international financial reporting standards: framework-based

International Financial Reporting Standards

The views expressed in this presentation are those of the presenter, not necessarily those of the IFRS Foundation or the IASB

IFRS Foundation

International Financial Reporting Standards:

framework-based understanding and teaching

© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org

Guillermo Braunbeck, Project Manager, Education Initiative, IASB

Outline

• Why global standards?

• The progress

• Structure and governance

• Understanding principle-based standards

• Common misunderstandings

• Framework-based understanding of IFRSs

• Framework-based teaching of IFRSs

2




IFRS Foundation

Why global standards?

The reality

• 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

4


Benefits of global standards

• 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

5




IFRS Foundation

The progress

Status of IFRSs use around the world

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 2012.


7

8

Source of information (adapted from): www.iasplus.com

8

Countries seeking convergence with the IASB or pursuing adoption of IFRSs

Countries that require or permit 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 seeking convergence with the IASB or pursuing adoption of IFRSs

Countries that require or permit IFRSs

More than 100 countries require or permit the use of International Financial Reporting Standards (IFRSs), or are converging with the IASB’s standards.

THE MOMENTUM TOWARDS GLOBAL ADOPTION OF IFRSs

The World is Getting Smaller

Fortune Global 500 (July 2009)

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org

9

Fortune G500 Based on

announced plans

Which GAAP? 2009 2013 Japan 2015?

IFRSs and word-for-word IFRS equivalents 190 245 310

US GAAP 155 155 140

National GAAPs 155 100 50

Total 500 500 500



IFRS Foundation

Structure and governance

The vision

…one single set of high

quality global standards..

..used on the global

capital markets.

11

Structure of IFRS Foundation


12

IFRSAdvisoryCouncil

Operations

International Accounting Standards

Board

IFRS InterpretationsCommittee

Staff

The standard-setting operation

AdvisoryGroups

PublicationsXBRLEducation

IFRS Foundation TrusteesInternational Monitoring

Board

Consultation process


13

Discussion paper

Exposure Draft

Final standardComment

analysisComment analysis

Research:

Standard setters, EFRAG, and others.

Effective date

9 – 15 months

9 – 15 months

12 –18 months

Additional input

Additional input

Feedback statement

2 year post implementation

review



IFRS Foundation


Understanding principle-based standards

15What does principle-based mean?

• There is overwhelming support for principle-based 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

15

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

– IAS 8 hierarchy16© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

17

17Objective of financial reporting

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)

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

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.


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


20

20Qualitative 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.


21

21Fundamental qualitative characteristics

• 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


22

22Enhancing Qualitative Characteristics

• 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


232323Pervasive constraint

• 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.


242424Summary

• 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.


25

25Elements

• 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


26Recognition

• 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


27Recognition

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.


28

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.


29

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 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org



IFRS Foundation

Quiz: Conceptual Frameworkfor Financial Reporting

31

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?

32

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?

33

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)?

34

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

35

Quiz: fundamental qualitative characteristics

Question 4: The fundamental qualitative characteristics are:

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

36Quiz: 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


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 understandable.37


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.

38

39Quiz: recognition

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

40Quiz: uncertain future cash flows

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

41Quiz: measurement

Question 9: How many measurement bases does IFRSs specify for the measurement of assets?a. one—historical costb. one—fair value c. two—historical cost and fair valued. many—including historical cost, fair

value, value in use, estimated selling price less costs to complete and sell, etc

41

42Quiz: status of Conceptual Framework

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



IFRS Foundation

Common misunderstandings


44

Common ‘conceptual’ misunderstandings

The Framework does not… Clarification—the Frameworkincludes

include a matching concept accrual basis of accounting—recognise elements when satisfy definition and recognition criteria

include prudence/conservatism concept

neutrality concept

include an element other comprehensive income (or a concept for OCI)

only the following elements—asset, liability, equity, income and expense

mention management intent or business model


45

Common ‘conceptual’ misunderstandings continued

Misunderstanding Clarification

Uniformity = comparability 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


46



There is a clear concept for the historical cost of an item

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?

