International Financial Reporting Standards
(IFRS)
Lecture 1: Introduction to IFRS
Tuesday 4 September 2018
Lecturer - Dennis Jullens
1
WELCOME TO IFRS 1!
Week 1 · 2
INTRODUCTION
Week 1 · 3
INTRODUCTION IFRS 1 COURSE
• Objectives: Knowledge of IFRS and the main IFRS standards and
being able to apply and interpret these standards
• Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne,
Janice Loftus, Leo van der Tas (2016). “Applying International
Financial Reporting Standards”, 4th edition, John Wiley & Sons.
• Topics:
• week 1: Introduction to IFRS
• week 2: Accounting for Assets
• week 3: Group Accounting
• week 4: Financial instruments
• week 5: Employee Benefits
• week 6: Recent Developments in IFRS
Week 1 · 4
INTRODUCTION IFRS 1 COURSE
• 6 lectures of 2 hours, and 6 tutorials of 2 hours. Attendance is
mandatory.
• Assessment:
• 90% written exam / 10% home assignments
• Homework assignments (week 2-6):
• hand in at start of the lecture
• maximum of two students of same group
• 5 homework assignments, min 4 have to be handed in
• grading homework P or F, pass if P >= 4, if P = 3 then additional assignment
• if P < 3 retake course in 2019
• not handing in homework is automatically an F for missed assignment
Week 1 · 5
INTRODUCTION IFRS 1 COURSE
• Written exam requires a minimum grade of 5,0
• Mock exams are on Canvas
• See also Canvas for planning for exam
Week 1 · 6
INTRODUCTION IFRS 1 COURSE
• Additional material on Canvas is relevant for the exam
• Practise with www.ifrs.org/use-around-the-world/ifrs-quiz/
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TODAY‘S AGENDA
• The Role of Financial Reporting
• Introducing International Financial Reporting Standards
• Introducing the International Accounting Standards Board
• The Conceptual Framework
• Conclusions
Week 1 · 8
THE ROLE OF FINANCIAL REPORTING
Week 1 · 9
THE EQUITIES BUSINESS
Equities Institutional Investors
‘The Sell Side’ ‘The Buy Side’
Week 1 · 10
INTRODUCING APPLE
Week 1 · 11
APPLE ANNOUNCES SECOND QUARTER RESULTS
Source: Apple
Week 1 · 12
FINANCIAL MARKETS RESPOND TO APPLE
Source: FT
Week 1 · 13
APPROACHES FOR EQUITY VALUATION
Discounted Residual Income Valuation
Cash Flow Model* Multiples
Enterprise value INDIRECT WAY TO VALUE EQUITY
Equity value DIRECT WAY TO VALUE EQUITY
* Residual Income Model is also known as Abnormal Earnings or Economic Profit Approach
Week 1 · 14
THE STOCK RECOMMENDATIONS
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THE NEED FOR FINANCIAL REPORTING
• ‘Joking aside, the fact is that accounting really matters. David
Tweedie, my predecessor as Chairman of the IASB, used to say
that the job of accounting is to keep capitalism honest’
• ‘High quality financial information is the lifeblood of market-based
economies. If the blood is of poor quality then the body shuts down
and the patient dies. It is the same with financial reporting. If
investors cannot trust the numbers, then financial markets stop
working’
Source: Hans Hoogervorst, speech at LSE, 6/11/2012
Week 1 · 16
FINANCIAL STATEMENTS CAPTURE THE BUSINESS
Business activities
Operating Investing Financing
activities activities activities
All these activities are captured in financial statements
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PURPOSE OF FINANCIAL STATEMENTS
• The objective of financial statements is to provide financial
information about the reporting entity that is useful to present and
potential equity investors, lenders and other creditors in making
decision about providing resources to the entity.
• Financial statements also show the results of the management’s
stewardship of the resources entrusted to it.
