Chapter 5

• The International Accounting Standards Board is the independent accounting standard-setting body of the IFRS Foundation.

  Responsible for issuing International Accounting Standards.

  The standards come in the form of IAS Standards and IFRS Standards.

  They show how to recognise, measure and disclose items in financial statements.
• The IFRS foundation has also issued its Conceptual Framework for Financial Reporting. This sets out the concepts that underline the preparation and presentation of financial statements.
• According to the Conceptual Framework the objective of financial statements is to:

  'provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.'
• The Conceptual framework identifies relevance and faithful representation as fundamental qualitative characteristics. These are required for information to be useful to users.
• Fundamental Characteristics: Relevance

  relevant info must have predictive value (assess the future of a business) and confirmatory value (confirming past predictions).

  Information may be relevant in nature or materiality.
• Fundamental Characteristics: Faithful Representation

  must be: complete, neutral, free from error, showing substance over form.

  Neutrality is supported through the exercise of prudence - exercising caution under situations of uncertainty.
• Enhancing Characteristics: Comparability

  Info should be produced on a consistent basis. This means they can be compared with the financial statements of other entities and the earlier periods of the same entity.
• Enhancing Characteristics: Verifiability

  Information can be checked against support. A consensus could be reached by observers that the information faithfully represents transactions or events.
• Enhancing Characteristics: Timeliness

  info should be supplied to users in time to be used in decision making. The more recent the info the more useful. Some info remains timely for a long time after the end of a reporting period.
• Enhancing Characteristics: Understandability

  Info must be understandable to users who have a reasonable knowledge of business and accounting.
• The Conceptual Framework identifies the going concern basis as an underlying assumption - the assumption that the entity will continue to operate in the same manner for the foreseeable future
• IAS 1 Presentation of Financial Statements - deals with the structure and content of the financial statements.

  Formats of Financial Statements are recommended, but not compulsory.
• IAS 1 States that a set of financial statements comprises of:

  • Statement of financial position
  • Statement of Profit and loss
  • Statement of changes in equity
  • Statement of cash flows
  • accounting policies and explanatory notes
• The purpose of IAS 1 is to ensure comparability by prescribing the basis for the presentation of general-purpose financial statements.

  The purpose of financial statements is to provide a summary of the accounting transactions within the period.
• Fair presentation:

  IAS 1 states that financial statements should present fairly: financial position, financial performance, cash flows of the entity.

  Fair presentation requires the faithful representation of the effects of the transactions in accordance with the requirement of the conceptual framework. Application of IFRS is presumed to achieve this.
• Departures from International Accounting Standards:

  IAS 1 states that entities that comply with the International Accounting Standards should disclose this fact.

  In rare cases where compliance with International Accounting Standards may be misleading a departure from them is necessary for fair presentation.

  Departures require disclosure and an explanation of the circumstances together with an estimation of the financial impact.
• Comparative Information:

  IAS 1 states that financial statements include comparative information for all amounts, including narrative and descriptive into where relevant.

  When presentation or classification of items is amended, the comparative amounts should be reclassified where practical.
• Accruals concept: transactions and events are recognised when they occur, not when the cash is received or paid.

  Meaning costs incurred in generating income are matched off against the revenue they have generated.
• Going concern concept: entity is viewed as continuing its operations for the foreseeable future. Assuming there is no intention or necessity to liquidate or curtail materially its operations.
• Break up basis: the value at which the business could sell their assets if they were to liquidate.

  This implies that the business isn't expected to remain open.

  If the breakup basis is applied the business need to state the fact itself, disclose the basis the accounts have been prepared and state the reasons the entity in no longer a going concern.
• IAS 1 states that information is material is its omission, misstatement or obscuring could influence the economic decision of users taken in the basis of the financial statements.

  Materiality depends on size or effect of the item judged, meaning determining if an item is material it subjective - but a percentage is normally used as a rule of thumb. However any decisions must be made in context.
• IAS 1 does not allow for assets and liabilities or income and expenses to be offset from one another unless another International Accounting Standard allows for such treatment.
• Historical cost convention:

  Generally assets and liabilities are recorded in the statement of financial position at their historic cost.

  Assets are recondong at the amount of cash paid or the fair value of the consideration given to them.

  Liabilities are recorded at the amount proceeds are received in exchange for the obligation.

  By doing this it removes the subjectivity of estimating the value of an asset or liability as there is usually objective evidence of their cost.
• Why is Regulation needed?

  • ensures accounts are sufficiently reliable, useful and timely
  • statements are used as a starting point for determining taxable profit
  • annual statements are used for reporting to shareholders of the condition and performance of a company
  • stock markets rely on statements published by companies
  • international investors prefer information to be presented in a similar and comparable way no matter where the company is based
• Preparation of financial statements are regulated or affected by:

  • legislation
  • accounting concepts
  • financial reporting standards
  • generally accepted accounting practices (GAAP)
  • the concept of fair presentation
  • sustainability