IFRS Introduction

ERMIAS ABERA (PhD – DBL, ACCA, MBA, BA

in ACCOUNTING and FINANCE)

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 Learning Objectives
 At the completion of this topic, you will be able to:
 Understand the essence and current level of IFRS
 Describe the structure of IASB
 List the current pronouncements that constitute IFRS
 Identify the basic differences between IFRS and US GAAP
 Describe the Ethiopian new legal requirements related to
financial reporting
 Describe the conceptual framework of IFRS
 Definition & Importance of Accounting

Information system
Supply of information
Accounting
Service activity
Demand for information

Analytical descriptive discipline

Financial performance
Financial position
Liquidity, etc

Input Process
Output
Economic Accounting Financial
Activities Cycle Information
 What is IFRS?
 IFRS: International Financial Reporting Standards:
◦ Are single-set of globally accepted and enforced set of

standards;
◦ Aim at high quality, transparent and Comparable information in

financial statements
◦ Are issued by IASB [International Accounting Standards Board]

 Those Standards prescribe:

 the items that should be recognized as assets, liabilities, income

and expense
 how to measure those items;

 how to present them in a set of financial statements; and

 related disclosures about those items.

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 Principles-Based vs. Rules-Based Standards

IFRS are referred to as being principles-based standards

 Provide core principles (objectives) with minimum

guidance.
 Results in accounting that is more flexible to deal with

unique economic and business circumstances

 The judgments are expected to be consistent with

clear conceptual framework

 They are more loosely framed, allowing for

professional judgment to be applied

 Some argue that allowing professional judgment

introduces bias
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 Principles-Based vs. Rules-Based Standards

US GAAP are referred to as being rules-based standards:

 They are more prescriptive

 Provide a rule for every situation

 Body of knowledge too large and complicated

 Although more guidance is a comfort to some, it

becomes difficult to ensure that the standards are all

consistent.
 More on the differences between IFRS and US GAAP

later

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 Benefits of IFRS
 Credibility of local market to foreign investors
 More cross-border investment
 Efficient capital allocation( efficient information)
 Comparability across political boundaries
 Facilitates global education and training
 Lower cost of capital
 Facilitates raising capital abroad
 Integrated IT systems
 One set of books + easier consolidation
 Better understanding of financial statements from business partners abroad

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 IFRS Adoption

 Many countries (about 126) have converted to IFRS and

conversions are imminent for other countries
 IFRS Standards are applied by domestic companies in
150 jurisdictions
 126 of the 150 jurisdictions require IFRS  for all or most
domestic publicly accountable entities (listed
companies and financial institutions).
 China and United States are among the Nine
jurisdictions use national or regional standards.
 Japan(JMIS) and Switzerland are among jurisdictions
that permit, rather than require, IFRS Standards: 8
 IFRS Adoption

 International support to have global accounting

standards
 G20

 WB

 IMF

 Basel Committee,

 International Organization of Securities Commissions

 International Federation of Accountants

(instrumental in IPSAS)
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 Global adoption of IFRSs

Countries seeking convergence

with the IASB or pursuing
adoption of IFRS
Countries that require or
permit IFRS or have fixed
 IFRS in Ethiopia

 Ethiopia passed a financial reporting law in 2014

which requires the use of IFRS by commercial
businesses operating in Ethiopia.
 Proclamation No. 847/2014
 Regulation No. 332/2014

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 IFRS in Ethiopia

The proclamation requires:

 Commercial organizations to follow

 International Financial Reporting Standards (IFRS),

or
 International Financial Reporting Standards for

Small and Medium Enterprises (IFRS for SME)

 Charities and societies to follow International Public

Sector Accounting Standards (IPSAS)

 Public auditors to follow International Standards for

Auditing.
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 IFRS in Ethiopia

 Public interest entity (PIE) should use the full IFRS.

