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International Financial Reporting Standards - Structure, Framework and Provisions of IFRS


Contents -

1. Meaning and Structure of International Financial Reporting Standards (IFRS).
2. Framework of International Financial Reporting Standards (IFRS).
2. Various provisions of International Financial Reporting Standards (IFRS).
  • Meaning -
International financial reporting standards (IFRS) are standard, interpretations and the framework adopted by the International accounting standards board (IASB).
Many of the standards forming 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 1st April 200, 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 calling the new standards IFRS.

  • Structure of IFRS -
IFRS Applicability are considered a principles based set of standards in that they establish board rule as well as dictation specific treatments.
International financial reporting standards comprise :

1. International financial reporting standards (IFRS) - standards issued after 2001.

2. International accounting standard (IAS) - standard issued before 2001.

3. Interpretations originated from the international financial reporting, interpretation committee (IFRIC) - issued after 2001.

4. Standing interpretations committee (SIC) - issued before 2001.
There is also a framework for the preparation and presentation of financial statement which describe the principle underlying IFRS.
"In making the judgement described in paragraph 10 management shall refer to and consider the applicability of the following sources in descending order :
a) The requirements and guidance in standards and interpretation dealing with similar and related issues, and 
b) The definitions, "Recognition criteria and Measurement Concept for asset, liability, income and expenses in the framework."

  • Framework -
Need of IFRS, In the absence of a standard or an interpretation that specifically applies to a transaction, management must use it judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement IAS 8.11 requires management to consider the definition, recognition criteria and measurement Concept for asset, liabilities, income and expenses in the framework. This elevation of the importance of the framework was added in the 2003 revision to IAS.

1) Objective of Financial Statements :
A framework is the foundation of accounting standard. The framework state 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 public in general.

2) Underlying Assumptions -
The underlying assumption used in IFRS are :

a) Accrual Basis -
The effects of transactions and other events are recognised when they occur, not as cash in gained or paid.

b) Going Concern -
The financial statement are prepared on the basis that an entity will continue in operation for the foreseeable future.

c) Qualitative Characteristics of Financial Statements -
The framework describe the qualitative characteristics of financial statement as having :
Understandability, reliability, accountability, relevance, comparability, timeliness.

Provisions of International Financial Reporting Standards (IFRS) -

Guidelines and rules set by the International accounting standards board (IASB) that companies and organisations can follow when complaint financial statement. The creation of International standard allows investor, organisations and governments to compare the IFRS - supported financial statement with greater ease. Over 100 countries currently require aur permit companies to comply with IFRS standards. These standards were previously called the international accounting standard  Organisation in the United States are required to use the Generally Accepted Accounting Principles (GAAP).

1) Accounting Policy, Accounting Estimates and Errors -

A) Change in accounting policy :
a) IFRS required that an entity which has not applied a new IFRS that has been issued but not yet effective to disclose this fact and know or reasonably estimable information relevant to assessing the possible impact that application on the new IFRS will have on entity financial statement in the period of initial application.
b) IFRs permits a change in accounting policy if it is required by an IFRS. Voluntary change is permitted only if it result in information that is more reliable and relevant.

B) Applying Changes in Accounting Policies -
IFRS requires that when a change in accounting policy is applied retrospectively, The Entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and other comparative amounts disclosed for each prior period presented as if the accounting policy had always been applied.

C) Limitations on Retrospective Application -
IFRS provide that when it is impracticable to estimate either the periodic-specific effect or cumulative effect of the change the entity shall apply the change from the beginning of the earliest period for with which the retrospective application is practicable.

D) Change in Accounting Estimates -
Requirements in IFRS are the same as those in the Indian GAAP expect that to the extent that a change in the accounting estimate given rise to changes in asset and liabilities or relates to an items of equity, it shall be recognised by the adjusting the carrying amount of the related asset, liability or equity item in the period of the change.

E) Prior Period Error : Definition -
Prior period errors and omission from and misstatements in the entity financial statement for one or more prior period arising from the failure to use, or misuse, reliable information that :
a) Was available when financial statement of those period were authorised for issue, and
b) Could reasonably expect to have been obtained and taking into account in the preparation and presentation of those financial statement.

