A Regulatory Framework for Financial Reporting 23

Unit 2: A Regulatory Framework for

Financial Reporting Notes

Structure
2.1 Introduction
2.2 Need for Regulatory Framework
2.3 Overview of International Accounting Standards (IAS)
2.4 Development and Interpretation of International Financial Reporting Standards
(IFRS)
2.5 Legal Requirements of not for Profit
2.6 Public Sector and Single Entity
2.7 Summary
2.8 Check Your Progress
2.9 Questions and Exercises
2.10 Key Terms
2.11 Further Readings

Objectives
After studying this unit, you should be able to:
 Understand the Concept of Need for regulatory framework
 Discuss the International Accounting Standards (IAS).
 Explain the Legal requirements of not for profit.

2.1 Introduction
A regulatory framework for the preparation of financial statements is necessary for a
number of reasons:
To ensure that the needs of the users of financial statements are met with at least a
basic minimum of information.
To ensure that all the information provided in the relevant economic arena is both
comparable and consistent. Given the growth in multinational companies and global
investment this arena is an increasing international one.
 To increase users' confidence in the financial reporting process.
 To regulate the behaviour of companies and directors towards their investors.
 Financial reporting standards on their own would not be sufficient to achieve these
aims. In addition there must be some legal and market-based regulation.
 National regulatory frameworks for financial reporting.
There are many elements to the regulatory environment of accounting. A typical
regulatory structure includes:
 National financial reporting standards
 National law
 Market regulations
 Security exchange rules.

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For example; the UK has its own national financial reporting authority, the
Accounting Standards Board (part of the Financial Reporting Council) that issues
Notes financial reporting standards in the UK. The main piece of legislation affecting
businesses in the UK is the Companies Act 2006. However, there are also many other
pieces of UK, EU and even US legislation (such as the Sarbanes Oxley Act) that affect
accountability in the UK. There are also numerous industry specific regulatory systems
that affect accounting in the UK, for example, the Financial Services Authority, whose
aim is to achieve public accountability of the financial services industry. Finally, there
are regulations provided by the London Stock Exchange for companies whose shares
are quoted on this market

2.2 Need for Regulatory Framework

The following points highlight the five components in regulatory framework of financial
reporting in India, i.e.,
1. Legal Requirements
2. Accounting Standards and Guidance Notes of the ICAI
3. IASs and IFRSs
4. Requirements of Stock Exchanges
5. Recent Trends and Emerging Issues in Corporate Reporting.

Financial Reporting Component

1. Legal Requirements:
Sub section 3 of 209: Books of accounts should be kept on accrual basis and
according to double entry system of accounting.
Sub section 4 of 209: This section requires companies to preserve their books of
accounts for a period of at least 8 years.
Section 210: Describes the duty of the board of directors to lay before the annual
general meeting, the balance sheet and profit and loss account of the company.
Income statement should not predate the annual general meeting by more than 6
months. It may be prepared for maximum period of 18 months.
Section 211: This section deals with the form and contents of the profit and loss
account and balance sheets. This section provides schedule VI of the Act to provide
format for balance sheet and profit and loss account.
Section 211(1) Every balance sheet of company shall provide true and fair view of
the state of affairs of company.
Section 211(2) Provides that every profit and loss account of a company shall give
a true and fair view of the profit and loss of the company for the accounting period.
Section 211(3A) Sub-section 3A, 3B and 3C were inserted by the companies
(Amendment) Act, 1999 w.e.f. 31.10.1998 state “Every profit and loss account and
Balance sheet of the company shall comply with accounting standard”.
Section 212 to 214: These sections deal with defining of several ways in which a
holding and subsidiary relationship can arise.
Section 215: This section requires that balance sheet and profit and loss account
must be signed by Company Secretary and at least two directors of the company.
The companies which may not have company secretaries can get these statements
signed by manager.
Section 216: This section of the act requires that profit and loss account should be
annexed to the balance sheet.
Section 217: The auditor’s report like director’s report shall be attached to the
balance sheet as per the provision of this section. The contents of the director’s
report should cover as following laid down in section 217 of company law.

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(a) State of company affairs.
(b) Amount proposed to be transferred to reserves.
Notes
(c) Amount recommended as dividends.
(d) Material changes affecting the financial positive of the company between the
end of the financial year and date of the report.
(e) Changes that have occurred in the nature of the company’s business during the
financial year.
(f) Names of the employees who have received an aggregate remuneration in
excess of Rs12, 00,000 per annum.
(g) A report on conservation of energy technology absorption and foreign exchange
earnings and out go.
(h) A reference to benefits expected from contracts yet to be executed.
(i) Changes in the type of business carried out by the company.
Section 224: This section requires that every company shall at each annual
general meeting appoint an auditor or auditors to hold office from the conclusion of
that meeting to the conclusion of next annual general meeting.
Section 226: This section requires company to appoint only chartered accountants
within the meaning of Chartered Accountants Act 1949 qualified to be appointed as
auditors of a company.
Section 227: This section defines powers sand duties of auditors. In addition to the
above, the provision of section 205 to 208 of the Indian company law dealing with
payment of dividends also has a bearing on financial statements and reporting of
companies.
Section 205: Dividends can be paid out of profits arrived at after providing for
depreciation in accordance with the provisions of sub section 2 of section 205. Sub
section of 2A of section 205 deals with transfer a portion of their profits to the
reserves before declaration of dividends.
Section 217 (2A): At present in India information regarding the names and other
particulars of the employees of the company read with the company rules 1975 is
required to be provided as part of the director’s report in published annual reports of
Indian companies, in respect of employees getting remuneration of ` 12, 00,000 or
more per annum. Section 217(2AA)—This section was inserted by the company
amendment act 2000. The Board’s report shall also include a Director’s
Responsibility Statement.
Income Tax Act 1961
Section 44 AB: This section requires all the companies in India to have tax audit
mandatory for this section actually require for every one whosoever is carrying on
business or profession and fulfilling certain condition to get his accounts audited
before the specified date.
Section 145: This section deals with methods of accounting. Provisions of this
section require assessee to maintain the books of accounts under the cash system
or mercantile system of accounting. It does not recognise hybrid system of
accounting.
Section 145 A: This section was amended in 1998 finance bill and was made
operative with retrospective effect from 1986-87. This section requires valuation of
inventory for the purpose of determining the income chargeable under the head
“profits and gains of business or profession” shall be accordance with the method of
accounting regularly employed by the assessee and further adjusted to include the
amount of tax; duty; cess or fees actually paid or incurred by assessee.
The regulatory framework of financial reporting is very important in determination of
the form and contents of financial reports. Only few companies in India disclose
information that are over and above what is legally required.

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The regulatory framework on which financial reporting in India is based may vary
across border and within the same country across various types of business
Notes organisations. It is very necessary to go through this framework. In India companies
are required to present and publish financial statements as per schedule VI — Part
I, Part II and Part III.
2. Accounting Standards and Guidance Notes of the ICAI: IACI has issued 32 ASs
along with 30 ASIs and guidance notes, companies while doing financial reporting
have to comply with these standards.
3. IASs and IFRSs: At international front also IASB (previously IASC) has issued 41
IASs and 9 IFRSs so as to bring harmonization in divergent accounting practices
being followed in different countries. Regulatory framework in every country has to
comprise these IASs and IFRSs.
4. Requirements of Stock Exchanges:
(i) Amendment to Clause 32 of the Listing Agreement:
(a) This Amendment requires companies to publish consolidated financial
statements in the annual report in addition to the traditional financial
statements. It has been made mandatory for companies, audit of
consolidated financial statements by statutory auditors and filing of the
consolidated financial statements with the stock exchanges.
(b) Related Party Disclosures: Companies shall be required to make disclosure
in accordance with the AS on related party Disclosures. An extract from
Annual report of WOCKHARDT LIMITED is reproduced for reference of
students.
(i) Parties where control exists
Wholly owned subsidiary companies:
1. Wockhardt UK Holdings Limited (formerly, Wockhardt UK Limited)
2. CP Pharmaceuticals Limited
3. CP Pharma (Schweiz) AG
4. Walls Group Limited
5. The Walls Laboratory Limited
6. Wockhardt Pharmaceutical Do Brazil Ltd.
7. Wallis Licensing Limited
8. Wockhardt Bio-pharm Limited
9. Vinton Healthcare Limited
10. Wockhardt Infrastructure Development Limited
11. Esparma GmbH
12. Wockhardt Europe Limited
13. Wockhardt Nigeria Limited
14. Wockhardt USA Inc.
15. Wockhardt EU operations (Swiss) AG
16. Wockhardt UK Limited
17. Wockhardt Cyprus Limited
18. Wockpharma Ireland Limited
19. Pinewood Laboratories Limited

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20. Monash Limited
21. PWH Limited Notes
22. Atlantis USA Inc.
23. NegmaLeards S.A.S.
24. Wockhardt France (Holdings) S.A.S.
25. Esparma AG
26. Wockhardt Holding Corp
27. MGP Holding Corporation
28. Morton Grove Pharmaceuticals, Inc.
29. MGP Incorporation
30. Girex S.A.S.
31. Mazal Pharmaceutique S.A.R.L.
32. Pharma 2000 S.A.S.
33. Hariphar S.C.
34. Niverpharma S.A.S
35. Cap Dermatology S.A.R.L.
36. Negma Beneulex S.A.
37. S.E.G.A. S.A.S.
38. Chams Informatique S.A.R.L.
39. S.C.I. Salome
40. DMH S.A.S.
41. Phytex S.A.S.
42. Scomedia S.A.s.
Holding Company:
Khorakiwala Holdings and Investments Private Limited
Enterprise over which key Managerial Personnel exercising significant
influence
Palanpur Holdings and investments Private Limited.
(ii) Other related party relationships where transactions have taken
place during the year Fellow Subsidiary:
Carol Info Services Limited
Associate Enterprises
Khorakiwala Foundation
Key management Personnel
H.F. Khorakiwala, Chairman and Managing Director
Rajiv B. Gandhi, Whole Time Director
(iii) Transactions with related parties during the year:

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Notes

Contd…

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Notes

Note: Wockhardt IP AG, Wockhardt Switzerland Holdings AG and Wockhardt USA Holdings
(Swiss) AG had been merged with Wockhardt EU Operations (Swiss) AG vide agreement dated
June 11, 2007 with effect from January 1, 2007. The said merger had been registered with
commercial Registry of Switzerland on June 18, 2007.
(c) Additional Clause 50: A new clause has been added as clause 50 which
requires companies to comply with accounting standards issued by the ICAI
from time to time.
(d) Amendment to Clause 41 of the Listing Agreement: This Amendment to
clause 41 is related with Quarterly unaudited financial results.
(i) Companies shall be required to furnish segments wise results with effect
from the quarters ending on or after September 30, 2001.
(ii) Companies shall be required to comply with the AS on Accounting for taxes
on Income” in respect of un-audited quarterly financial result with effect
from the quarters ending on or after 30th Sep. 2001.
(iii) Companies shall be required to have an option to publish consolidated
quarterly financial results.

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(e) Amendment in Clause 43 of Listing Agreement: This amendment requires
companies to submit a statement to the exchange showing the variations
Notes between projected utilization of funds and/or projected profitability.
(f) Addition to Clause 49 of Listing Agreement: This clause requires the listed
companies to provide report on Corporate Governance as a part of annual
report and noncompliance is to be specifically reported.
5. Recent Trends and Emerging Issues in Corporate Reporting: Regulatory
framework for support of financial reporting has to comprise recent trends and
emerging issues, for instance, corporate governance, social disclosures,
environmental issues interim reporting and segment reporting etc. General
instructions for preparation of Balance Sheet given in Schedule VI, Part I as per
provision of section 211 of Companies Act, 1956.

