International Financial Reporting Standards: framework-based understanding and teaching

Transcription

1 International Financial Reporting Standards International Financial Reporting Standards: framework-based understanding and teaching Guillermo Braunbeck, Project Manager, Education Initiative, IASB IFRS Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK. Outline 2 Why global standards? The progress Structure and governance Understanding principle-based standards Common misunderstandings Framework-based understanding of IFRSs Framework-based teaching of IFRSs 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

2 International Financial Reporting Standards Why global standards? IFRS Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB The reality 4 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 Accounting and auditing needs strengthening World Bank ROSCs corporate failures standard setters work programmes High-quality information facilitates the allocation of global capital 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

3 Benefits of global standards 5 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 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK. International Financial Reporting Standards The progress IFRS Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB

4 Status of IFRSs use around the world 7 Since 2001, over 120 countries have required or permitted the use of IFRSs. Remaining major economies have time lines to converge 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 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK. The World is Getting Smaller 8 THE MOMENTUM TOWARDS GLOBAL ADOPTION OF IFRSs More than 100 countries require or permit the use of International Financial Reporting Standards (IFRSs), or are converging with the IASB s standards. Countries that require or permit IFRSs Countries seeking convergence with the IASB or pursuing adoption of IFRSs Source of information (adapted from):

5 Fortune Global 500 (July 2009) 9 Fortune G500 Based on announced plans Which GAAP? Japan 2015? IFRSs and word-for-word IFRS equivalents US GAAP National GAAPs Total IASC Foundation. 30 Cannon Street London EC4M 6XH UK. International Financial Reporting Standards Structure and governance IFRS Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB

6 The vision 11 one single set of high quality global standards....used on the global capital markets. Structure of IFRS Foundation 12 International Monitoring Board IFRS Foundation Trustees The standard-setting operation IFRS Advisory Council International Accounting Standards Board IFRS Interpretations Committee Advisory Groups Staff Education XBRL Publications Operations 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

7 Consultation process months 9 15 months months Discussion paper Comment analysis Exposure Draft Comment analysis Final standard Effective date Research: Standard setters, EFRAG, and others. Additional input Additional input Feedback statement 2 year post implementation review 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK. International Financial Reporting Standards Understanding principlebased standards IFRS Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

8 What does principle-based mean? 15 There is overwhelming support for principlebased 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 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 16 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. IAS 8 hierarchy

9 Objective of financial reporting 17 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) 17 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Objective of financial reporting 18 Investors, lenders and other creditors expectations about 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 and debt instruments depend on the returns that they expect from an investment in those instruments, eg dividends, principal and interest payments or market price increases. Decisions by lenders about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect. 18 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

10 Objective of financial reporting 19 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 19 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Qualitative characteristics If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent (ie fundamental qualities). Financial information without both relevance and faithful representation is not useful, and it cannot be made useful by being more comparable, verifiable, timely or understandable. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable (ie enhancing qualities less critical but still highly desirable) Financial information that is relevant and faithfully represented may still be useful even if it does not have any of the enhancing qualitative characteristics IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

11 Fundamental qualitative characteristics 21 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 21 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Enhancing Qualitative Characteristics 22 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 22 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

12 Pervasive constraint 23 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. Summary 24 Reporting financial information that is relevant and faithfully represents what it purports to represent helps users to make decisions with more confidence (ie financial information must possess the fundamental qualitative characteristics). IFRS requirements must be cost-beneficial Applying the enhancing qualitative characteristics is an iterative process that does not follow a prescribed order. Sometimes, one enhancing qualitative characteristic may have to be diminished to maximise another qualitative characteristic. IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

13 Elements 25 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 of resources 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 25 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Recognition 26 Accrual basis of accounting recognise element (eg asset) when satisfy definition and recognition criteria Recognise item that meets element definition when probable that benefits will flow to/from the entity has cost or value that can measured reliably IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

