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
  • Standing Interpretations Committee (SIC)— issued before 2001
  • Conceptual Framework for Financial Reporting (2010)

IAS 8 Par. 11

“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 Interpretations dealing with similar and related issues; and

(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.”

Framework

The Framework for the Preparation and Presentation of Financial Statements states basic principles for IFRS. (The framework provided in this link is a version issued by Australia, and is partly out-of-date.)

The IASB and FASB Frameworks are in the process of being updated and converged. The Joint Conceptual Framework project aims to update and refine the existing concepts to reflect the changes in markets, business practices and the economic environment that have occurred in the two or more decades since the concepts were first developed.

Role of framework

Deloitte states:

In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its 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 definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8.[2]

Objective of financial statements

A financial statement should reflect true and fair view of the business affairs of the organization. As these statements are used by various constituents of the society / regulators, they need to reflect true view of the financial position of the organization. and it is very helpful to check the financial position of the business for a specific period.

IFRS authorize three basic accounting models:

I. Current Cost Accounting, under Physical Capital Maintenance at all levels of inflation and deflation under the Historical Cost paradigm as well as the Capital Maintenance in Units of Constant Purchasing Power paradigm. (See the Conceptual Framework, Par. 4.59 (b).)

II. Financial capital maintenance in nominal monetary units, i.e., globally implemented Historical cost accounting during low inflation and deflation only under the traditional Historical Cost paradigm.(See the original Framework (1989), Par 104 (a))[now Conceptual Framework (2010), Par. 4.59 (a)].

III. Financial capital maintenance in units of constant purchasing power, i.e., Constant Item Purchasing Power Accounting – CIPPA – in terms of a Daily Consumer Price Index or daily rate at all levels of inflation and deflation (see the original Framework (1989), Par 104 (a)) [now Conceptual Framework (2010), Par. 4.59 (a)] under the Capital Maintenance in Units of Constant Purchasing Power paradigm and Constant Purchasing Power Accounting – CPPA – (see IAS 29) during hyperinflation under the Historical Cost paradigm.

The following are the three underlying assumptions in IFRS:

  • 1. Going concern: an entity will continue for the foreseeable future under the Historical Cost paradigm as well as under the Capital Maintenance in Units of Constant Purchasing Power paradigm. (See Conceptual Framework, Par. 4.1)
  • 2. Stable measuring unit assumption: financial capital maintenance in nominal monetary units or traditional Historical cost accounting only under the traditional Historical Cost paradigm; i.e., accountants consider changes in the purchasing power of the functional currency up to but excluding 26% per annum for three years in a row (which would be 100% cumulative inflation over three years or hyperinflation as defined in IAS 29) as immaterial or not sufficiently important for them to choose Capital Maintenance in units of constant purchasing power in terms of a Daily Consumer Price Index or daily rate Constant Item Purchasing Power Accounting at all levels of inflation and deflation as authorized in IFRS in the original Framework(1989), Par 104 (a) [now Conceptual Framework (2010), Par. 4.59 (a)].

Accountants implementing the stable measuring unit assumption (traditional Historical Cost Accounting) during annual inflation of 25% for 3 years in a row would erode 100% of the real value of all constant real value non-monetary items not maintained constant under the Historical Cost paradigm.

  • 3. Units of constant purchasing power: capital maintenance in units of constant purchasing power at all levels of inflation and deflation in terms of a Daily Consumer Price Index or daily rate (Constant Item Purchasing Power Accounting) only under the Capital Maintenance in Units of Constant Purchasing Power paradigm; i.e. the total rejection of the stable measuring unit assumption at all levels of inflation and deflation. See The Framework (1989), Paragraph 104 (a) [now Conceptual Framework (2010), Par. 4.59 (a)]. Capital maintenance in units of constant purchasing power under Constant Item Purchasing Power Accounting in terms of a Daily Consumer Price Index or daily rate of all constant real value non-monetary items in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus – remedies for an indefinite period of time the erosion caused by Historical Cost Accounting of the real values of constant real value non-monetary items never maintained constant as a result of the implementation of the stable measuring unit assumption at all levels of inflation and deflation under HCA.

It is not inflation doing the eroding. Inflation and deflation have no effect on the real value of non-monetary items.[3] It is the implementation of the stable measuring unit assumption, i.e., traditional HCA which erodes the real value of constant real value non-monetary items never maintained constant in a double entry basic accounting model.

