IFRS

Standards and interpretations adopted by the International Accounting Standards Board (IASB). They comprise:

• International Financial Reporting Standards (IFRSs);
• International Accounting Standards (IASs); and
• Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC) and approved by the IASB.

IFRSs establish broad rules as well as dictates specific treatments. Its overall objective is to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged.

The International Accounting Standards Board (IASB) is an independent, privately funded accounting standard-setter based in London, England. The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee (IASC). It is responsible for developing International Financial Reporting Standards and promoting the use and application of these standards.

No. In over 100 countries it is either required or permitted, but the specific rules differ by country. It is generally expected that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by reducing the costs of comparing alternative investments and increasing the quality of information. Companies are also expected to benefit, as investors will be more willing to provide financing.

The Financial Accounting Standards Board (FASB) has been the designated organization (private, not for profit) in the private sector for establishing standards of financial accounting (GAAP) that govern the preparation of financial reports in the US. Those standards are officially recognized as authoritative by the Securities and Exchange Commission (SEC)

The SEC has statutory authority to establish financial accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934. Throughout its history, however, the Commission’s policy has been to rely on the private sector for this function to the extent that the private sector demonstrates ability to fulfill the responsibility in the public interest.

Generally Accepted Accounting Principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing , and in the preparation of financial statements. GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions. (However, GAAP also refers to the principles set by FASB in the US)

Reliability

Accounting information is reliable to the extent that users can depend on it to represent the economic conditions or events that it purports to represent. Reliable information has:
(a) Verifiability (see below)
(b) Representational faithfulness (there is agreement between the measure and what users would assume the measure represents)
(c) Neutrality (the information does not favour one particular group over others)           

Relevance

Relevance

To be relevant, information must be capable of making a difference in the economic decisions of users by helping them evaluate the effect of past and present events on future net cash inflows (predictive value) or confirm or correct previous evaluations (confirmatory value), even if it is not now being used. Accounting information is relevant if it is capable of making a difference in a decision. Relevant information has:
(a) Predictive value
(b) Feedback value
(c) Timeliness

(A key thing to remember re: relevance is that the strongest argument for moving to fair value accounting is that historical cost accounting did not provide relevant information to users. See essay type answer for Relevance vs Reliability below)

Verifiability

The accounting information is objectively obtained. Financial information needs to be verifiable to provide assurance to users that the information faithfully represents what it purports to represent and that the information is free from material error, complete, and neutral.  

Prudence

Accounting transactions and other events are sometimes uncertain but in order to be relevant we have to report them in time. We have to make estimates requiring judgment to counter the uncertainty. While making judgment we need to be cautious and prudent. Prudence is a key accounting principle which makes sure that assets and income are not overstated and liabilities and expenses are not understated

Conservatism

If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective. The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may write inventory down to an amount that is lower than the original cost, but will not write inventory up to an amount higher than the original cost.

Matching Principle

This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. For example, sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid. If a company agrees to give its employees 1% of its 2010 revenues as a bonus on January 15, 2011, the company should report the bonus as an expense in 2010 and the amount unpaid at December 31, 2010 as a liability. (The expense is occurring as the sales are occurring.)

Realization

The process of converting noncash resources and rights into cash or rights into cash. More simply, completing a transaction and receiving the appropriate payment.

1.     Conversion of assets, goods, or services into cash or receivables through sale. Also called actualization.

2.     In accrual basis accounting, recognition of revenue upon its occurrence, when the title passes from seller to the buyer with the associated creation of an obligation to pay. In contrast, in cash based accounting revenue is recognized only when cash is received.

Materiality

Omissions or misstatements of items are material if they could, by their size or nature, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. Professional judgement is needed to decide whether an amount is insignificant or immaterial.

Operating Segments (read more at: http://www.iasplus.com/standard/ifrs08.htm)

IFRS 8 defines an operating segment as follows. An operating segment is a component of an entity: [IFRS 8.2]

• that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity)
• whose operating results are reviewed regularly by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and
• for which discrete financial information is available

2. Explain briefly (approximately 200 words), with one good example, “Consistency” in Financial Accounting.

When a reporting entity has options to choose alternative accounting treatments for a same transaction, the entity is required to apply the same method continuously, so that the comparability between different accounting periods is maintained. When this consistency is not or cannot maintained, for example when the reporting entity changed its depreciation method from the reducing balance method to the straight line method, the entity is required to disclose (1) the fact that the method was changed, (2) the reason for the change, and (3) the impact of the change on the financial statements; so that any too-convenient creative accounting is prevented. 

 “Cash is fact, Profit is someone’s opinion”. This is one of common quotes in the field of financial reporting. Then, is Cash more trustworthy or useful than Profit in our business decision making?

                  The interpretation of Cash is Fact          

The interpretation of Profit is opinion.

It appears that Cash (C/F) is more useful than Profit

But Cash is also made out of I/S and B/S items.

For instance, selling off all long-term assets will increase Cash but loose long-term growth. Therefore, the reading of the relationships between IS, BS and CF is important to understand the overall performance and financial conditions of companies.

Ans:        Definition of Goodwill

                  Theoretical rightness of not amortising under fair value accounting

                  Theoretical incoherence between tangible assets (like Buildings)

                  Practical difficulty of valuing Goodwill + discretion to management and auditors

                  Possible alternative treatment of Goodwill 

Ans:-       Pro: generally understood to assure high quality, and comparability (?)

                  Cons: discouraging active better account-ing

                  Cons: cheap and superficial comparability

                  Cons: legitimising corporate activities rather than enhancing env. issue.

                  Also, requires discussions over the regulations. 

Ans:-First in First Out (with relation to inventory/stocks)

FIFO under inflation means that cheap historical cost being the expense, thus yes, more gross profit. This should be compared with LIFO or other methods.

Currently, CSR reports are often criticised as mere a marketing tool, without serving neither actual improvement of CSR or efficient investment.

One of the reasons for the criticisms is that the CSR reports are not (internationally) standardized. The other criticism is that the CSR reports are not clear in terms of the company’s financial implications.

Given the above criticisms, one may consider standardizing CSR reports under the IASB which has become internationally dominant in the Financial Statements regulation. There may be certainly benefits of standardization and companies may be effectively forced to disclosed what otherwise they may wish to hide. Given the disclosure requirement, companies may change the corporate behaviour in an appropriate way. 

However, the standardized regulation may also minimise appropriate evolution of flexible and creative reporting practices of individual companies. Standardization is often considered to enhance "comparability”, however this understanding is often flawed. Standardised form of reports may not fit to each individual company’s different CSR activities.

Also, it is not clear whether CSR should be linked clearly to the financial implications. Although IASB claims that it exists for varieties of stakeholders, it is mainly for the financial market participants, mainly investors and managements.