IFRS. International Financial Reporting Standards

Transcription

1 IFRS International Financial Reporting Standards

2 International Financial Reporting Standards IFRS is a Set of International Accounting Standards stating how business transactions and other events should be reported in financial statements Issued by the International Accounting Standards Board (IASB) IFRSs comprise of: 13 No of International Financial Reporting Standards 29 No of International Accounting Standards and 16 No of Interpretations originated by the International Financial Reporting Interpretations Committee( IFRIC) and 10 No of Interpretations issued by the former Standing Interpretations Committee ( SIC).

3 Objective OF IFRS To standardize accounting methods and procedures. To lay down principles for preparation and presentation. To establish benchmark for evaluating the quality of financial statements prepared by the enterprise. To ensure the users of financial statements get creditable financial information. To attain international levels in the related areas

4 Accounting Standards and the Companies Act, 1956 As per Section 211 sub sections (3 A), (3 B) and (3 C) inserted by the Companies Amendment Act, 1999 w.e.f : (3A) every P & L Account and Balance Sheet shall comply with accounting standards, (3 B) deviations, if any, to be disclosed with reasons and financial effect of deviation, (3 C) "accounting standards" means standards of accounting recommended by ICAI or as may be prescribed by Central Govt. in consultation with National Advisory Committee on Accounting Standards.

5 WHY IFRS? About 120 Countries are converging towards IFRS Indian Companies are listed on overseas stock exchanges FDI and FII requirement of uniformity in accounting standards ICAI has decided to implement IFRS in India. The Ministry of Corporate Affairs has also announced its commitment to convergence to IFRS by 2011.

6 Convergence or adoption Adoption: IFRS are used instead of domestic financial reporting rules Convergence Is a process whereby domestic standards and IFRS are gradually brought into line. Examples of convergence Title IFRS/IAS Convergence Converged Indian Accounting Standard IFRS 1: First time adoption of IFRS IAS 2 Inventories Covers a framework for switching over from one set of accounting rules to IFRS. Explains how to opening balances in IFRS standard Explains methodology for inventory valuation. Ind A S First time adoption of Indian Accounting Standards Ind A S 2 Inventories

7 Convergence in India Phase Phase I Target date for convergence with IFRS 1 st April 2011 Companies with net worth more than Rs 1000 Cr and companies which are listed Phase II Companies having networth between Rs 500 Cr to Rs 1000 Cr 1 st April 2013 Phase III Companies having net worth less than Rs 500 Cr 1 st April 2014

8 LIST OF IFRS IFRS-1 First time Adoption of International Financial Reporting Standards IFRS-2 Share-based payments IFRS-3 Business Combinations IFRS-4 Insurance Contracts IFRS-5 Non Current Assets held for sale and Discontinued Operations IFRS-6 Exploration for and evaluation of Mineral Resources. IFRS-7 Financial Instruments-Disclosures IFRS-8 Operating Segments

9 List of International Accounting Standards 1. IAS 1 Presentation of Financial Statements 2 IAS 2 Inventories 3. IAS 7 Statement of Cash Flows 4. IAS 8 Errors Accounting Policies, Changes in Accounting Estimates and 5. IAS 10 Events after the Reporting Period 6. IAS 11 Construction Contracts 7. IAS 12 Income Taxes 8. IAS 16 Property, Plant and Equipment 9. IAS 17 Leases 10. IAS 18 Revenue 11. IAS 19 Employee Benefits 12. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance 13. IAS 21 The Effects of Changes in Foreign Exchange Rates 14. IAS 23 Borrowing Costs 15. IAS 24 Related Party Disclosures

10 LIST OF IASs 16. IAS 26 Accounting and Reporting by Retirement Benefit Plans. 17. IAS 27 Consolidated and Separate Financial Statements 18. IAS 28 Investments in Associates 19. IAS 29 Financial Reporting in Hyperinflationary Economies 20. IAS 31 Interests in Joint Ventures 21 IAS 32 Financial Instruments : Presentation 22. IAS 33 Earnings per Share 23. IAS 34 Interim Financial Reporting 24. IAS 36 Impairment of Assets 25. IAS 37 Provisions, Contingent Liabilities and Contingent Assets 26. IAS 38 Intangible Assets 27. IAS 39 Financial Instruments : Recognition and Measurement 28. IAS 40 Investment Property 29. IAS 41 Agriculture

