ACC4305 Michel Leseure IFRS Standards Overview Reading: Chapter 6

ACC4305 Michel Leseure Conceptual Framework Very close to the US FASB framework for accounting Published in 1989

ACC4305 Michel Leseure Conceptual Framework Fair Presentation Accruals (and matching) Going Concern RelevanceReliability Comparability (and consistency) Timeliness Understandability (and materiality) Faithful representation Economic substance Neutrality Prudence (conservatism) Completeness Notice relationship Prudence: exercise a degree of caution in front of uncertainty

ACC4305 Michel Leseure Financial Statements IAS 1 requires: –Balance sheet –Income statement –Statement of Change in Equity IAS 8: –Choice of accounting policies –Accounting for changes in accounting policies –Dealing with accounting errors

ACC4305 Michel Leseure Key Standards IAS 18: Defining Revenues Assets: –IAS 16: Property Plant and Equipment –IAS 40: Investment Property Not occupied by the owner –IAS 38: Intangible Assets Research expenses cannot be capitalised Internally generated goodwill, brands, etc. cannot be capitalised (capitalised only in the event of a transaction which provides a reliable measure) Development expenses can be capitalised under certain conditions –IAS 2: Inventory No LIFO!

ACC4305 Michel Leseure Valuation of Assets Cost Models (Gains deferred or never recognised as income) Value Models (Gains and losses to income) Historical (Gains deferred) Value in Use (DCF) Inventory (IAS 2) PPE (IAS 16) Intangibles (IAS 38) Held-to-Maturity Investments (IAS 39) Investment Property (IAS 40) PPE (IAS 16) Intangibles (IAS 38) Entity-Specific Revalued (Reserves – Never in income) Impaired Assets (IAS 36) Market Value Fair ValueNet Realisable Value Other investments (IAS 39) Investment Property (IAS 40) Inventories (IAS 2) Impaired Assets (IAS 36) Biological Assets (IAS 41) Only for a whole class of assets

ACC4305 Michel Leseure Leases IAS 17 Strict distinction between operating and capital/finance lease Operating lease = rental Any other -> should be capitalised Frowns upon the 90% rule –For example, why a difference in accounting treatment between 88 and 92% of fair value? –Recommendation to capitalise

ACC4305 Michel Leseure Financial Instruments IAS 32 Should all be valued at fair value, except: –No reliable fair value (e.g. unlisted share) –Those intended to be held to maturity –Non-traded loans originated by the entreprise (e.g. loans made by banks) In these cases -> cost For fair value accounting: –Gains and losses recognised to income –Some exceptions IAS 39: Give a full fair value system option!

ACC4305 Michel Leseure Mixed Valuations Parker and Nobes stress that some assets are covered by different standards Example of a piece of land that rises in value: –IAS16/40 suggest using a cost basis, gain is deferred until sale –IAS16 revaluation: never recognised (reserve) –IAS40: immediate recognition of fair value !!!

ACC4305 Michel Leseure Liabilities Provisions –IAS37 –Need to be a real liability to a third party Provision pour risques et charges: ok Provision pour charge constatee d’avance: no Employee benefits –Bonuses, pensions, etc. –Should be recorded when likely and measurable –Complicated when commitment is make on future salary levels Discounted value of obligation less any fund set for that purpose! Deferred Tax –Should be accounted for

ACC4305 Michel Leseure Impact of IFRS The European Case

ACC4305 Michel Leseure Impact of IFRS Conversion to IFRS is a major issue today in Europe Consolidated traded group need to publish their financial statements according to IFRS Key questions: –Impact on bottom line (net income, EPS)? –Impact of management and financial policies?

ACC4305 Michel Leseure

ACC4305 Michel Leseure Pearson