In today’s globalized environment, business does not operate in just one country rather they operate around the world. However, it must be emphasized that around the globe different countries follow different accounting standards. This leads to a need for a global set of standards commonly referred to as ‘International Financial Reporting Standards (IFRS)’.
What are IFRS?
IFRS are designed to serve as a common global language of business affairs so that accounts of various companies are understandable and comparable across international boundaries. National accounting standards prevailing in different countries are being replaced by these International Financial Reporting Standards.
International Financial Reporting Standards (IFRS) are a set of standards developed by the International Accounting Standard Board (IASB) stating how a particular transaction shall be treated or an event shall be reported in financial statements.
Aim of IFRS
The basic aim of IFRS is to enable the comparison of financial statements not just in our country but around the globe. This is quite difficult as every country today has its own standards, for example, in the US, US GAAPs are followed, and similarly, in India, Indian GAAPs are followed. So, it becomes very difficult to comprehend all such standards which are being followed around the world in one set of rules.
Underlying Assumptions in IFRS
Measuring unit assumption: Measuring unit is the current purchasing power. It means that assets and liabilities are not to be shown at the historical cost in the Balance sheet but at their current or fair value.
Units of Constant Purchasing Power: It requires that inflation prevailing in the country should be accounted for i.e. value of capital should be adjusted to inflation at the end of the financial year.
Going concern: It is assumed that the life of the business is infinite i.e. the entity will continue to exist for an indefinite period in the future.
Accrual assumption: Transactions are recorded on an accrual basis i.e. as and when they occur and the actual date of payment or receipt is immaterial.
Need of IFRS
Check on manipulation in financial statements: IFRS helps to keep a check on the manipulation associated with the figures related to financial statements. This encourages consistency in the recognition and measurement of financial statements.
Global harmony, uniformity, and comparability: IFRS helps the economies of the world to establish global harmony, uniformity, and comparability in the process of preparation of their financial statements.
The flow of foreign investment: The Financial Reporting Standards and Accounting Standards together create a sense of security in the minds of foreign investors which facilitates a free flow of direct as well as the indirect flow of foreign investments across the countries.
IFRS Based Financial Statements
- Statement of Financial Position (Balance Sheet)
- Statement of Comprehensive Income (Profit and Loss Account)
- Statement of Changes in Equity
- Statement of Cash Flows
- Notes and Significant Accounting Policies
Measurement of the Elements of IFRS Based Financial Statements
IFRS as discussed earlier has evolved because of the world coming closer and closer as a result of globalization. For comparison of the firms across the globe, it thus becomes essential for them to prepare their financial statements uniformly. Various elements like assets and liabilities, etc., contained in the IFRS based financial statements can be measured using the bases as mentioned below to different extents:
Historical Cost: This is in conformity with the Historical cost concept studied in the previous chapter. So, going with it we record all our assets at an amount we paid to acquire them and liabilities at the amount of money we received in lieu of the obligation. For example, Furniture is purchased for Rs. 8000 then this will be the amount so recorded.
Current Cost: As we are all well aware by now, that the prices of the goods that we own like television, laptops, etc., never stays the same. It is for this reason, that we sometimes carry our assets in the Balance Sheet at the price or amount we will currently pay for them. Also, the liabilities are carried at before discount value for the settlement of the obligation.
Settlement (Realisable) Value: Here, the computation is based on what we would get in return if the assets are sold and what we will pay for our liabilities in the future if calculated at present. Based on this, assets are carried at the present discounted value (i.e. the value of Rs. 1 earned today is much more than that earned in the future owing to uncertainties) of the net cash inflows that it would generate in the normal course of the business. Similarly, liabilities are carried at the present discounted value (i.e. what we pay tomorrow is much less than what we pay today.) of the future net cash outflows that we are expected to pay in the normal course of the business.
Accounting Standards are the statements of code of practice from the regulatory accounting bodies that are to be observed within the preparation and presentation of monetary statements.