Day 1-4. Framework-based_understanding of IFRSs.ppt

imternation training material from IASB

1. International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Framework-based
understanding of IFRSs
Joint World Bank and IFRS Foundation ‘train
the trainers’ workshop hosted by the ECCB,
30 April to 4 May 2012
K
The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation.

2. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2Framework-based understanding… 2
Principles RulesConcepts
•relates IFRS requirements to the concepts in
the Conceptual Framework
•reasons why some IFRS requirements do not
maximise those concepts (eg application of the
cost constraint or inherited requirements)
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3
Framework-based understanding
provides… 3
•a cohesive understanding of IFRSs
–Frameworkfacilitates consistent and logical
formulation of IFRSs
•a basis forjudgement in applying IFRSs
–Frameworkestablished the concepts that underlie
the estimates, judgements and models on which
IFRS financial statements are based
•a basis for continuously updating IFRS
knowledge and IFRS competencies
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4. 4
Minimum guidance that gives effect to the principles
Presentation and
disclosure principles
Measurement
principle/s
Recognition
principle
Structure of a principle-based standard 4
Derecognition
principle
Concepts
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5. 5The ideal principle-based standard
•Scope
–no exceptions
•Principles
–derived from the Conceptual Framework
–reliance on professional judgement to apply
principles in business context
•Application guidance
–explains application of principles
–gives effect to the principles
5
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6. 6Get rule-based standards if
•Preparers and auditors
–refuse to exercise judgement
–don’t act with integrity
–ask for detailed interpretations
–refuse to accept raw economic facts
•Regulators
–want one answer in spite of different economic
facts
•Courts
–lawyers fail to defend reasonable judgements
6
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7. 7
Rules/application guidance
Application guidance to give effect to the principles
Rules (interpretations)Rules (exceptions)
Principles
Structure of some IFRSs 7
Concepts
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8. 8
Example:
Business combinations
•Objective
•Concepts
–elements definitions
–representational faithfulness
•Core principle
–an acquirer of a business (scope)
–recognises assets acquired and liabilities assumed
(recognition principle)
–at their acquisition-date fair values (measurement
principle)
–discloses information that enables users to evaluate
the nature and financial effects of the acquisition
(disclosure principle)
8
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9. 9
Example:
Business combinations continued
•Rules
–exceptions to the recognition principle
–exceptions to the measurement principle
–specified disclosures
9
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10. 10
Example:
Business combinations continued 10
To understand build from objective through concepts
to core principle and rules
–recognition—understand reason for removing
(i) the probability criterion; and
(ii) the explicit reliability of measurement criteria
(see Basis for Conclusions on IFRS 3 paragraphs BC125–BC130)
–understand reasons for exceptions to IFRS 3:
–recognition principle
–measurement principle
(see Basis for Conclusions on IFRS 3)
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11. 11
Example:
Business combinations continued 11
Focus on judgements, eg
–identifying a business
–measuring fair value in the absence of an active market etc
Consider with reference to the objective and QCs whether
uncertainty should enter recognition or measurement
(for business combinations and then extend to consider
for other transactions and elements)
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12. 12
Rules
Application guidance
to give effect to the broadly stated requirements
InterpretationsExceptions
Broadly stated
requirements
(not based on
concepts in
Conceptual Framework)
Structure of other IFRSs 12
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13. 13What if requirement not principle-based 13
•Understand why IASB deviated from the main
concepts in the Conceptual Framework
–see Basis for Conclusions (BfC)
–If no BfCthen requirement could predate Conceptual
Framework(egIAS 20))
A Guide through IFRSscross-references all IFRS
requirements to the Basis for Conclusions
•Consider what a more principle-based requirement
could be (consider rejected alternatives, subsequent
IASB DPs and EDs, etc)
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14. 14
Example:
Lease classification
•Objective
•Concepts
–faithful representation
–element definitions
•Broadly stated lease classification requirement
–capitalise in-substance purchases (finance leases)
–other leases = executory contracts (operating leases)
–is this requirement principle-based?
