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Introduction 1. The Pillars 3. The Framework 4. Example 2: An inflow income or liability? Example 3: Staff costs an asset? Contents continued 5. IAS 1: Presentation of financial statements: an overview 5. IAS 1: Presentation of financial statements: general features 6. IAS 1: Presentation of financial statements: structure and content 7. Contents continued 7. Through the ages, very many languages developed; Latin, English, French, Spanish and Zulu, to name but a few.
Now English, for instance, is used to communicate information and opinions to other English-speaking people or to those who are at least able to understand it. Accounting is also a language, but one that is used by accountants to communicate financial information and opinions to other accountants and, of course, to those other interested parties who are able and willing to try to understand it.
In order to communicate effectively in the language of English as in all other languages , there are certain rules to observe when spelling and pronouncing words and when stringing them together in the right order to make an understandable sentence. When communicating in our accounting language, there are similar rules. These rules are set out in detail and are commonly referred to as statements of generally accepted accounting practice GAAP.
Much of this globe-shrinking technology has been around for many years now, so communication has already begun between countries that, only a few hundred years ago, did not even know of each others existence.
And this includes communication amongst accountants and amongst businesses! The problem is that with so many different languages, communication between different nationalities can sometimes become almost impossible; picture the scene where an Englishspeaking New Zealander and a Swahili-speaking East African are trying to have a conversation. Even when speaking the same language, there are some accents that make a conversation between, for instance, an English-speaking American and an English-speaking Briton, just as amusing.
Accounting, as a language, is no different. Almost every country has its own accounting language. The language GAAP used in one country is often vastly different to that in another country; so different, in fact, that it is like comparing French with Ndebele. In other cases, however, the differences between two countrys GAAP may be relatively minor that it is similar to comparing Dutch with Afrikaans or Scottish with Irish. These differences, however small, will still result in miscommunication.
Whereas miscommunication on street level often leads to tragedies ranging from divorce to war, miscommunication between businesses often leads to court cases and sometimes even final liquidation of the businesses. This amazing process is referred to as the International Harmonisation Project. Its basic objective is to produce a language that is understandable and of a high quality. The process of harmonisation involves discussion amongst standard setters in any country wishing to be part of the process, during which the reporting processes currently used by these standard setters their local statements of GAAP are considered and then the best processes are selected to constitute or form the basis of the new international standard going forward.
Although most countries participating countries as at 5 November , www. This project is therefore expected to be a long and politically volatile one, but one which, in the end, will hopefully enable accountants all around the globe to communicate in one language. All countries that adopt the global accounting language, must comply with these rules IFRSs in their financial statements for financial periods beginning on or after 1 January Over the years, this committee developed 41 global accounting standards, referred to as International Accounting Standards IAS.
This new board adopted all 41 IASs and started the development of more global accounting standards. We now, therefore, have a total of 49 global accounting standards IFRS : 41 of which are referenced as IAS 1 41 produced by the old committee and 8 of which are referenced as IFRS 1 8 produced by the new board.
These interpretations are developed when accountants and auditors notify the board of difficulties in understanding and applying certain parts of a standard.
This committee developed 34 interpretations SIC 1 SIC 34 , only 11 of which still stand, with the rest having been gradually withdrawn as a result of the harmonisation process. In considering which ideas or combination of ideas to adopt as the new standard, they use what is referred to as the Framework. This framework sets out the basic objectives, characteristics, concepts, definitions, recognition and measurement criteria relevant for a good set of financial statements.
There are approx 40 members who meet three times a year. Develop and pursue the technical agenda, issue interpretations, basis for conclusions with standards and exposure drafts.
They need 9 votes out of 14 to get standards, exposure drafts and interpretations published. The 12 members are unpaid but have expenses reimbursed. They meet every second month. They make interpretations and consider public comments and get final approval from IASB.
During the process of harmonisation, new ideas develop that result in changes having to be made to some of the existing standards and their interpretations. This is what is referred to as the Improvements Project. Before a new standard is issued, an exposure draft is first issued. The exposure draft may only be issued after approval by at least nine of the fourteen members of the IASB and is issued together with: the opinions of those members of the IASB who did not approve of the exposure draft and the basis for the conclusions that were made by the rest of the IASB members.
Any interested party may comment on these drafts. The comments received are thoroughly investigated after which the draft is adopted as a new standard either verbatim or with changes having been made for the comments received or is re-issued as a revised exposure draft for further comment.
These include the documented acceptable methods used by businesses to recognise, measure and disclose business transactions. Legally, financial statements must generally comply with the national statutory requirements of the relevant country. The problem is that most statutes laws of many countries currently require compliance with either generally accepted accounting practice or the statements of generally accepted accounting practice. A strict interpretation of the requirement to comply with generally accepted accounting practice GAAP suggests that if everyone is doing it, so can we, or in other words, the official Statements or Standards need not be complied with.
In all cases, if a country wishes its business entities to use global accounting standards IFRS , the terms included in that countrys legislation will have to require compliance with international financial reporting standards and the interpretations thereof IFRS instead.
In addition to the requirements of the legal statute of the country, IAS 1 Presentation of Financial Statements requires that where companies do comply with international financial reporting standards and the interpretations thereof in their entirety , disclosure of this fact must be made in their financial statements. By implication, those companies that do not comply, may not make such a declaration. It is obviously beneficial to be able to make such a declaration since it lends credibility to the financial statements, makes them understandable to foreigners and thus encourages investment.
