МСФО (IFRS)МСФО - A question of standards

МСФО - A question of standards

A question of standards

In May the Accounting Standards Board published seven British
Financial Reporting Exposure Drafts, and the EU wants
International Accounting Standards, themselves under review, to be adopted
throughout the EU by 2005. Philip Dunn outlines the provision of International
Accounting Standards.
press release was issued by the International
Accounting Standards Board early in June and refers to the changes in reporting 
require­ments to come into use by 2005.
The European Commission has proposed a directive amending the existing European 
Union accounting directives. The proposal brings existing EU rules into line with current best practice and complements the International Accounting 
Standards (IAS) Regulation, that requires all EU companies listed on a regulated 
market to use IAS from 2005 onwards and allows Member States to extend this 
requirement to every company (see IP/02/417 IP/02/200). The amendments now 
proposed to the Accounting Directives would allow Member States which do not 
apply IAS to all companies to move towards similar, high quality financial 
They would allow appropriate accounting for special purpose vehicles, improve 
the disclosure of risks and uncer­tainties and increase the consistency of audit 
reports across the EU. The proposal is an important element in the Financial 
Services Action Plan (see IP/00/1269), endorsed by the Lisbon European Committee 
as a key element of the creation of an integrated financial services market. It 
is also in line with the strate­gy outlined in the Commission's June 2000 
communication on the future of financial reporting in Europe (see IP/00/606).
Internal Market Commissioner Frits Bolkestein said: 'this proposal demonstrates 
again our commitment to transparent, high quality financial reporting, applied 
consistently across Europe. Shareholders, potential investors and the public 
need to know from companies' accounts exactly how well they are performing to be 
able to compare like with like. An efficient internal market demands no less. 
The amendments to Accounting > Directives complement the policy of moving 
towards IAS proposal and has been in preparation since 1999, but the collapse of 
Enron serves to underline its importance even more strongly'. The proposed IAS 
Regulation would require every EU company listed on a regulated market to 
prepare their consolidated accounts in accordance with endorsed IAS from 2005 
onwards. Member States may expect this requirement to extend to unlisted 
companies and to annual accounts. Where endorsed IAS is not applied, detailed 
provisions of the 4th and 7th Accountin
Directives, which this proposal would amend, will contin­ue to act as the basis 
of ED accounting requirements. These Directives may therefore continue to apply 
to up to 5 million companies in Europe.
The Commission's proposal would bring EU accounting requirements into line with' 
modern accounting theory and practice.
In doing so, it would remove all inconsistencies with IAS. Notably, it makes it 
more difficult for a company to 'hide' liabilities by setting up article 
structures (so-called 'special purpose vehicles') which, in substance/ they 
control but which, considering only the shareholdings, appear to be largely 
unrelated. This is an important step in the proper treatment of 
off-balance-sheet financing.
Given the link, in some Member States, between annual accounts and taxation, it 
is important that every Member State move toward IAS at an appropriate pace. 
Accordingly, most changes will be implemented as Member State options allowing 
gradual alignment of national accounting requirements with IAS'.
This initiative prompted me to write this article to give a brief summary of the 
IAS cur­rently in issue.

Framework for the preparation and presentation of financial statements
The IASB outlines its framework as: 'a conceptual accounting framework that sets 
out the concepts that underlie preparation and presentation of financial 
state­ments for external users. It was approved in 1989. The IASB Framework 
assists the IASB: 
· In the development of future IAS and in its review of existing IAS; and
· In promoting the harmonisation of regulations, accounting standards and 
procedures relating to presentation of financial statements by providing a basis 
for reducing the number of alternative accounting treatments permitted by I AS.
In addition, the Framework may assist:
· Preparers of financial state­ments in applying IAS and dealing with 
topics that are not yet the subject of an IAS. 
· Auditors to form an opinion as to whether financial statements 
conform with IAS. 
· Users of financial statements in interpreting the information 
contained in financial state- -:V ments prepared in conformity with IAS; and
· Those who are interested in.-the work of IASB, providing ..-, them 
with information about its approach to the formulation of accounting standards.

