Information in financial statements is relevant when it influences the economic decisions of users by helping them evaluate past, present, or future events. Timeliness is another component of relevance. To be useful, information must be provided to users within the time period in which it is most likely to bear on their decisions.
Reliability is information that is free from material error and bias and can be depended upon by users to represent events and transactions faithfully.
Users must be able to compare the financial statements of an entity over time so that they can identify trends in its financial position and performance. Disclosure of accounting policies is important for comparability
Definition, recognition and measurement
Recognition is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies:
It is probable that any future economic benefit associated with the item will flow to or from the entity
The item's cost or value can be measured with reliability.
Based on this above the financial statement is made up of five key elements: assets, liability, income, expense, equity.
The IASB Framework recognises the following measurement bases: fair value measurement, historical convention, current value approach, future value measurement
and present value method
One fundamental aspect of the IASB framework is that it lays emphasis on the balance sheet approach. Which implies decisions should be taken on the basis of the equity position; hence the net assets.
Advantages of conceptual framework:
The situation is avoided where standards are developed on a patchwork basis. Where a particular accounting problem is recognised as having emerged resources can then be channeled into standardising accounting practice in that area.
The development of national standards has been subject to considerable political interference from interested parties. If there is a conflict of interest between user groups on which policies to choose, policies from a conceptual framework are less open to criticism that the standard-setting ones.
Disadvantages of conceptual framework:
Financial statements are intended for a variety of users, and it is not certain that a single conceptual framework can be devised which will suit all users.
Given the diversity of user requirements, there may be a need for a variety of accounting standards, each produced for a different purpose (and with different concepts as a basis).
It is not clear that a conceptual framework makes the task of preparing and then implementing standards any easier than without a framework
Regulatory Framework:
Regulatory framework ensures relevant and reliable financial statements by enforcing compliance with Generally Accepted Accounting Policies (GAAP). For this to work there has to be a body responsible for producing financial reporting standards and a framework of general principles where reporting standards can be produced. A principle based system means the framework provides a background of principles from which standards can be developed which ensures standards produced do not conflict each other.
The International Accounting Standards Committee
It was formed in 1973 by an between the bodies of 140 that and promoted the use of the . It is succeeded by the .
The IASC foundation are an independent, non- profiting organisation working for the public interest who have two main bodies Trustees and the IASB. Trustees appoint IASB members, exercise oversight and raise funds needed, however the IASB is sole responsible for setting standards. The IASC principal objectives are to:
Develop a single set of high quality, understandable, and enforceable international financial reporting standards (IFRSs) through the IASB
Promote the use and application of those standards
Take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs)
Bring convergence of national accounting standards and IFRSs to high quality solutions.
Bodies Associated with IASC: IFRIC, SAC
The International Financial Reporting Interpretations Committee (IFRIC) is the interpretative body of the IASB and meetings are open to the public and webcast. It comprises of 14 voting members appointed by the Trustees and drawn from a variety of countries and professional backgrounds. The IFRIC reviews widespread accounting issues that have arisen within the context of current IFRSs and provides authoritative guidance on these issues.
The Standards Advisory Council (SAC) are consulted by the IASB on all projects. They compromise of fifty members and give advice to board and members; they meet at least three times a year with meetings open to public. The SAC advise the Board on agenda decisions and priorities the Board's work and informing them of the views of the organisations and individuals on the Council on major standard-setting projects.
International Accounting Standards:
Presentation of Financial Statements (IAS1)
The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose financial statements. IAS1 ensures comparability with the entity's financial statements of previous periods and with the financial statements of other entities. The overall requirements are set out for the presentation of financial statements and guidelines for their structure and minimum requirements for their content. Terminology used is that suitable for profit-oriented entities, and IAS1 cautions that entities that are non-profiting need to amend the descriptions of statements or line items if applying IAS 1.
General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs. They apply to all general purpose financial statements based on IFRS.
The objective of general purpose financial statements is to provide information about the financial position and to meet that objective, financial statements provide information about an entity's: assets, liabilities, equity, cash flows, income and expenses, including gains and losses, contributions by and distributions to owners.
IAS 1.10 states complete sets of financial statements include: a balance sheet at the end of the period, an income statement and a statement of comprehensive income a statement of changes in equity for the period, a statement of cash flows for the period and explanatory notes.
The financial statements must be presented “fairly" The application of IFRSs is presumed to result in financial statements that achieve a fair presentation.
Inventories (IAS 2)
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for recognising an expense, including any write-down to net realisable value. It provides guidance on the cost formulas that are used to assign costs to inventories.
Inventories include assets in three stages of a business in production: raw materials, work in progress and finished goods. IAS 2 excludes inventories such as work in process arising under construction contracts, financial instruments, biological assets related to agricultural activity It also does not apply to the measurement of inventories held by: producers of agricultural and forest products, commodity brokers and dealers who measure their inventories at fair value
IAS2 requires Inventories are stated at the lower of cost and net realisable value (NRV) NRV is the estimated selling price less the estimated cost of completion and the estimated costs necessary to make the sale. Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs.
