International accounting - UniBg

UNIVERSITÀ DEGLI STUDI DI BERGAMO Faculty of Economics and Business Administration

Department of Business Administration

International accounting 910005

Professor Gervasio Daniele

Lesson 1 – Introduction to IAS/IFRS

Introduction to IAS/IFRS – a.a. 2011/2012

The course materials are:

•  A guide through IFRS part A – IFRS Foundation (July 2011);

•  A guide through IFRS part B – IFRS Foundation (July 2011); availables on: http://shop.ifrs.org/ProductCatalog/ProductCategory.aspx?ID=9907

•  slides projected during class and published on the course web page:http://www.unibg.it/struttura/struttura.asp?corso=910005&nomecorso=International%20Accounting%20(ENG)

Materials

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Instructions

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The course consists of 16 class lesson of 3 hours each and two midterm exam. We also offer – if requested – a voluntary oral examina?on to help you integrate the wriBen part.


The Accountancy harmonization Definition: Just as the words connote, “harmonization of accounting standards” can be defined as the continuous process of ensuring that the Generally Accepted Accounting Principles (GAAP) are formulated, aligned and updated to international best practices (GAAPs in other countries) with suitable modifications and fine tuning considering the domestic conditions. Scope: This harmonization is needed due to the globalization of businesses and services and increase in cross-border investments and borrowings.

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Some of the benefits of harmonization are as under:

-  It ensures reliable and high quality financial reporting and disclosures;

-  It enables a systematic review and evaluation of the performance of a multinational company having subsidiaries and associates in various countries wherein each country has its own set of GAAP

-  It makes the comparison of the performance of a company against its domestic and international peers easier and more meaningful

-  It adds to the international credibility of a company -  It is a precursor for accessing international capital markets which

can, in turn, reduce the capital cost and consequently, improve the performance of a company

-  It provides a level playing field where no country is advantaged or disadvantaged by its GAAP.

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IAS - IFRS

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What basically are the differences between the International Financial Accounting Standards (IFRS) and International Accounting Standards (IAS)? The IAS’s were issued by the International Accounting Standards Committee (IASC) from 1973 to 2001, while the IFRS’s were issued by the International Accounting Standards Board (IASB) from 2001 onwards. The IASB is basically the successor for IASC. When IASB was installed in 2001, it adopted the existing IAS and decided to name any future standards as International Financial Reporting Standards. Consequently, IAS 1 Presentation of Financial Statements defines IFRS as standards and interpretations adopted by the IASB.


Standards are issued by an international private organization called the International Accounting Standards Board (IASB) The International Accounting Standards Board (IASB) is an independent, privately funded accounting standard-setter based in London, England. The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Commitee (IASC). It is responsable for developing International Financial Reporting Standard (the new name for International Accounting Standard issue after 2001), and promoting the use and application of these standards.

IASB

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The IASB also receives official support from relevant regulatory authorities such as the IFRIC (international reporting interpretation Committee) that issues interpretations of IFRS. The work of the Interpretations Committee is aimed at reaching consensus on the appropriate accounting treatment and providing authoritative guidance on those issues. In developing interpretations, the Interpretations Committee works closely with similar national committees. The interpretations cover both: - newly identified financial reporting issues not specifically dealt with in IFRSs; and - issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop in the absence of authoritative guidance

IFRIC-SIC

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- IFRS are issued by the IASB; - IAS were issued by the IASC, predecessor of IASB till 2000; - IFRIC are standards interpretations issued by the International Financial Reporting Interpretations Committee; - SIC were standards interpretations issued by the Standards Interpretations Committee, predecessor of IFRIC till 2002.

IAS/IFRS IASB-IASC IFRIC-SIC

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Summary


European Community Regulation 1606/2002

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The European Community Regulation 1606/2002 required companies listed in regulated European markets to adopt international accounting and financial reporting standards for preparing their consolidated financial statements as from January 1, 2005. EU Countries have adopted international accounting standards following different timetables and different effects.


“fair value is the amount for which an asset could or a liability settled, between knowledgeable, willing

parties in an arm's length transaction” (IAS 39)

IFRS adoption in the E.U.

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(IAS 39)

Convergence of accounting principles in the E.U.

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IAS/IFRS impact on the auditor’s role- Daniele Gervasio, Serena Somenzi

(IAS 39)

Convergence of accounting principles in the E.U.

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IAS/IFRS impact on the auditor’s role- Daniele Gervasio, Serena Somenzi

IAS/IFRS in the world

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IAS/IFRS approach

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RULES-BASED approach

PRINCIPLES BASED approach

-  flexibility; -  ambiguity; -  clarity; -  creativity; -  discretionality;

-  severity; -  accuracy; -  complexity; -  rigidity; -  rationality;


Objectives of IAS/IFRS

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The objective of financial statements is to provide information about an enterprise’s financial position, performance and changes in financial position which is useful to a wide range of users for making economic decisions.

