IFRS
IFRS is short for International Financial Reporting Standard is a globally
adopted method of financial reporting issued by International
Accounting Standard Board (IASB).
Formerly, it is known as International Accounting Standard (IAS). The
standard is used for the preparation and presentation of the financial
statement i.e. balance sheet, income statement, cash flow statement, changes in
equity and footnotes, etc.
IFRS
IFRS ensures comparability and understandability of international business.
It is aimed to provide users with information about the financial position,
performance, profitability and liquidity of the company, to help them in making
rational economic decisions.
At present around 120 countries has adopted IFRS as a framework to govern
accounting statement. With the adoption of IFRS, the presentation of financial
statement will be better, easier and similar to the overseas competitors.
GAAP
Generally accepted accounting principles (GAAP) refer to a common set of
accepted accounting principles, standards, and procedures that companies and
their accountants must follow when they compile their financial statements.
GAAP is a combination of authoritative standards (set by policy boards) and
the commonly accepted ways of recording and reporting accounting
information.
GAAP improves the clarity of the communication of financial information.
GAAP is meant to ensure a minimum level of consistency in a company's
financial statements, which makes it easier for investors to analyze and extract
useful information.
GAAP
GAAP must be followed
when a company
distributes its financial
statements outside of the
company. If a
corporation's stock is
publicly traded, the
financial statements must
also adhere to rules
established by the U.S.
Securities and Exchange
Commission (SEC).
IFRS Developments – What’s the big deal
The Momentum Towards Global IFRS Adoption
More than 100 countries require or permit the use of International Financial Reporting Standards (IFRSs), or
are converging with the IASB’s standards.
Top 10 Global Capital
Markets
US US GAAP
Japan Converting to IFRS
UK IFRS
France IFRS
Canada Converting to IFRS
Germany IFRS
Hong Kong IFRS
Spain IFRS
Switzerland IFRS or US GAAP
Australia IFRS
Countries that require or permit IFRSs
Countries seeking convergence with the IASB on pursuing adoption of IFRSs
How do you define convergence?
• IFRS GAAP convergence
• US GAAP
• Local Territory Statutory GAAP
• Local Territory Statistical Convergence
• Local Territory Tax Federal
• Local Territory Tax State & Local
• Local Territory Performance
• Others?
GAAP
India has adopted Indian Accounting Standards (Ind AS) that are based on and
substantially converged with IFRS Standards as issued by the IASB. ... An appendix
to each Ind AS explains 'the major differences, if any, between' the Indian
Accounting Standard (Ind AS) and the corresponding IFRS Standard.
IFRS
GAAP VS. IFRS
GAAP IFRS
Stands for Generally Accepted Accounting Principles International Financial Reporting Standards
Universal financial reporting method that
Standard guidelines and structure for typical
Introduction allows international businesses to understand
financial accounting.
each other and work together.
Over 120 countries, including those in the
Used in ONLY WITH United States
European Union
BASIS GAAP is based on rules. IFRS is based on principles,
Performance Revenue or expenses, assets or liabilities,
Revenue or expenses, assets or liabilities
elements gains, losses, comprehensive income
Required
Balance sheet, income statement, statement
documents in Balance sheet, income statement, changes in
of comprehensive income, changes in equity,
financial equity, cash flow statement, footnotes
cash flow statement, footnotes
statements
First-in, first-out or weighted-average cost
Inventory Last-in, first-out; first-in, first-out; or weighted-
(LIFO doesn’t depict the accurate flow of
Estimates average cost
inventory)
GAAP VS. IFRS
GAAP IFRS
GAAP is a set of accounting guidelines and IFRS is the universal business language
PURPOSE procedures, used by the companies to prepare followed by the companies while reporting
their financial statements financial statements.
Financial Accounting Standard Board issues International Accounting Standard Board
Issued by
GAAP (FASB) (IASB) issued IFRS.
Inventory
Prohibited Permitted under certain criteria
Reversal
US GAAP (or FASB) framework has no Under IFRS, company management is
Purpose of the provision that expressly requires management expressly required to consider the framework if
framework to consider the framework in the absence of a there is no standard or interpretation for an
standard or interpretation for an issue. issue.
In general, broad focus to provide relevant info In general, broad focus to provide relevant info
Objectives of
to a wide range of stakeholders. GAAP to a wide range of stakeholders. IFRS provides
financial
provides separate objectives for business and the same set of objectives for business and
statements
non-business entities. non-business entities.
IFRS gives prominence to underlying
Underlying The "going concern" assumption is not well-
assumptions such as accrual and going
assumptions developed in the US GAAP framework.
concern.
GAAP VS. IFRS
GAAP IFRS
Inventory
Prohibited Permitted under certain criteria
Reversal
Relevance, reliability, comparability and
understandability. GAAP establishes a hierarchy Relevance, reliability, comparability and
Qualitative of these characteristics. Relevance and reliability understandability. The IASB framework (IFRS)
characteristics are primary qualities. Comparability is secondary. states that its decision cannot be based upon
Understandability is treated as a user-specific specific circumstances of individual users.
quality.
The IFRS framework defines an asset as a
Definition of The US GAAP framework defines an asset as a
resource from which future economic benefit
an asset future economic benefit.
will flow to the company.
Accounting Concepts, Conventions &
Terminology
Personal systems of accounting may have worked in the days when most companies
were owned by sole proprietors or partners, but they do not anymore, in this era of
joint stock companies.
These companies have thousands of stakeholders who have invested millions, and
they need a uniform, standardised system of accounting by which companies can be
compared on the basis of their performance and value.
Therefore, accounting principles based on certain concepts, convention, and tradition
have been evolved by accounting authorities and regulators and are followed
internationally.
