International Financial Reporting

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International Financial Reporting
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MBA TERM PAPERS CUSTOM ESSAY WRITING SERVICES Table of contents Introduction ..................................................................................................................................... 3 IAS 17 ............................................................................................................................................. 4 IAS 23 ............................................................................................................................................. 7 IAS 36 ............................................................................................................................................. 9 IAS 37 ........................................................................................................................................... 12 Reference ...................................................................................................................................... 15
Introduction Account is considered as the backbone of business, because all the financial activities taking place in business are recorded in the books of accounts with the help of predetermined accounting standards. These accounting standards guide the accountants to maintain the books of account in a more structured manner thereby enhancing transparency and fairness in the financial statements. In the earlier days, each business had its own individual way of maintaining the accounts. With the growth of business, activities related to it turned more complicated. People felt the need of a common accounting standard. The main aim of this standard was to introduce uniformity in the records so that the people can have more faith on the accounting information while doing business with each other. With time, the concept of accounting standard came into existence and the government actively participated in developing and enforcing these accounting standards. With businesses now crossing boundaries, the need for international accounting has become all the more intense and hence international accounting bodies of developed nations have come together to develop International Accounting Standards. International Accounting Standards (IAS) can be described as a set of standards that prescribes the manner in which different types of transactions and events should be recorded and reflected in the financial statement. Earlier, the Board of the International Accounting Standards Committee (IASC) was alone responsible for forming the IAS. However, from 2001 onwards, a modified set of international accounting standards, known as International Financial Reporting Standards (IFRS) was introduced by International Accounting Standards Boards (IASB) (Greuning & Koen, 2001, p.1). ORDER YOUR CUSTOM ESSAY NOW - http://mbatermpapers.co.uk/order/
MBA TERM PAPERS CUSTOM ESSAY WRITING SERVICES Many developed as well as developing nations are in the process of replacing their local GAAP with IFRS to enhance the competency in their prevailing accounting standards (IAS Plus, n.d.). There are several accounting standards to guide the accountants through each and every transaction; among them IAS 17, IAS 23, IAS 36 and IAS 37 are of special importance. Each of these accounting standards will be discussed elaborately in the following sections.
IAS 17 IAS 17 deals with accounting of lease. This accounting standard was first introduced in September 1982; however it underwent modification with the demands of the situation. On April 2009, this accounting standard was amended for Annual Improvements to IFRSs 2009 (International Accounting Standards Committee Foundation & International Accounting Standards Board, 2007, p.1041). Relevance: IAS 17 prescribes standards that deal with lessee and lessor. Moreover it puts forth appropriate accounting policies to be used along with the discloser related to operating leases. Therefore it can be inferred that ISA17 is solely concerned with lease and its treatment while developing financial statements. This accounting standard is applicable on all the lease agreements except the lease related to oil, natural gas and minerals. This standard is not applicable on regenerative resources that include videos, different plays, patents, copyrights and other such similar items. If the lease agreements are under other IAS such as IAS 40 and IAS 41, then IAS 17 cannot be applied.
MBA TERM PAPERS CUSTOM ESSAY WRITING SERVICES Discretion: IAS 17 helps in classifying lease as financial lease or operational lease. Basically the nature of lease is determined after taking into consideration the substance of transaction. IAS 17 explains that payment made for the operating lease shall be considered as an expense calculated on a straight line basis after having undertaken the lease term. On the other hand, for a financial lease, the lessee should incorporate the lease in the form of asset or liability in the balance sheet. The amount to be incorporated in the balance sheet should reflect the fair value of the leased property or present value of the minimum lease payable. While calculating the present value of the lease payable, the discount rate that is used should actually be the interest rate on the lease or the incremental borrowing rate of the lease. The accounting standard also indicates that finance lease leads to the depreciation of expense that results due to depreciation of the leased assets and the financial expenses made on the leased properties each year. The depreciation policy for the leased assets remains same throughout the period and such depreciation is calculated in accordance with IAS 16 (Property, Plant & Equipment) and IAS 38 (Intangible assets). It had also been explained that in case of an uncertainty, the lessee can get the ownership of the leased property at the end of the lease period when the asset are fully depreciated on the basis of its useful life or the term of lease, whichever be the minimum (IFRS Foundation, n.d.). IAS 17 provides guidelines for the lessor of both operating as well as financial lease. In case of operating lease, the lessor shall disclose the leased property as an asset in the balance sheet depending on the nature of assets. The property under lease should be depreciated in the same manner as that of other assets, as mentioned in the common depreciating policy followed by the lessor for all other assets. Income under the lease shall be treated as income for the whole of the lease period. Treatment of financial lease is quite different for the lessor as compared to operational lease. In financial lease, the lessor should replace the leased asset from the balance
