IFRS

OVREVIEW OF IFRS

1. OVREVIEW OF IFRS 1 Prepared by Mr.. Abdi Hassen

2. What is IFRS? International Financial Reporting standards are accounting standards that two bodies: International Accounting Standard Committee ( IASC ) from 1973 to 2001 and International Accounting Standard Board ( IASB ) since 2001. Accounting standards developed by IASC are called International Accounting Standards ( IASs )while those developed by IASB are called International Financial Reporting Standards ( IFRS ). IASB adopted the IAS developed by IASC and continued developing other standards, and, currently, both IAS and IFRS are termed as IFRS. IFRS is a globally recognized set of Standards for the preparation of financial statements by business entities. Those Standards prescribe : the items that should be recognized as assets, liabilities, income and expense how to measure those items; how to present them in a set of financial statements; and related disclosures about those items. 2 Abdi H

3. Principles-Based vs. Rules-Based Standards IFRS are referred to as being principles - based standards Provide core principles (objectives ) with minimum guidance. They are more loosely framed, allowing for professional judgment to be applied The judgments are expected to be consistent with clear conceptual framework. Results in accounting that is more flexible to deal with unique economic and business circumstances Some argue that allowing professional judgment introduces bias. 3 Abdi H

4. US GAAP are referred to as being rules-based standards: They are more prescriptive Provide a rule for every situation Body of knowledge too large and complicated Although more guidance is a comfort to some, it becomes difficult to ensure that the standards are all consistent . More on the difference between IFRS and US GAAP later 4 Abdi H

5. Why IFRS? Investors are acting on a global market !! National standards don’t work on a global market Cross boarder business is hindered by national standards 5 Abdi H

6. Benefits of IFRS Credibility of local market to foreign investors More cross-border investment Efficient capital allocation Comparability across political boundaries Facilitates global education and training 6 Abdi H

7. Benefit of IFRS to companies! Lower cost of capital Facilitates raising capital abroad Integrated IT systems One set of books + easier consolidation Better understanding of financial statements from business partners abroad 7 Abdi H

8. IFRS Adoption More than 110 countries International support to have global accounting standards G20 WB IMF Basel Committee, International Organization of Securities Commissions International Federation of Accountants 8 Abdi H

9. IFRS in Ethiopia Ethiopia passed a financial reporting law in 2014 which requires the use of IFRS by commercial businesses operating in Ethiopia. Proclamation No. 847/2014 Regulation No. 332/2014 9 Abdi H

10. The proclamation requires: Commercial organizations to follow International Financial Reporting Standards (IFRS ), or International Financial Reporting Standards for Small and Medium Enterprises (IFRS for SME) Charities and societies to follow International Public Sector Accounting Standards (IPSAS) Public auditors to follow International Standards for Auditing. 10 Abdi H

11. Public interest entity (PIE) should use the full IFRS. A PIE is a reporting entity that is of significant public relevance because of the nature of its business , its size , its number of employees . PIE also includes banks , insurance companies, and any other financial institutions and public enterprises . Small or medium enterprises (SME)= Not public interest entity 11 Abdi H

12. Structure, strategic plan, and roadmap of AABE Accounting and Auditing Board of Ethiopia is established by Regulation No. 332/2014 It is an autonomous government organ accountable to MOFEC. It is headed by the Director General It has 12-member Board of Directors 12 Abdi H

13. AABE duties (among others) Issue standards and directives relating to financial reporting and auditing and ensure their compliance. Receive and register financial statements of reporting entities Review and monitor the accuracy and fairness of FS to enforce compliance with the reporting standards Register and license public auditors 13 Abdi H

14. Oversee professional accountancy bodies Establish, publish and review a code of professional conduct and ethics for certified public accountants and certified auditors Conduct or arrange for the conduct of professional examination for the purpose of registering certified public accountants 14 Abdi H

15. AABE Roadmap to IFRS Implementation 15 Abdi H

16. Date What is expected July 7, 2017 Mandatory reporting by financial institutions and large public enterprises Adoption of IFRS by PIE (other than financial institutions and large public enterprises) and IPSAS by Charities and Societies. July 7, 2018 PIE (other than financial institutions and large public enterprises) and IPSAS by Charities and Societies issue IFRS and IPSAs based financial statements respectively July 7, 2019 Small and Medium-sized Entities in Ethiopia issue IFRS based financial statements 16 Abdi H

17. IASB and IFRS IFRS is developed by the International Accounting Standards Board ( IASB ), which operates under the oversight of the IFRS Foundation . IASB was formerly called International Accounting Standards Committee ( IASC ) IASB is based in London 17 Abdi H

