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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IFRS Foundation or the IASB
IFRS Foundation
International Financial
Reporting Standards:framework-based
understanding and teaching
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Guillermo Braunbeck, Project Manager, Education Initiative, IASB
Outline
• Why global standards?
• The progress
• Structure and governance
• Understanding principle-based standards
2
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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IFRS Foundation or the IASB
IFRS Foundation
Why global standards?
The reality
• Capital markets are global – New York, London, Luxemburg, Hong Kong, Singapore
• World’s economies are interdependent
– the financial crisis
– SMEs integrated into the global economy
4
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Benefits of global standards
• Efficient allocation of capital globally
– attracting investment through transparency
– reducing the cost of capital
– increasing world-wide investment
• Reducing costs and increased efficiency
– facilitates standardising information systems
– eliminates wasteful reconciliations
– audit efficiencies
– education and training
5
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
International Financial Reporting Standards
Th
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Status of IFRSs use around the world
Since 2001, over 120 countries have required or
permitted the use of IFRSs.
Remaining major economies have time lines toconverge with or adopt IFRSs in the near future.
Next wave of new joiners in 2011/2012: Argentina,
Canada, Mexico, South Korea, etc
Japan: IFRS permitted for a number of international
companies since 2010; decision about mandatory
adoption around 2012.
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
7
88
More than 100 countries require or permit the use of International Financial Reporting Standards (IFRSs),or are converging with the IASB’s standards.
More than 100 countries require or permit the use of International Financial Reporting Standards (IFRSs),or are converging with the IASB’s standards.
THE MOMENTUM TOWARDS GLOBAL ADOPTION OF IFRSs
The World is Getting Smaller
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Fortune Global 500 (July 2009)
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
9
Fortune G500 Based on
announced plans
Which GAAP? 2009 2013 Japan 2015?
IFRSs and word-for-word
IFRS equivalents 190 245 310
US GAAP 155 155 140
National GAAPs 155 100 50
Total 500 500 500
International Financial Reporting Standards
Structure and
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The vision
…one single set of high
quality global standards..
..used on the global
capital markets.
11
Structure of IFRS Foundation 12
IFRSInternational
IFRS Interpretations
The standard-setting operation
IFRS Foundation TrusteesInternationalMonitoring
Board
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Consultation process
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
13
Discussion
paper
Exposure
Draft
Final
standardComment
analysis
Comment
analysis
Research:
Standard
setters,
EFRAG, and
others.
Effective
date
9 – 15
months
9 – 15
months12 –18
months
Additional
input
Additional
input
Feedback
statement
2 year post
implementationreview
International Financial Reporting Standards
Understanding principle-b d t d d
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15What does principle-based mean?
• There is overwhelming support for principle-
based accounting standards
• But what does principle-based mean?
• In this presentation
– an IFRS requirement is principle-based only when
it is consistent with the concepts in the IASB’s
Conceptual Framework
15
Role of the Conceptual Framework
• Conceptual Framework sets out agreed concepts thatunderlie financial reporting
– objective, qualitative characteristics, element definitions, …
• IASB uses Conceptual Framework to set standards
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17
17Objective of financial reporting
Provide financial information about the reportingentity that is useful to existing and potentialinvestors, lenders and other creditors in making
decisions about providing resources to the entity
Note:
• other aspects of the Conceptual Framework flowlogically from the objective (CF.OB1)
• Conceptual Framework sets out the concepts that
underlie IFRS financial statements and assist theIASB in the development of future IFRSs and in itsreview of existing IFRSs (CF.Purpose and Status)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
18Objective of financial reporting
• Investors’, lenders’ and other creditors’ expectationsabout returns depend on their assessment of the
amount, timing and uncertainty of (the prospects
for) future net cash inflows to the entity.
– Decisions by investors about buying, selling or holding equity
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19
19Objective of financial reporting
• To assess an entity’s prospects for future net cash
inflows, existing and potential investors, lenders and
other creditors need information about:
– the resources of the entity;
– claims against the entity; and
– how efficiently and effectively the entity's management
and governing board have discharged their
responsibilities to use the entity's resources
– eg protecting the entity's resources from unfavourable effects
of economic factors such as price and technological changes
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
20Qualitative characteristics
• If financial information is to be useful, it must berelevant and faithfully represent what it purports torepresent (ie fundamental qualities).
– Financial information without both relevance and faithfulrepresentation is not useful, and it cannot be made useful bybeing more comparable, verifiable, timely or understandable.
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21
21Fundamental qualitative characteristics
• Relevance: capable of making a difference in users’
decisions
– predictive value
– confirmatory value
– materiality (entity-specific)
• Faithful representation: faithfully represents the
phenomena it purports to represent
– completeness (depiction including numbers and words)
– neutrality (unbiased)
– free from error (ideally)
Note: faithful representation replaces reliability
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
22Enhancing Qualitative Characteristics
• Comparability : like things look alike; different thingslook different
• Verifiability : knowledgeable and independent
observers could reach consensus, but not
necessarily complete agreement, that a depiction is
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232323Pervasive constraint
• Reporting financial information imposes costs, and it is
important that those costs are justified by the benefits of
reporting that information.
• Benefits include more efficient functioning of capital markets and a
lower cost of capital for the economy.
• Costs include collecting, processing, verifying and disseminating
financial information and the costs of analysing and interpreting the
information provided.
• In applying the cost constraint, the IASB assesses whether
the benefits of reporting particular information are likely to
justify the costs incurred to provide and use that information.Those assessments are usually based on a combination of
quantitative and qualitative information.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
242424Summary
• Reporting financial information that is relevant andfaithfully represents what it purports to representhelps users to make decisions with moreconfidence (ie financial information must possessthe fundamental qualitative characteristics).
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25
25Elements
• Asset : Resource controlled as a result of past events and
from which future economic benefits are expected to flow
• Liability : Present obligation arising from past events, the
settlement of which is expected to result in outflow ofresources embodying economic benefits
• Equity : Assets minus liabilities
• Income (expense): Increases (decreases) in economic
benefits during period from inflows or enhancements
(outflows or depletions) of assets (liabilities) or decreases
(incurrences) of liabilities from in increases (decreases) in
equity, other than contributions from (distributions to) equity
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
26Recognition
• Accrual basis of accounting
– recognise element (eg asset) when satisfy
definition and recognition criteria
• Recognise item that meets element definition when
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27Recognition
What does probable mean?
The meaning of probable is determined at thestandards level. Therefore, inconsistent useacross IFRSs
What does measure reliably mean?