2.3 Overview of International Accounting Standards (IAS)

 Standards: International Accounting Standards (IASs) were issued by the IASC
from 1973 to 2000. The IASB replaced the IASC in 2001. Since then, the IASB has
amended some IASs and has proposed to amend others, has replaced some IASs
with new International Financial Reporting Standards (IFRSs), and has adopted or
proposed certain new IFRSs on topics for which there was no previous IAS.
Through committees, both the IASC and the IASB also have issued Interpretations
of Standards.
 Compliance with Standards: Financial statements may not be described as
complying with IFRSs unless they comply with all of the requirements of each
applicable standard and each applicable interpretation.
 Summaries of Standards: Please remember that the summaries of IASs and
IFRSs only cover highlights and are not a substitute for reading the entire standard.
They should not be relied on for preparing financial statements. The summaries
reflect the latest revisions to the standard (including some revisions whose adoption
is permitted but not yet required) unless otherwise stated.
 IASB Framework: While not a standard, the IASB Framework for the Preparation
and Presentation of Financial Statements serves as a guide to resolving accounting
issues that are not addressed directly in a standard. Moreover, in the absence of a
standard or an interpretation that specifically applies to a transaction, IAS 8 requires
that an entity must use its judgement in developing and applying an accounting
policy that results in information that is relevant and reliable. In making that
judgement, IAS 8.11 requires management to consider the definitions, recognition
criteria and measurement concepts for assets, liabilities, income, and expenses in
the Framework. The IASB adopted the Framework in April 2001. It had originally
been adopted by the IASC in 1989. Currently, the IASB is working on a Project to
Revise the Framework.
 Preface to IFRSs: Sets out IASB's objectives, the scope of IFRSs, due process,
and policies on effective dates, format, and language for IFRSs.\
 How to Obtain.
 The IASB publishes:
 individual copies of its standards,
 an annual "Bound Volume" of all existing standards and interpretations,
 electronic IFRSs (eIFRS), and
 a CD ROM with standards and Interpretations.
 Publications and subscriptions may be ordered on IASB's website
www.ifrs.org.
 In April 2009, the IASB began making available on its website, without
charge, access to the versions of IFRSs (including interpretations)
published in the most recent bound volume of IFRSs and the application

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guidance that is an integral part of those standards. Free registration is
required. The illustrative examples, implementation guidance, and bases for
conclusions that accompany, but are not part of, the standards are Notes
available only to subscribers. The free standards are available in English
and several other languages. Each standard is a separate PDF file.
 When IASB standards are endorsed by the European Commission for use
in the European Union, they (minus the non-mandatory guidance and
bases for conclusions) are published in the Official Journal of the European
Union in all of the EU languages.
 Exposure drafts of proposed new or revised IFRSs may be downloaded
from the IASB's website without charge during the comment period.
 The term 'IFRSs': The term International Financial Reporting Standards
(IFRSs) has both a narrow and a broad meaning. Narrowly, IFRSs refer to the
new numbered series of pronouncements that the IASB is issuing, as distinct
from the International Accounting Standards (IASs) series issued by its
predecessor. More broadly, IFRSs refer to the entire body of IASB
pronouncements, including standards and interpretations approved by the IASB
and IASs and SIC interpretations approved by the predecessor International
Accounting Standards Committee. [On this website, consistent with IASB policy,
we abbreviate International Financial Reporting Standards (plural) as IFRSs
and International Accounting Standards (plural) as IASs.]

International Financial Reporting Standard for Small and Medium-sized Entities

History of the IFRS for SMEs

Date Development

2001 Project carried over from old IASC

24 June 2004 Discussion Paper Preliminary Views on Accounting

Standards for Small and Medium-sized Entities
published

15 February 2007 Exposure Draft Proposed IFRS for Small and Medium-
sized Entities published
(Various translations were also subsequently
published)

9 July 2009 IFRS for Small and Medium-sized Entities issued

26 June 2012 Request for Information Comprehensive Review of the

IFRS for SMEs published

3 October 2013 ED/2013/9 Proposed amendments to the International

Financial Reporting Standard for Small and Medium-
sized Entities (IFRS for SMEs) published

21 May 2015 2015 Amendments to the IFRS for SMEs issued

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Amendments under consideration by the IASB
none
Notes 

Summary of the IFRS for SMEs

The World Bank has published on their website a two-part webcast presentation by
IASB member Paul Pacter entitled An Overview of the IFRS for SMEs. The presentation
is based on the first of the 20 training modules used in the IASB's 'Train the trainer'
workshops for the IFRS for Small and Medium-sized Entities. The first module reviews
the requirements in each of the 35 sections of the IFRS for SMEs and highlights
differences with full IFRSs. Each part of the webcast is approximately one hour long.
Click for:
 Webcast presentation on the first module (link to World Bank website)
 All training modules used in the IASB's 'Train the trainer' workshops for the IFRS for
SMEs (link to IASB website)

AICPA IFRS for SMEs – US GAAP comparison tool

This tool has been developed by the American Institute of CPAs (AICPA) staff and is
being added to collaboratively by those who use the tool. AICPA technical staff monitors
and review the additions. Here is the AICPA's description:
The purpose of this Wiki is to provide a detailed and comprehensive comparison of
the International Accounting Standards Board's International Financial Reporting
Standard for Small-and Medium-Sized Entities ('IFRS for SMEs') with corresponding
requirements of United States generally accepted accounting principles ('US GAAP').
But this is more than just a comparison resource, it is a Wiki. That means it is a
collaborative, ongoing work in progress for anyone to contribute and use.
This Wiki is intended to be a rich resource. The AICPA Accounting Standards team
decided to introduce the comparison resource during its development stage to help you
learn and to learn ourselves about the similarities and differences between IFRS for
SMEs and US GAAP. Anyone preparing financial statements under IFRS for SMEs in
the United States and anyone interested in the differences between the two sets of
accounting standards will find this comparison resource valuable.
The comparison resource will cover all sections of IFRS for SMEs. Disclosure
requirements of the IFRS for SMEs sections are excluded. As the AICPA completes
sections, it will add the information to the Wiki. The AICPA Accounting standards team
welcomes anyone with an interest in and knowledge of IFRS for SMEs and US GAAP to
read the Wiki and contribute.
Inasmuch as this Resource is a work-in-progress, the completeness and accuracy
of the content varies from section to section. True to the wiki platform, the AICPA looks
to AICPA members and the accounting profession to complete, correct, and improve
upon the work begun by the Accounting Standards team. Sources of authoritative
literature should be consulted when preparing or reporting upon financial statements.
As more fully explained [on the Wiki website], contributions to the Wiki will be
monitored and reviewed by AICPA technical staff. It is expected that after all sections of
the comparison resource are introduced and exposed for review and editing, the
resource will be maintained and updated periodically by the AICPA.

Announcement of issuance of the IFRS for SMEs

On 9 July 2009, the IASB issued the IFRS for SMEs. This is the first set of international
accounting requirements developed specifically for small and medium-sized entities
(SMEs). It has been prepared on IFRS foundations but is a stand-alone product that is
separate from the full set of International Financial Reporting Standards (IFRSs). The
IFRS for SMEs have simplifications that reflect the needs of users of SMEs' financial

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statements and cost-benefit considerations. Compared with full IFRSs, it is less
complex in a number of ways:
 Topics not relevant to SMEs are omitted.
Notes
 Where full IFRSs allow accounting policy choices, the IFRS for SMEs allows only
the easier option.
 Many of the principles for recognising and measuring assets, liabilities, income and
expenses in full IFRSs are simplified.
 Significantly fewer disclosures are required.
 And the standard has been written in clear, easily translatable language.
To further reduce the reporting burden for SMEs, revisions to the IFRS will be
limited to once every three years. It is suitable for all entities except those whose
securities are publicly traded and financial institutions such as banks and insurance
companies. The 230-page standard is a result of a five-year development process with
extensive consultation of SMEs worldwide. Accompanying the standard is
implementation guidance consisting of illustrative financial statements and a
presentation and disclosure checklist. The IFRS for SMEs is available for any
jurisdiction to adopt whether or not it has adopted the full IFRSs. It is up to each
jurisdiction to determine which entities should use the standard. It is effective
immediately on issue. The standard and accompanying guidance and basis for
conclusions may be downloaded immediately without charge from the IASB's website.
To support the implementation of the IFRS for SMEs the IASC Foundation is developing
comprehensive training material. The Foundation is also working with international
development agencies to provide instructors for regional workshops to 'train the trainers'
in the use of the training material, particularly within developing and emerging
economies. The training material will be published in a number of languages (initially
English).

Key dates in the process to get to the Final Standard

 Sept 2003: World Standard Setters survey
 June 2004: Discussion Paper (117 comments)
 April 2005: Questionnaire on recognition and measurement (94 responses)
 Oct 2005: Roundtables on recognition and measurement (43 groups)
 Feb 2007: Exposure Draft (162 comments)
 Nov 2007: Field tests (116 real SMEs)
 Mar – Apr 2008: Board education sessions
 May 2008 – Apr 2009: Re-deliberations
 May 2009: Near-final draft posted on IASB website
 1 June 2009: Ballot draft sent to the Board
 9 July 2009: Final IFRS for SMEs issued

Contents of the IFRS for SMEs

Section

Preface
1. Small and Medium-sized Entities
2. Concepts and Pervasive Principles
3. Financial Statement Presentation
4. Statement of Financial Position
5. Statement of Comprehensive Income and Income Statement

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6. Statement of Changes in Equity and Statement of Comprehensive Income and
Retained Earnings
Notes 7. Statement of Cash Flows
8. Notes to the Financial Statements
9. Consolidated and Separate Financial Statements
10. Accounting Policies, Estimates and Errors
11. Basic Financial Instruments
12. Additional Financial Instruments Issues
13. Inventories
14. Investments in Associates
15. Investments in Joint Ventures
16. Investment Property
17. Property, Plant and Equipment
18. Intangible Assets other than Goodwill
19. Business Combinations and Goodwill
20. Leases
21. Provisions and Contingencies
22. Liabilities and Equity
23. Revenue
24. Government Grants
25. Borrowing Costs
26. Share-based Payment
27. Impairment of Assets
28. Employee Benefits
29. Income Tax
30. Foreign Currency Translation
31. Hyperinflation
32. Events after the End of the Reporting Period
33. Related Party Disclosures
34. Specialised Activities
35. Transition to the IFRS for SMEs

Glossary
Derivation Table
Separate booklets
 Basis for Conclusions
 Illustrative Financial Statements and Presentation and Disclosure Checklist

Section-by-section summary of the IFRS for SMEs

Preface
 The IFRS for Small and Medium-sized Entities is organised by topic, with each topic
presented in a separate section. All of the paragraphs in the standard have equal
authority.
 The standard is appropriate for general purpose financial statements and other
financial reporting of all profit-oriented entities. General purpose financial

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statements are directed towards the common information needs of a wide range of
users, for example, shareholders, creditors, employees and the public at large.
 The IASB intends to issue a comprehensively reviewed standard after two year's
Notes
implementation, to address issues identified and also, if appropriate, recent
changes to full IFRSs. Thereafter, an omnibus proposal of amendments will be
issued, if necessary, once every three years.

Section 1: Small and Medium-sized Entities

 Defines SME as used by IASB:
Small and medium-sized entities are entities that:
 do not have public accountability, and
 publish general purpose financial statements for external users. Examples of
external users include owners who are not involved in managing the business,
existing and potential creditors, and credit rating agencies. General purpose
financial statements are those that present fairly financial position, operating results,
and cash flows for external capital providers and others.
An entity has public accountability if:
 its debt or equity instruments are traded in a public market or it is in the process of
issuing such instruments for trading in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets), or
 it holds assets in a fiduciary capacity for a broad group of outsiders as one of its
primary businesses. This is typically the case for banks, credit unions, insurance
companies, securities brokers/dealers, mutual funds and investment banks. If an
entity holds assets in a fiduciary capacity as an incidental part of its business, that
does not make it publicly accountable. Entities that fall into this category may
include public utilities, travel and real estate agents, schools, and charities.
 The standard does not contain a limit on the size of an entity that may use the IFRS
for SMEs provided that it does not have public accountability.
 Nor is there a restriction on its use by a public utility, not-for-profit entity, or public
sector entity.
 A subsidiary whose parent or group uses full IFRSs may use the IFRS for SMEs if
the subsidiary itself does not have public accountability.
 The standard does not require any special approval by the owners of an SME for it
to be eligible to use the IFRS for SME.
 Listed companies, no matter how small, may not use the IFRS for SMEs.
 Q&A 2011/01 (published June 2011) states that a parent entity assesses its
eligibility to use the IFRS for SMEs in its separate financial statements on the basis
of its own public accountability without considering whether other group entities
have, or the group as a whole has, public accountability.

