Intermediate Accounting: IFRS
Edition
Chapter 1: Financial Reporting and Accounting
Standards
LO1: Describe the global fnancial markets and their relation to
fnancial reporting
Capital markets are increasingly integrated and companies have greater feeiiility in deciding where
to raise capital. The move toward adopton of gloial accountng standards has and will contnue to
facilitate this trend.
Financial accountngg the process that culminates in the preparaton of fnancial reports on the
enterprise for use iy ioth internal and eeternal partes.
Managerial accountngg the process of identfying, measuring, analyzing, and communicatng fnancial
informaton needed iy management to plan, control, and evaluate a company’s operatons.
Financial statementsg the principal means through which a company communicates its fnancial
informaton to those outside itg
The statement of fnancial positon.
The income statement (or statement of comprehensive income).
The statement of cash fows.
The statement of changes in equity.
To facilitate efcient capital allocaton, investors need relevant informaton and a faithful
representaton of that informaton to enaile them to make comparisons across iorders.
LO2: Explain the objective of fnancial reporting
The oijectve of general-purpose fnancial reportng is to provide fnancial informaton aiout the
reportng entty that is useful to present to potental equity investors, lenders, and other creditors in
making decisions aiout providing resources to the entty.
General-purpose fnancial statementsg provide fnancial reportng informaton to a wide
variety of users. They provide at the least cost the most useful informaton possiile.
Entty perspectveg companies are viewed as separate and distnct from their owners.
Proprietary perspectveg a perspectve that fnancial reportng should ie focused only on the
needs of shareholders.
Decision-usefulness approachg investors are interested in fnancial reportng iecause it provides
informaton that is useful for making decisions.
Accrual-iasis accountngg ensures that a company records events that change its fnancial statements
in the periods in which the events occur, rather than only in the periods in which it receives or pays
cash.
,LO3: Identify the major policy-setting bodies and their role in the
standard-setting process
Two organizatons that have a role in internatonal standard-setngg
Internatonal Organizaton of Securites Commissions (IOSCO)g associaton of organizatons
that regulate the world’s securites and futures markets. It does not set accountng
standards, iut is dedicated to ensuring that the gloial markets can operate in an efcient
and efectve iasis.
Internatonal Accountng Standards Board (IASB)g the main internatonal standard-setng
organizaton, iased in London. The IASB issues Internatonal Financial Reportng Standards
(IFRS). Four organizatonsg
- IFRS Foundatong provides oversight to the IASB, IFRS Advisory Council, and IFRS
Interpretatons Commitee. It appoints memiers, reviews efectveness, and helps in the
fundraising eforts for these organizatons.
- Internatonal Accountng Standards Board (IASB)g develops a single set of high-quality,
enforceaile, and gloial internatonal fnancial reportng standards for general-purpose
fnancial statements.
- IFRS Advisory Councilg provides advice and counsel to the IASB on major policies and
technical issues.
- IFRS Interpretatons Commiteeg assists the IASB through the tmely identfcaton,
discussion, and resoluton of fnancial reportng issues within the framework of IFRS.
Monitoring Boardg estailish a link ietween accountng standard-seters and those puilic
authorites (IOSCO) that generally oversee them.
The IASB issues three major types of pronouncementsg
Internatonal Financial Reportng Standards (IFRS).
Conceptual Framework for Financial Reportngg sets forth the fundamental oijectve and
concepts that the Board uses in developing future standards of fnancial reportng.
Internatonal Financial Reportng Standards Interpretatonsg cover newly identfed fnancial
reportng issues not specifcally dealt with in IFRS and issues where unsatsfactory or
confictng interpretatons have developed in the aisence of authoritatve guidance.
LO4: Discuss the challenges facing fnancial reporting
Challenges includeg
IFRS in a politcal environmentg user groups ofen target the IASB, to pressure it to change
the eeistng rules and develop new ones. IFRS cannot escape politcs and politcal pressures.
Eepectatons gapg what the puilic thinks accountants should do and what accountants think
they can do, is difcult to close.
Signifcant fnancial reportng issuesg
- Non-fnancial measuresg fnancial reports failed to provide some key performance
measures widely used iy management.
- Forward-looking informatong fnancial reports failed to provide forward-looking
informaton needed iy present and potental investors and creditors.
- Sof assetsg fnancial reports failed to provide much informaton aiout a company’s sof
assets (intangiiles).
- Timelinessg companies only prepared fnancial statements quarterly and provided
audited fnancial annually. Litle to no real-tme fnancial statement informaton was
availaile.
Ethical dilemmas.
