International Financial Reporting Standards
IFRS are accounting standards issued by the International Accounting Standards Board (IASB). These are mainly used by publicly-traded entities to prepare general-purpose financial statements. The IFRS also includes the International Accounting Standards (IAS) issued by predecessor body of the IASB, the International Accounting Standards Committee, and related interpretations issued by the Interpretations Committee.
Many jurisdictions have adopted IFRS as the applicable reporting framework either in their original or slightly modified form. Further, there has been increased convergence between IFRS and US GAAP, the US accounting standards issued by the US standard-setter, the Federal Accounting Standards Board (FASB).
The Conceptual Framework for Financial Reporting issued by IASB outlines the broad over-arching principles used by the IASB in setting standards and by preparers of financial statements in determining accounting policies if no specific standard is available.
International Financial Reporting Standards
Following are the IFRS issued by IASB:
IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 1 deals with an entity’s first set of annual (and associated interim) IFRS-compliant financial statements. It requires an entity to prepare the opening IFRS statement of financial position at the date of transition to IFRS.
On transition, an entity follows all IFRSs effective as at the first annual reporting date in its opening IFRS SFP and all periods presented in the first IFRS financial statements. Transitional provisions contained in other IFRSs typically do not apply to first-time adopters.
The standard contains certain transactions/events for which retrospective application is either prohibited or exempted. It does not allow revision to accounting estimates unless there is evidence that those estimates were erroneous.
The standard requires statements of financial position for three years and other statements for two years.
IFRS 2 Share-based Payment
IFRS 2 deals with accounting for share-based payments (including employee stock options). It requires an increase in equity in case of equity-settled share-based payments and increase in liability in case of cash-settled share-based payment.
In an equity-settled share-based payment transaction, the standard requires an entity to measure the goods or services at the fair value (or if it not available at the fair value of the equity) at the grant date and does not allow any remeasurement. In a cash-settled share-based payment, liability is remeasured at each reporting and settlement date.
The recognition also depends on any vesting conditions and vesting period.
IFRS 3 Business Combinations
IFRS 3 requires an acquirer to measure the cost of the acquisition at the fair value of the consideration paid; allocate that cost to the acquired identifiable assets and liabilities based on their fair values; recognize any excess (deficit) of the consideration over the fair value of net assets as goodwill (on statement of financial position) and bargain purchase (in profit or loss).
IFRS 3 also stipulates related disclosures requirements.
IFRS 4 Insurance Contracts
IFRS 4 shall be superseded by IFRS 17. IFRS 4 applies to all insurance contracts issued by an insurer. It exempts the entity from applying the Conceptual Framework to accounting for its insurance contracts. However, it requires testing for adequacy of insurance liabilities and impairment testing of assets. Similarly, it prohibits offsetting of insurance liabilities with reinsurance assets, and creation of provision in respect of insurance contracts not yet entered.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 5 requires that if an entity determines that the carrying amount to a non-current asset or a group shall be recovered through a sale transaction, it shall classify these as held for sale. Once such a classification is made, depreciation shall cease, and the asset shall be carried at the lower of the carrying amount and fair value less cost to sell. Assets and liabilities and income resulting from these assets are presented separately in financial statements.
IFRS 6 Exploration for and Evaluation of Mineral Resources
IFRS 6 specifies treatment for some exploration and evaluation costs, and costs incurred on determination of technical feasibility of extraction of mineral resources.
IFRS 6 allows companies to make determine an accounting policy regarding their exploration/evaluation and development activities and carry out impairment testing if there are indications that any exploration and evaluation assets are impaired.
IFRS 7 Financial Instruments: Disclosures
IFRS 7 prescribers financial instruments disclosure aimed at giving the users of the financial statements an overview of the significance of financial instruments for an entity, the nature of extent of associated risk exposures and the entity’s risk management processes.
IFRS 8 Operating Segments
IFRS 8 requires companies who have publicly-listed equity or debt instruments to disclose information which helps investors in identifying performance of its different business activities. Entities are required to separately disclose information for operating segments (segments whose operations are separately measured and reviewed by executive management) whose assets, revenue or profits are 10% or more of the total assets, total revenue and net income.
IFRS 9 Financial Instruments
IFRS 9 outlines recognition, derecognition, and classification requirements for financial assets and liabilities, and impairment and hedge accounting guidance.