47



Principles are necessarily less rigorous than rules

Rules are the tools of financial engineers

There are few judgements and estimates in cost-based measurements

Inventory, eg allocate joint costs and production overheadsPPE, eg costs to dismantle/restore site, useful life, residual value, depreciation methodProvisions, eg uncertain timing and amount of expected future cash flows



IFRS Foundation

Framework-based understanding of IFRSs

49

Framework-based understanding… 49

Principles RulesConcepts

• 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)


50

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


51

Minimum guidance that gives effect to the principles

Presentation and disclosure principles

Measurement principle/s

Recognitionprinciple

Structure of a principle-based standard 51

Derecognitionprinciple

Concepts


52The ideal principle-based standard

• 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

52


53What 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)


54

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


55

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


56

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


57

Examples:errors and changes in policies and estimates

• Objective• Concepts

– 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

57


585858Pervasive constraint• Cost

– IASB assesses whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information.

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.


59Elements

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

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…

59


60Elements, 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


61Elements, examples• Liability?

• 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

61


62Elements, examples• Liability or equity?

• issue ordinary share

• issue compulsorily redeemable debt (fixed interest, fixed redemption)

• issue convertible debt instrument (holder has option to convert)

• non-controlling interest

62


63

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


64

Classification• Objective of financial reporting

• Financial statements portray financial effects of transactions and events by:



• IAS 1


– don’t offset assets & liabilities or income & expenses


65

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)© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

66

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)


67Classification, liability• Which IFRS classification of liability are?

• 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

67


68

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)


69Asset classification• Which IFRS classification of asset are?

• 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

69


70Recognition






• Unit of account (unit of measure for recognition)

• Materiality


71Recognition, examples

• 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


72

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)


73

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)



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.

74Fair value measurement concept


75

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



76

ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION

MODEL BASED ON FAIR VALUE

BASIS OF IMPAIRMENT TEST

IFRS 9 Financial Instruments

Fair value For specified financial assets and for particular business models: fair value

IAS 16 Property, Plant and Equipment

Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management.

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 38 Intangible

AssetsPurchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management

Accounting policy choice: revaluation model

IAS 40Investment 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

77

ExampleBiological 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 cost-depreciation-impairment model (IAS 41.27)


78

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.


79

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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org


80

ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION

COST MODEL BASIS OF IMPAIRMENT

TESTIAS 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

Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management.

Accounting policy choice: cost less accumulated depreciation and impairment, 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 38 IntangiblesAssets

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 amortisation (unless indefinite life asset) and amortisation, if any

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

81

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


82

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)


83

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)


84

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


85

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) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

86

Presentation and disclosure• Objective of financial reporting




• IAS 1




87

Subclassification


• ‘Definition’: a class of asset is a grouping of assets of a similar nature and use in an entity's operations


88

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.


89Framework’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


90If no specific IFRS requirement

• Use judgement to

– develop a policy that results in relevantinformation that faithfully represents (ie complete, neutral and error free)

– Hierarchy:

1st IFRS dealing with similar and related issue

2nd Framework definitions, recognition crit. etc

Can also in parallel refer to GAAPs with similar framework

90


91In 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?


92Example: 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.


93Example: 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.


94Example: 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

Framework-based teaching of IFRSs

96

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


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

989898The 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

Other concepts all flow from the objective

Framework-based teaching… 99

Principles RulesConcepts

• 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)

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

101What is Framework-based teaching?

In the context of IFRSs, Framework-based teaching relates the concepts in the IASB’s Conceptual Framework to the particular IFRS requirements being taught

101

102Framework-based teaching• Because

– 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)

102

103Teaching suggestions—objective

• Contrast objective of IFRS financial statements with objectives of other financial statements

• Debunk myths

– 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

103

104Framework-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

105Framework-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

106

Examples 1a, b and c:Errors and changes in policies and estimates

• Objective

• Concepts– faithful representation– comparability

• Principle – 1a Prior period error: retrospective restatement– 1b Change in policy: retrospective application– 1c Change in estimate: prospective application

• Rules– impracticable exception– specified disclosures

106

107Examples 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

108What 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

109

Example 2: 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)


109

110

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)



IFRS Foundation

Framework-based teaching of IFRSs

Property, plant and equipment

112

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

– even where previous accounting is based on a similar Framework, those requirements often rules-based (eg industry specific guidance)

113

Reference material: PPEcourse 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 cross-references and annotations, eg IFRIC agenda decisions) + the IFRS for SMEs and accompanyingdocuments

