1. Contemporary Issues in Accounting
IFRS
Dr Ashraful Alam
University of Salford
Room (Office): Maxwell 304

2. Learning objectives Accounting standards
Why we have different accounting standards
IFRS vs US-GAAP
Conceptual framework of accounting standards
The Effects of Mandatory IFRS Adoption in the EU

3. The need for regulation
Companies are owned by shareholders but managed by directors
Most shareholders of larger companies have no day-to-day involvement with the company
Shareholders rely upon financial reports for information to help them make important decisions
Regulations try to ensure that financial reports provide a faithful representation
Similarly, creditors and other user groups may rely heavily on financial reports for information

4. Sources of regulation Legislation: (varies from country to country)
Companies Act 2006 in UK
EU Directives
Stock exchange regulations: (listed companies)
e.g. a 5-year summary of key performance indicators must be provided
Listed companies must publish financial information on a quarterly (US) or half-yearly basis (UK and ROI)
Accounting standards:
national standards
international standards

5. Accounting Standards Examples:
Accounting standards: “user manual” for how to translate an entity’s financial transactions into a set of financial statements.
Transaction: economic events by the company
Examples:
The owner invested £10000 to start business
Equipment is bought for £5000
Borrowed £20000
Land is sold for £15000
Company purchased inventory for £8000 on credit
Accounting standards help to translate the financial transactions into financial statements

6. Accounting standards The Objectives of Accounting Standards
Financial reporting standards require the information to be of a reliable quality and presented in a reliable format. However, objectives may differ( Mueller et al. 1994):
USA- Financial accounting information is directed primarily towards the needs of investors and creditors and decision usefulness is the overriding criteria for judging its quality.
South American Countries- Financial Accounting is designed primarily to ensure that the proper amount of income tax is collected by the national government.
Other Countries- Financial accounting is designed to help accomplish macroeconomic policies such as achieving a predetermined rate of growth in the nation’s economy .

7. Financial reporting in different business entities
In sole traders and basic partnerships: no legal obligation
In private companies: preparation is legal obligation as part of the corporate governance mechanisms – accountability and stewardship to owners
In public companies: publication is legal obligation – stewardship to shareholders and accountability to stakeholders, and decision-usefulness to investors

8. Accounting standards Pathway to financial reporting standards:
The International Accounting Standards Committee (IASC), which was the predecessor body to the International Accounting Standards Board ( IASB), was founded in June 1973.
The IASC developed and issued International Accounting Standards (IAS).
In 2001, the IASC was superseded/replaced by the IASB
The IASB issues “The international Financial Reporting Standards” (IFRS), but has adopted all the IASC’s IAS.
Any reference to IFRS should be taken as including IAS
IAS: Standards issued before 2001 by IASC
IFRS Standards issued after 2001 by IASB

9. International financial reporting before and since IFRS
Before IFRS:
Do nothing
Convenience translations
Convenience statements
Partial restatements
Secondary financial statements
After IFRS:
Financial reporting in accordance with IFRS

10. Aims of IFRS in the EU and globally
Main Aims of IFRS:
Transparency- IFRS brings transparency by enhancing the international comparability and quality of financial information. This will then enable international investors and other global market participants to make better informed economic decisions.
Accountability- IFRS strengthen accountability by reducing the information asymmetry between providers of equity and debt capital and the directors of the companies in which they have invested their money,
Economic Efficiency- IFRS contributes to economic efficiency by helping investors to identify opportunities and risks across the world, thus improving global capital allocation. For business, the use of single trusted accounting language lowers the cost of capital and reduces international reporting costs.
EU: To enable the creation of a single integrated and efficient European capital market
World: IASB aims to bring transparency, accountability and efficiency to financial markets around the word – to enable the creation of integrated and efficient capital markets around the world

11. Worldwide use of IFRS Standards
Required for listed companies in over 120 countries.
The countries concerned include all EU member states together with countries such as Australia, Brazil, Canada, Russia and South Africa. The use of IFRS standards is permitted (but not required) in several countries. Furthermore:
(a) India’s national standards are largely converged with IFRS standards. Most listed companies and large unlisted companies are required to comply with these standards.
(b) Japan permits most listed companies to use IFRS standards
(c) China has substantially converged its national standards with IFRS standards
(d) China has fully converged its national standards with IFRS standards
(e)USA has not yet adopted IFRS Standards but the US FASB and the IASB have worked together on convergence projects
Over 80 countries have adopted the IFRS for SMEs Standard (unlisted companies)

12. What might impact be on financial reporting following brexit
16/02/2019
Departing from the EU offers the UK three choices when preparing financial statements for listed companies, namely to:
(i) Continue with EU-endorsed IFRS; or
(ii) move to full IFRS; or
(iii) revert to UK GAAP.
It is very unlikely that UK would decide to revert to UK GAAP given the widespread internationally of the adoption of IFRS. It might, however, consider UK-endorsed as opposed to EU-endorsed IFRS. This would mean that the UK profession would have the ability to adapt IFRS to its own needs.

