NATIONAL UNIVERISITY OF MODERN LANGUAGE

DEPARTMENT OF MANAGEMENT SCIENCES

LAHORE CAMPUS

Class:
BS Accounting & Finance
Project:
Advance Financial Accounting

Submitted To:
Sir Hafiz M. Tahir Nasir
Submitted By:
LF-1184 Jahnzaib Khan
LF-1188 Sumaira Amjad
LF-1187 Muhammad Muneeb
IFRS; International Financial Reporting Standards
International Financial Reporting Standards, commonly called IFRS,
are accounting standards issued by the IFRS Foundation and the International
Accounting Standards Board (IASB). They constitute a standardised way of
describing the company's financial performance and position so that
company financial statements are understandable and comparable across
international boundaries. They are particularly relevant for companies with shares or
securities listed on a public stock exchange. IFRS have replaced many different
national accounting standards around the world but have not replaced the separate
accounting standards in the United States where U.S. GAAP is applied.

Key points.

 International Financial Reporting Standards (IFRS) were created to bring consistency

and integrity to accounting standards and practices, regardless of the company or the
country.
 They were issued by the London-based Accounting Standards Board (IASB) and
address record keeping, account reporting, and other aspects of financial reporting.
 The IFRS system replaced the International Accounting Standards (IAS) in 2001.
 IFRS fosters greater corporate transparency.
IFRS vs. GAAP

Public companies in the U.S. are required to use a rival system, the generally accepted
accounting principles (GAAP). The GAAP standards were developed by the Financial
Standards Accounting Board (FSAB) and the Governmental Accounting Standards Board
(GASB).

History of IFRS

IFRS originated in the European Union with the intention of making business affairs and
accounts accessible across the continent. It was quickly adopted as a common accounting
language. Although the U.S. and some other countries don't use IFRS, currently 167
jurisdictions do, making IFRS the most-used set of standards globally.

Who Uses IFRS?

IFRS is required to be used by public companies based in 167 jurisdictions, including all of
the nations in the European Union as well as Canada, India, Pakistan, Russia, South Korea,
South Africa, and Chile. The U.S. and China each have their own systems

How Does IFRS Differ From GAAP?

The two systems have the same goal: clarity and honesty in financial reporting by publicly-
traded companies. IFRS was designed as a standards-based approach that could be used
internationally. GAAP is a rules-based system used primarily in the U.S. Although most of
the world uses IFRS standards, it is still not part of the U.S. financial accounting world. The
SEC continues to review switching to the IFRS but has yet to do so. Several methodological
differences exist between the two systems. For instance, GAAP allows a company to use
either of two inventory cost methods: First in, First out (FIFO) or Last in, First out (LIFO).
LIFO, 

Why Is IFRS Important?

IFRS fosters transparency and trust in the global financial markets and the companies that
list their shares on them. If such standards did not exist, investors would be more reluctant to
believe the financial statements and other information presented to them by companies.
Without that trust, we might see fewer transactions and a less robust economy.
The Bottom Line

The International Financial Reporting Standards (IFRS) are a set of accounting rules for
public companies with the goal of making company financial statements consistent,
transparent, and easily comparable around the world. This helps for auditing, tax purposes,
and investing.

What Are International Accounting Standards (IAS)?

International Accounting Standards (IAS) are a set of rules for financial statements that were
replaced in 2001 by International Financial Reporting Standards (IFRS) and have
subsequently been adopted by most major financial markets around the world. Both sets of
standards were issued by the International Accounting Standards Board (IASB), an
independent body based in London. The United States does not follow IFRS. Instead, the
U.S. Securities & Exchange Commission requires public companies in the U.S. to follow
Generally Accepted Accounting Standards (GAAP). China and Japan also declined to adopt
IFRS.
Understanding International Accounting Standards (IAS)

International Accounting Standards (IAS) were the first international accounting standards
that were issued by the International Accounting Standards Committee (IASC), formed in
1973. The goal then, as it remains today, was to make it easier to compare businesses around
the world, increase transparency and trust in financial reporting, and foster global trade and
investment.