To a large extent, financial reports are based onestimates, judgements and models rather thanexact depictions.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Measurement concepts 28
• Measurement is the process of determining monetaryamounts at which elements are recognised and
carried. (CF.4.54)
• To a large extent, financial reports are based on
estimates judgements and models rather than exact
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29
Presentation and disclosure
• Objective of financial reporting
• Presentation: financial statements portray financial
effects of transactions and events by:
– grouping into broad classes (the elements, eg asset)
– sub-classify elements (eg assets sub-classified by their
nature or function in the business)
• IAS 1
– application of IFRSs with additional disclosures whennecessary results in a fair presentation (faithful
representation of transactions, events and conditions)
– don’t offset assets & liabilities or income & expenses© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
International Financial Reporting Standards
Quiz:Conceptual Framework
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31
Quiz: purpose of the Conceptual
Framework for Financia l Report ing
Question 1: The purpose of the ConceptualFramework for Financia l Report ing is:
a. to assist the IASB in setting IFRSs?b. to assist preparers of financialstatements in applying IFRSs?
c. to assist auditors in forming an opinionon whether financial statementscomply with IFRSs?
d. to assist users of financial statements
in interpreting IFRS financialstatements?e. all of the above?
Quiz: objective of general purpose of
financial reporting
Question 2: The objective of generalpurpose financial reporting is:
a. provide financial information about thereporting entity that is useful toexisting and potential investors,
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33
Quiz: objective of general purpose of
financial reporting
Question 2: The objective of generalpurpose financial reporting is:
d. to meet all the information needs of allthe users of an entity’s financialstatements?
e. to inform economic decision-makingby a broad range of users (includingmanagers, investors, creditors andprudential regulators)?
34
Quiz: objective of general purpose
financial reporting
Question 3: Which of the following could
most closely be associated with the
objective of financial reporting:
a. have a bias toward understating assetsand income and overstating liabilities
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35
Quiz: fundamental qualitative
characteristics
Question 4: The fundamental qualitative
characteristics are:
a. comparability and relevance?b. relevance and reliability?
c. relevance, reliability and
comparability?
d. relevance and faithful representation?
e. comparability, relevance and faithfulrepresentation?
35
36Quiz: qualitative characteristics
Question 5: verifiability meansknowledgeable and independent observers:
a. would reach complete agreement that a
depiction is a faithful representation?
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37Quiz: qualitative characteristics
Question 6: which statement/s are true?
a. Relevance is a fundamental qualitative
characteristic.b. Financial information without both
relevance and faithful representation is
not useful.
c. Financial information without both
relevance and faithful representation
cannot be made useful by being more
comparable, verifiable, timely or
understandable.37
38Quiz: qualitative characteristics
Question 6: which of the statements beloware true?
d. Financial information that is relevantand faithfully represented may still beuseful even if it does not have any of
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39Quiz: recognition
Question 7: Expenses are recognised in
comprehensive income (profit or OCI):
a. using the matching basis—on the basisof a direct association between thecosts incurred and the earning ofspecific items of income?
b. using the accrual basis—items arerecognised as assets, liabilities, equity,income or expenses when they satisfy
the definitions and recognition criteriafor those items?c. at the discretion of management?
39
40Quiz: uncertain future cash flows
Question 8: Recognition criteria determinewhen to recognise an item.Measurement is determining the monetaryamounts at which to measure an item.Uncertainties about the extent of future cashflo s
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41Quiz: measurement
Question 9: How many measurement bases
does IFRSs specify for the measurement of
assets?a. one—historical cost
b. one—fair value
c. two—historical cost and fair value
d. many—including historical cost, fair
value, value in use, estimated selling
price less costs to complete and sell,etc
41
42Quiz: status of Conceptual Framework
Question 10: the Conceptual Framework :
a. is an IFRS?
b. overrides all other IFRS requirements?
c. does not define standards for any
ti l t di l
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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IFRS Foundation or the IASB
IFRS Foundation
Commonmisunderstandings
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Common ‘conceptual’misunderstandings
The Framework does not… Clarification—the Framework
includes
include a matching concept accrual basis of accounting—
recognise elements when satisfy
definition and recognition criteria
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45
Common ‘conceptual’misunderstandings continued
Misunderstanding Clarification
Uniformity = comparability Comparability is achieved when
like things are accounted for in
the same way.
Comparability is not achieve
when accounting rules require
unlike things be accounted for in
the same way
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Common ‘conceptual’misunderstandings continued
Misunderstanding Clarification
There is a clear concept for the
historical cost of an item
The Framework provides only a
vague description—assets are
recorded at the amount of cash
or cash equivalents paid or the
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47
Common ‘conceptual’misunderstandings continued
Misunderstanding Clarification
Principles are necessarily less
rigorous than rules
Rules are the tools of financial
engineers
There are few judgements and
estimates in cost-based
measurements
Inventory, eg allocate joint costs
and production overheads
PPE, eg costs to
dismantle/restore site, useful
life, residual value, depreciation
method
Provisions, eg uncertain timing
and amount of expected future
cash flows
International Financial Reporting Standards
Framework-basedd t di f IFRS
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49
Framework -based understanding… 49
Principles RulesConcepts
• relates IFRS requirements to the concepts in
the Conceptual Framework
• reasons why some IFRS requirements do not
maximise those concepts (eg application of thecost constraint or inherited requirements)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Framework -based understandingprovides… 50
• a cohesive understanding of IFRSs – Framework facilitates consistent and logical
formulation of IFRSs
• a basis for judgement in applying IFRSs
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51
Minimum guidance that gives effect to the principles
Presentation and
disclosure principles
Measurement
principle/s
Recognition
principle
Structure of a principle-based standard 51
Derecognition
principle
Concepts
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
52The ideal principle-based standard
• Scope – no exceptions
• Principles
– derived from the Framework
52
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53What if requirement not principle-based 53
• Understand why IASB deviated from the mainconcepts in the Conceptual Framework
– see Basis for Conclusions (BfC)
– If no BfC then requirement could predate ConceptualFramework (eg IAS 20))
A Guide through IFRSs cross-references all IFRSrequirements to the Basis for Conclusions
• Consider what a more principle-based requirementcould be (consider rejected alternatives, subsequentIASB DPs and EDs, etc)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
54
Example:Lease classification
• Objective
• Concepts – faithful representation
– element definitions
• Broadly stated lease classification requirement
54
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55
Example:
Lease classification continued 55
– understand broadly stated requirement is inconsistent
with the Conceptual Framework
(see basis for conclusions on ED Leases)
– consider what a principle-based lease classification
principle could be (see ED Leases)
– focus on making the judgements to apply
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
56
Does the Framework help meunderstand IFRSs? 56• Yes, the starting point for understanding all IFRS
information is the objective and the concepts that flowlogically from that objective:
– IASB uses Framework to set IFRSs
– Teachers/Trainers use Framework -based teachingto prepare students to make judgements that are
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57
Examples:errors and changes in policies and estimates
• Objective
• Concepts
– faithful representation
– comparability• Principle
– Prior period error: retrospective restatement
– Change in policy: retrospective application
– Change in estimate: prospective application
• Rules
– impracticable exception
– transitional provisions (new requirements)
– specified disclosures
57
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
585858Pervasive constraint• Cost
– IASB assesses whether the benefits of reportingparticular information are likely to justify the
costs incurred to provide and use that
information.
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59Elements
Asset
• resource controlled by the
entity
• result of past event
• expected inflow of economic
benefits
Liability
• present obligation
• arising from past event
• expected outflow of
economic benefits
Equity = assets less liabilities
Income
• recognised increase inasset/decrease in liability incurrent reporting period
• that result in increasedequity except…
Expense
• recognised decrease inasset/increase in liability incurrent reporting period
• that result in decreasedequity except…
59
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
60Elements, examples• Asset?