Constant real value non-monetary items are non-monetary items with constant real values over time whose values within an entity are not generally determined in a market on a daily basis.

Examples include borrowing costs, comprehensive income, interest paid, interest received, bank charges, royalties, fees, short term employee benefits, pensions, salaries, wages, rentals, all other income statement items, issued share capital, share premium accounts, share discount accounts, retained earnings, retained losses, capital reserves, revaluation surpluses, all accounted profits and losses, all other items in shareholders´ equity, trade debtors, trade creditors, dividends payable, dividends receivable, deferred tax assets, deferred tax liabilities, all taxes payable, all taxes receivable, all other non-monetary payables, all other non-monetary receivables, provisions, etc.

All constant real value non-monetary items are always and everywhere measured in units of constant purchasing power at all levels of inflation and deflation under CIPPA in terms of a Daily CPI or daily rate under the Capital Maintenance in Units of Constant Purchasing Power paradigm. The constant item gain or loss is calculated when current period constant items are not measured in units of constant purchasing power.

Monetary items are units of money held and items with an underlying monetary nature which are substitutes for units of money held.

Examples of units of money held are bank notes and coins of the fiat currency created within an economy by means of fractional reserve banking. Examples of items with an underlying monetary nature which are substitutes of money held include the capital amount of: bank loans, bank savings, credit card loans, car loans, home loans, student loans, consumer loans, commercial and government bonds, Treasury Bills, all capital and money market investments, notes payable, notes receivable, etc. when these items are not in the form of money held.

Historic and current period monetary items are required to be inflation-adjusted on a daily basis in terms of a daily index or rate under the Capital Maintenance in Units of Constant Purchasing Power paradigm. The net monetary loss or gain as defined in IAS 29 is required to be calculated and accounted when they are not inflation-adjusted on a daily basis during the current financial period. Inflation-adjusting the total money supply (excluding bank notes and coins of the fiat functional currency created by means of fractional reserve banking within an economy) in terms of a daily index or rate under complete co-ordination would result in zero cost of inflation (not zero inflation) in only the entire money supply (as qualified) in an economy.

Variable real value non-monetary items are non-monetary items with variable real values over time. Examples include quoted and unquoted shares, property, plant, equipment, inventory, intellectual property, goodwill, foreign exchange, finished goods, raw material, etc.

Current period variable real value non-monetary items are required to be measured on a daily basis in terms of IFRS excluding the stable measuring unit assumption and the cost model in the valuation of property, plant, equipment and investment property after recognition under the Capital Maintenance in Units of Constant Purchasing Power paradigm. When they are not valued on a daily basis, then they as well as historic variable real value non-monetary items are required to be updated daily in terms of a daily rate as indicated above. Current period impairment losses in variable real value non-monetary items are required to be treated in terms of IFRS. They are constant real value non-monetary items once they are accounted. All accounted losses and profits are constant real value non-monetary items.

Under the Capital Maintenance in Units of Constant Purchasing Power paradigm daily measurement is required of all items in terms of

(a) a Daily Consumer Price Index or monetized daily indexed unit of account, e.g. the Unidad de Fomento in Chile, during low inflation, high inflation and deflation and

(b) in terms of a relatively stable foreign currency parallel rate (normally the US Dollar daily parallel rate) or a Brazilian-style Unidade Real de Valor daily index during hyperinflation. Hyperinflation is defined in IAS 29 as cumulative inflation being equal to or approaching 100 per cent over three years, i.e. 26 per cent annual inflation for three years in a row.

Qualitative characteristics of financial statements

Qualitative characteristics of financial statements include:

  • Relevance (Materiality)
  • Faithful representation

Enhancing qualitative characteristics include:

  • Comparability
  • Verifiability
  • Timeliness
  • Understandability

Elements of financial statements (IAS 1 article 10)

  • The financial position of an enterprise is primarily provided in the Statement of Financial Position. The elements include:
    • Asset: An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.
    • Liability: A liability is a present obligation of the enterprise arising from the past events, the settlement of which is expected to result in an outflow from the enterprise’ resources, i.e., assets.
    • Equity: Equity is the residual interest in the assets of the enterprise after deducting all the liabilities under the Historical Cost Accounting model. Equity is also known as owner’s equity. Under the units of constant purchasing power model equity is the constant real value of shareholders´ equity.
  • The financial performance of an enterprise is primarily provided in the Statement of Comprehensive Income(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, i.e., 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.
Revenues and expenses are measured in nominal monetary units under the Historical Cost Accounting model and inunits of constant purchasing power (inflation-adjusted) under the Units of Constant Purchasing Power model.

