International Financial Reporting Standards requirements
This article lists some of the important requirements of International Financial Reporting Standards (IFRS).
References to IFRS standards are given in the standard convention, for example (IAS1.10) refers to paragraph 10 of IAS1, Presentation of Financial Statements..
- 1 Presentation of financial statements
- 2 Consolidated financial statements
- 3 Acquisition accounting and goodwill
- 4 Property, plant and equipment
- 5 Joint ventures, associates and other investments
- 6 Inventory (stock)
- 7 Receivables (debitors) and payables (creditors)
- 8 Borrowing
- 9 Provisions
- 10 Revenue
- 11 Employee costs
- 12 Share-based payment
- 13 Income taxes
- 14 Cash flow statements
- 15 Leasing (accounting by lessees)
- 16 Fair value
- 17 Amortised cost
- 18 References
Presentation of financial statements
- a statement of financial position (balance sheet) as at the end of the period;
- a statement of comprehensive income for the period. This may be presented as a single statement or in two components; an income statement (profit and loss account) and a statement of other comprehensive income. The statement of other comprehensive income would include gains or losses on property, plant and equipment and gains or losses arising from the translation of financial statements of foreign operations;
- a statement of changes in equity for the period;
- a statement of cash flows for the period;
- notes including a summary of significant accounting policies.
Comparative information is provided for the previous reporting period. An entity preparing IFRS accounts for the first time must apply IFRS in full for the current and comparative period although there are transitional exemptions.
Consolidated financial statements
The ultimate parent (holding company) of a group must present consolidated financial statements including all of its subsidiaries. A 'subsidiary' is an entity which is controlled by its parent. An investor controls an investee when 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.
When preparing consolidated financial statements, an entity must use uniform accounting policies for reporting like transactions and other events in similar circumstances. Intragroup balances and transactions must be eliminated.
Acquisition accounting and goodwill
All business combinations are accounted for by applying the purchase method, requiring that one entity is identified as acquirer (IFRS3.6).
The acquiring entity assesses the fair value of the separate assets, liabilities and contingent liabilities in the business it has acquired. This can include identification of intangible assets, for example customer relationships, which are not commonly recognised except on acquisitions (IFRS3.10)
The difference between the price paid (consideration) for the business combination and the fair value of the assets and liabilities acquired represents goodwill (IFRS3.41). Goodwill is not subject to amortization, but is assessed for impairment at least annually (IAS36.10). Impairment loss, if any, is charged to the income statement (IAS36.60). Such losses are not subsequently reversed (IAS36.124).
Property, plant and equipment
Property, plant and equipment may be revalued to fair value if the entire class of assets to which it belongs is so treated (for example, the revaluation of all freehold properties) (IAS16.31 and 36). Surpluses on revaluation are recognised directly to equity, not in the income statement; deficits on revaluation are recognised as expenses in the income statement (IAS16.39 and 40).
Depreciation is charged to write off the cost or valuation of the asset over its estimated useful life down to the recoverable amount (IAS16.50). The cost of depreciation is recognised as an expense in the income statement, unless it is included in the carrying amount of another asset (IAS16.48); for example depreciation of PPE used for development activities may be included in the cost of an intangible asset (IAS16.49). The depreciation method and recoverable amount is reviewed at least annually (IAS16.61). In most cases the method is "straight line," with the same depreciation charge from the date when an asset is brought into use until it is expected to be sold or no further economic benefits obtained from it, but other patterns of depreciation are used if assets are used proportionately more in some periods than others (IAS16.56).
Joint ventures, associates and other investments
Joint ventures are investments other than subsidiaries where the investor has a contractual arrangement with one or more other parties to undertake an economic activity that is subject to joint control (IAS31.3).
Joint ventures may be accounted for using either:
- proportionate consolidation, accounting for the investor's share of the assets, liabilities, income and expenses of the joint venture (IAS31.30).
- equity method. The investment is stated initially at cost and adjusted thereafter for the investor's share of post-acquisition changes in net assets. The income statement includes the investor's share of profit or loss of the investment (IAS31.38).
Associates are investments, other than joint ventures and subsidiaries, in which the investor has a significant influence (the power to participate in financial and operating policy decisions) (IAS28.2). It is presumed that this will be the case if the investment is greater than 20% of the investee unless it can be clearly demonstrated not to be the case (IAS28. 6). Associates are accounted for using the equity method.
Investments other than subsidiaries, joint ventures and associates are accounted for at their fair values (IAS39.9 and 46) unless:
- they have fixed or determinable maturity periods and are expected to be held to maturity, in which case they are stated at amortised cost, providing a constant rate of return until maturity;
- there is no reliable market value, in which case they are measured at cost.
With effect from 1 January 2013 (2014 in the EU), the requirements of IAS 31 were replaced by IFRS 11. IFRS 11 makes two main changes to IAS 31. Firstly, it allows investors in joint arrangements that are structured through an entity to look through that entity in certain circumstances and treat the joint arrangement as if no entity exists. Secondly, it removes the option to apply proportionate consolidation for joint ventures.
'Cost' comprises all costs of purchase, costs of conversion and other costs incurred in bringing items to their present location and condition (IAS2.10). Where individual items are not identifiable, the "first in first out" (FIFO) or weighted average cost formula is used. "Last in first out" (LIFO) is not acceptable (IAS2.25).
'Net realisable value' is the estimated selling price less the costs to complete and costs to sell.