• an oil explorer’s exploration rig
• a fish farmer’s breeding stock
• fish in the sea (from a fish harvester’s perspective)
• own shares held by an entity
60
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61Elements, examples
• Liability?
• defending a lawsuit
• promise to make good environmental damage(no legal obligation to do so)
• law requires smoke filters be fitted to factory
• lessee—short-term car rental agreement
• participant in a cap and trade emission trading
scheme
61
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
62Elements, examples
• Liability or equity?
• issue ordinary share
• issue compulsorily redeemable debt (fixedinterest, fixed redemption)
62
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63
Elements, examples 63
Liability or equity at 31/12/20X1?
•On 15/01/20X2 the shareholders of an entity approved
the distribution of CU40,000 dividend for the year ended
31/12/20X1 (as proposed by management on 21
December 20X1.
– CU18,000: minimum dividend required by law for the year
ended 31 December 20X1
– CU22,000: additional to required minimum dividends
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Classification• Objective of financial reporting
• Financial statements portray financial effects oftransactions and events by:
– grouping into broad classes (the elements, eg asset)
– sub-classify elements (eg assets sub-classified by their
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65
Classification, assets and claims
• Information about the nature and amounts of a
reporting entity’s economic resources and claims
can help users to identify the reporting entity’s
financial strengths and weaknesses.• That information can help users to:
– assess the reporting entity’s liquidity and
solvency
– its needs for additional financing and how
successful it is likely to be in obtaining thatfinancing.
(CF.OB13)© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Classification, claims
• Information about priorities and paymentrequirements of existing claims helps users to
predict how future cash flows will be distributed
among those with a claim against the reporting
entity (CF OB13)
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67Classification, liability
• Which IFRS classification of liability are?
• obligation to pay current tax
• metered power used but not yet billed bysupplier
• ‘normal’ warrantee obligation to make goodmanufacturing defect
• warrantee obligation to compensate formanufacturing defects by settling in
compensation in cash
• extended warrantee obligation
67
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Classification, assets
• Different types of economic resources affect auser’s assessment of the reporting entity'sprospects for future cash flows differently.
– Some future cash flows result directly from existingeconomic resources (eg accounts receivable andinvestment property).
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69Asset classification• Which IFRS classification of asset are?
• investment in ordinary shares
• gold
• land
• land planted with plantation
• farm implements
• bird breeder’s birds
• birds in a zoological garden
• birds in a bird breeding zoo
• owner-occupied building held for sale
• owner-occupied building decided to abandon
69
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
70Recognition
• Accrual basis of accounting – recognise element (eg asset) when satisfy
definition and recognition criteria
• Recognise item that meets element definition when
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71Recognition, examples
• Recognise the asset?
• a hospital’s backup backup generator (expect never touse it)
• an oil explorer’s exploration rig• an oil extractor’s unproven reserves
• an oil extractor’s proven reserves
• advertising expenditure
• research and development expenditure
• internally generated brand
• lessee—short-term car rental agreement• firm order to acquire gold, cannot settle net
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Measurement ‘concepts’ 72
• Measurement is the process of determining monetary
amounts at which elements are recognised and
carried. (CF.4.54)
• To a large extent, financial reports are based on
estimates judgements and models rather than exact
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75
Fair value measurement concept 75
• Information about an entity’s financial performance in
a period, reflected by changes in economic resources
is useful in assessing the entity’s past and future
ability to generate net cash inflows (see CF.OB18)
• Income (expenses) are increases (decreases) in
economic benefits during an accounting period in the
form of enhancements (depletions) of assets (CF.4.25)
• measure element at fair value with changes in fair
value recognised as income or expense for the periodin which it arises
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
76
ASSET TYPE MEASUREMENT AT
INITIAL RECOGNITION
MODEL BASED
ON FAIR VALUE
BASIS OF
IMPAIRMENT TEST
IFRS 9 Financial
Instruments
Fair value For specified financial
assets and for particular
business models: fairvalue
IAS 16 Property,
Plant and Equipment
Purchase costs + construction
costs + costs to bring to the
location and condition necessary
to be capable of operating in the
manner intended by
management
Accounting policy choice:
revaluation model
Compare carrying amount
to recoverable amount.
Recoverable amount is
greater of value in use and
fair value less disposal
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77
ExampleBiological asset in agricultural activity 77
• The concepts
• The principle: a gain or loss arising on initial
recognition of a biological asset at fair value less
costs to sell and from a change in fair value less
costs to sell of a biological asset shall be included
in profit or loss for the period (IAS 41.26)
• The limited exception: inability at initial recognition
to measure fair value reliably then cost-
depreciation-impairment model (IAS 41.27)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Historical cost ‘concept’ 78
• Assets are recorded at the amount of cash or cash
equivalents paid or the fair value of the consideration
given to acquire them at the time of their acquisition.
• Liabilities are recorded at the amount of proceeds
received in exchange for the obligation or in some
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79
Cost-based IFRS measures 79
• Few things measured at historical cost
– unimpaired land (IAS 16 + IAS 40 cost model)
– unimpaired indefinite life intangibles (IAS 38)
– unimpaired inventories (IAS 2)
• Cost-based measures are more common
– unimpaired depreciated historic cost (IAS 16)
– unimpaired amortised historical cost (IAS 38)
– amortised cost (IFRS 9)
Impairment changes to a fair value or other measure
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
80
ASSET TYPE MEASUREMENT AT INITIAL
RECOGNITION
COST MODEL BASIS OF
IMPAIRMENT
TEST
IAS 2 Inventory Cost of purchase and/or conversion
costs and costs to get the item to the
location and condition for sale
Cost unless impaired Lower of cost
(initial recognition)
and net realisablevalue
IAS 16 Property, Plant
and Equipment
Purchase costs + construction costs +
costs to bring to the location and
condition necessary to be capable of
operating in the manner intended by
management.
Accounting policy choice:
cost less accumulated
depreciation and
impairment, if any
Compare carrying
amount to
recoverable
amount.
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81
Example:allocating depreciation: concepts 81
• Information about an entity’s financial performance in
a period, reflected by changes in economic resources
(eg PPE) is useful in assessing the entity’s past and
future ability to generate net cash inflows (CF.OB18)
• Expenses are decreases in economic benefits during
an accounting period in the form of depletions of
assets… (CF.4.25)
• Depreciation represents the consumption of the assets
service potential in the period. – land with an indefinite useful life is not depreciated because
its service potential does not reduce with time© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Example:allocating depreciation: principle 82
• Depreciation is the systematic allocation of the
depreciable amount of an asset over its useful
life (IAS16.6).
–essentially a cost allocation technique
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83
Example: allocating depreciation:application guidance (1) 83
• Systematic allocation (application guidance):
– depreciation method must closely reflects the pattern
in which the asset’s future economic benefits areexpected to be consumed by the entity.
