IFRS Explained by Media, BPP Learning -- Read -- Imperial Library of Trantor

Index

Contents Introduction 1 The IASB and the regulatory framework

1 Impact of globalisation 2 International Accounting Standards Board (IASB)

Structure of the IASB

IASC Foundation Standards Advisory Council (SAC) International Financial Reporting Interpretations Committee (IFRIC)

Scope and authority of IFRSs IFRS due process Interpretation of IASs/IFRSs

Authority and application of IFRIC Interpretations Comment periods

Co-ordination with national standard setters

3 Generally Accepted Accounting Practice (GAAP)

True and fair view (or presented fairly)

4 Other international influences

European Commission (EC) United Nations (UN) International Federation of Accountants (IFAC) Organisation for Economic Co-operation and Development (OECD) International Organisation of Securities Commissions (IOSCO) Financial Accounting Standards Board (FASB)

5 Scope and application of IASs/IFRSs 6 Progress towards global harmonisation

IASB liaison members World-wide effect of IASs and the IASB Harmonisation in Europe IFRS in the USA Rules-based versus principles-based financial reporting standards Brief comparison of IFRS v UK GAAP v US GAAP UK Accounting Standards Board Convergence Approach

7 Benefits of and barriers to global harmonisation

Benefits of global harmonisation Barriers to harmonisation

8 IFRS 1: First-time adoption of International Financial Reporting Standards

Preparing the opening IFRS statement of financial position Exemptions from other IFRSs

Business combinations

2 Conceptual framework for financial reporting

1 The need for a conceptual framework

Advantages and disadvantages of a conceptual framework

Advantages Disadvantages

2 The IASB Framework

Preface Users and their information needs

3 The objective of financial statements

Financial position, performance and changes in financial position

4 Underlying assumptions

Accruals basis Going concern

5 Qualitative characteristics of financial statements

Understandability Relevance Materiality Reliability Faithful representation Substance over form Neutrality

Prudence Completeness

Comparability Constraints on relevant and reliable information

Timeliness Balance between benefits and cost Balance between qualitative characteristics

True and fair view/fair presentation

6 The elements of financial statements

Financial position Performance

7 Recognition of the elements of financial statements

Probability of future economic benefits Reliability of measurement Recognition of items

8 Measurement of the elements of financial statements

3 Presentation of published financial statements

1 IAS 1 (revised): Presentation of financial statements

Components of financial statements Fair presentation and compliance with IFRS Going concern Accrual basis of accounting Consistency of presentation Materiality and aggregation Offsetting Comparative information Disclosure of accounting policies

2 Structure and content of financial statements

Profit or loss for the period How items are disclosed Identification of financial statements Reporting period Timeliness

3 Statement of financial position

Statement of financial position example Information presented either on the face of the statement of financial position or by note

4 The current/non-current distinction

Current assets Current liabilities

5 Statement of comprehensive income 6 Income statement

Nature of expense method Function of expense/cost of sales method

Examples of separate income statements Information presented in the statement of comprehensive income or separate income statement Information presented either in the statement or in the notes Dividends

Further points

7 Changes in equity 8 Notes to the financial statements

Presentation of accounting policies Other disclosures

9 Small and medium-sized entities (SMEs)

IFRS for SMEs

Omitted topics Recognition and measurement

10 IAS 34: Interim financial reporting

Minimum components Form and content

Selected explanatory notes

Periods covered Materiality

Recognition and measurement principles Revenues received occasionally, seasonally or cyclically Costs incurred unevenly during the financial year Payroll taxes or insurance contributions paid by employers Cost of a planned major periodic maintenance or overhaul Other planned but irregularly-occurring costs Non-mandatory intangible assets Depreciation Tax on income Inventory valuations

Use of estimates

4 Accounting for tangible non-current assets

1 IAS 16: Property, plant and equipment

Definitions Recognition

Components of cost

Measurement subsequent to initial recognition

Revaluation model

Cost model: Depreciation

Review of useful life Review of depreciation method Impairment of asset values

Retirements and disposals Disclosure

2 IAS 20: Accounting for government grants and disclosure of government assistance

Accounting treatment of government grants

Capital approach Income approach

Presentation of grants related to assets Presentation of grants related to income