13. (IFRS, US-GAAP, Japan Standards, China Standards….)
Accounting standards
Why we have different accounting standards?
(IFRS, US-GAAP, Japan Standards, China Standards….)
This is due to differences in the characteristics of countries such as:
Legal system (Civil law countries tend to be in the hands of government)
The way in which industry financed (Equity vs debt finance)
Political system (degree of government intervention)
Scale of economy (developed/developing)
Culture differences (Secrecy vs Transparency/ Conservatism vs Optimism)
Influence of accounting profession (Auditor- Pressure from client)
Language- (Translate concepts from English into another language)
If all countries have the same characteristics, single set of standards will fit all
Different characterises require different standards

14. IFRS- Structure
Since 2005, the EU companies have had to comply with IFRS
IFRS was made mandatory in the EU in 2005

15. IFRS1 First-time Adoption of IFRS Standards
First time adoption of IFRS sets out the procedure that an entity must follow when it adopts IFRS for the first time. This includes:
(1)Prepare the current year financial statement under IFRS
(2) Restate the prior year comparatives under IFRS
(3) Reconcile the current year profit under IFRS to the profit that would have been reported under local gap.

16. 16/02/2019

17. IFRS 2 Share based payment
Specify the financial reporting by an entity who undertakes a share based payment transaction.
Equity settled share based payment- Company issues share in return for the provision of goods and services
Cash settled share based payment - Company pays cash in return for the provision of goods and services

18. IFRS 3 Business Combination
16/02/2019
IFRS 3 establishes principles and requirements for how an acquirer in a business combination:
Recognise and measure in its financial statements the assets and liabilities acquired, and any interest in the acquiree held by other parties.
Recognise and measure the goodwill acquired in the business combination or a gain from a bargain purchase; and
Determines what information to disclosure to enable users of the financial statements to evaluate the nature and financial effects of the business combination

19. IFRS 4 Insurance Contracts
16/02/2019
The standard applies to contracts in which an entity takes on insurance risk either as an insurer or a reinsurer.
It also applies to contracts in which an entity cedes insurance risk to a reinsurer..
The standard also addresses the treatment of certain financial instruments issued by an entity which allow the policyholder to participate in profits of the entity or investment returns through discretionary participation features.

20. 16/02/2019

21. Accounting standards
Accounting Standards in US are called “US-GAAP” and issued by “Financial Accounting Standard Board” (FASB)
In October (2002): agreement between FASB and IASB to “develop high quality reporting standards worldwide”. Work still in progress

22. IFRS vs US-GAAP
What are the general differences between IFRS and US-GAAP? 1)
IFRS setting body: International Accounting Standard Board (IASB)
US-GAAP setting body: Financial Accounting Standard Board (FASB)

23. IFRS vs US-GAAP 2) IFRS is Principle based standards
US-GAAP is Rule based standards
Principle based standards: in principle based standards, key principles are set out to ensure good reporting.
Guidelines can be applied for a variety of circumstances.
We do not have detailed standards
IFRS provides less details
Rule based standards: in rule based standards, there is a list of detailed rules that must be followed when preparing financial reporting.
Detailed standards are issued
US-GAAP provides more details

24. IFRS vs US-GAAP 3)
Differences in terms of financial statement presentation
Unlike IFRS, US GAAP does not require presentation of comparative Information (information for different periods)
Comparative information are required under IFRS 4)
Differences related to measurement choice
IFRS does not permit Last In First Out (LIFO) as an inventory costing method
US-GAAP permit Last In First Out (LIFO) as inventory valuation method 5)
Differences in terms of:
Revenue recognition
Expense recognition
Lease

25. Challenges for the IASB
Promoting the global adoption of IFRS
(Many firms perceived that IFRS adoption has resulted in an ongoing increase of 20% or more on annual accounting and compliance costs. The costs include internal staff time, external consultancy and audit support, and systems costs (Pawsey, 2017).
Consistent application across different institutional environments

27. Conceptual Framework of accounting Standards

28. Conceptual framework The objective and users of financial statements
Conceptual framework: system of concepts and principles that support the preparation of financial statements.
It explains the concepts and principles that support the preparation of financial statements.
The International Accounting Standards Board (IASB) has developed a conceptual framework document called the “Framework for the Preparation and Presentation of Financial Statements”.
The IASB Framework covers topics (such as):
The objective and users of financial statements
The elements of financial statements
Qualitative characteristics of accounting information

29. Conceptual framework The objective and users of financial statements
The objective of financial reporting
The objective of financial reporting is to provide financial information about the reporting entity that is useful to different users
Financial reporting is to provide users with information about:
The financial position of the entity
The financial performance of the entity
Changes in its financial position.