•Rules
–guidance (eg contingent rentals)
–specified disclosures
14
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15. 15
Example:
Lease classificationcontinued 15
–understand broadly stated requirement is inconsistent
with the Conceptual Framework
(see basis for conclusions on ED Leases)
–consider what a principle-based lease classification
principle could be (see ED Leases)
–focus on making the judgements to apply
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16
Does the Frameworkhelp me
understand IFRSs? 16
•Yes, the starting point for understanding all IFRS
information is the objective and the concepts that flow
logically from that objective:
–IASB uses Frameworkto set IFRSs
–Teachers/Trainers use Framework-based teaching
to prepare students to make judgements that are
necessary to apply IFRSs
–Preparers use Frameworkto make the judgements
that are necessary to apply IFRSs
–Auditors and regulators assess those judgements
–Investors, lenders and others consider those
judgements when using IFRS financial information
to inform their decisions
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22
Examples:
errors and changes in policies and estimates
•Objective
•Concepts
–faithful representation
–comparability
•Principle
–Prior period error: retrospective restatement
–Change in policy: retrospective application
–Change in estimate: prospective application
•Rules
–impracticable exception
–transitional provisions (new requirements)
–specified disclosures
22
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232323Pervasive constraint
•Cost
–IASB assesses whether the benefits of reporting
particular information are likely to justify the
costs incurred to provide and use that
information.
Note: It is consistentwith the Frameworkfor an
IFRS requirement not to maximise the
qualitative characteristics of financial information
and other main Framework concepts when the
costs of doing so would exceed the benefits.
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24
Transitional provisions and effective
dates
•The concepts= objective of financial
reporting and qualitative characteristics (see
Conceptual Framework)
•The principlefor changes in accounting
policies (see IAS 8) =
–retrospective application of new accounting
policy
–voluntary policy change only if change results in
reliable and more relevant information
–disclose the effects of retrospective application
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25
Transitional provisions and effective
dates
•Rule transitional provisions for new and
amended IFRSs
•cost constraint
•prevent abuse from the use of hindsight
•Rule impracticability exception
•practical expedient
•Rule specified disclosures
•application guidance
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26Elements
Asset
•resource controlled by the
entity
•result of past event
•expected inflow of economic
benefits
Liability
•present obligation
•arising from past event
•expected outflow of
economic benefits
Equity = assets less liabilities
Income
•recognised increase in
asset/decrease in liability in
current reporting period
•that result in increased
equity except…
Expense
•recognised decrease in
asset/increase in liability in
current reporting period
•that result in decreased
equity except…
26
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27Elements, examples
•Asset?
•an oil explorer’s exploration rig
•a fish farmer’s breeding stock
•fish in the sea (from a fish harvester’s
perspective)
•own shares held by an entity
•firm order to acquire gold, settle net in cash
•firm order to acquire gold, cannot settle net
•expenditure on major inspection (a condition of
continuing to operate an item of PPE)
•‘right’ to recover past costs incurred increased
future prices in a rate regulated activity
27
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28Elements, examples
•Liability?
•defending a lawsuit
•promise to make good environmental damage
(no legal obligation to do so)
•law requires smoke filters be fitted to factory
•lessee—short-term car rental agreement
•participant in a cap and trade emission trading
scheme
28
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29Elements, examples
•Liability or equity?
•issue ordinary share
•issue compulsorily redeemable debt (fixed
interest, fixed redemption)
•issue convertible debt instrument (holder has
option to convert)
•non-controlling interest
29
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30Elements, examples 30
Liability or equity at 31/12/20X1?
•On 15/01/20X2 the shareholders of an entity approved
the distribution of CU40,000 dividend for the year
ended 31/12/20X1 (as proposed by management on
21 December 20X1.
–CU18,000: minimum dividend required by law for the year
ended 31 December 20X1
–CU22,000: additional to required minimum dividends
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31Classification
•Objective of financial reporting
•Financial statements portray financial effects of
transactions and events by:
–grouping into broad classes (the elements, eg asset)
–sub-classify elements (eg assets sub-classified by their
nature or function in the business)
•IAS 1
–application of IFRSs with additional disclosures when
necessary results in a fair presentation (faithful
representation of transactions, events and conditions)
–don’t offset assets & liabilities or income & expenses
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32Classification, assets and claims
•Information about the nature and amounts of a
reporting entity’s economic resources and claims
can help users to identify the reporting entity’s
financial strengths and weaknesses.
•That information can help users to:
–assess the reporting entity’s liquidity and
solvency
–its needs for additional financing and how
successful it is likely to be in obtaining that
financing.
(CF.OB13)
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33Classification, claims
•Information about priorities and payment requirements
of existing claims helps users to predict how future cash
flows will be distributed among those with a claim
against the reporting entity (CF.OB13)
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34Classification, liability
•Which IFRS classification of liability are?
