INTERNATIONAL FINANCIAL ACCOUNTING AND REPORTING Fudan University School of Economics INTERNATIONAL FINANCIAL ACCOUNTING AND REPORTING Elena Kozeltseva PhD, Associate professor Moscow State University

International financial accounting and reporting Introduction to International Accounting Conceptual Framework Presentation of financial statements Revenue recognition Inventories Property, plant and equipment Intangible assets Provisions Equity Statement of cash flows

List of readings International Financial Reporting Standards (IFRSs) 2008. – IASCF, 2008. Alexander D., Britton A., Jorissen A.International Financial Reporting and Analysis. – 3rd edition, Thomson Learning, 2007. Alexander D., Nobes C. Financial Accounting. An International Introduction. – Pearson Education Limited, 2001. Keiso D., Weygandt J., Warfield T., Intermediate Accounting.- 12-th ed., John Wiley & Sons, Inc., 2008 Websites: www.iasb.org.uk www.iasplus.com

Introduction to International Accounting Accounting is an information system that measures, processes, and communicates financial information about an identifiable economic entity to interested parties for making economic decisions. Bookkeeping is the means of recording transactions and keeping records.

USERS OF ACCOUNTING INFORMATION Those outside the business enterprise Those who manage a business With direct financial interest With indirect financial interest

Comparing Financial accounting with Management accounting Primary users of information Types of accounting systems Restrictive guidelines Units of measurement Focal point analysis Frequency of reporting Degree of reliability

standard-setting process Financial accounting standard-setting process National level Regional level International level International Accounting Standards Committee Foundation (IASCF) International Federation of Accountants (IFAC) International Organization of Securities Commissions (IOSCO) Organization for Economic Cooperation and Development (OECD) US GAAP (Generally accepted accounting principles) National GAAP European Community Asian & Pacific region Africa South America

US GAAP development American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB) Securities and Exchange Commission (SEC) Government Accounting Standards Board (GASB)

FASB pronouncements Statements of Financial Accounting Concepts (SFAC) Statements of Financial Accounting Standards (SFAS) Interpretations/Staff positions Technical Bulletins Emerging Issues Task Force Statements (EITF)

FASB Emerging Issues Task Force Statements US GAAP hierarchy A FASB Standards and Interpretations Accounting Principles Board Opinions AICPA Accounting Research Bulletins B FASB technical bulletins AICPA Industry Audit and Accounting Guides AICPA Statements of Positions C FASB Emerging Issues Task Force Statements AICPA practice bulletins D AICPA Accounting Interpretations FASB Implementation Guides Widely recognized and prevalent industry practice

Financial accounting regulation in Russia Federal law on accounting National accounting standards developed and issued by the Ministry of Finance Normative acts regulating specific accounting issues Accounting policy

Causes of differences between national accounting systems Provision of finance Legal systems Link between accounting and taxation Accounting profession Cultural differences Geographical position …

ACCOUNTING MODELS Continental European Anglo-American model model USA Great Britain Netherlands Canada Australia India South Africa… France Germany Italy Austria Belgium…

European accounting directives The Fourth Council Directive 78/660/EEC of 25 July of 1978 on the annual accounts of certain types of companies The Seventh Council Directive 83/349/EEC of 13 June 1983 on consolidated accounts ……. ec.europa.eu/internal market/accounting

International Accounting Standards Committee (I A S C) IASC was created in 1973 by agreement between the professional accountancy bodies in nine countries Australia Netherlands Canada Great Britain France Ireland Germany USA Japan Mexico

IASB Structure (as a result of structural changes in 2001) IASC Foundation (Trustees) International Accounting Standards Board (IASB) Standards Advisory Council (SAC) International Financial Reporting Interpretations Committee (IFRIC)

The objectives of the IASC Foundation are: to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB; to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and to bring about convergence of national accounting standards and IFRSs to high quality solutions. www.iasb.org

International Financial Reporting Standards (IFRSs) Framework for the Preparation and Presentation of Financial Statements International Accounting Standards (IAS 1- 41) International Financial Reporting Standards (IFRS 1-8) Interpretations originated by the IFRIC (or its predecessor, the former Standing Interpretations Committee –SIC)

Standard – setting due process 1. Setting the agenda 2. Project planning 3. Development and publication of a discussion paper 4. Development and publication of an exposure draft 5. Development and publication of an IFRS IFRSs 6. Procedures after an IFRS is issued

