CHAPTER 1
PREFACE OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
1 INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
1.1 INTRODUCTION
The IASB was established in 2001 as part of International Accounting Standard
Committee (IASC) Foundation. The IASB was preceded by the board of IASC, which came
into existence on June 29, 1973 as a result of an agreement by accountancy bodies in
Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United
Kingdom and Ireland, and the United States of America. In 1982 the old IASC joined
hands with the International Federation of Accountants (IFAC), which resulted in all the
members of IFAC becoming members of IASC.
1.2 STRUCTURE OF IASB
a) The IASB was established in 2001 as part of IFRS Foundation. The governance of
IFRS Foundation rests with the 22 Trustees. The trusties appoint the members of
the IASB and associated council. The Board comprises of fifteen full-time
members.
b) The IASB has two advisory committees namely The International Financial
Reporting Interpretations Committee (IFRIC) and Standard Advisory Council
(SAC). The structure of IASC Foundation can be summarized through the
following table.
International Financial Reporting Standard (IFRS) Foundations
(22 Trustees)
International Accounting
IFRS Advisory Council Standard Board
(15 Members)
Advisory Committees
Appoints International Financial
Reporting Standard
Reports Interpretation Committee
(IFRIC) (14 members and one
nonvoting chairman
Director of Operations and non- Director of Technical Activities and Technical
technical staff Staff
1.3 OBJECTIVE
The objectives of IASB as set out in its Constitution are: -
a) To formulate and publish in the public interest a single set of high quality,
understandable and enforceable global accounting standards that require high
quality, transparent and comparable information in financial statement and
other financial reporting to help participants in the various capital markets of
the world and other users of the information to make economic decisions.
b) To promote the use and rigorous application of those standards.
c) To work actively with national standard-setters to bring about convergence of
national accounting standards and IFRSs to high quality.
2 IFRS FOUNDATION
The parent entity of the IASB is the International Financial Reporting Standards (IFRS)
Foundation, a not-for-profit corporation incorporated in the State of Delaware, United States.
The Trustees of the IFRS Foundation appoint the 14 Board members and Chairman of the IASB,
and the members of the other organizations, and seek funding for the organizations' activities.
The Chairman of the IASB is currently Ms. Rachel Grimes.
3 THE INTERNATIONAL FINANCIAL REPORTING STANDARDS INTERPRETATIONS COMMITTEE
(IFRS IC)
The role of IFRS IC is to prepare interpretations of IFRSs for approval by the IASB and, in the
context of the Framework, to provide timely guidance on financial reporting issues not
specifically addressed by IFRSs.
Interpretations of IFRS are prepared to give authoritative guidance on issues that are likely to
receive divergent or unacceptable treatment in the absence of such guidance. In developing
interpretations, IFRIC works closely with similar national committees.
4 THE INTERNATIONAL FINANCIAL REPORTING STANDARDS ADVISORY COUNCIL (IFRS AC)
The IFRS AC provides a formal vehicle for participation by organizations and individuals with an
interest in international financial reporting. Its objective is to give advice to the IASB on priorities
and on major standard-setting projects. The participants have diverse geographical and
functional backgrounds.
5 SCOPE AND APPLICATION OF IFRS
5.1 Scope
Any limitation of the applicability of a specific IFRS is made clear within that standard.
IFRS are not applied to immaterial items, nor are they retrospective.
5.2 Application of IFRS
i) Within each country the local regulations govern to a greater or lesser extent
the issue of financial statements.
ii) The IASB concentrates on essentials when producing IFRS. This means that IASB
tries not to make IFRS too complex, because otherwise they would be
impossible to apply on a worldwide basis. Applicable to commercial, industrial
or business enterprise
iii) The IFRS do not override local regulations on financial statements. Members of
IASB should simply disclose the fact where IFRS is complied with in all material
respects. The members of IASB in individual countries will attempt to persuade
local authorities, where current regulations deviate from IFRS.
6 WORKING PROCEDURE the IASB prepares in accordance with due process.
- The staff is asked to identify and review all the issues associated with topic and to
consider the application of the Framework to the issue
- Study national standards and practices and exchange views about the issues with
national standard setting bodies.
- Consulting the IFRS AC about the advisability of adding the topic to the IASB’s agenda.
- Formation of an advisory group to give advice to the IASB on the project.
- Publishing for public comment a discussion document.
- Publishing for public comment an exposure draft approved by at least nine votes of the
IASB, including any dissenting opinions held by the IASB members.
- Publishing within an exposure draft a basis of conclusions.
- Consideration of all comments received within the comment period on discussion
documents and exposure drafts.
- Consideration of desirability of holding a public hearing and of the desirability of
conducting field tests and, if considered desirable, holding such hearings and conducting
such tests.
- Approval of a standard by at least nine votes of the IASB and inclusion in the published
standard of any dissenting opinions.
- Publishing within a standard a basis for conclusions, explaining among other things, the
steps in the IASB’s due process and how the IASB dealt with public comments on the
exposure draft.
7 TIMING OF APPLICATION
IFRS apply from a date mentioned in the IFRS. The IFRS also sets out transitional provisions for
their initial application.
8 LANGUAGE
The IFRS is issued in English language however; the members are authorized to issue the IAS in
their own language. However, this fact should be disclosed in the standard
9 CONCLUSION
If the IAS’s are applied to financial statements, their comparability, creditability and usefulness
will enhance though out the world.
10 THE NEED FOR A REGULATORY FRAMEWORK
A regulatory framework for accounting is needed for two principal reasons:
(a) To act as a central source of reference of generally accepted accounting practice (GAAP)
in a given market, and
(b) To designate a system of enforcement of that GAAP to ensure consistency between
companies in practice.
The aim of a regulatory framework is to narrow the areas of difference and choice in
financial reporting and to improve comparability. This is even more important when we
consider how different financial reporting can be around the world. Compliance with
IFRSs cannot be required without their adoption in national or regional law.
11 Principles-based versus rules-based approach
a) IFRSs are written using a 'principles-based' approach. This means that they are written
based on the definitions of the elements of the financial statements, recognition and
measurement principles, as set out in the Framework for the Preparation and
Presentation of Financial Statements.
b) In IFRSs, the underlying accounting treatments are these 'principles', which are designed
to cover a wider variety of scenarios without the need for very detailed scenario by
scenario guidance as far as possible.
c) Other GAAPs, for example US GAAP, are 'rules-based', which means that accounting
standards contain rules which apply to specific scenarios.
d) The US announced its intention in March 2003 to switch to a principles-based approach
following a number of corporate accounting scandals, where the existence of rules,
which could be avoided, rather than principles which cover multiple scenarios, were
identified as one of the causes.
11.1 Advantages and disadvantages of a principles VS rules-based approach
11.1.1 Advantages
(a) A principles-based approach based on a single conceptual framework
ensures standards are consistent with each other.
(b) Rules can be broken and 'loopholes' found. Principles offer a 'catch all'
scenario.
(c) Principles reduce the need for excessive detail in standards.
11.1.2 Disadvantages
(a) Principles can become out of date as practices (e.g. the current move
towards greater use of 'fair values') change.
(b) Principles can be overly flexible and subject to manipulation.
