IFRS

1. Introduction to IFRS
and
Conceptual Framework

2. Overview
 IFRS Basics: Concepts, Principles and Rules
 Purpose, structure, scope and use of IFRS
 IASB: The Standard Setting Process
 Authoritative IFRS pronouncements: Books
 Financial Reporting proclamation and Regulation
 AABE and its road map
 Similarities and Differences between IFRS and
Previous GAAP
 Benefits and Challenges of IFRS
2

3. What is IFRS?
 IFRS: International Financial Reporting Standards
 single-set of high quality
 globally accepted and enforced set of standards that
require
 high quality, transparent and Comparable information in
financial statements
 IFRSs are Issued by IASB [International Accounting
Standards Board]
 IFRS
 Standards that require Measurement, Recognition,
Presentation and Disclosure
3

4. 4
Framework Based: Concepts,
Principles and Rules
Principles Rules
Concepts
• Conceptual Framework establish the concepts
• Principles relates IFRS requirements to the
concepts in the Conceptual Framework
• Rules justify reasons why some IFRS
requirements do not maximize those concepts
(e.g. application of the cost constraint)

5. Purpose, Structure, Scope and
Use of IFRS
 IFRS guide the preparation of General Purpose
Financial Reports
 General purpose financial reporting
 aims to provide useful financial information about the reporting
entity to primary users who cannot require the reporting entity to
provide information directly to them.
 Special purpose financial reporting
 responds to the requirements of users that have the authority to
require the reporting entity to provide the information that they
need for their purposes directly to them. Examples include:
 prudential regulation reporting requirements
 tax reporting requirements
5

6. Why IFRS?
 Global
 IFRS Primary Users are Investors and Creditors
 Capital providers are now playing at a global market
 National standards don’t work on a global market
 Cross boarder business is hindered by national standards
 Local
 There were no national standards
 Nor there were officially adopted standards
 GAAP was not defined
 US GAAP but not updated
6

7. 7
7
IASB: The Standard Setting Process
• IFRS is a single set of accounting standards
developed and maintained by the IASB
• (Superseded IASC 2001 onwards),
• a standard setting body of the IFRS Foundation
• a public interest organization.
• IASB is based in London

8. 8
8
The IASB’s Objective
develop, in the public interest, a single set
of high quality, understandable, enforceable
and globally accepted financial reporting
Standards.
 require high quality, transparent and comparable information
in financial statements

9. Standards development process
9

10. 10
10
Authoritative Pronouncements
IFRS Versions: There are 2
1. Full International Financial
Reporting Standards: Full IFRS
2. IFRS for SMEs: International
Financial Reporting Standards
for Small and Medium Sized
Entities.

11. IASB Books
IASB publishes IFRS in 3 books every year
 Red Book
 Blue Book
 Green Book
Each book is published as 2 books
11

12. 12

13. 13
Authoritative Pronouncements
 IFRS the Full Version
 sets out recognition, measurement, presentation and disclosure
requirements for general purpose financial statements of profit seeking
entities
 Intended to Public Interest Entities and include:
 Conceptual Framework for Financial Reporting: Not a standard.
 IFRS 1-16=16 Standards [Issued by IASB from 2001]
 IAS 1-41=24 Standards [Issued by IASC 1973-2001]
 Both are IFRSs. Effective from January 2016 up to now there
are 40 standards.
 IFRIC: IFRS Interpretation Committee’s interpretations. IFRIC 1-
21=21
 SIC: IFRC Standing Interpretation Committee interpretations:
SIC 7-32=10 SICs

14. 14
Conceptual Framework

15. 15
15
Authoritative Pronouncements
 IFRS for SMEs Version
 Intended to SMEs, private entities or entities with no public
accountability.
 Based on full IFRS with modifications
 Relevance, Appropriateness or need
 Cost-benefit considerations
 How small is small?
 Nature vs Quantity Threshold
 Only 1 standard with 35 sections

