Financial Reporting

IFRS Framework

INTRODUCTION
In the context of financial reporting, the term framework can be used in two different ways:

1. This is a regulatory or institutional framework which embraces the IFRS standard-setting process and
the general legal context in which IFRS standards are used;

2. This is a set of generally accepted theoretical principles which should be kept in mind when designing
new accounting standards or when applying them in practice.

REGULATORY FRAMEWORK
When we consider the legal environment, there are elements that are usually in place and which tend to
impact companies’ accounting and financial reporting processes:

● National laws;
● European Union or other regulations; All these elements make up the regulatory
● Securities exchange rules; framework in which companies operate
● Tax regulations; and
● Accounting principles.

Key goal: To ensure that users of financial statements receive information which is good enough to enable
them to make sensible economic decisions.

There are strong tendencies for accounting regulation from around the world to become unified and
harmonised, which brings about multiple benefits :

● If financial information coming from different countries is prepared on a consistent basis, it makes
reading and interpreting the numbers, and doing business, a lot easier;

● The preparation of financial information for various stakeholders uses up less resources. Also,
consolidating the results coming from different parts becomes easier, if all countries follow the same
rules;

● For investors, harmonisation makes it easier to compare different entities and make fully informed
investment decisions; and

● Harmonisation makes it easier to control tax statements, therefore limiting tax avoidance.

However, there are considerable barriers that make the full harmonisation of accounting standards an
improbable, if not impossible task:

● Individual countries typically have their own social, political and economic contexts;
 ● The legal systems of different countries vary widely, so some harmonised solutions are not easily
transferable to all countries concerned; and

● Developing a full set of harmonised accounting rules and making companies adopt them is a very
costly process.

The four institutions which are at the very heart of the IFRS standard-setting process are described below:

1. The International Accounting Standards Board (IASB) . This body is at the very centre of the
standard-setting process having sole responsibility for issuing International Financial Reporting Standards
(IFRS):

a. The goal of the IASB is to develop a single set of high-quality understandable and enforceable
accounting standards.

b. The IASB lacks the legal authority to enforce compliance with the standards that it develops,
making it necessary to cooperate closely with national authorities.

2. The International Financial Reporting Standards Foundation (IFRS Foundation) . This body acts
as a supervisory body to the IASB and is responsible for oversight and governance of the Board’s
activities. Its objective is the development of a set of global accounting standards of high quality as
well as promoting the widespread application of those standards.

3. The IFRS Interpretations Committee or IFRS IC . This body issues guidance on accounting topics,
where divergent interpretations of the standards exist, or where there are new issues which are not
specifically dealt with in the standards. However, before any of the interpretations issued by the IFRS
IC become binding, they first need to be approved by the IASB.

4. The IFRS Advisory Council (IFRS AC) . The role of this body is to provide a forum for the IASB
to consult a wide spectrum of stakeholders who might be affected by the work of the Board.

The typical sequence for the development of a new International Financial Reporting Standard is as follows:

1. The IASB identifies a topic that should be covered and appoints a committee from its members to
work on the subject;

2. When the work reaches a stage deemed advanced enough, a discussion paper may be issued by
the IASB to encourage comments from a wider audience;

3. The IASB publishes a so-called exposure draft for public comment. The exposure draft is also the
first draft version of the proposed standard; and

4. Following the receipt of comments, the IASB publishes the final text of the new IFRS.

CONCEPTUAL FRAMEWORK
The conceptual framework is a set of generally accepted theoretical principles that guide the bodies that
design financial reporting standards and help users to apply them in practice.

There are two main approaches to how financial reporting may be designed and regulated:
 A. The principles-based approach: Under this approach, the goal is to lay down the general principles
that should universally govern financial accounting, making a link between the objectives of financial
reporting and those general principles; and

B. The rules-based approach: This approach is based on detailed regulations which all companies
must uniformly follow and which leave very little space for independent interpretation.

