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IFRS BY ICAI Dissemination of knowledge on IFRS

IFRS BY ICAI Dissemination of knowledge on IFRS

IFRS BY ICAI Dissemination of knowledge on IFRS:

  • Why global standards?
  • The progress
  • Structure and governance
  • Understanding principle-based standards
  • Common misunderstandings
  • Framework-based understanding of IFRSs
  • Framework-based teaching of IFRSs

IFRS BY ICAI Dissemination of knowledge on IFRS: The reality

  • Capital markets are global – New York, London, Luxemburg, Hong Kong, Singapore
  • World’s economies are interdependent – the financial crisis – SMEs integrated into the global economy.
  • Accounting and auditing needs strengthening – World Bank ROSCs – corporate failures – standard setters work programmes
  • High-quality information facilitates the allocation of global capital

Benefits of global standards

  • Efficient allocation of capital globally – attracting investment through transparency – reducing the cost of capital – increasing world-wide investment
  • Reducing costs and increased efficiency – facilitates standardising information systems – eliminates wasteful reconciliations – audit efficiency – education and training

Status of IFRSs use around the world

  • Since 2001, over 120 countries have required or permitted the use of IFRSs.
  • Remaining major economies have time lines to converge with or adopt IFRSs in the near future.
  • Next wave of new joiners in 2011/2012: Argentina, Canada, Mexico, South Korea, etc
  • Japan: IFRS permitted for a number of international companies since 2010; decision about mandatory adoption around 2012.

IFRS BY ICAI Dissemination of knowledge on IFRS

What does principle-based mean?

  • There is overwhelming support for principle based accounting standards
  • But what does principle-based mean?
  • In this presentation – an IFRS requirement is principle-based only when it is consistent with the concepts in the IASB’s Conceptual Framework

IFRS BY ICAI Dissemination of knowledge on IFRS

Role of the Conceptual Framework

  • Conceptual Framework sets out agreed concepts that underlie financial reporting – objective, qualitative characteristics, element definitions.
  • IASB uses Conceptual Framework to set standards – enhances consistency across standards – enhances consistency over time as Board members change – provides benchmark for judgements
  • Prepares use Conceptual Framework to develop accounting policies in the absence of specific standard or interpretation
IFRS BY ICAI Dissemination of knowledge on IFRS

IFRS BY ICAI Dissemination of knowledge on IFRS

IFRS BY ICAI Dissemination of knowledge on IFRS

Objective of 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 Note:

  • Other aspects of the Conceptual Framework flow logically from the objective (CF.OB1)
  • Conceptual Framework sets out the concepts that underlie IFRS financial statements and assist the IASB in the development of future IFRSs and in its review of existing IFRSs (CF.Purpose and Status)

IFRS BY ICAI Dissemination of knowledge on IFRS

Objective of financial reporting

Investors’, lenders’ and other creditors’ expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity. – Decisions by investors about buying, selling or holding equity and debt instruments depend on the returns that they expect from an investment in those instruments, eg dividends, principal and interest payments or market price increases. – Decisions by lenders about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect.

IFRS BY ICAI Dissemination of knowledge on IFRS

Objective of financial reporting

• To assess an entity’s prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about: – the resources of the entity; – claims against the entity; and – how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s resources – eg protecting the entity’s resources from unfavourable effects of economic factors such as price and technological changes

IFRS BY ICAI Dissemination of knowledge on IFRS

Qualitative characteristics

  •  If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent (ie fundamental qualities). – Financial information without both relevance and faithful representation is not useful, and it cannot be made useful by being more comparable, verifiable, timely or understandable.
  • The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable (ie enhancing qualities—less critical but still highly desirable) – Financial information that is relevant and faithfully represented may still be useful even if it does not have any of the enhancing qualitative characteristics.

IFRS BY ICAI Dissemination of knowledge on IFRS

Fundamental qualitative characteristics

  • Relevance: capable of making a difference in users’ decisions – predictive value – confirmatory value – materialist (entity-specific)
  • Faithful representation: faithfully represents the phenomena it purports to represent – completeness (depiction including numbers and words) – neutrality (unbiased) – free from error (ideally) Note: faithful representation replaces reliability.

IFRS BY ICAI Dissemination of knowledge on IFRS

Summary

  •  Reporting financial information that is relevant and faithfully represents what it purports to represent helps users to make decisions with more confidence (ie financial information must possess the fundamental qualitative characteristics).
  • IFRS requirements must be cost-beneficial
  • Applying the enhancing qualitative characteristics is an iterative process that does not follow a prescribed order. Sometimes, one enhancing qualitative characteristic may have to be diminished to maximise another qualitative characteristic.

IFRS BY ICAI Dissemination of knowledge on IFRS

Enhancing Qualitative Characteristics

  • Comparability: like things look alike; different things look different
  • Venerability: knowledgeable and independent observers could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation
  • Timeliness: having information available to decision-makers in time to be capable of influencing their decisions
  • Understand ability: Classify, characterise, and present information clearly and concisely

IFRS BY ICAI Dissemination of knowledge on IFRS

Pervasive constraint

  •  Reporting financial information imposes costs, and it is important that those costs are 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.
  • In applying the cost constraint, the IASB assesses whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information. Those assessments are usually based on a combination of quantitative and qualitative information.

IFRS BY ICAI Dissemination of knowledge on IFRS

Summary

  • Reporting financial information that is relevant and faithfully represents what it purports to represent helps users to make decisions with more confidence (ie financial information must possess the fundamental qualitative characteristics).
  • IFRS requirements must be cost-beneficial
  • Applying the enhancing qualitative characteristics is an iterative process that does not follow a prescribed order. Sometimes, one enhancing qualitative characteristic may have to be diminished to maximise another qualitative characteristic.

IFRS BY ICAI Dissemination of knowledge on IFRS

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