 A PIE is a reporting entity that is of significant public
relevance because of the:
 nature of its business,
 its size,
 its number of employees.
 PIE also includes banks, insurance companies, and any
other financial institutions and public enterprises.
 Small or medium enterprises (SME)= Not public
interest entity
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 Structure, strategic plan, & roadmap of AABE

 Accounting and Auditing Board of Ethiopia is

established by Regulation No. 332/2014
 It is an autonomous government organ accountable
to MOFEC.
 It is headed by the Director General
 It has 12-member Board of Directors

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 AABE duties (among others)

 Issue standards and directives relating to financial

reporting and auditing and ensure their compliance.
 Receive and register financial statements of reporting
entities
 Review and monitor the accuracy and fairness of FS
to enforce compliance with the reporting standards
 Register and license public auditors
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 AABE duties (among others)

 Oversee professional accountancy bodies

 Establish, publish and review a code of professional
conduct and ethics for certified public accountants
and certified auditors
 Conduct or arrange for the conduct of professional
examination for the purpose of registering certified
public accountants
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 AABE Roadmap to IFRS Implementation

IFRS implementation road map: 3 phase transition over 3 years:

 Phase 1: Significant Public Interest Entities (Financial Institutions and

public enterprises owned by Federal - Adoption of IFRS)

 Adoption start from EFY 2009 (i.e. specifically July 8, 2017);

 Phase 2: Other Public Interest Entities (ECX member companies and

those that meet PIE quantitative thresholds and Regional Public

Enterprises) adoption of IFRS and IPSAS for Charities and Societies-
 start adoption of the standards at the start of EFY 2010 (i.e

specifically July 8, 2018)

 Phase 3: Small and Medium-sized Entities adoption of the IFRS for

SMEs
 start adoption of the standards from EFY 2011 (i.e specifically July 8,

2019)
 Are those meeting 2 or more of: Annual TO of >= 50 mn; >= 10 employees; 2
mn capital; and 500,000 liability
Back to IFRS

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 A CONCEPTUAL AND REGULATORY FRAMEWORK

FRAMEWORKS OF FINANCIAL
REPORTING

 
 REGULATORY CONCEPTUAL
FRAMEWORK FRAMEWORK

THE REGULATORY THE

SYSTEM FRAMEWORK 

REGULATORY
BODIES QUALITATIVE
ELEMENTS OF FINANCIAL
STANDARD SETTING CHARACTERSITICS OF
STATEMENTS
PROCESS FINANCIAL INFORMATION

RECOGNITION OF
ELEMENTS OF FINANCIAL
FUNDAMENTAL ENHANCING
STATEMENTS
   

 COMPARABILITY
FAITHFUL
RELEVANCE  VERIFIABILITY
REPRESENTATION
   TIMELINESS
 
 UNDERSTANDABILITY
Regulatory Framework

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 IASB and IFRS
 IFRS is developed by the International Accounting Standards Board (IASB),
which operates under the oversight of the IFRS Foundation( formed on
March 8, 2001).
 IASB was formerly (before April 1,2001) called International Accounting
Standards Committee (IASC) Board. IASC was founded in 1973.
 1973-April 1 2001 SIC; April 1, 2001-March 31,2010 IFRIC; March 31, 2010
to date IFRS intrptn Committee.
 Until 31 March 2010, the IFRS Advisory Council was named the Standards
Advisory Council (SAC)
 IASB is based in London
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Standards Development Process

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List of Applicable IFRSs

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List of Applicable IFRS

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IFRS Comprises

International Accounting
Standards (IAS) -24

International Financial
Reporting Standards (IFRS)-
17

Standing Interpretations
Committee (SIC)- 5

International Financial
Reporting Interpretations
Committee (IFRIC)- 13
 International Accounting Standards (IAS)

 IAS 1: Presentation of Financial Statements

 IAS 2: Inventories
 IAS 7: Statement of Cash Flows
 IAS 8: Accounting Policies, Changes in Accounting
Estimates and Errors
 IAS 10: Events after the Reporting Period

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 International Accounting Standards (IAS)

 IAS 11: Construction Contracts (will be superseded by

IFRS 15 as of 1 January 2018)
 IAS 12: Income Taxes
 IAS 16: Property, Plant and Equipment
 IAS 17: Leases (will be superseded by IFRS 16 as of 1
January 2019)
 IAS 18: Revenue (will be superseded by IFRS 15 as of 1
January 2018)
 IAS 19: Employee Benefits

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 International Accounting Standards (IAS)

 IAS 20: Accounting for Government Grants and

Disclosure of Government Assistance
 IAS 21: The Effects of Changes in Foreign Exchange
Rates
 IAS 23: Borrowing Costs
 IAS 24: Related Party Disclosures
 IAS 26: Accounting and Reporting by Retirement
Benefit Plans
 IAS 27: Separate Financial Statements