16. 16
16
LIST OF IFRSs
Standard Standard Name Effective Date
IFRS 1 First-time Adoption of International Financial Reporting
Standards
1 July 2009
IFRS 2 Share-based Payment 1 January 2005
IFRS 3 Business Combinations 1 July 2009
IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations
1 January 2005
IFRS 6 Exploration for and Evaluation of Mineral Resources 1 January 2006
IFRS 7 Financial Instruments - Disclosures 1 January 2007
IFRS 8 Operating Segments 1 January 2009
IFRS 9 Financial Instruments 1 January 2015
IFRS 10 Consolidated Financial Statements 1 January 2013
IFRS 11 Joint Arrangements 1 January 2013
IFRS 12 Disclosure of Interests in Other Entities 1 January 2013
IFRS 13 Fair Value Measurement 1 January 2013
IFRS 14 Regulatory Deferral Accounts 1 January 2016
IFRS 15 Revenue from Contracts with Customers 1 January 2018
IFRS 16 Leases 1 January 2019
IFRS 17 Insurance Contract 1 January 2020

17. 17
17
LIST OF IFRSs
Standard Standard Name Effective Date
IAS 1 Presentation of Financial Statements 1 January 2005
IAS 2 Inventories 1 January 2005
IAS 7 Statement of Cash Flows 1 January 1994
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 1 January 2005
IAS 10 Events After the Reporting Period 1 January 2005
IAS 12 Income Taxes 1 January 1998
IAS 16 Property, Plant and Equipment 1 January 2005
IAS 17 Leases 1 January 2005
IAS 19* Employee Benefits 1 January 2013
IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance
1 January 1984
IAS 21 The Effects of Changes in Foreign Exchange Rates 1 January 2005
IAS 23 Borrowing Costs 1 January 2009
IAS 24 Related Party Disclosures 1 January 2011

18. 18
LIST OF IFRSs
Standard Standard Name Effective Date
IAS 26 Accounting and Reporting by Retirement Benefit Plans 1 January 1988
IAS 27* Separate Financial Statements 1 January 2013
IAS 28 * Investments in Associates and Joint Ventures 1 January 2013
IAS 29 Financial Reporting in Hyperinflationary Economies 1 January 2007
IAS 32 Financial Instruments - Presentation 1 January 2005
IAS 33 Earnings per Share 1 January 2005
IAS 34 Interim Financial Reporting 1 January 1999
IAS 36 Impairment of Assets 1 January 2004
IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1 January 1999
IAS 38 Intangible Assets 31 March 2004
IAS 40 Investment Property 1 January 2005
IAS 41 Agriculture 1 January 2003

19. Ethiopia issued a financial reporting law on
December 5, 2014 which requires the use of
IFRS by commercial businesses operating in
Ethiopia.
 Proclamation No. 847/2014
 Regulation No. 332/2014
19
Financial Reporting
Proclamation and Regulation

20. The proclamation requires:
Commercial organizations to follow
 International Financial Reporting Standards
(IFRS), or
 International Financial Reporting Standards for
Small and Medium Enterprises (IFRS for SME)
Charities and societies to follow International
Public Sector Accounting Standards (IPSAS)
Auditors to follow International Standards for
Auditing.
20
Financial Reporting Proclamation and
Regulation

21. Public interest entity (PIE) should use the full IFRS.
A PIE is a reporting entity that is of significant public
relevance because of the nature of its business, its
size, its number of employees.
PIE also includes banks, insurance companies, and
any other financial institutions and public enterprises.
21
Financial Reporting Proclamation
and Regulation

22. Structure, strategic plan, and roadmap
of AABE
Accounting and Auditing Board of Ethiopia is
established by Regulation No. 332/2014
It is an autonomous government organ accountable
to MOFEC.
It is headed by the Director General
It has 12-member Board of Directors
22

23. AABE duties
 Issue standards and directives relating to financial
reporting and auditing and ensure their compliance.
 Receive and register financial statements of reporting
entities
 Review and monitor the accuracy and fairness of FS to
enforce compliance with the reporting standards
 Register and license Auditors and Accountants
 Accreditation for Professional Association
23

24.  Oversee professional accountancy bodies
 Establish, publish and review a code of professional conduct and ethics
for certified public accountants and certified auditors
 Conduct or arrange for the conduct of professional examination for the
purpose of registering certified public accountants
24
AABE duties Cont.