•obligation to pay current tax
•metered power used but not yet billed by
supplier
•‘normal’ warrantee obligation to make good
manufacturing defect
•warrantee obligation to compensate for
manufacturing defects by settling in
compensation in cash
•extended warrantee obligation
34
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35Classification, assets
•Different types of economic resources affect a user’s
assessment of the reporting entity's prospects for future
cash flows differently.
–Some future cash flows result directly from existing
economic resources (egaccounts receivable and
investment property).
–Other cash flows result from using several resources in
combination to produce and market goods or services to
customers (egPPE and intangible assets). Although
those cash flows cannot be identified with individual
economic resources (or claims), users of financial
reports need to know the nature and amount of the
resources available for use in a reporting entity’s
operations. (CF.OB14)
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36Asset classification
•Which IFRS classification of asset are?
•investment in ordinary shares
•gold
•land
•land planted with plantation
•farm implements
•bird breeder’s birds
•birds in a zoological garden
•birds in a bird breeding zoo
•owner-occupied building held for sale
•owner-occupied building decided to abandon
36
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37Recognition
•Accrual basis of accounting
–recognise element (egasset) when satisfy
definition and recognition criteria
•Recognise item that meets element definition when
–probable that benefits will flow to/from the entity
–has cost or value that can measured reliably
•Unit of account (unit of measure for recognition)
•Materiality
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38Recognition, examples
•Recognise the asset?
•a hospital’s backup backup generator (expect never
to use it)
•an oil explorer’s exploration rig
•an oil extractor’s unproven reserves
•an oil extractor’s proven reserves
•advertising expenditure
•research and development expenditure
•internally generated brand
•lessee—short-term car rental agreement
•firm order to acquire gold, cannot settle net
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39Measurement ‘concepts’ 39
•Measurement is the process of determining monetary
amounts at which elements are recognised and
carried. (CF.4.54)
•To a large extent, financial reports are based on
estimates, judgements and models rather than exact
depictions. The Conceptual Frameworkestablishes
the concepts that underlie those estimates,
judgements and models (CF.OB11)
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40Measurement ‘concepts’ 40
•Measurement part of Conceptual Frameworkis weak
•A number of different measurement bases are
employed to different degrees and in varying
combinations in financial statements, including
–historical cost
–current cost
–realisable (settlement) value
–present value (CF.4.55)
•IASB guided by objective andqualitative
characteristics when specifying measurements.
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36. The concept, defined in IFRS 13
•Fair value is the price that would be received to sell
an asset or paid to transfer a liability (exit price) in
an orderly transaction (not a forced sale) between
market participants (market-based view) at the
measurement date (current price).
•Fair value is a market-based measurement (it is not
an entity-specific measurement)
•consequently, the entity’s intention to hold an asset
or to settle or otherwise fulfil a liability is not relevant
when measuring fair value.
41Fair value measurement concept
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42Fair value measurement concept 42
•Information about an entity’s financial performance in
a period, reflected by changes in economic
resources is useful in assessing the entity’s past and
future ability to generate net cash inflows (see
CF.OB18)
•Income (expenses) are increases (decreases) in
economic benefits during an accounting period in the
form of enhancements (depletions) of assets (CF.4.25)
•Measure element at fair value with changes in fair
value recognised as income or expense for the period
in which it arises
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43
ASSETTYPE MEASUREMENT AT
INITIAL RECOGNITION
MODEL BASED
ON FAIR VALUE
BASIS OF
IMPAIRMENTTEST
IFRS 9 Financial
Instruments
Fair value For specified financial
assets and for particular
business models: fair
value
IAS 16 Property,
Plant and Equipment
Purchase costs + construction
costs + costs to bring to the
location and condition
necessary to be capable of
operating in the manner
intended by management.
Accounting policy choice:
revaluation model
Compare carrying amount
to recoverable amount.
Recoverable amount is
greater of value in use and
fair value less disposal
costs (IAS 36)
IAS 38 Intangible
Assets
Purchase costs + development
costs + costs to bring to the
location and condition
necessary to be capable of
operating as intended by
management
Accounting policy choice:
revaluation model
IAS 40
Investment Property
Cost including transaction costsAccounting policy choice:
fair value
IAS 41 AgricultureFair value less costs to sellFair value less costs to
sell

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44
Example
Biological asset in agricultural activity44
•Theconcepts: see slides 41 and 42
•The principle: a gain or loss arising on initial
recognition of a biological asset at fair value less
costs to sell and from a change in fair value less
costs to sellof a biological asset shall be included
in profit or loss for the period (IAS 41.26)
•The limited exception: inability at initial recognition
to measure fair value reliably then cost-
depreciation-impairment model (IAS 41.27)
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45Historical cost ‘concept’ 45
•Assets are recorded at the amount of cash or cash
equivalents paid orthe 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 taxes), at the
amounts of cash or cash equivalents expected to be
paid to satisfy the liability in the normal course of
business.