Repayment of government grants SIC 10 Government assistance – no specific relation to operating activities

3 IAS 40: Investment property

Initial measurement Measurement subsequent to initial recognition

Fair value model

Transfers Disclosure requirements

4 IAS 36: Impairment of assets

Identifying a potentially impaired asset

Measuring the recoverable amount of the asset

Composition of estimates of future cash flows Recognition and measurement of an impairment loss Goodwill and the impairment of assets Corporate assets Accounting treatment of an impairment loss Reversal of an impairment loss Disclosure

5 IAS 23: Borrowing costs

Recognition Commencement of capitalisation Cessation of capitalisation Disclosures

5 Intangible assets and goodwill

1 IAS 38: Intangible assets

Definition Expected future economic benefits Internally generated goodwill Research and development costs Development

Cost of an internally generated intangible asset

Measurement subsequent to initial recognition Useful life Amortisation Indefinite useful lives Disposals/retirements of intangible assets Disclosure requirements

2 Goodwill (IFRS 3)

IFRS 3: Business combinations

6 Reporting financial performance

1 IAS 10: (revised) Events after the reporting period

Events requiring adjustment Events not requiring adjustment Dividends Disclosures

2 IAS 8: Accounting policies, changes in accounting estimates and errors

Definitions

3 Accounting policies 4 Changes in accounting policies

Adoption of an IAS/IFRS Other changes in accounting policy

5 Changes in accounting estimates 6 Errors

Accounting treatment

7 IFRS 5: Non-current assets held for sale and discontinued operations

Classification of assets held for sale Measurement of assets held for sale Presenting discontinued operations Illustration Presentation of a non-current asset or disposal group classified as held for sale Additional disclosures

7 Revenue recognition

1 Introduction 2 IAS 18: Revenue

Sale of goods Rendering of services Reporting the substance of the transaction Realised profit Interest, royalties and dividends Disclosure

IFRS improvements

8 Provisions and contingencies

1 IAS 37: Provisions, contingent liabilities and contingent assets

Meaning of obligation Transfer of economic benefits Measurement of provisions Reimbursements Changes in provisions Use of provisions Future operating losses Onerous contracts

2 Provisions for restructuring

Costs to be included within a restructuring provision Disclosure

3 Contingent liabilities and contingent assets

Treatment of contingent liabilities Contingent assets Disclosure ‘Let out’

9 Inventories and construction contracts

1 Inventories and short-term WIP (IAS 2)

Cost of inventories Net realisable value (NRV) Cost formulae for inventories

2 IAS 11: Construction contracts

What is a construction contract? Contract revenue Contract costs Recognition of contract revenue and expenses When can reliable estimates be made? Determining the stage of completion Outcome of the contract cannot be reliably estimated

Recognition of expected losses

Summary of accounting treatment Statement of comprehensive income (income statement)

10 Accounting for leases

1 IAS 17: Leases

Accounting for operating leases Accounting for finance leases

2 Lessees

Accounting treatment for finance leases Apportionment of rental payments Disclosure requirements for lessees Operating leases: disclosure requirements for lessees

3 Lessors

Finance leases Accounting treatment Manufacturer/dealer lessors Lessors’ disclosures for finance leases Operating leases Accounting treatment Lessors’ disclosures for operating leases Sale and leaseback transactions

11 Accounting for taxation

1 IAS 12: Income Taxes

Definitions Recognition of current tax liabilities and assets Measurement Recognition of current tax Presentation

2 Deferred tax

Definitions Tax base Temporary differences

3 Taxable temporary differences

Transactions that affect the statement of comprehensive income Transactions that affect the statement of financial position Fair value adjustments and revaluations Timing differences

Revalued assets Initial recognition of an asset or liability

4 Deductible temporary differences

Transactions that affect the statement of comprehensive income Fair value adjustments and revaluations Recognition of deductible temporary differences Taxable profits in future periods

Unused tax losses and unused tax credits

Reassessment of unrecognised deferred tax assets

5 Measurement and recognition of deferred tax

Changes in tax rates Discounting Carrying amount of deferred tax assets Recognition Why do we recognise deferred tax?