Section 2: Concepts and Pervasive Principles

 Objective of SMEs' financial statements: To provide information about financial
position, performance, cash flows
 Also shows results of stewardship of management over resources
 Qualitative characteristics (understandability, relevance, materiality, reliability,
substance over form, prudence, completeness, comparability, timeliness, balance
between benefit and cost, undue cost or effort*)
 Definitions:
 Asset: Resource with future economic benefits
 Liability: Present obligation arising from past events, result in outflow of
resources

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 Income: Inflows of resources that increase equity, other than owner
investments
Notes  Expenses: Outflows of resources that decrease equity, other than owner
withdrawals
 Financial position: The relationship of assets and liabilities at a specific date
 Performance: The relationship of income and expenses during a reporting period
 Total comprehensive income: Arithmetic difference between income and
expenses
 Profit or loss: Arithmetic difference between income and expenses other than
those items of income or expense that are classified as 'other comprehensive
income'.
 There are only 3 items of other comprehensive income (OCI) in the IFRS for SMEs:
 Some foreign exchange gains and losses relating to a net investment in a
foreign operation (see Section 30)
 Some changes in fair values of hedging instruments – in a hedge of variable
interest rate risk of a recognised financial instrument, foreign exchange risk or
commodity price risk in a firm commitment or highly probable forecast
transaction, or a net investment in a foreign operation (see Section 12) (Note
that hedge accounting is optional)
 Some actuarial gains and losses (see Section 28) (Note that reporting actuarial
gains and losses in OCI is optional)
 Basic recognition concept – An item that meets the definition of an asset, liability,
income, or expense is recognised in the financial statements if:
 it is probable that future benefits associated with the item will flow to or from the
entity, and
 the item has a cost or value that can be measured reliably
 Basic measurement concepts
 Historical cost and fair value are described
 Basic financial assets and liabilities are generally measured at amortised cost
 Other financial assets and liabilities are generally measured at fair value
through profit or loss
 Non-financial assets are generally measured using a cost-based measure
 Non-financial liabilities are generally measured at settlement amount
 Section 2 includes pervasive recognition and measurement principles
 Source of guidance if a specific issue is not addressed in the IFRS for SMEs
(see Section 10)
 Concepts of profit or loss and total comprehensive income
 Offsetting of assets and liabilities or of income and expenses is prohibited unless
expressly required or permitted
*'undue cost or effort' added by 2015 Amendments to the IFRS for SMEs issued on
21 May 2015 effective 1 January 2017

Section 3: Financial Statement Presentation

 Fair presentation: Presumed to result if the IFRS for SMEs is followed (may be a
need for supplemental disclosures)
 State compliance with IFRS for SMEs only if the financial statements comply in full
 Does include 'true and fair override' but this should be 'extremely rare'
 IFRS for SMEs presumes the reporting entity is a going concern

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 SMEs shall present a complete set of financial statements at least annually
At least one year comparative prior period financial statements and note data

Notes
 Presentation and classification of items should be consistent from one period to the
next
 Must justify and disclose any change in presentation or classification of items in
financial statements
 Materiality: An omission or misstatement is material if it could influence economic
 Complete set of financial statements:
 Statement of financial position
 Either a single statement of comprehensive income, or two statements: an
income statement and a statement of comprehensive income
 Statement of changes in equity
 Statement of cash flows
 Notes
 If the only changes to equity arise from profit or loss, payment of dividends,
corrections of errors, and changes in accounting policy, an entity may present a
single (combined) statement of income and retained earnings instead of the
separate statements of comprehensive income and of changes in equity (see
Section 6)
 An entity may present only an income statement (no statement of comprehensive
income) if it has no items of other comprehensive income (OCI)
 The only OCI items under the IFRS for SMEs are:
 Some foreign exchange gains and losses relating to a net investment in a
foreign operation (see Section 30)
 Some changes in fair values of hedging instruments – in a hedge of variable
interest rate risk of a recognised financial instrument, foreign exchange risk or
commodity price risk in a firm commitment or highly probable forecast
transaction, or a net investment in a foreign operation (see Section 12)
 Some actuarial gains and losses (see Section 28)

Section 4: Statement of Financial Position

 May still be called 'balance sheet'
 Current/non-current split is not required if the entity concludes that a liquidity
approach produces more relevant information
 Some minimum line items required. These include:
 Cash and equivalents
 Receivables
 Financial assets
 Inventories
 Property, plant, and equipment
 Investment property at cost*
 Investment property at fair value
 Intangible assets
 Biological assets at cost
 Biological assets at fair value
 Investment in associates
 Investment in joint ventures

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 Payables
Financial liabilities
Notes 
 Current tax assets and liabilities
 Deferred tax assets and liabilities
 Provisions
 Non-controlling interest
 Equity of owners of parent
 And some required items may be presented in the statement or in the notes
 Categories of property, plant, and equipment
 Information about assets with binding sale agreements
 Categories of receivables
 Categories of inventories
 Categories of payables
 Employee benefit obligations
 Classes of equity, including OCI and reserves
 Details about share capital
 Sequencing, format, and titles are not mandated

Section 5: Statement of Comprehensive Income and Income Statement

 One-statement or two-statement approach – either a single statement of
comprehensive income, or two statements: an income statement and a statement of
comprehensive income
 Must segregate discontinued operations
 Must present 'profit or loss' subtotal if the entity has any items of other
comprehensive income
 Bottom line ('profit or loss' in the income statement and 'total comprehensive
income' in the statement of comprehensive income) is before allocating those
amounts to non-controlling interest and owners of the parent
 No item may be labelled 'extraordinary'
 But unusual items can be separately presented
 Expenses may be presented by nature (depreciation, purchases of materials,
transport costs, employee benefits, etc.) or by function (cost of sales, distribution
costs, administrative costs, etc.) either on face of the statement of comprehensive
income (or income statement) or in the notes

Single statement of comprehensive income:

 Revenue
 Expenses, showing separately:
 finance costs
 profit or loss from associates and jointly controlled entities
 tax expense
 discontinued operations)
 Profit or loss (may omit if no OCI)
 Items of other comprehensive income
 Total comprehensive income (may label Profit or Loss if no OCI)

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Separate statements of income and comprehensive income:

Income Statement: Notes

 Bottom line is profit or loss (as above)

Statement of Comprehensive Income:

 Begins with profit or loss
 Shows each item of other comprehensive income
 Bottom line is Total Comprehensive Income

Section 6: Statements of Changes in Equity and Statement of Comprehensive

Income and Retained Earnings
 Shows all changes to equity including
 Total comprehensive income
 Owners' investments
 Dividends
 Owners' withdrawals of capital
 Treasury share transactions
 Can omit the statement of changes in equity if the entity has no owner investments
or withdrawals other than dividends and elects to present a combined statement of
comprehensive income and retained earnings

Section 7: Statement of Cash Flows

 Presents information about an entity's changes in cash and cash equivalents for a
period
 Cash equivalents are short-term, highly liquid investments (expected to be
converted to cash in three months) held to meet short-term cash needs rather
than for investment or other purposes
 Cash flows are classified as operating, investing, and financing cash flows
 Option to use the indirect method or the direct method to present operating cash
flows
 Interest paid and interest and dividends received may be operating, investing, or
financing
 Dividends paid may be operating or investing
 Income tax cash flows are operating unless specifically identified with investing or
financing activities
 Separate disclosure is required of some non-cash investing and financing
transactions (for example, acquisition of assets by issue of debt)
 Reconciliation of components of cash

Section 8: Notes to the Financial Statements

 Notes are normally in this sequence:
 Basis of preparation (i.e. IFRS for SMEs)
 Summary of significant accounting policies, including
 Information about judgements
 Information about key sources of estimation uncertainty
 Supporting information for items in financial statements
 Other disclosures

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 Comparative prior period amounts are required by Section 3 (unless another
section allows omission of prior period amounts)
Notes
Section 9: Consolidated and Separate Financial Statements
 Consolidated financial statements are required when a parent company controls
another entity (a subsidiary).
 Control: Power to govern financial and operating policies to obtain benefits
 More than 50% of voting power: control presumed
 Control exists when entity owns less than 50% but has power to govern by
agreement or statute, or power to appoint majority of the board, or power to cast
majority of votes at board meetings
 Control can be achieved by currently exercisable options that, if exercised, would
result in control
 A subsidiary is not excluded from consolidation because:
 Investor is a venture capital organisation
 Subsidiary's business activities are dissimilar to those of parent or other subs
 Subsidiary operates in a jurisdiction that imposes restrictions on transferring
cash or other assets out of the jurisdiction
 However, consolidated financial statements are not required, even if a parent-
subsidiary relationship exists if:
 Subsidiary was acquired with intent to dispose within one year
 Parent itself is a subsidiary and its parent or ultimate parent uses IFRSs or
IFRS for SMEs
 Must consolidate all controlled special-purpose entities (SPEs)
 Consolidation procedures:
 Eliminate intra company transactions and balances
 Uniform reporting date unless impracticable
 Uniform accounting policies
 Non-controlling interest is presented as part of equity
 Losses are allocated to a subsidiary even if non-controlling interest goes
negative
 Guidance on separate financial statements (but they are not required).
 In a parent's separate financial statements, it may account for subsidiaries,
associates, and joint ventures that are not held for sale at cost or fair value
through profit and loss or using the equity method*
 Guidance on combined financial statements (but they are not required)
*'equity method' added by 2015 Amendments to the IFRS for SMEs issued on 21 May
2015 effective 1 January 2017

Section 10: Accounting Policies, Estimates and Errors

 If the IFRS for SMEs addresses an issue, the entity must follow the IFRS for SMEs
 If the IFRS for SMEs does not address an issue:
 Choose policy that results in the most relevant and reliable information
 Try to analogise from standards in the IFRS for SMEs
 Or use the concepts and pervasive principles in Section 2
 Entity may look to guidance in full IFRSs (but not required)
 Change in accounting policy:

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 If mandated, follow the transition guidance as mandated
If voluntary, retrospective

Notes
 Change in accounting estimate: prospective
 Correction of prior period error: restate prior periods if practicable

Section 11: Basic Financial Instruments

 IFRS for SMEs has two sections on financial instruments:
 Section 11 on Basic Financial Instruments
 Section 12 on Other FI Transactions
 Option to follow IAS 39 instead of sections 11 and 12
 Even if IAS 39 is followed, make Section 11 and 12 disclosures (not IFRS 7
disclosures)
 Essentially, Section 11 is an amortised historical cost model
 Except for equity investments with quoted price or readily determinable fair
value. These are measured at fair value through profit or loss.
 Scope of Section 11 includes:
 Cash
 Demand and fixed deposits
 Commercial paper and bills
 Accounts and notes receivable and payable
 Debt instruments where returns to the holder are fixed or referenced to an
observable rate
 Investments in nonconvertible and non-puttable ordinary and preference shares
 Most commitments to receive a loan
 Initial measurement:
 Basic financial assets and financial liabilities are initially measured at the
transaction price (including transaction costs except in the initial measurement
of financial assets and liabilities that are measured at fair value through profit or
loss) unless the arrangement constitutes, in effect, a financing transaction. A
financing transaction may be indicated in relation to the sale of goods or
services, for example, if payment is deferred beyond normal business terms or
is financed at a rate of interest that is not a market rate. If the arrangement
constitutes a financing transaction, measure the financial asset or financial
liability at the present value of the future payments discounted at a market rate
of interest for a similar debt instrument.
 Measurement subsequent to initial recognition:
 Debt instruments at amortised cost using the effective interest method
 Debt instruments that are classified as current assets or current liabilities are
measured at the undiscounted amount of the cash or other consideration
expected to be paid or received (i.e. net of impairment) unless the arrangement
constitutes, in effect, a financing transaction. If the arrangement constitutes a
financing transaction, the entity shall measure the debt instrument at the
present value of the future payments discounted at a market rate of interest for
a similar debt instrument.
 Investments in non-convertible preference shares and non-puttable ordinary or
preference shares:
 if the shares are publicly traded or their fair value can otherwise be
measured reliably without undue cost or effort*, measure at fair value with
changes in fair value recognised in profit or loss
 measure all other such investments at cost less impairment