30. Different users – different needs
Shareholders
Loan creditors
Employees
Return on the investment and risk involved
Possibility to repay loans and pay interest
Stability and profitability of the firm, employment and remuneration opportunities

31. Different users – different needs
Information to advise whether to hold, buy or sell shares
Ability to pay the amounts due
Going concern of the enterprise, corporate responsibility
Performance of the competition
Financial analysts
Suppliers and trade creditors
Customers
Competitors

32. Different users – different needs
To determine taxable income, to supervise regulation, to judge efficient allocation of resources
The viability of the company, the corporate responsibility
Government
The public

33. Summary of user needs
Many, although not all, of the information requirements are essentially forward looking
Different users, with different purposes, may require different information about the same items
Different users will require different degrees of complexity and depth
Not all the information required is likely to be included in financial accounts

34. Conceptual framework Assets Liabilities Equity What the company owns
Elements of financial statements
Assets
What the company owns
Assets include:
Cash
Accounts Receivables
Inventory
Fixed assets (land, building, equipment)
Liabilities
What the company owes = obligations against the company
Liabilities include:
Borrowings
Accounts Payables
Equity
Owner Capital (stockholders equity if firm is owned by stockholders)
Revenues (e.g., Sales)
Expenses (e.g., cost of goods sold, salaries, ..)
Owner drawings

35. Qualitative characteristics of financial information
Conceptual framework
Qualitative characteristics of financial information
Information must have certain characteristics to be useful for decision making.
The IASB Conceptual Framework classifies the qualitative characteristics into two types:
Fundamental qualitative characteristics; and
Enhancing qualitative characteristics
A. Fundamental qualitative characteristics:
Relevance
Faithful representation
B. Enhancing qualitative characteristics
Comparability
Verifiability
Timeliness
Understandability

36. Conceptual framework A. Fundamental qualitative characteristics:
1) Relevance
Information that would make a difference to a decision (if this information is provided, your decision will be affected)
It helps users to predict what might happen in the future (help to predict future).
2) Faithful representation
Information that is (to the extent possible) complete, neutral and free from error

37. Conceptual framework
B. Enhancing qualitative characteristics 1) Comparable: information that can be compared with similar information about other entities and with similar information about the same entity for another period. 2) Verifiable: Information is verifiable if different persons using the same information can reach the same conclusion 3) Timely : information available to decision-makers in time to be capable to affect their decisions. 4) Understandable : understandable to users who have a reasonable knowledge of business and economic activities.

38. The Effects of Mandatory IFRS Adoption in the EU

39. The Effects of IFRS
Since 2005, the EU companies have had to comply with IFRS
In October, 2014, the Institute of Chartered Accountants in England and Wales (ICAEW) published a report that summarizes the effects of mandatory IFRS adoption in the EU.
ICAEW documents that, mandatory IFRS adoption has:
Effect on Transparency
Effect on Comparability
Effect on Cost of capital
Effect on Market liquidity
Effect on Investment efficiency
Effect on Cross-border investment
Other effects

40. The Effects of IFRS Effect on Transparency
Financial reporting is transparent if it allows readers to understand the firm’s financial performance and financial position.
Research suggests that there was an improvement, but that it was not experienced by all companies or in all countries.
Effect on Comparability
Research suggests that there was an improvement, but there is also of incomplete comparability in some companies.

41. The Effects of IFRS Effect on Cost of capital
A lower cost of capital is important to the welfare of society generally, as the lower the cost of capital, the more investments are feasible
Research suggests that there were reductions in the cost of equity capital and in the cost of bonds, but that they were not experienced by all companies or in all countries.
Effect on Market liquidity
A liquid market for securities is one in which investors can buy and sell securities at their fair value. Where a market is illiquid it may be difficult to find buyers or sellers
Research suggests that there was an increase, but that it was not experienced in relation to all companies or all countries.

42. The Effects of IFRS Effect on Investment efficiency
Improvements in the efficiency of capital markets should make it easier for corporates to invest efficiently
Research suggests an improvement in the efficiency of corporate investment following mandatory IFRS adoption. It
Effect on Cross-border investment
IFRS adoption can reduce barriers to international investment.
Adoption of IFRS in different EU countries helps investors to understand companies in different countries
Research suggests increasing in cross-border investment (foreign direct investment) following mandatory IFRS adoption, but also it was not experienced by all companies or all countries

43. The Effects of IFRS Increased trade within the EU
Other benefits
Mandatory adoption of IFRS :
Increased trade within the EU
Increased use of accounting information within the EU (financial statements of different companies within different countries are prepared using single set of accounting standards)

44. Conclusion Mandatory IFRS adoption has: Effect on Transparency
Effect on Comparability
Effect on Cost of capital
Effect on Market liquidity
Effect on Investment efficiency
Effect on Cross-border investment
Increased use of accounting information
However, these effects were not experienced by all companies or in all countries.
For exam, please discuss in details
do not summarise

45. Thank you very much for your attention