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46Cost-based IFRS measures 46
•Few things measured at historical cost
–unimpaired land (IAS 16 + IAS 40 cost model)
–unimpaired indefinite life intangibles (IAS 38)
–unimpaired inventories (IAS 2)
•Cost-based measures are more common
–unimpaired depreciated historic cost (IAS 16)
–unimpaired amortised historical cost (IAS 38)
–amortised cost (IFRS 9)
Impairment changes to a fair value or other measure
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47
ASSETTYPE MEASUREMENT AT INITIAL
RECOGNITION
COST MODEL BASIS OF
IMPAIRMENT
TEST
IAS 2 Inventory Costof purchase and/or conversion
costsand coststo get the item to the
locationand condition for sale
Cost unless impaired Lower of cost
(initial recognition)
and netrealisable
value
IAS 16 Property, Plant
and Equipment
Purchase costs+ construction costs+
coststo bring to the location and
condition necessary to be capable of
operating in the manner intended by
management.
Accounting policy choice:
costless accumulated
depreciationand
impairment, if any
Compare carrying
amount to
recoverable
amount.
Recoverable
amount is greater
of value in use
and fair value less
disposal costs
(IAS 36)
IAS 38 Intangibles
Assets
Purchase costs+ development costs+
coststo bring to the location and
condition necessary to be capable of
operating as intended by management
Accounting policy choice:
costless accumulated
amortisation(unless
indefinite life asset) and
amortisation, if any
IAS 40 Investment
Property
Costincluding transaction costs Accounting policy choice:
costless accumulated
depreciation(unless land)
and impairment (if any)
IFRS 9 Financial
Instruments
Fair value For particular business
models amortised cost
IAS 39 specifies
impairment rules

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48
Example:
allocating depreciation: concepts 48
•Information about an entity’s financial performance in
a period, reflected by changes in economic resources
(egPPE) is useful in assessing the entity’s past and
future ability to generate net cash inflows (CF.OB18)
•Expenses are decreases in economic benefits during
an accounting period in the form of depletions of
assets… (CF.4.25)
•Depreciation represents the consumption of the assets
service potential in the period.
–land with an indefinite useful life is not depreciated because
its service potential does not reduce with time
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49
Example:
allocating depreciation: principle 49
•Depreciation is the systematic allocation of the
depreciable amountof an asset over its useful
life(IAS16.6).
–essentially a cost allocation technique
(IAS16.BC29)
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50
Example: allocating depreciation:
application guidance (1) 50
•Systematic allocation (application guidance):
–depreciation methodmust closely reflects the
pattern in which the asset’s future economic
benefits are expected to be consumed by the
entity. (cannot use a revenue-based depreciation method?)
–unit of measurefor depreciation is different from
that for an item of PPE. By depreciating significant
parts of an item of PPE separately, depreciation
more faithfully represents the consumption of the
assets service potential. (IAS16.BC26)
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51
Example: allocating depreciation:
application guidance (2) 51
•Depreciable amount =
–cost model: historical cost less residual value
–revaluation model: fair value less residual value
•Residual value =
–amount that the entity would currently obtained
from disposal of asset (less estimated disposal
costs) if the asset were already of the age and in
the condition expected at the end of its useful life
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52
Example: allocating depreciation:
application guidance (3) 52
•Useful life (entity specific) =
–the period over which the asset is expected to be available
for use by the entity; or
–the number of production or similar units expected to be
obtained from the asset by the entity.
•Consequently, depreciation continues when idle(if
useful life = period)
•However, depreciation ceases when classified as
held for salebecause IFRS 5 measurement is
essentially a process of valuation, rather than
allocation (IFRS5.BC29)
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53Derecognition 53
•Derecognitionoccurs when a recognised item is
removed from the statement of financial position
•There is no explicit concept for derecognitionin the
Conceptual Framework. Consequently:
•derecognitionrequirements are specified at the
Standards level
•inconsistencies exist between the derecognition
requirements of different IFRSs
•derecognitiondoes not necessarily coincide with no
longer meeting the requirements specified for
recognition
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54Derecognition of PPE 54
•IAS 16.67 specifies: the carrying amount of an item
of PPE shall be derecognised:
(a) on disposal; or
(b) when no future economic benefits are
expected from its use or disposal.
