International Financial Reporting Standards and Harmonisation of Standards
History of Accounting Standards
Accounting, known as the language of business, has a rich history that spans over the
years. From its beginnings on clay tablets in ancient Mesopotamia to the globally recognized
standards of today, accounting practices have evolved to meet the changing needs of
commerce and industry. As trade expanded in the 17th century, the need for standardized
accounting practices became evident. The British, pioneers in industrialization, developed
practices like stock valuation and cost accounting to manage the complexities of burgeoning
businesses. With the advent of the Industrial Revolution in the 18th and 19th centuries,
companies began issuing financial statements, marking a significant step towards
transparency and accountability.
The 19th century witnessed the establishment of professional accounting bodies, such
as the Institute of Chartered Accountants in England and Wales (ICAEW). These
organizations set ethical and professional standards for accountants, ensuring a level of
expertise and integrity within the field. The aftermath of the 1929 stock market crash led to a
pivotal moment in accounting history. In response, the United States introduced the Securities
Act of 1933 and the Securities Exchange Act of 1934, which mandated standardized financial
reporting. Furthermore, the Financial Accounting Standards Board (FASB) emerged in 1973,
an independent body tasked with setting accounting standards and principles for accounting
firms and individual certified public accountants practising in the united states.
International Convergence and the IFRS
The globalization of business necessitated a unified approach to accounting standards.
In 1973, the International Accounting Standards Committee (IASC) was established, and
during its existence issued a total of 16 standards. The IASC later evolved to the International
Accounting Standards Board (IASB) in 2001. The IASB introduced the International
Financial Reporting Standards (IFRS), which have been adopted by numerous countries and
regions around the world, promoting consistency and comparability in financial reporting. In
response to contemporary challenges, accounting standards continue to evolve. The IASB has
issued a total of 17 standards so far.
Today, accounting standards stand as a cornerstone in ensuring transparency,
comparability, and reliability in financial reporting across industries and nations. They
provide the foundation upon which investors, regulators, and stakeholders make informed
decisions about businesses. From ancient clay tablets to globally accepted IFRS, the journey
of accounting standards is a testament to the adaptability and resilience of a field that
continues to play a pivotal role in the world of commerce.
Organogram of the IASB
The IFRS Foundation has a three-tier governance structure, based on two independent
standard-setting boards of experts (International Accounting Standards Board and
International Sustainability Standards Board), governed and overseen by Trustees from
around the world (IFRS Foundation Trustees) who in turn are accountable to a monitoring
board of public authorities (IFRS Foundation Monitoring Board). The IFRS Advisory
Council provides advice and counsel to the Trustees and the boards, whilst the boards also
consult extensively with a range of other standing advisory bodies and consultative groups.
The structure for the IASB is as follows:
1. IASB Trustees:
The IASB is overseen by the IFRS Foundation, which is responsible for governance
and funding. Trustees appoint the members of the IASB and ensure its overall strategic
direction.
2. IASB Chairman:
The Chairman leads the IASB and represents it in various international forums.
3. IASB Vice-Chairman:
The Vice-Chairman supports the Chairman in leadership responsibilities and may take on
specific roles as assigned.
4. IASB Board Members:
The IASB consists of a group of members, typically representing diverse geographical
regions. Each member plays a role in developing and revising International Financial
Reporting Standards (IFRS).
5. Technical Staff:
Technical staff includes experts in accounting and financial reporting. They work closely
with IASB Board members in research, analysis, and drafting of accounting standards.
6. Consultative Advisory Groups:
The IASB engages with various consultative advisory groups, such as the IFRS Advisory
Council and the Global Preparers Forum. These groups provide input and feedback on
standard-setting activities.
7. Interpretations Committee (IFRIC):
The IFRS Interpretations Committee assists the IASB in addressing implementation
issues and providing interpretations of IFRS standards.
8. Standards Advisory Council (SAC):
The SAC provides input to the IASB on the agenda and priority-setting for standard-
setting projects.
9. IASB Staff:
Support staff within the IASB assist in various administrative and operational functions to
facilitate the work of the Board.
