidity basis is preferred as per the Companies Act. 5. Functional currency: Indian entities prepare financial statements in Indian Rupees. Under IFRS, an entity measures its assets and liabilities and revenues and expenses in its functional currency. Functional currency is the currency of the primary environment in  which the entity operates which may be different from the local currency of a country. 6. IFRS requires annual reassessment of useful life of the assets. Earlier depreciation was stopped once asset is retired from active use. But under IFRS depreciation is to be allowed till the time of actual de-recognition of asset from the books. 7. Component accounting: IFRS mandates Component Accounting. Under this approach each major part of an item of equipment with a cost that is significant in relation to the total cost of an item has to be maintained and depreciated separately. ADVANTAGES OF IFRS: The main advantages to India by converging with IFRS are as follows: a) Common basis of comparison: Most of the countries of the European Union have switched over to IFRS. If companies in India also switched over to IFRS, it would make transitions and dealings with companies of other countries who operate under IFRS much easier. It would also give stock holders and other interested parties a common basis of comparability. b) Clarity and productivity: Under IFRS, financial makers use their own professional judgement as to how to handle a specific transaction. This will lead to less time being spent trying to follow all rules that are coupled with rule based accounting. c) Consistent financial Reporting Basis: A consistent financial reporting basis would allow a multinational company to apply common accounting standards with its subsidiaries worldwide which would improve internal communication, quality ofreporting and group decision making.  IFRS also expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements. These are very consistent, reliable and easy to adopt ensuring better quality of financial reporting. d) Quality information: It is expected that the adoption of IFRS will be beneficial to investors and other users of financial statements, by reducing the cost of comparing alternative investments and increasing the quality of information. The companies are also expected to benefit, as investors will be more willing to provide financing. e) Improved access to international capital markets: Many Indian entities are expanding and making significant acquisitions in the global market for which large amount of capital is required. The majority of the stock exchanges require financial information prepared under IFRS. f) Lower cost of capital: Migration to IFRS will lower the cost of raising funds, as it willeliminate the need for preparing dual sets of financial statements. It will also reduce accountant’s fees abolish risk premiums and will enable access to all major capital markets as IFRS is globally acceptable. g) Escape multiple Reporting: Convergence to IFRS will eliminate the need for multiple reports and significant adjustments for preparing consolidated financial statements. Firms registered in India prepare their accounts as per Indian Accounting Standards whereas firms registered in other countries prepare their financial statements as per the Reporting Standards  of the respective country. Adoption of IFRS ensures the elimination of multiple financial reporting standards by these firms as they are following single set of Financial Reporting. h) Reflect true value of acquisition: In Indian GAAP business combinations are recorded at carrying values rather than fair value of net assets in the acquirer’s books is not reflected separately in the financial statements, instead the amount CHALLENGES OF IFRS: CHALLENGES OF CONEVRGENCE WITH IFRS: In spite of the various benefits, adoption of IFRS in India is difficult task and faces many challenges. Few of these have been listed below: a. Wide Gap: IFRS is very much different from present accounting policies being followed. There are big differences expected in accounting for financial instruments deferred taxes, business combinations and employees benefit. b. Increased responsibility: The change to IFRS opens up certain choices a company will have in flow to account for some items. This carries with it the responsibility to investors the reasons for the choices and the impact on financial statements. c. Awareness of International Financial Reporting Practices: Convergence with IFRS means a set of converged reporting standards have to bring in. the awareness of these reporting standards is still not there among the stakeholders like firms, banks, stock exchanges and commodity exchanges etc. to bring a complete awareness of these standards among these parties is a difficult task. d. Training: Professional Accountants are looked upon to ensure successful convergence with IFRS. Along with these accountants, government officials, chief executive officers, chief information officers are also responsible for a smooth adoption process. India is  lacking facilities to train such a large group. It has also been observed that India does not have enough number of fully trained professionals to carry out this task of convergence with IFRS in India. e. Amendments to Existing laws: In India, Accounting Practices are governed by Companies Act 1956 and Indian generally accepted accounting principles (GAAP). Existing laws such as SEBI regulations, Indian Banking Laws & Regulations, Foreign Exchange Management Act also provide some guidelines on preparation of Financial Statements in India. IFRS does not recognise the presence of these laws and the Accountants will have to follow the Ind AS fully with no overriding provisions from these laws, Indian lawmakers will have to make necessary amendments to ensure a smooth transition to IFRS. f. Changes may be required to various regulatory requirements under The Companies Act, 1956, Income Tax Act, 1961, SEBI, RBI, etc., so that IFRS financial statements are accepted generally. g. Tax implications: IFRS convergence will have