18. How IASB Works 18 Abdi H

19. Standards development process 19 Abdi H

20. List of Applicable IFRS 20 Abdi H

21. 21 Abdi H

22. IFRS Comprises 22 Abdi H

23. International Accounting Standards (IAS) IAS 1: Presentation of Financial Statements IAS 2: Inventories IAS 7: Statement of Cash Flows IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors IAS 10: Events after the Reporting Period 23 Abdi H

24. IAS 11: Construction Contracts (will be superseded by IFRS 15 as of 1 January 2018) IAS 12: Income Taxes IAS 16: Property, Plant and Equipment IAS 17: Leases IAS 18: Revenue (will be superseded by IFRS 15 as of 1 January 2018) IAS 19: Employee Benefits 24 Abdi H

25. IAS 20: Accounting for Government Grants and Disclosure of Government Assistance IAS 21: The Effects of Changes in Foreign Exchange Rates IAS 23: Borrowing Costs IAS 24: Related Party Disclosures IAS 26: Accounting and Reporting by Retirement Benefit Plans IAS 27: Separate Financial Statements 25 Abdi H

26. IAS 28: Investments in Associates and Joint Ventures IAS 29: Financial Reporting in Hyperinflationary Economies IAS 32: Financial Instruments: Presentation IAS 33: Earnings per Share IAS 34: Interim Financial Reporting IAS 36: Impairment of Assets 26 Abdi H

27. IAS 37: Provisions, Contingent Liabilities and Contingent Assets IAS 38: Intangible Assets IAS 39: Financial Instruments: Recognition and Measurement (will be superseded by IFRS 9 as of 1 January 2018) IAS 40: Investment Property IAS 41: Agriculture 27 Abdi H

28. International Financial Reporting Standards IFRS 1: First-time Adoption of International Financial Reporting Standards IFRS 2: Share-based Payment IFRS 3: Business Combinations IFRS 4: Insurance Contracts IFRS 5: Non-current Assets Held for Sale and Discontinued Operations IFRS 6: Exploration for and Evaluation of Mineral Resources 28 Abdi H

29. IFRS 7: Financial Instruments: Disclosures IFRS 8: Operating Segments IFRS 9: Financial Instruments (will replace IAS 39 as of 1 January 2018) IFRS 10: Consolidated Financial Statements IFRS 11: Joint Arrangements IFRS 12: Disclosure of Interests in Other Entities 29 Abdi H

30. IFRS 13: Fair Value Measurement IFRS 14: Regulatory Deferral Accounts IFRS 15: Revenue from Contracts with Customers (will replace IAS 11 and IAS 18 as of 1 January 2018) IFRS 16: Leases (replaces IAS 17 as of January 1, 2019) 30 Abdi H

31. IFRS Interpretations Committee Interpretations IFRIC 1: Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 2: Members’ Shares in Co-operative Entities and Similar Instruments IFRIC 4: Determining whether an Arrangement contains a Lease (will be superseded by IFRS 16 as of 1 January 2019) IFRIC 5: Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds 31 Abdi H

32. IFRIC 6: Liabilities arising from Participation in a Specific Market – Waste Electrical and Electronic Equipment IFRIC 7: Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 9: Reassessment of Embedded Derivatives IFRIC 10: Interim Financial Reporting and Impairment 32 Abdi H

33. IFRIC 12: Service Concession Arrangements IFRIC 13: Customer Loyalty Programmes (will be superseded by IFRS 15 as of 1 January 2018) IFRIC 14: IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction IFRIC 15: Agreements for the Construction of Real Estate (will be superseded by IFRS 15 as of 1 January 2018) 33 Abdi H

34. IFRIC 16: Hedges of a Net Investment in a Foreign Operation IFRIC 17: Distributions of Non-cash Assets to Owners IFRIC 18: Transfer of Assets from Customers (will be superseded by IFRS 15 as of 1 January 2018) IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments IFRIC 20: Stripping Costs in the Production Phase of a Surface Mine IFRIC 21: Levies 34 Abdi H

35. Standing Interpretations Committee Interpretations (SIC) SIC-7: Introduction of the Euro SIC-10: Government Assistance – No Specific Relation to Operating Activities SIC-15: Operating Leases – Incentives (will be superseded by IFRS 16 as of 1 January 2019) SIC-25: Income Taxes – Changes in the Tax Status of an Entity or its Shareholders 35 Abdi H

36. SIC-27: Evaluating the Substance of Transactions Involving the Legal Form of a Lease (will be superseded by IFRS 16 as of 1 January 2019) SIC-29: Service Concession Arrangements: Disclosures SIC-31: Revenue – Barter Transactions Involving Advertising Services (will be superseded by IFRS 15 as of 1 January 2018) SIC-32: Intangible Assets – Web Site Costs 36 Abdi H