The main advantages (they are also disadvantages of the rules-based system) of having a conceptual framework
and following a principles-based approach are:

● Transactions or issues are not specifically addressed in the standards. A conceptual framework provides
meaningful guidance on how to deal with them, allowing preparers of financial statements to develop
suitable accounting solutions;

● Having a conceptual framework helps avoid “fire-fighting” - a practice of developing accounting standards
in response to specific situations or issues;

● Accounting standards based on a conceptual framework are thought to be more difficult to circumvent;

● Having a clear view of governing principles enhances the credibility of financial reporting and the
accounting profession; and

● With transparent principles laid down, it is less likely that the standard-setting process will be
influenced by vested interests or lobby groups.

The goals of the Conceptual Framework are:

● To help the IASB in its task of developing future IFRSs and reviewing the existing body of standards;

● To help the IASB promote harmonisation by reducing the number of alternative accounting treatments
permitted by IFRS;

● To help national standard-setting bodies in the development of national standards;

● To help those who prepare financial statements in applying IFRS and in dealing with areas where
there are no relevant standards in place;

● To help users of financial statements in interpreting the financial information which they encounter;

● To help auditors form an opinion on whether financial statements conform with IFRS; and

● To provide information to all parties who may be interested in the work of the IASB.

The overarching objective of the framework is to provide help and support to the various stakeholders who
come into contact with financial statements prepared under IFRS.

Note: The framework is not itself a standard. In the rare cases where a conflict might occur between it and
a specific IFRS, it is the IFRS which prevails over the framework.

The four main areas for which the conceptual framework attempts to provide guidance are:

1. The objective of financial reporting. The objective is to provide financial information about the reporting
entity that is useful to existing and potential investors and lenders in making decisions about providing
resources to the entity;

2. The qualitative characteristics of financial information;

 3. The definitions, as well as the recognition and measurement rules applicable to the principal elements
of financial statements;

4. The concepts of capital and capital maintenance.

QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION

Qualitative characteristics can generally be thought of as those attributes which make financial information
useful from the perspective of fulfilling its declared objective.

The framework identifies two kinds of qualitative characteristics:

1. Fundamental: These characteristics are composed of just two items:

a. Relevance: Financial information is relevant if it is capable of making a difference to the

decisions made by its users. The framework introduces the concepts of predictive and
confirmatory value:

i. On the one hand, if information has predictive value, it helps users predict a company’s
future performance;

ii. On the other hand, if the information has confirmatory value, it provides feedback
about how accurate past evaluations of performance actually were.

b. Faithful representation: The information should faithfully represent the financial situation and
economic performance of the company. According to the framework, faithful representation is
associated with all of the following characteristics:

i. It should be complete , meaning it should include all necessary descriptions and

explanations;

ii. It should be neutral or free from bias, meaning that it should not be manipulated or
phrased in such a way that it is received and interpreted in an
unduly favourable or unfavourable manner; and

iii. It should be free from error , but taking note of the materiality rule. Information is
considered material if omitting or misstating it could influence the decisions of users
of financial information about a specific reporting entity.

2. Enhancing: These characteristics constitute a more varied collection comprising comparability,

verifiability, timeliness and understandability:

a. Comparability may be interpreted in two ways:

i. The financial statements of one entity may be compared over time in order to identify
trends in its financial performance;

ii. The financial statements of various entities may be compared in order to evaluate their
relative performance.

These forms of comparability may be achieved using two important tools:

 1. Consistency: Refers to the use of the same accounting treatment for similar items,
either from period to period within a single reporting entity, or in a single period but across
entities; and

2. Disclosure: Refers to the fact that companies are required to disclose various pieces
of information, including the accounting policies which they employ in the preparation of
financial statements.

b. Verifiability means that financial information should be capable of being confirmed;

c. Timeliness relates to making information available to users in time for it to be capable of

influencing their decisions; and

d. Understandability means that the information contained in the financial statements is assumed
to be prepared for users who have a reasonable knowledge of business and economic
activities and are able to review and analyse economic information diligently.

PRINCIPAL ELEMENTS OF FINANCIAL STATEMENTS

Financial statements are normally prepared on the assumption that the entity in question is a going concern.
This is an underlying presumption that the company will continue its operations for the foreseeable future
and that it has neither the intention nor the need to liquidate or reduce the scale of its operations materially.