a significant impact on the financial statements and consequently tax liabilities tax authorities should ensure that there is clarity on the tax treatment of items arising from convergence with IFRS. h. Currently, Indian tax laws do not recognize the Accounting Standards. A complete overhaul of tax laws is the major challenge faced by the Indian Law Makers immediately. Enough changes are to be made in Tax laws to ensure that tax authorities recognize Ind AS complaint financial statements otherwise it will duplicate the administrative work for the firms. i. Re-negotiation of contracts: The contracts would have to be re- negotiated which is also a big challenge. This is because the financial results under IFRS are likely to be very different from those under the Indian GAAP. j. Financial Reporting systems: Companies would have to ensure that the existing business reporting model is amended to suit the reporting requirements of IFRS. The information systems should be designed to capture new requirements related to fixed assets, segment disclosures, and related party disclosures.  k. IFRS provides a complete set of reporting systems for companies to make their financial statements. In India, various laws and acts provide the financial reporting systems but nor=t as comprehensive as provided by the IFRS. Indian firms will have to ensure that existing business reporting model is amended to suit the requirements of IFRS. THEOREICAL FRAMEWORK OF IFRS: IFRS 1: First time adoption of IFRS: IFRS 1 sets out the rules and procedures that an entity must follow when it reports in accordance with IFRSs for the first time. The main aim is to ensure that entity’s first financial statements and related interim financial reports are in line with IFRS and can be generated at cost not exceeding the benefits. It prescribes how the opening statement of financial position shall be prepared for the first-time adopters and what accounting policies shall be used. Necessary comparative information is prescribed: At least 3 statements of financial position 2 statements of comprehensive income statement 2 separate income statement if presented 2 statements of cash flow statements 2 statements of changes in equity and Related notes including comparative information. IFRS 1 then orders that an entity must explain how transition to IFRSs affected its reported financial statements and prepare reconciliations of equity and total comprehensive income. IFRS 2: Share Based Payments: The objective is to set out the rules for reporting the share-based payment transactions in entity’s profit or loss and financial position, including transactions in which share options are granted to employees. IFRS 2 deals with 3 types of share-based payments transactions: ❖ The first type is equity settled share-based payment transactions where an entity receives goods or services in exchange for equity instruments. For example, providing share options to employees as a part of their remuneration package. ❖ The second type is cash settled share-based payment transactions in which the entity receives or acquires goods or services in exchange for liabilities to these suppliers. Liabilities are in amounts based on the price or value of entity’s shares or other equity instruments. For example, a company grants share appreciation rights to their employees, whereby employees will be entitled to future cash payment based on increase of company’s share price over some specified period of time. ❖ The third type is share- based payment transactions with cash alternatives, where entity receives or acquires goods or services in exchange for either cash settlement or equity instrument. IFRS 2 prescribes how various transactions shall be measured and recognized, lists all necessary disclosures and provides application guidance on various situations. IFRS 3: BUSINESS COMBINATIONS: o To provide rules for recognition and measurement of business combinations when an acquirer acquires assets and liabilities of another company (acquire) and those constitute a business (parent- subsidiary company situations) o To prescribe what acquisition method should be applied in accounting for business combinations. Scope: IFRS 3 does not set out the rules for preparation of consolidated financial statements for business combinations, such as group of companies under the control of parent, etc. Applying the acquisition method comprises 4 steps: ✓ Identifying the acquirer. ✓ Determining the acquisition date ✓ Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquire. ✓ Recognizing and measuring goodwill or a gain from a bargain purchase. IFRS 4: Insurance Contracts: IFRS 4 is the first standard dealing with insurance contracts. It defines the rules of financial reporting for insurance contracts (including reinsurance contracts) by entity who issues such contracts (insurer, for example, any insurance company) and also for reinsurance contracts by entity who holds them. Scope: IFRS 4 does not apply to other assets and liabilities of an insurer. Also, IFRS 4 does not apply to policy holders (insured entities, etc). IFRS 4 defines insurance contracts and establishes accounting policies applied to them, including recognition and measurement rules. It addresses some specific issues, such as embedded derivatives in insurance contracts, situations when insurance contract contain both insurance and deposit component, shadow accounting practices etc. IFRS 5: Non-Current Assets Held for Sale and Discontinued ▪ To specify the accounting for assets or disposal groups held for sale (those whose carrying amount will be recovered principally through a sale transaction rather than continuing use) and the presentation and disclosure of discontinued operation (component of an entity- subsidiary, line of business, geographical area of operations, etc.