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 International Accounting Standards (IAS)

 IAS 28: Investments in Associates and Joint Ventures

 IAS 29: Financial Reporting in Hyperinflationary
Economies
 IAS 32: Financial Instruments: Presentation
 IAS 33: Earnings per Share
 IAS 34: Interim Financial Reporting
 IAS 36: Impairment of Assets
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 International Accounting Standards (IAS)

 IAS 37: Provisions, Contingent Liabilities and

Contingent Assets
 IAS 38: Intangible Assets
 IAS 39: Financial Instruments: Recognition and
Measurement (will be superseded by IFRS 9 as of 1
January 2018)
 IAS 40: Investment Property
 IAS 41: Agriculture
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 International Financial Reporting Standards

 IFRS 1: First-time Adoption of International Financial

Reporting Standards
 IFRS 2: Share-based Payment
 IFRS 3: Business Combinations
 IFRS 4: Insurance Contracts (will be superseded by IFRS
17 as of 1 January 2021)
 IFRS 5: Non-current Assets Held for Sale and
Discontinued Operations
 IFRS 6: Exploration for and Evaluation of Mineral
Resources
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 International Financial Reporting Standards

 IFRS 7: Financial Instruments: Disclosures

 IFRS 8: Operating Segments
 IFRS 9: Financial Instruments (will replace IAS 39 as of
1 January 2018)
 IFRS 10: Consolidated Financial Statements
 IFRS 11: Joint Arrangements
 IFRS 12: Disclosure of Interests in Other Entities
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 International Financial Reporting Standards

 IFRS 13: Fair Value Measurement

 IFRS 14: Regulatory Deferral Accounts
 IFRS 15: Revenue from Contracts with Customers (will
replace IAS 11 and IAS 18 as of 1 January 2018)
 IFRS 16: Leases (replaces IAS 17 as of January 1, 2019)
 IFRS 17: Insurance Contracts (replaces IFRS 4 as of
January 1, 2021)
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 IFRS Vs. US GAAP

 Great strides have been made by the FASB and the

IASB to converge the content of IFRS and U.S. GAAP.
 There is continued support for the objective of a
single set of high-quality, globally accepted
accounting standards.

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 IFRS Vs. US GAAP

 Virtually Identical Standards

 share-based payments,
 segment reporting,
 business combinations,
 consolidated financial statements,
 fair value measurement,
 joint arrangements,
 investment entities, and
 Revenue
 Natural resources

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 IFRS Vs. US GAAP

 Unsuccessful Joint Projects

 leases,

 Insurance,

 Financial instruments,

 Conceptual framework

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 IFRS Vs. US GAAP
 Inventory costing method
US GAAP allows LIFO method

IFRS doesn’t allow LIFO method

 Reversal of inventory write-downs

 US GAAP doesn’t allow

 IFRS allows

 Valuation of property, plant, and equipment

 U.S.GAAP: Cost less accumulated depreciation

 IFRS: Cost less accumulated depreciation (or) fair

value(revaluation)
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 IFRS Vs. US GAAP

 Valuation of intangible assets

 U.S GAAP: Cost less accumulated amortization.

Revaluation prohibited
 IFRS: Cost less accumulated amortization (or) fair

value(revaluation)
 Research and development expenditures
 U.S GAAP: Expensed in the period incurred

 IFRS:

 Research: expensed in the period incurred

 Development: that meet specified criteria: capitalized

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 IFRS Vs. US GAAP

 Distinction between debt and equity for preferred stock

 U.S. GAAP: most preferred stock is included in
stockholders’ equity, with the dividends reported as a
reduction in retained earnings
 IFRS: most preferred stock is reported as debt, with
the dividends reported in the income statement as
interest expense
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 IFRS Vs. US GAAP

 Discontinued operations
 U.S. definition is broader than its international

counterpart
 IFRS considers a component to be primarily either a

major line of business or geographical area of

operations
 Extraordinary items
 U.S. GAAP: provides separate reporting

 IFRS: recording or disclosure not allowed

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The Conceptual Framework
of
Financial Reporting

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 Meaning of the Conceptual Framework

