CHAPTER ONE

Introduction to and objectives of IFRS

INTERNATIONAL FINANCIAL REPORTING IS ON THE MOVE, and common world-wide business and financial reporting formats are developing. The recent so-called global financial crisis emphasises the need for financial reporting standards. In effect, International Financial Reporting Standards can be a precursor and an example for a much needed global framework for financial and legal standards.

The goal of the IFRS Foundation (IFRSF) is to develop a single set of high-quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated accounting principles.

As of 2005, the European Union (EU) requires all publicly traded entities in member states to prepare their consolidated financial statements under IFRS. These accounting standards may differ significantly from the US-based Generally Accepted Accounting Principles (GAAP) previously applicable.

More than 150 countries now require the application of IFRS in one form or another. The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) are actively pursuing convergence projects. China, India, Japan and other countries have been agreed upon convergence. In May 2012, the Pan African Federation of Accountants (PAFA) – representing 34 African nations – made a broad policy resolution to adopt IFRS, IPSAS and ISA.

Once global convergence is completed by the IASB, financial statements will be fully comparable worldwide. Needless to say, accounting and financial reporting changes have an impact on capital markets and on critical financial measures, such as profits, earnings per share, valuation of assets and credit ratings. This overview is designed to provide an understanding of the basic issues when people are reporting using IFRS, such as the following:

Corporate

• How are business combinations accounted for under IFRS 3?
• What further changes are planned regarding measurement, such as the application of fair value?
• How are goodwill and other intangibles accounted for?
• How does adopting IFRS in separate financial statements affect distributable profits?
• What are the new rules when accounting for pensions and stock options under IFRS 2?

Banking and capital markets

• How are financial covenants affected by moving to IFRS?
• What is the impact of IFRS on performance indicators, such as EBITDA (earnings before interest, taxes, depreciation and amortisation) finance costs, net debt and net worth?

Tax

• How is tax affected by adopting IFRS in separate financial statements?
• What is the impact of IFRS on de-recognition of financial assets and off-balance sheet arrangements?

The first section of this chapter provides an overview of the International Accounting Standards Board and its predecessor, the International Accounting Standards Committee (IASC). It explains the history, organisation, structure and funding, and provides a list of key members and thought leaders. In addition, it outlines what the IASB has achieved so far and gives an idea as to where the IASB is heading.

The body of this chapter presents a summary of the individual International Financial Reporting Standards and International Accounting Standards (IAS) as originally developed by the IASC. Obviously, for a more detailed discussion, the reader should always refer to the original pronouncements (the full set of Standards), which include implementation guidance and the basis for conclusions by the board. A full set of Standards (approximately 3,000 pages) is published annually, in different versions and languages, by the IASB. For electronic updates, see www.ifrs.org.

One of the major accomplishments of the new organisation, the IASB, is the development of standards for small and medium-sized enterprises (IFRS for SMEs). An overview on these standards is provided, too.

Interpretations play an important role in the implementation and use of the standards. They apply to certain sections of the standards and require a highly technical understanding and knowledge of IFRS. In legal cases, where interpretations are involved, it is recommended that the history and exposure drafts for the development of the interpretations are reviewed.

Reconciling differences between existing accounting principles is one of the main topics lawyers must understand. Therefore, reconciling items between US GAAP and IFRS are explained. Of course, regulators play an important role in the enforcement of IFRS. Their international involvement through the IOSCO (International Organisation of Securities Commissions) is important for the future development of the Standards.

Adoption of IFRS has increased dramatically in recent years. It is estimated that more than 150 countries apply the standards in full, or corporate entities in those countries are permitted to use them, or apply them partially. In this regard, the EU can be considered a role model and pioneer in the adoption of IFRS.

At the same time, related and supplemental business and financial reporting standards are developed by different international organisations, such as the IFAC (International Federation of Accountants), IPSAS (International ­Public Sector Accounting Standards) and GRI (Global Reporting Initiative). A brief overview of these organisations, and their associated activities, appears in later sections.

It is worth noting that technology is the main driver for globalisation. It plays an important part in the implementation of IFRS. Several tools were developed in conjunction with educational materials, checklists and model financial statements. These are often presented at seminars and conferences.

The localisation of the standards, as facilitated by translation, is another key factor for the adoption of standards. A brief description of the IASB translation policy is provided. Finally, the future application of IFRS is heavily influenced by advances in technology. As in other sectors, such as worldwide logistics, ‘barcoding' of financial information is now a major topic for discussion. Extensible Business Reporting Language (XBRL), based on XML, will bind together all the members of the business reporting supply chain and eliminate re-keying of finance and accounting information. The IFRS – XBRL taxonomy, available in multiple formats and languages, is important in the further adoption and development of standards.

Jointly with the US FASB, the IASB has a heavy Work Plan and related guidance, such as new presentation formats and management commentary.

At the end of this book, the reader can find lists of helpful resources, such as checklists, references to publications, websites and abbreviations. In the next chapter we look at the importance of IFRS to business.

It is also noteworthy that, associated with IFRS material throughout this book, in relation to all images, abstracts, screenshots and related text, the following applies: Copyright © 2012 IFRS Foundation. All rights reserved. ­Reproduced by John Wiley & Sons, Ltd with the permission of the IFRS Foundation. No permission is granted to third parties to reproduce or distribute.