It requires financial assets to be classified either as amortized cost (if the entity’s business model is to hold the asset for earning cash flows and the cash flows are solely payments of principal and interest), fair value through other comprehensive income (if the business model is to both collect cash flows and make a capital gain), and fair value through profit or loss (the residual category).
Financial liabilities are mostly classified as amortized cost or at fair value through profit or loss (in case of derivatives, for example). While financial assets may be reclassified after initial recognition, financial liabilities cannot be.
IFRS 9 also contains forward-looking impairment recognition requirements and new hedge accounting guidance.
IFRS 10 Consolidated Financial Statements
IFRS 10 contains principles for preparation of consolidated financial statements. It deals with determination of control, accounting requirements for consolidation, and outlines exceptions available to investment entities.
IFRS 11 Joint Arrangements
IFRS 11 contains guidance on accounting for joint arrangements, arrangement in which unanimous decision of two or more entities are required. These include joint operations and joint ventures.
In accordance with IFRS 11, a joint operator recognizes its share of the assets and liabilities, and revenues and expenses in accordance with IFRSs applying to those items. However, a joint venture partner applies the equity method required by IAS 28.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 stipulates disclosures which entities must make regarding the natures and risks of their interests in subsidiaries, associates, joint ventures, etc., and the associated effects on its financial position, performance and cash flows.
IFRS 13 Fair Value Measurement
IFRS 13 defines fair value and outlines the measurement and disclosure guidance which are to be applied when other standards requires or permits fair value measurement except for cases in which those standards contain their own fair value guidance (such as share-based payments and leases). The standard defines fair value as ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price)’.
IFRS 14 Regulatory Deferral Accounts
IFRS 14 allows first-time adopters to continue to recognize regulatory deferral balances. Regulatory deferral balances are amounts of income or expense which do not qualify for recognition, but which can be deferred because the rate reguIlator will consider them in future price determination.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 establishes the following five-step model for recognition of revenue from contracts wit customers (other than leases, financial instruments and some other exceptions):
- Identifying the contract with customer.
- Identifying the performance obligations in a contract.
- Determining transaction price of the contract.
- Allocating the transaction price to difference performance obligations.
- Recognizing revenue based on progress towards satisfaction of each performance obligation.
IFRS 16 Leases
IFRS 16 replaces IAS 17, the previous lease accounting standard. It requires lessees to present all leases (except short-term leases and leases of low-value items) on their statements of financial position (by recognizing a right of use asset and a lease liability). However, it retains the finance lease and operating lease bifurcation in case of lessors.
Lessee depreciation their right of use assets and unwind the lease liability. Lessors recognize finance income on their net investment in lease (in case of finance leases) and operating lease income (on some reasonable basis) in case of operating leases.
The standards also provides guidance on lease term, lease components, lease modifications and sale and leaseback transactions.
IFRS 17 Insurance Contracts
IFRS 17 will be effective for annual reporting periods beginning on or after 1 January 2023.
IFRS 17 requires an entity to identify insurance contracts with customers, separate the non-insurance (investment, embedded derivative, etc.) components, divide the contracts to different groups and measures the groups at (a) a risk-adjusted present value of the future cash flows, and (b) an amount representing the unearned profit. The standards requires an entity to recognize profit from insurance contracts as the entity provides services and it is released from the risk. However, any loss is required to be recognized immediately.
International Accounting Standards
Following are the currently effective international accounting standards (IASs).
IAS 1 Presentation of Financial Statements
IAS 1 provides guidance on structure, contents, frequency and overall presentation of financial statements. It stipulates that a complete set of financial statements include:
- A statement of financial position,
- A single statement of profit or loss and other comprehensive income or separate statement or profit or loss and statement of other comprehensive income,
- A statement of cash flows
- A statement of changes in equity
- Cross-referred notes to the financial statements.
It also specifies other requirements such as when an entity can claim compliance with IFRS, going concern, changes in classification, etc.
IAS 2 Inventories
IAS 2 allows an entity to capitalize direct labor and conversion costs and only such other costs which are necessary to bring the inventories to their present location and condition. It allows assigning cost of inventories to sales using either specific identification, or FIFO or weighted average methods. Cost of inventories is recognized when associated revenues are recognized.
The closing inventories are carried at the lower of cost or net realizable value (which equals estimated selling price less costs to sell) and any write-down is expensed. IAS 2 also allows any reversal of impairment loss recognized on inventories if their value recovers.
