IFRS For Dummies

Steven Collings

• Publisher: For Dummies
• Year: 2012
• ISBN:
  9781119966531
• Edition: 1
• Topic: Business
• Subtopic: Accounting Standards
• Index: Business

The easy way to get a grip on International Reporting Standards

IFRS For Dummies is your complete introduction to IFRS and international accounting and balancing standards. Combining all the facts needed to understand this complex subject with useful examples, this easy-to-read guide will have you on top of IFRS in no time.

In plain English, it helps you make sense of IFRS and your understanding of: what they are and where they apply; how to adopt IFRS for the first time; how IFRS affects the key components of your financial statements; how to disclose information in financial statements; and much more.

• Covers what to do if you're applying IFRS for the first time
• Explains complicated material in plain English
• Helps you make sense of this principles-based set of standards that establish broad rules for financial reporting

If you're an accountant, student, or trainee in need of accessible information on IFRS, this hands-on, friendly guide has you covered.

Part I

Concepts and Basic Standards

In this part . . .

Financial reporting has become increasingly complicated over the years. Many trainee and professional accountants find the sheer size of the accounting standards, as well as trying to figure out just exactly what the standards want you to do, problematic.

In this part, I introduce you to the conceptual framework and examine some of the more basic standards. Understanding how and why the standards are created is crucial in actually understanding the world of financial reporting. I start with the basics, introducing you to the standard-setting process, and then move on to how a company develops its accounting policies and how a first-time adopter of IFRS deals with the switchover from domestic accounting standards to IFRS.

Chapter 1

Introducing IFRS

In This Chapter

Seeing how standards are set, and amended

Rolling out IFRS globally

Presenting IFRS financial statements

Many organisations use International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) in preparing their general purpose financial statements – the year-/period-end statements prepared for users: shareholders and external stakeholders like employees, tax authorities, banks and financiers. The IFRS and IAS tell accountants and other preparers of financial statements how to account for transactions and events, and what to disclose, within the accounts.

Over recent years, the IFRS have become more and more prevalent throughout the world, but a frequently asked question is why? Well, many countries like the idea of being able to produce financial information comparable to that of other companies that report under IFRS – for example, comparing against other companies in the same industry but in a different country. Think from a potential investor’s point of view: if you’re planning to pump money into a company, you need to see clear and comparable financial information. And because IFRS is now gathering pace all around the world, you can compare financial information far more easily now than, say, 20 years ago.

In this chapter, I move beyond telling you what standards are to helping you understand what they do. To start, I explain how the standards are created and amended, and then I take a look at the scope of IFRS worldwide. Finally, I introduce you to the important financial statements that you must present to conform with IFRS: the statement of financial position, statement of comprehensive income and the statement of changes in equity. By the end of this chapter, you’ve a good grounding in IFRS.

Creating and Amending the Standards

The standards don’t create themselves – someone has to produce them – and this unenviable job belongs to the International Accounting Standards Board (IASB). The Board began work in 2001 and took over from the International Accounting Standards Committee (IASC), which was originally set up in 1973. The IASB doesn’t have the authority to impose its standards on any country – this decision is left to the various countries themselves. A major breakthrough came in 2002 when the European Union (EU) adopted legislation that requires listed companies in Europe to apply IFRS in their consolidated financial statements and this applied to more than 7,000 companies in 28 countries.

When the IASB sets the accounting standards, it has a clear objective in mind: that companies reporting under IFRS and IAS produce general purpose financial statements that are of a high quality, clear and transparent nature and allow the financial statements to be comparable. The objective is that the user (the shareholder or the external stakeholder) can make rational decisions about the company based on the information contained in the financial statements. The IASB also promotes the IFRS and IAS globally with the aim that eventually all countries report under the standards. The Board works with other national standard-setters (for example, the US Financial Accounting Standards Board) to converge national accounting standards to IFRS.

The following sections take you through the IASB’s Conceptual Framework, and how it sets and amends standards.

Understanding the Framework

When the IASB develops or changes an accounting standard, it does so with reference to their Conceptual Framework for Financial Reporting. The Conceptual Framework considers the theoretical and conceptual issues that surround financial reporting and its objective is to form a coherent and consistent basis upon which accounting standards are developed.

The differences between IFRS and IAS

A common question I hear is, ‘Why are there IFRS and IAS?’ When the IASB had its first meeting, it took on all the IASC’s standards (which were all IAS). The IASB amended quite a lot of the standards, but also issued new standards, known as IFRS. The abbreviation IFRS has become a generic term to refer to all the standards (for example, when you hear people say ‘the company reports under IFRS’ what they mean is that they adopt all the IFRS and IAS in preparing their financial statements). Throughout this book, I refer to IFRS and IAS for consistency and simplicity.

Knowing who does what at the IASB

The structure of international financial reporting isn’t exactly straightforward. You don’t just find one senior person at the head of the IASB directing a load of accounting standard writers/editors underneath. Instead, you find a fairly complicated structure consisting of:

Advisory Committee (appointed by the IASC Foundation, advises on activities of the IASB)

Director of operations and non-technical staff (report to the IASC Foundation)

Director of technical activities and technical staff (report to the IASB and ...