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 Must test all amortised cost instruments for impairment or uncollectibility
Previously recognised impairment is reversed if an event occurring after the
Notes 
impairment was first recognised causes the original impairment loss to decrease
 Guidance is provided on determining fair values of financial instruments
 The most reliable is a quoted price in an active market
 When a quoted price is not available the most recent transaction price provides
evidence of fair value
 If there is no active market or recent market transactions, a valuation technique
may be used
 Guidance is provided on the effective interest method
 Derecognise a financial asset when:
 the contractual rights to the cash flows from the financial asset expire or are
settled;
 the entity transfers to another party all of the significant risks and rewards
relating to the financial asset; or
 the entity, despite having retained some significant risks and rewards relating to
the financial asset, has transferred the ability to sell the asset in its entirety to
an unrelated third party who is able to exercise that ability unilaterally and
without needing to impose additional restrictions on the transfer.
 Derecognise a financial liability when the obligation is discharged, cancelled, or
expires
 Disclosures:
 Categories of financial instruments
 Details of debt and other instruments
 Details of de-recognitions
 Collateral
 Defaults and breaches on loans payable
 Items of income and expense
*'undue cost or effort' added by 2015 Amendments to the IFRS for SMEs issued on 21
May 2015 effective 1 January 2017

Section 12: Additional Financial Instruments Issues

 Financial instruments not covered by Section 11 (and, therefore, are within Section
12) are measured at fair value through profit or loss. This includes:
 Investments in convertible and puttable ordinary and preference shares
 Options, forwards, swaps, and other derivatives
 Financial assets that would otherwise be in Section 11 but that have 'exotic'
provisions that could cause gain/loss to the holder or issuer
 Hedge accounting involves matching the gains and losses on a hedging instrument
and hedged item.
It is allowed only for the following kinds of risks:
 interest rate risk of a debt instrument measured at amortised cost
 foreign exchange or interest rate risk in a firm commitment or a highly probable
forecast transaction
 price risk of a commodity that it holds or in a firm commitment or highly
probable forecast transaction to purchase or sell a commodity
 foreign exchange risk in a net investment in a foreign operation.
 Section 12 defines the type of hedging instrument required for hedge accounting.
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 Hedges must be documented up front to qualify for hedge accounting
Section 12 provides guidance for measuring assessing effectiveness

Notes
 Special disclosures are required

Section 13: Inventories

 Inventories include assets for sale in the ordinary course of business, being
produced for sale, or to be consumed in production
 Measured at the lower cost and estimated selling price less costs to complete and
sell
 Cost is determined using:
 specific identification is required for large items
 option to choose FIFO or weighted average for others
 LIFO is not permitted
 Inventory cost includes costs to purchase, costs of conversion, and costs to bring
the asset to present location and condition
 Inventory cost excludes abnormal waste and storage, administrative, and selling
costs
 If a production process creates joint products and/or by-products, the costs are
allocated on a consistent and rational basis
 A manufacturer allocates fixed production overheads to inventories based on
normal capacity
 Standard costing, retail method, and most recent purchase price may be used only
if the result approximates actual cost
 Impairment – write down to net realisable value (selling price less costs to complete
and sell – see Section 27)

Section 14: Investments in Associates

 Associates are investments where significant influence exists. Significant influence
is defined as the power to participate in the financial and operating policy decisions
of the associate but where there is neither control nor joint control over those
policies. Presumption that significant influence exists if investor owns 20% or more
of the voting shares.
 Option to use:
 Cost-impairment model (except if there is a published quotation – then must
use fair value through profit or loss)
 Equity method (investor recognises its share of profit or loss of the associate –
detailed guidance is provided)
 Fair value through profit or loss
 Investments in associates are always classified as non-current assets

Section 15: Investments in Joint Ventures

 For investments in jointly controlled entities, there is an option for the venturer to
use:
 Cost model (except if there is a published quotation – then must use fair value
through profit or loss)
 Equity method (using the guidance in Section 14)
 Fair value through profit or loss
 Proportionate consolidation is prohibited

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 For jointly controlled operations, the venturer should recognise assets that it
controls and liabilities it incurs as well as its share of income earned and expenses
Notes that are incurred
 For jointly controlled assets, the venturer should recognise its share of the assets
and liabilities it incurs as well as income it earns and expenses that are incurred

Section 16: Investment Property

 Investment property is investments in land, buildings (or part of a building), and
some property interests in finance leases held to earn rentals or for capital
appreciation or both
 Property interests that are held under an operating lease may be classified as an
investment property provided the property would otherwise have met the definition
of an investment property
 Mixed use property must be separated between investment and operating property
 If fair value can be measured reliably without undue cost or effort, use the fair value
through profit or loss model
 Otherwise, an entity must treat investment property as property, plant and
equipment using Section 17

Section 17: Property, Plant and Equipment

 Historical cost-depreciation-impairment model or revaluation model*
 Section 17 applies to most investment property as well (but if fair value of
investment property can be measured reliably without undue cost or effort then the
fair value model in Section 16 applies)
 Section 17 applies to property held for sale – there is no special section on assets
held for sale. Holding for sale is an indicator of possible impairment.
 Cost model: Measurement is initially at cost, including costs to get the property
ready for its intended use; subsequent to acquisition, the entity uses the cost-
depreciation-impairment model, which recognises depreciation and impairment of
the carrying amount
 Revaluation model: Measurement is at fair value at the date of the revaluation less
any subsequent accumulated depreciation and subsequent accumulated
impairment losses; revaluations must be made with sufficient regularity*
 The carrying amount of an asset, less estimated residual value, is depreciated over
the asset's anticipated useful life. The method of depreciation shall be the method
that best reflects the consumption of the asset's benefits over its life. Separate
significant components should be depreciated separately.
 Component depreciation only if major parts of an item of PP&E have 'significantly
different patterns of consumption of economic benefits'
 Review useful life, residual value, depreciation rate only if there is a significant
change in the asset or how it is used. Any adjustment is a change in estimate
(prospective).
 Impairment testing and reversal – follow Section 27
*'revaluation model' added by 2015 Amendments to the IFRS for SMEs issued on 21
May 2015 effective 1 January 2017

Section 18: Intangible Assets other than Goodwill

 No recognition of internally generated intangible assets. Therefore:
 Charge all research and development costs to expense
 Charge the following items to expense when incurred: Costs of internally
generated brands, logos, and masthead, start-up costs, training costs,
advertising, and relocating of a division or entity

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 Amortisation model for intangibles that are purchased separately, acquired in a
business combination, acquired by grant, and acquired by exchange of other assets
 Amortise over useful life. If the entity is unable to estimate useful life, then use the
Notes
management’s best estimate but not more than 10 years*.
 Review useful life, residual value, depreciation rate only if there is a significant
change in the asset or how it is used. Any adjustment is a change in estimate
(prospective)
 Impairment testing – follow Section 27
 Any revaluation of intangible assets is prohibited
*clarified by 2015 Amendments to the IFRS for SMEs issued on 21 May 2015 effective
1 January 2017 - originally the standard required the use of 10 years if the entity is
unable to estimate useful life

Section 19: Business Combinations and Goodwill

 Section does not apply to combinations of entities under common control
 Acquisition (purchase) method. Under this method:
 An acquirer must always be identified
 The cost of the business combination is measured. Cost is the fair value of
assets given, liabilities incurred or assumed, and equity instruments issued,
plus costs directly attributable to the combination.
 At the acquisition date, the cost is allocated to the assets acquired and liabilities
and provisions for contingent liabilities assumed. The identifiable assets
acquired and liabilities and provisions for contingent liabilities assumed are
measured at their fair values. Any difference between cost and amounts
allocated to identifiable assets and liabilities (including provisions) is recognised
as goodwill or so-called 'negative goodwill'.
 All goodwill must be amortised. If the entity is unable to estimate useful life, then
use 10 years.
 'Negative goodwill' – first reassess original accounting. If that is ok, then immediate
credit to profit or loss
 Impairment testing of goodwill – follow Section 27
 Reversal of goodwill impairment is not permitted

Section 20: Leases

 Scope includes arrangements that contain a lease [IFRIC 4]
 Leases are classified as either finance leases or operating leases.
 Finance leases result in substantially all the risks and rewards incidental to
ownership being transferred between the parties, while operating leases do not.
 Substantially all risks and rewards of ownership are presumed transferred if:
 the lease transfers ownership of the asset to the lessee by the end of the
lease term
 the lessee has a 'bargain purchase option'
 the lease term is for the major part of the economic life of the asset even if
title is not transferred
 at the inception of the lease the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the leased
asset
 the leased assets are of such a specialised nature that only the lessee can
use them without major modifications
 the lessee bears the lessor losses if cancelled

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 a secondary rental period at below market rates
the residual value risk is borne by the lessee
Notes 
 Lessees – finance leases:
 The rights and obligations are to be recognised as assets and liabilities at
fair value, or, if lower, the present value of the minimum lease payments.
Any direct costs of the lessee are added to the asset amount recognised.
Subsequently, payments are to be spilt between a finance charge and
reduction of the liability. The asset should be depreciated either over the
useful life or the lease term.
 Lessees – operating leases:
 Payments are to be recognised as an expense on the straight line basis, unless
payments are structured to increase in line with expected general inflation or
another systematic basis is better representative of the time pattern of the
user's benefit.
 Lessors – finance leases:
 The rights are to be recognised as assets held, i.e. as a receivable at an
amount equal to the net investment in the lease. The net investment in a lease
is the lessor's gross investment in the lease (including unguaranteed residual
value) discounted at the interest rate implicit in the lease.
 For finance leases other than those involving manufacturer or dealer lessors,
initial direct costs are included in the initial measurement of the finance lease
receivable and reduce the amount of income recognised over the lease term.
 If there is an indication that the estimated unguaranteed residual value used in
computing the lessor's gross investment in the lease has changed significantly,
the income allocation over the lease term is revised, and any reduction in
respect of amounts accrued is recognised immediately in profit or loss.
 Lessors – finance leases by a manufacturer or dealer:
 A finance lease of an asset by a manufacturer or dealer lessor gives rise to two
types of income:
 profit or loss equivalent to the profit or loss resulting from an outright sale of
the asset being leased, at normal selling prices, reflecting any applicable
volume or trade discounts; and
 finance income over the lease term.
 The sales revenue recognised at the commencement of the lease term by a
manufacturer or dealer lessor is the fair value of the asset or, if lower, the
present value of the minimum lease payments accruing to the lessor, computed
at a market rate of interest.
 The cost of sale recognised at the commencement of the lease term is the cost,
or carrying amount if different, of the leased property less the present value of
the unguaranteed residual value. The difference between the sales revenue
and the cost of sale is the selling profit, which is recognised in accordance with
the entity's policy for outright sales.
 If artificially low rates of interest are quoted, selling profit shall be restricted to
that which would apply if a market rate of interest were charged. Costs incurred
by manufacturer or dealer lessors in connection with negotiating and arranging
a lease shall be recognised as an expense when the selling profit is recognised.
 Lessors – operating leases:
 Lessors retain the assets on their balance sheet and payments are to be
recognised as income on the straight line basis, unless payments are structured
to increase in line with expected general inflation or another systematic basis is
better representative of the time pattern of the user's benefit.