IAS 7 Statement of Cash Flows
IAS 7 requires an entity to present its cash flows segregated into operating, investing and financing activities using either the direct method (which shows each category of inflow and outflow) or indirect method (which determines net operating cash flow by adjusting net income for non-cash transactions and working capital changes).
Operating activities are the principal revenue-producing activities, investing activities are concerned with acquisition or disposal of long-term assets, and financing activities represent transactions with providers of capital.
IAS 7 allows policy choice in classification of interest received, interest paid and dividends.
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
If a specific IFRS does not address an accounting transaction, IAS 8 requires entities to draw guidance, first from IFRSs dealing with similar transaction, and then from the Conceptual Framework. Any change in accounting policies shall be made retrospectively unless an IFRS contains specific transition provisions.
Any change in accounting estimates is accounted for prospectively. Any prior period errors or omissions are corrected retrospectively.
IAS 10 Events after the Reporting Period
IAS 10 requires than an entity adjust its financial statements for any adjusting events but not for non-adjusting events. Adjusting events are those that provide evidences of conditions existing at the year-end. However, significant non-adjusting events are disclosed.
IAS 12 Income Taxes
In accordance with IAS 12, an entity recognizes a liability or asset in respect of current tax for current or prior periods at tax rates which are enacted or substantively enacted.
IAS 12 also requires recognition of deferred tax liability or a deferred tax asset for temporary differences arising from differences between financial accounting treatment and tax treatment of transactions (based on tax rates expected to be enacted when those differences reverse). Deferred tax assets may also be recognized in respect of tax losses carried forward. However, a valuation adjustment is needed if future tax profits will not be enough to utilize the whole deferred tax assets.
IAS 16 Property, Plant and Equipment
IAS 16 stipulates accounting treatment for tangible fixed assets. It requires capitalization of costs which are expected to generate economic benefits in more than on period. Subsequent to initial recognition, it allows an entity to adopt either the cost model or the revaluation model. While the cost model just depreciates the initial cost of the asset on some systematic basis, the revaluation model allows for recognition of changes in fair value of the asset which are credited/debited to shareholders’ equity.
IAS 19 Employee Benefits
IAS 19 provides accounting guidance on employee compensations other than share options (which are dealt by IFRS 2). Short-term benefits such as salaries are recognized at their undiscounted amounts when the employees provide services.
In case of a defined contribution plan, an entity recognizes the contributions payable as expense when the employee provides services unless they can be capitalized under another standard. In case of a defined benefit plan, an entity determines its liability and expense in relation to the present value of future expected outlays and plan assets.
An entity recognizes termination benefits at the earlier of when the entity cannot withdraw offer or when it recognizes associated restructuring provision in accordance with IAS 37.
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
IAS 20 deals with accounting for government grants. Entities recognize government grants only when they are reasonably certain they will meet the associated conditions. Expense-related government grants are recognized in the periods in which the associated expense is recognized, and asset-related government grants are either netted-off from the associated asset or presented as a deferred amount. If a government grant becomes repayable, it is treated as a change in estimate.
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 21 stipulates accounting for foreign exchange transactions, translation of foreign operations to its functional currency (currency of its main economic environment) and translation of its own financial statements to another presentation currency.
A foreign currency transaction is initially recorded at the spot exchange rate on the transaction date. At each reporting period, foreign-currency monetary items are translated at the closing exchange rate, the non-monetary transactions at the historical exchange rate or the date of their fair value (if carried at fair value). Any difference is carried to profit or loss except for differences arising from net investment in foreign operations which are taken to other comprehensive income.
Translation of financial statements to foreign currency is carried out by translating assets and liabilities at the closing rate and the income and expenses at the date of transactions. Any differences are reflected in other comprehensive income.
IAS 23 Borrowing Costs
IAS 23 requires capitalization of borrowing costs incurred in qualifying assets (assets that necessarily take a substantial period of time in getting ready for their intended use). It contains guidance on borrowing costs measurement.
IAS 24 Related Party Disclosures
IAS 24 defines a related party and specifies disclosure requirements of related party relationships and transactions with related parties. It also requires disclosure of management compensation.
IAS 26 Accounting and Reporting by Retirement Benefit Plans
IAS 26 specifies the minimum content requirements for financial statements of (defined benefit) retirement plans.
IAS 27 Separate Financial Statements
If an entity elects or is required to present separate financial statements in addition to the consolidated financial statements, it follows IAS 27 for the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates. In the separate financial statements, investments are measured either at cost (under IFRS 9) of the equity method.