Stage 2 material +Local GAAP (if any) + main principles in IASB DPs and EDs

114114IFRS Foundation - Materials

2012 2012

2011 2012

+

and much more onwww.ifrs.org

115

Class material: PPE


Reference material (previous slide) + notes (eg see handout) +video/web clips + basic tutorials (egsee handout)

Reference material (previous slide) + notes (eg see handout), video/web clips + tutorials + IFRS financial statements + select regulatory decisions + relevant press coverage + main principles in issues being considered by IASB

Reference material (previous slide) + advanced tutorials and integrated case studies + IFRS financial statements + relevant regulatory decisions + relevant press coverage + IASB DPs and EDs and select agenda papers

116116Teaching steps

Accounting for PPE

– Objective

– Identification

– Classification

– Recognition

– Measurement (initial and subsequent)

– Derecognition

– Presentation and disclosure

117

Relate PPE accounting & reporting to objective & main concepts (pervasive)


Explain why relevant and faithfully represented information about PPE (particularly manufacturers and retailers) is useful to the primary user group.

Reinforce with class discussion + tutorial.

Assess understood.

Stage 1 + (don’t limit to manufacturers and retailers, eg include service industry buildings and explain in more detail).

Reinforce teaching with class discussion + tutorials.

Assess understood.

Reinforce understanding and develop competence in making the judgements that are necessary to account for assets.

Some ideas:- cross-cutting issues

class discussions

- advanced tutorials

- integrated case studies

- GAAP comparisons & improvements.


“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.”

Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans or other forms of credit


• Primary users

– provide resources, but cannot demand information

– common information needs

• Assess the prospects for future net cash inflows

– buy, sell, hold

– efficient and effective use of resources

120120Fundamental qualitative characteristics

• Relevance

– Predictive value

– Confirmatory value

– Materiality, entity-specific

• Faithful representation (replaces reliability)

– Completeness

– Neutrality

– Free from error

121

121Enhancing Qualitative Characteristics





122122Pervasive constraint

• Cost

– IASB assesses whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information.

Note: It is consistent with the Framework for an IFRS requirement not to maximise the qualitative characteristics of financial information when the costs of doing so would exceed the benefits.

123123

Identification, classification and recognition

• Property, plant and equipment

– identification

– classification

– recognition

• Focusing on stages 1 and 2, linking to stage 3

• Full IFRS and the IFRS for SMEs

– Similar accounting principles

Elements

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

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…

124

125125Stage 1: Identification of PPE

• Definition of PPE in IFRS

• PPE are tangible assets

a. used in the production or supply of goods or services, for rental to others or administrative purposes AND

b. expected to be used for more than one period

• Examples 1 to 3 of the stage 1 teaching material

• Step 1: definition of an asset per the Conceptual Framework

• Step 2: definition of PPE

126126Stage 2: Identification of PPE• Definition of PPE in IFRS

• PPE are tangible assets

a. used in the production or supply of goods or services, for rental to others or administrative purposes AND

b. expected to be used for more than one period

• Examples 1 and 2 of the stage 2 teaching material

• Step 1: definition of an asset per the Conceptual Framework

• Step 2: definition of PPE

• NOTE: example 2 – scoped out of IAS 16(exploration equipment)

127127Stage 2: Classification of PPE

Primary considerations for classification:

• Presentation

– subclassification

– function within the business—information being provided to users

• Use of judgement

– ‘portions’ of properties

– example: portion for rental and other for use in administrative function

128128Stage 2: Classification of PPE continued

Primary considerations for classification continued:

• Scope exclusions

– IFRS 5

– biological assets (related to agricultural activity)

– exploration and evaluation assets

– Mineral rights (eg oil and natural gas)

• Examples 1-8 of the stage 2 teaching material

129129

Stage 2: Classification of PPE—Examples

• How would you classify the following:

• Example 1: Cattle and farm implements (p. 29)

• Example 2: Land, trees grown for timber

• Example 3: Guard dogs

• Example 4: Bird breeder

• Example 5: Bird breeding zoo

• Examples 6-8: PPE held for sale

– examples in IFRS 5

See PPE framework based teaching notes pp. 29-30

130130Stage 2: Classification of PPE continued

Unit of account:

• Example 9 of the stage 2 teaching material

– use of judgement in the absence of guidance

– related back to the Framework

– general purpose of reporting

– objective of financial information

– Judgement applied based on significance of the individual items

131

Classification:Unit of account for PPE


IAS 16 does not prescribe the unit of measure for recognition of PPE (an item of PPE) consequently use judgement.

