Introduction & ias framework

Introduction and the IAS
Framework
JOIN KHALID AZIZ
COACHING CLASSES
ICMAP STAGE 1,2,3,4,5
ICAP MODULE A,B,C,D
PIPFA
BBA & MBA
B.COM & M.COM
ACCOUNTING OF O/A LEVEL
MA-ECONOMICS
0322-3385752
KARACHI, PAKISTAN

 Introduction and the Framework
 The Canadian and U.S. experiences to
date
 Looking ahead
 Measurement model
 End-of-chapter practice

2

Introduction and the IAS
Framework

 A common set of global accounting
standards
 Conceptual framework for the
preparation and presentation of financial
statements
 GAAP hierarchy

3

A Common Set of Global
Accounting Standards
Do we need a common set of global accounting standards?

 Various GAAP have been developed in many countries due to
differences in the legal, regulatory, social, economic, and cultural
environments.
 Results in financial statements that are not comparable and
difficult for users to interpret

 This acts as a barrier for global capital movement

 Recently, there has been a movement toward harmonization and
convergence of GAAP
 most significant initiative being led by the International

4 Accounting Standards Board (IASB)

IASB:
 Reports to the IASC Foundation
 Structure: www.iasb.org
 12 full time and 2 part time members
 IFRIC assists the IASB through timely
identification, discussion and resolution of
issues
 Mandate – single set of high quality,
understandable, enforceable global standards
5  Transparent, comparable information

 The IASB works with national accounting standard
setters to move
toward global convergence
 To date, nearly 100 countries have
converged (require or allow IFRS) or are on the path to
convergence.

6

Political and Regulatory Issues
 One issue with convergence is enforcement
 In Canada, regulation takes place at the provincial and territorial level

 Once standard setting moves to a global arena, this fragmented regulatory environment will prove
to be a challenge

 With so many entities regulating the markets, is it possible to be consistent?
 In October 2005, IOSCO announced that it would create an IFRS database for regulators to
share decisions on the application of IFRS

 Is there or can there ever be total acceptance of IFRS?
 It may be required only for consolidated financials and for public companies
 National GAAPs are still in existence and are widely used

7

Can one set of standards meet the needs of all users?

 There is a concern that private companies would not benefit from using
IFRS

 Many operate in a local market and have more simplified business
models

 On the international front, there is a move to establishing more
simplistic standards for these entities

 Canada is also in the process of deciding what GAAP will be for these
non-publicly accountable enterprises

8

Principles orAccounting better?
rules—which are Standards

 IFRS is referred to as being principles based
 They are more loosely framed, allowing for professional judgement
to be applied
 Results in accounting that is more flexible to deal with unique
economic and business circumstances
 Some argue that allowing professional judgement introduces bias

 At the other end of the spectrum is a rules-based GAAP
model that is more prescriptive
 Provides a rule for every situation
 Body of knowledge too large and complicated
 Although more guidance is a comfort to some, it becomes difficult
9 to ensure that the standards are all consistent.

 In January 2008, the CEOs of the Big 6 accounting firms concluded that
the key elements of a principles-based accounting standard were as
follows:

10

CONCEPTUAL FRAMEWORK FOR THE
PREPARATION AND PRESENTATION OF
FINANCIAL STATEMENTS
 Purpose
 Formal status
 Users and objectives
 Qualitative characteristics
 Elements

11

What is the role of a conceptual framework?
 The conceptual framework sets out the concepts that underlie the
preparation of the financial statements

 The purpose of the framework is to:
(a) assist the IASC in the development of future International Accounting
Standards (IAS)
(b) assist the IASC Board in promoting harmonization of regulations
(c) assist national standard-setting bodies in developing national standards
(d) assist preparers of financial statements in applying IAS
(e) assist auditors in forming an opinion on whether financial statements conform
with IAS
(f) assist users in interpreting the information contained in financial statements
prepared according to IAS and
12 (g) provide those who are interested in the work of IASC with information about