14 Recognition 27 What does probable mean? The meaning of probable is determined at the standards level. Therefore, inconsistent use across IFRSs What does measure reliably mean? To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Measurement concepts 28 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 depictions. The Framework establishes the concepts that underlie those estimates, judgements and models (CF.OB11) IASB guided by objective and qualitative characteristics when specifying measurements. 28 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

15 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 when necessary results in a fair presentation (faithful representation of transactions, events and conditions) don t offset assets & liabilities or income & expenses 29 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. International Financial Reporting Standards Quiz: Conceptual Framework for Financial Reporting IFRS Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB

16 Quiz: purpose of the Conceptual Framework for Financial Reporting Question 1: The purpose of the Conceptual Framework for Financial Reporting is: a. to assist the IASB in setting IFRSs? b. to assist preparers of financial statements in applying IFRSs? c. to assist auditors in forming an opinion on whether financial statements comply with IFRSs? d. to assist users of financial statements in interpreting IFRS financial statements? e. all of the above? 31 Quiz: objective of general purpose of financial reporting Question 2: The objective of general purpose financial reporting is: a. 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? b. to inform government statistics? c. to support the entity s tax return? 32

17 Quiz: objective of general purpose of financial reporting Question 2: The objective of general purpose financial reporting is: d. to meet all the information needs of all the users of an entity s financial statements? e. to inform economic decision-making by a broad range of users (including managers, investors, creditors and prudential regulators)? 33 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 assets and income and overstating liabilities and expenses? b. transparency and neutrality? c. financial stability through conservatism/prudence? d. management discretion in reporting financial information? 34 34

18 Quiz: fundamental qualitative characteristics Question 4: The fundamental qualitative characteristics are: 35 a. comparability and relevance? b. relevance and reliability? c. relevance, reliability and comparability? d. relevance and faithful representation? e. comparability, relevance and faithful representation? 35 Quiz: qualitative characteristics Question 5: verifiability means knowledgeable and independent observers: a. would reach complete agreement that a depiction is a faithful representation? b. cannot reach consensus that a depiction is a faithful representation? c. could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation? 36 36

19 Quiz: 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 37 understandable. 37 Quiz: qualitative characteristics Question 6: which of the statements below are true? d. Financial information that is relevant and faithfully represented may still be useful even if it does not have any of the enhancing qualitative characteristics e. All of the above statements. f. None of the above statements

20 Quiz: recognition 39 Question 7: Expenses are recognised in comprehensive income (profit or OCI): a. using the matching basis on the basis of a direct association between the costs incurred and the earning of specific items of income? b. using the accrual basis items are recognised as assets, liabilities, equity, income or expenses when they satisfy the definitions and recognition criteria for those items? c. at the discretion of management? 39 Quiz: uncertain future cash flows 40 Question 8: Recognition criteria determine when to recognise an item. Measurement is determining the monetary amounts at which to measure an item. Uncertainties about the extent of future cash flows: a. only affect the decision about whether to recognise? b. only affect the estimation of the amount at which to measure the item? c. could affect both recognition and measurement? 40

21 Quiz: measurement 41 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 Quiz: status of Conceptual Framework 42 Question 10: the Conceptual Framework: a. is an IFRS? b. overrides all other IFRS requirements? c. does not define standards for any particular measurement or disclosure issue? d. is in the hierarchy that management must in the absence of a specific IFRS requirement apply in developing an accounting policy that results in information that is relevant and reliable? 42

22 International Financial Reporting Standards Common misunderstandings IFRS Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK. Common conceptual misunderstandings The Framework does not include a matching concept include prudence/conservatism concept include an element other comprehensive income (or a concept for OCI) mention management intent or business model Clarification the Framework includes accrual basis of accounting recognise elements when satisfy definition and recognition criteria neutrality concept only the following elements asset, liability, equity, income and expense 44 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

23 Common conceptual misunderstandings continued Misunderstanding Uniformity = comparability Clarification 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 45 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Common conceptual misunderstandings continued Misunderstanding There is a clear concept for the historical cost of an item Clarification The Framework provides only a vague description 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. What is cost when: - advance/deferred payment? - purchased option exercised? - contingent purchase price? 46

