International Accounting Standarts

Objectives of Financial Statements

Your teachers for today

• Understand the importance of International norms

• Understand the IFRS structure and concepts

• Understand the GAAP structure and concepts

• Main differences between the 2 systems

ves of Financial Statements

Goals of today Presentation

• You have several tasks you can fulfill with accounting such as to calculate the taxable income, calculate the split of profit among owners, help management to decide where to expand business and so on.

• Both GAAP and IFRS aim to provide relevant information to a wide range of users. To make the Decision Process more efficient and effective.

Cost conceptWhat’s the main purpose of accounting?

• We can say the financial statements are useful mainly for the stakeholders such as suppliers, employees, customers or even potential investors who are thinking of becoming owners.

Cost conceptAnd… who needs it?

What is IFRS?

• International Financial Reporting Standards (IFRS) is a single set of accounting standards, developed and maintained by the IASB with the intention of apply those standards on a globally consistent basis.

• The International Accounting Standards Board (IASB), by its side, is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs). The IASB operates under the domain of the IFRS Foundation.

But what is IASB?

IFRS- Historical data

• IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization made the concept attractive around the world.

• On 1 April 2001, the new International Accounting Standards Board (IASB) replaced the IASC in the responsibility for setting International Accounting Standards.

• IFRS are used in many parts of the world, including the European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, Chile, South Africa, Singapore and Turkey, but not in the United States.

The main characteristics of this type of accounting are:

•The investors as the main target;•Allow making economic decisions;•The investors have to predict entity’s future cash flows;•Understandable, relevant, reliable and comparable information;

Cost conceptIFRS

• Business entity;

• Accounting period;

Cost conceptImportant concepts to retain

• Existence distinct from the owners;• To the accountant, the business and its owners are

considered completely separately

Cost conceptBusiness entity

• Profit just can be measured after defining the lenght of the period;

• Normally the companies set up 1 year;

• The need of more frequent financial statements;

Cost conceptAccounting period

• Main objective;

• Important assumptions;

• Relevance;

• Reliability;

Cost conceptThe IASB’s concepts

• To provide the users of financial statements making good decisions, through a fair presentation of the state and performance of a business;

But HOW?

• Giving relevant and reliable information;

Cost conceptMain objective

There are two main principles IASB based on to establish the IFRS:

•Accruals (and matching)•Going concern

Cost conceptImportant assumptions

• Transactions are recognized when they really occur;

• On the other hand matching means that revenues and expenses must be related together;

Cost conceptAccruals and matching

Cost conceptConfused? Let’s figure out some examples

• Imagine that a business rents out some premises and asks for the rent in advance….

Cost conceptAnd the opposite…

Cost conceptBut how to make matching with

assets?

• Imagine now that your company purchases an asset, like a machine used in the production for example.

• How will the accountant report the expense?• The answer is…

Depreciation

Cost conceptGoing concern

• Is is assumed that the business will continue for the foreseeable future.

• Examples: Inventory and depreciation policy.

Cost conceptIASB’S framework

• Comparison across companies and across periods of time;

• Providing understandable information, assuming that the important users are intelligent and educated

• Consistency in the use of methods and presenting numbers

• Timeliness, which means that information should be updated

• Materiality- giving emphasis to the significant items

• Faithful representation, which means that the information should be shown in a transparent way

• Economic substance, which means that is giving preference to the economic substance of transactions rather than their legal form

• Neutrality, which means that objective information should be used, without any bias

• Prudence (conservatism), which means that you must consider always the worst situation

• Completeness- Although the constraints of materiality, information have to be complete.

BUTThe benefits of information should cover the costs of producing it

Cost conceptSome inconsistencies

1- Prudence and going concern:

As mentioned before, the going concern convention assumes that the firm will survive for a indefinite period of time.But the prudent convention could say us to keep in mind that a bankruptcy can always happend.

So as you can see both concepts in a certain moment contradict each other…

Cost conceptSome inconsistencies

2- Matching and prudence

Matching convention consider assets into future periods with the conviction that they will be used profitably later.

So, we are considering something for the long term. Is it prudent?

Cost conceptSome inconsistencies

3- Neutrality and prudence

Neutrality can be described as being impartial But how can an accountant be prudent without being impartial? There is always critical thinking…

Cost conceptPotencial future developments

• The IASB and the US Financial Accounting Standards Board are now working closely together, and they are committed to providing a revised conceptual framework which is common to both bodies.

Cost conceptConclusion

The main advantages of using IFRS are:•The possession of centralized information;•It’ s possible to compare financial performances between international companies;•The analysis of information is faster;

1 - Money Measurement

2 –Entity Concept

3 – Going Concern Concept

4 - Cost concept

 •Does not necessarily-indeed, does not ordinarily-reflectwhat assets are worth, except at the moment they are acquired.

•An asset is ordinarily entered in the accounting records at the price paid toacquire it-at its cost

•Book Value VS Market Value

Cost concept4 - Cost concept – What does it mean?

  A "market value" or "current worth" concept would be difficult to apply because it would require that the accountant attempt to keep track of the ups and downs of the market price of each asset. The cost concept leads to a much more feasible system.

In summary, the accounting profession with the Cost Concept sacrificessome degree of relevance in exchange for greater objectivity and greater feasibility.

Cost concept4 - Cost concept - Why is it like this?

 GoodWill

Cost concept4 - Cost concept – Associated Concept

GoodWill - What People think it is?

GoodWill - What Realy is?

GoodWill is a Intangible and valuable Economic Resource

5 -The Dual Aspect Concept

ASSETS = OWNERS' EQUITY + OTHER LIABILITIES

6 –The Accounting Period Concept

7 -The Conservatism Concept

 1. Recognize revenues (increases in retained earnings) only when theyare reasonably certain

2. Recognize expenses (decreases in retained earnings) as soon as theyare reasonably possible

Cost concept7 -The Conservatism Concept – how it works

8 - The Realization Concept

1. Recognize revenues (increases in retained earnings) only when they are reasonably certain

2. Recognize expenses (decreases in retained earnings) as soon as they are reasonably possible

Cost concept8 - The Realization Concept

9 - The Matching Concept

The conservatism concept suggests the period when revenue shouldbe recognized.

The realization concept, indicates the amount of revenue that should be recognized from a given sale.

Cost concept9 - The Matching Concept

10 - The Consistency Concept

11 - The Materiality Concept

11 - The Materiality Concept

• Understand the importance of International norms;

• Understand the IFRS structure and concepts;

• Understand the GAAP structure and concepts;

• Main differences between the 2 systems;

e Materiality Concept

Goals of today Presentation

Thank you for your attention