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 Sale and leaseback:
If a sale and leaseback results in a finance lease, the seller should not

recognise any excess as a profit, but recognise the excess over the lease term.
Notes
 If a sale and leaseback results in an operating lease, and the transaction was at
fair value, the seller shall recognise any profits immediately.

Section 21: Provisions and Contingencies

 Provisions:
 Provisions are recognised only when (a) there is a present obligation as a result
of a past event, (b) it is probable that the entity will be required to transfer
economic benefits, and (c) the amount can be estimated reliably.
 The obligation may arise due to contract or law or when there is a constructive
obligation due to valid expectations having been created from past events.
However, these do not include any future actions that may create an
expectation. Nor can expected future losses be recognised as provisions.
 Initially recognised at the best possible estimate at the reporting date. This
value should take into any time value of money if this is considered material.
When all or part of a provision may be reimbursed by a third party, the
reimbursement is to be recognised separately only when it is virtually certain
payment will be received.
 Subsequently, provisions are to be reviewed at each reporting date and
adjusted to meet the best current estimate. Any adjustments are recognised in
profit and loss while any unwinding of discounts is to be treated as a finance
cost.
 Must accrue provisions for (examples):
 Onerous contracts
 Warranties
 Restructuring if legal or constructive obligation to restructure
 Sales refunds
 May NOT accrue provisions for (example):
 Future operating losses, no matter how probable
 Possible future restructuring (plan but not yet a legal or constructive obligation)
 Contingent liabilities:
 These are not recognised as liabilities
 Unless remote, disclose an estimate of the financial effect, indications of the
uncertainties relating to timing or amount, and the possibility of reimbursement
 Contingent assets:
 These are not recognised as assets.
 Disclose a description of the nature and the financial effect.

Section 22: Liabilities and Equity

 Guidance on classifying an instrument as liability or equity
 An instrument is a liability if the issuer could be required to pay cash
Puttable financial instruments are only recognised as equity if it has all of the
following features:
 The holder is entitled to a pro rata share of the entity's net assets in the event of
liquidation.
 The instrument is the most subordinate class.
 All financial instruments in the most subordinate class have identical features.

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 Apart from the puttable features the instrument includes no other financial
instrument features.
Notes  The total expected cash flows attributable to the instrument over the life of the
instrument are based substantially on the change in the value of the entity.
 Members' shares in co-operative entities and similar instruments are only classified
as equity if the entity has an unconditional right to refuse redemption of the
members' shares or the redemption is unconditionally prohibited by local law,
regulation or the entity's governing charter. If the entity could not refuse redemption,
the members' shares are classified as liabilities.
 Covers some material not covered by full IFRSs, including:
 original issuance of shares and other equity instruments. Shares are only
recognised as equity when another party is obliged to provide cash or other
resources in exchange for the instruments. The instruments are measured at
the fair value of cash or resources received, net of transaction cost, unless the
time value of money is significant in which case initial measurement is at the
present value amount. When shares are issued before the cash or other
resources are received, the amount receivable is presented as an offset to
equity in the statement of financial position and not as an asset. Any shares
subscribed for which no cash is received are not recognised as equity before
the shares are issued.
 sales of options, rights and warrants
 stock dividends and stock splits – these do not result in changes to total equity
but, rather, reclassification of amounts within equity.
 'Split accounting' is required to account for issuance of convertible instruments
 Proceeds on issue of convertible and other compound financial instruments are
split between liability component and equity component. The liability is
measured at its fair value, and the residual amount is the equity component.
The liability is subsequently measured using the effective interest rate, with the
original issue discount amortised as added interest expense.
 A comprehensive example of split accounting is included
 If a liability is fully or partially extinguished by issuing equity instruments to the
creditor, the equity instruments issued are measured at their fair value. If the fair
value of the equity instruments issued cannot be measured reliably without undue
cost or effort, the equity instruments is measured at the fair value of the financial
liability extinguished.*
 Treasury shares (an entity's own shares that are reacquired) are measured at the
fair value of the consideration paid and are deducted from the equity. No gain or
loss is recognised on subsequent resale of treasury shares.
 Minority interest changes that do not affect control do not result in a gain or loss
being recognised in profit and loss. They are equity transactions between the entity
and its owners.
 Dividends paid in the form of distribution of assets other than cash are recognised
when the entity has an obligation to distribute the non-cash assets:
 The dividend liability is measured at the fair value of the assets to be
distributed.
 If the fair value of the assets to be distributed cannot be measured reliably
without undue cost or effort, the liability shall be measured at the carrying
amount of the assets to be distributed.*
*added by 2015 Amendments to the IFRS for SMEs issued on 21 May 2015 effective 1
January 2017

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Section 23: Revenue
Revenue results from the sale of goods, services being rendered, construction

contracts income by the contractor and the use by others of your assets
Notes
 Some types of revenue are excluded from this section and dealt with elsewhere:
 leases (section 20)
 dividends from equity accounted entities (section 14 and 15)
 changes in fair value of financial instruments (section 11 and 12)
 initial recognition and subsequent re-measurement of biological assets (section
34) and initial recognition of agricultural produce (section 34)
 Principle for measurement of revenue is the fair value of the consideration received
or receivable, taking into account any possible trade discounts or rebates, including
volume rebates and prompt settlement discounts
 If payment is deferred beyond normal payment terms, there is a financing
component to the transaction. In that case, revenue is measured at the present
value of all future receipts. The difference is recognised as interest revenue.
 Recognition – sale of goods: An entity shall recognise revenue from the sale of
goods when all the following conditions are satisfied:
 the entity has transferred to the buyer the significant risks and rewards of
ownership of the goods.
 the entity retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold.
 the amount of revenue can be measured reliably.
 it is probable that the economic benefits associated with the transaction will flow
to the entity.
 the costs incurred or to be incurred in respect of the transaction can be
measured reliably.
 Recognition – sale of services: Use the percentage of completion method if the
outcome of the transaction can be estimated reliably. Otherwise use the cost-
recovery method.
 Recognition – construction contracts: Use the percentage of completion method
if the outcome of the contract can be estimated reliably. Otherwise use the cost-
recovery method.
 Recognition – interest: Interest shall be recognised using the effective interest
method as described in Section 11
 Recognition – royalties: Royalties shall be recognised on an accrual basis in
accordance with the substance of the relevant agreement.
 Recognition – dividends: Dividends shall be recognised when the shareholder's
right to receive payment is established.
 Appendix of examples of revenue recognition under the principles in Section 23
 Award credits or other customer loyalty plan awards need to be accounted for
separately. The fair value of such awards reduces the amount of revenue
initially recognised and, instead, is recognised when awards are redeemed.

Section 24: Government Grants

 This section does not apply to any 'grants' in the form of income tax benefits
 All grants are measured at the fair value of the asset received or receivable
Recognition as income:
 Grants without future performance conditions are recognised in profit or loss
when proceeds are receivable

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 If there are performance conditions, the grant is recognised in profit or loss only
when the conditions are met
Notes
Section 25: Borrowing Costs
 Borrowing costs are interest and other costs arising on an entity's financial liabilities
and finance lease obligations
 All borrowing costs are charged to expense when incurred – none are capitalised

Section 26: Share-based Payment

 Basic principle: All share-based payment must be recognised
 Equity-settled:
 Transactions with other than employees are recorded at the fair value of the
goods and services received, if these can be estimated reliably
 Transactions with employees or where the fair value of goods and services
received cannot be reliably measured are measured with reference to the fair
value of the equity instruments granted
 Cash-settled:
 Liability is measured at fair value on grant date and at each reporting date and
settlement date, with each adjustment through profit or loss.
 For employees where shares only vest after a specific period of service has
been completed, recognise the expense as the service is rendered.
 Share-based payment with cash alternatives:
 Account for all such transactions as cash settled, unless the entity has a past
practice of settling by issuing equity instruments or the option has no
commercial substance because the cash settlement amount bears no
relationship to, and is likely to be lower in value than, the fair value of the equity
instrument.
 Fair value of equity instruments granted:
 Observable market price if available
 If no observable price, use entity-specific market data such as a recent share
transaction or valuation of the entity
 If (a) and (b) are impracticable, directors must use their judgement to estimate
fair value
 Certain government-mandated plans provide for equity investors (such as
employees) to acquire equity without providing goods or services that can be
specifically identified (or by providing goods or services that are clearly less than
the fair value of the equity instruments granted). These are equity-settled share-
based payment transactions within the scope of this section.

Section 27: Impairment of Assets

 Inventories – write down, in profit or loss, to lower of cost and selling price less
costs to complete and sell, if below carrying amount. When the circumstances that
led to the impairment no longer exist, the impairment is reversed through profit or
loss.
 Other assets – write down, in profit or loss, to recoverable amount, if below carrying
amount. When the circumstances that led to the impairment no longer exist, the
impairment is reversed through profit or loss.
 Recoverable amount is the greater of fair value less costs to sell and value in use
 If recoverable amount of an individual asset cannot be determined, measure
recoverable amount of that asset's cash generating unit

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 If an impairment indicator exists, the entity should review the useful life and the
depreciation methods even though an impairment may not be recognised
 Simplified guidance on computing impairment of goodwill when goodwill cannot be
Notes
allocated to cash generating units

Section 28: Employee Benefits

 Short-term benefits:
 Measured at an undiscounted rate and recognised as the services are
rendered.
 Other costs such as annual leave are recognised as a liability as services are
rendered and expensed when the leave is taken or used.
 Bonus payments are only recognised when an obligation exists and the amount
can be reliably estimated.
 Post-Employment Benefits – Defined Contribution Plans:
 Contributions are recognised as a liability or an expense when the contributions
are made or due.
 Post-Employment Benefits – Defined benefit plans
 Recognise a liability based on the net of present value of defined benefit obligations
less the fair value of any plan assets at balance sheet date.
 The projected unit credit method is only used when it could be applied without
undue cost or effort.
 Otherwise, en entity can simplify its calculation:
 Ignore estimated future salary increases
 Ignore future service of current employees (assume closure of plan)
 Ignore possible future in-service mortality
 Plan introductions, changes, curtailments, settlements: Immediate recognition (no
deferrals)
 For group plans, consolidated amount may be allocated to parent and subsidiaries
on a reasonable basis
 Actuarial gains and losses may be recognised in profit or loss or as an item of other
comprehensive income – but...
 No deferral of actuarial gains or losses, including no corridor approach
 All past service cost is recognised immediately in profit or loss
 Other Long-Term benefits:
 The entity shall recognise a liability at the present value of the benefit obligation
less any fair value of plan assets.
 Termination benefits:
 These are recognised in profit and loss immediately as there are no future
economic benefits to the entity.

Section 29: Income Tax*

 Requires a temporary difference approach, similar to IAS 12
 Current tax:
 Recognise a current tax liability if the current tax payable exceeds the current
tax paid at that point in time. Recognise a current tax asset when current tax
paid exceeds current tax payable or the entity has carried a loss forward from
the prior year and this can be used to recover current tax in the current year.
 Current tax assets and liabilities for current and prior periods are measured at
the actual amount that is owed or the entity owes using the applicable tax rates

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enacted or substantively enacted at the reporting date. The measurement must
include the effect of the possible outcomes of a review by the tax authorities.
Notes  Deferred tax:
 If an asset or liability is expected to affect taxable profit if it recovered or settled
for its carrying amount, then a deferred tax asset or liability is recognised
 If the entity expects to recover an asset through sale, and capital gains tax is
zero, then no deferred tax is recognised, because recovery is not expected to
affect taxable profit
 Temporary difference arises if the tax basis of such assets or liabilities is
different from carrying amount
 Tax basis assumes recovery by sale. Exception: No deferred tax on unremitted
earnings of foreign subsidiaries and jointly controlled entities
 Recognise deferred tax assets in full, with a valuation allowance
 Criterion is that realisation is probable (more likely than not)
 Take uncertainty into account in measuring all current and deferred taxes –
assume tax authorities will examine reported amounts and have full knowledge
of all relevant information
 Deferred taxes are all presented as non-current
 Recognition of changes in current or deferred tax must be allocated to the related
components of profit or loss, other comprehensive income and equity.
*Section 29 was completely revised by 2015 Amendments to the IFRS for SMEs issued
on 21 May 2015 effective 1 January 2017, please see summary of revised section
below.