24 Common conceptual misunderstandings continued 47 Misunderstanding Principles are necessarily less rigorous than rules There are few judgements and estimates in cost-based measurements Clarification Rules are the tools of financial engineers 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-based understanding of IFRSs IFRS Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB

25 Framework-based understanding 49 relates IFRS requirements to the concepts in the Conceptual Framework reasons why some IFRS requirements do not maximise those concepts (eg application of the cost constraint or inherited requirements) Concepts Principles Rules 49 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Framework-based understanding provides 50 a cohesive understanding of IFRSs Framework facilitates consistent and logical formulation of IFRSs a basis for judgement in applying IFRSs Framework established the concepts that underlie the estimates, judgements and models on which IFRS financial statements are based a basis for continuously updating IFRS knowledge and IFRS competencies 50 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

26 Structure of a principle-based standard 51 Minimum guidance that gives effect to the principles Recognition principle Measurement principle/s Concepts Derecognition principle Presentation and disclosure principles IFRS Foundation 30 Cannon Street London EC4M 6XH UK. The ideal principle-based standard 52 Scope no exceptions Principles derived from the Framework reliance on professional judgement to apply principles in business context Application guidance explains application of principles gives effect to the principles IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

27 What if requirement not principle-based 53 Understand why IASB deviated from the main concepts in the Conceptual Framework see Basis for Conclusions (BfC) If no BfC then requirement could predate Conceptual Framework (eg IAS 20)) A Guide through IFRSs cross-references all IFRS requirements to the Basis for Conclusions Consider what a more principle-based requirement could be (consider rejected alternatives, subsequent IASB DPs and EDs, etc) IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Example: 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 54 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

28 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. Does the Framework help me understand IFRSs? 56 Yes, the starting point for understanding all IFRS information is the objective and the concepts that flow logically from that objective: IASB uses Framework to set IFRSs Teachers/Trainers use Framework-based teaching to prepare students to make judgements that are necessary to apply IFRSs Preparers use 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.

29 Examples: errors and changes in policies and estimates Objective Concepts 57 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 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Pervasive constraint Cost IASB assesses whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information. 58 Note: It is consistent with the Framework for an IFRS requirement not to maximise the qualitative characteristics of financial information and other main Framework concepts when the costs of doing so would exceed the benefits. IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

30 Elements 59 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 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Equity = assets less liabilities Income recognised increase in asset/decrease in liability in current reporting period that result in increased equity except Expense recognised decrease in asset/increase in liability in current reporting period that result in decreased equity except Elements, 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 firm order to acquire gold, settle net in cash firm order to acquire gold, cannot settle net expenditure on major inspection (a condition of continuing to operate an item of PPE) right to recover past costs incurred increased future prices in a rate regulated activity 60 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

31 Elements, examples Liability? 61 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 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Elements, examples Liability or equity? 62 issue ordinary share issue compulsorily redeemable debt (fixed interest, fixed redemption) issue convertible debt instrument (holder has option to convert) non-controlling interest IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

32 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 63 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Classification Objective of financial reporting 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 when necessary results in a fair presentation (faithful representation of transactions, events and conditions) don t offset assets & liabilities or income & expenses 64 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

33 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 that financing. (CF.OB13) 65 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Classification, claims Information about priorities and payment requirements 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) 66 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

34 Classification, liability Which IFRS classification of liability are? 67 obligation to pay current tax metered power used but not yet billed by supplier normal warrantee obligation to make good manufacturing defect warrantee obligation to compensate for manufacturing defects by settling in compensation in cash extended warrantee obligation IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Classification, assets Different types of economic resources affect a user s assessment of the reporting entity's prospects for future cash flows differently. Some future cash flows result directly from existing economic resources (eg accounts receivable and investment property). Other cash flows result from using several resources in combination to produce and market goods or services to customers (eg PPE and intangible assets). Although those cash flows cannot be identified with individual economic resources (or claims), users of financial reports need to know the nature and amount of the resources available for use in a reporting entity s operations. (CF.OB14) 68 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

