Introduction
This chapter focuses on two important elements of international financial accounting:
1. The framework adopted by the International Accounting Standards Committee (IASC),
discussed in the IASB’s Framework for the Preparation and Presentation of Financial
Statements; and
2. The significant reporting disclosures required in IFRSs and IASs related to subsequent
events, related parties, accounting changes, and operating segments.
Framework for the Preparation and
Presentation of Financial Statements
International accounting concepts and financial reporting are driven by the needs of many
different user groups. Although the preparation of financial statements may appear similar from
country to country, differences arise in national requirements due to various social, economic,
and legal circumstances. These differences include the use of a variety of definitions of assets,
liabilities, equity, income, and expenses; differing recognition and measurement criteria; and the
scope of financial statements and disclosures made within them.
The International Accounting Standards Committee is committed to narrowing these differences
by seeking to harmonize regulations, accounting standards, and procedures relating to the
preparation and presentation of financial statements useful in making economic decisions. The
IASC recognizes that governments may specify different or additional requirements for their
own purposes, but such requirements should not affect financial statements published for the
benefit of other users (outside of local government jurisdictions) unless they also meet the needs
of those other users.
The IASB’s
Framework for the Preparation and Presentation of Financial Statements
(Framework) sets out the concepts that underlie the preparation and presentation of international
financial statements for external users. The Framework is intended for use by the IASB in setting
accounting standards as well as to
- Assist the IASC Board in developing future IASs and in its review of existing IASs;
- Assist the IASC Board in promoting harmonization of regulations, accounting standards,
and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IASs;
- Assist national standard-setting bodies in developing national standards;
- Assist preparers of financial statements in applying IFRS and in dealing with topics that
have yet to form the subject of an international standard;
- Assist auditors in forming an opinion whether financial statements conform with IFRS;
- Assist users of financial statements in interpreting the information contained in financial
statements prepared in conformity with IFRS; and
- Provide those who are interested in the work of IASC with information about its
approach to the formulation of IFRS.
It is important to note here that the Framework is not a Standard and, therefore, does not define
standards for any particular measurement or disclosure issue. Nothing in the Framework
overrides any specific international accounting standard. However, if no IFRS standard
specifically applies to a truncation, other event, or condition, and management must use its
judgment in developing an accounting policy, the definitions, recognition criteria, and
measurement concepts for assets, liabilities, income, and expenses in the Framework take
precedence under IAS 8 over all other sources (such as accepted industry practices and recent
pronouncements of other standard-setting bodies that use a similar conceptual framework – such
as the FASB).
Scope
The Framework is concerned with general purpose annual financial statements, including
consolidated financial statements, directed toward the common information needs of a wide
range of users that rely on the financial statements as their major source of financial information.
A complete set of financial statements normally includes a statement of financial position, a
statement of comprehensive income, a statement of changes in equity, a statement of cash flows,
and accounting policies and explanatory notes. The Framework applies to the financial
statements of all commercial, industrial, and business reporting entities, whether in the public or
the private sectors, and deals with
a) The objective of financial statements;
b) The qualitative characteristics that determine the usefulness of information in financial
statements;
c) The definition, recognition, and measurement of the elements from which financial
statements are constructed; and
d) The concepts of capital and capital maintenance.
The Objective of Financial Statements
The Framework reiterates that the objective of financial statements is to provide information
about the financial position (and changes therein) and performance of an entity that is useful to a
wide range of users in making economic decisions. Financial statements also show the results of
the stewardship of management over the resources entrusted to it so that users can make
informed decisions regarding the entity.
Like U.S. GAAP, international financial statements are prepared on the accrual basis of
accounting, with the effects of transactions and other events recognized when they occur.
Financial statements prepared on the accrual basis inform users not only of past transactions
involving the payment and receipt of cash, but also of obligations to pay cash in the future and of
receipts that represent cash to be received in the future. Hence, they provide the type of
information about past transactions and other events that is most useful to users in making
economic decisions.
International financial statements are also normally prepared on the assumption that an entity is a
going concern and will continue in operation for the foreseeable future. Hence, it is assumed that
the entity has neither the intention nor the need to liquidate or curtail materially the scale of its
operations; if such an intention or need exists, the financial statements may have to be prepared
on a different basis and, if so, the basis used is disclosed.
Qualitative Characteristics of Financial Statements
Although financial statements are generally thought of in terms of an entity’s quantitative results
of operations, the qualitative characteristics of financial information can be just as important to
users of financial statements as “the numbers.” The four principal qualitative characteristics are
understandability, relevance, reliability, and comparability.
Understandability
To be of any use at all to users of financial statement information, it must be understandable.
This understanding is generally thought of in the context of users having a reasonable knowledge
of business-related economic activities, accounting principles, and a willingness to study the
information with reasonable diligence. However, information about complex matters that should
be included in the financial statements because of its relevance to the economic decision-making
needs of users should not be excluded merely on the grounds that it may be too difficult for
certain users to understand.
Relevance
To be useful in the decision-making process, information must not only be understandable but
also relevant to users. Information has the quality of relevance when it has the capacity to make a
difference in a decision by helping users evaluate past, present, or future events, or to confirm or
correct prior evaluations.
Information about past performance is frequently used as the basis for predicting future
performance; for example, return on investments, dividend payments, and stock prices. The
ability to make predictions from financial statement information is enhanced by the manner in
which information on past transactions and events is displayed. For example, the predictive value
of the comprehensive statement of income is enhanced if unusual and infrequent items are
disclosed separately.
The relevance of information is also affected by its nature and materiality. In some cases, the
nature of information alone is sufficient to determine its relevance; for example, a pending
lawsuit may affect the assessment of risk facing an entity regardless of its materiality. The
Framework defines materiality as an omission or misstatement of information that could
influence users’ economic decisions based on the financial statements.
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