F) Accounting for Errors -
IFRS required that an entity should correct material prior period error retrospectively by restating the comparative amount of prior period presented in which the error occurred or if the error occurred before the earliest period presented, restating the opening balance of asset, liability and equity for the earliest prior period presented.

2) Presentation of Financial Statements -

A) Consistency and Presentation - 
In additional in Indian GAAP required IFRS required that when management is aware of material uncertainties related to investment and conditions that may cast significant doubt upon the entitys ability to continue as a going concern, The Entity should disclose those uncertainties.
An entity should retain the presentation and classification of the item in financial statements from one period to the next unless :
a) It is apparent following significant change in the nature of the entity operations or a review of the financial statement that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in IAS 8, or
b) IFRS required a change in presentation when the entity change the presentation and classification of the item in financial statement, The Entity should reclassify comparative amount unless reclassification is impracticable.

B) Current and Non-current Distinction -
Rigid classification of asset and liabilities between the current and non-current is required.

C) Comprehensive Income -
a) Change in equity during the year excluding change arising from transaction with shareholder, measures comprehensive income.
b) Thus Comprehensive income is the total of profit or loss for the period and other comprehensive income (item of income / gain and expenses / losses directly taken to equity under IFRS).

D) Sources of Estimation - Uncertainty -
An entity should disclose information about the exemption it is make about the future and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risks of resulting in a material adjustment to the carrying amount of asset and liabilities within the next reporting period.

E) Capital -
An entity should disclose information that enables users of its financial statement to evaluate the entity objective, policies and processes for managing capital.
An entity discourses :
a) Qualitative information about its objective, policies and processes for the managing capital. and 
b) Summary of quantitative data about what it manages as capital.

3. Property, Plant and Equipment -

A) Component Accounting -
a) Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item should be depreciated separately.
b) Parts having same useful lives and same depreciation method may be grouped together.
c) Parts that are replaced during the useful life of the items should be derecognised as per the derecognition provision.
When a major inspection in performed, it's cost is recognised in the carrying amount of the property, plant and equipment as replacement in the recognition criteria are satisfied.

B) Subsequent Expenses -
Principles for initial recognition are to be applied. There is no second recognition principle.

C) Measurement Cost -
a) The cost of an item of PPE is the cash prize equivalent at the recognised data.
b) In a exchange transaction, expect in rare situation the cost it measured at the fair value of the item.

D) Cost of Dismantling and Removing the Item and Restoration of Site -
a) Elements of costs include the initial cost of dismantling and removing the item and restoring the site on which it is located.
b) IAS 37 requires an entity to consider the time value of money, if its Impact is material in estimating provision.

E) Measurement After Initial Recognition -
a) An entity has a choice to use either the cost model or the revaluation model.
b) Cost model may be used for some classes of assets while for other revaluation model may be used.
c) When revaluation model is used the carrying amount should not deviate maternally from the current value at the balance sheet date.

F) Useful Life, Residual Value and Depreciation Method -
a) Useful life, residual value and depreciation method should be reviewed at least at the end of each financial year.
b) Change in depreciation method is a change in accounting estimate.

G) Comprehensive for Impairments -
Compensation from third party for the item of PPE that were impaired, lost or giving a should be included in profit or loss when the composition become the receivable.

4) Intangible Assets -

a) Intangible asset with the indefinite useful life should not be amortised. They should be tested for impairment at least annually.
b) Intangible asset with the finite useful life should be amortised over their useful life. There is no rebuttable presumption as to the useful life.

5) Investment Property -

A) Investment Property Held by a Lessee Under an Operating Lease -
a) An entity  has the option to recognise an item held under an  operating lease as an investment property, provided it measures  investment properties  at fair value. 
b) If it recognises  the item as investment property, it should account for the lease as 'finance lease'. 

B) Measurement Principle -
a) An entity has a choice to use either the cost model (as stipulated in AS10)  or the fair value model .A choice is to be applied to all investment properties. 
b)  If  an entity uses the fair value model,  the change in the fair value should be recognised in profit or loss. 

