Advanced Financial

Accounting
(ACFN– 611)

03/14/24
 Chapter 2
International Convergence of Financial
Reporting and International Financial reporting
Standards ( IFRS)

03/14/24
Chapter objectives
By the end to this chapter you are able to
understand the following.
1. Harmonization and convergence
2. Proposed changes to IASB Frame work by IASB
and FASB
3. International Financial Reporting standards issued
by IASB: IAS 1 through 41 and IFRS 1 through 13
4. IFRS for SME issue by IASB

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 2.1. Harmonization and convergence

Harmonization
What is harmonization?
Harmonization -- the process of increasing
the
level of agreement in accounting standards
and
practices between countries.

Learning Objective 1
3-4
 Harmonization
The two “levels” of Harmonization
Harmonization in accounting standards,
which is increased agreement in
accounting rules.
Harmonization in practice, which is
increased agreement in actual accounting
practices.
Harmonization in standards may or may
not result in harmonization in practice.
Learning Objective 1
3-5
 Harmonization
Harmonization
Is different from Standardization.
Harmonization allows for different
standards in different countries as long as
there are not logical conflicts.
 Standardization involves using the same
standards in different countries.

Learning Objective 1
3-6
 Harmonization: The Pros and
Cons
Pros:
Expedite the integration of global capital
markets and make easier the cross-listing of
securities.
Facilitate international mergers and
acquisitions.
Reduce investor uncertainty and the cost of
capital.
Reduce financial reporting costs.
Allow for easy adoption of high-quality
standards by developing countries.
Learning Objective 2
3-7
 Harmonization: The Pros and
Cons
Cons:
Significant differences in standards currently
exist.
The political cost of eliminating differences.
Overcoming “Nationalism” and traditions.
Perhaps it will not provide significant
benefits.
Will cause “Standards Overload” for some
firms.
Diverse standards for diverse places is
acceptable.
Learning Objective 2
3-8
Convergence and Arguments for Convergence
 Convergence
 Enforcement of single set of accepted standards by several regulatory bodies
 Facilitate better comparability of financial statements
 Easier evaluation of companies
 Facilitate international mergers and acquisitions
 Reduce financial reporting costs
 Cost-listing would allow access to less expensive capital
 Reduce investor uncertainty and the cost of capital
 Reduce cost of preparing worldwide consolidated financial statements
 Simplify auditing
 Easy transfer of accounting staff internationally

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Arguments for Convergence
 Raise the quality level of accounting practices
internationally
 Increase credibility of financial information
 Enable developing countries to adopt a ready-made set of
high-quality standards with minimum cost and effort

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Arguments against Convergence
 Significant differences in existing standards
 Enormous political cost of eliminating differences
 Nationalism and traditions
 Arriving at universally accepted principles is difficult
 Need for common standards is not universally accepted
 Well-developed global capital market exists already
 May cause standards overload
 Differences in accounting across countries might be
necessary

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Harmonization Efforts
 Several organizations were involved at global and
regional levels
 International Organization of Securities Commissions
(IOSCO)
 International Federation of Accountants (IFAC)
 European Union (EU)
 International Forum on Accountancy Development (IFAD)
 International Accounting Standards Committee(IASC)
 International Accounting Standard Board (IASB)

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International Organization of Securities
Commissions (IOSCO)
 Established in 1974
 Initially limited its membership to regulatory agencies in
America
 Opened membership to agencies in other parts of the world
in 1986
 Aims at ensuring a better regulation of markets on both
domestic and international levels
 Works to facilitate cross-border securities offering and
listings by multinational issuers
 Advocates the adoption of a set of high-quality accounting
standards

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International Federation of Accountants (IFAC)
 Established in October1977 at 11th World Congress of
Accountants in Munich
 Promotes adherence to high-quality professional
standards of auditing, ethics, education, and training
 Launched International Forum on Accountancy
Development (IFAD) to
 Enhance the accounting profession in emerging nations
 Promote transparent financial reporting
 Established the Forum of Firms with an aim of
 Protecting the interests of cross-border investors
 Promoting international flows of capital

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European Union (EU)
 Founded in March 1957 with the signing of the Treaty of
Rome by six European nations
 Issued two directives aimed at harmonizing accounting
 Fourth Directive: Dealt with valuation rules, disclosure
requirements, and the format of financial statements
 Established the true and fair view principle
 Provided considerable flexibility
 Allowed countries to choose from among acceptable alternatives
 Opened the door for noncomparability in financial statements
 Seventh Directive: Dealt with consolidated financial
statements

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European Union (EU)
 Directives helped reduce differences in financial
statements
 Complete comparability was not achieved
 European Commission decided not to issue additional
accounting directives
 Associated itself with efforts undertaken by the IASC toward
a broader international harmonization of accounting
standards

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International Forum on Accountancy
Development (IFAD)
 Mission was to improve the market security and
transparency, and financial stability on a global basis
 Assists in defining expectations from accountancy
profession
 Encourages governments to focus on the needs of
developing economies in transition
 Harness funds and expertise to build accounting and
auditing capacity in developing countries