Focus on teaching the judgements necessary to identify an item of PPE. Some examples:

-immaterial items

-individually insignificant items (eg moulds, tools & dies?)

Reinforce understanding and develop competence in identifying the unit of account. Some ideas:

-cross-cutting issues class discussions

-advanced tutorials

-integrated case studies

-GAAP comparisons & improvements.

Recognition






132

Recognition continued

What does probable mean?

• Its meaning is determined at the standards level. Therefore, inconsistent use across IFRSs

– IAS 37: more likely than not

– Could include other uncertainties which would lead to a more complicated process (ie fair value)

• Stage 2 teaching material: Example 11-14

133

Recognition continued

• Would you recognise the following as an item of PPE?

• Example 11: Backup generator

• Example 12: Day-to-day servicing

• Example 13: Replacement parts

• Example 14: Major inspections

• See PPE Framework-based teaching notes pp. 34-36

134

135

Recognition of PPE


PPE asset recognition principle is from the Framework :- probable FEBs associated

with the item will flow to the entity

- cost of the item can be measured reliably (IAS16.7)

Creates awareness of judgements (eg what is material, probable and reliable).

Stage 1 + focus on teaching the judgements necessary to identify PPE. Some egs:

- immaterial items

- backup generator at hospital

- day-to-day servicing

- replacement parts

- major inspections

Reinforce understanding and develop competence in making the judgements necessary to recognise assets. Some ideas:- cross-cutting issues

class discussions- advanced tutorials- integrated case

studies- GAAP comparisons

& improvements.

Measurement

• Measurement is the process of determining the monetary amounts at which the recognisedelements are carried.

• IFRS measurements are largely based on estimates, judgements and models.

• The measurement part of the Framework is weak and IASB has a project to replace it

• Measurement determined at the standards level. Therefore, inconsistent use across IFRS

136

137

Measurement of PPE 137

• Because measuring PPE requires significant estimates and judgements, it is important that students be taught those requirements in a way that prepares them to make those judgements and estimates.

138

Measurement concepts 138

• Measurement is the process of determining monetary amounts at which elements are recognised and carried. (¶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 (¶OB11)


139

Measurement section of Framework 139

• Measurement section of Framework is weak―only lists some measurement methods used in practice:

– historical cost: cash paid or fair value of consideration given

– current cost: cash that would be paid if acquired now

– realisable (settlement) value: cash that could be obtained by selling the asset now

– present value: present discounted value of future net cash inflows that the item is expected to generate

– market value: listed but not described in Framework. For fair value see IFRS 13

140

IFRS measurements for some assets 140

• PPE and intangible assets: initial = cost, then

– cost model (cost-depreciation-impairment) or

– revaluation model (fair value-depreciation-impairment)

• Investment property: initial = cost, then

– cost model (cost-depreciation-impairment) or

– fair value model (fair value through profit or loss)

• Inventories: initial = cost, then

– lower of cost or net realisable value (entity specific value)

• Biological assets that relates to agricultural activity

– fair value less costs to sell (if impracticable then cost model)

Explain reasons for different measurements

Measurement of PPE• Measurement at cost

– Stage 1: cost (recognise and relate with investment analysis); elements of cost (recognise, list, select); awareness of elements with higher J&E (illustrate self-constructed PPE, borrowing costs etc)

– Stage 2: focus on J&E

– Self-constructed assets

– Borrowing costs (discussion questions, page 36)

– Deferred payment (example 16)

– Decommisioning (example 17)

– Assets exchange (examples 19 and 22)

– Business combination (example 21)

141

142

Measurement of PPE at recognition


At initial recognition: cost = cash price equivalent at recognition date. Cost comprises:- purchase price- costs directly attributable to bring

item to location and condition necessary for it to be capable of operating as intended by mgt.

- initial estimate of costs of dismantling and removing and restoring the site.

Create awareness of judgements.

Stage 1 + focus on judgements to measure cost. Some egs:- self constructed - borrowing costs- dismantling etc- deferred payments- exchange

transactionsExplain why exceptions:- leases (IAS 17)- government grants

(IAS 20)

Reinforce understanding & develop competence in judgements to measure cost. Some ideas: - cross-cutting

issues class discussions


- integrated case studies.