– unit of measure for depreciation is different from that
for an item of PPE. By depreciating significant parts of
an item of PPE separately, depreciation more faithfully
represents the consumption of the assets service
potential. (IAS16.BC26)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Example: allocating depreciation:application guidance (2) 84
• Depreciable amount =
– cost model: historical cost less residual value
– revaluation model: fair value less residual value
• Residual value =
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85
Example: allocating depreciation:application guidance (3) 85
• Useful life (entity specific) =
– the period over which the asset is expected to be available for
use by the entity; or
– the number of production or similar units expected to be
obtained from the asset by the entity.
• Consequently, depreciation continues when idle (if
useful life = period)
• However, depreciation ceases when classified as
held for sale because IFRS 5 measurement is
essentially a process of valuation, rather than
allocation (IFRS5.BC29)© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Presentation and disclosure• Objective of financial reporting
• Presentation: financial statements portray financialeffects of transactions and events by:
– grouping into broad classes (the elements, eg asset)
– sub-classify elements (eg assets sub-classified by their
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87
Subclassification
• Objective of financial reporting
• ‘Definition’: a class of asset is a grouping of assets
of a similar nature and use in an entity's operations
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Example, subclassification
• How many classes of property, plant andequipment?
– plot on which HQ is built
– vacant plot, intend to construct new HQ
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89Framework’s role in applying IFRSs 89
Does the Framework help me apply IFRSs?
• Yes, Framework is in IAS 8 hierarchy (see next
slide) – Preparers use the Framework to make the
judgements that are necessary to apply IFRSs
– Auditors and regulators assess those
judgements
– Investors, lenders and others consider those judgements when using IFRS financial
information to inform their decisions© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
90If no specific IFRS requirement
• Use judgement to –develop a policy that results in relevant
information that faithfully represents (ie
complete, neutral and error free)
90
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91In other words, if no IFRS requirement… 91
Framework-based approach would ask:
• What is the economics of the phenomenon (eg
transaction or event)?• What relevant information using the accrual
basis of accounting faithfully present that
economic phenomenon to inform decisions of
investors and lenders (potential and existing)?
• Is there anything in IFRSs that prevents me
from providing that information?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
92Example: non-cash distribution 92
Before IFRIC 17, entity distributes non-cash
asset (eg land or shares in another) whose fairvalue = CU1 mill. Carrying amount of asset =cost = CU1K
• Economics = reduce owners’ claims against theentit b distrib ting to them an asset orth
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93Example: non-cash distribution 93
Before IFRIC 17… (continued)
• Does IFRSs prevent providing that information?No. Therefore:
– recognise CU999K income (previouslyunrecognised increase in the value of theasset derecognised).
– recognise CU1 million distribution to owners.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
94Example: share-based payment 94
Before IFRS 2, entity pays employee in own shares.
Par value of shares issued = CU1K. Fair value ofservices provided = CU1 million = fair value of shares.
• Economics = entity paid employees CU1 million forservices. Employees invested CU1 million in entity.
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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IFRS Foundation or the IASB
IFRS Foundation
Framework-basedteaching of IFRSs
Support for Framework -based teaching 96
• IFRS Foundation education initiative works with
others to support Framework -based teaching
– create awareness
– develop material (starting with PPE and non-financial
li biliti )
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Range of IFRS classes 97
Can I use Framework -based teaching in my IFRS class?
• Yes, the starting point for all IFRS teaching should be
the objective of IFRS financial information and the
concepts that flow logically from that objective
• However, the extent of IFRS requirements taught are
likely to vary by course level and to suit the objectives
of the course
989898The IASB’s Conceptual Framework
• Framework sets out agreed concepts that
underlie IFRS financial reporting
– the objective of general purpose financial
reporting
qualitative characteristics
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Framework-based teaching… 99
Principles RulesConcepts
• relates the IFRS requirements being taught to
the concepts in the Conceptual Framework
• explains why some IFRS requirements do not
maximise those concepts (eg application of thecost constraint or inherited requirements)
Framework -based teaching provides… 100
• a cohesive understanding of IFRSs
– Framework facilitates consistent and logical
formulation of IFRSs
• a basis for judgement in applying IFRSs
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101What is Framework -based teaching?
In the context of IFRSs, Framework -based
teaching relates the concepts in the IASB’s
Conceptual Framework to the particular
IFRS requirements being taught
101
102Framework -based teaching• Because
– the Framework sets out agreed concepts thatunderlie IFRS financial reporting, and
– Framework -based teaching relates the concepts in
the Framework to the particular IFRS requirements
102
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103Teaching suggestions—objective
• Contrast objective of IFRS financial statements
with objectives of other financial statements
• Debunk myths
– Myth 1: objective = record of historical costs
– Myth 2: objective = support tax return
– Myth 3: financial statements are designed to meet all the
information needs of all users
• Before teaching the class the IFRS requirements
for a transaction or event, discuss whatinformation about that transaction or event would
best meet the objective
103
104Framework -based IFRS teaching 104
Framework -based teaching relates the concepts in
the Framework to the particular IFRS requirementsbeing taught
• Because the objective of the Framework is to
facilitate the consistent and logical formulation of
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105Framework -based IFRS teaching 105
To a large extent, IFRS financial statements arebased on estimates, judgements and models ratherthan exact depictions
• Because the Framework established the conceptsthat underlie those estimates, judgements andmodels it provides a basis for the use of judgementin resolving accounting issues
• By relating those concepts to the IFRS requirementsFramework -based teaching
– enhances the ability of students to exercise the judgementsthat are necessary to apply IFRSs
– prepares students to continuously update theirIFRS knowledge and competencies
106
Examples 1a, b and c:Errors and changes in policies and estimates
• Objective
• Concepts – faithful representation
– comparability
• Principle
106
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107Examples 1a,b and c: continued 107
Teaching suggestions:
– build from objective to concepts to principles and rules
– explain how specified disclosures give effect to principle
– focus on judgements
eg differentiating changes in accounting estimates
from changes in accounting policies and correction
of prior period errors
– test understanding, eg use integrated case studies
108What if requirement not principle-based 108• When teaching the requirement
– explain why IASB deviated from the main conceptsin the Framework (see Basis for Conclusions (BfC).If no BfC then requirement could predateFramework (eg IAS 20))
di h t i i l b d i t
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109
Example 2:Lease classification
• Objective
• Concepts
– faithful representation
– element definitions• Broadly stated lease classification requirement
– capitalise in-substance purchases (finance leases)
– other leases = executory contracts (operating leases)
– is this requirement principle-based?