Recognition of elements of financial statements

An item is recognized in the financial statements when:

  • it is probable future economic benefit will flow to or from an entity.
  • the resource can be reliably measured – otherwise the stable measuring unit assumption is applied under the Historical Cost Accounting model: i.e. it is assumed that the monetary unit of account (the functional currency) is perfectly stable (zero inflation or deflation); it is simply assumed that there is no inflation or deflation ever, and items are stated at their original nominal Historical Cost from any prior date: 1 month, 1 year, 10 or 100 or 200 or more years before; i.e. the stable measuring unit assumption is applied to items such as issued share capital, retained earnings, capital reserves, all other items in shareholders´ equity, all items in the Statement of Comprehensive Income (except salaries, wages, rentals, etc., which are inflation-adjusted annually), etc.

Under the Units of Constant Purchasing Power model, all constant real value non-monetary items are inflation-adjusted during low inflation and deflation; i.e. all items in the Statement of Comprehensive Income, all items in shareholders´ equity, Accounts Receivables, Accounts Payables, all non-monetary payables, all non-monetary receivables, provisions, etc.

Measurement of the elements of financial statements

Par. 99. Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement.

Par. 100. A number of different measurement bases are employed to different degrees and in varying combinations in financial statements. They include the following:

(a) Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.

(b) Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.

(c) Realisable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

Par. 101. The measurement basis most commonly adopted by entities in preparing their financial statements is historical cost. This is usually combined with other measurement bases. For example, inventories are usually carried at the lower of cost and net realisable value, marketable securities may be carried at market value and pension liabilities are carried at their present value. Furthermore, some entities use the current cost basis as a response to the inability of the historical cost accounting model to deal with the effects of changing prices of non-monetary assets.

Concepts of capital and capital maintenance

A major difference between US GAAP and IFRS is the fact that three fundamentally different concepts of capital and capital maintenance are authorized in IFRS while US GAAP only authorize two capital and capital maintenance concepts during low inflation and deflation: (1) physical capital maintenance and (2) financial capital maintenance in nominal monetary units (traditional Historical Cost Accounting) as stated in Par 45 to 48 in the FASB Conceptual Satement Nº 5. US GAAP does not recognize the third concept of capital and capital maintenance during low inflation and deflation, namely, financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) in 1989.

Concepts of capital

Par. 102. A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.

Par. 103. The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements. Thus, a financial concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital. If, however, the main concern of users is with the operating capability of the entity, a physical concept of capital should be used. The concept chosen indicates the goal to be attained in determining profit, even though there may be some measurement difficulties in making the concept operational.

Concepts of capital maintenance and the determination of profit

Par. 104. The concepts of capital in paragraph 102 give rise to the following two concepts of capital maintenance:

(a) Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.

(b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

The concepts of capital in paragraph 102 give rise to the following three concepts of capital during low inflation and deflation:

  • (A) Physical capital. See paragraph 102&103
  • (B) Nominal financial capital. See paragraph 104.[4]
  • (C) Constant purchasing power financial capital. See paragraph 104.[5]

The concepts of capital in paragraph 102 give rise to the following three concepts of capital maintenance during low inflation and deflation:

  • (1) Physical capital maintenance: optional during low inflation and deflation. Current Cost Accounting model prescribed by IFRS. See Par 106.
  • (2) Financial capital maintenance in nominal monetary units (Historical cost accounting): authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104 (a) Historical cost accounting. Financial capital maintenance in nominal monetary units per se during inflation and deflation is a fallacy: it is impossible to maintain the real value of financial capital constant with measurement in nominal monetary units per se during inflation and deflation.
  • (3) Financial capital maintenance in units of constant purchasing power (Constant Item Purchasing Power Accounting): authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104(a). IAS 29 is prescribed [6] during hyperinflation: i.e. the restatement of Historical Cost or Current Cost period-end financial statements in terms of the period-end monthly published Consumer Price Index.[7] Only financial capital maintenance in units of constant purchasing power (CIPPA) per se can automatically maintain the real value of financial capital constant at all levels of inflation and deflation in all entities that at least break even in real value—ceteris paribus—for an indefinite period of time. This would happen whether these entities own revaluable fixed assets or not and without the requirement of more capital or additional retained profits to simply maintain the existing constant real value of existing shareholders´ equity constant. Financial capital maintenance in units of constant purchasing power requires the calculation and accounting of net monetary losses and gains from holding monetary items during low inflation and deflation. The calculation and accounting of net monetary losses and gains during low inflation and deflation have thus been authorized in IFRS since 1989.

Par. 105. The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured; it is a prerequisite for distinguishing between an entity’s return on capital and its return of capital; only inflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Hence, profit is the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses exceed income the residual amount is a loss.

Par. 106. The physical capital maintenance concept requires the adoption of the current cost basis of measurement. The financial capital maintenance concept, however, does not require the use of a particular basis of measurement. Selection of the basis under this concept is dependent on the type of financial capital that the entity is seeking to maintain.

Par. 107. The principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity. In general terms, an entity has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit.

Par. 108. Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. They may not be recognised as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity.

Par. 109. Under the concept of physical capital maintenance when capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. All price changes affecting the assets and liabilities of the entity are viewed as changes in the measurement of the physical productive capacity of the entity; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit.

Par. 110. The selection of the measurement bases and concept of capital maintenance will determine the accounting model used in the preparation of the financial statements. Different accounting models exhibit different degrees of relevance and reliability and, as in other areas, management must seek a balance between relevance and reliability. This Framework is applicable to a range of accounting models and provides guidance on preparing and presenting the financial statements constructed under the chosen model. At the present time, it is not the intention of the Board of IASC to prescribe a particular model other than in exceptional circumstances, such as for those entities reporting in the currency of a hyperinflationary economy. This intention will, however, be reviewed in the light of world developments.[8]

Requirements of IFRS

See Requirements of IFRS. IFRS financial statements consist of (IAS1.8)

Comparative information is required for the prior reporting period (IAS 1.36). An entity preparing IFRS accounts for the first time must apply IFRS in full for the current and comparative period although there are transitional exemptions (IFRS1.7).

On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements. The main changes from the previous version are to require that an entity must:

  • present all non-owner changes in equity (that is, ‘comprehensive income’ ) either in one Statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the Statement of changes in equity.
  • present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies the new standard.
  • present a statement of cash flow.
  • make necessary disclosure by the way of a note.

The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is permitted.

IASB current projects

Much of its work is LEAD TO convergence with US GAAP.

Adoption of IFRS

IFRS are used in many parts of the world, including the European Union, India, Hong Kong, Australia, Malaysia,Pakistan, GCC countries, Russia, South Africa, Singapore and Turkey. As of August 2008, more than 113 countries around the world, including all of Europe, currently require or permit IFRS reporting and 85 require IFRS reporting for all domestic, listed companies, according to the U.S. Securities and Exchange Commission.[10]

It is generally expected that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by reducing the costs of comparing alternative investments and increasing the quality of information.[11]Companies are also expected to benefit, as investors will be more willing to provide financing.[11] Companies that have high levels of international activities are among the group that would benefit from a switch to IFRS. Companies that are involved in foreign activities and investing benefit from the switch due to the increased comparability of a set accounting standard.[12] However, Ray J. Ball has expressed some skepticism of the overall cost of the international standard; he argues that the enforcement of the standards could be lax, and the regional differences in accounting could become obscured behind a label. He also expressed concerns about the fair value emphasis of IFRS and the influence of accountants from non-common-law regions, where losses have been recognized in a less timely manner.[11]

For a current overview see PwC’s map of countries that apply IFRS.