6 Taxation in financial statements

Taxation in the statement of comprehensive income Taxation in the statement of financial position Presentation of tax assets and liabilities

12 Financial instruments

1 Financial assets and liabilities

Derivatives

2 IAS 32: Financial instruments: Presentation

Liabilities and equity Contingent settlement provisions Settlement options Compound financial instruments Treasury shares Interest, dividends, losses and gains Offsetting a financial asset and a financial liability Amendment to IAS 32: Puttable financial instruments and obligations arising on liquidation

3 IAS 39: Financial instruments: Recognition and measurement

Initial recognition Derecognition

4 Measurement of financial instruments

Subsequent measurement Classification – IAS 39 Subsequent measurement of financial liabilities Gains and losses Impairment and uncollectability of financial assets

Financial assets carried at amortised cost Financial assets carried at cost Available for sale financial assets

5 IFRS 9: Financial Instruments 6 Embedded derivatives

Examples of host contracts Examples of embedded derivatives Accounting treatment of embedded derivatives

7 Hedging

Conditions for hedge accounting Accounting treatment

Fair value hedges Cash flow hedges

8 Reducing complexity 9 Amended reclassification rules

Measurement after the reclassification date

Exception Disclosures

10 IFRS 7: Financial Instruments: Disclosures

General requirements Classes of financial instruments and levels of disclosure

Statement of financial position Statement of comprehensive income Other disclosures

Nature and extent of risks arising from financial instruments

Qualitative disclosures Quantitative disclosures

Capital disclosures

13 Earnings per share

1 IAS 33: Earnings per share

Potential ordinary shares

2 Basic EPS

Measurement Earnings Per share Consideration

3 Effect on EPS of changes in capital structure

Capitalisation/bonus issue and share split/reverse share split Rights issue Procedures

4 Diluted EPS

Earnings Per share Dilutive potential ordinary shares Restatement

5 Presentation, disclosure and other matters

Significance of earnings per share

14 Statement of cash flows

1 IAS 7: Statement of cash flows

Benefits of cash flow information Definitions Cash and cash equivalents

Operating activities Investing activities Financing activities

Reporting cash flows from operating activities Using the direct method Using the indirect method Interest and dividends Taxes on income Components of cash and cash equivalents Other disclosures

2 Preparing a statement of cash flows 3 Interpretation of statements of cash flows

Criticisms of IAS 7

15 Related party disclosures and segment reporting

1 IAS 24: Related party disclosures

Scope Definitions Disclosure Parents and subsidiaries Management personnel Disclosures

2 IFRS 8: Operating segments

Definition of operating segment Aggregation Determining reportable segments

16 Constitution of a group

1 Group accounts

Definitions Investments in subsidiaries Investments in associates

2 IAS 27: Consolidated and separate financial statements

Exemption from preparing group accounts Potential voting rights Exclusion of a subsidiary from consolidation Different reporting dates Uniform accounting policies Date of inclusion/exclusion Accounting for subsidiaries and associates in the parent’s separate financial statements Disclosure

3 Content of group accounts and group structure

Group structure

4 Group accounts: the related parties issue

Individual company accounts Consolidated accounts Disposal of subsidiaries Effect on trading

17 The consolidated statement of financial position

1 IAS 27: Summary of consolidation procedures

Cancellation and part cancellation Part cancellation

2 Non-controlling interests – IFRS 3 (revised) 3 Dividends paid by a subsidiary 4 Goodwill arising on consolidation

Goodwill and pre acquisition profits Goodwill and non-controlling interest Non-controlling interest at fair value Non-controlling interest at year end Effect of non-controlling interest at fair value Impairment of goodwill Gain on a bargain purchase Forms of consideration

Contingent consideration Deferred consideration Share exchange Expenses and issue costs

5 Intra-group trading

Unrealised profit Non-controlling interests in unrealised intra-group profits

6 Intra group sales of non-current assets

Accounting treatment

7 Acquisition of a subsidiary during its accounting period 8 Dividends and pre-acquisition profits

Is the dividend paid from pre-acquisition profits?