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USERS OF FINANCIAL STATEMENTS
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ACCOUNTING IS A LANGUAGE
• Since 2005, European listed companies use IFRS
• IFRS is now used by more in 120+ countries
• In the US, companies use US GAAP
Week 1 · 20
CURRENT GLOBAL ACCOUNTING STANDARDS
IFRS US GAAP
Standards Principle based standards Rule-based standards
Authorities International Accounting The Financial Accounting
Standards Board (IASB) Standards Board (FASB)
Chairman Hans Hoogervorst Russel Golden
Board members 14 7
Countries More than 120 countries The United States
Week 1 · 21
FINANCIAL REPORTING – RULES OR PRINCIPLES?
Principles Rules
Week 1 · 22
FINANCIAL REPORTING – ART OR SCIENCE?
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OBJECTIVES OF IFRS
• Bring transparency by enhancing the international comparability
and quality of financial information, enabling investors and other
market participants to make informed economic decisions;
• Strengthen accountability by reducing the information gap
between the providers of capital and the people to whom they have
entrusted their money.
• Contribute to economic efficiency by helping investors to identify
opportunities and risks across the world, thus improving capital
allocation.
Source: IASB Document – Who we are and what we do
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IMPORTANCE OF IFRS
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USE OF IFRS AROUND THE WORLD
Source: IFRS Week 1 · 26
GLOBALIZATION OF IFRS - CONQUERING THE WORLD
Source: IFRS Week 1 · 27
GLOBALIZATION OF IFRS – GOOD OR BAD?
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FINANCIAL REPORTING – IFRS VERSUS US GAAP?
Week 1 · 29
VIEWS ON IFRS
Source: IFRS Week 1 · 30
VIEWS ON IFRS
Source: FT Week 1 · 31
THE INTERNATIONAL ACCOUNTING STANDARDS BOARD
Source: IFRS Week 1 · 32
IFRS COMMITTEES
Source: IFRS Week 1 · 33
THE IASB‘S MISSION
The principal objectives of the IFRS Foundation are:
• To develop a single set of high quality, understandable, enforceable
and globally accepted International Financial Reporting Standards
(IFRSs) through its standard-setting body, the International Accounting
Standards Board (IASB);
• To promote the use and rigorous application of those standards;
• To take account of the financial reporting needs of emerging
economies and small and medium-sized entities (SMEs);
• and to promote and facilitate adoption of IFRSs, being the standards
and interpretations issued by the IASB, through the convergence of
national accounting standards and IFRSs.
Week 1 · 34
DEVELOPING THE STANDARDS
Source: IFRS Week 1 · 35
STRUCTURE OF IFRS
• CONCEPTUAL FRAMEWORK
• STANDARDS
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INTROCUDING THE CONCEPTUAL FRAMEWORK
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INTRODUCING THE CONCEPTUAL FRAMEWORK
A practical tool that assists
Board Preparers All
• to develop • to develop consistent • to understand and
Standards accounting policies interpret Standards
Addresses fundamental issues
What are assets, liabilities, equity,
What makes financial income and expenses, when
What is the objective
should they be recognised and
of financial reporting? information useful?
how should they be measured,
presented and disclosed?
