Learning Unit 2: GAAP and IFRS Group 1: Anu Maharjan (#16119) Bina Rana Magar (#16126) Nikhil N. Shakya (#16130) Pratibha Shrestha (#16136) Sami Shakya (#16131) Sujan Neupane (#16124)

What is accounting??? It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information Language of business Means of communication

GAAP GAAP is simply the universally accepted guidelines used by the accountants more precisely to measure process and communicate the financial information to various stakeholders. These principles are established by the International Financial Accounting Standard Board (IFASB).

Composition of GAAP Accounting concepts Accounting principles Business entity concept Money measurement concept Going concern concept Accounting period concept Accounting principles Cost principle Revenue principle Matching principle Full disclosure principle Accounting conventions Materiality Consistency Conservatism Cost-benefit analysis Industry practices

IFRS International Financial Reporting Standards https://stats.oecd.org/glossary/detail.asp?ID=7303 http://www.ifrs.com/ifrs_faqs.html#q9 http://www.hbs.edu/faculty/Publication%20Files/09-102.pdf http://www.charteredclub.com/what-is-ifrs/ http://www.slideshare.net/42217909/international-financial-reporting-standards-ifrsppt

IFRS ? Units 50km/l Mileage 45km/l 140km/hr Speed 160km/hr 50km/l Mileage 120m/gallon 140km/hr Speed 100m/hr HONDA ACTIVE VS TVS JUPITER Units

IFRS Set of accounting standards that MUST be followed by the accountants Previously known as International Accounting Standards (IAS) Developed by International Accounting Standard Board (IASB) IFRS is a global language Governs how the accounting system works Understandability and making comparisons easier. The standards are made on clearly articulated principles Makes financial reporting considerable easier The Growing international shareholding and global trade has led to the need of such standards.

CREDIT & INVESTMENT OPPORTUNITY UNDERSTAND COMPARE CREDIT & INVESTMENT OPPORTUNITY TRANPARENCY CREDIBILITY

IFRS 10 Consolidated Financial Statements IAS 1Presentation of Financial Statement IAS 4 Depreciation Accounting IFRS 11 Joint Arrangements IAS 7 Statement of Cash Flows IFRS 13 Fair Value Measurement IAS 12 Income Taxes IFRS 14 Regulatory Deferral Accounts IAS 19 Employee Benefits  IFRS 16 Leases IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments IFRS 9 Financial Instruments

IAS 29 Financial Reporting in Hyperinflationary Economies  Zimbabwe's peak month of inflation is estimated at 79.6 billion percent in mid-November 2008 2008 Mid-Nov.79,600,000,000% US$1= Z$2,621,984,228. By 2009- no currency printing

History 1973- 2001 International Accounting Standard were issued by International Accounting Standards Committee (IASC) Replaced by International Accounting Standards Board (IASB) in1st April, 2001 In 2002, the IAS was implemented in countries European Union By 2005, more than 70 countries were using it Now more than 100 countries uses the completed IFRS or synchronized form http://www.icaew.com/en/library/subject-gateways/accounting-standards/worldwide-adoption-of-ifrs

Regulatory Bodies Trustee The Board Standing Advisory Council(SAC) http://www.accountingweb.com/practice/practice-excellence/adopting-ifrs-will-be-expensive-for-us-companies The IFRS Interpretations Committee is the interpretative body of the IASB. The mandate of the Interpretations Committee is to review on a timely basis implementation issues that have arisen within the context of current IFRS and to provide authoritative guidance (IFRIC Interpretations) on those issues. Interpretation Committee meetings are open to the public and webcast. In developing interpretations, the Interpretations Committee works closely with similar national committees and follows a transparent, thorough and open due process. IFRIC (International Financial Reporting Interpretation Committee)

Conceptual Framework Conceptual Framework sets out agreed concepts that underlie financial reporting Deals with : Objectives Underlying Assumptions Qualitative characteristics Elements Recognition Presentation and disclosure

Objectives To provide financial information To provide information about the cash flows To disclose the obligation and economic resources of an entity

Underlying Assumptions Accrual Basis Revenue recognition Revenue is earned Revenue is realized or realizable Expenses recognition Going concern basis

Qualitative Characteristics Understandability Relevance Faithful representation Comparability

Elements relating to financial position Assets Liabilities Equity Elements relating to financial performance Income Expenses

Recognition and Measurement concepts An item that meets the definition of an element should be recognized in the financial statement, if: Any future economic benefit associated with the item will from or to the entity The item has a cost or value that can be measured with reliability