• Rules
– guidance (eg contingent rentals)
– specified disclosures
109
110
Example 2:
Lease classification continued 110
Teaching suggestions: – explain broadly stated requirement is inconsistent
with the Framework (see BfC ED Leases)
– discuss what a principle-based lease classification
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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IFRS Foundation or the IASB
IFRS Foundation
Framework-basedteaching of IFRSsProperty, plant and equipment
Why PPE material first? 112
• As jurisdictions implement IFRSs many find that
the accounting for PPE is a special challenge(Upton, IASB’s Director of International Activities, 2010)
– IFRS requirements for PPE require many
estimates and judgements
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113
Reference material: PPEcourse work & open-book assessment
Stage 1 Stage 2 Stage 3
Extracts from
Framework + basic
IFRS principles from
Section 17 of the
IFRS for SMEs or
IAS 16
(eg, see handout)
A Guide through IFRSs
(includes full text of
Framework + IFRSs and
accompanying material
with extensive cross-
references and
annotations, eg IFRIC
agenda decisions) + the
IFRS for SMEs and
accompanying
documents
Stage 2 material +
Local GAAP (if any) +
main principles in IASB
DPs and EDs
114114IFRS Foundation - Materials
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115
Class material: PPE
Stage 1 Stage 2 Stage 3
Reference material
(previous slide) +
notes (eg see
handout) +
video/web clips +
basic tutorials (eg
see handout)
Reference material
(previous slide) + notes
(eg see handout),
video/web clips +
tutorials + IFRS financial
statements + select
regulatory decisions +
relevant press coverage
+ main principles in
issues being considered
by IASB
Reference material
(previous slide) +
advanced tutorials and
integrated case studies +
IFRS financial statements
+ relevant regulatory
decisions + relevant press
coverage + IASB DPs
and EDs and select
agenda papers
116116Teaching steps
Accounting for PPE
– Objective
– Identification
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117
Relate PPE accounting & reporting toobjective & main concepts (pervasive)
Stage 1 Stage 2 Stage 3
Explain why
relevant and
faithfully
represented
information about
PPE (particularly
manufacturers and
retailers) is useful to
the primary user
group.
Reinforce with class
discussion + tutorial.
Assess understood.
Stage 1 + (don’t limit to
manufacturers and
retailers, eg include
service industry
buildings and explain in
more detail).
Reinforce teaching with
class discussion +
tutorials.
Assess understood.
Reinforce understanding
and develop competence
in making the judgements
that are necessary to
account for assets.
Some ideas:
- cross-cutting issues
class discussions
- advanced tutorials
- integrated case studies- GAAP comparisons &
improvements.
118118Objective of financial reporting
“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.”
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119119Objective of financial reporting
• Primary users
– provide resources, but cannot demand
information – common information needs
• Assess the prospects for future net cash inflows
– buy, sell, hold
– efficient and effective use of resources
120120Fundamental qualitative characteristics
• Relevance
– Predictive value
– Confirmatory value
Materiality entity specific
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121
121Enhancing Qualitative Characteristics
• Comparability : like things look alike; different things
look different
• Verifiability : knowledgeable and independent
observers could reach consensus, but notnecessarily complete agreement, that a depiction is
a faithful representation
• Timeliness: having information available to
decision-makers in time to be capable of influencing
their decisions
• Understandability : Classify, characterise, andpresent information clearly and concisely
122122Pervasive constraint
• Cost
– IASB assesses whether the benefits of reporting
particular information are likely to justify the
costs incurred to provide and use that
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123123
Identification, classification andrecognition
• Property, plant and equipment
– identification
– classification – recognition
• Focusing on stages 1 and 2, linking to stage 3
• Full IFRS and the IFRS for SMEs
– Similar accounting principles
Elements
Asset
• resource controlled by the
entity
• result of past event
Equity = assets less liabilities
Income
• recognised increase inasset/decrease in liability incurrent reporting period
124
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125125Stage 1: Identification of PPE
• Definition of PPE in IFRS
• PPE are tangible assets
a. used in the production or supply of goods or
services, for rental to others or administrative
purposes AND
b. expected to be used for more than one period
• Examples 1 to 3 of the stage 1 teaching material
• Step 1: definition of an asset per the ConceptualFramework
• Step 2: definition of PPE
126126Stage 2: Identification of PPE
• Definition of PPE in IFRS
• PPE are tangible assetsa. used in the production or supply of goods or services,
for rental to others or administrative purposes AND
b. expected to be used for more than one period
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127127Stage 2: Classification of PPE
Primary considerations for classification:
• Presentation
– subclassification – function within the business—information being
provided to users
• Use of judgement
– ‘portions’ of properties
– example: portion for rental and other for use inadministrative function
128128Stage 2: Classification of PPE continued
Primary considerations for classification continued:
• Scope exclusions
– IFRS 5
biological assets (related to agricultural activity)
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129129
Stage 2: Classification of PPE—Examples
• How would you classify the following:
• Example 1: Cattle and farm implements (p. 29)
• Example 2: Land, trees grown for timber
• Example 3: Guard dogs
• Example 4: Bird breeder
• Example 5: Bird breeding zoo
• Examples 6-8: PPE held for sale
– examples in IFRS 5
See PPE framework based teaching notes pp. 29-30
130130Stage 2: Classification of PPE continued
Unit of account:
• Example 9 of the stage 2 teaching material
– use of judgement in the absence of guidance
related back to the Frame ork
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131
Classification:Unit of account for PPE
Stage 1 Stage 2 Stage 3
IAS 16 does not prescribe the
unit of measure for recognition of
PPE (an item of PPE)
consequently use judgement.
Focus on teaching the
judgements necessary to identify
an item of PPE. Some examples:
-immaterial items
-individually insignificant items
(eg moulds, tools & dies?)
Reinforce understanding and
develop competence in
identifying the unit of account.
Some ideas:
-cross-cutting issues class
discussions
-advanced tutorials
-integrated case studies
-GAAP comparisons &
improvements.
Recognition
• Accrual basis of accounting
– recognise element (eg asset) when satisfy
definition and recognition criteria
• Recognise item that meets element definition when
132
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Recognition continued
What does probable mean?
• Its meaning is determined at the standards level.
Therefore, inconsistent use across IFRSs
– IAS 37: more likely than not
– Could include other uncertainties which would lead
to a more complicated process (ie fair value)
• Stage 2 teaching material: Example 11-14
133
Recognition continued
• Would you recognise the following as an item of
PPE?
• Example 11: Backup generator
• Example 12: Day-to-day servicing
134
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135
Recognition of PPE
Stage 1 Stage 2 Stage 3
PPE asset recognition
principle is from the
Framework :
- probable FEBs associated
with the item will flow to
the entity
- cost of the item can be
measured reliably
(IAS16.7)
Creates awareness of judgements (eg what is
material, probable and
reliable).
Stage 1 + focus on
teaching the
judgements
necessary to identifyPPE. Some egs:
- immaterial items
- backup generator
at hospital
- day-to-day
servicing- replacement parts
- major inspections
Reinforce
understanding and
develop competence
in making the judgements necessary
to recognise assets.
Some ideas:- cross-cutting issues
class discussions
- advanced tutorials
- integrated casestudies
- GAAP comparisons
& improvements.
Measurement
• Measurement is the process of determining the
monetary amounts at which the recognisedelements are carried.
• IFRS measurements are largely based on
ti t j d t d d l
136
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137
Measurement of PPE 137
• Because measuring PPE requires significant
estimates and judgements, it is important that students
be taught those requirements in a way that prepares
them to make those judgements and estimates.