143

Measurement after recognition 143

• Choice between cost and revaluation

– Stage 1: recognise the differences between policies; discuss the extent each measurement meets the objective; relate to assets definition and recognise impairment, compare cost and revaluation (awareness)

– Stage 2: compare cost and revaluation; J&E required for revaluation and impairment

144

Allocating depreciation: concepts 144

• 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 (see ¶OB18)

• Expenses are decreases in economic benefits during an accounting period in the form of depletions of assets… (¶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

145

Allocating depreciation: principle 145

• 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)

• 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)

146

Allocating depreciation: application guidance (1) 146

• 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

147

Allocating depreciation:application guidance (2) 147

• 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) – example 24

• However, depreciation ceases when classified as held for sale because IFRS 5 measurement is essentially a process of valuation, rather than allocation (IFRS5.BC29)

148

Measurement of PPE after recognition


Accounting policy choice: cost model or revaluation model.

Which model provides primary users most useful information?

Teach the theory and mechanics of depreciation.

Reinforce with class discussion + tutorial.

Assess understood.

Stage 1 + focus on teaching the judgements necessary to measure PPE after initial recognition. Some examples:

- useful life

- residual value

- depreciation method

- for revaluation (fair value if no recent transactions)

- for impairment (fair value less costs to sell)

Reinforce understanding and develop competence in making the judgement necessary to measure assets. Some ideas:

- cross-cutting issues class discussions


- integrated case studies.

149

Derecognition of assets 149

• Derecognition of an asset refers to when an asset previously recognised by an entity is removed from the entity’s statement of financial position

– Derecognition requirements are specified at the standards level.

– Derecognition does not necessarily occur when the asset no longer satisfies the conditions specified for its initial recognition (ie derecognition does not necessarily coincide with the loss of control of the asset ).

150

Derecognition of assets 150

• Stage 1: recognise disposal of PPE and conditions in which no future economic benefits expected; discuss revenue x gain (awareness)

• Stage 2: analyse and compare different J&E required in

• Plans to sell PPE (example 26)

• Abandonment (example 27)

• Revenue or gain (example 28)

151

Derecognition of PPE


PPE is derecognised:

-on disposal, or

-when no future economic benefits are expected from its use or disposal (IAS16.67)

Stage 1 + focus on teaching the judgements necessary to determine when to derecognise PPE.

For example:

-applying the criteria for the sale of goods in IAS 18 to determine when to recognise the sale of an item of PPE (see IAS16.69 and BC34)

Reinforce understanding and develop competence in making the judgements necessary to derecognise assets. Some ideas:-cross-cutting issues class discussions-advanced tutorials-integrated case studies-GAAP comparisons & improvements.

152

Presentation and disclosure





• IAS 1



153

Presentation and disclosure of PPE


Statement of financial position: why present PPE separately from other assets (relate to objective + QCs)?

Statement of comprehensive income or notes: why present depreciation separately from other expenses (relate to objective + QCs)?

Offsetting: why is gain (or loss) on disposal of PPE presented net?

Stage 1 + focus on teaching the judgements necessary to present and disclose PPE, egs- identify (see slide 11) - sub-classify PPE into

separate classes (grouping of assets of a similar nature and use in the entity’s operations, eghow many classes of land―vacant land, land on which buildings are situated and landfill site?)

Reinforce understanding and develop competence in presenting assets and related income & expenses. Some ideas: - cross-cutting

issues class discussions

- advanced tutorials - integrated case

studies.

Stage 3 case study

• Stage 3 teaching materials

• The Open Country Safari Company Case Study

154

155Questions or comments?

Expressions of individual views by members of the IASB and their staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.



IFRS Foundation

IASB’s active agenda

www.ifrs.org

www.ifrs.org

The Major Projects

Crisis (MoU)

Financial instruments

Fair value measurement

Consolidation

Derecognition

Other (Non MoU)

Insurance contracts© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Other (MoU)

Revenue recognition

Leases

Post-employment benefits

Financial statement presentation

Liability/Equity



IFRS Foundation

IFRSs adoption

161Use of IFRSs – the ideal

Ideally, adopt IFRSs as the reporting framework:

• IFRSs as issued by the IASB in full

• Audit report and basis of presentation note refer to conformity with IFRSs

• Without local ‘endorsement’

Use of IFRSs means all standards and all interpretations

• Sometimes the ideal is hard to achieve

162Use of IFRSs – variations from ideal

Problems with local ‘endorsement’:

• Urge to tinker

• Time delay

• Politicisation

• Cost

• What does audit report refer to?