11 List of IFRIC Interpretations 1. IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities 2. IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments 3. IFRIC 4 Determining Whether an Arrangement Contains a Lease 4. IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. 5. IFRIC 6 Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment 6. IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies 7. IFRIC 8 Scope of IFRS 2 * 8 IFRCI 9 Reassessment of Embedded Derivatives 9. IFRIC 10 Interim Financial Reporting and Impairment 10 IFRIC11* IFRS 2: Group and Treasury Share Transactions 11. IFRIC 12 Service Concession Arrangements 12. IFRIC13 Customer Loyalty Programme 13. IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements an their Interaction 14. IFRIC 15 Agreement for the Construction of Real Estate 15 IFRIC 16 Hedges of Net investments in a Foreign Operation 16 IFRIC 17 Distribution of Non Cash Assets to Owners 17. IFRIC 18 Transfer of Assets from Customers * Interpretations contained in IFRIC 8 and IFRIC 11 are now included in IFRS 2 ( as amended in June 2009).

12 Revenue recognition- IAS 18 & Ind AS 18 Revenue is gross inflow of economic benefits during the accounting period arising from the ordinary operating activities of any entity provided such inflows result in increase in equity other than increases relating to contributions from equity holders. As per IAS 18 Revenue is measured at the fair value of consideration received or receivable. Fair value of the transaction is determined by the agreement between the buyer and the seller. Fair value excludes discounts, volume rebates etc.

13 Conditions for revenue recognition Conditions 1.The entity has transferred to the buyer the significant risks and rewards of ownership of goods 2. The entity does not retain any continuing managerial involvement which is normally associated with the ownership of the asset. Explanation Normally, transfer of risks and rewards of ownership coincides with the transfer of legal title or when the buyer takes the possession of the goods. This is a case in all retail sales After sale services do not indicate retention of continuing managerial involvement. An entity sells a cargo ship which is used for goods transportation between Mumbai to Dubai, and but its managerial team remained engaged in procuring orders, processing such orders, etc. In this case sale of ship is not complete as there was continuing managerial involvement. 3. The amount of revenue can be measured reliably. 4. It is probable that economic benefit associated with the transaction will flow to the seller. If there is uncertainty about the revenue realization, revenue should not be recognized. 5. The costs incurred or to be incurred in respect of the transaction can be reliably measured.

14 Examples Example I Company A sold a machine to a customer with a guarantee that in the machine can not be operated at 120% capacity for four years, it will replace the same. Normally, it provides one year on-sight guarantee for 120% capacity utilization. In this case, significant risks and rewards attached to ownership have not been passed to the buyer as the seller assumes risks beyond normal warranty. Therefore, condition of revenue recognition is not satisfied. Example II A whole-seller sold goods to a retailer with an option to return within 15 days from the date of sale. It has been assessed that only 0.25% of the cases, goods are actually returned by the retailer. In this case, only insignificant amount of risk attach to the ownership has not been passed to the buyer. Therefore, the revenue can be recognized.

15 Alternative approaches to valuation What is the fair value today? Past Present Future Acquisition cost Historical value Market value Economic value Future Cash Flows Assumed to be objective and stable Replacement Cost subjective and volatile

16 IFRS 13 Fair value measurement This standard defines fair value Sets out in a single IFRS a framework for measuring fair value Requires disclosures about fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer liability in an ordinary transaction between market participants at the measurement date. Fair value is a market based measurement not entity based measurement It is not observable market price but it is measured using the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.

17 Example A company is making valuation of equipment. It can be sold in two markets Market Price Brokerage Transportati on cost Realizable value A Rs 10 lakhs 1% Rs 0.05 lakhs Rs 9.85 lakhs B Rs 9.95 Lakh 0.6% Rs 0.06 lakhs Rs Therefore Market A is advantageous. Fair value of the equipment is Rs 10 lakhs minus Rs 0.05 lakhs = Rs 9.95 lakhs because transportation cost is not part of transaction costs.

18 Thank you