Summaries of International Accounting Standards
The following is a list of IAS currently in issue:
IAS 1: Presentation of financial statements
IAS 2: Inventories
IAS 7: Cash Flow Statements
IAS 8: Net Profit or Loss for the Period. Fundamental Errors and
Changes in Accounting Policies IAS 10: Events After the Balance Sheet Date 
IAS 11: Construction Contracts 
IAS 12: Income Taxes 
IAS 14: Segment Reporting
IAS 15: Information Reflecting the Effects of Changing Prices 
IAS 16: Property, Plant and Equipment 
I AS 17: Leases IAS 18: Revenue 
IAS 19: Employee Benefits 
IAS 20: Accounting for Government Grants and Disclosure of
Government Assistance
IAS 21: The Effects of Changes in Foreign Exchange Rates
IAS 22: Business Combinations 
IAS 23: Borrowing Costs 
IAS 24: Related Party Disclosures
IAS 26: Accounting and Reporting by Retirement Benefit Plans 
IAS 27: Consolidated Financial Statements 
IAS 28: Investments in Associates 
IAS 29: Financial Reporting in Hyperinflationary Economies 
IAS 30: Disclosures in the Financial Statements of Banks and
Similar Financial Institutions IAS 31: Financial Reporting of Interests in Joint 
IAS 32: Financial Instruments: Disclosure and Presentation
IAS 33: Earnings per Share
IAS 34: Interim Financial Reporting
IAS 35: Discontinuing Operations
IAS 36: Impairment of Assets
IAS 37: Provisions, Contingent Liabilities and Contingent Assets
IAS 38: Intangible Assets
IAS 39: Financial Instruments: Recognition and Measurement
IAS 40: Investment Property 
IAS 41: Agriculture

IAS 1: Presentation of Financial Statements
The standard was revised in 1997 and defines overall considerations for 
financial statements and includes such concepts as: going concern, accruals 
basis of accounting, consistency of presentation, offsetting, comparative 
information, materiality and aggregation, accounting policies and fair 
The standard prescribes the minimum structure and content of four basic 
financial statements: income statement, balance sheet, cash flow statement (IAS 
7) and an analysis showing changes in equity.
The standard gives a number of definitions and also illustrative pro formas of 
financial statements.

IAS 2: Inventories
The standard became effective in 1995 and its objectives include:
· Inventories should be valued at the lower of cost and net realisable 
· Cost should include all relevant costs of bringing the inventories to 
their present state and location.
· The benchmark treatment to determine cost is either FIFO or weighted 
average cost formula.
· The cost of the inventory should be recognised as an expense in line 
with the matching principle.
Other disclosures include: accounting policy, inventories car­ried by category 
and the carrying amount at net realisable value.

IAS 7: Cash Flow Statement
The standard became effective for financial statements after 1 January 1994. Its 
structure had an influence on the revision of FRS 1.
· The statement is required and identified in IAS 1, Presentation of 
Financial Statements, as a basic financial statement.
· It identifies movement in cash and cash equivalents during the 
financial period.
· Cash equivalents are defined as short-term, highly liquid invest­ments.
· The statement should classify the changes in cash and cash equivalents 
to operating, investing and financing activities.

IAS 8: Net Profit or Loss for the Period, Fundamental Errors and Changes in 
Accounting Policies

Revised in 1993 and effective from 1 January 1994 it provides that:
· Extraordinary items of profit or loss should be separately disclosed 
after the profit or loss on ordinary activities.
· Any activities that are abnormal are separately disclosed, usually in 
· Any corrections of fundamental errors should be treated as a prior 
period adjustment.
· Changes in accounting policies must be treated retrospectively by 
restating the prior periods where possible. » A full statement for the reason 
behind the change in policy must be disclosed.