25. AABE Roadmap
25

26. Date What is expected
July 7, 2018  Mandatory reporting by financial institutions
and large public enterprises
 Adoption of IFRS by PIE (other than financial
institutions and large public enterprises) and
IPSAS by Charities and Societies.
July 7, 2019 PIE (other than financial institutions and large
public enterprises) and IPSAS by Charities and
Societies issue IFRS and IPSAs based financial
statements respectively
July 7, 2020 Small and Medium-sized Entities in Ethiopia issue
IFRS based financial statements
26

27. Similarities and Difference
between IFRS and US GAAP
 FASB and the IASB has been working to harmonize
and converge the content of IFRS and U.S. GAAP.
27
Unsuccessful Projects
 leases,
 Insurance,
 Financial instruments,
 Conceptual framework
Successful Convergence Projects
 share-based payments,
 segment reporting,
 business combinations,
 consolidated financial statements,
 fair value measurement,
 joint arrangements,
 investment entities, and
 revenue

28. Continued
 Inventory costing method
 US GAAP allows LIFO method
 IFRS doesn’t allow LIFO method
 Reversal of inventory write-downs
 US GAAP doesn’t allow
 IFRS allows
 Valuation of property, plant, and equipment
 U.S.GAAP: Cost less accumulated depreciation
 IFRS: Cost less accumulated depreciation (or) fair
value(revaluation)
28

29. Continued
 Valuation of intangible assets
 U.S GAAP: Cost less accumulated amortization.
Revaluation prohibited
 IFRS: Cost less accumulated amortization (or) fair
value(revaluation)
 Research and development expenditures
 U.S GAAP: Expensed in the period incurred
 IFRS:
 Research: expensed in the period incurred
 Development: that meet specified criteria: capitalized
29

30. Continued
 Contingencies
 U.S. GAAP: accrue if it is probable and can be
reasonably estimated. GAAP defines probable as
“likely to occur” (a higher threshold of occurrence
than under IFRS)
 IFRS: threshold for “probable” is defined as “more
likely than not” (greater than 50%)
 Valuation of long-term contingencies
U.S.GAAP: present value—only when timing of
cash flows is certain
IFRS: present value—time value of money is
material
30

31. Treatment of convertible debt
 U.S. GAAP: entire issue price is recorded as a
liability
 IFRS: convertible debt is divided into its
liability (bonds) and equity (conversion option)
elements
31

32. Benefits of IFRS
 Credibility of local market to foreign investors
 More cross-border investment
 Efficient capital allocation
 Comparability across political boundaries
 Facilitates global education and training
32

33. Benefit of IFRS to
companies!
Lower cost of capital
Facilitates raising capital abroad
Integrated IT systems
One set of books + easier consolidation
Better understanding of financial statements from
business partners abroad
33

34. Challenges of IFRS Adoption
Graduates were trained in GAAP than IFRS.
Shortage of well trained Professionals.
Absence of Valuation experts in ascertaining fair
values
Absence of Structured Markets
 Lack of Institutional vehicles that guide through
Implementation
 Cost of Implementation
34

35. Conceptual Framework for
Financial Reporting

36. 36
Conceptual Framework
provides…
 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,
judgments and models on which IFRS financial statements are based
 a basis for continuously updating IFRS knowledge and IFRS
competencies

37. Conceptual Framework
 Concepts underlying general purpose financial information
 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
37

38. 38
Objective 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.”
Those decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans or other forms of credit

39. 39
Objective of financial
reporting
 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

40. 40
Fundamental qualitative
characteristics
 Relevance
 predictive value
 confirmatory value
 materiality, entity-specific
 Faithful representation (replaces reliability)
 completeness
 neutrality
 free from error

41. 41
Enhancing qualitative
characteristics
Comparability
Verifiability
Timeliness
Understand ability

42. 42
Example 1:
errors and changes in policies and estimates
 Objective
 Concepts including qualitative characteristics
 faithful representation
 comparability
 Rules
 impracticable exception
 specified disclosures

43. 43
Pervasive constraint
Cost
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.

44. Example 2: Transitional provisions
new or amended IFRSs
 The concepts = objective and qualitative characteristics,
particularly comparability
 The principle = retrospective application of new accounting
policy
 The rule = transitional provisions for new and amended IFRSs
 application of the cost constraint
44

45. 45
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…

46. Identifying an entity’s
assets
What do you think?
 Is the public road to its factory an asset of the manufacturer?
 Are Ethiopian wolves an asset of a Bale Mountains National
Park-based photographic safari operator?
 Are the hived bees assets of a Robe-based honey farmer?
 Is an unpatented but secret formula for a premium product an
asset of the knowing entity?
46

