Framework-Based - Understanding of IFRSs

International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,

not necessarily those of the IASB or IFRS Foundation.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Framework-based
understanding of IFRSs
Joint World Bank and IFRS Foundation train
the trainers workshop hosted by the ECCB,
30 April to 4 May 2012
K

The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation.
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2
Framework-based understanding
2
Principles Rules Concepts
relates IFRS requirements to the concepts in
the Conceptual Framework
reasons why some IFRS requirements do not
maximise those concepts (eg application of the
cost constraint or inherited requirements)
3
Framework-based understanding
provides 3
a cohesive understanding of IFRSs
Framework facilitates consistent and logical
formulation of IFRSs
a basis for judgement in applying IFRSs
Framework established the concepts that underlie
the estimates, judgements and models on which
IFRS financial statements are based
a basis for continuously updating IFRS
knowledge and IFRS competencies
4
Minimum guidance that gives effect to the principles
Presentation and
disclosure principles

Measurement
principle/s

Recognition
principle

Structure of a principle-based standard 4
Derecognition
principle

Concepts
5
The ideal principle-based standard
Scope
no exceptions
Principles
derived from the Conceptual Framework
reliance on professional judgement to apply
principles in business context
Application guidance
explains application of principles
gives effect to the principles

5
6
Get rule-based standards if
Preparers and auditors
refuse to exercise judgement
dont act with integrity
ask for detailed interpretations
refuse to accept raw economic facts
Regulators
want one answer in spite of different economic
facts
Courts
lawyers fail to defend reasonable judgements
6
7
Rules/application guidance
Application guidance to give effect to the principles
Rules (interpretations) Rules (exceptions)
Principles
Structure of some IFRSs
7
Concepts
8
Example:
Business combinations
Objective
Concepts
elements definitions
representational faithfulness
Core principle
an acquirer of a business (scope)
recognises assets acquired and liabilities assumed
(recognition principle)
at their acquisition-date fair values (measurement
principle)
discloses information that enables users to evaluate
the nature and financial effects of the acquisition
(disclosure principle)
8
9
Example:
Business combinations continued
Rules
exceptions to the recognition principle
exceptions to the measurement principle
specified disclosures
9
10
Example:
Business combinations continued 10
To understand build from objective through concepts
to core principle and rules
recognitionunderstand reason for removing
(i) the probability criterion; and
(ii) the explicit reliability of measurement criteria
(see Basis for Conclusions on IFRS 3 paragraphs BC125BC130)
understand reasons for exceptions to IFRS 3:
recognition principle
measurement principle
(see Basis for Conclusions on IFRS 3)
11
Example:
Business combinations continued 11
Focus on judgements, eg
identifying a business
measuring fair value in the absence of an active market etc

Consider with reference to the objective and QCs whether
uncertainty should enter recognition or measurement
(for business combinations and then extend to consider
for other transactions and elements)
12
Rules

Application guidance
to give effect to the broadly stated requirements
Interpretations Exceptions

Broadly stated
requirements
(not based on
concepts in
Conceptual Framework)
Structure of other IFRSs
12
13 What if requirement not principle-based 13
Understand why IASB deviated from the main
concepts in the Conceptual Framework
see Basis for Conclusions (BfC)
If no BfC then requirement could predate Conceptual
Framework (eg IAS 20))
A Guide through IFRSs cross-references all IFRS
requirements to the Basis for Conclusions

Consider what a more principle-based requirement
could be (consider rejected alternatives, subsequent
IASB DPs and EDs, etc)

14
Example:
Lease classification
Objective
Concepts
faithful representation
element definitions
Broadly stated lease classification requirement
capitalise in-substance purchases (finance leases)
other leases = executory contracts (operating leases)
is this requirement principle-based?
Rules
guidance (eg contingent rentals)
14
15
Example:
Lease classification continued
15
understand broadly stated requirement is inconsistent
with the Conceptual Framework
(see basis for conclusions on ED Leases)
consider what a principle-based lease classification
principle could be (see ED Leases)
focus on making the judgements to apply
16
Does the Framework help me
understand IFRSs? 16
Yes, the starting point for understanding all IFRS
information is the objective and the concepts that flow
logically from that objective:
IASB uses Framework to set IFRSs
Teachers/Trainers use Framework-based teaching
to prepare students to make judgements that are
necessary to apply IFRSs
Preparers use Framework to make the judgements
that are necessary to apply IFRSs
Auditors and regulators assess those judgements
Investors, lenders and others consider those
judgements when using IFRS financial information
to inform their decisions
22
Examples:
errors and changes in policies and estimates
Objective
Concepts
faithful representation
comparability
Principle
Prior period error: retrospective restatement
Change in policy: retrospective application
Change in estimate: prospective application
Rules
impracticable exception
transitional provisions (new requirements)
22
23 23 23
Pervasive constraint
Cost
IASB assesses whether the benefits of reporting
particular information are likely to justify the
costs incurred to provide and use that
information.

