Impact of adoption of IFRS on Accounting Practices

IMPACT OF ADOPTION OF IFRS ON ACCOUNTING PRACTICES

Basic Concept

Mix of historical cost and fair valuation. 

True and fair over-ride

In extremely rare circumstances when management concludes that compliance with a requirement in an IFRS or an Interpretation of a Standard would be misleading, and therefore that departure from a requirement is necessary to achieve a fair presentation, an entity should disclose: (a) that management has concluded that the financial statements fairly present the entity’s financial position, financial performance and cash flows; (b) that it has complied in all material respects with applicable IIFRS except that it has departed from a Standard in order to achieve a fair presentation; (c) the Standard from which the entity has departed, the nature of the departure, including the treatment that the Standard would require, the reason why that treatment would be misleading in the circumstances and the treatment adopted; and (d) the financial impact of the departure on the entity’s net profit or loss, assets, liabilities, equity and cash flows for each period presented.

The override does not apply where there is a conflict between local company law and IFRS; in such a situation, the IFRS requirements must be applied.

When assessing whether a departure from a specific requirement in IFRS is necessary, consideration is given to: (a) the objective of the requirement and why that objective is not achieved or is not relevant in the particular circumstances; and (b) the way in which the entity’s circumstances differ from those of other entities which follow the requirement.

Accounting Policies

Management should select and apply accounting policies so that the financial statements comply with all the requirements of each applicable International Financial Reporting Standard and Interpretation of the International Financial Reporting Interpretations Committee.  Where there is no specific requirement, management should develop policies to ensure that the financial statements provide information that is:

(a) relevant to the decision-making needs of users; and

(b) reliable in that they represent faithfully the results and financial position of the entity; reflect the economic substance of events and transactions and not merely the legal form; are neutral, that is free from bias; are prudent; and  are complete in all material respects.

Component of financial statements

Balance sheet, Income statement, Statement of changes in equity (SOCIE), cash flow and notes to accounts. Statement of Recognized Income and Expenses (SORIE) can be presented separately from SOCIE, if the entity so chooses.

Disclosure of Critical Judgments

IAS 1 requires disclosure of critical judgments and estimates made by management in applying accounting policies

Comparatives

Comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements.  Comparative information shall be included for narrative and descriptive information when it is relevant to an understanding of the current period's financial statements.

Reporting currency for presentation of financial statements

An entity can present its financial statement in any currency. However, all items needs to be recorded in functional currency. The company translates the financial statement from functional currency to presentation currency. The balance sheet items are translated at closing rate. P&L items at average rate. The exchange difference arising in such process is shown as separate component of equity.

Balance sheet format

Illustrative format has been provided under IFRS as there is no prescribed rigid format. Under IAS 1 each entity should present current and non-current assets and current and non-current liabilities as separate classifications on the face of the balance sheet except when a presentation based on liquidity provides information that is reliable and is more relevant.    Whichever method of presentation is adopted, an entity should disclose, for each asset and liability item that combines amounts expected to be recovered or settled both before and after twelve months from the balance sheet date. 

IAS 1 prescribes minimum line items to be included on the face of the balance sheet. An entity should disclose, either on the face of the balance sheet or in the notes to the balance sheet, further sub-classifications of the line items presented, classified in a manner appropriate to the entity’s operations.  Each item should be sub-classified, when appropriate, by its nature and, amounts payable to and receivable from the parent entity, fellow subsidiaries and associates and other related parties should be disclosed separately.

Income statement format

There is no prescribed rigid format. IFRS sets out the line items that are required to be disclosed on the face of the income statement as a minimum.  Additional line items, headings and sub-totals should be presented on the face of the income statement when required by an International Financial Reporting Standard, or when such presentation is necessary to present fairly the entity’s financial performance.  IFRS permits the expenses to be based on either the nature of expenses or their function within the entity, whichever provides information that is reliable and more relevant.  Under the nature of expense method expenses are aggregated in the income statement according to their nature, (for example depreciation, purchases of materials, transport costs, wages and salaries, advertising costs), and are not reallocated amongst various functions within the entity.  This method is simple to apply in many smaller entities because no allocation of operating expenses between functional classifications is necessary.  The second analysis is referred to as the function of expense or ‘cost of sales’ method and classifies expenses according to their function as part of cost of sales, distribution or administrative activities.  This presentation often provides more relevant information to users than the classification of expenses by nature, but the allocation of costs to functions can be arbitrary and involves considerable judgment.  Entities classifying expenses by function should disclose additional information on the nature of expenses, including depreciation and amortization expense and staff costs.  The entity is allowed to present the income statement using the mixed approach with certain additional disclosures in the notes.

The choice of analysis between the cost of sales method and the nature of expenditure method depends on both historical and industry factors and the nature of the organization.  Both methods provide an indication of those costs which might be expected to vary, directly or indirectly, with the level of sales or production of the entity.  .  However, because information on the nature of expenses is useful in predicting future cash flows, additional disclosure is required when the cost of sales classification is used. 

Exceptional Items

Does not use the term exceptional items but requires the separate disclosure of items of income and expense that are of such size, nature or incidence that their separate disclosure is necessary to explain the performance of the entity for the period. Disclosure may be on the face of the income statement or in the notes.

Extraordinary items

Disclosure as extraordinary items either on the face of the income statement or in the notes prohibited.

Statements of changes in shareholders’ equity (SOCIE) & Statement of changes in recognized gains and losses (SORIE)

On the face of SOCIE, the following shall be disclosed:

a) Profit or loss for the period;

b) Each item of income/expense that are required by IFRSs to be recognized directly in equity;

c) Total of (a) + (b), with allocation to parent and minority interest; and

d) The effects of changes in accounting policies/corrections or errors per IAS 8, for each equity component.

The total of gains and losses recognized in the period comprises net income and the following gains and losses recognized directly in equity:

Ø  Fair value gains (losses) on land and buildings, available-for-sale    investments and certain financial instruments;

Ø Foreign exchange translation differences;

Ø The cumulative effect of changes in accounting policy; and

Ø Changes in fair values on certain financial instruments if designated as cash     flow hedges, net of tax, and cash flow hedges reclassified to income and/or the relevant hedged asset/liability.

Ø Those required by the transitional provision of a standard and the consequential tax effect.

 A statement of changes in equity that comprises only these items shall be titled a statement of recognized income and expense.

 On the face of SOCIE or in the notes, an entity shall also present the following: (a) transactions with equity holders in their capacity as equity holders, showing separately distributions to them (b) retained earning at beginning and end of period, and changes during the period (c) reconciliation between closing and opening balance of each class of contributed equity and reserve, with separate disclosure of each change.