Measurement of inventories mean cost should include all costs of purchases, convention and any other costs incurred in bringing the inventories to their present condition. Inventory cost should not include: any waste, storage costs, admin overheads, selling costs, etc. IAS2 states the standard cost may be used for the measurement of cost, provided that the results approximate actual cost. Inventory items that are not interchangeable, specific costs are attributed to the specific inventory and for interchangeable items IAS 2 allows only the FIFO or weighted average cost formulas.
Statements of Cash flow (IAS 7)
The objective of IAS 7 is to require the presentation of information about the historical changes in cash by means of a cash flow statement which shows all cash flow coming in and out the business. All entities that prepare financial statements with IFRSs are required to present a statement of cash flow.
The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents consist of: cash on hand, demand deposits, highly liquid investments that can be converted to cash. Equity investments are normally excluded, unless they are in substance a cash equivalent. Bank overdrafts which are repayable on demand are included as a component of cash and cash equivalents.
Cash flows must be analysed between operating, investing and financing activities. Principles specified by IAS 7 are:
Operating activities are revenue-producing activities that are not investing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees
Investing activities are disposal of long-term assets and investments not considered to be cash equivalents
Financing activities are activities that alter the equity capital and borrowing structure
Interest and dividends received and paid may be classified as: operating investing, or financing cash flows provided that they are classified consistently
Operating cash flows, the direct method of presentation is popular but the indirect method is acceptable
Event after the reporting period (IAS 10)
It is defined as an event that could be favourable/ unfavourable which occurs between the end of the reporting period and the date that the financial statements are authorised for issue.
An adjusting event is an event after the reporting period, where further evidence is shown to exist and this has to be adjusted in the balance sheet. A non-adjusting event is indicative of a condition that rises after the end of the reporting period and does not have to be adjusted in the financial statements. An example of a non-adjusting event is if an entity declares dividends after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period.
An entity can not prepare its financial statements on a going concern basis, if management determines that after the end of the reporting period either that it intends to: liquidate the entity or to end trading, or has no realistic alternative but to do so.
Non-adjusting events must be disclosed if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions. The required disclosure is nature of the event and an estimate of its financial effect. A company should update disclosures that relate to conditions that existed at the end of the reporting period to reflect any new information that it receives after the reporting period about those conditions. The date when the financial statements were authorised for issue and who gave the authorization must be disclosed. If the enterprise's owners or others have the power to amend the financial statements after issuance, the enterprise must disclose this.
Revenue (IAS 18)
IAS 18 is used for the accounting treatment for revenue arising from certain types of transactions and events.
Revenue is the gross inflow of economic benefits rising from the ordinary operating activities of an entity. It is the entire amount of income before any deductions are made.
Revenue should be measured at the fair value of the consideration received or receivable. An exchange for goods of a similar nature and value is not regarded as a transaction that generates revenue. However, exchanges for dissimilar items are regarded as generating revenue.
If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. This would occur, if the seller is providing interest-free credit to the buyer or is charging a below-market rate of interest. Interest must be based on market rates.
Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue in the income statement when it meets the following criteria: it is probable that any future economic benefit associated with the item of revenue will flow to the entity, the amount of revenue can be measured with reliability
IAS 18 provides guidance for recognising the following specific categories of revenue: Sale of Goods, Rendering of Services Interest, Royalties, and Dividends
Intangible Assets (IAS38)
IAS 38 is used when the accounting treatment for intangible assets that are not dealt with specifically in another IFRS. This Standard requires an entity to recognise an intangible assets only if, specified criteria are met. IAS38 specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets.
IAS 38 applies to all intangible assets other than: financial assets, exploration and evaluation assets expenditure on the development and extraction of minerals, intangible assets arising from insurance contracts intangible assets covered by another IFRS.
The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets: the definition of an intangible asset and the recognition criteria:
An asset meets the identifiability criteria in the definition of an intangible asset when it is separable and arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
An intangible asset shall be recognised if, and only if: it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity and the cost of the asset can be measured reliably.
Hopefully, after reading this report you will have gained an understanding on The International Accounting Standard Body and the conceptual and regulatory framework concerning the IASB, as well as learning the key provisions associated with the accounting standards: IAS1, IAS2, IAS7, IAS10 1AS18, IAS38.
References:
Morris, Glynis D. (2005) ‘UK Accounting Practice’ LexisNexis Butterworths: London
CGA (2009) “International Accounting Standard 1”
Sajeel (2009) ‘Regulatory Framework’ http://www.slideshare.net/sajeel/regulatory-framework-chapter-02
Deloitte (2010)
Sift Media ‘IASB Framework’ .
Luthra. V (2010) ‘IASB’