Measurement concepts 138
• Measurement is the process of determining monetary
amounts at which elements are recognised andcarried. (¶4.54)
• To a large extent, financial reports are based on
estimates, judgements and models rather than exact
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139
Measurement section of Framework 139
• Measurement section of Framework is weak―only
lists some measurement methods used in practice:
– historical cost: cash paid or fair value of consideration
given – current cost: cash that would be paid if acquired now
– realisable (settlement) value: cash that could be
obtained by selling the asset now
– present value: present discounted value of future net
cash inflows that the item is expected to generate
– market value: listed but not described in Framework .
For fair value see IFRS 13
IFRS measurements for some assets 140• PPE and intangible assets: initial = cost, then
– cost model (cost-depreciation-impairment) or
– revaluation model (fair value-depreciation-impairment)
• Investment property: initial = cost, then
– cost model (cost-depreciation-impairment) or
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Measurement of PPE
• Measurement at cost
– Stage 1: cost (recognise and relate with investment
analysis); elements of cost (recognise, list, select);
awareness of elements with higher J&E (illustrate self-
constructed PPE, borrowing costs etc)
– Stage 2: focus on J&E
– Self-constructed assets
– Borrowing costs (discussion questions, page 36)
– Deferred payment (example 16)
– Decommisioning (example 17)
– Assets exchange (examples 19 and 22)
– Business combination (example 21)
141
Measurement of PPE at recognition
Stage 1 Stage 2 Stage 3
At initial recognition: cost = cashprice equivalent at recognition date.
Cost comprises:
- purchase price
- costs directly attributable to bring
Stage 1 + focus on judgements to measure
cost. Some egs:
- self constructed
- borrowing costs
Reinforceunderstanding &
develop
competence in
judgements to
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143
Measurement after recognition 143
• Choice between cost and revaluation
– Stage 1: recognise the differences between policies;
discuss the extent each measurement meets the objective;
relate to assets definition and recognise impairment,
compare cost and revaluation (awareness)
– Stage 2: compare cost and revaluation; J&E required for
revaluation and impairment
Allocating depreciation: concepts 144
• Information about an entity’s financial performance in
a period, reflected by changes in economic resources(eg PPE) is useful in assessing the entity’s past and
future ability to generate net cash inflows (see ¶OB18)
• Expenses are decreases in economic benefits during
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145
Allocating depreciation: principle 145
• Depreciation is the systematic allocation of the
depreciable amount of an asset over its useful life
(IAS16.6).
– essentially a cost allocation technique (IAS16.BC29)
• Systematic allocation (application guidance):
– Depreciation method must closely reflects the pattern in which
the asset’s future economic benefits are expected to be
consumed by the entity.
– Unit of measure for depreciation is different from that for an itemof PPE. By depreciating significant parts of an item of PPE
separately, depreciation more faithfully represents the
consumption of the assets service potential. (IAS16.BC26)
Allocating depreciation:application guidance (1) 146
• Depreciable amount =
– cost model: historical cost less residual value
– revaluation model: fair value less residual value
• Residual value =
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147
Allocating depreciation:application guidance (2) 147
• Useful life (entity specific) =
– the period over which the asset is expected to be available for
use by the entity; or
– the number of production or similar units expected to beobtained from the asset by the entity.
• Consequently, depreciation continues when idle (if
useful life = period) – example 24
• However, depreciation ceases when classified as held
for sale because IFRS 5 measurement is essentially aprocess of valuation, rather than allocation
(IFRS5.BC29)
Measurement of PPE after recognition
Stage 1 Stage 2 Stage 3
Accounting policychoice: cost model or
revaluation model.
Which model provides
primar sers most
Stage 1 + focus on teaching the judgements necessary to
measure PPE after initial
recognition. Some examples:
sef l life
Reinforceunderstanding and
develop competence
in making the
judgement necessary
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149
Derecognition of assets 149
• Derecognition of an asset refers to when an asset
previously recognised by an entity is removed from
the entity’s statement of financial position
– Derecognition requirements are specified at the
standards level.
– Derecognition does not necessarily occur when the
asset no longer satisfies the conditions specified for its
initial recognition (ie derecognition does not
necessarily coincide with the loss of control of theasset ).
Derecognition of assets 150
• Stage 1: recognise disposal of PPE and conditions
in which no future economic benefits expected;discuss revenue x gain (awareness)
• Stage 2: analyse and compare different J&E
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151
Derecognition of PPE
Stage 1 Stage 2 Stage 3
PPE is derecognised:
-on disposal, or
-when no future
economic benefits are
expected from its use
or disposal (IAS16.67)
Stage 1 + focus on
teaching the judgements
necessary to determine
when to derecognise PPE.For example:
-applying the criteria for the
sale of goods in IAS 18 to
determine when to
recognise the sale of an
item of PPE (see IAS16.69
and BC34)
Reinforce
understanding and
develop competence in
making the judgementsnecessary to
derecognise assets.
Some ideas:-cross-cutting issues
class discussions
-advanced tutorials
-integrated case studies-GAAP comparisons &
improvements.
Presentation and disclosure
• Objective of financial reporting
• Presentation: financial statements portray financial
effects of transactions and events by:
– grouping into broad classes (the elements, eg asset)
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153
Presentation and disclosure of PPE
Stage 1 Stage 2 Stage 3
Statement of financial
position: why present PPE
separately from other assets
(relate to objective + QCs)?Statement of
comprehensive income or
notes: why present
depreciation separately from
other expenses (relate to
objective + QCs)?
Offsetting: why is gain (orloss) on disposal of PPE
presented net?
Stage 1 + focus on teaching
the judgements necessary to
present and disclose PPE,
egs- identify (see slide 11)
- sub-classify PPE into
separate classes
(grouping of assets of a
similar nature and use in
the entity’s operations, eg
how many classes of
land―
vacant land, landon which buildings are
situated and landfill site?)
Reinforce
understanding and
develop competence
in presenting assetsand related income &
expenses.
Some ideas:
- cross-cutting
issues class
discussions
- advanced tutorials
- integrated casestudies.
Stage 3 case study
• Stage 3 teaching materials
• The Open Country Safari Company Case Study
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155Questions or comments?
Expressions of individual views
by members of the IASB and
their staff are encouraged.
The views expressed in this
presentation are those of thepresenter. Official positions of
the IASB on accounting matters
are determined only after
extensive due process
and deliberation.