Globally comparable accounting standards promote transparency, accountability, and

efficiency in financial markets around the world. This enables investors and other market
participants to make informed economic decisions about investment opportunities and risks
and improves capital allocation. Universal standards also significantly reduce reporting and
regulatory costs, especially for companies with international operations and subsidiaries in
multiple countries.

Moving Toward New Global Accounting Standards

There has been significant progress towards developing a single set of high-quality global
accounting standards since the IASC was replaced by the IASB. IFRS have been adopted by
the European Union, leaving the United States, Japan (where voluntary adoption is allowed),
and China (which says it is working towards IFRS) as the only major capital markets
without an IFRS mandate.
What Are the Benefits of International Accounting Standards?

If you own a small business in the U.S. that is privately held but sells goods and services
overseas, the Securities and Exchange Commission doesn’t require your company to adhere
to the generally accepted accounting principles in financial reporting. The SEC only
requires that U.S. domestic companies that are listed companies need to use GAAP in
financial reporting. However, as the owner of a privately held business that understands the
scope and importance of international accounting, you can voluntarily comply with the
international accounting standards established by the International Accounting Standards
Board. The IASB has created International Financial Reporting Standards to facilitate
business across borders. To understand the importance of international accounting
standards, it is necessary to first understand the benefits of accounting standards as they
apply to your small business.

IAS 37 — Provisions, Contingent Liabilities and Contingent Assets

About

IAS 37 defines and specifies the accounting for and disclosure of provisions, contingent
liabilities, and contingent assets. A provision is a liability of uncertain timing or amount. The
liability may be a legal obligation or a constructive obligation. A constructive obligation
arises from the entity’s actions, through which it has indicated to others that it will accept
certain responsibilities, and as a result has created an expectation that it will discharge those
responsibilities. Examples of provisions may include: warranty obligations; legal or
constructive obligations to clean up contaminated land or restore facilities; and obligations
caused by a retailer’s policy to make refunds to customers. An entity recognises a provision if
it is probable that an outflow of cash or other economic resources will be required to settle
the provision. If an outflow is not probable, the item is treated as a contingent liability. A
provision is measured at the amount that the entity would rationally pay to settle the
obligation at the end of the reporting period or to transfer it to a third party at that time. Risks
and uncertainties are taken into account in measuring a provision. A provision is discounted
to its present value.

IAS 37 elaborates on the application of the recognition and measurement requirements for
three specific cases:

 future operating losses—a provision cannot be recognised because there is no

obligation at the end of the reporting period;
 an onerous contract gives rise to a provision; and
 A provision for restructuring costs is recognised only when the entity has a
constructive obligation because the main features of the detailed restructuring plan
have been announced to those affected by it.

Contingent liabilities

Contingent liabilities are possible obligations whose existence will be confirmed by uncertain
future events that are not wholly within the control of the entity. An example is litigation
against the entity when it is uncertain whether the entity has committed an act of wrongdoing
and when it is not probable that settlement will be needed .Contingent liabilities also include
obligations that are not recognised because their amount cannot be measured reliably or
because settlement is not probable. Contingent liabilities do not include provisions for which
it is certain that the entity has a present obligation that is more likely than not to lead to an
outflow of cash or other economic resources, even though the amount or timing is uncertain.
A contingent liability is not recognised in the statement of financial position. However,
unless the possibility of an outflow of economic resources is remote, a contingent liability is
disclosed in the notes.

Contingent assets

Contingent assets are possible assets whose existence will be confirmed by the occurrence or
non-occurrence of uncertain future events that are not wholly within the control of the entity.
Contingent assets are not recognised, but they are disclosed when it is more likely than not
that an inflow of benefits will occur. However, when the inflow of benefits is virtually certain
an asset is recognised in the statement of financial position, because that asset is no longer
considered to be contingent.

Standard history

In April 2001 the International Accounting Standards Board adopted IAS 37 Provisions,

Contingent Liabilities and Contingent Assets, which had originally been issued by the
International Accounting Standards Committee in September 1998. That standard replaced
parts of IAS 10 Contingencies and Events Occurring after the Balance Sheet Date that was
issued in 1978 and that dealt with contingencies. In May 2020 the Board issued Onerous
Contracts—Cost of Fulfilling a Contract. This amended IAS 37 to clarify that for the purpose
of assessing whether a contract is onerous, the cost of fulfilling the contract includes both the
incremental costs of fulfilling that contract and an allocation of other costs that relate directly
to fulfilling contracts.

