IFRS Conceptual Framework
Introduction to Financial Accounting and Reporting
The IFRS standards are principle-based:
This means there is room for judgment and discretion when applying these standards.
Because the economic reality is dynamic and complex, there are not always easy and
straightforward answers in the application of IFRS
We will reflect on the incentives behind reporting and the consequences of one choice versus
another when it comes to applying discretion and standards. We will do this based on more
complex real-life cases to help understand what standard applications can look like in practice.
Financial reporting reflects reality, which is dynamic and not straightforward.
We can ask ourselves questions about how we should report:
- the rise in intangible assets?: what is the trade-off between or against recognition
- crypto assets?: are they monetary resources or more like investments?
- sustainability impacts on financials?: impact on the company’s liabilities and opportunities.
During financial reporting, it is important to keep in mind the following:
* The purpose of corporate reporting
* The underlying conceptual framework that guides the principles behind reporting under IFRS.
* Reporting incentives
* The feedback effect on reporting on actions/decision-making outcomes
Accounting is not only about the rules or the standards that apply to financial reporting.
With accounting, you look at the whole ecosystem as you look at the inputs, the standards, the
outcomes, the use of information, and how that feeds back into economic transactions and
standards.
,The course overview
The need for
international accounting standards
Why do we need financial accounting?
Fundamental problem: Information asymmetry
* Adverse selection
A type of information asymmetry whereby one or
more parties to a business transaction, or potential
transaction, have an information advantage.
* Moral hazard
A Type of information asymmetry whereby one or
more parties to a contract can observe their actions in fulfillment of the contract but other
parties cannot.
Why do we need standards?
Accounting and financial reporting is crucial for the functioning of efficient capital markets.
Resolving information asymmetry
For users, it is key that there is relevant information that faithfully represents the financial
position and performance of a firm and that this information can be easily compared.
Accounting standards facilitate this purpose.
Why do we need international accounting?
, The internationalization of accounting follows from the internationalization of capital markets:
• Substantial increase in net purchases of foreign equities by local residents since the 1980s.
• Substantial increase in the number of cross-listings (i.e., listings in foreign countries) during the
1990s.
* Foreign investments
Foreign investors are not/less familiar with local GAAP.
Adopting international accounting standards to attract foreign investors
* Cross-listings
Cross-listed companies had to present separate financial statements for each market.
This is costly and confusing (Profit [Local GAAP] ≠ Profit [US GAAP])
Both companies and investors had a strong interest in the international harmonization of
accounting standards and intensely lobbied for international accounting standards.
Need for a common internal language of accounting to serve the international capital market
1973: Establishment of the International Accounting Standards Committee (IASC)
− Initiative: Auditing companies
− Private standard-setting organization
− Developed International Accounting Standards (IAS) 1 to 41
2001: New structure of the IASC as International Accounting StandardsBoard (IASB)
− IFRS Foundation as an organizational structure
− Developed International Financial Reporting Standards (IFRS) 1 to 19 (as of May 2024)
- Members of the Internal Accounting Standards Board are appointed by the IFRS foundation
The institutional setting of IFRS
Introduction to Financial Accounting and Reporting
The IFRS standards are principle-based:
This means there is room for judgment and discretion when applying these standards.
Because the economic reality is dynamic and complex, there are not always easy and
straightforward answers in the application of IFRS
We will reflect on the incentives behind reporting and the consequences of one choice versus
another when it comes to applying discretion and standards. We will do this based on more
complex real-life cases to help understand what standard applications can look like in practice.
Financial reporting reflects reality, which is dynamic and not straightforward.
We can ask ourselves questions about how we should report:
- the rise in intangible assets?: what is the trade-off between or against recognition
- crypto assets?: are they monetary resources or more like investments?
- sustainability impacts on financials?: impact on the company’s liabilities and opportunities.
During financial reporting, it is important to keep in mind the following:
* The purpose of corporate reporting
* The underlying conceptual framework that guides the principles behind reporting under IFRS.
* Reporting incentives
* The feedback effect on reporting on actions/decision-making outcomes
Accounting is not only about the rules or the standards that apply to financial reporting.
With accounting, you look at the whole ecosystem as you look at the inputs, the standards, the
outcomes, the use of information, and how that feeds back into economic transactions and
standards.
,The course overview
The need for
international accounting standards
Why do we need financial accounting?
Fundamental problem: Information asymmetry
* Adverse selection
A type of information asymmetry whereby one or
more parties to a business transaction, or potential
transaction, have an information advantage.
* Moral hazard
A Type of information asymmetry whereby one or
more parties to a contract can observe their actions in fulfillment of the contract but other
parties cannot.
Why do we need standards?
Accounting and financial reporting is crucial for the functioning of efficient capital markets.
Resolving information asymmetry
For users, it is key that there is relevant information that faithfully represents the financial
position and performance of a firm and that this information can be easily compared.
Accounting standards facilitate this purpose.
Why do we need international accounting?
, The internationalization of accounting follows from the internationalization of capital markets:
• Substantial increase in net purchases of foreign equities by local residents since the 1980s.
• Substantial increase in the number of cross-listings (i.e., listings in foreign countries) during the
1990s.
* Foreign investments
Foreign investors are not/less familiar with local GAAP.
Adopting international accounting standards to attract foreign investors
* Cross-listings
Cross-listed companies had to present separate financial statements for each market.
This is costly and confusing (Profit [Local GAAP] ≠ Profit [US GAAP])
Both companies and investors had a strong interest in the international harmonization of
accounting standards and intensely lobbied for international accounting standards.
Need for a common internal language of accounting to serve the international capital market
1973: Establishment of the International Accounting Standards Committee (IASC)
− Initiative: Auditing companies
− Private standard-setting organization
− Developed International Accounting Standards (IAS) 1 to 41
2001: New structure of the IASC as International Accounting StandardsBoard (IASB)
− IFRS Foundation as an organizational structure
− Developed International Financial Reporting Standards (IFRS) 1 to 19 (as of May 2024)
- Members of the Internal Accounting Standards Board are appointed by the IFRS foundation
The institutional setting of IFRS