47. Identifying an entity’s
assets
What do you think?
 Are Ethiopian coffee brands an asset?
 Does your answer depend on whether the brand was internally
generated, purchased or acquired in a business combination?
 Company A owns 60% of Company B; Company B owns 60%
of Company C
 are the assets of Company C assets of Company B?
 are the assets of Company C assets of Company A?
47

48. 48
Financial position
The concepts
 Information about the nature and amounts of an entity’s
economic resources and claims against the reporting entity help
users identify the reporting entity’s financial strengths and
weaknesses (see OB12–OB14).
 help assess entity’s prospects for future cash flows, its liquidity and
solvency, its needs for additional financing and how successful it is likely
to be in obtaining financing.
 Definition of asset, liability and equity (4.4)

49. 49
Financial performance The
concepts
 Financial performance during a period, reflected by changes
in its economic resources and claims (other than by obtaining
additional resources directly from investors and creditors), is
useful in assessing the entity’s past and future ability to
generate net cash inflows (see OB18)
 Accrual basis of accounting (depicts the effects of transactions and
other events and circumstances on a reporting entity’s economic
resources and claims in the periods in which those effects occur (see
¶OB17)

50. 50
Example 3
Biological asset in agricultural
activity
 The concepts: see the previous slide
 The principle: A gain or loss arising 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)

51. 51
Measurement concepts
 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)
 IASB guided by objective and qualitative characteristics when specifying
measurements.

52. 52
Measurement section of
Framework
 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 Fair Value Measurements

53. Measurement Model
53

54. Judging relevance
Applying IFRS requires relevance judgements. For example
when:
 Judging relevance requires primarily determining which
alternative provides information that better enables primary
users to make their own projections of the reporting entity’s
future cash flows?
54

55. Judging relevance
Applying IFRS requires relevance judgements. For example
when:
 Judging relevance requires primarily determining which
alternative provides information that better enables primary
users to make their own projections of the reporting entity’s
future cash flows?
55

56. Judging relevance: example
Day 1: you pay $1,000,000 to construct a car
manufacturing plant in Country A (A).
Day 2: the market value of your plant quadruples when
vast quantities of oil are unexpectedly discovered in A
Day 3: your competitor builds a plant in A: cost =
$4,000,000.
56

57. Judging relevance
The cost of each car that you build is:
- $100 if you use the cost model; or
- $300 if you use the revaluation model.
The cost of your competitor’s cars = $300 each.
Cars sell at $250 each in A.
Question 1: for each car sold economically are you ‘making’
(1) $150 profit; or (2) $50 loss
Question 2: which model provides more relevant information?
(1) cost model; or (2) revaluation model
57

58. Comparability
What do you think?
 Which of the following measurements achieves greatest
comparability?
 Choose 1 of:
1) cash accounting (no accruals; no remeasurements);
2) historical cost accounting (no depreciation; no impairment);
3) cost-impairment accounting (no depreciation);
4) cost-depreciation-impairment accounting;
5) fair value accounting (without some assets, e.g. brands); or
6) fair value accounting (with all assets).
58

59. 59
Recognition
The concept: recognise element (eg asset) when
 probable that benefits will flow to/from the entity
 has cost or value that can measured reliably
(see ¶4.38)
The principle
 recognise elements (eg asset) when they satisfy the
definition and recognition criteria (see ¶ IAS1.28)
Applying the principle (see individual IFRSs)
What does probable mean?

60. 60
De recognition of assets
• 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 (i.e.
derecognition does not necessarily coincide with the loss of control of the
asset )
 IASB guided by objective, qualitative characteristics and
elements

61. Presentation and disclosure
 Presentation: financial statements portray financial effects of
transactions and events by:
 grouping into broad classes (the elements, egg asset)
 sub-classify elements (egg 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)
 do not offset assets & liabilities or income & expenses
 IASB guided by objective and qualitative characteristics
61

62. Underlying assumptions of financial
reporting:
 Going concern, and
 Accruals accounting
62

63. Common misunderstandings
The Framework does NOT… Clarification—the Framework
includes
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
63

64. Common misunderstandings
continued
Misunderstanding Clarification
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, egg allocate joint costs
and production overheads
PP&E, egg costs to
dismantle/restore site, useful life,
residual value, depreciation method
Provisions, egg uncertain timing and
amount of expected future cash
flows
64

65. Thank You

66. Questions and
Discussion