Presentation and disclosure Presentation: Prescribed form of disclosure of financial information Disclosure: process of presenting relevant financial information about the entity to users

Key Differences Between IFRS and GAAP BASIS IFRS US GAAP 1.Base 2.Assumptions 3. Method 4. Terminology difference Principle based Accrual Going concern Single-step method for impairment write-downs Turnover- Profit Profit before tax Share capital 11 Rule based Economic entity Periodicity Monetary unit Two step method is used Revenue net income pretax income common stock

CONTD.. IFRS US.GAAP 5. Cash flow Direct cash flow method Indirect cash flow method 6. Inventory costing FIFO is used LIFO is used

Considerations before adopting IFRS Benefits Generally accepted on a global basis Best way to account for and report a transactions Focus on investors Lower cost of capital to companies and higher share prices Allows comparability Improved consistency and transparency of financial reporting

Challenges for adopting IFRS Legal Economic Accounting education Transparency and fraud Lack of technical skills

Adoption of IFRS and Convergence with IFRS. Convergence means that the U.S. Financial Accounting Standards Board (FASB) and the IASB would continue working together to develop high quality, compatible accounting standards over time. Adoption would mean that the SEC sets a specific time table when publicly listed companies would be required to use IFRS as issued by the IASB. Convergence will make adoption easier and less costly . Convergence is good, adoption is necessary to be truly able to harvest the benefits of the change.

NAS & NFRS

Nepal Accounting Standards (NASs) Introduction:- Written policy documents issued by expert accounting body or other regulatory body Cover the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements Nepal has Issued its own NAS in 2001 A.D. to localize them properly NASs are the standards issued by Accounting Standards Board (ASB) in Nepal.  In Nepal, there are 27 issued Nepalese accounting standards. FS are prepared in every organization to summarise the end results of all the business activities by an enterprise during an accounting period in monetary terms. These business activities vary from one enterprise to other. To compare the F.S. of various reporting…. It is a principal that guides and standardizes accounting practices. In case of Nepal, even though Nepal has accepted IFRS and IAS.....

Objective of NAS:- To harmonize the diverse accounting policies and practices To promote transparency in accounting To ensure the adequacy and reliability of the accounts To facilitate comparison of financial statements To bring uniformity in accounting as a need of world trade To assess the Enterprise performance To improve the quality of financial reporting It removes differences and Variations in the treatment of several accounting aspects…..Similarly, It brings Standardization in the Prepn of F.S. or information. NAS provides reliable, understandable and comparable information to all users of financial statement i.e. investors, customers, employees, shareholders, lenders etc.

NAS Formulation Process:- IFRS is the source for NAS Technical Committee to Prepare Drafts First Reading in Board Second Reading in the Board Numbering Of Exposure Drafts  Public Discussion on Exposure Drafts  Issuance of Standards  Request for Compliance Language of the Standards

List of Nepal Accounting Standards (NAS):- NAS 1: Presentation of Financial Statements NAS 26: Accounting & Reporting by Retirement Benefit Plans NAS 2: Inventories NAS 27: Consolidated & Separate Financial State. NAS 7: Statement of Cash Flows NAS 8: Accounting Policies, Changes in Accounting Estimates and Error NAS 28: Investments in Associates NAS 32: Financial Instruments: Presentation NAS10: Events after the Reporting Period NAS 33: Earnings Per Share NAS 11: Construction Contracts NAS 34: Interim Financial Reporting NAS 12:  Income Taxes NAS 16: Property, Plant & Equipment NAS 36: Impairment of Assets NAS 17: Leases NAS 37: Provisions, Contingent Liabilities & Contingent Assets NAS 18: Revenue NAS 38: Intangible Assets NAS 19: Employee Benefits NAS 39: Financial Instruments: Recognition & Measurements NAS 20: Accounting for Government Grants and Disclosure of Government Assistance NAS 21: The Effects of Changes in Foreign Exchange Rates NAS 40: Investment Property NAS 41: Agriculture NAS 23: Borrowing Cost NAS 24: Related Party Disclosures As you can see, these are the list of 27 issued NAS from NAS-1 Presentation of Financial Statements to NAS-41 Agriculture. These are standard serial number.