35 Asset classification Which IFRS classification of asset are? 69 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 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Recognition 70 Accrual basis of accounting recognise element (eg asset) when satisfy definition and recognition criteria Recognise item that meets element definition when probable that benefits will flow to/from the entity has cost or value that can measured reliably Unit of account (unit of measure for recognition) Materiality IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

36 Recognition, examples 71 Recognise the asset? a hospital s backup backup generator (expect never to use 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. 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 depictions. The Conceptual Framework establishes the concepts that underlie those estimates, judgements and models (CF.OB11) 72 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

37 Measurement concepts 73 Measurement part of Conceptual Framework is weak A number of different measurement bases are employed to different degrees and in varying combinations in financial statements, including historical cost current cost realisable (settlement) value present value (CF.4.55) IASB guided by objective and qualitative characteristics when specifying measurements. 73 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Fair value measurement concept 74 The concept, defined in IFRS 13 Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction (not a forced sale) between market participants (market-based view) at the measurement date (current price). Fair value is a market-based measurement (it is not an entity-specific measurement) consequently, the entity s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value. IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

38 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 period in which it arises 75 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION MODEL BASED ON FAIR VALUE BASIS OF IMPAIRMENT TEST 76 IFRS 9 Financial Instruments IAS 16 Property, Plant and Equipment IAS 38 Intangible Assets Fair value Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management. Purchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management For specified financial assets and for particular business models: fair value Accounting policy choice: revaluation model Accounting policy choice: revaluation model Compare carrying amount to recoverable amount. Recoverable amount is greater of value in use and fair value less disposal costs (IAS 36) IAS 40 Investment Property Cost including transaction costs Accounting policy choice: fair value IAS 41 Agriculture Fair value less costs to sell Fair value less costs to sell 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

39 Example Biological 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 costdepreciation-impairment model (IAS 41.27) 77 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 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 circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business. 78 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

40 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 79 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION COST MODEL BASIS OF IMPAIRMENT 80 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 realisable value IAS 16 Property, Plant and Equipment IAS 38 Intangibles Assets Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management. Purchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management Accounting policy choice: cost less accumulated depreciation and impairment, if any Accounting policy choice: cost less accumulated amortisation (unless indefinite life asset) and amortisation, if any Compare carrying amount to recoverable amount. Recoverable amount is greater of value in use and fair value less disposal costs (IAS 36) IAS 40 Investment Property Cost including transaction costs Accounting policy choice: cost less accumulated depreciation (unless land) and impairment (if any) IFRS 9 Financial Instruments Fair value For particular business models amortised cost IAS 39 specifies impairment rules 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

41 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 81 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 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 (IAS16.BC29) 82 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

42 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 are expected 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) 83 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 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 = amount that the entity would currently obtained from disposal of asset (less estimated disposal costs) if the asset were already of the age and in the condition expected at the end of its useful life 84 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

43 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) 85 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 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 when necessary results in a fair presentation (faithful representation of transactions, events and conditions) don t offset assets & liabilities or income & expenses 86 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

44 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 87 IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Example, subclassification How many classes of property, plant and equipment? plot on which HQ is built vacant plot, intend to construct new HQ plot that operates as landfill site plot on which sales office is built 10 plots in different cities each with retail outlet plot acquired for an undetermined purpose. 88 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

45 Framework 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. If no specific IFRS requirement 90 Use judgement to develop a policy that results in relevant information that faithfully represents (ie complete, neutral and error free) Hierarchy: 1 st IFRS dealing with similar and related issue 2 nd Framework definitions, recognition crit. etc Can also in parallel refer to GAAPs with similar framework IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

46 In 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. Example: non-cash distribution 92 Before IFRIC 17, entity distributes non-cash asset (eg land or shares in another) whose fair value = CU1 mill. Carrying amount of asset = cost = CU1K Economics = reduce owners claims against the entity by distributing to them an asset worth CU1 million. Relevant information for investors and lenders that faithfully represents the economics: investors received CU1 million refund of capital. value of assets available to meet lenders claims reduced by CU1 million. IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