IASB Conceptual Framework
The International Accounting Standards Board (IASB) Conceptual Framework is a
foundational document that provides the underlying principles and concepts used in the
development of International Financial Reporting Standards (IFRS). It guides the IASB in
creating new accounting standards and helps ensure consistency and coherence in financial
reporting.
The key components of the IASB Conceptual Framework:
1. Objective of Financial Reporting:
The primary objective of financial reporting, as per the conceptual framework, is to
provide information about an entity's financial position, performance, and cash flows that is
useful for a wide range of users in making economic decisions.
2. Qualitative Characteristics of Useful Financial Information:
The qualitative characteristics of financial statements are attributes that make financial
information useful to users for decision-making purposes. According to the International
Financial Reporting Standards (IFRS) framework, there are two primary qualitative
characteristics namely Fundamental and Enhancing Qualitative Characteristics. The
framework outlines two fundamental qualitative characteristics: relevance and faithful
representation. Additionally, it emphasizes enhancing characteristics like comparability,
verifiability, timeliness, and understandability.
Fundamental Characteristics
i. Relevance: information is relevant if it has a predictive and confirmatory value.
Predictive Value: Information is relevant if it helps users form predictions about
the future.
Confirmatory Value: Information is relevant if it confirms or corrects prior
expectations.
ii. Faithful Representation: The financial statements should represents what it truly
purports to represent. The financial information is faithfully represented if it is
Complete, Neutral and free from errors.
Completeness: Information is complete if it includes all necessary details for a
user to understand the transaction or event.
Neutrality: Information is free from bias, ensuring it is not slanted or distorted to
favour any particular interest.
Free from Error: Information is accurate and reliable, containing no material
misstatements or errors.
Enhancing Characteristics
i. Comparability:
Information should presented in a consistent manner over time, allowing users to
compare it across different periods. Also, Information should be presented in a way
that allows users to compare it with similar information from other entities.
ii. Verifiability:
Information is verifiable if different knowledgeable and independent observers could
reach a consensus that the information is faithfully represented.
iii. Timeliness:
Information is most useful when it is provided in a timely manner, allowing users to
make decisions in a relevant time frame.
iv. Understandability:
Information should be presented in a clear and concise manner, making it
comprehensible to users who have a reasonable knowledge of business and economic
activities.
3. Element of Financial Statements:
The financial statements are composed of various elements that represent the economic
activities of a company. These elements are used to report the financial position and
performance of an entity. According to the International Financial Reporting Standards
(IFRS) framework, there are five primary elements of financial statements:
i. Assets:
Assets are economic resources controlled by an entity as a result of past events, of which
future economic benefits are expected to flow from it. Examples of assets include cash,
accounts receivable, inventory, property, plant, and equipment.
ii. Liabilities: Liabilities are obligations of an entity arising from past events, the
settlement of which is expected to result in an outflow of economic resources.
Examples of liabilities include accounts payable, loans, and deferred revenue.
iii. Equity: Equity represents the residual interest in the assets of the entity after
deducting liabilities. It is the ownership interest of shareholders in a company and
is sometimes referred to as shareholders' equity or owner's equity.
iv. Income (Revenue): Income is an increase in economic benefits during the
accounting period in the form of inflows or enhancements of assets or decreases in
liabilities. This includes revenues from the sale of goods, services, interest, rent,
etc.
v. Expenses: Expenses are decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or incurrences of liabilities.
Expenses are typically incurred to generate revenue or to maintain the company's
operations.
Additionally, the IFRS framework recognizes two other elements:
vi. Gains: Gains are increases in economic benefits, either through transactions or
events that are not related to the ordinary activities of the entity. They arise from
events or transactions that are peripheral or non-recurring in nature.
vii. Losses: Losses are decreases in economic benefits, either through transactions or
events that are not related to the ordinary activities of the entity. Similar to gains,
losses arise from events or transactions that are peripheral or non-recurring. The
framework identifies the basic building blocks of financial statements, which
include assets, liabilities, equity, income, expenses, gains, and losses.
4. Recognition and Derecognition:
Recognition is the process of formally recording or reporting an item in a company's
financial statements. For an item to be recognized, the item must meet the definition of an
element (e.g., asset, liability, equity, income, or expense) as defined in the accounting
framework.