The framework mentions five key elements, splitting them into two categories:

1. Elements related to the measurement of financial position . This category includes:

a. Assets: A present economic resource controlled by the entity as a result of past events. You
should remember that:

i. Legal ownership is not a prerequisite for the recognition of an asset in the statement
of financial position;

ii. For each asset reported in the statement of financial position, there must have been
a past event, which made the recognition of that asset possible; and

iii. An asset must be of value to the reporting entity, so it must be a resource which
the company expects to convert into a flow of benefits of one kind or another.

b. Liabilities: A present obligation of the entity to transfer an economic resource as a result of

past events. You should remember that:

i. A liability may only be recognised as a result of a past transaction or event;

ii. The settlement of an obligation recognised as a liability typically entails giving up

valuable resources; and

iii. Present obligation is a duty or responsibility to act or perform in a certain way.

Present obligations may actually arise in two ways:

1. Legal obligations, as they result from binding contracts which are legally enforceable, or
from statutory requirements; and
 2. Constructive obligations, which are the result of past behaviour, established practice or
business custom.

c. Equity: This is the residual interest in the assets of the entity after deducting all of its
liabilities.

2. Elements related to the measurement of performance. This category includes:

a. Income: This is defined as increases in assets or decreases in liabilities that result in

increases in equity, other than those relating to contributions from equity participants.

b. Expenses: These are decreases in assets or increases in liabilities that result in decreases
in equity, other than those relating to distributions to equity participants.

Note: The intention of the framework is to indicate that income and expenses are a reflection of changes
in the value of assets and liabilities, and as a consequence, in the value of equity as well.

RECOGNITION RULES
Recognition is appropriate if it results in both relevant information about assets, liabilities, equity, income and
expenses and a faithful representation of those items, because the aim is to provide information that is useful to
investors, lenders and other creditors.

The revised recognition criteria refer explicitly to the qualitative characteristics of useful information.

DERECOGNITION RULES
Asset: when the entity loses control of all or part of the recognised asset

Liability: when the entity no longer has a present obligation for all or part of the recognised liability

MEASUREMENT RULES
Measurement is the process by which monetary values of the various financial statements' elements are
determined. It is at these monetary values that the elements are recognised and carried in the statement of
financial position and statement of comprehensive income.

The framework identifies following measurement bases, which are used to a different degree and in varying
combinations in financial statements:

1. Historical cost , where the basis for computing the carrying amount of an asset is the amount of
cash paid to acquire it in the first place. It has some very clear advantages over the other approaches:

a. It is easy to calculate and comprehend;

b. It is relatively objective and free from bias, especially if the historical cost at which an item
was acquired is known;

c. It facilitates easy forecasting of future carrying amounts, as the assumptions used in applying
the historical cost approach are relatively insensitive to current market conditions;
 d. Historical cost is easy to verify using transaction-related documents such as invoices. The main
disadvantage is that it does not reflect the current value of assets or liabilities, where such
information would obviously be considered more useful by readers of financial statements.

2. Current value measurement bases, current value provides information updated to reflect conditions at the
measurement date. current value measurement bases include:

 Fair value:

o The price that would be received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement
o Reflects market participants’ current expectations about the amount, timing and uncertainty
of future cash flows

 Value in use (for assets) / Fulfilment value (for liabilities):

o Reflects entity-specific current expectations about the amount, timing and uncertainty of future
cash flows

 Current cost

o Reflects the current amount that would be:

 paid to acquire an equivalent asset

 received to take on an equivalent liability

Key advantage of CCA: It provides users of financial statements with more relevant information,
which reflects the current state and performance of the company. However, it is not free from drawbacks,
the most important of which are:

● Current cost accounting is typically more subjective and less reliable than the historical cost
approach;

● Applying it may prove a complex task, and it is definitely less familiar to users of financial
information;

● Monetary items are still carried at their historical cost, which might not be relevant under
current market conditions;

● It may sometimes be difficult to obtain appropriate current cost values for all non-current
assets, especially if no market for such assets exists.