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International Accounting Standards Committee
(IASC)
 Established in 1973 by leading professional accounting
bodies in 10 countries
 Broad objective of formulating international accounting
standards
 Harmonization efforts evolved in three mail phases
 Lowest-common-denominator approach
 Issuance of 26 generic International Accounting Standards
 Comparability project
 Publication of Framework for the Preparation and Presentation
of Financial Statements
 Comparability of Financial Statements Project
 IOSCO agreement

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International Accounting Standards Board
(IASB)
 Replaced IASC in 2001
 IFRS Foundation appoints board of 16 members
 13 full and 3 part-time
 Board approves standards, exposure drafts, and
interpretations
 Shift in emphasis from harmonization to global standard-
setting or convergence
 Main aim is to develop a set of high-quality financial
reporting standards for global use

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EXHIBIT 3.2—The Structure of the IASB

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International Accounting Standard-setting
 Other factors leading to noncomparable accounting
numbers despite similar accounting standards
 Quality of audits
 Enforcement mechanisms
 Culture
 legal requirements
 Socioeconomic and political systems
 International convergence of accounting standards refers
to both a goal and the process adopted to achieve it

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Principles-Based Approach to International
Financial Reporting Standards
 IASB follows a principles-based approach to standard setting
vs a rules-based approach
 Standards establish general principles for recognition,
measurements, and reporting requirements for transactions
 Limits guidance and encourages professional judgment in
applying general principles to entities or industries
 A principles-based accounting system --- such as GAAP ---
provides basic guidelines for accountants to follow. The basic ones
found in GAAP include regularity, consistency, sincerity,
prudence, continuity, periodicity and good faith, among others that
may apply to a company's operations. In some cases, the principles
provide suggestions on how to apply GAAP to complex financial
transactions. This leads to different reporting for certain
transactions, making it possible for two companies to handle a
similar transaction differently.

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Rules-based approach
 Rules-based accounting systems provide specific dictates
for reporting financial information. Accountants must
follow these rules or face penalties for noncompliance.
International countries may have a rules-based system.
Rules detail how a company should prepare and report
financial transactions. Accountants must learn and follow
these rules, taking a company's financial information and
forcing it to meet the rules-based system.
IASB Framework
 Created to develop accounting standards systematically
 Framework for Preparation and Presentation of Financial
Statement adopted by IASB in 2001 from IASC
 Scope of Framework
 Objective of financial statements and underlying
assumptions
 Qualitative characteristics that affect the usefulness of
financial statements
 Definition, recognition, and measurement of the financial
statements elements
 Concepts of capital and capital maintenance

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Qualitative Characteristics of Financial
Statements
 Understandability: Understandable to people with
reasonable financial knowledge
 Relevance: Useful for making predictions and confirming
existing expectations
 Affected by nature and materiality of information
 Reliability: Neutral and represents faithfully what it
purports to
 Reflecting items based on economic substance rather than
their legal form
 Comparabilty

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2.2. Proposed Changes to existing frameworks
by IASB and FASB
 IASB and FASB will work on existing frameworks to
provide basis for developing future standards by boards
 Phases of project
 Objectives and qualitative characteristics
 Elements and recognition
 Measurement
 Reporting entity
 Presentation and disclosure
 Purpose and status
 Application to not-for-profits
 Finalization

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Elements of Financial Statements
 Definition
 Assets, liabilities, and other financial statement elements are
defined
 Recognition
 Guidelines as to when to recognize revenues and expenses
 Measurement
 Various bases are allowed: historical cost, current cost,
realizable value, and present value

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The Norwalk Agreement
 Norwalk Agreement refers to a Memorandum of
Understanding signed in September 2002 between the
Financial Accounting Standards Board (FASB), the US
standard setter, and the International Accounting Standards
Board (IASB). The agreement is so called as it was reached in
Norwalk. Proposed Changes as per the discussion paper
published jointly by two boards:
 Decision-useful objective encompassing information relevant to
assessing stewardship
 Stakeholder approach (vs. U.S. framework of shareholder
approach) — users other than capital providers explicitly
acknowledged
 Emphasis on principle and guidance development for fair value
measurements in IFRS

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International Convergence Issues
 The complicated nature of standards such as financial instruments
and fair value accounting (fair value is a rational and unbiased
estimate of the potential market price of a good, service, or asset. It
takes into account such objective factors as:
acquisition/production/distribution costs, replacement costs, or costs
of close substitutes actual utility at a given level of development of
social productive capability

 The tax-driven nature of the national accounting regime

 Disagreement with significant IFRS, such as financial statements
and fair value accounting
 Insufficient guidance on first time application of IFRS
 Limited capital markets are less beneficial
 Investor satisfaction with national accounting standards
 IFRS difficulties in language translation

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IASB/FASB Convergence
 The Norwalk Agreement reached in 2002 between the
IASB and FASB pledged
 For compatible financial reporting standards
 Proper coordination of work program to maintain
compatibility