MBA TERM PAPERS CUSTOM ESSAY WRITING SERVICES sheet and place it as a receivable item. The amount of the leased asset should be equal to net investment made in the lease. When the lessors are manufacturers or dealers, they should treat the profit or loss on the lease with the same policy that is followed for outright sale (Boobyer, 2003, p.449-450). IAS 17 provides rules and regulations for selling an asset and leasing back the same asset. Accounting treatment of these phenomena directly depends on the nature of the asset. Reliability: Since this accounting standard prescribes the necessary guidelines related to lease property and its effect on the financial statement of lessee as well as lessor, this standard can be considered as a reliable one. However, there are certain more issues related to IAS 17 that need to be settled as soon as possible. As for example, it is not very clear that whether this standard can be used effectively while treating service concessions. Moreover, doubt persists on the manner in which this accounting standard should be used in the event of involvement of multiple assets. Whether the standard should be applied for the transaction as a whole or it should be applied for each asset individually still remains debateable. Confusion exists whether apart from the lease obligation, other obligations can be associated with service concession agreement and the latters treatment in the books of account (IAS Plus-b, 2010). Comparison: To have a better insight of IAS 17, it was compared with US GAAP. This comparison will assist one to understand the basic differences in both of these approaches related to lease. According to IFRS, the leaseholds interest can be considered as a part of investment property under IAS 40. This is possible if the property is held for investment. While measuring the fair value, the change in value is treated as profit or loss, and if the given condition is not
MBA TERM PAPERS CUSTOM ESSAY WRITING SERVICES applied then the interest will be considered as prepayment. According to US GAAP lease hold interest in land is always treated as prepayment.
IAS 23 IAS 23 involves the treatment of borrowing costs. This accounting standard was first introduced in January 01, 1986 as capitalisation of borrowing costs. This standard underwent several modifications which changed the global market conditions. In December 1993, it was renamed as borrowing costs. From 2006 onward, certain changes were incorporated every year in this act to make it more appropriate and effective in handling issues related to borrowing costs. Major change was done on 22 May 2008 for Annual Improvements to IFRS. Relevance: This international accounting standard provides guidelines on the manner in which borrowing costs ought to be treated in the books of accounts. The term borrowing costs includes many elements, as for example it takes into account the interest paid on bank overdraft, the premium paid on borrowing, amortisation of loans, financial charges related to finance lease. Borrowing cost also includes the exchange difference related to foreign currency borrowing. While calculating the interest expense method, IAS 39 should be used. The expense related to finance lease should be calculated according to IAS 17.
Description: The definition of borrowing cost prescribed in IAS 23.6 makes it clear that this accounting standard does not take into consideration the cost of equity and preferred capital as they are not incorporated in liabilities. Therefore IAS 23 is applicable to all those costs that are

directly attributable to the acquisition, construction or production of a qualifying asset that forms a part of the cost of the asset (IFRS Foundation-a, n.d.). As per IAS 23, an organisation should capitalise the borrowing costs that are directly related to construction, acquisition or production of an asset depending on the cost of that particular asset. The organisation should also identify other expenses related to borrowing costs for a particular time period. Initially the concept of qualifying asset was not incorporated in IAS 23; hence the companies had the alternative option called immediate expensing model that allows borrowing cost to be spread throughout the period when the expenses are incurred. However, after the amendment of IAS 23 in the year 2009, this method is no more relevant ( International Accounting Standards Committee
Foundation & International Accounting Standards Board, 2007, p.114). This accounting standard
opines that capitalisation should be initiated as soon as expenses are incurred, borrowing costs are accumulated and the activities necessary for production of asset (to be used or to be sold) have started. This standard made it mandatory to disclose the amount of borrowing cost that is getting capitalised in each financial year. This standard also asks the accountants to specify the rates used for capitalising borrowing cost. Reliability: As discussed above, earlier there were two ways of capitalising the borrowing incurred in a specific financial year, but after the amendment of IAS 23 in 2009, things became more structured. Before capitalising the borrowing assets, companies need to first verify whether the asset belongs to the category of qualifying asset or not. As per IAS 23, A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (Ifra Foundation-b, n.d.). Though the definition sounds quite simple, it is very confusing when applied to real life situations. As for example, IAS 23 quotes that all the expenses directly related to acquisition of the assets should be capitalised. On the other hand IAS 17 explains that finance lease should be

recognised as an asset. However, the financial charges associated with finance lease are not capitalised. There are, therefore, many such issues that require further modification to make IAS more effective.