Section 29: Income Tax (Revised)*

 Requires a temporary difference approach, similar to IAS 12
 Current tax:
 Recognise a current tax liability for tax payable on taxable profit for the current
and past period.
 Recognise a current tax asset for the benefit of a tax loss that can be carried
back to recover tax paid in a previous period.
 Measure the current tax liability (asset) at the amount expected to pay (recover)
using the tax rates and laws that have been enacted or substantively enacted
by the reporting date.
 Current tax assets and liabilities are not discounted.
 Deferred tax:
 Recognise a deferred tax asset or liability for tax recoverable or payable in
future periods as a result of past transactions or events.
 The tax base of an asset is the amount that will be deductible for tax purposes
against taxable economic benefits. The tax base of a liability is its carrying
amount less any amount that will be deductible for tax purposes in respect of
that liability in future.
 Temporary difference arises if the tax basis of such assets or liabilities is
different from carrying amount. Recognise a deferred tax liability for most
taxable temporary differences and recognise a deferred tax asset for most
deductible temporary differences to the extent that it is probable that taxable
profit will be available against which the deductible temporary difference can be
utilised.
 Measure deferred tax liabilities and assets using the tax rates and tax laws that
have been enacted or substantively enacted by the reporting date.

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 Deferred tax assets and liabilities are not discounted.
At the end of each reporting period, reassess any unrecognised deferred tax

assets and recognise previously unrecognised deferred tax assets to the extent
Notes
that it has become probable that future taxable profit will allow the deferred tax
asset to be recovered.
 Deferred taxes are all presented as non-current.
 Recognition of changes in current or deferred tax must be allocated to the
related components of profit or loss, other comprehensive income and equity.
 Offsetting current tax assets and current tax liabilities or offsetting deferred tax
assets and deferred tax liabilities is only permissible if an entity has a legally
enforceable right to set off the amounts and the entity plans either to settle on a net
basis or to realise the asset and settle the liability simultaneously.
*Section 29 was completely revised by 2015 Amendments to the IFRS for SMEs issued
on 21 May 2015. This summary provides an overview of the requirements effective 1
January 2017.

Section 30: Foreign Currency Translation

 Functional currency approach similar to that in IAS 21
 An entity's functional currency is the currency of the primary economic environment
in which it operates
 It is a matter of fact, not an accounting policy choice
 A change in functional currency is applied prospectively from the date of the
change
 To record a foreign currency transaction in an entity's functional currency:
 On initial recognition, record the transaction by applying the spot rate at the
date of the transaction. An average rate may be used, unless there are
significant fluctuations in the rate.
 At reporting date, translate foreign currency monetary items using the closing
rate. For non-monetary items measured at historical cost, use the exchange at
the date of the transaction. For non-monetary items measured at fair value, use
the exchange at the date when the fair value was determined.
 For monetary and non-monetary item translations, gains or losses are
recognised where they were initially recognised – either in profit or loss,
comprehensive income, or equity
 Exchange differences arising from a monetary item that forms part of the net
investment in a foreign operation are recognised in equity and are not 'recycled'
through profit or loss on disposal of the investment
 Goodwill arising on acquisition of a foreign operation is deemed to be an asset of
the subsidiary, and translated at the closing rate at year end
 An entity may present its financial statements in a currency different from its
functional currency (a 'presentation currency'). If the entity's functional currency is
not hyperinflationary, translation of assets, liabilities, income, and expense from
functional currency into presentation currency is done as follows:
 Assets and liabilities for each statement of financial position presented are
translated at the closing rate at the date of that statement of financial position
 Income and expenses are translated at exchange rates at the dates of the
transactions
 All resulting exchange differences are recognised in other comprehensive
income.

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Section 31: Hyperinflation
An entity must prepare general price-level adjusted financial statements when its
Notes 
functional currency is hyperinflationary
 IFRS for SMEs provides indicators of hyperinflation but not an absolute rate. One
indicator is where cumulative inflation approaches or exceeds 100% over a 3 year
period.
 In price-level adjusted financial statements, all amounts are stated in terms of the
(hyperinflationary) presentation currency at the end of the reporting period.
Comparative information and any information presented in respect of earlier periods
must also be restated in the presentation currency.
 All assets and liabilities not recorded at the presentation currency at the end of the
reporting period must be restated by applying the general price index (generally an
index published by the government).
 All amounts in the statement of comprehensive income and statement of cash flows
must also be recorded at the presentation currency at the end of the reporting
period. These amounts are restated by applying the general price index from the
dates when they were recorded.
 The gain or loss on translating the net monetary position is included in profit or loss.
However, that gain or loss is adjusted for those assets and liabilities linked by
agreement to changes in prices.

Section 32: Events after the End of the Reporting Period

 Adjust financial statements to reflect adjusting events – events after the balance
sheet date that provide further evidence of conditions that existed at the end of the
reporting period.
 Do not adjust for non-adjusting events – events or conditions that arose after the
end of the reporting period. For these, the entity must disclose the nature of event
and an estimate of its financial effect.
 If an entity declares dividends after the reporting period, the entity shall not
recognise those dividends as a liability at the end of the reporting period. That is a
non-adjusting event.

Section 33: Related Party Disclosures

 Disclose parent-subsidiary relationships, including the name of the parent and (if
any) the ultimate controlling party.
 Disclose key management personnel compensation in total for all key management.
Compensation includes salaries, short-term benefits, post-employment benefits,
other long-term benefits, termination benefits and share-based payments. Key
management personnel are persons responsible for planning, directing and
controlling the activities of an entity, and include executive and non-executive
directors.
 Disclose the following for transactions between related parties:
 Nature of the relationship
 Information about the transactions and outstanding balances necessary to
understand the potential impact on the financial statements
 Amount of the transaction
 Provisions for uncollectible receivables
 Any expense recognised during the period in respect of an amount owed by a
related party
 Government departments and agencies are not related parties simply by virtue of
their normal dealings with an entity

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Section 34: Specialised Activities

Agriculture: Notes
 If the fair value of a class of biological asset is readily determinable without undue
cost or effort, use the fair value through profit or loss model.
 If the fair value is not readily determinable, or is determinable only with undue cost
or effort, measure the biological assets at cost less and accumulated depreciation
and impairment.
 At harvest, agricultural produce is being measured at fair value less estimated costs
to sell. Thereafter it is accounted for an inventory.

Exploration for and evaluation of mineral resources:

 Determine an accounting policy that specifies which expenditures are recognised as
exploration and evaluation assets in accordance with paragraph 10.4 and apply the
policy consistently.*
 Exploration and evaluation assets shall be measured on initial recognition at cost.*
 (Subsequently) Tangible or intangible assets used in extractive activities are
accounted for under Section 17 Property, Plant and Equipment and Section 18
Intangible Assets other than Goodwill.
 Assess exploration and evaluation assets for impairment when facts and
circumstances suggest that the carrying amount of an exploration and evaluation
asset may exceed its recoverable amount. Measure, present and disclose any
resulting impairment loss in accordance with Section 27 Impairment of Assets.*
 An obligation to dismantle or remove items or restore sites is accounted for using
Section 17 and Section 21 Provisions and Contingencies.

Service concession arrangements:

 Guidance is provided on how the operator accounts for a service concession
arrangement. The operator either recognises a financial asset or an intangible asset
depending on whether the grantor (government) has provided an unconditional
guarantee of payment or not.
 A financial asset is recognised to the extent that the operator has an unconditional
contractual right to receive cash or another financial asset from or at the direction of
the grantor for the construction services.
 An intangible asset is recognised to the extent that the operator receives a right or
license to charge users for the public service.
*added by 2015 Amendments to the IFRS for SMEs issued on 21 May 2015 effective 1
January 2017

Section 35: Transition to the IFRS for SMEs

 First-time adoption is the first set of financial statements in which the entity makes
an explicit and unreserved statement of compliance with the IFRS for SMEs: '...in
conformity with the International Financial Reporting Standard for Small and
Medium-sized Entities'.
 Can be switching from:
 National GAAP
 Full IFRSs
 Or never published General Purpose Financial Statements in the past
 Date of transition is beginning of earliest period presented
 Select accounting policies based on IFRS for SMEs at end of reporting period of
first-time adoption
 Many accounting policy decisions depend on circumstances – not 'free choice'

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 But some are pure 'free choice'
Prepare current year and one prior year's financial statements using the IFRS for
Notes 
SMEs
 But there are many exceptions from restating specific items
 Some exceptions are optional
 Some exceptions are mandatory
 And a general exemption for impracticability
 All of the special exemptions in IFRS 1 are included in the IFRS for SMEs

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 Assets
 IFRS 7 Financial Instruments: Disclosures
 IFRS 8 Operating Segments
 IFRS 9 Financial Instruments
 IFRS 10 Consolidated Financial Statements
 IFRS 11 Joint Arrangements
 IFRS 12 Disclosure of Interests in Other Entities
 IFRS 13 Fair Value Measurement

International Accounting Standards

 IAS 1 Presentation of Financial Statements
 IAS 2 Inventories
 IAS 3 Consolidated Financial Statements - Originally issued 1976, effective 1 Jan
1977. Superseded in 1989 by IAS 27 and IAS 28
 IAS 4 Depreciation Accounting - Withdrawn in 1999, replaced by IAS 16, 22, and
38, all of which were issued or revised in 1998
 IAS 5 Information to Be Disclosed in Financial Statements - Originally issued
October 1976, effective 1 January 1997. Superseded by IAS 1 in 1997
 IAS 6 Accounting Responses to Changing Prices - Superseded by IAS 15, which
was withdrawn December 2003
 IAS 7 Statement of Cash Flows
 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
 IAS 9 Accounting for Research and Development Activities - Superseded by IAS 38
effective 1.7.99
 IAS 10 Events After the Reporting Period
 IAS 11 Construction Contracts
 IAS 12 Income Taxes
 IAS 13 Presentation of Current Assets and Current Liabilities - Superseded by
IAS 1
 IAS 14 Segment Reporting

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 IAS 15 Information Reflecting the Effects of Changing Prices - Withdrawn
December 2003
 IAS 16 Property, Plant and Equipment
Notes
 IAS 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 - Superseded by IFRS 3 effective 31 March 2004
 IAS 23 Borrowing Costs
 IAS 24 Related Party Disclosures
 IAS 25 Accounting for Investments - Superseded by IAS 39 and IAS 40 effective
2001
 IAS 26 Accounting and Reporting by Retirement Benefit Plans
 IAS 27 Consolidated and Separate Financial Statements - Superseded by IFRS 10,
IFRS 12 and IAS 27 (rev. 2011) effective 2013
 IAS 28 Investments in Associates - Superseded by IAS 28 (rev. 2011) and IFRS 12
effective 2013
 IAS 29 Financial Reporting in Hyperinflationary Economies
 IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial
Institutions - Superseded by IFRS 7 effective 2007
 IAS 31 Interests In Joint Ventures - Superseded by IFRS 11 and IFRS 12 effective
2013
 IAS 32 Financial Instruments: Presentation - Disclosure provisions superseded by
IFRS 7 effective 2007
 IAS 33 Earnings Per Share
 IAS 34 Interim Financial Reporting
 IAS 35 Discontinuing Operations - Superseded by IFRS 5 effective 2005
 IAS 36 Impairment of Assets
 IAS 37 Provisions, Contingent Liabilities and Contingent Assets
 IAS 38 Intangible Assets
 IAS 39 Financial Instruments: Recognition and Measurement - Superseded by IFRS
9 effective 2013
 IAS 40 Investment Property
 IAS 41 Agriculture

2.4 Development and Interpretation of International Financial

Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) are a set of international accounting
standards stating how particular types of transactions and other events should be
reported in financial statements. IFRS are issued by the International Accounting
Standards Board, and they specify exactly how accountants must maintain and report
their accounts. IFRS were established in order to have a common accounting language,
so business and accounts can be understood from company to company and country to
country.