37. Difference between IFRS and US GAAP Great strides have been made by the FASB and the IASB to converge the content of IFRS and U.S. GAAP . There is continued support for the objective of a single set of high-quality, globally accepted accounting standards . 37 Abdi H

38. Virtually identical standards share-based payments, segment reporting, business combinations, consolidated financial statements, fair value measurement, joint arrangements, investment entities, and revenue 38 Abdi H

39. Unsuccessful joint projects leases , Insurance, Financial instruments, Conceptual framework Major differences between IFRS and US GAAP are as follows: 39 Abdi H

40. Inventory costing method US GAAP allows LIFO method IFRS doesn’t allow LIFO method Reversal of inventory write-downs US GAAP doesn’t allow IFRS allows Valuation of property, plant, and equipment U.S.GAAP : Cost less accumulated depreciation IFRS : Cost less accumulated depreciation (or) fair value(revaluation) 40 Abdi H

41. Valuation of intangible assets U.S GAAP: Cost less accumulated amortization. Revaluation prohibited IFRS : Cost less accumulated amortization (or) fair value(revaluation) Research and development expenditures U.S GAAP: Expensed in the period incurred IFRS : Research : expensed in the period incurred Development : that meet specified criteria: capitalized 41 Abdi H

42. Contingencies U.S. GAAP: accrue if it is probable and can be reasonably estimated. GAAP defines probable as “likely to occur” (a higher threshold of occurrence than under IFRS) IFRS: threshold for “probable” is defined as “more likely than not” (greater than 50%) Valuation of long-term contingencies U.S.GAAP: present value—only when timing of cash flows is certain IFRS: present value—time value of money is material 42 Abdi H

43. Treatment of convertible debt U.S. GAAP: entire issue price is recorded as a liability IFRS: convertible debt is divided into its liability (bonds) and equity (conversion option) elements 43 Abdi H

44. Distinction between debt and equity for preferred stock U.S. GAAP: most preferred stock is included in stockholders’ equity , with the dividends reported as a reduction in retained earnings IFRS: most preferred stock is reported as debt , with the dividends reported in the income statement as interest expense 44 Abdi H

45. Reacquired shares: IFRS does not permit retirement of shares U.S. GAAP: All buybacks are treated as treasury stock Cash outflows for interest payments U.S. GAAP: operating cash flows IFRS: either operating or financing cash flows 45 Abdi H

46. Cash inflows from interest and dividends received U.S. GAAP: operating cash flows IFRS : either operating or investing cash flows Disclosure of noncash activities U.S. GAAP: Reported either on the face of the statement of cash flows or in a disclosure note IFRS: Disallows presentation on the face of the statement and requires reporting in a disclosure note 46 Abdi H

47. Discontinued operations U.S. definition is broader than its international counterpart IFRS considers a component to be primarily either a major line of business or geographical area of operations Extraordinary items U.S . GAAP: provides separate reporting IFRS : recording or disclosure not allowed 47 Abdi H

48. Conceptual Framework 48 Abdi H

49. Conceptual Framework sets out the concepts that underlie IFRS financial statements It comprises of: the objective of general purpose financial reporting qualitative characteristics elements of financial statements recognition measurement presentation and disclosure Other concepts all flow from the objective 49 Abdi H

50. Purpose of the Conceptual Framework To assist IASB in setting and revising standards To assist preparers to make the judgements that are necessary to apply IFRSs To assist auditors and regulators assess judgments of preparers To assist users to consider those judgments when using IFRS financial information to inform their decisions To assist in understanding of standard-setting by IFRS To reduce conflicts between Framework and Standards 50 Abdi H

51. Objective of General Purpose Financial Reporting “Provide financial information about the reporting entity that is useful to existing and potential investors , lenders and other creditors in making decisions about providing resources to the entity ” 51 Abdi H

52. To provide information about Economic resources and claims ( SFP ) Changes in economic resources and claims ( SPLOCI ) Financial performance reflected by past cash flows ( SCF ) Changes in economic resources and claims not resulting from financial performance ( SCE ) 52 Abdi H

53. Qualitative Characteristics of Useful Financial Information Fundamental Relevance Faithful representation Enhancing Comparability Verifiability Timeliness Understandability 53 Abdi H

54. 54 Abdi H

55. Relevance : Capable of making a difference in users’ decisions predictive value confirmatory value materiality (entity-specific) Faithful representation : F aithfully represents the phenomena it purports to represent completeness (depiction including numbers and words) neutrality (unbiased) free from error (ideally) 55 Abdi H