-that either has been disposed of or is classified as held for sale). ▪ To establish conditions when the entity shall classify a non- current asset or disposal group as held for sale. ▪ To set out the rules for measurement of assets or disposal groups held for sale, recognition of impairment losses and their reversals, and rules for the situation when an entity makes changes to a plan of sale and assets or disposal group can no longer be classified as held for sale. IFRS 5 explains the term “discontinued operations” and prescribes what shall be reported in the statement of comprehensive income and statement of cash flows with regard to it. Additional disclosures in the notes to the financial statements are also required. IFRS 6: Exploration for and Evaluation of Mineral Resources: IFRS 6 specifies financial reporting of the expenditures for the exploration for and evaluation of mineral resources (oil, natural gas and similar non- regenerative resources.) IFRS 6 prescribes that exploration and evaluation assets shall be measured at cost. It permits the entity to determine accounting policy specifying which expenditures are recognized as exploration and evaluation assets and gives examples of acceptable types of expenditures (acquisition of rights to explore, exploratory drilling, trenching, sampling, etc.) IFRS 6 then prescribes the rules for subsequent measurement, changes in accounting policies and impairment of these assets). In relation to presentation, IFRS 6 describes classification and reclassification of exploration and evaluation assets and finally number of disclosures is prescribed. IFRS-7: Financial Instruments: Disclosures: IFRS 7 prescribes what disclosures an entity shall provide about financial instruments in its financial statements and thus it complements standard IAS 32 on presentation and IAS 39/ IFRS 9 on recognition and measurement of financial instruments. Before, standard IAS 32 dealt also with disclosures, but IAS 32’s part on disclosures was superseded by IFRS 7. IFRS 7 requires disclosures in 2 main categories: The first category represents disclosures about significance of financial instruments for financial position and performance. Within this category, an entity is required to disclose the following information related to the statement of financial position: i. Information by categories of financial assets and liabilities. ii. Specific disclosures about financial assets or financial liabilities at fair value through profit or loss and financial assets valued at fair value through other comprehensive income. iii. Reclassification of financial instruments among categories. iv. De-recognition. v. Collaterals vi. Allowances for credit losses vii. Compound financial instruments with multiple embedded derivatives  viii. Defaults and breaches of loan agreement terms, etc. The second category represents disclosures about nature and extent of risks arising from financial instruments. IFRS 7 then prescribes specific disclosures about credit risk, liquidity risk and market risk. IFRS 7 sets guidelines related to disclosures about transfer of financial assets. It states which information shall be disclosed when transferred financial asset is derecognized in its entirety and which information shall be disclosed when transferred financial asset is not derecognized in its entirety. IFRS-8: Operating Segments: IFRS 8 replaced the standard IAS 14 – Segment reporting with effective date for periods beginning 1 January 2009 or later. It prescribes the information that an entity must disclose about its business activities- operating segments, products and services, the geographical areas in which it operates and its major customers. Scope: Standard IFRS 8 applies only to entities whose debt or equity instruments are traded in a public market or in the process of filing its financial statements with a security commission or other regulatory organisation for that purpose. IFRS 8 defines operating segments and explains what can be deemed operating segment. Then it prescribes criteria for reportable segments, including aggregation criteria and quantitative thresholds for segment to be reported separately. IFRS- 9: Financial Instruments: The first version of IFRS 9 was issued in November 2009 and then it was amended in October 2010 and November 2013. Once it is fully finalised, it will replace standard IAS 39 in the future. IFRS 9 deals with recognition, classification, measurement and de- recognition of financial instruments as well as with the hedge accounting rules. The current version of IFRS 9 does not include mandatory effective date, but entities can adopt it voluntarily. IASB will add the mandatory effective date later when all phases are completed. IFRS 9 consists of 7 chapters and 3 appendices. It sets rules when the financial assets shall be derecognized in its entirety, or just partially. Basically, financial asset shall be derecognized when the contractual rights to the cash flows from the financial asset expire, or the entity transfers the financial asset as set out and the transfer qualify for de-recognition. With regard to de-recognition of financial liabilities, an entity can remove financial liability from the statement of financial position when it is extinguished- i.e., when the obligation specified in the contract is discharges or cancelled or expires. IFRS 9 also deals with classification of financial assets and liabilities. Financial assets are divided into 2 categories – those measured at amortized cost and those measured at fair value. IFRS- 10: Consolidated Financial Statements: The objective of IFRS 10 is to establish principles for consolidation related to all investees based on control that parent exercise over the investee rather than the nature of investee. IFRS 10 defines when investor controls the investee: When the investor is exposed, or has rights to variable returns from its involvement with the investee and Has the ability to affect those returns through its power over the investee. Investor controls the investee when it has all three elements: ▪ Power over the investee. ▪ Exposure, or rights, to variable returns from its involvement with the investee, and  ▪ The ability to use its power over the investee to affect the amount of the investor’s returns. IFRS 10 then sets the accounting requirements for preparation of