1 INTERNATIONAL FEDERATION OF ACCOUNTANTS (IFAC)

IFAC represents the worldwide accountancy profession.

1.1 Mission of the International Federation of Accountants (IFAC)

• To develop and enhance the profession to provide services of consistency high quality in the public interest.

1.2 Membership

• Accountancy bodies recognised by law or consensus within their countries.
• Membership in IFAC automatically includes membership in the International Accounting Standards Committee (IASC).

1.3 Technical committees

• International Auditing Practices Committee (IAPC) – issues International Standards on Auditing (ISAs)
• Forum on Ethics – publishes a Code of Ethics for Professional Accountants.
• Others
• Education
• Financial and Management Accounting
• Public Sector
• Information Technology
• Membership

1.4 Accounting v auditing

The classification and recording of actual transactions in monetary terms The presentation and interpretation of the results of transactions

Objective is to express an opinion whether the financial statements are prepared, in all material respects, in accordance with a financial reporting framework.

2 INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC)

2.1 Objectives

• To formulate and publish, in the public interest, accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance.
• To work to improve and harmonise regulations, accounting standards and procedures relating to the presentation of financial statements.

2.2 Constitution

2.2.1 Membership

• All professional accountancy bodies that are members of the International Federation of Accountants (IFAC).

2.2.2 Structure

2.2.3 The Board

• Comprises representatives of accountancy bodies in 13 countries
• Appointed primarily by IFAC
• Meets 3 times a year.

2.3 Advisory council

2.3.1 Role

• To promote the acceptability of IASs
• To enhance the credibility of IASC
• To review and comment on the Board’s strategy
• To prepare an annual report on the effectiveness of the Board
• To promote participation in, and the acceptance of, work by IASC
• To seek and obtain funds for IASC’s work

3 INTERNATIONAL ACCOUNTING STANDARDS (IASs)

3.1 Importance

• Ultimately, IASs will form the basis of international generally accepted accounting principles ("GAAP").

3.2 Development of IASs

Notes

1    Representatives may include expert in particular topic.

2    Committee considers IASC’s Framework and national and regional requirements.

3    Does not have to be published (eg where revisions to existing IAS proposed).

4    More than one ED may be issued.

3.3 Interpretation of IASs

Steps taken by the IASC to achieve consistent interpretation include

1. Comparability and improvements project – resulted in the revision of ten IASs. "Alternative accounting treatments" (see below) were reduced or eliminated and disclosure requirements reviewed in the context of "the Framework"
2. Publication of draft statement of principles – to make IASC intentions clear
3. Issue of a newsletter "Insight" – provides regular updates and explains technical decisions
4. Issue of interpretations by the Standing Interpretations Committee (SIC).

3.4 Benchmark and allowed alternative treatments

• Where IASs permit two accounting treatments for like transactions and events
• one is designated the benchmark treatment
• the other is the allowed alternative treatment.

Increases acceptability of Standard

Reduces comparability

3.5 Scope and application

• Published financial statements of any commercial, industrial or business reporting enterprise (whether public or private sector).
• Separate financial statements and consolidated financial statements.
• Any limitation on the applicability of specific IASs is made clear in the IAS.
• IASs are not intended to apply to immaterial items.
• An IAS applies from a date specified in the standard, and does not apply to past periods

Exclusions

• Non-business aspects of public sector enterprises.
• Private sector not-for-profit (NFP) entities.

3.6 Authority

• IASs do not override local regulations governing the issue of financial statements in a particular country.
• Neither IASC nor the accountancy profession has the power to enforce international agreement or to require compliance.

3.7 Harmonisation

• Conformity with IASs is achieved where IASs are

• adopted as national requirements

• used as the basis for national requirements

• used as an international benchmark for countries which develop revise their own requirements

• incorporated in legislation (ie compliance made a statutory requirement).

4 INTERNATIONAL ORGANIZATION OF SECURITIES
COMMISSIONS (IOSCO)

Mutual goal – To enable any company to offer or list its securities on any foreign stock exchange with one set of financial statements.