56. Comparability : like things look alike; different things look different Verifiability : knowledgeable and independent observers could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation Timeliness : having information available to decision-makers in time to be capable of influencing their decisions Understandability : Classify, characterize, and present information clearly and concisely 56 Abdi H

57. Elements of financial statements 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 contributions from owners Expense recognised decrease in asset/increase in liability in current reporting period that result in decreased equity except distributions to owners 57 Abdi H

58. Recognition Accrual basis of accounting used Recognise element when: The element satisfies definition probable that benefits will flow to/from the entity has cost or value that can be measured reliably 58 Abdi H

59. What does probable mean? It means “more likely than not” The meaning of probable is determined at the standards level. Therefore , inconsistent use across IFRSs (usually more than 50%) What does measure reliably mean? To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. 59 Abdi H

60. Measurement Measurement is the process of determining monetary amounts at which elements are recognised and carried. To a large extent, financial reports are based on estimates , judgements and models rather than exact depictions. 60 Abdi H

61. Measurement methods include Historical cost: cash paid or fair value of consideration given Current cost: Cash that would be paid if acquired now R ealisable (settlement) value: cash that could be obtained by selling the asset now Present value: present discounted value of future net cash inflows that the item is expected to generate 61 Abdi H

62. Constraints Cost vs. benefit: cost of information is justified by the benefits of reporting that information. Benefits include more efficient functioning of capital markets and a lower cost of capital for the economy. Costs include collecting, processing, verifying and disseminating financial information and the costs of analysing and interpreting the information provided. 62 Abdi H

63. Underlying assumptions of financial reporting: G oing concern , and A ccruals accounting 63 Abdi H

64. Financial Statements A statement of financial position as at the end of the period A statement of profit or loss and other comprehensive income for the period A statement of changes in equity for the period A statement of cash flows for the period Notes, comprising A summary of significant accounting policies Other explanatory information 64 Abdi H

65. IASB Books IASB publishes IFRS in 3 books every year Red Book Blue Book Green Book Each book is published as 2 books 65 Abdi H

66. Red book   Standards with effective date after 1 January of the year the book refers to. It excludes standards that are being replaced and/or superseded. 66 Abdi H

67. Blue Book :   Standards with an effective date before 1 January of the year the book refers to. It does not contain Standards with an effective date after 1 January. 67 Abdi H

68. Green Book :   Standards issued at 1 July of the year the book refers to, including standards with an effective date after 1 July.  It excludes standards that are being replaced and/or superseded 68 Abdi H

69. IFRS for SMEs Final standard issued 9 July 2009 230 pages (vs. 3,000+ in full IFRS) Simplified IFRSs, but built on an IFRS foundation Completely stand-alone and divided into 39 Sections Designed specifically for SMEs Internationally recognized 69 Abdi H

70. How simplified Some topics in IFRSs omitted if irrelevant to private entities Where IFRSs have options, include only simpler option Recognition and measurement simplifications Reduced disclosures Simplified drafting 70 Abdi H

71. Who are SMEs? Small or medium enterprise is: A reporting entity, and is not a public interest entity 71 Abdi H

72. List of IFRS for SME Section 1: Small and Medium-sized Entities Section 2: Concepts and Pervasive Principles Section 3: Financial Statement Presentation Section 4: Statement of Financial Position Section 5: Statement of Comprehensive Income and Income Statement Section 6: Statement of Changes in Equity and Statement of Comprehensive Income and Retained Earnings 72 Abdi H

73. Section 7: Statement of Cash Flows Section 8: Notes to the Financial Statements Section 9: Consolidated and Separate Financial Statements Section 10: Accounting Policies, Estimates and Errors Section 11: Basic Financial Instruments Section 12: Additional Financial Instruments Issues 73 Abdi H

74. Section 13: Inventories Section 14: Investments in Associates Section 15: Investments in Joint Ventures Section 16: Investment Property Section 17: Property, Plant and Equipment Section 18: Intangible Assets other than Goodwill 74 Abdi H

75. Section 19: Business Combinations and Goodwill Section 20: Leases Section 21: Provisions and Contingencies Section 22: Liabilities and Equity Section 23: Revenue Section 24: Government Grants 75 Abdi H

76. Section 25: Borrowing Costs Section 26: Share-based Payment Section 27: Impairment of Assets Section 28: Employee Benefits Section 29: Income Tax Section 30: Foreign Currency Translation 76 Abdi H

77. Section 31: Hyperinflation Section 32: Events after the End of the Reporting Period Section 33: Related Party Disclosures Section 34: Specialized Activities Section 35: Transition to the IFRS for SMEs 77 Abdi H