Australia

The Australian Accounting Standards Board (AASB) has issued ‘Australian equivalents to IFRS’ (A-IFRS), numbering IFRS standards as AASB 1–8 and IAS standards as AASB 101–141. Australian equivalents to SIC and IFRIC Interpretations have also been issued, along with a number of ‘domestic’ standards and interpretations. These pronouncements replaced previous Australian generally accepted accounting principles with effect from annual reporting periods beginning on or after 1 January 2005 (i.e. 30 June 2006 was the first report prepared under IFRS-equivalent standards for June year ends). To this end, Australia, along with Europe and a few other countries, was one of the initial adopters of IFRS for domestic purposes (in the developed world). It must be acknowledged, however, that IFRS and primarily IAS have been part and parcel of accounting standard package in the developing world for many years since the relevant accounting bodies were more open to adoption of international standards for many reasons including that of capability.

The AASB has made certain amendments to the IASB pronouncements in making A-IFRS, however these generally have the effect of eliminating an option under IFRS, introducing additional disclosures or implementing requirements for not-for-profit entities, rather than departing from IFRS for Australian entities. Accordingly, for-profit entities that prepare financial statements in accordance with A-IFRS are able to make an unreserved statement of compliance with IFRS.

The AASB continues to mirror changes made by the IASB as local pronouncements. In addition, over recent years, the AASB has issued so-called ‘Amending Standards’ to reverse some of the initial changes made to the IFRS text for local terminology differences, to reinstate options and eliminate some Australian-specific disclosure. There are some calls for Australia to simply adopt IFRS without ‘Australianising’ them and this has resulted in the AASB itself looking at alternative ways of adopting IFRS in Australia

Canada

The use of IFRS became a requirement for Canadian publicly accountable profit-oriented enterprises for financial periods beginning on or after 1 January 2011. This includes public companies and other “profit-oriented enterprises that are responsible to large or diverse groups of shareholders.”[13]

European Union

All listed EU companies have been required to use IFRS since 2005.

In order to be approved for use in the EU, standards must be endorsed by the Accounting Regulatory Committee (ARC), which includes representatives of member state governments and is advised by a group of accounting experts known as the European Financial Reporting Advisory Group. As a result IFRS as applied in the EU may differ from that used elsewhere.

Parts of the standard IAS 39: Financial Instruments: Recognition and Measurement were not originally approved by the ARC. IAS 39 was subsequently amended, removing the option to record financial liabilities at fair value, and the ARC approved the amended version. The IASB is working with the EU to find an acceptable way to remove a remaining anomaly in respect of hedge accounting. The World Bank Centre for Financial Reporting Reform is working with countries in the ECA region to facilitate the adoption of IFRS and IFRS for SMEs.

India

The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April 2012. This will be done by revising existing accounting standards to make them compatible with IFRS.

Reserve Bank of India has stated that financial statements of banks need to be IFRS-compliant for periods beginning on or after 1 April 2011.

The ICAI has also stated that IFRS will be applied to companies above INR 1000 crore (INR 10 billion) from April 2011. Phase wise applicability details for different companies in India:

Phase 1: Opening balance sheet as at 1 April 2011*
i. Companies which are part of NSE Index – Nifty 50
ii. Companies which are part of BSE Sensex – BSE 30

a. Companies whose shares or other securities are listed on a stock exchange outside India

b. Companies, whether listed or not, having net worth of more than INR 1000 crore (INR 10 billion)

Phase 2: Opening balance sheet as at 1 April 2012*

Companies not covered in phase 1 and having net worth exceeding INR 500 crore (INR 5 billion)

Phase 3: Opening balance sheet as at 1 April 2014*

Listed companies not covered in the earlier phases * If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year.

On January 22, 2010, the Ministry of Corporate Affairs issued the road map for transition to IFRS. It is clear that India has deferred transition to IFRS by a year. In the first phase, companies included in Nifty 50 or BSE Sensex, and companies whose securities are listed on stock exchanges outside India and all other companies having net worth of INR 1000 crore will prepare and present financial statements using Indian Accounting Standards converged with IFRS. According to the press note issued by the government, those companies will convert their first balance sheet as at April 1, 2011, applying accounting standards convergent with IFRS if the accounting year ends on March 31. This implies that the transition date will be April 1, 2011. According to the earlier plan, the transition date was fixed at April 1, 2010.