consolidated financial statements, consolidation procedures, reporting non-controlling interests and treatment of changes in ownership interests. Standard does not set any requirements for disclosures, as those are covered by IFRS 12. IFRS – 11: Joint Arrangements: IFRS 11 sets principles for reporting of joint arrangements- arrangements of which two or more parties have joint control. This standard effectively amends IAS 27 and IAS28. IFRS 11 explains characteristics of joint control: ✓ The parties are bound by a contractual arrangement and ✓ The contractual arrangement gives two or more of those parties joint control of the arrangement. IFRS 11 classifies joint arrangements into 2 categories: Joint Operation and Joint Venture and prescribes how each of these forms shall be recognized and reported in the financial statements of parties to a joint arrangement. IFRS- 12: Disclosure of Interest in Other Entities: IFRS prescribes what disclosures shall be provided in the financial statements with regard to interests in subsidiaries, joint arrangements, associates or unconsolidated structured entities. Reporting entity must present disclosures about significant judgements and assumptions made in determining the existence of control over another entity, the type of such control and existence and type of joint arrangement. IFRS 12 then sets broad range of disclosures for interests in subsidiaries, interests in joint arrangements and associates and interests in unconsolidated structured entities (entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity). IFRS 12 also requires disclosures for interests in unconsolidated subsidiaries in line with the newest amendments of IFRS 10. IFRS – 13: Fair Value Measurements: IFRS 13 defines fair value, provides guidance for its measurement as well as sets disclosure requirements with respect to fair value. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In order to increase consistency of fair value measurement, IFRS sets fair value hierarchy which classifies inputs used in valuation techniques into 3 levels: ▪ Quoted prices in active markets for identical assets or liabilities that an entity can access at the measurement date. ▪ Other than quoted market prices included within level 1 that are observable for the asset or liability, either directly or indirectly (quoted prices of similar assets) ▪ Unobservable inputs for the asset or liability. IFRS 13 then outlines a fair value measurement approach by stating what an entity shall determine when assessing fair value. With reference to valuation, IFRS 13 discusses 3 valuation techniques: a) Market approach: it utilizes the information from market transactions. b) Cost approach: it involves current replacement cost. c) Income approach based on future cash flows, income or expenses discounted to present value. IFRS – 14: Regulatory Deferral Accounts: IFRS 14 is to specify the financial reporting requirements for regulatory deferral account balances that arise when an entity provides goods or services to customers at a price or rate that is subject to rate regulation. Its purpose is to allow rate-regulated entities adopting IFRS for the first time to avoid changes in accounting policies in respect of regulatory deferral accounts. Presentation in financial statements: The impact of regulatory deferral account balances is separately presented in an entity’s financial statements. a. Separate line items are presented in the statement of financial position for the total of all regulatory deferral account debit balances, and all regulatory deferral account credit balances. b. Regulatory deferral account balances are not classified between current and non-current, but are separately disclosed using subtotals. c. The net movement in regulatory deferral account balances are separately presented in the statement of profit or loss and other comprehensive income using subtotals. IFRS – 15: Revenue from Contracts with Customers: The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. Application of the standard is mandatory for annual reporting periods starting from 1 January 2017 onwards. IFRS 15 applies to all contracts with customers except for leases within the scope of IAS 17 Leases. The core principle of IFRS 15 has shown in the 5-step model framework:  a. Identify the contracts with customers b. Identify the performance obligations in the contract c. Determine the transaction price d. Allocate the transaction price to the performance obligations in the contract e. Recognize the revenue when the entity satisfies a performance obligation Presentation in Financial Statements: Contracts with customers will be presented in an entity’s statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance and the customer’s payment. A Contract Liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to the entity performing by transferring the related good or service to the customer. When the entity has performed by transferring a good or service to the customer and the customer has not yet paid the related consideration, a Contract Asset or a receivable is presented in the statement of financial position. IFRS -16: Leases A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. An asset is typically identified by being explicitly specified in a contract, but an asset can also be identified by being implicitly specified at the time it is made available for use by the customer. Objective: To establish principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. Scope: IFRS 16 Leases applies to all leases, including subleases, except for: leases to explore for or use minerals, oil, natural gas and similar non- regenerative resources; leases of biological assets held by a lessee (IAS 41 Agriculture); service concession arrangements (IFRIC 12 Service Concession Arrangements); licenses of intellectual property granted by a lessor IFRS 15 Revenue from Contracts with Customers); and rights held by a lessee under licensing agreements for items such as films, videos, plays, manuscripts, patents and copyrights within the scope of IAS 38 Intangible Assets