Conceptual Framework(the framework) sets out the

concepts that underlie IFRS financial statements
 It comprises of:

 the objective of general purpose financial reporting

 qualitative characteristics
 elements of financial statements
 recognition
 measurement
 presentation and disclosure
 Other concepts all flow from the objective

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 Purpose of the Conceptual Framework

• To assist IASB in setting and revising standards

• To assist preparers to make the judgements that are
necessary to apply IFRSs
• To assist auditors and regulators assess judgments of
preparers
• To assist users to consider those judgments when
using IFRS financial information to inform their
decisions
• To assist in understanding of standard-setting by IFRS
• To reduce conflicts between Framework and
Standards and setting of conflicting standards
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 Objective of General Purpose
Financial Reporting

“Provide financial information about the reporting

entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about
providing resources to the entity”

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 Objective of General Purpose
Financial Reporting

 To provide information about

 Economic resources and claims (SFP)
 Changes in economic resources and claims
(SPLOCI)
 Financial performance reflected by past cash
flows (SCF)
 Changes in economic resources and claims not
resulting from financial performance (SCE)

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Qualitative Characteristics of Useful
Financial Information

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 Elements of Financial Statements

Income
Asset
 recognised increase in
 resource controlled by the
asset/decrease in liability in
entity current reporting period
 result of past event
 that result in increased
 expected inflow of economic equity except contributions
benefits from owners
Liability Expense
 present obligation  recognised decrease in

 arising from past event asset/increase in liability in

 expected outflow of
current reporting period
 that result in decreased
economic benefits
equity except distributions
Equity = assets less liabilities to owners 53
 Recognition

 Accrual basis of accounting used

 Recognise element when:
 The element satisfies definition
 probable that benefits will flow to/from the entity
 has cost or value that can be measured reliably

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 Recognition

 What does probable mean?

 It means “more likely than not”

 The meaning of probable is determined at the

standards level. Therefore, inconsistent use across

IFRSs (usually more than 50%)
 What does measure reliably mean?
 To a large extent, financial reports are based on

estimates, judgements and models rather than

exact depictions.

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 Measurement

 Measurement is the process of determining monetary

amounts at which elements are recognised and
carried.
 To a large extent, financial reports are based on
estimates, judgements and models rather than exact
depictions.

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 Measurement

 Measurement methods include

 Historical cost: cash paid or fair value of

consideration given
 Current cost(replacement cost): Cash that would

be paid if acquired now

 Realisable (settlement) value: cash that could be

obtained by selling the asset now

 Present value: present discounted value of future

net cash inflows that the item is expected to

generate
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 Constraints

 Cost vs. benefit: cost of information is justified by

the benefits of reporting that information.
 Benefits include more efficient functioning of
capital markets and a lower cost of capital for the
economy.
 Costs include collecting, processing, verifying and
disseminating financial information and the costs
of analysing and interpreting the information
provided.
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 Underlying Assumptions

Underlying assumptions of financial reporting:

 Going concern, and
 Accruals accounting

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 Financial Statements

 A statement of financial position as at the end of the

period
 A statement of profit or loss and other
comprehensive income for the period
 A statement of changes in equity for the period
 A statement of cash flows for the period
 Notes, comprising
 A summary of significant accounting policies

 Other explanatory information

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 IASB Books

 IASB publishes IFRS in 3 books every year

 Red Book

 Blue Book

 Green Book

 Each book is published as 2 books( A and B)

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IASB Books

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 IASB Books

Red book 
 Standards with effective date after 1 January of the
year the book refers to.
 It excludes standards that are being replaced and/or
superseded by these standards.
 For example, readers seeking the consolidated text of
IFRS issued at 1 January 2016 (including Standards with
an effective date after 1 January 2016) should refer to
the 2016 IFRS (Red Book), which is being issued in the
first quarter of 2016. 63
 IASB Books

Blue Book: 
 Standards with an effective date before/on 1 January of
the year the book refers to.
 It does not contain Standards or changes to the standards
with an effective date after 1 January.
 It includes the consolidated Standards as approved for
issue up to 31 December 2015 and as required to be
applied on 1 January 2016.