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PURPOSE OF THE CONCEPTUAL FRAMEWORK
Source: IFRS Week 1 · 39
PURPOSE OF THE CONCEPTUAL FRAMEWORK
Source: IFRS Week 1 · 40
PURPOSE OF THE CONCEPTUAL FRAMEWORK
Source: IFRS Week 1 · 41
REVISING THE CONCEPTUAL FRAMEWORK
Previous version of Conceptual Framework
useful but some improvements needed
incomplete out of date unclear
Main improvements
Filled in the gaps, for
Updated, for example, the Clarified, for example, the
example, concepts on
definitions of an asset and roles of stewardship and
measurement and
a liability and recognition prudence in financial
presentation and
criteria reporting
disclosure, including
guidance on the use of
profit or loss and OCI
Week 1 · 42
OBJECTIVE OF THE CONCEPTUAL FRAMEWORK
Provide financial information useful to users in making decisions
Users’ decisions involve decisions about
voting and influencing
buying, holding or selling providing or settling loans
management
To make these decisions, users assess
prospects for future net cash inflows to management’s stewardship of the
the entity entity’s economic resources
To make both these assessments, users need information about both
how efficiently and effectively
economic resources, claims and
management has discharged its
changes in those resources and claims
responsibilities
Week 1 · 43
Source: IFRS
QUALITATIVE CHARACTERISTICS
Fundamental qualitative characteristics
Relevance Faithful representation
• Information is relevant if it is • Information must faithfully
capable of making a difference to represent the substance of
the decisions made by users what it purports to represent
Enhancing characteristics
Comparability Verifiability Timeliness Understandability
Cost constraint
Week 1 · 44
Source: IFRS
ASPECTS OF FAITHFUL REPRESENTATION
• Exercise of caution under conditions of uncertainty
Prudence • Does not allow for overstatement or understatement of
assets, liabilities, income or expenses
• Supports neutrality
• Arises when monetary amounts cannot be observed directly
and need to be estimated
Measurement
• Does not prevent information from being useful
uncertainty • If very high, may affect whether a sufficiently faithful
representation can be achieved
• Economic substance of the underlying economic
phenomenon is normally the same as the legal form
Substance over form • If not, need to represent the substance to provide faithful
representation
Week 1 · 45
Source: IFRS
ELEMENTS OF FINANCIAL STATEMENTS
A present economic resource controlled by the entity as a result
of past events
Asset • An economic resource is a right that has the potential to
produce economic benefits
A present obligation of the entity to transfer an economic
resource as a result of past events
Liability • An obligation is a duty or responsibility that the entity has
no practical ability to avoid
The residual interest in the assets of the entity after deducting all
its liabilities
Equity • Financial Instruments with Characteristics of Equity research
project further explores how to distinguish liabilities from
equity
Week 1 · 46
Source: IFRS
ELEMENTS OF FINANCIAL STATEMENTS
Increases in assets, or decreases in liabilities, that result in
Income increases in equity, other than those relating to contributions
from holders of equity claims
Decreases in assets, or increases in liabilities, that result in
Expenses decreases in equity, other than those relating to distributions
to holders of equity claims
Information about income and expenses is just as important as information
about assets and liabilities
Week 1 · 47
Source: IFRS
RECOGNITION
Recognition criteria
Relevance Faithful representation
Whether recognition of an item results in Whether recognition of an item results in
relevant information may be affected by, a faithful representation may be affected
for example: by, for example:
• low probability of a flow of economic • measurement uncertainty
benefits • recognition inconsistency
• existence uncertainty • presentation and disclosure of resulting
income, expenses and changes in equity
Cost constraint
Week 1 · 48
Source: IFRS
PROFIT OR LOSS AND OCI
Statement of profit • Primary source of information about performance
or loss • Default location for income and expenses
Other • Exceptional circumstances
• Only changes in current values of assets and
comprehensive
liabilities
income • In principle, OCI items are recycled
Classification into profit or loss and OCI and recycling
Relevance Faithful representation
Only the Board can take decisions on OCI and recycling
Week 1 · 49
Source: IFRS
MEASUREMENT
Historical cost measurement Current value measurement
bases bases
• include amortised cost • include fair value, value in use,
fulfilment value and current cost
Selecting a measurement basis
Relevance Faithful representation
• characteristics of the asset or liability • measurement inconsistency
• contribution to future cash flows • measurement uncertainty
Information in both the statement of financial position and the
statement(s) of financial performance
Enhancing qualitative characteristics and cost constraint
Week 1 · 50
Source: IFRS
IFRS, MEASUREMENT AND CREDIT CRISIS
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CONCLUSION – RELEVANCE OF THE FRAMEWORK
• Framework tries to answer the following important questions
• Who are the users?
• Which are the users’ information needs?
• What are the objectives of financial reporting?
• How is the reporting entity defined?
• How should be measured?
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CONTACT DETAILS
Dennis Jullens
Email – [email protected]
Location – M1.25
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