International Financial Reporting Standards
IASB’ ti d
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www.ifrs.org
www.ifrs.org
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The Major Projects
Crisis (MoU)
Financial instruments
Fair value
measurement
Consolidation
Derecognition
Other (Non MoU) Insurance contracts© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Other (MoU)
Revenue recognition
Leases
Post-employment
benefits
Financial statement
presentation
Liability/Equity
International Financial Reporting Standards
IFRS d ti
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161Use of IFRSs – the ideal
Ideally, adopt IFRSs as the reporting framework:
• IFRSs as issued by the IASB in full
• Audit report and basis of presentation note refer to
conformity with IFRSs
• Without local ‘endorsement’
Use of IFRSs means all standards and all
interpretations
• Sometimes the ideal is hard to achieve
162Use of IFRSs – variations from ideal
Problems with local ‘endorsement’:
• Urge to tinker
• Time delay
• Politicisation
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163Get rule-based standards if
• Preparers and auditors
– refuse to exercise judgement
– don’t act with integrity
– ask for detailed interpretations – refuse to accept raw economic facts
• Regulators
– want one answer in spite of different economicfacts
• Courts
– lawyers fail to defend reasonable judgements
163
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
164
Rules/application guidance
Rules (interpretations)Rules (exceptions)
Principles
Structure of some IFRSs 164
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165
Example:Business combinations
• Objective
• Concepts
– elements definitions
– representational faithfulness
• Core principle – an acquirer of a business (scope)
– recognises assets acquired and liabilities assumed(recognition principle)
– at their acquisition-date fair values (measurementprinciple)
– discloses information that enables users to evaluate
the nature and financial effects of the acquisition(disclosure principle)
165
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
166
Example:Business combinations continued
• Rules
– exceptions to the recognition principle
– exceptions to the measurement principle
specified disclosures
166
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167
Example:Business combinations continued 167
To understand build from objective through concepts
to core principle and rules
– recognition—understand reason for removing
(i) the probability criterion; and(ii) the explicit reliability of measurement criteria(see Basis for Conclusions on IFRS 3 paragraphs BC125–BC130)
– understand reasons for exceptions to IFRS 3:
– recognition principle
– measurement principle
(see Basis for Conclusions on IFRS 3)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
168
Example:Business combinations continued 168
Focus on judgements, eg
– identifying a business
– measuring fair value in the absence of an active market etc
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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IFRS Foundation or the IASB
IFRS Foundation
Improving theConceptual Framework
170170Improving the Conceptual Framework
• Objective (‘old’ project)
– To develop an improved and common conceptual framework
that will provide a sound foundation for the development ofaccounting standards
• Phases (‘old’ project)
1. Objective of financial reporting and qualitative
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171
171Phase 1 completed in 2010Objective of financial reporting
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
Note:
• other aspects of the Conceptual Framework flow
logically from the objective (CF.OB1)
• Conceptual Framework sets out the concepts that
underlie IFRS financial statements and assist the IASB
in the development of future IFRSs and in its review of
existing IFRSs (CF.Purpose and Status)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
172
Phase 1 completed in 2010Fundamental qualitative characteristics
• Relevance: capable of making a difference in users’
decisions
– predictive value
– confirmatory value
– materiality (entity-specific)
Ph 1 l t d i 2010 E h i
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173
173Phase 1 completed in 2010 EnhancingQualitative Characteristics
• Comparability : like things look alike; different things look
different
• Verifiability : knowledgeable and independent observers
could reach consensus, but not necessarily complete
agreement, that a depiction is a faithful representation
• Timeliness: having information available to decision-makers
in time to be capable of influencing their decisions
• Understandability : Classify, characterise, and present
information clearly and concisely
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
174174174
Phase 1 completed in 2010Pervasive constraint
• Reporting financial information imposes costs, and it is
important that those costs are justified by the benefits of
reporting that information.
• In applying the cost constraint, the IASB assesses whether
the benefits of reporting particular information are likely to
justify the costs incurred to provide and use that information
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175
175Elements
Existing element definitions:
• Asset : Resource controlled as a result of past events and
from which future economic benefits are expected to flow
• Liability : Present obligation arising from past events, the
settlement of which is expected to result in outflow ofresources embodying economic benefits
• Equity : Assets minus liabilities
• Income (expense): Increases (decreases) in economic
benefits during period from inflows or enhancements
(outflows or depletions) of assets (liabilities) or decreases
(incurrences) of liabilities from in increases (decreases) in
equity, other than contributions from (distributions to) equity
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
176Elements
• How can we improve the element definitions?
• What does expected mean? Is it different from probable?
• Why focus on future inflow/outflow of economic benefits,
rather than present position?
• Why do we need to identify past transactions?
Elements
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177
177Elements‘Workin g’ asset defini t ion
• An asset of an entity is a present economic resource to which
the entity has a right or other access that others do not have.
– Present means that on the financial statement date the economic
resource exists and the entity has the right or other access that
others do not have.
– Economic resource is scarce and capable of producing cash inflows
or reducing cash outflows, directly or indirectly, alone or together with
other economic resources. Economic resources that arise from
contracts and other binding arrangements are unconditional
promises and other abilities to require provision of economic
resources, including through risk protection.
– Right or other access that others do not have enables entity to use
the economic resource and its use by others can be precluded or
limited. It is enforceable by legal or equivalent means.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
178
Elements‘Workin g’ l iabi l i ty defini t ion
• A liability of an entity is a present economic obligation for
which the entity is the obligor
– Present means that on the financial statement date the economic
obligation exists and the entity is the obligor.
– Economic obligation is an unconditional promise or other
requirement to provide or forgo economic resources, including
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El t d iti /d iti
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181
181Elements and recognition/derecognition
• This phase of the project has been deferred
• Board is not trying to fundamentally change what meets
current definitions, just trying to clarify and improve
• Has proven to be quite challenging
• Perhaps standards-level projects will provide insights
– Financial instruments with characteristics of equity
– IAS 37 (Provisions)
– Insurance
– Revenue…
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Reporting entity
• Nothing in current Conceptual Framework on reporting entity
• These are tentative decisions in CF project to date
• Circumscribed area of economic activity
– Activities are being, have been, or will be conducted
– Activities can be objectively distinguished
M t
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183
183Measurement
• Framework should set forth concepts for determining
appropriate measurement attribute for a particular asset or
liability in a given circumstance
• However, there is little in current Framework on
measurement – List of measurements used in standards
– No concepts or basis for choosing among them
• Large hole in the literature
• Has resulted in ad hoc standards-level decisions in multiple-
measurement environment
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
184Measurement
• Current thinking is measurement concepts should be based
on objective of financial reporting, qualitative characteristics
and elements definitions – Objective of financial reporting is the place to start
– Qualitative characteristics and cost constraint would be
measurement selection factors
Measurement
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185
185Measurement
• One approach being considered
– Determine view of financial reporting that best meets the
objective of financial reporting
– Statement of financial position view
– Income statement view – Holistic view (statements of financial position and income)
– Then identify implications of that view and the
fundamental qualitative characteristics for historical cost-
based and fair value measures
• Is it necessary to expand on relevance and faithful
representation in measurement chapter?
– How and why?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
186Measurement
• Path of this project phase has taken several turns
– Range from highly conceptual to writing down what is in
existing standards
• The measurement phase is controversial
– People have firmly held (although often loosely defined) views
M i thi i fi i l t t t i f d t l
Conceptual Framework versusstandards level projects
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187
187Conceptual Framework versusstandards-level projects
• How can standard setting continue without finishing the
Conceptual Framework project first?
– we have a Conceptual Framework in place today (not perfect)
– Standards-level projects inform Conceptual Framework
project and vice-versa (eg liabilities and equity) – Standards need improvement and Conceptual Framework
project is likely to take many years; investors cannot wait for
better information
• Would a completed Conceptual Framework help standard
setting?