The press note does not clarify whether the full set of financial statements for the year 2011–12 will be prepared by applying accounting standards convergent with IFRS. The deferment of the transition may make companies happy, but it will undermine India’s position. Presumably, lack of preparedness of Indian companies has led to the decision to defer the adoption of IFRS for a year. This is unfortunate that India, which boasts for its IT and accounting skills, could not prepare itself for the transition to IFRS over last four years. But that might be the ground reality. Transition in phases Companies, whether listed or not, having net worth of more than INR 500 crore will convert their opening balance sheet as at April 1, 2013. Listed companies having net worth of INR 500 crore or less will convert their opening balance sheet as at April 1, 2014. Un-listed companies having net worth of Rs 500 crore or less will continue to apply existing accounting standards, which might be modified from time to time. Transition to IFRS in phases is a smart move. The transition cost for smaller companies will be much lower because large companies will bear the initial cost of learning and smaller companies will not be required to reinvent the wheel. However, this will happen only if a significant number of large companies engage Indian accounting firms to provide them support in their transition to IFRS. If, most large companies, which will comply with Indian accounting standards convergent with IFRS in the first phase, choose one of the international firms, Indian accounting firms and smaller companies will not benefit from the learning in the first phase of the transition to IFRS. It is likely that international firms will protect their learning to retain their competitive advantage. Therefore, it is for the benefit of the country that each company makes judicious choice of the accounting firm as its partner without limiting its choice to international accounting firms. Public sector companies should take the lead and the Institute of Chartered Accountants of India (ICAI) should develop a clear strategy to diffuse the learning. Size of companies The government has decided to measure the size of companies in terms of net worth. This is not the ideal unit to measure the size of a company. Net worth in the balance sheet is determined by accounting principles and methods. Therefore, it does not include the value of intangible assets. Moreover, as most assets and liabilities are measured at historical cost, the net worth does not reflect the current value of those assets and liabilities. Market capitalisation is a better measure of the size of a company. But it is difficult to estimate market capitalisation or fundamental value of unlisted companies. This might be the reason that the government has decided to use ‘net worth’ to measure size of companies. Some companies, which are large in terms of fundamental value or which intend to attract foreign capital, might prefer to use Indian accounting standards convergent with IFRS earlier than required under the road map presented by the government. The government should provide that choice.

Japan

The minister for Financial Services in Japan announced in late June 2011 that mandatory application of the IFRS should not take place from fiscal year-ending March 2015; five to seven years should be required for preparation if mandatory application is decided; and to permit the use of U.S. GAAP beyond the fiscal year ending March 31, 2016.[14]

Montenegro

Montenegro gained independence from Serbia in 2006. Its accounting standard setter is the Institute of Accountants and Auditors of Montenegro (IAAM).[15]:2 In 2005, IAAM adopted a revised version of the 2002 “Law on Accounting and Auditing” which authorized the use of IFRS for all entities.[15]:18 IFRS is currently required for all consolidated and standalone financial statements, however, enforcement is not effective except in the banking sector.[15]:18 Financial statements for banks in Montenegro are, generally, of high quality and can be compared to those of the European Union.[15]:3 Foreign companies listed on Montenegro’s two stock exchanges (Montenegro Stock Exchange and NEX Stock Exchange) are also required to apply IFRS in their financial statements.[16] Montenegro does not have a nationalGAAP.[15]:18 Currently, no Montenegrin translation of IFRS exists, and because of this Montenegro applies the Serbiantranslation from 2010.[17]:20 IFRS for SMEs is not currently applied in Montenegro.[17]:20

Pakistan

All listed companies must follow all issued IAS/IFRS except the following:
IAS 39 and IAS 40: Implementation of these standards has been held in abeyance by State Bank of Pakistan for Banks and DFIs
IFRS-1: Effective for the annual periods beginning on or after January 1, 2004. This IFRS is being considered for adoption for all companies other than banks and DFIs.
IFRS-9: Under consideration of the relevant Committee of the Institute (ICAP). This IFRS will be effective for the annual periods beginning on or after 1 January 2013.

Russia

The government of Russia has been implementing a program to harmonize its national accounting standards with IFRS since 1998. Since then twenty new accounting standards were issued by the Ministry of Finance of the Russian Federation aiming to align accounting practices with IFRS. Despite these efforts essential differences between Russian accounting standards and IFRS remain. Since 2004 all commercial banks have been obliged to prepare financial statements in accordance with both Russian accounting standards and IFRS. Full transition to IFRS is delayed and is expected to take place from 2011.