Comparison: After comparing IAS 23 as prescribed in IFRS with that of US GAAP, certain noticeable differences have been registered. As for example, according to IFRS, the borrowing cost comprises different types of interests, exchange rates difference and other ancillary costs, whereas US GAAP takes into account only the interest. Differences are also found in the treatment of temporary funds raised for construction of assets. IFRS system allows the reduction of borrowing cost that is eligible for capitalisation. Under GAAP no such provision is mentioned (IAS Plus-b, 2010).
IAS 36 IAS 36 was introduced in the mid of 1998 and it became effective from 1st July 1999. This accounting standard was amended in 2004 to overcome certain drawbacks and again in 2008 it underwent modification under Annual Improvement to IFRS 2007. Further changes were introduced in 16 April 2009 pertaining to accounting for goodwill impairment. Relevance: This accounting standard ensures that the assets in the balance sheet reflect the recoverable amount and also puts forth the method needed for calculating the recoverable the latter. The standard states that if the amount carried forward is more than that its recoverable amount, then such asset should be called an impaired asset. IAS 36 is not applicable to the below given assets:
MBA TERM PAPERS CUSTOM ESSAY WRITING SERVICES Deferred tax assets Inventories Financial assets Assets generated due to construction contracts Assets related to insurance contract Investment property carried at its fair value Agricultural assets carried at fair value Assets generated due to employees benefits Therefore IAS 36 is used to find out the recoverable amount on assets like fixed assets (land, building, machinery, plant & equipment and investment in property that is carried at cost), intangible, goodwill and investment done in subsidiaries as well as in joint ventures. Description: Before understanding this accounting standard one needs to take into account certain terms. As for example recoverable amount or cash generating unit is the higher of its
fair value less costs to sell and its value in use (IFRS Foundation-c, n.d., p.1). While calculating the fair value of the assets certain factors need to be taken into account. Few of them are explained below: The future cash flow that the company can derive from the asset.
Expectation of variation in future cash flow. Time value of amount after undertaking the future interest rate and market risk.
MBA TERM PAPERS CUSTOM ESSAY WRITING SERVICES The degree of uncertainty related to market practices and its effect on price of the assets. It is equally important to understand the concept of impairment while finding recoverable amount. If the recoverable amount of the asset is less than the amount carried in balance sheet, then the difference between recoverable amount and carried forward amount shall represent the impairment loss. IAS 36 explains that there must be discloser of events and circumstances that results in impairment losses, the amount of loss, information regarding the nature of asset and the category to which the asset belongs, and the information related to cash generating units and so on.
Reliability: Every year, the accountants in different nations have contradictory view regarding the value of assets presented in the balance sheet. However, IAF 36 has provided a proper set of rules and regulation to deal with this chaotic situation. The accounting standard has enhanced the degree of transparency. The stakeholders of the company thereby now find the data regarding assets more reliable. However, certain issues regarding the impairment of assets must be followed. As for example it is quite difficult to predict the future cash flow and the possibility of short term liquidity crises in the market. Some confusion also exists regarding intangible assets and goodwill. According to this accounting standard the intangible asset with unlimited life should be tested for impairment, but these tests posses certain loopholes and often companies fail to get the real recoverable value (Ullah, et al., n.d., p.3).
Comparison: A comparison was done to find out the nature of change that a company needs to undertake while shifting from US GAAP to IFRS regarding asset impairment. As per IFRS, the recoverable amount of the asset should be represented in the books of account. This recoverable amount is the highest asset value in use as well as the fair value less costs to sell. On other side
MBA TERM PAPERS CUSTOM ESSAY WRITING SERVICES US GAAP asks impairment of the asset only on the basis of assets fair value (IAS Plus-b, 2010, p.12).
IAS 37 IAS 37, commonly known as Provisions, Contingent Liabilities and Contingent Assets was implemented in September 1998 and with time it underwent certain distinctive changes. On June 30, 2005 an amendment draft on this accounting standard was drafted to make it more effective in respect to IFRS. Relevance: This accounting standard ensures that appropriate measures are applied to different types of provisions, contingent liabilities as well as contingent assets. Therefore, the accounting standard explains that sufficient amount of information should be provided in the form of notes while preparing the financial statement so that the reader gets sufficient information on the nature and amount of provisions, contingent assets and contingent liabilities. This accounting standard is not applicable to the contingent assets and liabilities that result due to executory contacts where either both the parties have performed their obligations partially or none of the parties has performed any obligation. This accounting standard is also not applicable for those assets and liabilities that are covered by another accounting standard (IFRS Foundation-c, n.d.). Before applying this standard, one should understand certain basis definitions. For example, contingent liability is the liability that arises due to past events and the liability will be confirmed only on occurrence or non-occurrence of future events which are not in the control of the organisation. In the same manner contingent asset arises due to some past events and this asset
MBA TERM PAPERS CUSTOM ESSAY WRITING SERVICES becomes confirmed on occurrence or non-occurrence future events which are not in the control of the entity (IFRS Foundation-c, n.d.).
