IFRS

The conceptual framework regulates and sets the objective, definition, and qualitative characteristics to form the basis for financial reporting. IASB in turn uses these conceptual frameworks to set standards to build consistency across standards and also to set a benchmark for the judgments globally. Therefore, the Conceptual framework specifies fundamental concepts of financial reporting and the same is used to frame the IFRS.

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The revised Conceptual Framework for Financial Reporting (Conceptual Framework) issued in March 2018 is effective immediately for the International Accounting Standards Board (Board) and the IFRS Interpretations Committee.

Following fundamental concepts are defined for financial reporting:

1. The objective of general purpose financial reporting.
2. The qualitative characteristics of useful financial information
3. Description of the reporting entity and its boundary;
4. Definitions of an asset, a liability, equity, income and expenses and guidance supporting these definitions;
5. Criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them (derecognition);
6. Measurement bases and guidance on when to use them;
7. Concepts and guidance on presentation and disclosure; and
8. Concepts relating to capital and capital maintenance

Financial statements should possess the following characteristics. Therefore, while framing IFRS, it should be made sure IFRS get Financial statements prepared on the same line.

• Relevance

The information should be relevant in terms of prediction, confirmation, and materiality so as to be useful to the user

• Faithful representation

The financial reporting should be such that it depicts completeness, is neutral and unbiased and is ideally free from error

• Comparable

The information should be such that it can be compared between two entities of the same cadre or between two periods of the same entity

• Verifiable

A depiction of faithful representation in the information provided should be such that even if the total agreement is not achieved yet a consensus be reached between the knowledgeable and independent users

• Timeliness

Decision-makers always need information within time before it reaches expiry

• Understandability

The information should be so characterized, classified and presented that it is concise, clear and understandable to the users

A complete set of financial statements prepared in compliance with the IFRS would ideally comprise of the following:

1. A statement of monetary position – more commonly known as ‘Balance sheet’.
2. A statement of profit and loss for the year.
3. A statement of changes in equity – this can include a reconciliation between amounts shown at the start and at the end of the year.
4. A statement of cash flows for the period
5. Notes to the financial statements – including a summary of accounting policies followed and other explanatory information

The financial statements would sometimes also include a statement of the financial position of an earlier period in the following scenarios:

1. When an entity applies an accounting policy retrospectively;
2. When an entity retrospectively restated an item in its financial statements; or
3. When an entity reclassifies an item in its financial statements.

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While opposite to asset, liability is said to be a present obligation arising due to some past events and is expected to adhere to some future economic outflow. Also, liability is put up in financial statement only if it has some cost or measurable value

Income is recognized in Financial statements when a future economic benefit which results in an increase in an asset or decrease in liability can be measured effectively. Thus increase in asset or decrease in liability goes parallel with income recognition.

Similarly, expense is recognized in the Financial statement when there is a decrease in economic benefit due to an increase in liability or decrease in assets. Again this should be measurable. And there has to be a corresponding increase in liability or decrease in assets with an expense.

Equity can be said to be a residual interest of assets after deducting all the liabilities. The items of equity are share capital, retained earnings or retained losses, revaluation gain, or dividend payment.

GAAP and IFRS handle this ensuing rise in value differently. The rules of GAAP do not allow for an asset’s value to be written back up after it’s been impaired. IFRS standards, however, permit that certain assets can be revaluated up to their original cost and adjusted for depreciation.

Weighted average looks at the weighted average cost of items remaining in inventory at the time of an associated sale, which yields a figure that can then be used to value ending inventory and the related cost of goods sold.

·   GAAP andIFRS contrast in how they handle inventory valuation, too. Three methods thatcompanies use to value inventory are FIFO (First in First Out), LIFO (Last inFirst Out), and weighted inventory.

·   FIFOstands for First in First Out. This inventory valuation method follows thenatural flow of inventory, assuming that the first items in inventory are thefirst sold.

·   LIFO, orLast in First Out, takes the opposite approach of FIFO. Under this method, thelast items to arrive in inventory are assumed to be the first sold.

In the US, under GAAP, all these approaches to inventory valuation are permitted, while IFRS allows for the FIFO and weighted average methods to be used, but not LIFO.

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Chartered accountants expert in IFRS plays an important role in the adoption and implementation process of IFRS in Indian entities. Following are the areas where we at VJM Global helps in the convergence of IFRS:

• Implementation of IFRS or Ind As by proper training and academic course to the company and its employees.
• Alignment of existing books of accounts and business reporting with requirements of IFRS.
• Minimize the risk of disruption while the business is in a transition period
• Diligently assisting in renegotiating contracts and management compensation plans
• Fair value measurement forms a base in the valuation of elements of Financial statements, wherein we come into the picture for proper and effective valuation as per the specified requirements
• Treatment of tax liabilities as a result of convergence to IFRS
• Adoption of a new set of standards and preparing the new set of financial statements in aligning with the same

Actuarial valuation services are one more area where we hold expertise and knowledge

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