6) Provisions, Contingent Liabilities and Contingent Assets: 

A) Constructive Obligation -
A constructive  obligations is an  obligation that derives from the entity's  action where:
a)  By an established pattern of past practice, published policies or a  sufficiently specific current statement,  The Entity has indicated to other parties that it will be accept certain  responsibility; and 
b) as a result, The Entity has created a valid expectation on the part of other parties that it will be discharge   those responsibilities. An entity should recognise a constructive obligation if it  meets the recognition criteria, which could  fall under 'policyholder' Reasonable Expectations. 

B) Measurement : Time Value of Money -
Where the time value of money is materials, the amount of the provision shall be the present value of the expenditure expected to be required to settle the obligation.

7. Financial Instruments -

A) Initial recognition -
When a financial asset or financial liability is recognised initially, an entity should measure it at fair value in case of financial asset and financial liability not measured at the fair value through profit and loss transaction cost should be added to the fair value for initial measurement.

B) Subsequent Measurement : Unlisted and other than actively treated Equity Securities and Derivative Instruments -
a) Measure at cost only if the fair value cannot be measured reliably, if the fair value can be measured reliably the instrument should be measured at fair value test for impairment.
b) Fair value can be measured reliably.
c) Normally it is possible to estimate the fair value of the financial asset that an entity has acquired from the outside party.

C) Subsequent Measurement : Loans and Advances -
At amortised cost using effective interest rate method to be tested for impairment.

D) Derecognition of Financial Assets -
a) If risks and rewards of ownership are transferred substantially to the counter party, the asset of part of the asset should be derecognized.
b) If risks and rewards of ownership are retained substantially, the asset of part of the asset should continue to be recognised.
c) If the entire neither transfer nor retains substantially all the risks and rewards of ownership of the financial asset has retained control it should continue to recognise the financial asset to the extent of its continuing involvement to recognise the financial asset to the extent of its continuing involvement with the assets.

E) Hedge Accounting -
Special accounting if hedge effectiveness established.

F) Classification of Financial Asset -
a) Financial asset at fair value through profit or loss.
b) Held to maturity investments.
c) Loans and receivables.
d) Available for sale financial asset.

G) Reclassification -
a) An entity should not reclassify as financial instrument into or out of the fair value through profit or loss category while it is held or issued.
b) If as a result of change in intention or ability it is no longer appropriate to classify an investment as held to maturity it should be reclassified as available for sale and re-measured at fair value.

H) Subsequent Measurement : Debt -
a) If classified as held maturity -
Amortised cost using effective interest method.

b) If classified as held for sale -
Fair value change in fair value is to be taken to equity, on se accumulated gain or loss is to be transferred to profit or loss to be tested for impairment.

c) If classified as fair value through profit or loss -
Fair value change in fair value is to be taken to profit or loss.

8) Other Provisions -

A) Leases -
There is no major difference between the principal stipulate in Indian GAAP and those stipulated in IFRS although there is an important practical different.
Lease of land excluded from the scope of AS -19 whereas IAS 17 is applicable to lease of land. Although there are some differences in methods stipulated in AS 19 and stipulated in IAS 17, in most situations, the result from the application of both the method are expected to be the same.

B) Impairment of Assets -
There is no major difference between the principal stipulated in Indian GAAP and those stipulated in IFRS. Although there are some differences in methods stipulated in AS 19 and those stipulated in IAS 17, in most situations, the result from application of both methods are expected to be the same. However additional guidance is available in IAS 36.

C) Valuation of Inventories -
There is no major difference between the principal stipulated in Indian GAAP and those stipulated in IFRS. 

D) Revenue Recognition and Construction Contracts -
There is no major difference between the principal stipulated in Indian GAAP and those stipulated in IFRS. 

E) Government Grants -
There is no major difference between the principal stipulated in Indian GAAP and those stipulated in IFRS, expect that the IFRS does not permit recognised of the non monetary government grants at nominal value. IFRS requires that non monetary grants and corresponding assets should be recognised at fair value.

F) Employee Benefits -
There is no major difference between the principal stipulated in Indian GAAP and those stipulated in IFRS, expect that IFRS provide a choice to entities to the use the corridor approach for the recognising actuarial gains and losses.

G) Income Tax -
AS - 22 has adopted the income statement approach. IFRS has adopted the balance sheet approach. However in the most situation the result obtained by applying the principales stipulated in IFRS will be the same as those obtained by applying principles stipulated in the Indian GAAP.

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