Other Standards have made minor consequential amendments to IAS 37. They include
IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and
IAS 39) (issued November 2013), Annual Improvements to IFRSs 2010–2012 Cycle (issued
December 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014),
IFRS 9 Financial Instruments (issued July 2014), IFRS 16 Leases (issued January 2016),
IFRS 17 Insurance Contracts (issued May 2017), Amendments to References to the
Conceptual Framework in IFRS Standards (issued March 2018) and Definition of
Material (Amendments to IAS 1 and IAS 8) (issued October 2018).

Provisions and further specific guidance

Standard IAS 37 gives further guidance for certain situations in its appendix and also, several
interpretations clarify the accounting for provisions in some specific cases:

 IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

deals with the provision for removing the asset and restoring the site after the end of
its useful life;
 IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds is related to IFRIC 1 and it applies when a
company contributes to a fund for reimbursement of these expenses.
 IFRIC 6 Liabilities Arising from Participating in a Specific Market – Waste Electrical
and Electronic Equipment: this IFRIC specifies when the producers of electrical and
similar appliances sold to household are liable for decommissioning of electrical
waste
 IFRIC 17 Distributions of Non-cash Assets to Owners
 IFRIC 21 Levies

EXAMPLE
Rey Co has a published environmental policy. In this, Rey Co explains that they always
replant trees to counterbalance the environmental damage created by their operations. Rey Co
has a consistent history of honouring this policy. During 20X8, Rey Co opened a new factory,
leading to some environmental damage. Rey Co estimates that the associated tree planting
and environmental clear up costs will be $400,000.

Even if the country that Rey Cooperates in has no legal regulations forcing them to replant
trees, Rey Co will have a constructive obligation because it has created an expectation from
its publications, practice and history.

Summary

In summary, IAS 37 is a key standard for FR candidates. Candidates are required to learn the
three key criteria for a provision, as they are likely to have to explain these in an exam.
Careful attention must also be paid to the calculations involved in the recording of a
provision, particularly those around long-term provisions and including them at present
value. If candidates are able to do this, then provisions can be an area where they can score
highly in the FR exam.
IFRS 10 — Consolidated Financial Statements

About

IFRS 10 establishes principles for presenting and preparing consolidated financial statements
when an entity controls one or more other entities. IFRS 10:

 requires an entity (the parent) that controls one or more other entities (subsidiaries) to
present consolidated financial statements;
 defines the principle of control, and establishes control as the basis for consolidation;
 sets out how to apply the principle of control to identify whether an investor controls
an investee and therefore must consolidate the investee;
 sets out the accounting requirements for the preparation of consolidated financial
statements; and
 defines an investment entity and sets out an exception to consolidating particular
subsidiaries of an investment entity.

Consolidated financial statements are financial statements that present the assets, liabilities,
equity, income, expenses and cash flows of a parent and its subsidiaries as those of a single
economic entity.
Standard history

In April 2001 the International Accounting Standards Board (Board) adopted

IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries,
which had originally been issued by the International Accounting Standards Committee in
April 1989. IAS 27 replaced most of IAS 3 Consolidated Financial Statements (issued in June
1976).

In December 2003, the Board amended and renamed IAS 27 with a new title—Consolidated
and Separate Financial Statements. The amended IAS 27 also incorporated the guidance
contained in two related Interpretations (SIC-12 Consolidation-Special Purpose Entities and
SIC-33 Consolidation and Equity Method—Potential Voting Rights and Allocation of
Ownership Interests).

In May 2011 the Board issued IFRS 10 Consolidated Financial Statements to supersede

IAS 27. IFRS 12 Disclosure of Interests in Other Entities, also issued in May 2011, replaced
the disclosure requirements in IAS 27. IFRS 10 incorporates the guidance contained in two
related Interpretations (SIC-12 Consolidation-Special Purpose Entities and
SIC-33 Consolidation).

