ifrs

Framework   IAS 1  

Framework.pdf ias1.pdf

IAS 10 consolidated   IFRS 3 business combinations   IAS 16   IFRS 5  

Normes IFRS

In simple terms, there is no fundamental conflict between the two: IFRS is the modern name for the overall suite of international accounting rules, while IAS is the name used for the older rules within that same suite.

Think of it like a long-running book series where the author changed halfway through; the old chapters are still part of the story, but all the new ones are published under a new name.

1. The Historical Shift

• IAS (International Accounting Standards): These were issued between 1973 and 2001 by the IASC (International Accounting Standards Committee).
• IFRS (International Financial Reporting Standards): In 2001, the IASB (International Accounting Standards Board) replaced the old committee. They adopted all the existing IAS but decided that any new standards they wrote would be called “IFRS.”

2. Key Differences at a Glance

Feature	IAS (International Accounting Standards)	IFRS (International Financial Reporting Standards)
Issued By	IASC (Committee)	IASB (Board)
Period	1973 – 2001	2001 – Present
Current Status	Older, but many are still active.	Current, modern standards.
Approach	Often seen as more rules-based.	Focused on being principles-based.
Hierarchy	If an IFRS conflicts with an IAS, the IFRS takes precedence.	The governing standard for modern reporting.

3. How They Work Together

If you are looking at a company’s financial report today, you will see references to both. For example:

• IAS 1 is still used for the general presentation of financial statements.
• IAS 2 is still the standard for inventories.
• IFRS 16 is the newer standard used for leases (which replaced the old IAS 17).

Summary

You don’t choose between them; they are parts of the same framework. When a new IFRS is released, it often “supersedes” (replaces) an older IAS. If an old IAS hasn’t been replaced yet, it remains legally binding and active.

Would you like me to look up which specific IAS standards have been replaced recently by new IFRS standards?

Purpose of Conceptual Framework

The Conceptual Framework for Financial Reporting is essentially the “constitution” of the accounting world. It is not a specific accounting standard itself (like IFRS 16 or IAS 2), but rather a foundational document that provides the logic and theory behind all the rules.

Its primary purpose is to ensure that financial information is consistent, transparent, and useful for people making economic decisions.

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1. Three Main Goals

According to the IASB, the Framework serves three distinct groups:

• For the IASB (The Standard Setters): It helps them develop future IFRS standards based on consistent concepts. This prevents “patchwork” accounting where different rules contradict each other.
• For Preparers (The Accountants): It helps companies develop consistent accounting policies when no specific IFRS standard applies to a particular transaction.
• For Everyone Else (Auditors and Users): It helps investors, auditors, and students understand and interpret the standards by explaining the “why” behind the rules.

2. The Core Pillars of the Framework

The Framework defines the “rules of the game” by establishing several key building blocks:

A. The Objective

The “North Star” of the Framework is to provide financial information that is useful to existing and potential investors, lenders, and other creditors. This information helps them decide whether to buy, sell, or hold shares and loans.

B. Qualitative Characteristics

To be “useful,” the Framework states that information must meet two sets of criteria:

• Fundamental: Relevance (does it make a difference?) and Faithful Representation (is it complete, neutral, and free from error?).
• Enhancing: Comparability, Verifiability, Timeliness, and Understandability.

C. The Elements

The Framework provides the official definitions for the five “elements” of financial statements:

1. Assets: Resources controlled by the entity.
2. Liabilities: Present obligations to transfer economic resources.
3. Equity: The residual interest in the assets after deducting liabilities.
4. Income: Increases in assets or decreases in liabilities (resulting in equity growth).
5. Expenses: Decreases in assets or increases in liabilities.

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3. Does the Framework “Win” Against a Standard?

No. It is important to remember the hierarchy:

Specific IFRS Standards > Conceptual Framework

If a specific standard (like IFRS 15 on Revenue) gives a instruction that seems to conflict with the Conceptual Framework, the standard takes precedence. The Framework is the foundation, but the standards are the specific laws built upon it.

Would you like me to explain the specific “Qualitative Characteristics” (like Prudence or Substance Over Form) in more detail?

General Summary

There is no “official” legal order, but reading them chronologically (starting with IAS 1, then 2, etc.) is actually a mistake. Because the standards are interconnected, you should read them in a way that builds your “accounting muscle” from the ground up.

I recommend following this 4-Step Logical Path:

Phase 1: The Foundation (The “Why”)

Before touching the rules, understand the philosophy.

1. The Conceptual Framework: As we discussed, read this first. It defines what an “Asset” or “Liability” actually is.
2. IAS 1 (Presentation of Financial Statements): This shows you the “finished product”—what a Balance Sheet and P&L should actually look like.