CONCEPT OF CAPITAL
The framework claims that there are actually two ways of looking at the capital invested in a business:

1. Financial concept of capital: Capital is synonymous with the net assets of the entity, in other
words, its equity. Under this concept, profit is earned only if the financial or money value of net
assets at the end of the period exceeds the financial amount of net assets at the beginning of the
period; and

2. Physical concept of capital: Capital means the productive capacity or operating capability of the
firm. Under this concept, profit is earned only if the physical productive capacity of the company at
the end of the period exceeds the physical productive capacity of the company at the beginning of the
period.
 FR – IFRS 13
Fair Value Measurement

STANDARDS REFERRING TO FAIR VALUE

● IAS 16: Property, plant and equipment

● IAS 40: Investment property

● IAS 41: Agriculture

● IFRS 9: Financial instruments

● IFRS 13: Fair value measurement

IFRS 13
● IFRS 13 provides a set of measurement rules which must be applied whenever fair value is required or
permitted by another standard.

● It allows for consistency and comparability of fair value measurements used across different lines within
the statement of financial position.

● Where ‘Fair Value’:

○ Is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.

○ Should be thought of as an exit price.

○ Should be determined independent of the reporting entity’s intent or ability to actually sell the
asset or transfer the liability.

○ Is a market-based measure, not an entity-specific measure.

● Where ‘Orderly Transaction’:

○ Assumes adequate exposure to the market for a period before the measurement date to provide
market participants the ability to obtain awareness and knowledge of the asset or liability being
 valued.

○ Assumes involvement of market participants who are not forced to carry out the transaction.

FRAMEWORK FOR APPLYING THE DEFINITION

The standard states that we must identify the following:

● The particular asset or liability being measured;

● In the case of non-financial assets, the highest and best use of the specified asset;

● The principal, or in some cases, the most advantageous, market for the asset or liability; and

● The valuation technique appropriate for the actual measurement.

MEASUREMENT OF FAIR VALUE

The standard insists that the measurement of fair value should be based on an orderly transaction to sell the
asset or transfer the liability in either:

● The principal market (market which has the highest volume or level of activity) for the asset or liability; or

● In the absence of a principal market, the most advantageous market (market which maximises the
amount which would be received to sell the asset or minimises the amount that would have to be paid to
transfer a liability).

VALUATION TECHNIQUES
● The market approach: based on market transactions involving identical or similar assets or liabilities.

● The income approach: based on future amounts, typically cash flows or income, that are discounted to
their present value.

● The cost approach: links fair value to the amount required to replace an asset in its current condition.

HIERARCHY OF INPUTS
● Level 1: involve unadjusted quoted prices from active markets for identical assets or liabilities.

● Level 2: inputs comprise of:

○ Quoted prices coming from non-active markets, or from active markets but for assets or liabilities
which are similar, instead of identical;

○ Observable inputs other than quoted prices; and

○ Inputs that are not directly observable but are supported by observable market data.

● Level 3 – inputs that are unobservable.

 FR - The conceptual and regulatory
framework for financial reporting
IFRS 10 Consolidated Financial Statements - Module 1

PRINCIPLES OF CONSOLIDATION:

Basic idea: A company which controls one or more other entities is required to present consolidated financial
statements. The entity which exercises control over other businesses is naturally the parent, whereas the
companies over which control is exercised are its subsidiaries.

Although the parent and its subsidiaries remain legally separate, the consolidated financial statements of the
group which they constitute must be prepared as if those entities were, in fact, a single business. This
perspective on reporting the activities of a group is referred to as the single economic unit concept.

This method of preparing consolidated financial statements involves replacing the cost of the parent’s
investment in subsidiaries with the individual assets and liabilities of those subsidiaries, which when combined
with the assets and liabilities of the parent, provide an indication of the resources and obligations of the group as
a whole.

A key feature of IFRS 10: It establishes the rules for assessing whether the relationship between one entity and
another may, in fact, be deemed to constitute control. An investor controls an investee if it is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee. Accordingly, an investor is deemed to exercise control over an investee if
and only if that investor has all of the following:

a) Power over the investee. This criterion relates to power. An investor has the power when it has existing
rights giving it the current ability to direct the relevant activities of the investee. IFRS 10 defines relevant
activities as those activities of the investee that significantly affect the investee’s returns. The rights which
give the investor the ability to direct such activities, typically include voting rights, potential voting rights,
which arise from options over shares or instruments that are convertible into shares, or the rights to appoint
key management personnel;
b) Exposure, or rights, to variable returns from its involvement with the investee. Such conditions are
deemed to exist when the investor’s returns have the potential to vary as a result of the investee’s
performance;
c) The ability to use its power over the investee to affect a number of the investor’s returns. IFRS 10
 states that an investor who has power over an investee but cannot benefit from that power does not
exercise control. Similarly, an investor who has an exposure to variable returns from its involvement with the
investee, but cannot use its power to direct the activities that affect the investee’s return, also cannot claim
to control the investee.