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IASB/FASB Convergence
 IASB’s and FASB’s key initiatives in the Norwalk Agreement
 Joint projects – boards work jointly to address issues (e.g., revenue
recognition)
 Short-term convergence –remove differences between IFRS and
U.S. GAAP for issues where convergence is deemed most likely
 IASB liaison – IASB member in residence at FASB
 Monitoring IASB projects – FASB monitors IASB projects of
most interest
 Convergence research project – identification of all major
differences between IFRS and U.S. GAAP
 Convergence potential – FASB assesses agenda items for possible
cooperation with IASB

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IASB/FASB Convergence
 Following global financial crisis both groups formed
Financial Crisis Advisory Group (FCAG)
 July 2009 FCAG report addresses:
 Effective financial reporting
 Limitations of financial reporting
 Convergence of accounting standards
 Standard-setting independence and accountability

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Anglo-Saxon Accounting
 Accounting systems prevalent in English-speaking
countries including U.S., U.K., Canada, Australia and
New Zealand
 Fundamental features:
 Micro orientation (firm level) with emphasis on professional
rules and self-regulation
 Investor orientation
 Primary aim is efficient operation of capital markets
 Very transparent
 Less emphasis on prudence and measurement of taxable
income or distributable income

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Types of Differences Between IFRS and U.S.
GAAP
 Definition differences
 Recognition differences
 Measurement differences
 Alternatives
 Lack of requirements or guidance
 Presentation differences
 Disclosure differences

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IFRS and U.S. GAAP
 IFRS more flexible in many cases
 Choice between alternative treatments in accounting
 IFRS generally have less bright-line guidance
 More judgment is required in applying IFRS
 IFRS is a principles-based accounting system:
 whereas U.S. GAAP is a rules-based system
 Rules-based accounting systems provide specific dictates for
reporting financial information. Accountants must follow these
rules or face penalties for noncompliance. International countries
may have a rules-based system. Rules detail how a company
should prepare and report financial transactions. Accountants must
learn and follow these rules, taking a company's financial
information and forcing it to meet the rules-based system.

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 2.3. International Financial Reporting
standards issued by IASB: IAS 1
through 41 and IFRS 1 through 13
2.3.1. International Financial Reporting
standards issued by IASB: IAS 1
through 41
2.3.2. IFRS 1 through 13
IAS1.Presentation of Financial
Statements
 Business entity is required to present a complete set of financial
statements at least annually, with comparative amounts for the
preceding year (including comparative amounts in the notes)
A complete set of financial statements comprises:
• Financial Position
• Financial Performance
• Changes in Equity
• Cash flow Statement
• Local government
• Notes, comprising a summary of significant accounting
policies
• Explicit and unreserved statement of such compliance in
the notes.

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 IAS 2.Inventories
 For determining the cost of inventories and the subsequent
recognition of the cost as an expense, including any write-down
to net realizable value.
 Net realizable value is the estimated selling price in the
ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
 The cost of inventories includes all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories
to their present location and condition.
The cost of inventories is assigned by:
◦ specific identification of cost for items of inventory that are
individually significant; and
◦ the first-in, first-out or weighted average cost formula for large
quantities of individually insignificant items.Welfare benefits.

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IAS 7. Statement of Cash Flow
to present information about historical changes in an entity’s
cash (cash on hand and demand deposits) and cash
equivalents(short-term, highly liquid investments) in a
statement of cash flows.
The statement classifies cash flows during a period into cash
flows from operating, investing and financing activities:
 Operating activities
 Direct Method (major classes of gross cash receipts and gross cash
payments are disclosed)
 In-direct Method (Profit or loss is adjusted for the effects of
transactions 1. Non-cash nature, 2. Accruals of past, 3. Future operating
cash receipts and payments, 4. Income or expense associated with investing or
financing cash flows.)
 Investing activities
 Financing activities
39
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IAS 8. Accounting Policies, Changes in
Accounting Estimates and Errors
Accounting policies are the specific principles,
bases, conventions, rules and practices applied
by an entity in preparing and presenting
financial statements.
 changing accounting policies,
 together with the accounting treatment and disclosure
of changes in accounting policies,
 changes in accounting estimates
 corrections of errors

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IAS 10. Events after the Reporting Period
 when an entity should adjust its financial statements for
events after the reporting period; and
 the disclosures that an entity should give about the date when
the financial statements were authorized for issue and about
events after the reporting period.
 Events after the reporting period are those events, favorable
and unfavorable, that occur between the end of the reporting
period and the date when the financial statements are
authorized for issue.
The two types of events are:
 those that provide evidence of conditions that existed at the end of
the reporting period (adjusting events); and
 those that are indicative of conditions that arose after the reporting
period (non-adjusting events).
Thursday, March 14, 2024 41
IAS 11. Construction Contracts
 Contractor’s accounting treatment of revenue and costs
associated with construction contracts and it usually
performed in two or more accounting periods.
 Consequently, the primary accounting issue is the allocation
of contract revenue and contract costs to the accounting
periods in which construction work is performed.
 when the outcome of a construction contract can be estimated
reliably,
 when the outcome of a construction contract cannot be estimated
reliably:
 revenue is recognized only to the extent of contract costs incurred that it
is probable will be recoverable; and
 contract costs are recognised as an expense in the period in which they
are incurred.
Thursday, March 14, 2024 42
IAS 12. Income Tax
 Income taxes include all domestic and foreign taxes that are
based on taxable profits.
 The principal issue in accounting for income taxes is how to
account for the current and future tax consequences of:
 the future recovery (settlement) of the carrying amount of
assets(liabilities) that are recognised in an entity’s statement
of financial position; and
 transactions and other events of the current period that are
recognised in an entity’s financial statements.
• taxation authorities,
• using the tax rates and
• tax laws