Use of IFRS For 172 jurisdictions for domestic listed companies: IFRSs not permitted — 33 jurisdictions IFRSs permitted — 25 jurisdictions IFRSs required for some — 5 jurisdictions IFRSs required for all — 90 jurisdictions No stock exchange — 19 jurisdictions www.iasplus.com

Convergence between IFRSs and US GAAP 2002 The “Norwalk Agreement” 2006 Memorandum of Understanding (MoU) that described a programme to achieve improvements in accounting standards, and substantial convergence between IFRSs and US generally accepted accounting principles (GAAP) 2007 SEC issued its final rule on Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to US GAAP

Harmonization of financial accounting and reporting in Europe 1995 Accounting Harmonization: a new strategy vis-à-vis international harmonization 1998 IAS allowed for consolidated financial statements in several European countries (Germany, France etc.) 1999 EU Financial Reporting Strategy: the way forward. Communication from the Commission to the Council and the European Parliament 2000 Amendments to EU Accounting Directives 19 July 2002 Regulation (EC) No 1660/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards

IFRSs endorsement mechanism in Europe Legal level Accounting Regulation Committee – ARC Technical level European Financial Reporting Advisory Group – EFRAG) www.efrag.org

CONCEPTUAL FRAMEWORK

Framework for Preparation and Presentation of Financial Statements The objective of financial statements Underlying assumptions The qualitative characteristics that determine usefulness of information in financial statements The definition, recognition, and measurement of the elements from which financial statements are constructed Concepts of capital and capital maintenance

Underlying assumptions Accrual basis of accounting The effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid), and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Going concern The financial statements are normally prepared on the assumption that the entity has neither intention nor need to liquidate or curtail materially the scale of its operations, but will continue in operation for the foreseeable future.

Basic principles and concepts (accounting practice) Double entry Money measure Separate entity/Economic entity Cost principle/Historical cost Periodicity/Accounting period …

Qualitative characteristics of financial statements Usefulness of information in financial statements Relevance Reliability Comparability Understandability materiality faithfulness substance over form neutrality prudence completeness Constraints timeliness balance between benefit and cost balance between qualitative characteristics

Elements of financial statements Assets. An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Liabilities. Liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Equity. Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Elements of financial statements Income. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Expenses. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decrease in equity, other than those relating to distributions to equity participants.

Recognition of the elements of financial statements An item that meets the definition of an element should be recognized (i.e., incorporated in the financial statements) if: it is probable that any future economic benefit associated with the item will flow to or from the entity; and the item has cost or value that can be measured with reliability.

Measurement of the elements of financial statements Historical cost Current cost Realizable/Settlement value Present value

Measurement of the elements of financial statements Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income tax), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.

Measurement of the elements of financial statements Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.

Measurement of the elements of financial statements Realizable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.

Measurement of the elements of financial statements Present value. Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

The basic accounting equation Assets = Liabilities + Owner’s equity Owner’s equity = Assets – Liabilities Owner’s equity2 = Owner’s equity1 + Revenues – Expenses + Owner’s Investments – Owner’s Withdrawals

The accounting cycle Identification and measurement of transactions and other events Journalizing (General journal and special journals) Posting (the procedure of transferring journal entries to the ledge accounts) Trial balance preparation (list of all open accounts and their balances) Adjustments (entries made at the end of an accounting period to bring all accounts up to date on an accrual basis) Adjusted trial balance Preparing of financial statements Closing (nominal accounts)

Types of accounts Statement of financial position Income statement Permanent/ real accounts assets accounts liability accounts owner’s equity accounts Temporary/nominal accounts revenue accounts expense accounts Statement of financial position Income statement

General journal Date Debit Credit Telephone expense Accounts payable Page 1 Date Accounts Titles and Explanation Ref. Debit Credit 20х7 Jan.30 Telephone expense Accounts payable Received bill for telephone expense 513 212 70

General Ledger Accounts payable Account No.212 Date Debit Credit Ref. Debit Credit Balance 20х7 Jan.30 …. J 1 70

Types of adjusting entries Accruals Prepayments Accrued revenues Revenues earned but not yet received in cash or recorded. Accrued expenses Expenses incurred but not yet paid in cash or recorded. Prepaid expenses Expenses paid in cash and recorded as assets before they are used and consumed. Prepaid revenues Revenues received in cash and recorded as liabilities before they are earned.