Once the existence of control is established, IFRS 10 requires a parent to prepare consolidated financial
statements using uniform accounting policies for similar transactions and events.

If a member of the group uses accounting policies which differ from those adopted for the purposes of preparing
consolidated financial statements, appropriate adjustments are required to ensure conformity with the policies
followed by the group.

A potential problem also arises when the individual financial statements of the parent and its subsidiaries which
are used in the preparation of the consolidated financial statements are in fact prepared as at different reporting
dates. IFRS 10 states that if the end of the reporting period of the parent is different from that of a subsidiary, the
subsidiary must prepare, for consolidation purposes, additional financial information as of the same date as the
financial statements of the parent, unless it is impracticable to so.

In the event that the subsidiary is unable to prepare such additional information, the parent must use the most
recent financial statements which have been prepared by the subsidiary. These must be adjusted to reflect the
effects of significant transactions or events that occurred between the subsidiary’s reporting date and the date of
the consolidated financial statements. However, the difference between these dates cannot exceed three
months.
 FR - The conceptual and regulatory
framework for financial reporting
IFRS 10 Consolidated Financial Statements - Module 2

EXEMPTIONS FROM CONSOLIDATION:

Let’s examine the circumstances which allow a parent company to not present consolidated financial statements
or to exclude a subsidiary from consolidation.

Providing exemptions from the requirement to consolidate controlled subsidiaries is potentially risky and
dangerous. The rules are, therefore, quite strict and considerably limit the circumstances when this may occur.

IFRS 10 states that a parent entity may choose not to prepare consolidated financial statements if all of the
following conditions are met simultaneously:

- The parent itself is a wholly-owned subsidiary, in other words, it has a parent entity that holds 100% of its
shares, or is a partially-owned subsidiary of another entity and all of its remaining owners have been informed
about, and do not object to its intention not to present consolidated financial statements;
- Its debt or equity instruments, in other words, its bonds or shares, are not traded in a public market, where
public market is to be understood broadly to mean a domestic or foreign stock exchange or an over-the-
counter market;
- It did not file, nor is in the process of filing, its financial statements with a securities commission or other
regulatory body for the purpose of issuing any class of financial instruments in a public market;
- Its ultimate or any intermediate parent produces consolidated financial statements that are available for public
use and which comply with IFRS.

A parent who wishes to take advantage of the IFRS 10 exemption from preparing consolidated financial
statements cannot conceal the fact that it exercises control over other entities, and is, in fact, required to
disclose the following information in its separate financial statements:

- The fact that the exemption from consolidation has been used, and the name and principal place of business
of the company whose IFRS-compliant consolidated financial statements have been produced for public use;
- A list of its significant investments in subsidiaries, joint ventures and associates;
- A description of the method used to account for the above investments in its separate financial statements.
In addition to the exemption from preparing consolidated financial statements as provided by IFRS 10, there are
also two circumstances when an individual subsidiary may actually be excluded altogether from consolidated
financial statements that are nevertheless being prepared by the parent entity in a group, or excluded from
standard consolidation procedures:

1) The specific subsidiary may be deemed immaterial, and as you should already know, International Financial
Reporting Standards only apply to material items. An immaterial subsidiary would therefore not require
inclusion in the group’s consolidated financial statements;
2) The second reason pertains to omitting a subsidiary from standard consolidation procedures. This occurs
when the company is acquired with the intention of reselling it in the short term. In such cases, following
guidance contained in IFRS 5, the subsidiary would be reported under ‘assets held for sale’ within current
assets and measured at the lower of its carrying amount and fair value less costs to sell.
Note: In this case, the subsidiary would show up in the consolidated financial statements but its treatment
would be very different to the way in which other subsidiaries are reported and measured.