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 IASB Books

Green Book: 
 Standards issued at 1 July of the year the book refers
to, including standards with an effective date after 1
July. 
 It excludes standards that are being replaced and/or
superseded

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 IFRS for SMEs

 Final standard issued 9 July 2009

 230 pages (vs. 3,000+ in full IFRS)
 Simplified IFRSs, but built on an IFRS foundation
 Completely stand-alone and divided into 39 Sections
 Designed specifically for SMEs
 Internationally recognized

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 How simplified

1. Some topics in IFRSs omitted if irrelevant to private

entities
2. Where IFRSs have options, include only simpler
option
3. Recognition and measurement simplifications
4. Reduced disclosures
5. Simplified drafting

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 Who are SMEs?

 Small or medium enterprise is:

 A reporting entity, and
 is not a public interest entity
 Quantitative Thresholds for Full IFRS Adoption(at least 2)
 More than 50 Million annual turnover
 More than 100 Million Total Asset
 More than 100 Million Total Debt
 Over 100 Employees
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 IFRS 13

FAIR VALUE MEASUREMENT

 Learning Objectives

At the completion of studying this chapter, you will be able to:

Understand conceptual underpinnings for fair value measurement
Understand how fair value is measured for:

 non-financial assets

 financial assets

 financial liabilities

Understand the judgments in measuring the fair value of an item

identify the disclosure requirements of IFRS 13

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The objective of IFRS 13

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 The objective of IFRS 13

IFRS 13 establishes how to measure fair value. It does not prescribe:

 what should be measured at fair value;

 when to measure fair value (i.e. the measurement date); or

 how (or whether) to account for any subsequent changes in fair

value (e.g. in profit or loss or in other comprehensive income).

Apply IFRS 13:
 When another IFRS requires or permits fair value measurements or
disclosures about fair value measurements

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What is fair-value?

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 Who are the market participants?

 Market participants are buyers and sellers in the principal (or most
advantageous) market who are:

Independent Knowledgeable

Able to enter into a Willing to enter into a

transaction transaction
 Market participants act in their economic best interest
 Maximise the value of the asset

 Minimise the value of the liability

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 Fair value: market participant perspective
application guidance: how to measure fair value

 To measure fair value determine:

 all characteristics of the asset or liability

being measured (exclude things that are

not characteristics of the asset or
liability);
 for non-financial assets, the valuation

premise and the highest and best use;

 the principal (or most advantageous)

market;
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 Fair value: market participants’ view point
application guidance: characteristic of an asset or
liability
 Fair value measurement is for a particular asset or liability
 it captures all characteristics of the asset or liability being

measured that market participants would take into account when

pricing the item
–
Location
–
age and remaining economic life
–
Condition
–
restrictions on use or sale that are a characteristic of the item
 it excludes things that are not characteristics of the asset or liability

 transactions costs

 restrictions on use or sale that are not a characteristic of the

item

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 Where would the transaction taken place?

Fair value is the price in the …

Or, if no principal market, the
Principal market
most advantageous market
The market with the greatest volume The market that maximises the
and level of activity for the asset or amount that would be received to
liability sell the asset and minimize the
amount that would be paid to
transfer the liabilityafter considering
transaction costs and transport
costs.

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 Fair value hierarchy

IFRS 13 establishes a three level fair value hierarchy for inputs to measure fair value:

unadjusted quoted prices in active markets for identical

assets or liabilities
Level 1
inputs other than quoted prices
included in Level 1 that are
observable, either directly or
indirectly
Level 2
unobse
rvable
inputs
Level 3
 Fair value hierarchy
Example
 Entity A measures the fair value of its investment property using the price per
square metre derived from market transactions for similar buildings in similar
locations. The assets in the observed transactions are sufficiently comparable so
that no significant adjustments to the inputs are required

 Entity B measures the fair value of its investment property using the price per
square metre derived from market transactions for similar buildings. The assets and
the location in the observed transactions are not sufficiently comparable so a
significant adjustments to the inputs are required.

What is the fair value hierarchy for both entities?

 Valuation techniques
 When a price for an identical asset or liability is not observable, an entity measures
fair value using another valuation technique that:
•maximises the use of relevant observable inputs and
•minimises the use of unobservable inputs

•Appropriate in the circumstances

•For which sufficient data are available to measure fair value
 IFRS 13 provides guidance on the use of valuation techniques when measuring fair
value and states that there are three widely used valuation techniques:
 the market approach
 the cost approach
 the income approach
 An entity should use valuation techniques consistent with one or more of those
approaches to measure fair value.
Questions or comments?

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