43
Thursday, March 14, 2024
IAS 16. Property, Plant and Equipment
 for recognizing property, plant and equipment as assets, measuring their carrying amounts,
and measuring the depreciation charges and impairment losses to be recognized in relation to
their cost.
Property, plant and equipment are tangible items that:
 are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
 are expected to be used during more than one period.
The cost of an item of property, plant and equipment is recognized as an asset if, and only if:
 it is probable that future economic benefits associated with the item will flow to the entity; and
 the cost of the item can be measured reliably.
An item of property, plant and equipment that qualifies for recognition as an asset is initially
measured at its cost. Cost includes:
 its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates;
 costs directly attributable to bringing the asset to the location
 estimate of the costs of dismantling and removing the item
Still continues………………..,

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IAS 17. Leases
IAS 17 classifies leases into two types:
•A financial lease if it transfers substantially all the risks and rewards
incidental to ownership; and
•An operating lease if it does not transfer substantially all the risks and
rewards incidental to ownership.
IAS 17 prescribes lessee and lessor accounting policies for the two types of leases, as
well as disclosures.
Leases in the financial statements of lessees—operating leases
Lease payments under an operating lease are recognized as an
expense on a straight-line basis over the lease term unless another systematic
basis is more representative of the time pattern of the user’s benefit.
Leases in the financial statements of lessees—finance leases
At the commencement of the lease term, lessees recognize finance
leases as assets and liabilities in their statements of financial position at
amounts equal to the fair value of the leased property or, if lower, the present
value of the minimum lease payments, each determined at the inception of
the lease.
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IAS 18. Revenue
IAS 18 addresses when to recognize and how to measure revenue. Revenue
is the gross inflow of economic benefits during the period arising in the course of the
ordinary activities of an entity when those inflows result in increases in equity, other
than increases relating to contributions from equity participants.

IAS 18 applies to accounting for revenue arising from the following

transactions and events:
the sale of goods;
the rendering of services; and
the use by others of entity assets yielding interest, royalties and
dividends.
Revenue is recognized when it is probable that future economic benefits
will flow to the entity and those benefits can be measured reliably.

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IAS 19. Employee Benefits
IAS 19 prescribes the accounting for all types of employee benefits except
share-based payment, to which IFRS 2 applies. Employee benefits are all forms of
consideration given by an entity in exchange for service rendered by employees or for
the termination of employment. IAS 19 requires an entity to recognize:
a liability when an employee has provided service in exchange for employee
benefits to be paid in the future; and

an expense when the entity consumes the economic benefit arising from the service
provided by an employee in exchange for employee benefits.

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03/14/24
 IAS 20. Accounting for Government Grants and
Disclosure of Government
Assistance
 Government grants are assistance by government in the form of
transfers of resources to an entity in return for past or future
compliance.
 An entity recognizes government grants only when there is
reasonable assurance that the entity will comply with the
conditions attached to them and the grants will be received.
 Becomes receivable as compensation for expenses or losses
already incurred or for the purpose of giving immediate
financial support to the entity with no future related costs is
recognized in profit or loss of the period in which it becomes
receivable.
 Related to assets, including non-monetary grants at fair value,
are presented in the statement of financial position.
 Grants related to income are sometimes presented as a credit in
the statement of comprehensive income, either separately or
under a general heading such as ‘Other income’.Thursday, March 14, 2024 49
 IAS 21. The Effects of Changes in Foreign
Exchange Rates
 An entity may carry on foreign activities in two ways. It may have
transactions in foreign currencies or it may have foreign operations.
 IAS 21 prescribes how to include foreign currency transactions and
foreign operations in the financial statements of an entity and how to
translate financial statements into a presentation currency.
 The principal issues are which exchange rate(s) to use and how to report
the effects of changes in exchange rates in the financial statements.

At the end of each reporting period:

 foreign currency monetary items are translated using the closing rate;
 non-monetary items that are measured in terms of historical cost in a
foreign currency are translated using the exchange rate at the date of the
transaction; and
 non-monetary items that are measured at fair value in a foreign currency
are translated using the exchange rates at the date when the fair value was
measured.

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IAS 23. Borrowing Costs
 Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying
asset form part of the cost of that asset.

 Other borrowing costs are recognised as an expense.

Borrowing costs are interest and other costs that an
entity incurs in connection with the borrowing of funds.

 IAS 23 provides guidance on how to measure borrowing

costs, particularly when the costs of acquisition,
construction or production are funded by an entity’s
general borrowings.