4.1 Core standards

• IASC and IOSCO have been working together since 1995 to reach agreement on "core standards" as identified by IOSCO.
• IOSCO core standards include (amongst others)

• Key components were completed in March 1999.

4.2 Endorsement of IASs

• IOSCO technical committee has begun its assessment.
• If IOSCO satisfied, it will endorse IASs for cross-border capital raising and listing purposes in all global markets.

5 RELATIONSHIP OF IASC WITH OTHER BODIES

5.1 Intergovernmental bodies

• Those concerned with improvement and harmonisation of financial statements include

• the European Commission

• the Working Group on Accounting Standards of the Organisation for Economic Co-operation and Development (OECD working group)

• The United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (UN ISAR group)

5.2 National standard setting bodies (NSSBs)

• The European Commission and the United States Financial Accounting Standards Board (FASB)
• participate in IASC consultative groups
• attend board meetings.
• IASC, FASB and the Fédération des Experts Compatables Européens (FEE) organise an international conference of standard setting bodies.
• Representatives of NSSBs are invited to discuss EDs and develop papers.

FRAMEWORK DOCUMENT

1 PURPOSE AND STATUS

1.1 Purpose

• To assist the Board of IASC in
• developing future IASs and reviewing existing IASs
• promoting harmonisation of regulations etc by providing a basis for reducing the number of alternative accounting treatments permitted by IASs
• To assist NSSBs in developing national standards
• To assist preparers of financial statements in applying IASs and in dealing with topics that have yet to form the subject of an IAS
• To assist auditors in forming an opinion as to whether financial statements conform with IASs
• To assist users of financial statements in interpreting information contained in financial statements prepared in conformity with IASs
• To provide those who are interested in the work of IASC with information about its approach to the formulation of IASs.

1.2 Status

• Framework is not an IAS and does not define standards for measurement or disclosure.
• In a limited number of cases where a conflict between the framework and an IAS arises, the IAS prevails.

1.3 Scope

• Objective of financial statements
• Qualitative characteristics that determine usefulness of information in financial statements
• Definition, recognition and measurement of elements
• Concepts of capital and capital maintenance.

1.4 Financial statements

• Included
• Balance sheet (BS)
• Income statement (IS)
• Statement of changes in financial position (eg a CFS)
• Integral notes, other statements and explanatory material.
• Not included
• reports by directors
• statements by chairman
• discussion and analysis by management and similar items included in a financial or annual report.

1.5 Application

• Financial statements of all commercial, industrial and business reporting enterprises, whether public or private.

1.6 Users (and their information needs)

• Investors and their advisers

· Employees and their representatives

· Lenders

· Suppliers and other trade creditors

· Customers

· Governments and their agencies

· Public

2 THE OBJECTIVE OF FINANCIAL STATEMENTS

To provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.

• Also, to show the results of management’s stewardship (ie accountability for resources entrusted to it).

2.1 Financial position, performance and changes in financial position

• Information that enables users to evaluate
• ability of enterprise to generate cash and cash equivalents
• timing and certainty of their generation.

Affected by economic resources controlled financial structure liquidity and solvency capacity to adapt to changes.	· In particular profitability · To predict capacity to generate cash flows from existing resource base · To form judgements about effectiveness with which additional resources might be employed.	· To assess investing, financing and operating activities · To assess ability to generate cash and cash equivalents and needs to utilise those cash flows.
BALANCE SHEET	INCOME STATEMENT	SEPARATE STATEMENT

3 UNDERLYING ASSUMPTIONS

3.1 Accrual basis

• Effects of transactions and other events are
• recognised when they occur
• recorded in the accounting records and reported in the financial statements of the periods to which they relate.

3.2 Going concern

• Assumption that an enterprise will continue in operation for the foreseeable future.
• Therefore neither intention nor need to liquidate or curtail materially the scale of operations.

4 QUALITATIVE CHARACTERISTICS of Financial statements

Attributes that make information provided in financial statements useful to users.

4.1 Principal qualitative characteristics

• Relate to

4.2 Understandability

• Users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study information with reasonable diligence.
• Information about complex matters should not be excluded on the grounds that it may be too difficult for certain users to understand.