The Pillars This section and the entire chapter relates to what I call the pillars of accounting, a very important area, without which the top floor of your knowledge cannot be built. The foundations of this building were built in prior years of accounting study. If you feel that there may be cracks in your foundation, right now is the time to fix them by revising your work from prior years. Please read this chapter very carefully because every other chapter in this book will assume a thorough understanding thereof.
The Framework is technically not a standard but the foundation for all standards and interpretations. It sets out the: objective of financial statements, that is to say, the information that each component of a set of financial statement should offer; underlying assumptions inherent in a set of financial statements; qualitative characteristics that the financial statements should have; elements in the financial statements assets, liabilities, equity, income and expenses ; recognition criteria that need to be met before the element may be recognised in the financial statements; measurement bases that may be used when measuring the elements; and concepts of capital and capital maintenance.
IFRSs are designed to be used by profit-orientated entities commercial, industrial and business entities in either the public or private sector when preparing general purpose financial statements i.
IAS 1 builds onto the Framework and in some areas tends to overlap a little. IAS 1 has as its main objective comparability and with this in mind, sets out: the purpose of financial statements; the general features of a set of financial statements; the structure and minimum content of the five main components of financial statements: the statement of financial position as at the end of the period ; the statement of comprehensive income for the period ; the statement of changes in equity for the period ; the statement of cash flows for the period ; and the notes to the financial statements; other presentation issues, such as how to differentiate between items that are considered current and those that are considered non-current necessary when drawing up the statement of financial position.
It is important to note that users are not limited to shareholders and governments, but include, amongst others, employees, lenders, suppliers, competitors, customers and the general public. The four main qualities that a set of financial statements should have are listed as follows: understandability relevance reliability comparability.
Although one must try to achieve these qualitative characteristics, the Framework itself admits to the difficulty in trying to achieve a balance of characteristics. For example: to ensure that the information contained in a set of financial statements is relevant, one must ensure that it is published quickly.
This emphasis on speed may, however, affect the reliability of the reports. This balancing act is the fifth attribute listed to in the Framework, and is referred to as constraints on relevant and reliable information. If the four principal qualitative characteristics and the Standards are complied with, one should achieve fair presentation, which is the sixth and final attribute listed in the Framework.
The predictive and confirmatory role of the financial statements is therefore very important to 9 Chapter 1. By way of example, unusual items should be displayed separately because these, by nature, are not expected to recur frequently; materiality of the items: Consider the materiality of the size of the item or the potential error in user-judgement if it were omitted or misstated; nature: For example, reporting a new segment may be relevant to users even if profits are not material.
Materiality is a term that you will encounter very often in your accounting studies and is thus important for you to understand. The Framework explains that you should consider something an amount or some other information to be material: if the economic decisions of the users could be influenced if it were misstated or omitted. Materiality is considered to be a threshold or cut-off point to help in determining what would be useful to users and is therefore not a primary qualitative characteristic.
For example, all revenue types above a certain amount may be considered to be material to an entity and thus the entity would disclose each revenue type separately. Sometimes events or transactions can be so difficult to measure that the entity chooses not to include them in the financial statements.
The most common example of this is the internal goodwill that the entity is probably creating but which it cannot recognise due to the inability to clearly identify it and the inability to measure it reliably. A typical example here is a lease agreement the legal document. The term lease that is used in the legal document suggests that you are borrowing an asset in exchange for payments rental over a period of time.
Many of these so-called lease agreements result in the lessee the person borrowing the asset keeping the asset at the end of the rental period.
This means that the lease agreement is actually, in substance, not a lease but an agreement to purchase the lessee was actually purchasing the asset and not renting the asset.
This lease is referred to as a finance lease, but as accountants, we will recognise the transaction as a purchase and not as a pure lease. Bias is the selection or presentation of information in such a way that you achieve a pre-determined result or outcome in order to influence the decisions of users.
The idea behind prudence is to: avoid overstating assets and income, and avoid understating liabilities and expenses, but without : creating hidden reserves and excessive provisions, or deliberately understating assets and income, or overstating liabilities and expenses for reasons of bias.
This is because omission of information could be misleading and result in information that is therefore unreliable and not relevant. Immaterial items may be excluded if too costly to include.
As a result of requiring comparability, users need to be provided with information for the comparative year and should be provided with the accounting policies used by the entity and any changes that may have been made to the accounting policies used in a previous year. These constraints are essentially time and money: timeliness: the financial statements need to be issued soon after year-end to be relevant, but this race against time leads to reduced reliability; and cost versus benefit: to create financial statements that are perfect in terms of their relevance and reliability can lead to undue effort, with the result that this benefit is outweighed by the enormous cost to the entity; and a balance among the qualitative characteristics.
Bearing in mind that only fresh information is relevant, the financial statements of a business are not relevant to a user in who is trying to decide whether or not to invest in that business. The problem is, in the rush to produce relevant and timely financial statements, there is a greater risk that they now contain errors and omissions and are thus unreliable.
This balancing act is compounded by the constraint of cost. Money is obviously a constraint in all profit organisations whose basic idea is that the benefit to the business should outweigh the cost. To produce financial statements obviously costs the business money, but this cost increases the faster one tries to produce them due to costs such as overtime and the better one tries to do them more time and better accountants cost more money.
Gripping-IFRS VOL1-Complete (2008 EDITION).pdf
Introduction 1. The Pillars 3. The Framework 4. Example 2: An inflow income or liability? Example 3: Staff costs an asset? Contents continued 5.
Gripping IFRS Complete