Note: It is consistent with the Framework for an
IFRS requirement not to maximise the
qualitative characteristics of financial information
and other main Framework concepts when the
costs of doing so would exceed the benefits.
24
Transitional provisions and effective
dates
The concepts = objective of financial
reporting and qualitative characteristics (see
Conceptual Framework)
The principle for changes in accounting
policies (see IAS 8) =
retrospective application of new accounting
policy
voluntary policy change only if change results in
reliable and more relevant information
disclose the effects of retrospective application

25
Transitional provisions and effective
dates
Rule transitional provisions for new and
amended IFRSs
cost constraint
prevent abuse from the use of hindsight
Rule impracticability exception
practical expedient
Rule specified disclosures
application guidance

26
Elements
Asset
resource controlled by the
entity
result of past event
expected inflow of economic
benefits
Liability
present obligation
arising from past event
expected outflow of
economic benefits
Equity = assets less liabilities
Income
recognised increase in
asset/decrease in liability in
current reporting period
that result in increased
equity except
Expense
recognised decrease in
asset/increase in liability in
current reporting period
that result in decreased
equity except
26
27
Elements, examples
Asset?
an oil explorers exploration rig
a fish farmers breeding stock
fish in the sea (from a fish harvesters
perspective)
own shares held by an entity
firm order to acquire gold, settle net in cash
firm order to acquire gold, cannot settle net
expenditure on major inspection (a condition of
continuing to operate an item of PPE)
right to recover past costs incurred increased
future prices in a rate regulated activity
27
28
Elements, examples
Liability?
defending a lawsuit
promise to make good environmental damage
(no legal obligation to do so)
law requires smoke filters be fitted to factory
lesseeshort-term car rental agreement
participant in a cap and trade emission trading
scheme

28
29
Elements, examples
Liability or equity?
issue ordinary share
issue compulsorily redeemable debt (fixed
interest, fixed redemption)
issue convertible debt instrument (holder has
option to convert)
non-controlling interest

29
30 Elements, examples 30
Liability or equity at 31/12/20X1?
On 15/01/20X2 the shareholders of an entity approved
the distribution of CU40,000 dividend for the year
ended 31/12/20X1 (as proposed by management on
21 December 20X1.
CU18,000: minimum dividend required by law for the year
ended 31 December 20X1
CU22,000: additional to required minimum dividends

31
Classification
Objective of financial reporting
Financial statements portray financial effects of
transactions and events by:
grouping into broad classes (the elements, eg asset)
sub-classify elements (eg assets sub-classified by their
nature or function in the business)
IAS 1
application of IFRSs with additional disclosures when
necessary results in a fair presentation (faithful
representation of transactions, events and conditions)
dont offset assets & liabilities or income & expenses

32
Classification, assets and claims
Information about the nature and amounts of a
reporting entitys economic resources and claims
can help users to identify the reporting entitys
financial strengths and weaknesses.
That information can help users to:
assess the reporting entitys liquidity and
solvency
its needs for additional financing and how
successful it is likely to be in obtaining that
financing.
(CF.OB13)
33
Classification, claims
Information about priorities and payment requirements
of existing claims helps users to predict how future cash
flows will be distributed among those with a claim
against the reporting entity (CF.OB13)
34
Classification, liability
Which IFRS classification of liability are?
obligation to pay current tax
metered power used but not yet billed by
supplier
normal warrantee obligation to make good
manufacturing defect
warrantee obligation to compensate for
manufacturing defects by settling in
compensation in cash
extended warrantee obligation