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IAS 24. Related Party Disclosures
 The objective of IAS 24 is to ensure that an entity’s financial
statements contain the disclosures.
A related party is a person or an entity that is related to the reporting
entity.
 a person or a close member of that person’s family is related to a reporting
entity if that person:
• has control or joint control of the reporting entity;
• has significant influence over the reporting entity; or
• is a member of the key management personnel of the reporting entity or of a parent of the
reporting entity.
 an entity is related to a reporting entity if any of the following conditions
applies:
• the entity and the reporting entity are members of the same group
• one entity is an associate or joint venture of the other entity
• both entities are joint ventures of the same third party
• one entity is a joint venture of a third entity and the other entity is an associate of the third
entity
• the entity is a post-employment benefit plan for the benefit of employees
• the entity is controlled or jointly controlled by a person who is a related party.
• a person who is a related party has significant influence over the entity or is a member of the
key management personnel. Thursday, March 14, 2024 52
 IAS 26 Accounting and Reporting
by Retirement Benefit Plans
 IAS 26 prescribes the minimum content of the financial statements of retirement
benefit plans. It requires that the financial statements of a defined benefit plan must
contain either:

 a statement that shows the net assets available for benefits; the actuarial present
value of promised retirement benefits, distinguishing between vested benefits and
non-vested benefits; and the resulting excess or deficit; or

 a statement of net assets available for benefits including either a note disclosing the
actuarial present value of promised vested and non-vested retirement benefits or a
reference to this information in an accompanying actuarial report.

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 IAS 27 Separate Financial
Statements
 IAS 27 prescribes the accounting and disclosure requirements for investments in
subsidiaries, joint ventures and associates when an entity elects, or is required by
local regulations, to present separate financial statements.

 Separate financial statements are those presented in addition to consolidated

financial statements or in addition to the financial statements of an investor that
does not have investments in subsidiaries but has investments in associates or joint
ventures that are required by IAS 28 to be accounted for using the equity method.

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 IAS 28 Investments in Associates
and Joint Ventures
 IAS 28 requires an investor to account for its investment in associates using the
equity method.

 An associate is an entity over which the investor has significant influence.

Significant influence is the power to participate in the financial and operating
policy decisions of the investee but is not control or joint control of those policies.

 A joint venture is a joint arrangement whereby the parties that have joint control of
the arrangement have rights to the net assets of the arrangement.

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 IAS 29 Financial Reporting in
Hyper-inflationary Economies
 IAS 29 applies to any entity whose functional currency is the currency of a
hyperinflationary economy.
 Functional currency is the currency of the primary economic environment in which
the entity operates. Hyperinflation is indicated by factors such as prices, interest
and wages linked to a price index, and cumulative inflation over three years of
around 100 per cent or more.
 In a hyperinflationary environment, financial statements, including comparative
information, must be expressed in units of the functional currency current as at the
end of the reporting period.
 An entity must disclose the fact that the financial statements have been restated;
the price index used for restatement; and whether the financial statements are
prepared on the basis of historical costs or current costs.

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 IAS 32 Financial Instruments:
Presentation
 IAS 32 specifies presentation for financial instruments. The recognition and
measurement and the disclosure of financial instruments are the subjects of IFRS 9
or IAS 39 and IFRS 7 respectively.

 For presentation, financial instruments are classified into financial assets, financial
liabilities and equity instruments.

 A compound financial instrument, such as a convertible note, is split into equity

and liability components.

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 IAS 33 Earnings per Share
 IAS 33 deals with the calculation and presentation of earnings per share (EPS). It
applies to entities whose ordinary shares or potential ordinary shares (for example,
convertibles, options and warrants) are publicly traded. It does not apply to non-
public entities.
 An entity must present basic EPS and diluted EPS with equal prominence in the
statement of comprehensive income. When an entity presents consolidated
financial statements, EPS measures are based on the consolidated profit or loss
attributable to ordinary equity holders of the parent.
 Dilution is a potential reduction in EPS or a potential increase in loss per share
resulting from the assumption that convertible instruments are converted, options
or warrants are exercised, or ordinary shares are issued upon the satisfaction of
specified conditions.

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 IAS 34 Interim Financial Reporting
 An interim financial report is a complete or condensed set of financial statements
for a period shorter than a financial year.
 IAS 34 prescribes the minimum content of an interim financial report. It also
specifies the accounting recognition and measurement principles applicable to an
interim financial report.
 A set of condensed financial statements for the current period and comparative
prior period information, ie statement of financial position, statement of
comprehensive income, statement of cash flows, statement of changes in equity,
and selected explanatory notes.
 Accounting policies are applied in the interim report as in the most recent annual
report, or special disclosures are required if an accounting policy is changed.