IAS 10: Events After the Balance Sheet Date
Approved by the IASB in March 1999, its objectives are that:
· Adjustments to financial statements for events after the balance sheet 
date should relate to further evidence and conditions that existed at the 
balance sheet date.
· Adjustments must not be made for events that are indicative and 
occurred after the balance sheet date. »
· Dividends proposed or declared after the balance sheet date should not 
be recognised as a liability.
· Financial statements must not be prepared on a going concern basis, if 
the management determines after the balance sheet date that it is the intention 
to liquidate or to cease trading.
· Disclosures must be updated that relate to conditions which existed at 
the balance sheet date, based on any new informa­tion it received after the 
balance sheet date relating to those conditions.

IAS 11: Construction Contracts
The standard became effective in January 1995.
· Where costs and revenues can be estimated reliably to the completion 
stage of a contract then they should be recognised by stage of completion.
· Anticipated losses should be recognised at once. Disclosures should 
also include:
· Contract revenue should be recognised.
· Basis of determining that revenue.
· Basis of determining the stages of completion.
· Work-in-progress, aggregate costs, recognised profits and losses, 
advances and retentions should be reported.
· Amounts due from customers under contract.

IAS 12: Income Taxes
The standard was revised in 1996 and became effective in January 1998. It 
requires that:
· Deferred tax liability and/or asset for nearly all temporary 
differences be accrued.
· Unused tax losses and credits should be accrued if it is probable that 
they will be realised.
· Tax rates used should be those at settlement.
· Capital gains accrue tax at the expected rate.

IAS 14: Segment Reporting
The standard became effective
in July 1998.
It requires that: 
· Public Limited Companies must report financial information by 
categorising products and services and their geographical distribution.
· The reporting formats are primary or secondary segmentation.
· Disclosures include: revenue; segment assets; liabilities; costs to 
acquire assets; depreciation; inter-segment pricing and operating result before 
interest and tax.

IAS 15: Information Reflecting the Effects of Changing Prices
The standard was issued in 1989 but is voluntary.
Its objectives include (those formerly embedded in the UK Standard SSAP 16, now 
· Disclosure of information on general buying power or current cost 
· Depreciation adjustment. 
· Cost of sales adjustment.
· Monetary items adjustment. 
· The overall effect of the above concepts.

IAS 16: Property, Plant and Equipment 
The standard became effective in January 1995. 
Its requires that:
· Such assets should be recognised when it is probable that future 
benefits will flow from them and that their cost may be measured reliably. 
· The initial measurement must be based on cost.
· Thereafter, the benchmark is net book value ie depreciated (amortised) 
cost but an allowed alternative would be an updated fair value.
· The concepts of depreciation and revaluation are reviewed thoroughly.
· Required disclosures include: reconciliation of movements; capital 
commitments; items pledged as security: where assets are revalued historical 
amounts must be disclosed and changes in revaluation surplus shown.

IAS 17: Leases
The standard became effective in January 1998. 
It is meant to:
· Distinguish between finance and operating leases. 
· Define a finance lease as one that transfers all risks and rewards 
mostly to the lessee. 
· Provide that a finance lease should be capitalised by the losses at the 
lower of the fair value and present value of lease payments.
· Ensure that depreciation is calculated on leased assets using useful 
· Make a lessee show expense operating lease payments.
IAS 18: Revenue
The standard became operative in January 1995. It rules that revenue should be 
recognised when:
· Substantial risks and rewards of ownership are transferred to the 
· Managerial span of control has passed.
· The revenue can be mea­sured reliably.
· Economic benefit is expected to flow to the business.
· The costs of the transactions can be measured reliably.
Revenues and related expenses must be matched.
Consideration is also given to both the treatments of inter­est and dividend 

IAS 19: Employee Benefits
The standard became effective in 1999 but was amended in 2001.
Its coverage includes post employment benefits including pensions.
Its rules cover:
• Defined contribution plans;
• Defined benefit plans; and
• Other employee benefits.

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
The standard was introduced in 1984 reformatted in 1994 and amended in 2001. 
It rules that:
· Grants must not be credited to equity. Income should be recognised in 
such a way as it is matched to related cost.
· Grant aid directly related to assets should be deducted from the cost 
or treatment as deferred income.

IAS 21:The Effects of Changes in Foreign Exchange Rates
The standard became effective in 1995 and focuses on:
· Foreign currency transactions.
· Investments in foreign entities that are internal to the parent's 
· Investments in other foreign entities.
· Disclosures.

