BUSINESS & ECONOMICS/International / Accounting A one-stop resource for understanding and applying current International Financial Reporting Standards Colors= PMS Red 187, PMS 275, PMS 4655 International Financial Reporting Standards Understanding Fundamentals IFRS IFRS International Financial Reporting Standards Understanding IFRS Fundamentals Nandakumar Ankarath Kalpesh J. Mehta Ankarath Mehta Ghosh Alkafaji Technically reviewed by Ian Hague, Principal, Accounting Standards Board (AcSB), Canada Dr. T.P. Ghosh Dr. Yass A. Alkafaji T he move to International Financial Reporting Standards (IFRS) is the single most important initiative in the financial reporting world, with more than 100 countries requiring or allowing the use of IFRS for the preparation of financial statements by publicly held companies. It is expected that by 2011, more than 150 countries will be converting to it. It’s clear that IFRS is here to stay—get the expert advice you need to properly implement IFRS with Understanding IFRS Fundamentals: International Financial Reporting Standards. Filled with easy-to-follow examples and case studies, Understanding IFRS Fundamentals: International Financial Reporting Standards is your handy resource to all things IFRS, presenting: • Authoritative advice and simple explanations of IFRS standards • Topical arrangement of issues of common interest to financial statement preparers and users • Extracts from published financial statements illustrating practical implications for applying IFRS • Guidance for finance professionals in more than 100 countries that have either adopted or adapted to IFRS • Simple explanations of complex standards A practical reference with the answers to your issues of interest, Understanding IFRS Fundamentals: International Financial Reporting Standards serves as an essential resource for when you need information in a hurry. Stay on track and focused with the straightforward guidance in Understanding IFRS Fundamentals: International Financial Reporting Standards. $70.00 USA / $84.00 CAN International Financial Reporting Standards Un der stand ing Fu nda menta ls I F RS JOHN WILEY & SONS, INC. A. Nandakumar Kalpesh J. Mehta Dr. T.P. Ghosh Dr. Yass A. Alkafaji International Financial Reporting Standards Understanding Fundamentals I F RS Technically reviewed by Ian Hague, Principal, Accounting Standards Board (AcSB), Canada This book is printed on acid-free paper. Copyright © 2010 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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ISBN: 978-0-470-39914-9 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 CONTENTS Preface vii About the Authors ix Introduction xi 1 Introduction to International Financial Re p ortin g Standards 1 2 IASB Framework 11 3 Presentation of Financial Statements (IAS 1) 17 4 Inventories (IAS 2) 27 5 Statement of Cash Flows (IAS 7) 35 6 Accountin g Policies, Chan g es in Accountin g Estimates, and Errors (IAS 8) 41 7 Events After the Re p ortin g Period (IAS 10) 49 8 Construction Contracts (IAS 11) 53 9 Income Taxes (IAS 12) 59 10 Pro p ert y , Plant, and E q ui p ment (IAS 16) 69 11 Leases (IAS 17) 77 12 Revenue (IAS 18) 87 13 Em p lo y ee Benefits (IAS 19) 95 14 Accountin g for Government Grants and Disclosure of Government Assistance (IAS 20) 107 15 The Effects of Chan g es in Forei g n Exchan g e Rates (IAS 21) 111 16 Borrowin g Costs (IAS 23) 119 17 Related-Part y Disclosures (IAS 24) 123 18 Accountin g and Re p ortin g b y Retirement Benefit Plans (IAS 26) 131 19 Consolidated and Se p arate Financial Statements (IAS 27) 143 20 Investments in Associates (IAS 28) 155 21 Financial Re p ortin g in H yp erinflationar y Economies (IAS 29) 163 22 Interests in Joint Ventures (IAS 31) 171 23 Financial Instruments: Presentation (IAS 32) 177 24 Earnin g s Per Share (IAS 33) 187 25 Interim Financial Re p ortin g (IAS 34) 195 26 Im p airment of Assets (IAS 36) 207 27 Provisions, Contin g ent Liabilities, and Contin g ent Assets (IAS 37) 215 28 Intan g ible Assets (IAS 38) 223 29 Financial Instruments: Reco g nition and Measurement (IAS 39) 231 30 Investment Pro p ert y (IAS 40) 261 31 A g riculture (IAS 41) 267 32 First-Time Ado p tion of International Financial Re p ortin g Standards (IFRS 1) 277 33 Share-Based Pa y ment (IFRS 2) 295 34 Business Combinations (IFRS 3) 305 35 Insurance Contracts (IFRS 4) 321 36 Noncurrent Assets Held for Sale and Discontinued O p erations (IFRS 5) 331 37 Ex p loration for and Evaluation of Mineral Resources (IFRS 6) 339 38 Financial Instruments: Disclosures (IFRS 7) 345 39 O p eratin g Se g ments (IFRS 8) 363 40 Financial Instruments (IFRS 9) 369 41 International Financial Re p ortin g Standards (IFRS) for Small and Medium Enterprises (SMEs) 383 Index 395 PREFACE The International Financial Reporting Standards (IFRS) are now adopted in more than 100 countries. The recent decision of the U.S. Securities and Exchange Commission (SEC) to allow foreign private issuers to list their securities on U.S. stock exchanges using IFRS (without reconciling to U.S. GAAP) and the expectation that more than 150 countries will have adopted IFRS by 2011 has made it incumbent upon accounting and finance profession- als, bankers, regulators, educators, and trainers to understand and apply IFRS. We embarked on this project because there was an urgent need for an easy-to-understand IFRS book; most books covering the accounting standards contained explanations and interpretations of complex technical issues from standards. In this book, we have explained in simple terms the most important parts of these complex standards through easy-to-follow examples and case studies. It also provides a quick source of reference to find answers