What is the formal status of the conceptual framework?
 Not an IAS in and of itself and nothing in the framework overrides a specific
accounting standard

 IASB notes that there may be cases where the framework is in conflict with a
specific standard and, in these cases, the standard would override the
framework

 Where there is no specific standard, the framework should govern the
accounting

 Applies to the financial statements of all entities, whether public or private

 Currently the subject of a joint project between IASB and FASB
13


14

Users and Objectives
 According to the framework, users of financial statements include:
 Investors, employees, lenders, suppliers, creditors, customers, governments and
the public

 The overall objective of financial reporting is to produce financial statements that
present fairly the results of operations and the financial position

 The objective is articulated in the framework as follows:

-Financial statements are to provide information about the financial position,
performance and changes in financial position of an entity that is useful to a wide range
of users in making economic decisions

-Financial statements prepared for this purpose meet the common needs of most users

-Financial statements also show the results of the stewardship of management, or the
15 accountability of management for the resources entrusted to it

Qualitative Characteristics of Useful Information

Understandability:
 One benefit of a common set of quality accounting standards is that they
create less confusion and are more likely to be understood by users
internationally

Relevance:
 Relevant information must at least have the following characteristics:
1. Predictive value— many users use historic information to predict the
company’s future profits and cash flows. Although the past does not
necessarily allow users to predict the future, it does provide information
that can be used to assess the future potential of the entity

16 2. Confirmatory value— many users use the information to confirm their
prior expectations and to assess management performance

Relevance (continued):

 The concept of materiality is useful in that it defines the level of inclusion
of information

 As noted in the framework, information is material and useful if its
omission or misstatement could influence the economic decisions of
users

 Information might be material based solely on its nature or alternatively,
on its size or dollar value

 Currently the standard does not have a quantitative definition for what is
material and what is not

17  Often in the past, materiality has been defined as an item that is larger

Reliability:
 Information is considered reliable if it has the following characteristics:
1. Faithful representation—the objective of financial reporting is to
communicate information about the entity and its economic events and
transactions. In the proposed framework, this concept replaces reliability

2. Substance over form—this is often referred to as economic substance over
(legal) form. Accounting should reflect the substance of a transaction and
should look beyond the legal form

3. Neutrality—unbiased information is better information. Biased information is
of lesser quality since it is not objectively prepared

4. Prudence—this concept is similar to conservatism. Many uncertainties are
associated with information in the statements and prudence acts to ensure
that the assets and income are not overstated. In the proposed framework,
18 this concept disappears

Comparability:
 The main benefit of having one set of global standards is
comparability
 Use of the conceptual framework by all entities, whether they are
publicly accountable or not, would enhance this
 IFRS still allows a fair bit of choice in the various standards and the
IASB is trying to reduce the number of incidences where choices
are available

Balance/trade-offs:
 The proposed framework separates the qualitative characteristics
into two categories -“fundamental” and “enhancing”
 It is proposed that fundamental characteristics will include
relevance and representational faithfulness, while enhancing
19 characteristics will include comparable, verifiable, timely, and
understandable

Elements of Financial Statements
 Elements are recognized when probable and measurable with reliability

Assets: a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity

Liabilities: a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits. Liabilities may be legally
enforceable via a contract or law, but need not be

Equity: a residual interest in the assets of the entity after deducting all its
liabilities

20

Elements of Financial Statements (continued)

Income: increases in economic benefits that result in increases in equity
(other than those related to contributions from shareholders)
 Income includes both revenues (resulting from ordinary activities) and
gains
 Gains are not treated as a separate element since they may also arise
due to ordinary activities. Income may be realized or unrealized

Expenses: decreases in economic benefits that result in decreases in equity
(other than those related to distributions to shareholders)
 Expenses result from ordinary activities
 Similar to gains, losses may also result from ordinary activities so are not
treated as separate elements
 Expenses may be realized or not realized