Thursday, March 14, 2024 59

 IAS 36 Impairment of Assets
 The carrying amount exceeds the recoverable amount, the asset is
described as impaired.
 The entity must reduce the carrying amount of the asset to its
recoverable amount, and recognize an impairment loss.
 IAS 36 also applies to groups of assets that do not generate cash
flows individually (known as cash-generating units).
 The recoverable amount of the following assets must be assessed
each year: intangible assets with indefinite useful lives; intangible
assets not yet available for use; and goodwill acquired in a business
combination.
 The value in use of an asset is the expected future cash flows that
the asset in its current condition will produce, discounted to present
value using an appropriate pre-tax discount rate.
 The depreciation (amortization) charge is adjusted in future periods
to allocate the asset’s revised carrying amount over its remaining
useful life.
 An impairment loss for goodwill is never reversed.Thursday, March 14, 2024 60
 IAS 37 Provisions, Contingent
Liabilities and Contingent Assets
IAS 37 distinguishes between provisions and contingent liabilities. A
provision is included in the statement of financial position at the best estimate
of the expenditure required to settle the obligation at the end of the reporting
period. A contingent liability is not recognised in the statement of financial
position.
Provisions: A provision is a liability of uncertain timing or amount. A liability
may be a legal obligation or a constructive obligation. Risks and uncertainties
are taken into account in the measurement of a provision. A provision is
discounted to its present value.(IAS 37 elaborates on the application of the
recognition for three specific cases: for future operating losses, an onerous
contract gives rise to provision and restructuring costs.)
Contingent Liabilities: Contingent liabilities are possible obligations whose
existence will be confirmed by uncertain future events that are not wholly
within the control of the entity.
Contingent Assets: Contingent assets are possible assets whose existence will
be confirmed by the occurrence or non-occurrence of uncertain future events
that are not wholly within the control of the entity.
Thursday, March 14, 2024 61
 IAS 38 Intangible Assets
 IAS 38 sets out the criteria for recognizing and measuring intangible assets
and requires disclosures about them.
 An intangible asset is an identify able non-monetary asset without physical
substance.
 an asset is identifiable when it is separable, or when it arises from
contractual or other legal rights. Separable assets can be sold, transferred,
licensed etc. include computer

Ex: software, licenses, trademarks, patents, films, copyrights and import

Quotas and Goodwill, etc.

 Expenditure for an intangible item is recognized as an expense, unless the

item meets the definition of an intangible asset, and:

 it is probable that there will be future economic benefits from the asset;
and
 the cost of the asset can be reliably measured.

Thursday, March 14, 2024 62

 IAS 39 Financial Instruments:
Recognition and Measurement
 IAS 39 establishes principles for recognising and measuring financial
assets, financial liabilities and some contracts to buy or sell non-financial
items.
Recognition and derecognition:
 When the entity becomes a party to the financial instrument contract.
 An entity removes a financial liability from its statement of financial
position when its obligation is extinguished.
 An entity removes a financial asset from its statement of financial position
when its contractual rights to the asset’s cash flows expire; when it has
transferred the asset and all the risks and rewards of ownership.
Measurement: A financial asset or financial liability is measured initially at
amortised cost and at fair value (through Profit or Loss and available sales).
The following are measured at amortised cost:
• held to maturity—non-derivative financial assets that the entity has the
positive intention and ability to hold to maturity;
• loans and receivables—non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market; and
• financial liabilities that are not carried at fair value through profit or loss.
Thursday, March 14, 2024 63
 IAS 40 Investment Property
 Investment property is land or a building (including part of a building) or
both that is:

 held to earn rentals or for capital appreciation or both;

 not owner-occupied;

 not used in production or supply of goods and services, or for

administration; and

 not property that is for sale in the ordinary course of business.

Thursday, March 14, 2024 64

 IAS 41 Agriculture
 IAS 41 prescribes the accounting treatment, financial statement
presentation, and disclosures related to agricultural activity.
 Agricultural activity is the management of the biological transformation of
living animals or plants (biological assets) and harvest of biological assets
for sale or for conversion into agricultural produce or into additional
biological assets.
 IAS 41 establishes the accounting treatment for biological assets during
their growth, degeneration, production and procreation, and for the initial
measurement of agricultural produce at the point of harvest.
 IAS 41 contains the following accounting requirements:
 bearer plants are accounted for by IAS 16;
 other biological assets are measured at fair value less costs to sell;
 agricultural produce at the point of harvest is also measured at fair value
less costs to sell;
 changes in the value of biological assets are included in profit or loss; and
 biological assets that are attached to land (for example, trees in a
plantation forest) are measured separately from the land.
Thursday, March 14, 2024 65
 IFRS 1First time Adoption of IFRS
 IFRS 1 requires an entity that is adopting IFRS Standards for the first
time to prepare a complete set of financial statements for its first IFRS
reporting period and for the immediately preceding year.
 The entity uses the same accounting policies throughout all periods
presented in its first IFRS financial statements.
 Those accounting policies shall comply with each Standard effective
at the end of its first IFRS reporting period.
 The Standard requires disclosures that explain how the transition from
previous GAAP to IFRS Standards affected the entity’s reported
financial position, financial performance and cash flows.