Accounting Standards Board:- Established in March 2003 by virtue of the Institution of Chartered Accountants of Nepal (ICAN) Act 1997 ASB is primarily responsible for setting Accounting and Financial Reporting Standards for entities in line with the International Financial Reporting Standards (IFRSs) ASB consists of 13 members Members of Board are appointed by the Government of Nepal (GoN) from Accounting Professional, Regulatory Bodies and GoN agencies Implementation and Monitoring of NAS are done by ICAN ASB is an independent statutory body responsible for setting accounting standards for the preparation and presentation of financial statements in Nepal.

Conclusion…. Standards have facilitated uniformity, transparency, reliability and compressions in the books of accounts and its presentation The main problem lies in the lack of qualified and competent man power rather than the problems or inadequacy of standards Accounting Standards can be improvised with the implementation of IFRS from which corporate and foreign investment will benefit Although it is said to have systematic integration, there is poor integration and coordination among stakeholders Lack of ethical and moral values in the Nepalese Accounting Professionals

NFRS (Nepal Financial Reporting Standards) They are Accounting standards developed by Accounting Standards Board (ASB) They comprise of : a. Nepal Financial Reporting Standards; b. Nepal Accounting Standards; c. IFRIC Interpretations issued by the International Accounting Standards Board (IASB); d. Application Guidance and SIC interpretations issued by IASB The March,2003 amendment to ICAN Act,1997 requires that NASB develop NFRS for business enterprises in line with IFRS . It was only in 2013 that NASB formally issued NFRS .Earlier it has issued NAS. Implementation date: In Ashadh 2067, the ICAN has announced that IFRS shall be effective from following fiscal years: 2068/69 Listed Companies 2069/70 Public Companies 2070/71 All Companies

List of NFRS issued : 1 NFRS 1 : First Time Adoption of Nepal Financial Reporting Standards 2 NFRS 2: Share-based payment 3 NFRS 3: Business Combination 4 NFRS 4: Insurance Contracts 5 NFRS 5 : Non-Current Assets Held for Sale & Discontinued Operation 6 NFRS 6 : Exploration for and Evaluation of Mineral Resource 7 NFRS 7: Financial Instruments: Disclosures 8 NFRS 8 : Operation Segments 9 NFRS 9: Financial Instrument 10 NFRS 10 : Consolidated Financial Statements 11 NFRS 11: Joint Arrangements 12 NFRS 12 : Disclosure of Interest in Other Entities 13 NFRS 13 : Fair Value Measurement

Development of NFRS: Identification and review of issues to be considered Exchange of views with national regulators Consultation with ASB members and Advisory grounds Publishing exposure draft and letting it for public comments Final draft of standards (approval of at least 7 members of ASB essential)

Contd… once NFRS is approved by ASB , they are sent to ICAN for pronouncements However, Preface to NFRS states that: “when IASB revises , amends or withdraw IAS , IFRS , or such other standards ,such revision , amendment , withdrawal shall accordingly be treated as effective with immediate revision ,amendment and withdrawal in NFRS by ASB as well as to extent not in conflict with existing National laws.”

Status of IFRS implementation in Nepal Beneficiaries of convergence with IFRS: Economy: through growth of international business Investors: financial statements prepared using common sets of Accounting Standards helps to understand ,compare and take decision for global investors Industry: increase in capital from foreign market if it can create confidence in mind of foreign investors that their financial statements comply with global standards Accounting Professionals: to sell their services as experts in different parts of the world( pertaininig to the flourishing globalization).

Besides all these advantages ,full implementation of NFRS is still difficult in our context due to following reasons :- Awareness among users of Financial statements : The promoters , investors , and other stakeholders are still not aware of IFRS in Nepal so its difficult to implement NFRS Trainings : Its big challenge to train nearly about 7800 professional accountants(including Registered Auditors) in short period of time Amendments in laws : Though these standards are not above law but they have effect on different acts in addition to Company law viz : Income tax Act , Insurance Act , BAFIA Act , etc Effective mechanism: In Nepal till now there is no effective mechanism enforcing implementation of IFRS for examples, The Regulatory agents like Security Board , Registrars Office don’t review financial documents or their adherence with reporting framework They also don’t insist on IFRS implementation

Conclusion… GAAP is the common law that is adopted to make the accounting easier IFRS is an international GAAP aimed at bridging the gap among various accounting languages. The use of single set of high quality standard by companies all over the world improves comparability and transparency of financial statements Following the same pace, NASB has developed NFRS in line with IFRS retaining already issued NASs i.e convergence with IFRS. NFRS is still in its implementation stage and overcoming challenges hopefully it will meet up the standard of IFRS as is expected.

THANK YOU!!!