International Accounting Standarts

Objectives of Financial Statements Your teachers for today

Understand the importance of International norms Understand the IFRS structure and concepts Understand the GAAP structure and concepts Main differences between the 2 systems ves of Financial Statements Goals of today Presentation

You have several tasks you can fulfill with accounting such as to calculate the taxable income, calculate the split of profit among owners, help management to decide where to expand business and so on. Both GAAP and IFRS aim to provide relevant information to a wide range of users. To make the Decision Process more efficient and effective. Cost concept What’s the main purpose of accounting?

We can say the financial statements are useful mainly for the stakeholders such as suppliers, employees, customers or even potential investors who are thinking of becoming owners. Cost concept And… who needs it?

What is IFRS?

International Financial Reporting Standards (IFRS) is a single set of accounting standards, developed and maintained by the IASB with the intention of apply those standards on a globally consistent basis.

The International Accounting Standards Board (IASB), by its side, is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs). The IASB operates under the domain of the IFRS Foundation. But what is IASB?

IFRS- Historical data IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization made the concept attractive around the world. On 1 April 2001, the new International Accounting Standards Board (IASB) replaced the IASC in the responsibility for setting International Accounting Standards. IFRS are used in many parts of the world, including the European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, Chile, South Africa, Singapore and Turkey, but not in the United States.

The main characteristics of this type of accounting are: The investors as the main target; Allow making economic decisions; The investors have to predict entity’s future cash flows; Understandable, relevant, reliable and comparable information; Cost concept IFRS

Business entity; Accounting period ; Cost concept Important concepts to retain

Existence distinct from the owners; To the accountant, the business and its owners are considered completely separately Cost concept Business entity

Profit just can be measured after defining the lenght of the period; Normally the companies set up 1 year; The need of more frequent financial statements; Cost concept Accounting period

Main objective; Important assumptions; Relevance; Reliability; Cost concept The IASB’s concepts

To provide the users of financial statements making good decisions, through a fair presentation of the state and performance of a business; But HOW? Giving relevant and reliable information; Cost concept Main objective

There are two main principles IASB based on to establish the IFRS: Accruals (and matching) Going concern Cost concept Important assumptions

Transactions are recognized when they really occur; On the other hand matching means that revenues and expenses must be related together; Cost concept Accruals and matching

Cost concept Confused? Let’s figure out some examples Imagine that a business rents out some premises and asks for the rent in advance….

Cost concept And the opposite…

Cost concept But how to make matching with assets? Imagine now that your company purchases an asset, like a machine used in the production for example. How will the accountant report the expense? The answer is… Depreciation

Cost concept Going concern Is is assumed that the business will continue for the foreseeable future. Examples: Inventory and depreciation policy.

Cost concept IASB’S framework

Comparison across companies and across periods of time; Providing understandable information, assuming that the important users are intelligent and educated Consistency in the use of methods and presenting numbers Timeliness, which means that information should be updated Materiality- giving emphasis to the significant items

Faithful representation, which means that the information should be shown in a transparent way Economic substance, which means that is giving preference to the economic substance of transactions rather than their legal form Neutrality, which means that objective information should be used, without any bias Prudence (conservatism), which means that you must consider always the worst situation Completeness- Although the constraints of materiality, information have to be complete. BUT The benefits of information should cover the costs of producing it

Cost concept Some inconsistencies 1- Prudence and going concern: As mentioned before, the going concern convention assumes that the firm will survive for a indefinite period of time. But the prudent convention could say us to keep in mind that a bankruptcy can always happend. So as you can see both concepts in a certain moment contradict each other…

Cost concept Some inconsistencies 2- Matching and prudence Matching convention consider assets into future periods with the conviction that they will be used profitably later. So, we are considering something for the long term. Is it prudent?

Cost concept Some inconsistencies 3- Neutrality and prudence Neutrality can be described as being impartial But how can an accountant be prudent without being impartial? There is always critical thinking…

Cost concept Potencial future developments The IASB and the US Financial Accounting Standards Board are now working closely together, and they are committed to providing a revised conceptual framework which is common to both bodies.

Cost concept Conclusion The main advantages of using IFRS are: The possession of centralized information; It’ s possible to compare financial performances between international companies; The analysis of information is faster;

Money Measurement Entity Going Concern Cost concept Dual Aspect Accounting period Conservatism Realization Matching Consistency Materiality 11 Concepts

1 - Money Measurement

2 –Entity Concept

3 – Going Concern Concept

4 - Cost concept

Does not necessarily-indeed, does not ordinarily-reflect what assets are worth, except at the moment they are acquired. An asset is ordinarily entered in the accounting records at the price paid to acquire it-at its cost Book Value VS Market Value Cost concept 4 - Cost concept – What does it mean?

A "market value" or "current worth" concept would be difficult to apply because it would require that the accountant attempt to keep track of the ups and downs of the market price of each asset. The cost concept leads to a much more feasible system. In summary, the accounting profession with the Cost Concept sacrifices some degree of relevance in exchange for greater objectivity and greater feasibility. Cost concept 4 - Cost concept - Why is it like this?

GoodWill Cost concept 4 - Cost concept – Associated Concept

GoodWill - What People think it is?

GoodWill - What Realy is?

GoodWill is a Intangible and valuable Economic Resource

5 -The Dual Aspect Concept ASSETS = OWNERS' EQUITY + OTHER LIABILITIES

6 –The Accounting Period Concept

7 -The Conservatism Concept

1. Recognize revenues (increases in retained earnings) only when they are reasonably certain 2. Recognize expenses (decreases in retained earnings) as soon as they are reasonably possible Cost concept 7 -The Conservatism Concept – how it works

8 - The Realization Concept

1. Recognize revenues (increases in retained earnings) only when they are reasonably certain 2. Recognize expenses (decreases in retained earnings) as soon as they are reasonably possible Cost concept 8 - The Realization Concept

9 - The Matching Concept

The conservatism concept suggests the period when revenue shouldbe recognized. The realization concept, indicates the amount of revenue that should be recognized from a given sale. Cost concept 9 - The Matching Concept

10 - The Consistency Concept

11 - The Materiality Concept

Understand the importance of International norms; Understand the IFRS structure and concepts; Understand the GAAP structure and concepts; Main differences between the 2 systems; e Materiality Concept Goals of today Presentation

Thank you for your attention