IAS 22: Business Combinations 
The standard became effective in 1995 and has been subject to amendments in 2001
Its objectives include:
· Distinguishing between acquisitions and uniting of interests.
· Considering in-depth acquisi­tion - purchase method of accounting, 
including the recognition and treatment of goodwill.
· Uniting of interests - pooling of interests method of accounting.

IAS 23:Borrowing Costs 
The standard became effective in 1995.
Its objectives include:
· Setting a standard for the treatment of borrowing costs as expenses.
· Considering alternative treatment of capitalising those attributable to 
· Detailing the treatment of capitalisation of borrowing costs.

IAS 24: Related Party Disclosures
The standard was introduced in 1984 and reformatted in 1991. Its objectives 
· Defining related parties.
· Focusing on control and the exercise of significant influence such as 
parent-subsidiary relationships, entities under common control, associates, 
individuals and important managers.
· Disclosing the nature of relationships and amounts of transactions.

IAS 26: Accounting and Reporting by Retirement Benefit Plans
Introduced in 1986 and reformatted in 1991.
The standard focuses on:
· Accounting and reporting retirement benefit plans.
· Establishing separate stan­dards for reporting by defined benefit plans 
and defined con­tribution plans.

IAS 27: Consolidated Financial Statements 
Introduced in 1988, reformatted in 1994 and 
altered from 1998 to 2000.
Its objectives include defining a subsidiary company. It lays down that:
· where a parent has one or more subsidiaries then consolidated 
statements must be produced;
· that accounts must include all subsidiaries with minor exceptions;
· uniform accounting policies must be followed;
· disclosures should include details of name, country, ownership, nature 
of relationship.

IAS 28:Investments in Associates
Originally approved by the board in 1988 and reformatted in 1994 it has been 
subject of recent amendment.
The standard defines an associate as an enterprise other than a subsidiary over 
which the investor has a sig­nificant influence. This influ­ence is said to 
exist where an investor owns more than a fifth of the associate.
It rules that:
· accounting for associates in consolidated statements must be on the 
equity method;
· associates can be reported as equity or as long-term investments or 
revalued amounts;
· the equity method should be discontinued if the investor no longer has 
significant influence over the associate and;
· such investments are reported as noncurrent assets.

IAS 29: Financial Reporting in Hyperinflationary Economies
The standard was approved by the board in 1989 and refor­matted in 1994.
It defines hyperinflation as when cumulative inflation over three years is 100 
per cent or more.
Under such circumstances, financial statements should be presented in a unit 
that is cur­rent at the balance sheet date.
Comparative figures for earlier periods should be restat­ed in that unit 

IAS 30: Disclosures in the Financial Statements of Banks and Similar Financial Institutions
The standard was introduced in 1990 and reformatted in 1994. Small amendments 
were made in 1999.
It lays down that:
· Special disclosures be pre­scribed for banks and similar financial 
· The income statement should group income and expense by nature.
· The balance sheet should group assets and liabilities by nature.
It also outlines in depth other required disclosures.

IAS 31: Financial Reporting of Interests in Joint Ventures 
The standard was approved by the board in 
1990, reformatted in 1994 and subject of minor amendment in 1998 - 2000. 
Its objectives include the definition of three types of joint venture a 
contractual arrangement subject to joint control):
· Jointly controlled operations.
· Jointly controlled assets.
· Jointly controlled entities.

IAS 32: Financial Instruments: Disclosure and Presentation
The standard was approved by the board in 1995, and was subject to minor 
amendment in 1998 and 2000.
Its requirements include:
· Financial instruments should be classified into liabilities and equity.
· Classification should reflect substance not form. 
· An obligation to deliver cash or other financial asset is to be treated 
as debt.
· Redeemable stock is debt. 
· The cost of servicing a financial liability by interest is charged to 
profit and loss account.
· Equity financing by dividends is a distribution of equity.
IAS 33: Earning per Share
The standard was approved by the board in 1997 and became effective in 1998.
The standard only applies to public listed companies.
It requires that: 
· Undiluted and diluted net income per ordinary share be disclosed on the 
face of the income statement.
· The numerator for basic EPS is profit after minority interest and 
preference dividends.
· The denominator for basic EPS is a weighted average outstanding 
ordinary share.