!!! New international accounting standards are very close to the experience of market oriented countries where accounting information’s addresses investors. Vice versa in the other European Countries accounting information’s address many other groups, as creditors and state treasury


The accounting principles’ hierarchy

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Accrual basis the effects of transactions and other events are recognised when they occur, rather then when cash or its equivalent is received or paid, and are reported in the financial statements of the periods to which they relate.

Going concern principle presumes that an enterprise will continue to operate indefinitely

Understandability

Financial reports must be clear and avoid unnecessary complexity or inconsistency that may limit the ability of users to comprehend the information.

Relevance Reported information must be relevant to aid investors and other users in making decisions based on an entity’s financial position, performance, risks, and business prospects. Introduction to IAS/IFRS – a.a. 2011/2012


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Reliable reliable information means that the financial statements are a reflection of the company’s economic reality

Comparability implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time.

Materiality information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements

Neutrality

It must be free from bias. Although it is impossible because of human nature to completely eliminate all bias



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Prudence requires that accountants should exercise a degree of caution in the adoption of policies and significant estimates such that the assets and income of the entity are not overstated whereas liability and expenses are not under stated.

Faithful representation Faithfull representation requires that transactions and events should be accounted for in a manner that represent their true economic substance rather than the mere legal form.

Completeness Reliability of information contained in the financial statements is achieved only if complete financial information is provided relevant to the business and financial decision making needs of the users. Therefore, information must be complete in all material respects. Introduction to IAS/IFRS – a.a. 2011/2012


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Substance over form

requires that if substance of transaction differs from its legal form than such transaction should be accounted for in accordance with its substance and economic reality. The rationale behind this is that financial information contained in the financial statements should represent the business essence of transactions and events not merely their legal aspects in order to present a true and fair view.

Example A machine is leased to Company A for the entire duration of its useful life. Although Company A is not the legal owner of the machine, it may be recognized as an asset in its balance sheet since the Company has control over the economic benefits that would be derived from the use of the asset. This is an application of the accountancy concept of substance over legal form, where economic substance of a transaction takes precedence over its legal aspects. Introduction to IAS/IFRS – a.a. 2011/2012

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"the transactions and other events are relevant and represented in accordance with their substance and economic reality and not only in

accordance with their legal form" . Dezzani, F. (2007)

IAS 17 provides for the accounting by entering the depreciated value of the goods in the Assets of the balance sheet, while the amount of the residual debt must be written in the liabilities. The depreciation allowance and the financial charges must be entered in the income statement.

The provision absorbs the goods in leasing into those belonging to the company

Goods in leasing


FV-Historical cost

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IFRS consider two different measurement systems, namely:

(a) historical-cost under the historical cost assets are presented on the balance sheet at their value at the time of acquisition (generally represented by the purchase cost).

(b) fair values “fair value is the amount for which an asset could or a liability settled, between

knowledgeable, willing parties in an arm's length transaction” (IAS 39)


-  volatility, the figures change with each balance sheet; -  less legal certainty; -  prevalence of the principle of competence; -  transition to a configuration of “potentially produced

income”; -  relevance: it does not provide only data that statistically

reproduce events and reports regarding the past; -  allows the investor to obtain dynamic, forward-looking

information.

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FV main features


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FV-Historical cost

Historical cost Fair value

•  Historical value; •  Verifiable; •  realized values; •  reliable; •  objective; •  prudence; •  predictable; •  simple to calculate; •  derived from the

exchange.

•  Current values; •  Not verifiable; •  Not necessary realized

values; •  relevant; •  subjective; •  competence; •  Volatile; •  Difficult to calculate; •  different criteria for

determining it.


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FV-Historical cost


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Financial statements

A complete set of financial statements should include: - a statement of financial position (balance sheet) at the end of the period; - a statement of comprehensive income for the period (or an income statement and a statement of comprehensive income); -  a statement of changes in equity for the period; -  a statement of cash flows for the period; - notes, comprising a summary of accounting policies and other explanatory notes


Who does IFRS for SMEs Apply To? The IFRS for SMEs will apply to small and medium sized entities that: (a) do not have public accountability and (b) publish general purpose financial statements for external users.

IFRS for SMEs

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Compared with full IFRS (and many national GAAPs), the IFRS for SMEs is less complex in a number of way: • topics not relevant for SMEs are omitted. For examples, earnings per share interim financial reporting, and segment reporting. • Where full IFRS allows accounting policy choice, the IFRS for SMEs allows only the easier opinion. For example, no option to revenue property, equipment or intangibles; a cost-depreciation model for investment property unless fair value is readily available without undue cost or effort; no “corridor approach” for actuarial gains and losses; • Many principles for recognizing and measuring assets, liabilities, income and expenses in full IFRS are simplified. For example, amortize goodwill; expense all borrowing and R&D cost; cost model for associates and jointly-controlled entities; no available-for-sale or held to maturity classes of financial assets. • Significantly fewer disclosures are required; • And the Standard has been written in clear, easily translatable language.

IFRS for SMEs

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Documents

International accounting - UniBg