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BREAKING DOWN 'International Financial Reporting Standards - IFRS'

Notes The point of IFRS is to maintain stability and transparency throughout the financial
world. This allows businesses and individual investors to make educated financial
decisions, as they are able to see exactly what has been happening with a company in
which they wish to invest.
IFRS are standards in many parts of the world, including the European Union and
many countries in Asia and South America, but not in the United States. The Securities
and Exchange Commission (SEC) is in the process of deciding whether or not to adopt
the standards in America. Countries that benefit the most from the standards are those
that do a lot of international business and investing. Advocates suggest that a global
adoption of IFRS would save money on alternative comparison costs and individual
investigations, while also allowing information to flow more freely.
In the countries that have adopted IFRS, both companies and investors benefit from
using the system, since investors are more likely to put money into a company if the
company's business practices are transparent. Also, the cost of investments is usually
lower. Companies that do a lot of international business benefit the most from IFRS.
IFRS are sometimes confused with International Accounting Standards (IAS), which
are the older standards that IFRS replaced. IAS was issued from 1973 to 2000.
Likewise, the International Accounting Standards Board (IASB) replaced the
International Accounting Standards Committee (IASC) in 2001.

Standard IFRS Requirements

IFRS cover a wide range of accounting activities. There are certain aspects of business
practice for which IFRS set mandatory rules.
 Statement of Financial Position: This is also known as a balance sheet. IFRS
influence the ways in which the components of a balance sheet are reported.
 Statement of Comprehensive Income: This can take the form of one statement,
or it can be separated into a profit and loss statement and a statement of other
income, including property and equipment.
 Statement of Changes in Equity: It is also known as a statement of retained
earnings, this documents the company's change in earnings or profit for the given
financial period.
 Statement of Cash Flow: This report summarizes the company's financial
transactions in the given period, separating cash flow into Operations, Investing,
and Financing.
In addition to these basic reports, a company must also give a summary of its
accounting policies. The full report is often seen side by side with the previous report, to
show the changes in profit and loss. A parent company must create separate account
reports for each of its subsidiary companies.

IFRS vs. American Standards

Differences exist between IFRS and other countries' generally accepted accounting
standards (GAAP) that affect the way a financial ratio is calculated. For example, IFRS
are not as strict on defining revenue and allow companies to report revenue sooner, so
consequently, a balance sheet under this system might show a higher stream of
revenue. IFRS also have different requirements for expenses; for example, if a
company is spending money on development or an investment for the future, it doesn't
necessarily have to be reported as an expense (it can be capitalized).
Another difference between IFRS and GAAP is the specification of the way
inventory is accounted for. There are two ways to keep track of this, first in first out
(FIFO) and last in first out (LIFO). FIFO means that the most recent inventory is left
unsold until older inventory is sold; LIFO means that the most recent inventory is the

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first to be sold. IFRS prohibit LIFO, while American standards and others allow
participants to freely use either.
Notes
History of IFRS
IFRS originated in the European Union, with the intention of making business affairs
and accounts accessible across the continent. The idea quickly spread globally, as a
common language allowed greater communication worldwide. Although only a portion
of the world uses IFRS, participating countries are spread all over the world, rather than
being confined to one geographic region. The United States has not yet adopted IFRS,
as many view the American GAAP as the "gold standard"; however, as IFRS become
more of a global norm, this is subject to change if the SEC decides that IFRS are fit for
American investment practices.
Currently, about 120 countries use IFRS in some way, and 90 of those require them
and fully conform to IFRS regulations.
IFRS are maintained by the IFRS Foundation. The mission of the IFRS Foundation
is to "bring transparency, accountability and efficiency to financial markets around the
world." Not only does the IFRS Foundation supply and monitor these standards, but it
also provides suggestions and advice to those who deviate from the practice guidelines.
The official IFRS website has more information on the rules and history of the IFRS.
The goal with IFRS is to make international comparisons as easy as possible. This
is difficult because, to a large extent, each country has its own set of rules. For
example, U.S. GAAP is different from Canadian GAAP. Synchronizing accounting
standards across the globe is an ongoing process in the international accounting
community.

2.5 Legal Requirements of not for Profit

Non-profits (also known as NPOs or non-business entities) seem to confuse a lot of
people, especially those who aren’t involved or actively participate in one. Many people
will simply say that another word for non-profit is “charity,” which isn’t totally correct.
According to the Cornell Legal Information Institute, a non-profit is more complicated:
“A non-profit organization is a group organized for purposes other than generating
profit and in which no part of the organization’s income is distributed to its members,
directors, or officers. Non-profit corporations are often termed ‘non-stock corporations.’
They can take the form of a corporation, an individual enterprise (for example, individual
charitable contributions), unincorporated association, partnership, foundation
(distinguished by its endowment by a founder, it takes the form of a trusteeship), or
condominium (joint ownership of common areas by owners of adjacent individual units
incorporated under state condominium acts).”
Non-profits cannot just form out of thin air from already existing companies, as they
must be designated as a non-profit in their charters. According to the Cornell Institute,
“Non-profit organizations include churches, public schools, public charities, public clinics
and hospitals, political organizations, legal aid societies, volunteer services
organizations, labor unions, professional associations, research institutes, museums,
and some governmental agencies.”
A key difference between non-profits and for-profit organizations is that when a for-
profit organization goes out of business, the shareholders can get what’s leftover. But
when a nonprofit goes out of business, any remaining assets must be given to another
nonprofit.
Some of the most popular non-profits include: National Public Radio (NPR),
United Nations Children’s Fund (UNICEF), Human Rights Watch (HRW), WikiLeaks,
Green Peace, the Smithsonian Institute, Human Rights Campaign, Kiva, and Doctors
Without Borders.

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What are the Legal Requirements to be a Non-Profit?

Notes Many non-profit groups want to be considered non-profits because it will help them
avoid federal or state taxes. Non-profits often receive tax exemptions from Section
501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes referred
to “501(c)(3)s.” State laws are typically stricter than federal laws when it concerns
non-profits, and each state has its own set of rules and regulations, though many states
do overlap.

State Laws
State laws have big consequences for any non-profits that don’t strictly follow the rules.
There are many lawyers who specifically work with non-profits, as the nomenclature can
be quite confusing and dense, especially for people who have never taken law classes.
A non-profit that operates in more than one state will need to pay attention to the laws
that affect its work in each jurisdiction.
Twenty-six states require that non-profits complete an audit so that they are able to
participate in fund-raising activities from year to year. According to the National Council
of Non-Profits, “thirty-nine states (including the District of Columbia) require charitable
non-profits to register with the state in order to fundraise in that state.” Over half of the
states require some form of audit every year, whether the group actively fundraises or
not. For example, Maine is particularly strict with licensing and requires renewals each
year.
Many of the audits that take place within a state for the government must be done
by an independent auditor, or someone who does not have stake in either the company
or the government.
To see more about your specific state, visit the National Council of Non-Profits
interactive page.

Political Non-Profits
Political non-profits have become some of the largest contributors to elections in the last
few decades. Some of these organizations include the often talked-about Super PACs,
which pool campaign contributions from members and donate them to campaigns for or
against particular candidates. These organizations, predominantly 501(c)(4)s and
501(c)(6)s, “do not have to disclose the sources of their funding–though a minority do
disclose some or all of their donors, by choice or in response to specific circumstances.”
The anonymity and large scale of these Super PACs have ruffled many feathers,
especially within smaller parties.
That may be why the IRS is considering a rule “to police political nonprofits to
include political parties and political action committees.” These groups are commonly
called “social welfare” groups and operate under those guises, but play by a completely
different set of rules.
“If it’s going to be a fair system, it needs to apply across the board,” IRS
Commissioner John Koskinen said when asked by POLITICO about the new rule. He
continued, if we have a set of definitions for 501(c)(4)s, what about everybody else?
Can they do more or less [political activity]? And for us as [an] administration, for ease
of administration, it makes sense to have this common definition.”

Non-Profit Spending
How much of what you give a foundation or non-profit actually goes to the cause
depends greatly on the specific organization. For most of these organizations, a good
chunk goes toward overhead costs like fundraising, employee salaries, and
management costs.
For instance, according to The Street, the Walker Cancer Institute “spent 96.4% of
its total funds on overhead in 2012. The nonprofit spent 91.1% of its money to raise

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more funds and 5.3% for management and general costs. CEO Helen Marie Walker
received 1.3% of the non-profit’s funds in 2012.”
Notes
To check on any specific charity, the Charity Navigator has spending information on
about 7,000 different charities.

Non-Profit Controversies
These groups and organizations are not without controversy and problematic behavior.
Some of these controversies arose out of tax issues, while others came from the
actions of the group specifically.

Case Study: Autism Speaks

The organization has become one of the best known charities in the United States for
autism awareness. However, that doesn’t mean the group is without problems.
Autism Speaks has raised autism awareness significantly, and which has led to
better treatment, more donations, and more understanding. The Daily Beast details the
meteoric rise of autism funding:
When Autism Speaks began, $15 million in private funding went to autism research.
In 2010, according to the Interagency Autism Committee (IACC), the federal task force
for shaping government autism policy and funding, that amount surged to more than
$75 million, with over $18 million from Autism Speaks.
However Autism Speaks has faced some controversies. One of the major criticism
levied against the group is that Autism Speaks considers autism to be a “horror” and a
“tragedy” that happens to people and families. Autistic Hoya explains: “Autism Speaks
regularly issues propaganda in which they say, ‘The rate of autism is higher than the
rate of cancer, childhood diabetes, and AIDS combined,’ which compares a
developmental disability to diseases.”

In addition, the group has come under fire for allegedly aligning itself with the Judge
Rotenberg Center, which uses electric shock therapy.

Case Study: Susan G. Komen for the Cure

Amidst reports of “pinkwashing” or slapping a pink ribbon on a product and calling it
support, Susan G. Komen for the Cure recently made a controversial decision that
caused it to lose some respect and support. The call came when “it summarily cut off
funding to Planned Parenthood in what appeared to be a bow to anti-abortion
crusaders.” That cut stopped Planned Parenthood from performing many of the
necessary mammograms that caught breast cancer in women, and was reversed in just
three days. In the year following, the group lost almost $40 million in donations, and the
damage was done.
But that was just the start of the problems for the foundation. When people started
looking into its spending, they found something concerning. According to the Los
Angeles Times:
While the organization’s reputation is on the mend, it isn’t quite out of the woods yet
and still sees some criticism.

2.6 Public Sector and Single Entity

The basic principle of competition laws is the prevention of practices that harm the
normal market forces between independent parties competing for a larger slice of the
market. For this reason, market participants that form part of the same group are
normally excluded from their purview as all such participants are together seen as one
economic unit in the market place. The evolution of the concept of 'single economic
entity' can be traced back as early as the 1960s when the European Commission (EC),
in Mausegatt, observed that "affiliation to the group deprives the subsidiary company of
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the ability to act according to an economic scheme of its own. The 'given conditions' of
such a subsidiary's operations are prescribed not by the market but by the instructions
Notes of the principal company". In this case the relationship between the parent and the
subsidiary was used to demonstrate that a cartel could not be formed between the
parent and subsidiary, as they must be considered to be governed by the same leading
group.
This concept was formalized in the EC Guidelines on Horizontal co-operation which
notes "Companies that form part of the same 'undertaking' within the meaning of Article
101(1) are not considered to be competitors for the purposes of these guidelines. Article
101 only applies to agreements between independent undertakings. When a company
exercises decisive influence over another company they form a single economic entity
and, hence, are part of the same undertaking. The same is true for sister companies,
that is to say, companies over which decisive influence is exercised by the same parent
company. They are consequently not considered to be competitors even if they are both
active on the same relevant product and geographic markets".
The Supreme Court of the United States in Copperweld similarly concluded that "an
internal agreement to implement a single, unitary firm's policies does not raise the
antitrust dangers that Section 1 of the Sherman Act was designed to police"; it was
further observed that a parent corporation and its wholly owned subsidiary "are
incapable of conspiring with each other".