47 Example: non-cash distribution 93 Before IFRIC 17 (continued) Does IFRSs prevent providing that information? No. Therefore: recognise CU999K income (previously unrecognised increase in the value of the asset derecognised). recognise CU1 million distribution to owners. IFRS Foundation 30 Cannon Street London EC4M 6XH UK. Example: share-based payment 94 Before IFRS 2, entity pays employee in own shares. Par value of shares issued = CU1K. Fair value of services provided = CU1 million = fair value of shares. Economics = entity paid employees CU1 million for services. Employees invested CU1 million in entity. Relevant information for investors and lenders that faithfully represents the economics: CU1 million services received = staff cost. CU1 million invested = increased owner equity. Does IFRSs prevent providing that information? No. Therefore, recognise CU1 million expense and recognise CU1 million increase in equity. IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

48 International Financial Reporting Standards Framework-based teaching of IFRSs IFRS Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB 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 liabilities) 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 that are necessary to apply IFRSs 96 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

49 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 The IASB s Conceptual Framework Framework sets out agreed concepts that underlie IFRS financial reporting the objective of general purpose financial reporting qualitative characteristics elements of financial statements recognition measurement presentation and disclosure 98 Other concepts all flow from the objective

50 Framework-based teaching 99 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 the cost constraint or inherited requirements) Concepts Principles Rules 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 Framework established the concepts that underlie the estimates, judgements and models on which IFRS financial statements are based a basis for continuously updating IFRS knowledge and IFRS competencies

51 What is Framework-based teaching? 101 In the context of IFRSs, Framework-based teaching relates the concepts in the IASB s Conceptual Framework to the particular IFRS requirements being taught Framework-based teaching Because 102 the Framework sets out agreed concepts that underlie IFRS financial reporting, and Framework-based teaching relates the concepts in the Framework to the particular IFRS requirements being taught IFRS teachers should first teach their students the objective of general purpose financial reporting the concepts that flow from the objective which concepts are robust (and which are not)

52 Teaching suggestions objective Contrast objective of IFRS financial statements with objectives of other financial statements Debunk myths 103 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 what information about that transaction or event would best meet the objective Framework-based IFRS teaching 104 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

53 Framework-based IFRS teaching 105 To a large extent, IFRS financial statements are based on estimates, judgements and models rather than exact depictions Because the Framework established the concepts that underlie those estimates, judgements and models it provides a basis for the use of judgement in resolving accounting issues By relating those concepts to the IFRS requirements Framework-based teaching enhances the ability of students to exercise the judgements that are necessary to apply IFRSs prepares students to continuously update their IFRS knowledge and competencies Examples 1a, b and c: Errors and changes in policies and estimates Objective Concepts faithful representation comparability 106 Principle 1a Prior period error: retrospective restatement 1b Change in policy: retrospective application 1c Change in estimate: prospective application Rules impracticable exception specified disclosures

54 Examples 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 What if requirement not principle-based 108 When teaching the requirement explain why IASB deviated from the main concepts in the Framework (see Basis for Conclusions (BfC). If no BfC then requirement could predate Framework (eg IAS 20)) discuss what a more principle-based requirement could be (consider rejected alternatives, subsequent IASB DPs and EDs, etc) prepare students to continuously update their IFRS knowledge and competencies A Guide through IFRSs cross-references all IFRS requirements to the Basis for Conclusions

55 Example 2: Lease classification Objective Concepts faithful representation element definitions 109 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 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 principle could be (eg see ED Leases) focus on judgements (eg use lease classification case studies) test understanding (eg use integrated case study)

56 International Financial Reporting Standards Framework-based teaching of IFRSs Property, plant and equipment IFRS Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB 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 previous accounting frequently influenced or governed by tax requirements or central government planning 112 even where previous accounting is based on a similar Framework, those requirements often rulesbased (eg industry specific guidance)

57 Reference material: PPE course 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 crossreferences 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 113 IFRS Foundation - Materials and much more on