to issues of interest to financial statement preparers, users, and analysts. We have also included extracts from published financial statements to illustrate practical implications of applying IFRS. We have received immense support and assistance on this project from several people around the world. We express our sincere appreciation and gratitude to Ian Hague, a Principal with the Accounting Standards Board (AcSB) in Toronto, Canada, for his detailed review of the entire manuscript. The various amendments to the IFRS that came into effect during the time of writing this book required quite a few chapters to be rewritten and amended. We will be failing in our duties if we did not thank John DeRemigis and the editorial and marketing staff of John Wiley & Sons for their tremendous patience in bearing with the delay in meeting the initial deadlines set for publication. We also thank Abbas Ali Mirza, Partner with Deloitte Middle East who has been our inspiration for his valuable guidance and unstinting support. We are also grateful to all our family, friends, and colleagues who contributed in their own way to ensure the completion of this book. All the views expressed in this publication are ours and do not represent those of the firms or organizations of which we are part. Nandakumar Ankarath Dr. T.P.Ghosh Kalpesh J. Mehta Dr. Yass A. Alkafaji [...]... preparation and issuing of IFRS and Exposure Drafts that precede issuance of the final standards (i.e., the IFRS) IFRS Issued by the IASB to December 31, 2009 IFRS 1, First-Time Adoption of International Financial Reporting Standards IFRS 2, Share-Based Payment IFRS 3, Business Combinations IFRS 4, Insurance Contracts IFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations IFRS 6, Exploration... increase market efficiency, and reduce the cost of raising capital International 2 Understanding IFRS Fundamentals Financial Reporting Standards (IFRS) are increasingly becoming the set of globally accepted accounting standards that meet the needs of the world’s increasingly integrated global capital markets WHAT ARE IFRS? IFRS are a set of standards promulgated by the International Accounting Standards... IFRS (which some refer to as the sudden urge to merge or converge with IFRS in the United States), more specifically, under the U.S SEC IFRS road map, limited early use of IFRS has also been permitted for eligible entities; under this limited exception, certain U.S issuers may even begin using IFRS soon However, the final decisions in this regard are yet to be made as of this date THE WAY FORWARD IFRS. .. book contains basic explanations of IFRS to demonstrate their practical application and provides • • • • A quick source of reference to find answers to issues of interest to financial statement preparers, users and analysts; An easy way to understand IFRS through simple explanations of the most important parts of IFRS standards; Easy-to-follow illustrations explaining IFRS standards, keeping in mind the... Noncurrent Assets Held for Sale and Discontinued Operations IFRS 6, Exploration for and Evaluation of Mineral Resources IFRS 7, Financial Instruments: Disclosures IFRS 8, Operating Segments IFRS 9, Financial Instruments IFRS for SMEs** **In July 2009, the IASB promulgated the much-awaited IFRS for Small and Medium Enterprises (SMEs) It provides standards applicable to private entities (those that are not... companies in Europe to apply IFRS in their consolidated financial state- 8 Understanding IFRS Fundamentals ments The legislation came into effect in 2005 and applies to more than 8,000 companies in 30 countries, including countries such as France, Germany, Italy, Spain, and the United Kingdom The adoption of IFRS in Europe means that IFRS has replaced national accounting standards and requirements as the... have been moving toward IFRS By 2005, IFRS had become mandatory in many countries in Africa, Asia, and Latin America In addition, countries such as Australia, Hong Kong, New Zealand, Philippines, and Singapore had adopted national accounting standards that mirror IFRS Today, IFRS are used in more than 100 countries A significant number of Global Fortune 500 companies already use IFRS and this number is... issuers to list their securities on U.S stock exchanges using IFRS and without reconciling to U.S GAAP has also made it incumbent upon accountants, finance professionals, analysts, and bankers, even in the United States, to become proficient in IFRS This large-scale global adoption of IFRS has created an urgent need for an easy-tounderstand IFRS book Most books covering the accounting standards contain... nature or function unless they are immaterial 20 Understanding IFRS Fundamentals • • • • Offsetting: An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an IFRS Frequency of Reporting: An entity shall present a complete set of financial statements at least annually Comparative Information: Except when IFRS permits or requires otherwise, an entity shall... adoption of IFRS The Board usually meets once a month and its meetings are open to the public—in person and via the Internet The IASB shall comprise 14 members appointed by the Trustees; 12 full-time members and 2 part-time members With recent amendments to the constitution of the IASC Foundation, the size of the IASB is to be increased from 14 to 16 members by 2012 6 Understanding IFRS Fundamentals . 4655 International Financial Reporting Standards Understanding Fundamentals IFRS IFRS International Financial Reporting Standards Understanding IFRS Fundamentals Nandakumar. to it. It’s clear that IFRS is here to stay—get the expert advice you need to properly implement IFRS with Understanding IFRS Fundamentals: International