The Competition Act 2002

The Competition Act, 2002 (Act) applies to the activities carried on by an 'enterprise', a
concept similar to that of an 'undertaking' in the EC. The question that begs an answer
here is whether Section 3 of the Act applies strictly to enterprises forming part of a
single economic entity. The Raghavan Committee Report (based on which the
Competition Act was framed) noted that to be covered by the scope of Section 3 of the
Act, "it is also required that the parties to the agreement are engaged in rival or
potentially rival activities. A potential rival is one who could be capable of engaging in
the same type of activity. Such a provision has generally been interpreted to mean that
firms that are under common ownership or controls are not considered as "rival" or
"potentially rival" firms".

CCI's application of the SEE

Given its nascent stage, the precedents so far on the concept of single economic entity
are extremely limited under the Indian competition regime. However, the Competition
Commission of India (CCI) has also recognized that when a parent company owns all in
its subsidiary, it constitutes a single economic entity. In Exclusive Motors, the CCI
accepted the concept of single economic entity and opined that "Agreements between
entities constituting one enterprise cannot be assessed under the Act. This is with
accord with the internationally accepted doctrine of 'single economic entity'.... As long
as the opposite party and Volkswagen India are part of the same group, they will be
considered as a single economic entity for the purpose of the Act".
In an appeal filed by Exclusive Motors before the Competition Appellate Tribunal
(COMPAT), the COMPAT observed that an internal agreement between subsidiaries,
which are a part of the same group, cannot be considered as an agreement for the
purpose of Section 3 of the Act, thereby endorsing the view of the CCI. The decision in
Exclusive Motors is suggestive of the fact that an intra-group agreement or arrangement
cannot fall within the confines of the Act.
Similarly, in Shamsher Kataria, the CCI observed that "an internal agreement/
arrangement between an enterprise and its group/parent company is not within the
purview of the mischief of section 3(4) of the Act... At the same time, the Commission
would like to emphasize that the exemption of single economic entity stems from the
inseparability of the economic interest of the parties to the agreement. Generally,
entities belonging to the same group e.g. holding-subsidiaries are presumed to be part

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A Regulatory Framework for Financial Reporting 63
of a 'single economic entity' incapable of entering into an agreement, the presumption is
not irrebuttable."
Notes
Moving on to a recent decision, the opposite parties in cartelization by public
sector insurance companies, submitted that the Government of India holds 100%
shares of each of the companies i.e., National Insurance Co. Ltd., New India Assurance
Co. Ltd., Oriental Insurance Co. Ltd. and United India Insurance Co. Ltd and that the
management and affairs of the companies are controlled by the Government of India
through Department of Financial services (Insurance division), Ministry of Finance.
However, the CCI rejected the submissions of the insurance companies and stated that
even though the overall supervision of the insurance companies are with the central
government, each of the companies placed a separate bid in response to the tenders
floated by the government. Further, it was also observed that the Ministry of Finance did
not exercise de facto control over the insurance companies business decisions and as
such cannot be considered as a single economic entity.

2.7 Summary
In a broad sense a conceptual framework can be seen as an attempt to define the
nature and purpose of accounting. A conceptual framework must consider the
theoretical and conceptual issues surrounding financial reporting and form a coherent
and consistent foundation that will underpin the development of accounting standards. It
is not surprising that early writings on this subject were mainly from academics.

Conceptual frameworks can apply to many disciplines, but when specific ally related to
financial reporting, a conceptual framework can be seen as a statement of generally
accepted accounting principles (GAAP) that form a frame of reference for the evaluation
of existing practices and the development of new ones. As the purpose of financial
reporting is to provide useful information as a basis for economic decision making, a
conceptual framework will form a theoretical basis for determining how transactions
should be measured (historical value or current value) and reported – i.e. how they are
presented or communicated to users.
Some accountants have questioned whether a conceptual framework is necessary
in order to produce reliable financial statements. Past history of standard setting bodies
throughout the world tells us it is. In the absence of a conceptual framework, accounting
standards were often produced that had serious defects – that is:
 they were not consistent with each other particularly in the role of prudence versus
accruals/matching
 they were also internally inconsistent and often the effect of the transaction on the
statement of financial position was considered more important than its effect on
income the statement standards were produced on a ‘fire fighting’ approach, often
reacting to a corporate scandal or failure, rather than being proactive in determining
best policy.
 Some standard setting bodies were biased in their composition (i.e. not fairly
representative of all user groups) and this influenced the quality and direction of
standards
 the same theoretical issues were revisited many times in successive standards – for
example, does a transaction give rise to an asset (research and development
expenditure) or liability (environmental provisions)?
 It could be argued that the lack of a conceptual framework led to a proliferation of
‘rules-based’ accounting systems whose main objective is that the treatment of all
accounting transactions should be dealt with by detailed specific rules or
requirements. Such a system is very prescriptive and inflexible, but has the
attraction of financial statements being more comparable and consistent.

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64 Financial Reporting
By contrast, the availability of a conceptual framework could lead to ‘principles-
based’ system whereby accounting standards are developed from an agreed
Notes conceptual basis with specific objectives.
This brings us to the International Accounting Standards Board’s (IASB) The
Conceptual Framework for Financial Reporting (the Framework), which is in essence
the IASB’s interpretation of a conceptual framework and in the process of being up
dated. The main purpose of the Framework is to:
 assist in the development of future IFRS and the review of existing standards by
setting out the underlying concepts
 promote harmonisation of accounting regulation and standards by reducing the
number of per mitted alternative accounting treatments
 assist the preparers of financial statements in the application of IFRS, which would
include dealing with accounting transactions for which there is not (yet) an
accounting standard.
The Framework is also of value to auditors, and the users of financial statements,
and more generally help interested parties to understand the IASB’s approach to the
formulation of an accounting standard.
The content of the Framework can be summarised as follows:
 Identifying the objective of financial statements
 The reporting entity (to be issued)
 Identifying the parties that use financial statements
 The qualitative characteristics that make financial statements useful
 The remaining text of the old Framework dealing with elements of financial
statements: assets, liabilities equity income and expenses and when they should be
recognised and a discussion of measurement issues (for example, historic cost,
current cost) and the related concept of capital maintenance.
The development of the Framework over the years has led to the IASB producing a
body of world-class standards that have the following advantages for those companies
that adopt them:
 IFRS are widely accepted as a set of high-quality and transparent global standards
that are intended to achieve consistency and comparability across the world.
 They have been produced in cooperation with other internationally renowned
standard setters, with the aspiration of achieving consensus and global
convergence.
 Companies that use IFRS and have their financial statements audited in
accordance with International Standards on Auditing (ISA) will have an enhanced
status and reputation.
 The International Organisation of Securities Commissions (IOSCO) recognise IFRS
for listing purposes – thus, companies that use IFRS need produce only one set of
financial statements for any securities listing for countries that are members of
IOSCO. This makes it easier and cheaper to raise finance in international markets.
 Companies that own foreign subsidiaries will find the process of consolidation
simplified if all their subsidiaries use IFRS.
 Companies that use IFRS will find their results are more easily compared with those
of other companies that use IFRS. This should obviate the need for any
reconciliation from local GAAP to IFRS when analysts assess comparative
performance.

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A Regulatory Framework for Financial Reporting 65
2.8 Check Your Progress
Multiple Choice Questions Notes
1. The sources of regulation which comprise the regulatory framework for financial
reporting include:
(a) Legislation
(b) Accounting standards
(c) Stock exchange regulations
(d) All of the above
2. "Accounting standards set out the broad rules which govern financial reporting but
do not lay down the detailed accounting treatments of transactions and other items".
True or False?
(a) True
(b) False
3. The abbreviation "GAAP" stands for:
(a) Globally accepted accounting practice
(b) Generally accepted accounting practice
(c) Globally accepted accounting principles
(d) Generally accepted accounting principles
4. Standards issued by the International Accounting Standards Board (IASB) are
known as:
(a) Financial Reporting Standards (FRSs)
(b) International Accounting Standards (IASs)
(c) International Financial Reporting Standards (IFRSs)
(d) International Financial Standards (IFSs)
5. The body to which the International Accounting Standards Board is responsible is:
(a) The IFRS Advisory Council
(b) The IFRS Interpretations Committee
(c) The IFRS Foundation
(d) The Monitoring Board
6. One of the main advantages of standardisation in financial reporting is:
(a) Comparability between accounting periods and between entities
(b) The production of prudent financial statements
(c) Increased flexibility in financial reporting
(d) The use of creative accounting practices
7. IFRS1 First-time Adoption of International Financial Reporting Standards defines
the date of transition to IFRS as:
(a) The date at the end of the first IFRS reporting period
(b) The date at the start of the earliest period for which comparatives are provided
in the first IFRS financial statements
(c) The date at the end of the earliest period for which comparatives are provided
in the first IFRS financial statements
(d) The date at the start of the first IFRS reporting period
8. "An entity which adopts international financial reporting standards must always
adhere to the requirements of every standard, no matter what the circumstances".
True or False?

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(a) True
(b) False
Notes
9. The role of the IFRS Advisory Council is to:
(a) Chair the meetings of the IASB
(b) Interpret the application of international standards
(c) Appoint members to the IASB
(d) Inform the IASB of the Council's views on standard-setting projects
10. The word "entity" as used by the IASB refers to:
(a) Profit-oriented organisations only
(b) Companies only
(c) Not-for-profit organisations only
(d) Corporations only

2.9 Questions and Exercises

1. What is regulatory framework?
2. What is the need for regulatory framework?
3. What is International Accounting Standards (IAS)?
4. Explain the International Accounting Standards (IAS) Development.
5. Explain the Interpretation of International Financial Reporting Standards (IFRS).
6. What are the different Legal requirements of not for profit.
7. Define public sector.
8. What do you mean by single entity?

2.10 Key Terms

 Revenue The total amount of money received by the company for goods sold or
services provided during a certain time period. It also includes all net sales,
exchange of assets; interest and any other increase in owner's equity and is
calculated before any expenses are subtracted.
 Expense: Any cost of doing business resulting from revenue-generating activities.
 Cash Flow Statement: A summary of the actual or anticipated incomings and
outgoings of cash in a firm over an accounting period (month, quarter, year).
 Accounting Method: A process used by a business to report income and
expenses. Companies must choose between two methods acceptable to the IRS,
cash accounting or accrual accounting.
 Cash Basis Accounting: An accepted form of accounting that records all revenues
and expenditures at the time when payments are actually received or sent. This
straightforward method of accounting is appropriate for small or newer businesses
that conduct business on a cash basis or that don't carry inventories.

Check Your Progress: Answers

1. (d) All of the above
2. (a) True
3. (b) Generally accepted accounting practice
4. (c) International Financial Reporting Standards (IFRSs)
5. (c) The IFRS Foundation
6. (a) Comparability between accounting periods and between entities

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7. (b) The date at the start of the earliest period for which comparatives are provided
in the first IFRS financial statements
8. (b) False
Notes
9. (d) Inform the IASB of the Council's views on standard-setting projects
10. (a) Profit-oriented organisations only

2.11 Further Readings

 A Textbook of Financial Accounting, Hanif – 1986.
 Financial Accounting, P.C. Tulsian– 2002.
 Financial Accounting, V.K. Goyal – 2007.
 Accounting for Beginners, Shlomo Simanovsky – 2010.
 Financial Accounting, Mukherjee & Hanif – 2003.

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