Thursday, March 14, 2024 66

IFRS 2 Share Based Payement
 IFRS 2 specifies the financial reporting by an entity when it
undertakes a share-based payment transaction, including issue
of shares and share options.
 It requires an entity to recognize share-based payment
transactions in its financial statements, including
transactions with employees or other parties to be
settled in cash, other assets or equity instruments of the
entity.
It also requires an entity to reflect in its profit or loss and
financial position the effects of share-based payment
transactions, including expenses associated with
transactions in which share options are granted to
employees

Thursday, March 14, 2024 67

 IFRS 3 Business combination
 IFRS 3 establishes principles and requirements for how an acquirer in
a business combination:
• recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any non-controlling
interest in the acquire;
• recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and
• determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of
the business combination.
The core principle in IFRS 3 is that an acquirer of a business
recognizes the assets acquired and the liabilities assumed at their
acquisition-date fair values and discloses information that enables
users to evaluate the nature and financial effects of the acquisition
Thursday, March 14, 2024 68
IFRS 4 Insurance Contracts
 IFRS 4 specifies the financial reporting for insurance contracts by
any entity that issues such contracts until the Board completes its
comprehensive project on insurance contracts. An insurance contract
is a contract under which one party (the insurer) accepts significant
insurance risk from another party (the policyholder) by agreeing to
compensate the policyholder if a specified uncertain future event (the
insured event) adversely affects the policyholder.
IFRS 4 applies to all insurance contracts (including reinsurance contracts)
that an entity issues and to reinsurance contracts that it holds, except for
specified contracts covered by other Standards. It does not apply to
other assets and liabilities of an insurer, such as financial assets and
financial liabilities within the scope of IFRS 9. Furthermore, it does not
address accounting by policyholders.

Thursday, March 14, 2024 69

 IFRS 5 Non-current assets held for
sale and discontinued operation
 IFRS 5 requires:
• assets that meet the criteria to be classified as held for sale to be
measured at the lower of the carrying amount and fair value less costs
to sell, and depreciation on such assets to cease;
• an asset classified as held for sale and the assets and liabilities
included within a disposal group classified as held for sale to be
presented separately in the statement of financial position; and
• the results of discontinued operations to be presented separately in the
statement of comprehensive income.
 IFRS 5 requires an entity to classify a non-current asset (or disposal
group) as
 held for sale if its carrying amount will be recovered principally
through a
 sale transaction instead of through continuing use
Thursday, March 14, 2024 70
IFRS 6 Exploration for and
Evaluation of Mineral Resources
IFRS 6 specifies the financial reporting for costs
incurred for exploration for and evaluation of
mineral resources (for example, minerals, oil,
natural gas and similar non-regenerative
resources), as well as the costs of determination of
the technical feasibility and commercial viability
of extracting the mineral resource.

Thursday, March 14, 2024 71

IFRS 7Financial Instruments:
Disclosures
 the nature and extent of risks arising from financial instruments
to which the entity is exposed during the period and at the end of
the reporting period, and how the entity manages those risks.

The qualitative disclosures describe management’s objectives,

policies
and processes for managing those risks. The quantitative disclosures
provide information about the extent to which the entity is exposed
to risk, based on information provided internally to the entity’s
key management personnel.

Together, these disclosures provide an overview of the entity’s use of

financial instruments and the exposures to risks they create.

Thursday, March 14, 2024 72

IFRS 8 Operating Segments
 IFRS 8 requires an entity to disclose information to enable users of
its
financial statements to evaluate the nature and financial effects of
the different business activities in which it engages and the
different
economic environments in which it operates.
 It specifies how an entity should report information about its
operating segments in annual financial statements and in interim
financial reports.
 It also sets out requirements for related disclosures about products
and services, geographical areas and major customers

Thursday, March 14, 2024 73

IFRS 9 Financial Instruments
 IFRS 9 is effective for annual periods beginning on or after 1 January
2018 with early application permitted.
 IFRS 9 specifies how an entity should classify and measure financial
assets, financial liabilities, and some contracts to buy or sell non-
financial items.
 IFRS 9 requires an entity to recognize a financial asset or a financial
liability in its statement of financial position when it becomes party to
the contractual provisions of the instrument.
At initial recognition, an entity measures a financial asset or a
financial liability at its fair value plus or minus, in the case of a
financial asset or a financial liability not at fair value through profit
or loss, transaction costs that are directly attributable to the
acquisition or issue of the financial asset or the financial liability.

