International Financial Reporting Standards (IFRS) – Background, Requirements for Financial Statements and Disclosures, and Adoption Status
Background
The International Financial Reporting Standards or IFRS are a set of financial reporting standards, interpretations and framework issued by the International Accounting Standards Board (IASB). The accounting standards that comprise part of the IFRS are known as the International Accounting Standards (IAS) that were issued by the board of the International Accounting Standards Committee (IASC). The IASB took over from the IASC in 2001 in setting the continually evolving standards, calling the newer ones IFRS.
The IFRS are considered “principles based” since they establish broad rules as well as dictate specific treatments.
The IFRS 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
- Conceptual Framework for the Preparation and Presentation of Financial Statements (2010)
Applicability
Each country that has adopted the IFRS has different applicability requirements. Some countries might require all profit making entities to comply with IFRS or all entities that use financial instruments except banks or just listed companies alone. Therefore, the applicability of IFRS varies from country to country.
Financial Statements - Requirements
These entities’ financial statements give information about performance, position and cash flow that is useful to a range of users in making financial decisions. These users include shareholders, creditors, employees and the general public. A complete set of financial statements includes:
- Balance sheet
- Statement of comprehensive income
- Cash flow statement
- Statement of changes in equity
- A description of accounting policies
- Notes to the financial statements
Balance Sheet Requirements
A balance sheet presents the financial position of an entity at a specific point in time. While the IFRS has certain minimum presentation and disclosure requirements for balance sheet, the management of an entity can choose which form of presentation, sub-classifications to present and which information to disclose in the primary statement or note.
The balance sheet has to have the following requirements at the very least:
- Assets
- Equity
- Liabilities
- Assets and liabilities held for sale
Statement of Comprehensive Income Requirements
The statement of comprehensive income presents an entity’s performance over a specific period. Entities can present this in a single statement or as two statements:
- Single Statement: The statement should contain all items of income and expense and includes each component of other comprehensive income classified by nature.
- Two Statement: All components of profit or loss are presented in an income statement, followed immediately by a statement of comprehensive income. This begins with the total profit or loss for the period and displays all components of other comprehensive income and ends with total comprehensive income for the period.
The statement should contain at least the following items:
- Revenue.
- Finance costs.
- Share of the profit or loss of associates and joint ventures accounted for using the equity method.
- Tax expense.
- Post-tax profit or loss of discontinued operations aggregated with any post-tax gain or loss recognized on the measurement to fair value less costs to sell (or on the disposal) of the assets or disposal group(s) constituting the discontinued operation.
- Profit or loss for the period.
- Each component of other comprehensive income classified by nature.
- Share of the other comprehensive income of associates and joint ventures accounted for using the equity method.
- Total comprehensive income.
Cash Flow Statement
The requirements for Cash Flow Statement are outlined in IAS 7. The cash flow state is one of the primary statements in financial reporting and presents the generation and use of ‘cash and cash equivalents’ by category over a specific period of times. Stakeholders should be able to assess an entity’s ability to generate and utilize its cash. The generation and use of cash and cash equivalents should be presented in the following categories:
- Operating activities – An entity’s revenue-producing activities
- Investing activities – Acquisition and disposal of long-term assets, including business combinations and investments that are not cash equivalents.
- Financing activities – Changes in equity and borrowing.
Operating cash flows can be presented using either the direct method (gross cash receipts/payments) or the indirect method (adjusting net profit or loss for non-operating and non-cash transactions, and for changes in working capital).
Cash flows from investing and financing activities should be reported separately gross (that is, gross cash receipts and gross cash payments) unless they meet certain specified criteria.
Statement of Changes in Equity
The following items should be presented in the statement of changes in equity:
- Total comprehensive income for the period, showing separately the total amounts attributable to the parent’s owners and to non-controlling interest.
- For each component of equity, the effects of retrospective application or retrospective restatement recognized in accordance with IAS 8 - Accounting policies, changes in accounting estimates, and errors.
- Amounts of transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners.
- For each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing each change.
Notes to the Financial Statement:
An integral part of the financial statement is the Notes section – these provide additional information to the amounts disclosed in the ‘primary’ statements and include accounting policies and critical accounting estimates and judgments.
Disclosure
The major accounting scandals, instances of financial malpractice and corporate fraud in the past decade forced governments and regulatory agencies to formulate regulations regarding financial risk management and transparency. It has become possible to measure, predict and manage risks associated with the use of financial instruments.
Stakeholders in a profit making entity need to know the relevant information regarding that entity’s exposure to financial instruments, exposure to related risks and how it manages them. The disclosure of these details makes it easy for financial statement users and investors to make more informed decisions about risks that these entities may face.
Disclosure requirements are detailed in IFRS 7 – Financial Instruments: Disclosures. This standard is divided into two sections:
1. Deals with the quantitative disclosures, i.e. numbers, in the balance sheet and income statement.
2. Deals with risk disclosures arising from financial instruments. These should be given from the point of view of the management, disclosing how it perceives, measures and manages these risks.
IFRS 7 applies to financial and non-financial institutions. It covers all entities that have financial instruments such as borrowings, accounts payable and receivable, cash and investments.
Adoption Status
Around 90 countries have fully conformed with the IFRS. In total, around 120 nations and reporting jurisdictions permit or require IFRS for domestic listed companies.
Among the major economies, the EU has fully conformed with IFRS while Japan has introduced a roadmap for adoption on which it will decide on 2012, with a target adoption date of 2015 or 2016. The US is gradually transitioning from requiring only US GAAP to accepting IFRS and is expected to accept IFRS as the de rigueur financial reporting standards in the long term.
Additional Resources:
- Read the following standards in full: IAS 1, IAS 7, IAS 8, IFRS 7
- Do you know the differences between US GAAP and the IFRS? Or need to transition to IFRS? Then learn more from the following ComplianceOnline webinars:
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