IAS 34: Interim Financial Reporting 
The standard was 
approved by the board in February 1998 and became effective in 1999.
Its objectives include:
· Giving guidance on both pre­sentation and measurement.
· Defining the minimum content of such report.
· Prescribing accounting recognition and measurement principles.
It rules that basic statements include:
· Balance sheet;
· Income statement;
· Changes in equity; and
· Cash flow statement.
IAS 35: Discontinuing Operations
The standard became effective in January 1999.
It establishes a basis for segregating information on dis­continuing operations 
from continuing operations.
Required disclosures include:
· A description of the discontinuing operation.
· The business or geographical segment in which it was reported under IAS 14.
· The effective date of discontinuance and date of completion.
· The carrying amounts of assets and liabilities to be disposed of.
· Revenues, expenses and pretax profits.
· Gains or losses recognised on disposal of assets. 
· Net cash flows attributable to the operation.
IAS 36:Impairment of Assets
The standard became effective in July 1999.
Its objectives include:
· Addressing principal accounting for impairment of goodwill, intangible 
assets, property plant and equipment.
· Prescribing procedures for testing assets for impairment:
- identifying
- measuring
- recognising
- disclosing.

IAS 37: Provisions, Contingent Liabilities and Contingent Assets 
The standard became effective in July 1999. 
Its states that:
· Provisions are to be recognised when an entity has a pre­sent 
obligation as a result of a past event.
· Such provisions should be measured in the balance sheet at the best 
estimate of the expenditure.
· A provision should not be reduced by gains from the expected disposal 
of assets. 
· Provisions should be used only for expenditures for which it was 
originally recognised, reversible if an outflow
· of resources is no longer expected.
IAS 38: Intangible Assets
The standard became effective in 1999, and supersedes IAS 4 Depreciation 
Accounting and IAS 9 Research and Development Costs.
It applies to all intangible assets that are not dealt with specifi­cally in 
other standards.
· It lays down that an intangi­ble asset should be recognised at cost if:
· It meets the definition of an intangible asset. It must be an 
identifiable asset and distinguishable from goodwill.
· It is probable, as with all other assets, that future economic benefit 
attributable to the asset will add value to the enterprise.
· Cost can be measured reli­ably.
· After initial recognition, an intangible asset should be amortised over 
its useful eco­nomic life.

IAS 39: Financial Instruments: Recognition and Measurement 
The standard became effective in January 2001. 

It is a comprehensive statement for recognis­ing, measuring and 
presenting information relating to financial instruments.
Its provides that: 
· Financial assets and liabilities
· are recognised on the balance sheet including all derivatives and are 
measured initially at cost.
· After initial recognition, financial assets are measured again at fair 
value with a num­ber of exceptions.
IAS 40: Investment Property 
The standard became effective in2001.lt:
· Covers all investment property held by businesses and is not limited to 
those, whose main area of activity is concerned with investment property. 
· Defines investment property as that which is held to earn rentals or 
for capital appreciation, or both.
· Lists what is not included as investment property.
· Lets an enterprise choose to use the fair value model or cost model in 
recognising and measuring investment property in financial statements.

IAS 41: Agriculture 
This does not become effective until January 2003.'
It is a comprehensive stan­dard prescribing the account­ing treatment and 
financial statement presentation and disclosures relating to farming.
It deals with treatment of:
· Biological assets
· Agricultural produce
· Grants
· Gains and losses on disposal
· of biological assets
· Depreciation.

International Accounting Standards are becoming more important. UK standards are 
now set with regard to international requirements while a European Union 
regulation requires all EU listed companies to produce consolidated financial 
statements prepared according to international accounting standards by 2005 at 
the latest.

IASC operates a website giving information on its standards at www. iasc. org. 
uk. It can be contacted on 020 7246 6410

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