Internatonal convergence.
,Chapter 2: Conceptual Framework for Financial
Reporting
LO1: Describe the usefulness of a conceptual framework and the
objective of fnancial reporting
Conceptual frameworkg estailishes the concepts that underlie fnancial reportng.
A soundly developed conceptual framework enailes the IASB to issue more useful and consistent
pronouncements over tme. As a result of a soundly developed conceptual framework, the profession
should ie aile to more quickly solve new and emerging practcal proilems iy referring to an eeistng
framework of iasic theory.
Conceptual framework for fnancial
reportngg
First levelg oijectve of fnancial
reportng – the purpose of fnancial
reportng.
Second levelg qualitatve
characteristcs that make accountng
informaton useful and the elements
of fnancial statements (assets,
liaiilites, etc.).
Third levelg recogniton,
measurement and disclosure
concepts used in estailishing and
applying accountng standards and
the specifc concepts to implement
the oijectve.
The oijectve of fnancial reportng is the
foundaton of the Conceptual Framework. The oijectve of general-purpose fnancial reportng is to
provide fnancial informaton aiout the reportng entty that is useful to present and potental equity
investors, lenders and other creditors in making decisions aiout providing resources to the entty.
LO2: Identify the qualitative characteristics of accounting
information and the elements of fnancial statements
The second level forms a iridge ietween the why of accountng and the how of accountng.
A company choses an acceptaile accountng method, the amount and types of informaton to
disclose, and the format in which to present is iy determining which alternatve provides the most
useful informaton for decision-making purposes (decision-usefulness).
Qualitatve characteristcs of accountng informaton distnguish ieter (more useful) informaton
from inferior (less useful) informaton for decision-making purposes.
Fundamental qualitesg
Relevanceg accountng informaton is capaile of making a diference in a decision.
, - Predictve valueg when it has value as an input to predictve processes used iy investors
to form their own eepectatons aiout the future.
- Confrmatory valueg it helps users confrm or correct prior eepectatons.
- Materialityg omitng the informaton or misstatng it could infuence decisions that users
make on the iasis of the reported fnancial informaton. Assessing materiality requires
evaluatng ioth the relatve size and importance of an item. Companies must consider
ioth quanttatve and qualitatve factors in determining whether an item is material.
Faithful representatong the numiers and descriptons match what really eeisted or
happened.
- Completenessg all the informaton that is necessary for faithful representaton is
provided.
- Neutralityg a company cannot select informaton to favor one set of interested partes
over another.
- Free from error.
Enhancing qualitesg distnguish more-useful informaton from less-useful informaton.
Comparaiilityg measured and reported in a similar manner for diferent companies.
- Consistencyg when a company applies the same accountng treatment to similar events,
from period to period.
Verifaiilityg when independent measures, using the same methods, oitain similar results.
Timelinessg having informaton availaile to decision-makers iefore it loses its capacity to
infuence decisions.
Understandaiilityg informaton is classifed, characterized, and presented clearly and
concisely.
Basic elements (or defnitons)g
Assetg a resource controlled iy the entty as a result of past events and from which future
economic ienefts are eepected to fow to the entty.
Liaiilityg a present oiligaton of the entty arising from past events, the setlement of which
is eepected to result in an outlow from the entty of resources emiodying economic
ienefts.
Equityg the residual interest in the assets of the entty afer deductng all its liaiilites.
Incomeg increases in economic ienefts during the accountng period in the form of infows
or enhancements of assets or decreases of liaiilites that result in increases in equity, other
than those relatng to contriiutons from equity partcipants.
Eepensesg decreases in economic ienefts during the accountng period in the form of
outlows or depletons of assets or incurrences of liaiilites that result in decreases in equity,
other than those relatng to distriiuton to equity partcipants.
The frst three elements descriie amounts of resources and claims to resources at a moment in tme,
the second group of two elements descriie transactons, events, and circumstances that afect a
company during a period of tme.
LO3: Review the basic assumptions of accounting
Assumptons that are present in the reportng environmentg
Economic entty assumptong economic actvity can ie identfed with a partcular unit of
accountaiility. So, a company keeps its actvity separate and distnct form its owners and any
other iusiness unit. The entty concept does not necessarily refer to a legal entty.
Going concern assumptong the company will have a long life. Depreciaton and amortzaton
policies are justfaile and appropriate only if we assume some permanence to the company.
Only where liquidaton appears imminent is the assumpton inapplicaile.