34
35
Classification, assets
Different types of economic resources affect a users
assessment of the reporting entity's prospects for future
cash flows differently.
Some future cash flows result directly from existing
economic resources (eg accounts receivable and
investment property).
Other cash flows result from using several resources in
combination to produce and market goods or services to
customers (eg PPE and intangible assets). Although
those cash flows cannot be identified with individual
economic resources (or claims), users of financial
reports need to know the nature and amount of the
resources available for use in a reporting entitys
operations. (CF.OB14)

36
Asset classification
Which IFRS classification of asset are?
investment in ordinary shares
gold
land
land planted with plantation
farm implements
bird breeders birds
birds in a zoological garden
birds in a bird breeding zoo
owner-occupied building held for sale
owner-occupied building decided to abandon

36
37
Recognition
Accrual basis of accounting
recognise element (eg asset) when satisfy
definition and recognition criteria
Recognise item that meets element definition when
probable that benefits will flow to/from the entity
has cost or value that can measured reliably
Unit of account (unit of measure for recognition)
Materiality

38
Recognition, examples
Recognise the asset?
a hospitals backup backup generator (expect never
to use it)
an oil explorers exploration rig
an oil extractors unproven reserves
an oil extractors proven reserves
advertising expenditure
research and development expenditure
internally generated brand
lesseeshort-term car rental agreement
firm order to acquire gold, cannot settle net

39 Measurement concepts 39
Measurement is the process of determining monetary
amounts at which elements are recognised and
carried. (CF.4.54)
To a large extent, financial reports are based on
estimates, judgements and models rather than exact
depictions. The Conceptual Framework establishes
the concepts that underlie those estimates,
judgements and models (CF.OB11)

40 Measurement concepts 40
Measurement part of Conceptual Framework is weak
A number of different measurement bases are
employed to different degrees and in varying
combinations in financial statements, including
historical cost
current cost
realisable (settlement) value
present value (CF.4.55)
IASB guided by objective and qualitative
characteristics when specifying measurements.

The concept, defined in IFRS 13
Fair value is the price that would be received to sell
an asset or paid to transfer a liability (exit price) in
an orderly transaction (not a forced sale) between
market participants (market-based view) at the
measurement date (current price).
Fair value is a market-based measurement (it is not
an entity-specific measurement)
consequently, the entitys intention to hold an asset
or to settle or otherwise fulfil a liability is not relevant
when measuring fair value.
41
Fair value measurement concept
42 Fair value measurement concept 42
Information about an entitys financial performance in
a period, reflected by changes in economic
resources is useful in assessing the entitys past and
future ability to generate net cash inflows (see
CF.OB18)
Income (expenses) are increases (decreases) in
economic benefits during an accounting period in the
form of enhancements (depletions) of assets (CF.4.25)
Measure element at fair value with changes in fair
value recognised as income or expense for the period
in which it arises

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
43
ASSET TYPE MEASUREMENT AT
INITIAL RECOGNITION
MODEL BASED
ON FAIR VALUE
BASIS OF
IMPAIRMENT TEST
IFRS 9 Financial
Instruments
Fair value For specified financial
assets and for particular
business models: fair
value
IAS 16 Property,
Plant and Equipment
Purchase costs + construction
costs + costs to bring to the
location and condition
necessary to be capable of
operating in the manner
intended by management.
Accounting policy choice:
revaluation model

Compare carrying amount
to recoverable amount.

Recoverable amount is
greater of value in use and
fair value less disposal
costs (IAS 36)

IAS 38 Intangible
Assets
Purchase costs + development
costs + costs to bring to the
location and condition
necessary to be capable of
operating as intended by
management
revaluation model

IAS 40
Investment Property
Cost including transaction costs Accounting policy choice:
fair value
IAS 41 Agriculture Fair value less costs to sell Fair value less costs to
sell
44
Example
Biological asset in agricultural activity 44
The concepts: see slides 41 and 42
The principle: a gain or loss arising on initial
recognition of a biological asset at fair value less
costs to sell and from a change in fair value less
costs to sell of a biological asset shall be included
in profit or loss for the period (IAS 41.26)
The limited exception: inability at initial recognition
to measure fair value reliably then cost-
depreciation-impairment model (IAS 41.27)