Singapore

In Singapore the Accounting Standards Committee (ASC) is in charge of standard setting. Singapore closely models its Financial Reporting Standards (FRS) according to the IFRS, with appropriate changes made to suit the Singapore context. Before a standard is enacted, consultations with the IASB are made to ensure consistency of core principles.[18]

South Africa

All companies listed on the Johannesburg Stock Exchange have been required to comply with the requirements of International Financial Reporting Standards since 1 January 2005.

The IFRS for SMEs may be applied by ‘limited interest companies’, as defined in the South African Corporate Laws Amendment Act of 2006 (that is, they are not ‘widely held’), if they do not have public accountability (that is, not listed and not a financial institution). Alternatively, the company may choose to apply full South African Statements of GAAP or IFRS.

South African Statements of GAAP are entirely consistent with IFRS, although there may be a delay between issuance of an IFRS and the equivalent SA Statement of GAAP (can affect voluntary early adoption).

Taiwan

Adoption scope and timetable

(1) Phase I companies: listed companies and financial institutions supervised by the FSC, except for credit cooperatives, credit card companies and insurance intermediaries:

A. They will be required to prepare financial statements in accordance with Taiwan-IFRS starting from January 1, 2013.

B. Early optional adoption: Firms that have already issued securities overseas, or have registered an overseas securities issuance with the FSC, or have a market capitalization of greater than NT$10 billion, will be permitted to prepare additional consolidated financial statements1 in accordance with Taiwan-IFRS starting from January 1, 2012. If a company without subsidiaries is not required to prepare consolidated financial statements, it will be permitted to prepare additional individual financial statements on the above conditions.

(2) Phase II companies: unlisted public companies, credit cooperatives and credit card companies:

A. They will be required to prepare financial statements in accordance with Taiwan-IFRS starting from January 1, 2019 B. They will be permitted to apply Taiwan-IFRS starting from January. 1, 2013.

(3) Pre-disclosure about the IFRS adoption plan, and the impact of adoption To prepare properly for IFRS adoption, domestic companies should propose an IFRS adoption plan and establish a specific taskforce. They should also disclose the related information from 2 years prior to adoption, as follows:

A. Phase I companies: (A) They will be required to disclose the adoption plan, and the impact of adoption, in 2011 annual financial statements, and in 2012 interim and annual financial statements. (B) Early optional adoption: a. Companies adopting IFRS early will be required to disclose the adoption plan, and the impact of adoption, in 2010 annual financial statements, and in 2011 interim and annual financial statements. b. If a company opts for early adoption of Taiwan-IFRS after January 1, 2011, it will be required to disclose the adoption plan, and the impact of adoption, in 2011 interim and annual financial statements commencing on the decision date.

B. Phase II companies will be required to disclose the related information from 2 years prior to adoption, as stated above.

Year Work Plan

2008 Establishment of IFRS Taskforce

2009~2011

  • Acquisition of authorization to translate IFRS
  • Translation, review, and issuance of IFRS
  • Analysis of possible IFRS implementation problems,and resolution thereof
  • Proposal for modification of the related regulations and supervisory mechanisms
  • Enhancement of related publicity and training activities

2012

  • IFRS application permitted for Phase I companies
  • Study on possible IFRS implementation problems,and resolution thereof
  • Completion of amendments to the related regulations and supervisory mechanisms
  • Enhancement of the related publicity and training activities

2013

  • Application of IFRS required for Phase I companies,and permitted for Phase II companies
  • Follow-up analysis of the status of IFRS adoption,and of the impact

2014

  • Follow-up analysis of the status of IFRS adoption,and of the impact

2015 8Applications of IFRS required for Phase II companies

Expected benefits

(1) More efficient formulation of domestic accounting standards, improvement of their international image, and enhancement of the global rankings and international competitiveness of our local capital markets;

(2) Better comparability between the financial statements of local and foreign companies;

(3) No need for restatement of financial statements when local companies wish to issue overseas securities, resulting in reduction in the cost of raising capital overseas;

(4) For local companies with investments overseas, use of a single set of accounting standards will reduce the cost of account conversions and improve corporate efficiency.

Quote from Accounting Research and Development Foundation

Turkey

Turkish Accounting Standards Board translated IFRS into Turkish in 2005. Since 2005 Turkish companies listed in Istanbul Stock Exchange are required to prepare IFRS reports.