IAS 1 Presentation of Financial Statements

Complete set of general purpose financial statements Statement of financial position Statement of comprehensive income Statement of changes in equity Statement of cash flows Notes, comprising a summary of significant accounting policies and other explanatory notes

Overall requirements for the presentation of financial statements Fair presentation and compliance with IFRSs Going concern Accrual basis of accounting Materiality and aggregation Offsetting Comparative Information Consistency of presentation Frequency of reporting Стандарт должен применяться к любой отчетности общего назначения, подготовленной и представленной в соответствии с МСФО. Финансовая отчетность общего назначения отвечает интересам разных категорий пользователей. Она может быть представлена отдельно или в составе годового отчета. Стандарт не применяется в отношении промежуточной отчетности (МСФО 34). Стандарт применяется в равной степени ко всем компаниям, независимо от того, составляют ли они консолидированную отчетность или индивидуальную отчетность. Дополнительные требования в отношении формирования отчетности банков и других финансовых учреждений содержатся в МСФО 30. Терминология, используемая в стандарте, ориентирована на коммерческие организации. Все другие организации могут адаптировать требования к представлению финансовой отчетности.

Presentation of financial statements Identification of financial statements Financial statements should be clearly identified from other information in the same published document. Reporting period Financial statements should be presented at least annually. the name of the reporting entity the separate or consolidated financial statements the date of the end of the reporting period or the period covered the presentation currency the level of rounding used in presenting amounts

Statement of financial position Current/non-current distinction Current and non-current assets and liabilities should be classified separately on the face of the statement of financial position (except in circumstances when a liquidity-based presentation provides more reliable and relevant information)

Current/non-current assets An entity shall classify an asset as current when: it expects to realize the asset, or intends to sell or consume it, in its normal operating cycle; it holds the asset primary for the purpose of trading; it expects to realize the asset within twelve months after the reporting period; or the asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. An entity shall classify all other assets as non-current.

Current/non-current liabilities An entity shall classify a liability as current when: it expects to settle the liability in its normal operating cycle; it holds the liability primary for the purpose of trading; the liability is due to be settled within twelve months after the reporting period; or the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. An entity shall classify all other liabilities non-current.

The minimum line items that should be included in the statement of financial position Property, plant and equipment Investment property Intangible assets Financial assets Investments accounted for using the equity method Biological assets Inventories Trade and other receivables Cash and cash equivalents Provisions Financial liabilities Liabilities and assets for current tax Deferred tax liabilities and deferred tax assets Non-controlling interest (presented within equity) Issued capital and reserves

Statement of comprehensive income An entity shall present all items of income and expense recognized in the period: in a single statement of comprehensive income, or in two statements: a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit and loss and displaying components of other comprehensive income (statement of comprehensive income).

Statement of comprehensive income Total comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income comprises all components of “profit and loss” and of “other comprehensive income”. Other comprehensive income comprises items of income and expenses that are not recognized in profit or loss.

Classification of expenses An entity shall present an analysis of expenses recognized in profit or loss using classification based on either their nature or their function within the entity whichever provides information that is reliable and more relevant. The choice between the function of expense method and the nature of expense method depends on historical and industry factors and the nature of the entity.

Example of classification using the nature of expense method Revenue Other income Changes in inventories and finished goods and work in progress Raw materials and consumables used Employee benefits expenses Depreciation and amortization expense Other expenses Total expenses Profit before tax

Example of classification using the function of expense method Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Other expenses Profit before tax

Statement of changes in equity An entity shall present a statement of changes in equity showing in the statement: total comprehensive income for the period; for each component of equity, a reconciliation between carrying amount at the beginning and at the end of the period, separately disclosing changes resulting from: profit and loss; each item of other comprehensive income; transactions with owners in their capacity as owners.

Notes The notes shall: present information about the basis of preparation of the financial statements and other accounting policies used; disclose the information required by IFRSs that is not presented in the financial statements; and provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them.

An entity normally presents notes in the following order.. statement of compliance with IFRSs summary of significant accounting policies applied, supporting information for items presented in the statement of financial position and of comprehensive income, and in the statement of changes in equity and of cash flows other disclosures