• If not IFRSs, will users understand?

• If carve-out, what is the replacement standard?

163Get rule-based standards if

• Preparers and auditors

– refuse to exercise judgement

– don’t act with integrity

– ask for detailed interpretations

– refuse to accept raw economic facts

• Regulators

– want one answer in spite of different economic facts

• Courts

– lawyers fail to defend reasonable judgements

163


164

Rules/application guidance

Application guidance to give effect to the principles

Rules (interpretations)Rules (exceptions)

Principles

Structure of some IFRSs 164

Concepts


165

Example:Business combinations

• Objective• Concepts

– elements definitions– representational faithfulness

• Core principle– an acquirer of a business (scope)– recognises assets acquired and liabilities assumed

(recognition principle)– at their acquisition-date fair values (measurement

principle)– discloses information that enables users to evaluate

the nature and financial effects of the acquisition (disclosure principle)

165


166

Example:Business combinations continued

• Rules

– exceptions to the recognition principle

– exceptions to the measurement principle


166


167

Example:Business combinations continued 167

To understand build from objective through concepts

to core principle and rules

– recognition—understand reason for removing (i) the probability criterion; and (ii) the explicit reliability of measurement criteria (see Basis for Conclusions on IFRS 3 paragraphs BC125–BC130)

– understand reasons for exceptions to IFRS 3:

– recognition principle

– measurement principle(see Basis for Conclusions on IFRS 3)


168

Example:Business combinations continued 168

Focus on judgements, eg

– identifying a business

– measuring fair value in the absence of an active market etc

Consider with reference to the objective and QCs whether

uncertainty should enter recognition or measurement (for business combinations and then extend to consider

for other transactions and elements)




IFRS Foundation

Improving the Conceptual Framework

170

170170Improving the Conceptual Framework

• Objective (‘old’ project)– To develop an improved and common conceptual framework

that will provide a sound foundation for the development of accounting standards

• Phases (‘old’ project)1. Objective of financial reporting and qualitative

characteristics of financial reporting information 2. Elements of financial statements and recognition3. Measurement 4. Reporting entity 5. Presentation and disclosure, including reporting boundaries6. Purpose and status in GAAP hierarchy7. Applicability to the not-for-profit sector8. Entire framework, remaining issues if any


171

171

Phase 1 completed in 2010Objective of financial reporting

Objective of financial reporting is to 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)


172

172

Phase 1 completed in 2010 Fundamental qualitative characteristics

• 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


173

173

Phase 1 completed in 2010 Enhancing Qualitative Characteristics






174174174

Phase 1 completed in 2010 Pervasive constraint

• Reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information.

• 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.


175

175Elements

Existing element definitions:

• 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


176

176Elements

• How can we improve the element definitions?

• What does expected mean? Is it different from probable?

• Why focus on future inflow/outflow of economic benefits, rather than present position?

• Why do we need to identify past transactions?

• What does control mean in the asset definition?

• How does liability definition apply to non-contractual obligations?

• Should we define equity? If so, how?


177

177

Elements‘Working’ asset definition

• An asset of an entity is a present economic resource to which the entity has a right or other access that others do not have.

– Present means that on the financial statement date the economic resource exists and the entity has the right or other access that others do not have.

– Economic resource is scarce and capable of producing cash inflows or reducing cash outflows, directly or indirectly, alone or together with other economic resources. Economic resources that arise from contracts and other binding arrangements are unconditional promises and other abilities to require provision of economic resources, including through risk protection.

– Right or other access that others do not have enables entity to use the economic resource and its use by others can be precluded or limited. It is enforceable by legal or equivalent means.


178

178

Elements ‘Working’ liability definition

• A liability of an entity is a present economic obligation for which the entity is the obligor

– Present means that on the financial statement date the economic obligation exists and the entity is the obligor.

– Economic obligation is an unconditional promise or other requirement to provide or forgo economic resources, including through risk protection.

– An entity is the obligor if the entity is required to bear the economic obligation and its requirement to bear the obligation is enforceable by

legal or equivalent means.

Are these improvements?


179

179Elements

• How many elements? Which ones?

• Is other comprehensive income an element? If so, how should it be defined?