•Note: derecognitionof PPE does not necessarily
coincide with the loss of control of the asset.
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55Presentation
•Presentation: financial statements portray
financial effects of transactions and events by:
–grouping into broad classes (eg asset)
–sub-classify assets by their nature orfunction
in the business(eg land could be inventory,
investment property or PPE)
–PPE classified into classes—grouping of assets
of a similar nature anduse in the entity’s
operations
–do not offsetassets and liabilities or income
and expenses
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56Example—classes of PPE
•How many classes (similar nature and use in the
entity’s operations) of property, plant and
equipment?
–plot on which HQ is built
–vacant plot, about to construct new HQ
–plot that operates as landfill site
–plot on which sales office is built
–10 plots in different cities each with retail outlet
–vacant plot acquired for an undetermined
purpose
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52. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
57Disclosure
•Objective of financial reporting
•Notes provide narrative descriptions or
disaggregationsof items presented in ‘primary’
statements and information about items that do
not qualify for recognition in those statements
–the failure to recognise an item cannot be
rectified by disclosure
•Application of IFRSs with additional disclosures
when necessary results in a fair presentation
(faithful representation of transactions, events
and conditions)
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53. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
58Framework’s role in applying IFRSs 58
Does the Frameworkhelp me apply IFRSs?
•Yes, Frameworkis in IAS 8 hierarchy (see next
slide)
–Preparers use the Frameworkto make the
judgements that are necessary to apply IFRSs
–Auditors and regulators assess those
judgements
–Investors, lenders and others consider those
judgements when using IFRS financial
information to inform their decisions
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54. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
59If no specific IFRS requirement
•Use judgementto
–develop a policy that results in relevant
information that faithfully represents (ie
complete, neutral and error free)
–Hierarchy:
1
st
IFRS dealing with similar and related issue
2
nd
Frameworkdefinitions, recognition crit. etc
Can also in parallel refer to GAAPs with similar
framework
59
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55. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
60In other words, if no IFRS requirement…60
Framework-based approach would ask:
•What is the economics of the phenomenon (eg
transaction or event)?
•What relevant information using the accrual
basis of accounting faithfully present that
economic phenomenon to inform decisions of
investors and lenders (potential and existing)?
•Is there anything in IFRSs that prevents me
from providing that information?
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56. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
61Example:non-cash distribution 61
Before IFRIC 17, entity distributes non-cash
asset (eg land or shares in another) whose fair
value = CU1 mill. Carrying amount of asset =
cost = CU1K
•Economics = reduce owners’ claims against the
entity by distributing to them an asset worth
CU1 million.
•Relevant information for investors and lenders
that faithfully represents the economics:
–investors received CU1 million refund of capital.
–value of assets available to meet lenders’ claims
reduced by CU1 million.
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57. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
62Example: non-cash distribution 62
Before IFRIC 17… (continued)
•Does IFRSs prevent providing that information?
No. Therefore:
–recognise CU999K income (previously
unrecognised increase in the value of the
asset derecognised).
–recognise CU1 million distribution to owners.
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58. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
63Example: share-based payment 63
Before IFRS 2, entity pays employee in own shares.
Par value of shares issued = CU1K. Fair value of
services provided = CU1 million = fair value of shares.
•Economics = entity paid employees CU1 million for
services. Employees invested CU1 million in entity.
•Relevant information for investors and lenders that
faithfully represents the economics:
–CU1 million services received = staff cost.
–CU1 million invested = increased owner equity.
•Does IFRSs prevent providing that information? No.
Therefore, recognise CU1 million expense and
recognise CU1 million increase in owners’ equity.
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59. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
64Support for Framework-based teaching 64
•IFRS Foundation education initiative works with
others to support Framework-based teaching
–create awareness
–develop material (starting with PPE and non-financial
liabilities)
–workshops 2012: Brighton (BAFA), Llubijana (EAA),
Melbourne (AFAANZ), Washington DC (AAA)
–encourage those certifying accountants to examine
their students’ ability to make the judgements that
are necessary to apply IFRSs
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60. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
6565Questions or comments?
Expressions of individual views
by members of the IASB and
their staff are encouraged.
The views expressed in this
presentation are those of the
presenter. Official positions of
the IASB on accounting matters
are determined only after
extensive due process
and deliberation.
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61. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
66
The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at 1
January 2012 with an effective date after 1 January 2012
but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and the
publishers do not accept responsibility for loss caused to
any person who acts or refrains from acting in reliance on
the material in this PowerPoint presentation, whether such
loss is caused by negligence or otherwise.
66
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