Description: IAS 37 specifies, that the amount recognised as provision should be equal to the amount required to settle present liabilities reflected in the balance sheet. Hence, provision can be made for restructuring, settling law-suit or cleaning up the environment. Provision can also be developed regarding legal events such as warranties and customer refunds. Therefore, provisions should be adjusted with changes introduced in the balance sheet. Adjustment in provision is also required when outflow of cash is no longer probable. This accounting standard provides specific circumstances that explain when provision should be executed. While making the discloser, reconciliation should be made for opening balance, additions, unwinding the discount and closing balance. Description should be related to the nature of assets and liabilities, timing of the cash flow related to liabilities, and uncertainty, assumption and reimbursement of the provisions.
Reliability: Till date, people argue that IAS 37 suffers from certain major loopholes. As for example, the process by which uncertainty prevailing in the economy and market condition is determined while deriving value of provision has still remained dubious. Confusion takes place when financial lease is confused with obligation and people thereby follow IAS 37 for its treatment in the books of accounts instead of undertaking IAS 17 (International Accounting Standards Board, 2006, p.4).
Comparison: The IAS 37 was compared with both IFRS and US GAAP to understand the differences among them. In IFRS, settlement of the obligation should be done as per expected value method and discounting is allowed. On the other hand according to US GAAP lower possible amount should be considered and certain provisions should not be discounted.
Reference
Boobyer, C. 2003. Leasing and asset finance: the comprehensive guide for practitioners. Euromoney Books.
Greuning, H. V. & Koen, M. 2001. International accounting standards: a practical guide. World Bank Publications.
IAS Plus. No date. An Overview of International Financial Reporting Standards. Deloitte Touche Tohmatsu. [Online]. Available at: http://www.iasplus.com/standard/standard.htm [Accessed on July 04, 2010].
IAS Plus-b, 2010. Service Concession Arrangements. IFRS Interpretations Committee Agenda. [Online]. Available at: http://www.iasplus.com/ifric/ias17serviceconcession.htm [Accessed on July 04, 2010].
IFRS Foundation. No date. IAS 17 Leases. Technical Summary. [Pdf]. Available at: http://www.iasb.org/NR/rdonlyres/B8ABE9AA-8F5B-4301-866E-ED2D423504E7/0/IAS17.pdf [Accessed on July 04, 2010].
IFRS Foundation-a. No date. IAS 23 Borrowing Costs. Technical Summary. [Pdf]. Available at: http://www.iasb.org/NR/rdonlyres/5D6686FE-9436-432D-A0AD-72EB6B94207E/0/IAS23.pdf [Accessed on July 4, 2010].
IFRS Foundation-c. No date. IAS 36 Impairment of Assets. Technical Summary. [Pdf]. Available
at:
http://www.iasb.org/NR/rdonlyres/A288C781-7D39-4988-BA71-
9AB77A263BA0/0/IAS36.pdf [Accessed on 06 July 2010].
IFRS Foundation-d. No date. IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Technical Summary. [Pdf]. Available at: http://www.iasb.org/NR/rdonlyres/81F90956-30094346-B727-11119816C992/0/IAS37.pdf [Accessed on 06 July 2010].
International Accounting Standards Board. 2006. The Recognition Principle. IAS 37 Round-table Discussions: Summary of outcomes. [Pdf]. Available at:
http://www.iasb.org/NR/rdonlyres/B364DFB6-DB77-4183-8C3E0550C1FCF2FE/0/SummaryofoutcomesFINAL.pdf [Accessed on 06 July 2010].
International Accounting Standards Committee Foundation & International Accounting Standards Board. 2007. A guide through International Financial Reporting Standards (IFRSs)
MBA TERM PAPERS CUSTOM ESSAY WRITING SERVICES 2007: including the full text of the Standards and Interpretations and accompanying documents issued by the International Accounting Standards Board as at 1 January 2007 ; with extensive cross-references and other annotations. Kluwer.
Ullah, S., Zeb, M. & Khan, A. No date. Introduction. An Examination Of The IAS 36 Assets Impairment On The Valuation Models Used By Analysts Firms In U.K. [Online]. Available at: http://list.academic-journal.org/submissions/isfa2009_submission_4.doc [Accessed on July 06, 2010].

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