These principles, which serve as the rules for accounting for financial transactions and
preparing financial statements, are known as the “Generally Accepted Accounting
Principles,” or GAAP.
Accounting Concepts, Conventions &
Terminology
Accounting concepts are the fundamental accounting assumptions that act as a
foundation for recording business transactions and preparation of final accounts.
Business entity concept: A business and its owner should be treated separately as far
as their financial transactions are concerned.
Suppose Mr. Sahoo started business investing Rs100000. He purchased goods for
Rs40000, Furniture for Rs20000 and plant and machinery of Rs30000. Rs10000 remains
in hand. These are the assets of the business and not of the owner. According to the
business entity concept Rs100000 will be treated by business as capital i.e. a liability of
business towards the owner of the business.
Accounting Concepts, Conventions &
Terminology
Money measurement concept: Only business transactions that can be expressed in
terms of money are recorded in accounting, though records of other types of
transactions may be kept separately.
As per the money measurement concept, transactions which can be expressed in terms
of money are recorded in the books of accounts. For example, sale of goods worth
Rs.200000, purchase of raw materials Rs.100000, Rent Paid Rs.10000 etc. are expressed
in terms of money, and so they are recorded in the books of accounts.
Accounting Concepts, Conventions &
Terminology
Dual aspect concept: For every credit, a corresponding debit is made. The recording of
a transaction is complete only with this dual aspect.
Thus, the duality concept is commonly expressed in terms of fundamental
Accounting equation : Assets = Liabilities + Capital
Going concern concept: In accounting, a business is expected to continue for a fairly
long time and carry out its commitments and obligations. This assumes that the business
will not be forced to stop functioning and liquidate its assets at “fire-sale” prices.
Accounting Concepts, Conventions &
Terminology
Cost concept: The fixed assets of a business are recorded on the basis of their original
cost in the first year of accounting. Subsequently, these assets are recorded minus
depreciation. No rise or fall in market price is taken into account. The concept applies
only to fixed assets.
GOODWILL appears in the accounts only if the entity has purchased this intangible asset
for a price.
Accounting year concept: Each business chooses a specific time period to complete a
cycle of the accounting process—for example, monthly, quarterly, or annually—as per a
fiscal or a calendar year.
Matching concept: This principle dictates that for every entry of revenue recorded in a
given accounting period, an equal expense entry has to be recorded for correctly
calculating profit or loss in a given period.
Realisation concept: According to this concept, profit is recognised only when it is
earned. An advance or fee paid is not considered a profit until the goods or services have
been delivered to the buyer.
Accounting Concepts, Conventions &
Terminology
Realisation concept: According to this concept, profit is recognised only when it is
earned. An advance or fee paid is not considered a profit until the goods or services have
been delivered to the buyer.
N.P. Jeweller received an order to supply gold ornaments worth Rs.500000. They
supplied ornaments worth Rs.200000 up to the year ending 31st December 2005 and
rest of the ornaments were supplied in January 2006.
The revenue for the year 2005 for N.P. Jeweller is Rs.200000. Mere getting an order is
not considered as revenue until the goods have been delivered.
Bansal sold goods for Rs.1,00,000 for cash in 2006 and the goods have been delivered
during the same year.
The revenue for Bansal for year 2005 is Rs.1,00,000 as the goods have been delivered in
the year 2005. Cash has also been received in the same year.
Accounting Concepts, Conventions &
Terminology
The ACCRUAL CONCEPT under accounting assumes that revenue is realised at the time
of sale of goods or services irrespective of the fact when the cash is received.
For example, a firm sells goods for Rs 55000 on 25th March 2005 and the payment is
not received until 10th April 2005, the amount is due and payable to the firm on the
date of sale i.e. 25th March 2005. It must be included in the revenue for the year
ending 31st March 2005.
Similarly, expenses are recognised at the time services provided, irrespective of the fact
when actual payment for these services are made.
For example, if the firm received goods costing Rs.20000 on 29th March 2005 but the
payment is made on 2nd April 2005 the accrual concept requires that expenses must
be recorded for the year ending 31st March 2005 although no payment has been
made until 31st March 2005 though the service has been received and the person to
whom the payment should have been made is shown as creditor.
It helps in knowing actual expenses and actual income during a particular time
period. It helps in calculating the net profit of the business.
Accounting Concepts, Conventions &
Terminology
Accounting conventions are the methods and procedures which have universal acceptance.
These are followed by the firm while recording transactions and preparation of financial
statement
Conservatism is the convention by which, when two values of a transaction are available, the
lower-value transaction is recorded. By this convention, profit should never be overestimated,
and there should always be a provision for losses.
Consistency prescribes the use of the same accounting principles from one period of an
accounting cycle to the next, so that the same standards are applied to calculate profit and loss.
Materiality means that all material facts should be recorded in accounting. Accountants
should record important data and leave out insignificant information.
Full disclosure entails the revelation of all information, both favourable and detrimental to a
business enterprise, and which are of material value to creditors and debtors.
Accounting Concepts, Conventions &
Terminology
ACCOUNTING
BASIS FOR COMPARISON ACCOUNTING CONCEPT
CONVENTION
Meaning Accounting concepts refers to Accounting conventions
the rules of accounting which implies the customs or
are to be followed, while practices that are widely
recording business transactions accepted by the accounting
and preparing final accounts. bodies and are adopted by the
firm to work as a guide in the
preparation of final accounts.
What is it? A theoretical notion A method or procedure
Set by Accounting bodies Common accounting practices
Concerned with Maintenance of accounts Preparation of financial
statement
Biasness Not possible Possible