45 Historical cost concept 45
Assets are recorded at the amount of cash or cash
equivalents paid or the fair value of the consideration
given to acquire them at the time of their acquisition.
Liabilities are recorded at the amount of proceeds
received in exchange for the obligation, or in some
circumstances (for example, income taxes), at the
amounts of cash or cash equivalents expected to be
paid to satisfy the liability in the normal course of
business.
46 Cost-based IFRS measures 46
Few things measured at historical cost
unimpaired land (IAS 16 + IAS 40 cost model)
unimpaired indefinite life intangibles (IAS 38)
unimpaired inventories (IAS 2)
Cost-based measures are more common
unimpaired depreciated historic cost (IAS 16)
unimpaired amortised historical cost (IAS 38)
amortised cost (IFRS 9)

Impairment changes to a fair value or other measure
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
47
ASSET TYPE MEASUREMENT AT INITIAL
RECOGNITION
COST MODEL BASIS OF
IMPAIRMENT
TEST
IAS 2 Inventory Cost of purchase and/or conversion
costs and costs to get the item to the
location and condition for sale
Cost unless impaired Lower of cost
(initial recognition)
and net realisable
value
IAS 16 Property, Plant
and Equipment
Purchase costs + construction costs +
costs to bring to the location and
condition necessary to be capable of
operating in the manner intended by
management.
cost less accumulated
depreciation and
impairment, if any
Compare carrying
amount to
recoverable
amount.

Recoverable
amount is greater
of value in use
and fair value less
disposal costs
(IAS 36)
IAS 38 Intangibles
Assets
Purchase costs + development costs +
costs to bring to the location and
condition necessary to be capable of
operating as intended by management
amortisation (unless
indefinite life asset) and
amortisation, if any
IAS 40 Investment
Property
Cost including transaction costs Accounting policy choice:
depreciation (unless land)
and impairment (if any)
IFRS 9 Financial
Instruments
Fair value For particular business
models amortised cost
IAS 39 specifies
impairment rules
48
Example:
allocating depreciation: concepts 48
Information about an entitys financial performance in
a period, reflected by changes in economic resources
(eg PPE) is useful in assessing the entitys past and
future ability to generate net cash inflows (CF.OB18)
Expenses are decreases in economic benefits during
an accounting period in the form of depletions of
assets (CF.4.25)
Depreciation represents the consumption of the assets
service potential in the period.
land with an indefinite useful life is not depreciated because
its service potential does not reduce with time
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org`
49
Example:
allocating depreciation: principle 49
Depreciation is the systematic allocation of the
depreciable amount of an asset over its useful
life (IAS16.6).
essentially a cost allocation technique
(IAS16.BC29)

50
Example: allocating depreciation:
application guidance (1) 50
Systematic allocation (application guidance):
depreciation method must closely reflects the
pattern in which the assets future economic
benefits are expected to be consumed by the
entity. (cannot use a revenue-based depreciation method?)
unit of measure for depreciation is different from
that for an item of PPE. By depreciating significant
parts of an item of PPE separately, depreciation
more faithfully represents the consumption of the
assets service potential. (IAS16.BC26)

51
Depreciable amount =
cost model: historical cost less residual value
revaluation model: fair value less residual value
Residual value =
amount that the entity would currently obtained
from disposal of asset (less estimated disposal
costs) if the asset were already of the age and in
the condition expected at the end of its useful life

52
Useful life (entity specific) =
the period over which the asset is expected to be available
for use by the entity; or
the number of production or similar units expected to be
obtained from the asset by the entity.
Consequently, depreciation continues when idle (if
useful life = period)
However, depreciation ceases when classified as
held for sale because IFRS 5 measurement is
essentially a process of valuation, rather than
allocation (IFRS5.BC29)

53 Derecognition 53
Derecognition occurs when a recognised item is
removed from the statement of financial position
There is no explicit concept for derecognition in the
Conceptual Framework. Consequently:
derecognition requirements are specified at the
Standards level
inconsistencies exist between the derecognition
requirements of different IFRSs
derecognition does not necessarily coincide with no
longer meeting the requirements specified for
recognition