4.3 Relevance

• Quality helps users
• evaluate past, present or future events
• confirm or correct their past evaluations.
• Relevance of information is affected by

Nature alone may be sufficient to determine relevance.

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Depends on size of item or error judged in the particular circumstances of its omission or misstatement a threshold or cut-off point rather than being a primary qualitative characteristic.

4.4 Reliability

• Free from material error and bias
• Can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent.

• Reliability encompasses
• Faithful representation – eg meeting recognition criteria
• "Substance over form" – substance and economic reality, not merely legal form
• Neutrality – free from bias
• Prudence – including a degree of caution in making estimates under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated
• Completeness (within bounds of materiality and cost) – an omission can cause information to be false or misleading and thus unreliable

4.5 Comparability

• Users need to be able to compare
• financial statements of an enterprise through time – to identify trends in financial position and performance
• financial statements of different enterprises – to evaluate relative financial position, performance and changes in financial position.
• Consistent measurement and display of financial effect of like transactions and other events.
• Implication – users must be informed of accounting policies employed, any changes in those policies and the effects of such changes.
• Financial statements must show corresponding information for preceding periods.

5 ELEMENTS OF FINANCIAL STATEMENTS

Elements – broad classes of the financial effects of transactions grouped according to their economic characteristics.

5.1 Definitions

• An asset
• a resource controlled by the enterprise
• as a result of past events
• from which future economic benefits are expected to flow.
• A liability
• a present obligation of the enterprise
• arising from past events
• settlement of which is expected to result in an outflow of resources embodying economic benefits.
• Equity
• the residual interest
• in the assets of the enterprise
• after deducting all its liabilities.
• Income
• increases in economic benefits during the accounting period
• in the form of inflows (or enhancements) of assets or decreases of liabilities
• that result in increases in equity
• other than those relating to contributions from equity participants.
• Expenses
• decreases in economic benefits during the accounting period
• in the form of outflows (or depletions) of assets or incurrences of liabilities
• that result in decreases in equity
• other than those relating to distributions to equity participants

5.2 Recognition

5.2.1 Meaning

• The process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the criteria for recognition (below).
• It involves the depiction of the item in words and by a monetary amount and the inclusion of that amount in the balance sheet or income statement totals.
• Items that satisfy the recognition criteria should be recognised.
• The failure to recognise such items is not rectified by disclosure of the accounting policies used nor by notes or explanatory material.

5.2.2 Criteria

5.3 Measurement bases

	Assets	Liabilities
Historical cost	The amount paid (or the fair value of the consideration given) to acquire them at the time of their acquisition.	· The amount received in exchange for the obligation.
Current cost	The amount that would have to be paid if the same or an equivalent asset was acquired currently.	· The undiscounted amount that would be required to settle the obligation currently.
Realisable (settlement) value	The amount that could currently be obtained by selling the asset in an orderly disposal.	· At settlement values (ie the undiscounted amounts expected to be paid to satisfy the liabilities in the normal course of business).
Present value	Present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business.	· Present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

6 CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

6.1 Concepts of capital

6.1.1 Financial concept

• Capital is synonymous with the net assets or equity of the enterprise.

6.1.2 Physical concept

• Capital is regarded as the productive capacity of the enterprise (eg based on units of output per day).

6.2 Concepts of capital maintenance and the determination of profit

Principle – profit is only recorded after capital has been maintained intact.

6.2.1 Financial capital maintenance

• Profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period (after excluding any distributions to/ contributions from owners during the period).

6.2.2 Physical capital maintenance

• Profit is earned only if the physical productive capacity (or operating capability) of the enterprise at the end of the period exceeds the physical productive capacity at the beginning of the period (after excluding any distributions to/contributions from, owners during the period).

6.3 Methods of accounting

6.3.1 Current purchasing power (CPP)

• Current purchasing power accounting adjusts non-monetary items in historical cost accounts by general price index so reported profit is after allowing for maintenance of purchasing power.
• Reflects financial capital maintenance

6.3.2 Current cost accounting (CCA)

• In current cost accounting profit is the surplus after allowing for price changes on funds needed to continue the existing business and maintain operating capability (however financed).
• Reflects physical capital maintenance.