Derecognition: Derecognition is the process of removing an item from an entity's
financial statements when it no longer meets the criteria for recognition. An item can be
derecognized when it no longer meets the criteria for recognition. This typically occurs when
the rights or obligations associated with the item are extinguished.
5. Presentation and Disclosure:
Presentation: Presentation refers to the manner in which financial information is organized
and displayed in the financial statements. It involves grouping and structuring the information
to make it easier for users to understand and analyse.
Components of Presentation:
i. Balance Sheet (Statement of Financial Position): Presents the financial position of
an entity at a specific point in time, showing its assets, liabilities, and equity.
ii. Income Statement (Statement of Comprehensive Income): Presents the revenues,
expenses, gains, and losses over a specific period, resulting in the net income or
loss.
iii. Statement of Cash Flows: Provides information about the cash inflows and
outflows from operating, investing, and financing activities during a specific
period.
iv. Statement of Changes in Equity: Shows changes in equity during a period,
including contributions from and distributions to owners.
Disclosure: Disclosure involves providing additional information and explanations that are
not presented on the face of the financial statements but are necessary for a complete
understanding of an entity's financial position, performance, and cash flows.
6. Concepts of Capital and Capital Maintenance:
The framework discusses different concepts of capital and explains how an entity can
maintain capital over time. It distinguishes between physical capital and financial capital.
The IASB Conceptual Framework is not a standard itself, but rather a guiding framework
that informs the development and revision of accounting standards. It helps the IASB in
setting consistent and high-quality accounting standards that are globally accepted and used
by companies across different jurisdictions.
Hamonisation of Standards (Including the merits and demerits)
Definition: Harmonization of accounting standards refers to the process of aligning
accounting principles and practices across different countries or regions. The aim is to
facilitate international comparability and consistency in financial reporting.
Merits (Advantages) of Harmonization:
Facilitates Cross-Border Comparisons: Harmonized accounting standards enable investors,
analysts, and stakeholders to easily compare financial statements of companies operating in
different countries. This promotes transparency and helps in making informed investment
decisions.
Reduces Information Asymmetry: It reduces information asymmetry between international
companies and investors by providing a common set of rules for financial reporting. This can
lead to increased investor confidence and more efficient capital markets.
Simplifies Financial Reporting for Multinational Corporations: Multinational corporations
that operate in multiple jurisdictions benefit from using a standardized set of accounting
principles. This simplifies their financial reporting process and reduces compliance costs.
Enhances Access to Global Capital Markets: Companies following harmonized accounting
standards may find it easier to access global capital markets as they meet the expectations of
international investors and lenders.
Promotes Foreign Direct Investment (FDI): Harmonization can attract foreign direct
investment as it reduces uncertainty for foreign investors regarding the financial reporting
practices of potential investees.
Demerits (Disadvantages) of Harmonization:
Loss of National Sovereignty: Some critics argue that harmonization may lead to a loss of
national sovereignty in setting accounting standards. Countries may have to conform to
global standards, which may not always align with their specific economic or legal systems.
Challenges in Implementation: Achieving harmonization can be a complex and time-
consuming process. Countries may face difficulties in transitioning from their existing
accounting frameworks to the new harmonized standards.
Diverse Economic Realities: Different countries have varying economic structures, legal
systems, and business practices. A one-size-fits-all approach may not adequately address the
unique challenges and requirements of each jurisdiction.
Potential for Reduced Comparability: If harmonized standards are not consistently interpreted
and applied, it may result in reduced comparability rather than enhancing it. This can occur if
countries have different interpretations of the same standard.
Risk of Lower Quality Standards: In some cases, harmonization may lead to a "race to the
bottom," where standards are set at a level that is acceptable to all countries but may not
reflect the highest quality of financial reporting.
In conclusion, while the harmonization of accounting standards offers numerous benefits, it is
not without challenges. Striking the right balance between global consistency and
accommodating local economic realities is crucial for the success of any harmonization
effort. It is essential that any harmonized standards are implemented and monitored
effectively to ensure they achieve their intended objectives.
Introduction to IAS 1, 2, 16, 28, 38, 40, & 41, IFRS 5