Receivables (debitors) and payables (creditors)
Receivables and payables are recorded initially at fair value (IAS39.43). Subsequent measurement is stated at amortised cost (IAS39.46 and 47). In most cases, trade receivables and trade payables can be stated at the amount expected to be received or paid; however, it is necessary to discount a receivable or payable with a substantial credit period (see for example IAS18.11 for accounting for revenue).
If a receivable has been impaired its carrying amount is written down to its recoverable amount, being the higher of value in use and its fair value (less costs to sell). 'Value in use' is the present value of cash flows expected to be derived from the receivable (IAS36.9 and 59).
Borrowing is stated at amortised cost using the effective interest method. This requires that the costs of arranging the borrowing are deducted from the principal value of debt and are amortised over the period of the debt (IAS39.46).
Provisions are liabilities of uncertain timing or amount (IAS37.10). Provisions are recognised when an entity has, at the balance sheet date, a present obligation as a result of a past event, when it is probable that there will be an outflow of resources (for example a future cash payment) and when a reliable estimate can be made of the obligation (IAS37.14). Restructuring provisions are recognised when an entity has a detailed plan for the restructuring and has raised an expectation amongst those affected that it will carry out the restructuring (IAS37.72).
Revenue is measured at fair value of consideration received or receivable (IAS18.9).
Revenue for sale of goods cannot be recognised until the entity has transferred significant risks and rewards of ownership of goods to the buyer (IAS18.14).
Revenue for rendering of services is accounted for to the extent that the stage of completion of the transaction can be measured reliably (IAS18.20).
Employee costs are recognised when an employee has rendered service during an accounting period (IAS19.10). This requires accruals for short-term compensated absences such as vacation (holiday) pay (IAS19.11). Profit sharing and bonus plans require accrual when an entity has an obligation to make such payments at the reporting date (IAS19.17
Where an entity receives goods or services in return for the issue of its own shares or equity instruments it accounts for the fair value of those goods or services as an expense or as an asset (IFRS2.7). Where it offers options and other share based incentives to its employees it is required to assess the market value of the instruments when they are first granted and then to charge the cost over the period in which the benefit vests (IFRS2.10).
Taxes payable in respect of current and prior periods are recognised as a liability to the extent they are unpaid at the balance sheet date (IAS 12.12).
Deferred tax liabilities are recognised for taxable temporary differences at the balance sheet date which will result in tax payable in future periods (for example, where tax deductions 'capital allowances' have been claimed for capital items before the equivalent depreciation expense has been charged to the income statement) (IAS 12.15). Deferred tax assets are recognised for deductible temporary differences at the balance sheet date (for example, tax losses which can be used in future periods) if it is probable that there will be future taxable profits against which they can be offset (IAS 12.24, IAS 12.34).
There are exceptions to the recognition of deferred taxes in relation to goodwill (for deferred tax liabilities), the initial recognition of assets and liabilities in some cases and in relation to investments and interests in subsidiaries, branches, jointly controlled entities and associates providing certain criteria are met (IAS 12.15, IAS 12.24, IAS 12.39, IAS 12.44).
Cash flow statements
IFRS cash flow statements show movements in cash and cash equivalents. This includes cash on hand and demand deposits, short term liquid investments readily convertible to cash and overdrawn bank balances where these readily fluctuate from positive to negative (IAS7.6 to 9). IFRS cashflow statements do not need to show movements in borrowings or net debt.
Cash flow statements may be presented using either a direct method, in which major classes of cash receipts and cash payments are disclosed, or using the indirect method, whereby the profit or loss is adjusted for the effect of non-cash adjustments (IAS7.18).
Items on the cash flow statement are classified as operating activities, investing activities and financing (IAS7.10).
Leasing (accounting by lessees)
Leases are classified in IFRS:
- finance lease, meaning a lease which transfers substantially all the risks and rewards incidental to ownerships to the lessee. Finance leases are recognized on the balance sheet as an asset (the asset being leased) and as a liability by the lessee and as a receivable by the lessor(IAS17.4, 20, 36).
- operating lease, meaning a lease other than a finance lease. An expense is recognised in the income statement over the time period that the asset is used (IAS17.4 and 33).
The IASB has issued an exposure draft of a new standard for leases in 2010. No longer would there be categories of 'finance' and 'operating' leases (IAS 17). All leases would be recorded on the balance sheet as an asset (the right to use the asset) and a liability (the obligation to pay). The new accounting standard would be finalized in 2011.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction (IFRS1 App A).
Measurement at amortised cost uses the effective interest method to provide a constant rate of return on an asset or liability until maturity (IAS39.9).
- International Accounting Standards Board, International Financial Reporting Standards, International Accounting Standard 1, "Presentation of Financial Statements", paragraph 10
- http://www.iasplus.com/en-gb/standards/ias/ias1 Deloitte UK Accounting Plus IAS1
- IASB technical summary of IAS1
- International Accounting Standards Board, International Financial Reporting Standards, International Accounting Standard 1, "Presentation of Financial Statements", paragraph 41
- International Accounting Standards Board, International Financial Reporting Standards, International Accounting Standard 1, "Presentation of Financial Statements", paragraph 38
- International Accounting Standards Board, International Financial Reporting Standards, International Financial Reporting Standard, "First-time adoption of International Financial Reporting Standards", paragraph 7
- Deloitte UK Accounting Plus IFRS1
- IASB summary of FRS10