FASB (10) IASB (5)

Assets Gains Assets

Liabilities Losses Liabilities

Equity Revenue Equity

Investments by owners

Comprehensive Income

Income

Distributions to owners

Expenses Expenses


180

180Recognition/derecognition

• Current Framework has two recognition criteria

– Probable future economic benefit associated with the item will flow to or from the entity

– Item has a cost or value that can be measured reliably

• These criteria need clarification

– Probable?

– Measured reliably?

• There are no derecognition criteria

• Do we need recognition and derecognition criteria?

– Perhaps meeting (or not) the elements definitions and satisfying the qualitative characteristics is sufficient


181

181Elements and recognition/derecognition

• This phase of the project has been deferred

• Board is not trying to fundamentally change what meets current definitions, just trying to clarify and improve

• Has proven to be quite challenging

• Perhaps standards-level projects will provide insights

– Financial instruments with characteristics of equity

– IAS 37 (Provisions)

– Insurance

– Revenue…


182

Reporting entity

• Nothing in current Conceptual Framework on reporting entity

• These are tentative decisions in CF project to date

• Circumscribed area of economic activity– Activities are being, have been, or will be conducted

– Activities can be objectively distinguished

– Provides information for users to make decisions

• Legal entity not necessary– Branch or segment of a legal entity could be a reporting entity

• Consolidated financial statements are general purpose– May also be a group of entities under common control

– Parent-only financial statements useful with consolidated financial statements, but not on their own


183

183Measurement

• Framework should set forth concepts for determining appropriate measurement attribute for a particular asset or liability in a given circumstance

• However, there is little in current Framework on measurement

– List of measurements used in standards

– No concepts or basis for choosing among them

• Large hole in the literature

• Has resulted in ad hoc standards-level decisions in multiple-measurement environment


184

184Measurement

• Current thinking is measurement concepts should be based on objective of financial reporting, qualitative characteristics and elements definitions

– Objective of financial reporting is the place to start

– Qualitative characteristics and cost constraint would be measurement selection factors

– Elements tell us what we are trying to measure

• Board does not currently think the Framework should strive to identify a single measurement attribute for all assets and liabilities


185

185Measurement

• One approach being considered

– Determine view of financial reporting that best meets the objective of financial reporting

– Statement of financial position view

– Income statement view

– Holistic view (statements of financial position and income)

– Then identify implications of that view and the fundamental qualitative characteristics for historical cost-based and fair value measures

• Is it necessary to expand on relevance and faithful representation in measurement chapter?

– How and why?


186

186Measurement

• Path of this project phase has taken several turns– Range from highly conceptual to writing down what is in

existing standards

• The measurement phase is controversial– People have firmly held (although often loosely defined) views

– Measuring things in financial statements is fundamental

– But there are no concepts to guide the choice of attribute

– Each of the alternative approaches has significant perceived strengths and weaknesses

• Regardless, measurement concepts are sorely needed


187

187

Conceptual Framework versus standards-level projects

• How can standard setting continue without finishing the Conceptual Framework project first?

– we have a Conceptual Framework in place today (not perfect)

– Standards-level projects inform Conceptual Frameworkproject and vice-versa (eg liabilities and equity)

– Standards need improvement and Conceptual Frameworkproject is likely to take many years; investors cannot wait for better information

• Would a completed Conceptual Framework help standard setting?

– Yes, particularly measurement

– Also, disclosure and presentation


Agenda consultation 188188

• Public agenda review every three years

• Will help the IASB establish a broad strategic direction for its work plan:

– establish a balance between:– improvements (new IFRSs); and – maintenance (implementation)

– determine whether to return to projects that have been deferred

– identify areas where improvements are needed


Agenda ConsultationThe IASB’s initial thinking 189

• Development of financial reporting– Investing in researching key strategic issues

– Completion of the conceptual framework

– Completing MoU projects

– Selected standards-level projects

• Maintenance of existing IFRSs– Post-implementation reviews

– Responding to implementation needs

• Expansion of research function

189


Agenda ConsultationFeedback to date

• 246 comment letters, 4 Roundtables

Results will feed into the Board’s agenda setting process

• Common views:– Complete the four current projects

– Focus on maintenance over development of IFRSs in the near future

– Utilise research from national-standard setters and academics

– Complete the Conceptual Framework

190190


international financial reporting standards: framework-based

Documents