Understanding International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) are Standards, Interpretations, and the Framework for the Preparation and Presentation of Financial Statements (in the absence of a Standard or an Interpretation) adopted by the International Accounting Standards Board (IASB).
Many of the Standards that form part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1st, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting, the new Board adopted existing IAS and SICs. The IASB has continued to develop Standards, called the new Standards IFRS.
Structure of IFRS
IFRS are considered a “principles-based” set of Standards in that they establish broad rules as well as dictating specific treatments.
International Financial Reporting Standards comprise:
- International Financial Reporting Standards (IFRS) – Standards issued after 2001
- International Accounting Standards (IAS) – Standards issued before 2001
- Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC) – issued after 2001
- Standing Interpretations Committee (SIC) – issued before 2001
There is also a Framework for the Preparation and Presentation of Financial Statements.
Role of Framework
The Framework for the Preparation and Presentation of Financial Statements states basic principles for IFRS. A framework is the foundation of accounting Standards. The framework states that the objective of financial Statements is to provide information about the financial position, performance, and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions, and to provide the current financial status of the entity to its shareholders and the public in general.
Underlying Assumptions
The underlying assumptions used in IFRS are:
- Accrual basis – the effect of transactions and other events are recognized when they occur, not as cash is gained or paid.
- Going concern – the financial Statements are prepared on the basis that an entity will continue in operation for the foreseeable future.
Qualitative Characteristics of Financial Statements
The Framework describes the qualitative characteristics of financial statements as having:
- Understandability
- Relevance
- Reliability
- Comparability
- Accountability
- Timeliness
Elements of Financial Statements
The financial position of an enterprise is primarily provided in a balance sheet. The elements of a balance sheet or the elements that measure the financial position are as follows:
- Asset: An asset is a resource controlled by the enterprise as a result of past events, and from which future economic benefits are expected to flow to the enterprise.
- Liability: A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise’s resources, in other words, assets.
- Equity: Equity is the residual interest in the assets of the enterprise after deducting all the liabilities. Equity is also known as owner’s equity.
The financial performance of an enterprise is primarily provided in an income statement or profit and loss account. The elements of an income statement or the elements that measure the financial performance are as follows:
- Revenues: Increases in economic benefit during an accounting period in the form of inflows or enhancements of assets, or decrease of liabilities that result in increases in equity. However, it does not include the contributions made by the equity participants, that is, proprietor, partners, and shareholders.
- Expenses: Decreases in economic benefits during an accounting period in the form of outflows, or depletions of assets or incurrences of liabilities that result in decreases in equity.
Recognition of Elements of Financial Statements
An item is recognized in the financial statements when:
- it is probable that a future economic benefit flows to or from an entity.
- the item has a cost or value that can be measured with reliability.
- it has financial stability.