Thursday, March 14, 2024 74

 IFRS 10 Consolidated Financial

Statements
IFRS 10 establishes principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more
other entities. IFRS 10 requires an entity (the parent) that controls one
or more other entities (subsidiaries) to present consolidated financial
statements; defines the principle of control, and establishes control as
the basis for consolidation;
 • sets out how to apply the principle of control to identify whether an
investor controls an investee and therefore must consolidate the
investee; sets out the accounting requirements for the preparation of
consolidated financial statements; and defines an investment entity
and sets out an exception to consolidating particular subsidiaries of
an investment entity.
Consolidated financial statements are the financial statements of a
group in which the assets, liabilities, equity, income, expenses and cash
flows of the parent and its subsidiaries are presented as those of a
single economic entity.Thursday, March 14, 2024 75
 IFRS 11 JOINT ARRANGEMENT
 A joint arrangement is an arrangement of which two or more parties
have joint control. Joint control is the contractually agreed sharing of
control of an arrangement, which exists only when decisions about the
relevant activities (ie activities that significantly affect the returns of
the arrangement) require the unanimous consent of the parties sharing
control.
IFRS 11 classifies joint arrangements into two types—joint operations
and joint ventures:
 • a joint operation is a joint arrangement whereby the parties that have
joint control of the arrangement (ie joint operators) have rights to the
assets, and obligations for the liabilities, relating to the arrangement;
and
 • a joint venture is a joint arrangement whereby the parties that have
joint control of the arrangement (ie joint venturers) have rights to the
net assets of the arrangement

Thursday, March 14, 2024 76

IFRS 12 Disclosure of Interests in
Other Entities
 IFRS 12 requires an entity to disclose information that enables
users of its financial statements to evaluate:
• the nature of, and risks associated with, its interests in other
entities; and
• the effects of those interests on its financial position, financial
performance and cash flows.
 IFRS 12 applies to entities that have an interest in a subsidiary, a
joint
 arrangement, an associate or an unconsolidated structured entity.
 It establishes disclosure objectives and identifies the kind of
information an entity must disclose in its financial statements about
its interests in those other entities.

Thursday, March 14, 2024 77

IFRS 13Fair Value Measurement
 IFRS 13 defines fair value, sets out a framework for measuring fair
value, and requires disclosures about fair value measurements.
 IFRS 13 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (ie an exit
price).
 When measuring fair value, an entity uses the assumptions that
market participants would use when pricing the asset or the liability
under current market conditions, including assumptions about risk.
 As a result, an entity’s intention to hold an asset or to settle or
otherwise fulfill a liability is not relevant when measuring fair
value.

Thursday, March 14, 2024 78

IFRS 14 Regulatory Deferral
accounts
 IFRS 14 describes regulatory deferral account balances as amounts
of expense or income that would not be recognized as assets or
liabilities in accordance with other Standards, but that qualify to be
deferred in accordance with this Standard because the amount is
included, or is expected to be included, by the rate regulator in
establishing the price(s) that an entity can charge to customers for
rate-regulated goods or service.
 Specific costs or revenues that a utility is allowed to defer to its
balance sheet, rather than reporting them on the company's income
statement. Instead of being treated as income or expenditures in a
single year, these items are booked as assets and do not need to be
reported for tax purposes. Examples include the cost of energy-
efficiency programs and deferred fuel costs.

Thursday, March 14, 2024 79

IFRS 15 Revenues form contracts
with customers
 IFRS 15 establishes the principles that an entity applies
when reporting information about the nature, amount,
timing and uncertainty of revenue and cash flows from a
contract with a customer.
 The core principle is that a company recognizes revenue
to depict the transfer of promised goods or services to
the customer in an amount that reflects the consideration
to which the company expects to be entitled in exchange
for those goods or services.

80
 IFRS 16 lease
IFRS 16 introduces a single lessee accounting model and requires a
lessee to recognize assets and liabilities for all leases with a term of more
than 12 months, unless the underlying asset is of low value. A lessee is
required to recognize a right-of-use asset representing its right to use the
underlying leased asset and a lease liability representing its obligation to
make lease payments.
A lessee measures right-of-use assets similarly to other non-financial
assets (such as property, plant and equipment) and lease liabilities
similarly to other financial liabilities. As a consequence, a lessee
recognizes depreciation of the right-of-use asset and interest on the lease
liability. The depreciation would usually be on a straight-line basis.
In the statement of cash flows, a lessee separates the total amount of cash
paid into principal (presented within financing activities) and interest
(presented within either operating or financing activities) in accordance
with IAS 7.

Thursday, March 14, 2024 81

The IFRS Standard for Small and
Medium-sized Entities (IFRS for
SMEsStandard)
 The IFRS for SMEsStandard is a small (250-page) Standard that is
tailored for small companies.
 It focuses on the information needs of lenders, creditors, and other
users of SME financial statements who are primarily interested in
information about cash flows, liquidity and solvency.
 And it takes into account the costs to SMEs and the capabilities of
SMEs to prepare financial information.
 While based on the principles in full IFRS Standards, the IFRS for
SMEs Standard is stand-alone.
 It is organized by topic.

Thursday, March 14, 2024 82

The IFRS Standard for Small and
Medium-sized Entities (IFRS for
SMEs Standard)
 The IFRS for SMEs Standard reflects five types of simplifications
from full IFRS Standards:
 • some topics in full IFRS Standards are omitted because they are
not
relevant to typical SMEs;
 • some accounting policy options in full IFRS Standards are not
allowed because a more simplified method is available to SMEs;
 many of the recognition and measurement principles that are in full
IFRS Standards have been simplified;
 • substantially fewer disclosures are required; and
 • the text of full IFRS Standards has been redrafted in ‘plain
English’ for easier understandability and translation.

Thursday, March 14, 2024 83