International Financial Reporting Standards (IFRS) Key Concepts
1. Current Assets
Current assets are assets that are expected to be realized within 12 months after the balance sheet date, or are cash or cash equivalents whose use is not restricted. These assets are held for sale or consumption during the normal operating cycle of the business. All other assets should be classified as non-current.
2. Control Under IFRS
Under IFRS, a company is considered to have control over another entity when it has the power to govern the financial and operating policies of that entity to obtain benefits from its activities. This can be achieved through:
- Power to control more than half the voting rights
- Power to govern the financial and operating policies by statute or agreement
- Power to appoint or remove a majority of the board of directors
- Power to cast the majority of votes at board meetings
3. The Framework’s Basic Postulates
The IFRS Framework outlines two basic postulates:
- The accrual basis of accounting
- The going concern assumption
4. Accounting Policies
Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
5. Fair Value
Fair value is 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.
6. Users of Financial Statements
Users of financial statements include:
- Present and potential investors
- Employees
- Financiers
- Suppliers and other trade creditors
- Customers
- Government agencies
- The general public
7. Impairment
Impairment occurs when the carrying amount of an asset exceeds its recoverable amount. Indicators of impairment include a significant decline in market value, adverse changes in technology or the market, and an increase in market interest rates. Internal indicators include damage, obsolescence, plans to discontinue use or restructure, and poor economic performance. An impairment test is performed to determine if an asset is impaired.
8. Income and Expenses
Income: Gains represent other items that meet the definition of income and may or may not arise from ordinary activities. Gains are increases in economic benefits and are not considered a separate element in the Framework.
Expenses: Losses represent other items that meet the definition of expenses and may or may not arise from ordinary activities. Losses are decreases in economic benefits and are not considered a separate element in the Framework.
9. Joint Venture
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. It is characterized by:
- A contract between the parties
- Minutes of discussions between the parties
- Operation incorporated in legal articles
- Establishment in written form
- Joint control without the possibility of unilateral control
10. Accrual Basis of Accounting
Under the accrual basis of accounting, the effects of transactions and other events are recognized when they occur, regardless of when cash is received or paid. They are recorded in the accounting records and reported in the financial statements of the periods to which they relate.
11. Inventory Costs under IAS 2
According to IAS 2, inventory costs include:
- Purchase price
- Taxes (non-recoverable)
12. Recognition of Intangible Assets
An intangible asset can be recognized when:
- It is separable
- It is non-monetary
- It is without physical substance
- There are probable future economic benefits
- The entity has control over the asset
13. Origin of Intangible Assets
Intangible assets may arise from:
- Business combinations
- Purchases from third parties
- Internal generation
14. Agricultural Activity
Agricultural activity involves the management of the biological transformation of biological assets for sale or for conversion into agricultural produce or into additional biological assets. Examples of agricultural produce include:
- Fruits harvested from biological assets
- Wool
- Milk
- Logs
15. Recognition of Government Grants
Government grants can only be recognized when there is reasonable assurance that:
- The entity will comply with the conditions attached to the grant
- The grant will be received
16. Research and Development
Research: Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
Development: The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use.
Expenditures on research are expensed as incurred.
17. Significant Influence
Significant influence is the power to participate in the financial and operating policy decisions of an entity, but not control those policies.
18. Biological Assets
Biological assets are living animals or plants. They are capable of biological transformation and can be used to produce agricultural products or additional biological assets.
19. Factors Affecting Intangible Assets
Two factors affecting intangible assets are:
- Finite useful life: Intangible assets with a finite useful life are amortized and tested for impairment.
- Indefinite useful life: Intangible assets with an indefinite useful life are not amortized but are tested for impairment annually.
Retirement and disposal of intangible assets occur when:
- The asset is disposed of
- No future economic benefits are expected from its use or disposal
20. Amortization of Intangible Assets
Intangible assets with a finite useful life are amortized over their useful life. Intangible assets with an indefinite useful life are not amortized but are tested for impairment annually. The main difference is that assets with a finite life are systematically allocated over their useful life, while assets with an indefinite life are not.