Chapter 1

Financial Reporting
and IFRSs

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 Agenda

1. Objective of Financial Reporting and the IFRSs

2. History and Structure: From the IASC to the IASB
3. IFRSs, IASs and Interpretations
4. Authority of IFRSs
5. Application and Use of IFRSs
6. Current Trends and Future Challenges of IFRSs

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 Agenda

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 1. Objective of Fin. Reporting & IFRSs

• A user of an entity’s financial statements aims at

knowing what have happened in the entity
• However, before reading the financial statements,
the user should better know and be familiar with the
basis of preparation of the financial statements
• Each country or place used to have different
accounting procedures, principles and standards in
governing the preparation of financial statements of
the entity within its jurisdiction
• With an aim in resolving and reconciling such
accounting differences, the IFRSs and IASs, have
been issued since 1974, one year after the
establishment of the IASC

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 2. History & Structure of the IASB

• IASB = International Accounting Standards Board

– An independent, privately-funded accounting standard setter, based in
London
– Responsible to issue IFRSs (International Financial Reporting Standards)

• IASC (International Accounting Standards Committee) is IASB’s

predecessor
– Responsible to issue IASs (International Accounting Standards)

• IFRSs include IASs

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 2. History & Structure of the IASB

• In 1973, IASC was founded by several accountancy bodies over the

world
• From 1983 to 2001, IASC’s members included all professional
accountancy bodies of IFA (International Federation of Accountants)
• In 1999, a restructuring plan was approved
– IASC becomes a separate, independent and not-for-profit body governed
by trustees
– It funds the activities of IASB
• In 2001, IASC Foundation was incorporated and acts as the parent of
IASB
– IASB has then assumed accounting standard setting responsibilities from
IASC
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 2. History & Structure of the IASB

• Initially, IASC was established to promote the harmonisation of the

accounting standards
• While IASC issued more standards and more countries began to
participate in its activities, its international authority status had grown
• Its status enhanced by 2 significant developments:
– The endorsement of International Organisation of Security Commissions
(IOSCO) on IFRSs/IASs
– The requirement of the European Commission on all the listed companies in
the European Union to prepare their financial statements in conformity with
the IFRSs from 1 Jan. 2005

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 2. History & Structure of the IASB

• Its status further enhanced after the following significant developments:

2002: European Commission passed the requirement to require listed entities in
the European Union to adopt IFRSs from 2005;
2002: the IASB and the accounting standard setter in US, the FASB,
announced initiatives to achieve compatibility in financial reporting
standards and to co-ordinate future work programmes;
2003: Australia, Hong Kong & New Zealand committed to adoption of IFRSs;
2005: near 7,000 listed businesses in 25 countries in Europe switched to IFRSs;
2006: the IASB and FASB agreed roadmap for convergence between IFRSs
and the generally accepted accounting practices (“GAAP”) in the US;
2006: China, the country with the largest population, adopted accounting
standards substantially in line with IFRSs
2007: Brazil, Canada, Chile, India, Japan and Korea established timelines to
adopt or converge with IFRSs; and
2007: SEC in US removed reconciliation requirement for non-US companies
reporting under IFRSs, and consulted on IFRSs for domestic companies.
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 2. History & Structure of the IASB

• In 2001, after the restructuring, IASC Foundation’s objectives are

refined as:
a) to develop, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards that
require high quality, transparent and comparable information in financial
statements and other financial reporting to help participants in the world’s
capital markets and other users make economic decisions;
b) to promote the use and rigorous application of those standards; and
c) to bring about convergence of national accounting standards and IASs
and IFRSs to high quality solutions.

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 2. History & Structure of the IASB

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 2. History & Structure of the IASB

• The IASC Foundation

‒ is an independent organisation having two main bodies, the Trustees and
the IASB,
‒ as well as a Standards Advisory Council and the International Financial
Reporting Interpretations Committee.
• The IASC Foundation Trustees
‒ appoint the IASB members, exercise oversight and raise the funds
needed,
‒ but the IASB has sole responsibility for setting accounting standards

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 2. History & Structure of the IASB

• The International Accounting Standard Board (IASB) has sole

responsibility for setting accounting standards
– 14 board members, who come from different countries and have a variety
of functional backgrounds
– members not dominated by any particular constituency or regional
interest
– foremost qualification for IASB membership is technical expertise

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 2. History & Structure of the IASB