IAS 28 Investments in Associates and Joint Ventures
IAS 28 requires application of equity method to accounting for investments in associates (entities on which an investor has significant influence, presumed by a 20% holding). The joint venture accounting part is superseded by IFRS 11 which also requires equity method.
Under the equity method, an investment is initially recognized at cost, periodically increased by the proportion of the investor’s share in the net profits of the associate and decreased by proportionate share in dividends. However, in some situations, certain adjustments are needed.
IAS 29 Financial Reporting in Hyperinflationary Economies
IAS 29 is applied to an entity whose function currency is the currency of a hyperinflationary economy (i.e. it has cumulative inflation of 100% in 3 years). The standard requires restatement of comparative information based on changes in the general price index, and a disclosure of this fact. Any gain or loss is recognized in profit or loss.
IAS 32 Financial Instruments: Presentation
While IFRS 9/IAS 39 contains guidance on recognition and measurement, and disclosure (respectively) of financial instruments, IAS 32 specifies presentation requirements
Financial instruments are classified into financial assets, financial liabilities and equity instruments. A component financial instrument is split into equity and liability components. The fair value of equity component equals the difference between fair value of the component instrument minus fair value of the liability component. Offsetting between financial assets and financial liabilities is allowed only when there are both a legally enforceable right and intention.
IAS 33 Earnings per Share
IAS 33 is used by entities with publicly traded (current or potential) ordinary shares in calculating the earning per share. Non-public entities choosing to present EPS must also comply with IAS 33. It specifies the calculation mechanics for both the basic EPS and the diluted EPS.
IAS 34 Interim Financial Reporting
IAS 34 specifies the minimum content requirements of interim condensed financial statements. It prohibits repetition of information already contained in the most recent annual financial statements and reduces the disclosure requirements for different transactions.
IAS 36 Impairment of Assets
IAS 36 requires an entity to recognize impairment loss on assets (or cash-generating units) for which there is no specific impairment requirements contained in other standards. It mainly applies to PPE and intangible assets, etc. (or cash-generating units) for which there is no specific impairment requirements contained in other standards, such as financial assets, etc.
Impairment loss is recognized when the recoverable amount of an asset exceeds its carrying amount. Recoverable amount equals the higher of the fair value less costs to sell and the value in use (which in turn is the present value of future cash flows).
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 37 requires provisions (liabilities with uncertain timing and amount arising from present legal or constructive obligation) to be recognized at the discounted present value of future cash outflow. If outflow is not probable, a liability is treated as a contingent liability and is disclosed in the financial statements (but not recognized) unless the probability of outflow is remote. Contingent assets are assets whose existence depends on some future events. If it is more likely than not that an inflow related to a contingent asset would occur, it is disclosed.
IAS 38 Intangible Assets
IAS 38 contains guidance on accounting for intangible assets (assets lacking physical substance). It disallows capitalization of some internally-generated intangible assets (such as brands, customer lists, etc.) but allows capitalization of development costs but not research costs incurred on certain other intangible assets.
It allows an intangible asset to be carried at cost less accumulated amortization and accumulated impairment or at fair value (if it can be measured with reference to an active market). For intangible assets with infinite useful life, it requires annual impairment testing.
IAS 39 Financial Instruments: Recognition and Measurement
While IAS 39 is superseded by IFRS 9, it still contains some guidance on recognition and derecognition and retains the prior hedge accounting requirements which entities have an option to adopt instead of the IFRS 9 hedge accounting requirements.
IAS 40 Investment Property
IAS 40 requires an entity to account for land and buildings held for the purpose of earning rentals and/or capital appreciation differently than owner-occupied property. After initial classification/recognition of an investment property (which is at fair value plus initial costs), an entity either adopts the cost model or the fair value model and applies it to all of its investment property.
Under the cost model, no change in fair value of the property is recognized but under the fair value model, any change in fair value is charged to profit or loss for the period. The standard also specifies the treatment when a property is transferred between investment property, owner-occupied property and inventories.
IAS 41 Agriculture
IAS 41 deals with agricultural activity, the management of biological transformation of living animals or plants and their harvest or conversion to agricultural produce. It is concerned with accounting during the transformation and the initial measurement of agricultural produce.
Except for bearer plants (which are accounted for under IAS 16), all biological assets and agriculture produce are measured at fair value less costs to sell and any changes are reflected in profit or loss.