Phase 2: The Core “Brick & Mortar” Standards

These cover the most common items you find in almost every business.

1. IAS 16 (Property, Plant, and Equipment): How to account for physical things like buildings and machinery.
2. IAS 2 (Inventories): How to value the stock a company sells.
3. IAS 38 (Intangible Assets): How to handle things you can’t touch, like software or patents.
4. IAS 36 (Impairment of Assets): Crucial for understanding how to “write down” the value of assets when they lose worth.

Phase 3: The “Big Three” Modern Pillars

These are the most complex but also the most important for modern corporate reporting.

1. IFRS 15 (Revenue from Contracts with Customers): The 5-step model for when a company is allowed to say, “We made money.”
2. IFRS 16 (Leases): How to handle rented assets (this changed the accounting world significantly in 2019).
3. IFRS 9 (Financial Instruments): Often considered the most difficult; it covers loans, receivables, and investments.

Phase 4: Refinement and Specialty

Once you have the basics, move to the “cleanup” and “special case” rules:

• IAS 8: How to fix errors from previous years.
• IAS 10: What to do if something happens after the year ends but before you publish the report.
• IAS 37: Provisions (legal cases or future cleanup costs).

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Pro Tip for Reading

Don’t just read the Standard (Part A). Always look for the Illustrative Examples (Part B). The legal text of a standard can be very dry, but the examples show you exactly how the math works in a real-world scenario.

Would you like me to create a “Cheat Sheet” for one of the Phase 2 standards, like IAS 16, to get you started?

IFRS Cheat Sheet: Phase 2 Standards

IAS 16 (Property, Plant, and Equipment):

• Definition: Tangible items used for > 1 year.
• Measurement: Initially at Cost. Subsequently use Cost Model or Revaluation Model.

IAS 2 (Inventories):

• Rule: Measured at the lower of Cost and Net Realizable Value (NRV).
• Prohibited: LIFO is not allowed.

IAS 38 (Intangible Assets):

• Research vs. Development: Expense research; capitalize development only if PIRATE criteria are met.

IAS 36 (Impairment of Assets):

• Rule: Carrying amount must not exceed Recoverable Amount (Higher of Fair Value less costs to sell or Value in Use).

IAS 1 Summary: Presentation of Financial Statements

• Objective: Ensures comparability of financial reports.
• Components: Balance Sheet, P&L (and OCI), Changes in Equity, Cash Flows, and Notes.
• Key Principles:
• Going Concern: Assume the business continues for at least 12 months.
• Accrual Basis: Transactions are recorded when they occur, not when cash moves.
• Current/Non-Current: Separate items based on a 12-month window.

NRC

In a strict legal sense, the term “non-recurring cost” is not defined in the IFRS or IAS standards. In fact, IFRS specifically tries to avoid this label because it can be subjective and used by companies to hide regular expenses.

However, the concept exists under different names and rules. Here is where you can find the actual guidance:

1. IAS 1: The Prohibition of “Extraordinary”

One of the most important things to know is that IAS 1 prohibits companies from labeling any item as “extraordinary.”

• In the past, companies used “extraordinary” or “non-recurring” to tell investors, “Don’t look at this cost, it won’t happen again.”
• Now, the IASB insists that all costs are part of the business performance. You cannot hide them in a separate “one-off” category on the face of the Profit & Loss statement.

2. IAS 1: Material Items (The “Workaround”)

While you can’t use the word “non-recurring” as a formal category, IAS 1 (Paragraph 97) says that if items of income or expense are material (large or important enough to matter), a company must disclose their nature and amount separately.

• Instead of “non-recurring costs,” companies use terms like “Exceptional Items” or “Significant Items.”
• Common examples the standard mentions include:
• Write-downs of inventories or property.
• Restructuring costs (e.g., mass layoffs).
• Disposals of large assets.
• Litigation settlements (lawsuits).

3. IFRS 5: Discontinued Operations

If a “non-recurring” cost comes from the fact that a company is closing down an entire division, it is defined under IFRS 5.

• These costs are separated from “Continuing Operations” on the P&L.
• This is the closest the standards get to a formal definition of a “non-recurring” section.

4. The New Standard: IFRS 18 (Coming Soon)

The IASB has recently released IFRS 18 (replacing IAS 1 for periods starting in 2027, though companies can adopt it earlier).

• This new standard introduces a specific requirement to disclose “Management-defined Performance Measures” (MPMs).
• If a manager wants to show a “Clean EBITDA” by removing non-recurring costs, they must now follow strict rules in the notes to explain why they think those costs won’t happen again and reconcile them back to the official profit.