Monetary unit assumptong money is the common denominator of economic actvity and
provides an appropriate iasis for accountng measurement and analysis. Accountng
Edition
Chapter 1: Financial Reporting and Accounting
Standards
LO1: Describe the global fnancial markets and their relation to
fnancial reporting
Capital markets are increasingly integrated and companies have greater feeiiility in deciding where
to raise capital. The move toward adopton of gloial accountng standards has and will contnue to
facilitate this trend.
Financial accountngg the process that culminates in the preparaton of fnancial reports on the
enterprise for use iy ioth internal and eeternal partes.
Managerial accountngg the process of identfying, measuring, analyzing, and communicatng fnancial
informaton needed iy management to plan, control, and evaluate a company’s operatons.
Financial statementsg the principal means through which a company communicates its fnancial
informaton to those outside itg
The statement of fnancial positon.
The income statement (or statement of comprehensive income).
The statement of cash fows.
The statement of changes in equity.
To facilitate efcient capital allocaton, investors need relevant informaton and a faithful
representaton of that informaton to enaile them to make comparisons across iorders.
LO2: Explain the objective of fnancial reporting
The oijectve of general-purpose fnancial reportng is to provide fnancial informaton aiout the
reportng entty that is useful to present to potental equity investors, lenders, and other creditors in
making decisions aiout providing resources to the entty.
General-purpose fnancial statementsg provide fnancial reportng informaton to a wide
variety of users. They provide at the least cost the most useful informaton possiile.
Entty perspectveg companies are viewed as separate and distnct from their owners.
Proprietary perspectveg a perspectve that fnancial reportng should ie focused only on the
needs of shareholders.
Decision-usefulness approachg investors are interested in fnancial reportng iecause it provides
informaton that is useful for making decisions.
Accrual-iasis accountngg ensures that a company records events that change its fnancial statements
in the periods in which the events occur, rather than only in the periods in which it receives or pays
cash.
,LO3: Identify the major policy-setting bodies and their role in the
standard-setting process
Two organizatons that have a role in internatonal standard-setngg
Internatonal Organizaton of Securites Commissions (IOSCO)g associaton of organizatons
that regulate the world’s securites and futures markets. It does not set accountng
standards, iut is dedicated to ensuring that the gloial markets can operate in an efcient
and efectve iasis.
Internatonal Accountng Standards Board (IASB)g the main internatonal standard-setng
organizaton, iased in London. The IASB issues Internatonal Financial Reportng Standards
(IFRS). Four organizatonsg
- IFRS Foundatong provides oversight to the IASB, IFRS Advisory Council, and IFRS
Interpretatons Commitee. It appoints memiers, reviews efectveness, and helps in the
fundraising eforts for these organizatons.
- Internatonal Accountng Standards Board (IASB)g develops a single set of high-quality,
enforceaile, and gloial internatonal fnancial reportng standards for general-purpose
fnancial statements.
- IFRS Advisory Councilg provides advice and counsel to the IASB on major policies and
technical issues.
- IFRS Interpretatons Commiteeg assists the IASB through the tmely identfcaton,
discussion, and resoluton of fnancial reportng issues within the framework of IFRS.
Monitoring Boardg estailish a link ietween accountng standard-seters and those puilic
authorites (IOSCO) that generally oversee them.
The IASB issues three major types of pronouncementsg
Internatonal Financial Reportng Standards (IFRS).
Conceptual Framework for Financial Reportngg sets forth the fundamental oijectve and
concepts that the Board uses in developing future standards of fnancial reportng.
Internatonal Financial Reportng Standards Interpretatonsg cover newly identfed fnancial
reportng issues not specifcally dealt with in IFRS and issues where unsatsfactory or
confictng interpretatons have developed in the aisence of authoritatve guidance.
LO4: Discuss the challenges facing fnancial reporting
Challenges includeg
IFRS in a politcal environmentg user groups ofen target the IASB, to pressure it to change
the eeistng rules and develop new ones. IFRS cannot escape politcs and politcal pressures.
Eepectatons gapg what the puilic thinks accountants should do and what accountants think
they can do, is difcult to close.
Signifcant fnancial reportng issuesg
- Non-fnancial measuresg fnancial reports failed to provide some key performance
measures widely used iy management.
- Forward-looking informatong fnancial reports failed to provide forward-looking
informaton needed iy present and potental investors and creditors.
- Sof assetsg fnancial reports failed to provide much informaton aiout a company’s sof
assets (intangiiles).
- Timelinessg companies only prepared fnancial statements quarterly and provided
audited fnancial annually. Litle to no real-tme fnancial statement informaton was
availaile.
Ethical dilemmas.