In June 2012 IFRS 10 was amended by Consolidated Financial Statements, Joint

Arrangements and Disclosure of Interests in Other Entities: Transition
Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12). These amendments clarified the
transition guidance in IFRS 10. Furthermore, these amendments provided additional
transition relief in IFRS 10, limiting the requirement to present adjusted comparative
information to only the annual period immediately preceding the first annual period for which
IFRS 10 is applied.

In October 2012 IFRS 10 was amended by Investment Entities (Amendments to IFRS 10,

IFRS 12 and IAS 27), which defined an investment entity and introduced an exception to
consolidating particular subsidiaries for investment entities. It also introduced the
requirement that an investment entity measures those subsidiaries at fair value through profit
or loss in accordance with IFRS 9 Financial Instruments in its consolidated and
separate financial statements. In addition, the amendments introduced new disclosure
requirements for investment entities in IFRS 12 and IAS 27.
In September 2014 IFRS 10 was amended by Sale or Contribution of Assets between an
Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28), which
addressed the conflicting accounting requirements for the sale or contribution of assets to a
joint venture or associate. In December 2015 the mandatory effective date of this amendment
was indefinitely deferred by Effective Date of Amendments to IFRS 10 and IAS 28.

In December 2014 IFRS 10 was amended by Investment Entities: Applying the Consolidation
Exception (Amendments to IFRS 10, IFRS 12 and IAS 28). These amendments clarified
which subsidiaries of an investment entity should be consolidated instead of being measured
at fair value through profit or loss. The amendments also clarified that the exemption from
presenting consolidated financial statements continues to apply to subsidiaries of an
investment entity that are themselves parent entities. This is so even if that subsidiary is
measured at fair value through profit or loss by the higher level investment entity parent.
Other Standards have made minor consequential amendments to IFRS 10, including Annual
Improvements to IFRS Standards 2014–2016 Cycle (issued December 2016)
and Amendments to References to the Conceptual Framework in IFRS Standards (issued
March 2018).

Objective of the standard

The objective of IFRS 10 as set out in the standard is to establish principles for the
presentation and preparation of consolidated financial statements when an entity controls one
or more other entities. To meet this objective, the standard:

 Requires an entity (the parent) that controls one or more other entities (subsidiaries) to
present consolidated financial statements;

 Defines the principle of “control”, and establishes control as the basis for consolidation;

 Sets out how to apply the principle of control to identify whether an investor controls an
investee and therefore must consolidate the investee;

 Sets out the accounting requirements for the preparation of consolidated financial
statements; and  Defines an investment entity and sets out the exception to consolidating
particular subsidiaries of an investment entity.
Scope of the standard

IFRS 10 applies to all entities, except as follows:

 If all the following conditions are met, a parent need not present consolidated
financial statements:
1. It is a subsidiary of another entity and all its other owners, including those not
otherwise entitled to vote, have been informed about (and do not object to),
the parent not presenting consolidated financial statements
2. - Its debt or equity instruments are not traded in a public market
3. - It did not file, nor is in the process of filing, financial statements for the
purpose of issuing instruments in a public market; and - Its ultimate or any
intermediate parent produces consolidated financial statements that comply
with the IFRSs and are available for public use.
4. Post or long-term employee benefit plans to which IAS 19 Employee
Benefits applies.
5. An investment entity need not present consolidated financial statements but
rather measure all of its subsidiaries at fair value through profit or loss.
Summary
IFRS 10 replaces those parts of IAS 27 that relate to consolidated financial statements (IAS
27 revised now concentrates on separate financial statements only), and SIC 12 in its entirety.
IFRS 10 uses control as the single basis for consolidation, and requires that all three of the
following are in place in order to establish control and so consolidate an investee.

Reference of this Report

 https://www.ifrs.org/
 https://www.investopedia.com/terms/i/ifrs.asp
 https://www.iasplus.com/en/standards/ifrs/summary
 https://www.cfainstitute.org/en/advocacy/issues/international-finance-reporting-
stds#sort=%40pubbrowsedate%20descending