21

GAAP Hierarchy
IAS 8 identifies the GAAP hierarchy as follows:

1. IFRS (including IFRS, IAS, IFRIC, and SIC) and
implementation guidance

2. If no standards exist, financial statement preparers
may look to similar situations and related issues that
are covered by IFRS and the conceptual framework
and

3. If there is no guidance, we may look to other
22 standard-setting bodies as long as they do not conflict

The Canadian Experience to Date
U.S. Influence
 Canadian GAAP began as a principles-based body of knowledge, while the U.S. model
has been predominantly rules-based

 Two things caused Canada to recently migrate toward the rules-based approach:
1. For the past several years, Canada has had a harmonization mandate with respect
to U.S. GAAP. The objective was to facilitate the flow of capital in the North
American marketplace
2. The Canadian Securities Administrators currently allow Canadian companies to use
U.S. GAAP if they are SEC reporting issuers

International Influence
 In January 2006, the AcSB announced that Canadian GAAP would converge with IFRS
for publicly accountable entities on or after January 1, 2011
 Many standards in the Handbook are already substantially converged with IFRS
 In 2011, the Canadian Handbook, will cease to exist for companies that are publicly
accountable and will be effectively replaced by IFRS

23

The Canadian Experience to Date
Timeline

 In addition, current GAAP regarding changes in accounting policy
requires that the impact of accounting standards that have been
24 issued but are not yet effective/applied be disclosed in the

The U.S. Experience to Date
The rise of principles-based standards?
 Historically, U.S. GAAP developed without much outside influence
and has been viewed as being a very robust model and gold star
standard

 The pressures to converge are mounting due to the recent and
not-so-recent abuses of the rules-based GAAP such as Enron and
WorldCom

IFRS for Foreign Filers
 Since the SEC has now allowed foreign filers to use IFRS without a
reconciliation to U.S. GAAP, the question arises as to why U.S.
companies are not able to follow IFRS
 The SEC has just published (September 08) a roadmap that
25 proposes to allow public companies to use IFRS starting in 2014

The U.S. Experience to Date
Convergence with IASB
 In terms of the convergence/harmonization mandate, the following steps
have been taken:
 The Norwalk Agreement (2002)
 Roadmap for convergence (2006)

Roadblocks in the Roadmap
 The fate of the codification project?
 Significant funds spent to date
 Additional disclosures and safe harbour rules
 IFRS requires more disclosures in the financial statements – will this
mean more risk of lawsuits for preparers and auditors?
 Any legal protection?
 Decreasing influence of U.S. constituents
 Funding for IASB – independence?

26

Looking Ahead
 The IASB is currently overhauling the framework with FASB

According to the proposed framework currently being finalized:

 The objective of general purpose financial reporting is to provide financial information
about the reporting entity that is useful to present and potential investors and
creditors in making decisions as capital providers
 The emphasis is on resource allocation (lending and investing) and assessment of
management stewardship
 With regards to the qualitative characteristics of useful financial information:
 Faithful representation is attained when the substance of an economic
phenomenon is depicted completely, accurately, and neutrally
 Conservatism/prudence will be excluded from the qualitative characteristics of
accounting information as they conflict with neutrality
 Reliability is now gone from the framework (absorbed into the concept of faithful
representation)

27

Looking Ahead
 The IASB and FASB have agreed on the following changes in
definitions. (these views have not yet been exposed in an Exposure
Draft)

 The following definitions have been proposed:
-An asset of an entity is a present economic resource to which,
through an enforceable right or other means, the entity has
access or can limit the access of others

-An economic resource is something scarce that has positive
economic value. It is capable of being used to carry out economic
activities, such as production and exchange

-A liability of an entity is a present economic obligation that is
28 enforceable against the entity. The framework will define a liability

End-of-Chapter Practice

30

Introduction & ias framework

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