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Summary Table

Term	Status in IFRS	Where to look
Non-recurring cost	Not defined / Unofficial	Management Discussion & Analysis
Extraordinary item	Prohibited	IAS 1.87
Material items	Required disclosure	IAS 1.97
Discontinued Operations	Strictly defined	IFRS 5

Would you like me to explain the specific “PIRATE” criteria mentioned in the Phase 2 cheat sheet, since those often involve one-time development costs?

PIRATE

In the accounting world, the “PIRATE” mnemonic is the gold standard for remembering when you can stop expensing costs and start capitalizing them as an asset under IAS 38.

This applies specifically to the Development Phase. You can only capitalize development expenditures if you can demonstrate all six of these criteria:

The PIRATE Criteria

• P – Probable future economic benefits: You must show that the asset will actually make money (e.g., through a market for the product) or save money (if used internally).
• I – Intention to complete: Management must have a clear, documented intent to finish the project so it’s ready for use or sale.
• R – Resources available: You must have the technical, financial, and human resources (the “fuel”) to actually cross the finish line.
• A – Ability to use or sell: It’s not enough to finish it; you must be able to actually put it into service or sell it to someone else.
• T – Technical feasibility: You must prove that completing the asset is technically possible (it’s no longer just a “science experiment”).
• E – Expenditure measured reliably: Your accounting systems must be able to specifically track which costs belong to this project (e.g., developer hours via timesheets).

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Why this matters for “Non-recurring” costs

Earlier, you asked about non-recurring costs. In R&D, companies often have massive one-time spikes in spending.

• Research Phase: All costs are expensed (hit the P&L immediately). This is “non-recurring” but looks like a loss.
• Development Phase: Once PIRATE is met, these costs move to the Balance Sheet. This “hides” the massive spending from your P&L and spreads the cost over several years via amortization.

Important Note: You cannot “backdate” capitalization. If you spend $1M in May but only meet the PIRATE criteria in August, that $1M stays as an expense. You can only start capitalizing from the moment all six criteria are met.

Would you like a practical example of how to apply PIRATE to a software development project?

Detailed explanation of IAS 38 Intangible Assets

This video provides a deep dive into the recognition criteria and the critical differences between research and development phases under IFRS.

Other Comprehensive Income (OCI)

In simple terms, Other Comprehensive Income (OCI) is a “waiting room” for gains and losses that haven’t been finalized yet.

Under IAS 1, OCI is defined as items of income and expense that are not recognized in Profit or Loss because a specific IFRS standard requires or permits them to be excluded. These are usually “paper” gains or losses (unrealized) that would make the standard Net Income too volatile if they were included.

1. The Official List

There is no single “theory” for what goes into OCI; instead, it is a specific list of items dictated by individual standards.

The list is strictly divided into two categories based on “Recycling” (whether the amount will eventually move to the P&L or stay in Equity forever).

Category A: Items that will NOT be reclassified (Recycled) to P&L

Once these gains or losses are recorded in OCI, they stay in Equity. Even if you sell the asset, the gain never hits your Profit or Loss statement.

• Revaluation Surplus (IAS 16 & IAS 38): Increases in the value of land, buildings, or intangible assets.
• Pension Remeasurements (IAS 19): Actuarial gains and losses on defined benefit pension plans (e.g., changes in life expectancy assumptions).
• Own Credit Risk (IFRS 9): For liabilities designated at fair value, the portion of the change in value caused by the company’s own credit rating.
• Equity Investments (IFRS 9): Gains/losses on shares you chose to measure at “Fair Value through OCI” (FVTOCI).

Category B: Items that MAY be reclassified (Recycled) to P&L

These are temporary “paper” values. When the underlying transaction is finished (e.g., the asset is sold), the balance is “recycled” into the Profit or Loss statement.

• Foreign Currency Translation (IAS 21): Gains or losses from translating a foreign subsidiary’s books into the parent company’s currency.
• Cash Flow Hedges (IFRS 9): The effective portion of gains or losses on a derivative (like a fuel hedge) used to protect future cash flows.
• Debt Investments (IFRS 9): Gains/losses on bonds held for both collecting interest and selling (FVTOCI).

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2. Where does it live?

OCI appears in two places in your financial reports:

1. The Performance Statement: It appears immediately below “Profit for the Year.” When you add Profit + OCI, you get Total Comprehensive Income.
2. The Balance Sheet: The running total of all past OCI items is called Accumulated OCI (AOCI) and sits inside the Equity section, right next to Retained Earnings.

3. Why distinguish between P&L and OCI?

The IASB uses OCI to protect the “Profit” figure from noise.

Example: If the value of your head office building goes up by $10M, you are “richer” on paper, but you haven’t actually made a profit you can use to pay dividends. By putting that $10M in OCI, the company shows the increase in wealth without misleading investors into thinking they earned $10M in cash this year.

Would you like me to clarify the “Recycling” process with a specific example, like selling a foreign subsidiary?