9 Fair values in acquisition accounting

Fair value adjustment calculations IFRS 3 Fair values

Restructuring and future losses Intangible assets Contingent liabilities Cost of a business combination

18 The consolidated statement of comprehensive income and statement of cash flows

1 The consolidated income statement

Intra-group trading Intra-group dividends Pre-acquisition profits

2 The consolidated statement of comprehensive income

Consolidated statement of changes in equity

3 The consolidated statement of cash flows

Non-controlling interest Associates Acquisition of a subsidiary Disposal of a subsidiary

19 Accounting for associates

1 IAS 28: Investments in associates

Separate financial statements of the investor

2 The equity method

Consolidated statement of comprehensive income/income statement Consolidated statement of financial position

3 Income statement and statement of financial position

Consolidated statement of financial position ‘Upstream’ and ‘downstream’ transactions Associate’s losses Impairment losses

20 Accounting for joint ventures

1 IAS 31: Interests in joint ventures

Forms of joint venture

Contractual arrangement SIC 13 – Jointly controlled entities – non-monetary contributions by venturers Jointly controlled operations Accounting treatment Jointly controlled assets Accounting treatment Jointly controlled entities Transactions between a venturer and a joint venture Investors in joint ventures Operators of joint ventures Special purpose entities

2 Accounting treatment of jointly controlled entities

Separate financial statements of a venturer Consolidated financial statements of a venturer Proportionate consolidation

Equity method

21 Share-based payment

1 IFRS 2: Share-based payment

Recognition: the basic principle Equity-settled share-based payment transactions

Measurement Determining the fair value of equity instruments granted Transactions in which services are received

Cash-settled share-based payment transactions Transactions which either the entity or the other party has a choice of settling in cash or by issuing equity instruments.

2 Deferred tax implications

Measurement

3 Recent developments

Amendment to IFRS 2 Proposed amendment to IFRS 2

22 Employee benefits

1 IAS 19: Employee benefits

Accounting for employee benefit costs Categories of employee benefits Definitions Asset ceiling test

2 Short-term employee benefits

Short-term absences Profit sharing or bonus plans

3 Post-employment benefits

Multi-employer plans Insurance benefits

4 Defined contribution plans 5 Defined benefit plans: recognition and measurement

Outline of the method Constructive obligation The Projected Unit Credit Method Interest cost The statement of financial position The statement of comprehensive income Attributing benefit to periods of service Actuarial assumptions

Actuarial gains or losses Immediate recognition – amendment to IAS 19 Past service cost Plan assets Return on plan assets 6 Defined benefit plans: other matters

Curtailments and settlements Presentation and disclosure

7 Special cases

Other long-term employment benefits Termination benefits

8 Other issues and recent developments

Problems with IAS 19 Discussion Paper

Preliminary discussions Exposure draft

23 Foreign currency translation

1 Foreign currency Conversion gains and losses

Translation Consolidated accounts

2 IAS 21: The effects of changes in foreign exchange rates

Foreign currency transactions: initial recognition Reporting at subsequent reporting dates Recognition of exchange differences

3 IAS 21: Consolidated financial statements stage

Determining functional currency

Same functional currency as the reporting entity Different functional currency from the reporting entity Accounting treatment: different functional currency from the reporting entity

Analysis of exchange differences Further matters relating to foreign operations

Goodwill and fair value adjustments Consolidation procedures Hyperinflationary economies

Disposal of foreign entity

In the parent’s financial statements

Change in functional currency Tax effects of exchange differences Foreign associates Disclosure

4 IAS 29: Financial reporting in hyperinflationary economies

Requirement to restate financial statements in terms of measuring units current at the year end Making the adjustments Statement of financial position: historical cost Statement of comprehensive income: historical cost Gain or loss on net monetary position Current cost accounts: restating the accounts Economies ceasing to be hyperinflationary economies Disclosures Hyperinflation and changes in foreign exchange rates

24 Accounting for agriculture and mineral resources

1 IAS 41: Agriculture

Definitions Biological assets

Recognition of biological assets Measurement of biological assets Determining fair value Recognition Presentation and disclosure

Agricultural produce

Measurement and presentation Presentation in the statement of financial position

Government grants

2 IFRS 6: Exploration for and evaluation of mineral resources

Recognition Measurement at recognition Measurement after recognition Classification and reclassification Impairment Disclosures

Index

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