Internatonal convergence.
,Chapter 2: Conceptual Framework for Financial
Reporting
LO1: Describe the usefulness of a conceptual framework and the
objective of fnancial reporting
Conceptual frameworkg estailishes the concepts that underlie fnancial reportng.
A soundly developed conceptual framework enailes the IASB to issue more useful and consistent
pronouncements over tme. As a result of a soundly developed conceptual framework, the profession
should ie aile to more quickly solve new and emerging practcal proilems iy referring to an eeistng
framework of iasic theory.
Conceptual framework for fnancial
reportngg
First levelg oijectve of fnancial
reportng – the purpose of fnancial
reportng.
Second levelg qualitatve
characteristcs that make accountng
informaton useful and the elements
of fnancial statements (assets,
liaiilites, etc.).
Third levelg recogniton,
measurement and disclosure
concepts used in estailishing and
applying accountng standards and
the specifc concepts to implement
the oijectve.
The oijectve of fnancial reportng is the
foundaton of the Conceptual Framework. The oijectve of general-purpose fnancial reportng is to
provide fnancial informaton aiout the reportng entty that is useful to present and potental equity
investors, lenders and other creditors in making decisions aiout providing resources to the entty.
LO2: Identify the qualitative characteristics of accounting
information and the elements of fnancial statements
The second level forms a iridge ietween the why of accountng and the how of accountng.
A company choses an acceptaile accountng method, the amount and types of informaton to
disclose, and the format in which to present is iy determining which alternatve provides the most
useful informaton for decision-making purposes (decision-usefulness).
Qualitatve characteristcs of accountng informaton distnguish ieter (more useful) informaton
from inferior (less useful) informaton for decision-making purposes.
Fundamental qualitesg
Relevanceg accountng informaton is capaile of making a diference in a decision.
, - Predictve valueg when it has value as an input to predictve processes used iy investors
to form their own eepectatons aiout the future.
- Confrmatory valueg it helps users confrm or correct prior eepectatons.
- Materialityg omitng the informaton or misstatng it could infuence decisions that users
make on the iasis of the reported fnancial informaton. Assessing materiality requires
evaluatng ioth the relatve size and importance of an item. Companies must consider
ioth quanttatve and qualitatve factors in determining whether an item is material.
Faithful representatong the numiers and descriptons match what really eeisted or
happened.
- Completenessg all the informaton that is necessary for faithful representaton is
provided.
- Neutralityg a company cannot select informaton to favor one set of interested partes
over another.
- Free from error.
Enhancing qualitesg distnguish more-useful informaton from less-useful informaton.
Comparaiilityg measured and reported in a similar manner for diferent companies.
- Consistencyg when a company applies the same accountng treatment to similar events,
from period to period.
Verifaiilityg when independent measures, using the same methods, oitain similar results.
Timelinessg having informaton availaile to decision-makers iefore it loses its capacity to
infuence decisions.
Understandaiilityg informaton is classifed, characterized, and presented clearly and
concisely.
Basic elements (or defnitons)g
Assetg a resource controlled iy the entty as a result of past events and from which future
economic ienefts are eepected to fow to the entty.
Liaiilityg a present oiligaton of the entty arising from past events, the setlement of which
is eepected to result in an outlow from the entty of resources emiodying economic
ienefts.
Equityg the residual interest in the assets of the entty afer deductng all its liaiilites.
Incomeg increases in economic ienefts during the accountng period in the form of infows
or enhancements of assets or decreases of liaiilites that result in increases in equity, other
than those relatng to contriiutons from equity partcipants.
Eepensesg decreases in economic ienefts during the accountng period in the form of
outlows or depletons of assets or incurrences of liaiilites that result in decreases in equity,
other than those relatng to distriiuton to equity partcipants.
The frst three elements descriie amounts of resources and claims to resources at a moment in tme,
the second group of two elements descriie transactons, events, and circumstances that afect a
company during a period of tme.
LO3: Review the basic assumptions of accounting
Assumptons that are present in the reportng environmentg
Economic entty assumptong economic actvity can ie identfed with a partcular unit of
accountaiility. So, a company keeps its actvity separate and distnct form its owners and any
other iusiness unit. The entty concept does not necessarily refer to a legal entty.
Going concern assumptong the company will have a long life. Depreciaton and amortzaton
policies are justfaile and appropriate only if we assume some permanence to the company.
Only where liquidaton appears imminent is the assumpton inapplicaile.
Monetary unit assumptong money is the common denominator of economic actvity and
provides an appropriate iasis for accountng measurement and analysis. Accountng