54 Derecognition of PPE 54
IAS 16.67 specifies: the carrying amount of an item
of PPE shall be derecognised:
(a) on disposal; or
(b) when no future economic benefits are
expected from its use or disposal.
Note: derecognition of PPE does not necessarily
coincide with the loss of control of the asset.
55
Presentation
Presentation: financial statements portray
financial effects of transactions and events by:
grouping into broad classes (eg asset)
sub-classify assets by their nature or function
in the business (eg land could be inventory,
investment property or PPE)
PPE classified into classesgrouping of assets
of a similar nature and use in the entitys
operations
do not offset assets and liabilities or income
and expenses
56
Exampleclasses of PPE
How many classes (similar nature and use in the
entitys operations) of property, plant and
equipment?
plot on which HQ is built
vacant plot, about to construct new HQ
plot that operates as landfill site
plot on which sales office is built
10 plots in different cities each with retail outlet
vacant plot acquired for an undetermined
purpose

57
Disclosure
Objective of financial reporting
Notes provide narrative descriptions or
disaggregations of items presented in primary
statements and information about items that do
not qualify for recognition in those statements
the failure to recognise an item cannot be
rectified by disclosure
Application of IFRSs with additional disclosures
when necessary results in a fair presentation
(faithful representation of transactions, events
and conditions)

58 Frameworks role in applying IFRSs 58
Does the Framework help me apply IFRSs?
Yes, Framework is in IAS 8 hierarchy (see next
slide)
Preparers use the Framework to make the
judgements that are necessary to apply IFRSs
Auditors and regulators assess those
judgements
Investors, lenders and others consider those
judgements when using IFRS financial
information to inform their decisions
59
If no specific IFRS requirement
Use judgement to
develop a policy that results in relevant
information that faithfully represents (ie
complete, neutral and error free)
Hierarchy:
1
st
IFRS dealing with similar and related issue
2
nd
Framework definitions, recognition crit. etc
Can also in parallel refer to GAAPs with similar
framework
59
60 In other words, if no IFRS requirement 60
Framework-based approach would ask:
What is the economics of the phenomenon (eg
transaction or event)?
What relevant information using the accrual
basis of accounting faithfully present that
economic phenomenon to inform decisions of
investors and lenders (potential and existing)?
Is there anything in IFRSs that prevents me
from providing that information?
61 Example: non-cash distribution 61
Before IFRIC 17, entity distributes non-cash
asset (eg land or shares in another) whose fair
value = CU1 mill. Carrying amount of asset =
cost = CU1K
Economics = reduce owners claims against the
entity by distributing to them an asset worth
CU1 million.
Relevant information for investors and lenders
that faithfully represents the economics:
investors received CU1 million refund of capital.
value of assets available to meet lenders claims
reduced by CU1 million.

62 Example: non-cash distribution 62
Before IFRIC 17 (continued)
Does IFRSs prevent providing that information?
No. Therefore:
recognise CU999K income (previously
unrecognised increase in the value of the
asset derecognised).
recognise CU1 million distribution to owners.
63 Example: share-based payment 63
Before IFRS 2, entity pays employee in own shares.
Par value of shares issued = CU1K. Fair value of
services provided = CU1 million = fair value of shares.
Economics = entity paid employees CU1 million for
services. Employees invested CU1 million in entity.
Relevant information for investors and lenders that
faithfully represents the economics:
CU1 million services received = staff cost.
CU1 million invested = increased owner equity.
Does IFRSs prevent providing that information? No.
Therefore, recognise CU1 million expense and
recognise CU1 million increase in owners equity.
64 Support for Framework-based teaching 64
IFRS Foundation education initiative works with
others to support Framework-based teaching
create awareness
develop material (starting with PPE and non-financial
liabilities)
workshops 2012: Brighton (BAFA), Llubijana (EAA),
Melbourne (AFAANZ), Washington DC (AAA)
encourage those certifying accountants to examine
their students ability to make the judgements that
are necessary to apply IFRSs
65 65
Questions or comments?
Expressions of individual views
by members of the IASB and
their staff are encouraged.
The views expressed in this
presentation are those of the
presenter. Official positions of
the IASB on accounting matters
are determined only after
extensive due process
and deliberation.
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
66

The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at 1
January 2012 with an effective date after 1 January 2012
but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and the
publishers do not accept responsibility for loss caused to
any person who acts or refrains from acting in reliance on
the material in this PowerPoint presentation, whether such
loss is caused by negligence or otherwise.
66

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