• The International Financial Reporting Interpretation Committee

(IFRIC)
– reviews, on a timely basis within the context of current IFRSs and the
IASB Framework, accounting issues that are likely to receive divergent or
unacceptable treatment in the absence of authoritative guidance, with a
view to reaching consensus on the appropriate accounting treatment
– The IFRIC addresses issues of reasonably widespread importance, not
issues that are of concern to only a small minority of entities.
– The findings are summarised and published in
its IFRIC Interpretations

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 3. IFRSs, IASs and Interpretations

• International Financial Reporting Standards are:

• Standards and Interpretations issued by the International
Accounting Standards Board (IASB) and comprise:
– International Financial Reporting 8 sets in issue (from IFRS 1 to 8)
Standards (IFRSs);
– International Accounting 30 sets in issue (from IAS 1 to 41
Standards (IASs); and while 11 IASs has been withdrawn)
– Interpretations (SIC and IFRIC). 10 SIC and 13 IFRIC in issue

• What is the difference between IFRS and IAS?

‒ IASB has designated its accounting standards as IFRS
‒ IASs were issued by the IASB’s predecessor, the International Accounting
Standards Committee (IASC)
‒ After the establishment of the IASB, IFRSs includes IASs.

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 4. Authority of IFRSs

• The IASB achieves its objectives primarily by

developing and publishing IFRSs and promoting
the use of those standards in general purpose
financial statements and other financial reporting.
• However, the IASB has no authority to require
compliance with its accounting standards. It only
prescribes that, where IFRSs are the required
accounting standards, or an entity chooses to
comply with IFRSs, the requirements of all IFRSs
should be regarded as mandatory.

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 4. Authority of IFRSs

• In developing the IFRSs, the IASB follows a rigorous and open due
process
• Ensure that IFRSs are of high quality and are developed only after
giving IASB's constituencies opportunities to make their views known at
several points in the standards-setting due process.
• The procedure for developing an IFRS is as follows:
– Stage 1: Setting the agenda
– Stage 2: Project planning
– Stage 3: Development and publication of a discussion paper
– Stage 4: Development and publication of an exposure draft
– Stage 5: Development and publication of an IFRS
– Stage 6: Procedures after an IFRS is issued

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 5. Application and Use of IFRSs

• IFRSs are used in general purpose financial statements and other

financial reporting. Other financial reporting comprises information
provided outside financial statements that
 assists in the interpretation of a complete set of financial
statements or
 improves users’ ability to make efficient economic decisions.
• From the contents perspective, IFRSs set out recognition,
measurement, presentation and disclosure requirements dealing with
transactions and
• IFRSs include paragraphs in bold type and plain type, which have equal
authority.
 The paragraphs in bold type indicate the main principles.

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 5. Application and Use of IFRSs

• From the entity perspective, IFRSs are designed to apply to the general
purpose financial statements and other financial reporting of all profit-
oriented entities.
• Although IFRSs are not designed to apply to not-for-profit activities in
the private sector, public sector or government, entities with such
activities may find them appropriate.

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 6. Current Trends & Future Challenges

• In recent years, several trends of IFRSs are identified:

1. Globalisation of the accounting standards and convergence to
IFRSs
2. Convergence is not only on standards but also on terminology to be
used
3. Fair value measurement is frequently and increasingly used and is
considered to be more relevant
4. Fair value should reflect the market condition at the balance sheet,
i.e. revaluated at each balance sheet
5. Less accounting choices would be available
6. Off-balance sheet item can no longer be “off” and they must be
recognised in the balance sheet
7. Beyond the fair value measurement, risk approach or oriented
disclosures are required

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 6. Current Trends & Future Challenges

• Challenges are still faced by the IASB and IFRSs, for example:
1. Historical accounting differences (resulted from different reasons) may not
be reconciled or removed simply by the adoption of IFRSs.
2. Corporate failure, including Enron and Baring, has significantly changed the
regulatory framework on business, including accounting. Failure occurred
may still affect the practice and IFRSs and changes seem inevitable
3. Experience in applying IFRSs is still limited and a process of experience
accumulation may take time. Further changes in IFRSs may still occur.
4. IASB is an independent body, responsible to issue and interpret IFRSs, but
does not have a mechanism to resolve application dispute, an inconsistent
application or mis-application issue around the world.
5. In case of dispute, there is no international organization with the power to
enforce the IFRSs and assure that entities using IFRSs are really in
compliance with IFRSs
• For example, the case of Societe Generale

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 Chapter 1

Financial Reporting
and IFRSs

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