– Yes, particularly measurement
– Also, disclosure and presentation
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Agenda consultation 188188
• Public agenda review every three years
• Will help the IASB establish a broad strategic direction for its
work plan:
– establish a balance between: – improvements (new IFRSs); and
maintenance (implementation)
Agenda ConsultationThe IASB’ s ini t ial thinking
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Agenda ConsultationThe IASB s init ial thinking 189
• Development of financial reporting
– Investing in researching key strategic issues
– Completion of the conceptual framework
– Completing MoU projects
– Selected standards-level projects• Maintenance of existing IFRSs
– Post-implementation reviews
– Responding to implementation needs
• Expansion of research function
189
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Agenda ConsultationFeedback to date
• 246 comment letters, 4 Roundtables
Results will feed into the Board’s agenda setting process
• Common views:
– Complete the four current projects
– Focus on maintenance over development of IFRSs in the
190190
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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IFRS Foundation or the IASB
IFRS Foundation
Framework-basedunderstanding and teaching
of IFRSsIFRS Conference – Qassim University
May 2012
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Guillermo Braunbeck, Project Manager, Education Initiative, IASB
Outline
• Why global standards?
• The progress
• Understanding principle-based standards
• Framework-based understanding and teaching of
2
Benefits of global standards 3
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Benefits of global standards
• Efficient allocation of capital globally
– attracting investment through transparency
– reducing the cost of capital
– increasing world-wide investment
• Reducing costs and increased efficiency
– facilitates standardising information systems
– eliminates wasteful reconciliations
– audit efficiencies
– education and training
3
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
44
More than 100 countries require or permit the use of International Financial Reporting Standards (IFRSs),or are converging with the IASB’s standards.
More than 100 countries require or permit the use of International Financial Reporting Standards (IFRSs),or are converging with the IASB’s standards.
THE MOMENTUM TOWARDS GLOBAL ADOPTION OF IFRSs
The World is Getting Smaller
The vision 5
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The vision
…one single set of high
quality global standards..
..used on the global
capital markets.
5
6What does principle-based mean?
• There is overwhelming support for principle-
based accounting standards• But what does principle-based mean?
• In this presentation
6
Role of the Conceptual Framework
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Role of the Conceptual Framework
• Conceptual Framework sets out agreed concepts that
underlie financial reporting
– objective, qualitative characteristics, element definitions, …
• IASB uses Conceptual Framework to set standards – enhances consistency across standards
– enhances consistency over time as Board members change
– provides benchmark for judgments
• Preparers use Conceptual Framework to develop
accounting policies in the absence of specific standard
or interpretation
– IAS 8 hierarchy7© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
8When no IFRS specific requirement… 8
Framework-based approach would ask:
• What is the economics of the phenomenon (egtransaction or event)?
• What relevant information using the accrual
9Objective of financial reporting
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9
j p g
Provide financial information about the reportingentity that is useful to existing and potentialinvestors, lenders and other creditors in makingdecisions about providing resources to the entity
Note:
• other aspects of the Conceptual Framework flowlogically from the objective (CF.OB1)
• Conceptual Framework sets out the concepts thatunderlie IFRS financial statements and assist theIASB in the development of future IFRSs and in its
review of existing IFRSs (CF.Purpose and Status)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
10Fundamental qualitative characteristics
• Relevance: capable of making a difference in users’
decisions
– predictive value
– confirmatory value
– materiality (entity-specific)
11Does the Framework help meunderstand/apply IFRSs? 11
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pp y• Yes, the starting point for understanding all IFRS
information is the objective and the concepts that flowlogically from that objective:
– IASB uses Framework to set IFRSs
– Teachers/Trainers useFramework
-based teachingto prepare students to make judgements that arenecessary to apply IFRSs
– Preparers use Framework to make the judgementsthat are necessary to apply IFRSs
– Auditors and regulators assess those judgements
– Investors, lenders and others consider those judgements when using IFRS financial informationto inform their decisions
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Common ‘conceptual’misunderstandings
The Framework does not… Clar if icat ion—the Framework
includes
include a matching concept accrual basis of accounting—recognise elements when satisfy
definition and recognition criteria
Common ‘conceptual’misunderstandings continued
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13
Misunderstanding Clarification
Uniformity = comparability Comparability is achieved when
like things are accounted for in
the same way.
Comparability is not achievewhen accounting rules require
unlike things be accounted for in
the same way
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Common ‘conceptual’misunderstandings continued
Misunderstanding Clarification
Principles are necessarily less
rigorous than rules
Rules are the tools of financial
engineers
There are few judgements and
estimates incost-based
Inventory, egallocate joint costs
andproductionoverheads
Support for Framework -based teaching 15
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15
• IFRS Foundation education initiative works with
others to support Framework -based teaching
– create awareness
– develop material (starting with PPE and non-financialliabilities)
– workshops 2012: Brighton (BAFA), Llubijana (EAA),
Melbourne (AFAANZ), Washington DC (AAA), Saudi
Arabia (QU), Brazil (CFC)
– encourage those certifying accountants to examine
their students’ ability to make the judgements thatare necessary to apply IFRSs
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Range of IFRS classes 16
Can I use Framework -based teaching in my IFRS class?
• Yes, the starting point for all IFRS teaching should bethe objective of IFRS financial information and the
concepts that flow logically from that objective
H th t t f IFRS i t t ht
17Framework -based IFRS teaching 17
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Framework -based teaching relates the concepts in
the Framework to the particular IFRS requirements
being taught
• Because the objective of the Framework is to
facilitate the consistent and logical formulation of
IFRSs Framework -based teaching
– provides students with a cohesive understanding of
IFRSs
– prepares students to continuously update their
IFRS knowledge and competencies
18Framework -based IFRS teaching 18
• Education initiative has developed a number of
materials to help Framework -based teaching
(FBT):
– Applied approach of FBT (PPE) with:
– Reference materials
19Questions or comments?
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Expressions of individual views
by members of the IASB and
their staff are encouraged.
The views expressed in this
presentation are those of the
presenter. Official positions ofthe IASB on accounting matters
are determined only after
extensive due process
and deliberation.
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Part 1 Framework based teaching
The Conceptual Framework
The objective of the IASB’s Conceptual Framework for Financial Reporting (the Conceptual Framework ) is to facilitate the consistent and logical formulation of IFRSs (see paragraph 8
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of the Preface to IFRSs). In other words, the Conceptual Framework sets out the agreed
concepts on which the IASB bases IFRSs. Consequently, most IFRS requirements are
consistent with the concepts set out therein. However, application of the cost constraint(1)
continues to result in IFRS requirements that do not maximise the qualitative characteristics
or other main concepts in the Conceptual Framework .
The objective of general purpose 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.(2)
Those decisions
involve buying, selling or holding equity and debt instruments, and providing or settling loans
and other forms of credit (see paragraph OB2 of the Conceptual Framework ). In order to
assess an entity’s prospects for fu
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