Accounting standards differ for each country and not to mention it has done nothing to reduce the friction organizations face while preparing financial statements for cross-border business dealings. The need to create financial statements is defined by many terms.
The modern economic system demands global participation, but the issues concerning standard accounting principles created differences in terms of consistency while preparing financial statements. It was the post-convergence period that offered such challenges between two set of organizations based on different countries.
Company ‘A’ based in country ‘X’ has an international dealing with the company ‘B’ of country ‘Y’. Each of the organizations is defined by individual accounting standards.
Consequence 1: With different accounting standards, there will be a huge difference in financial statements.
Consequence 2: A small difference in financial statements can have a huge influence on economic decisions made by each organization.
IFRS Standards: What should you know?
IFRS comes under the management of IASB (the international accounting standards board), which is an independent private-sector body.
The responsibility of IASB is to develop IFRS, which was previously known by the term IAS (Inter accounting standards.
What is IFRS?
IFRS, short for International Financial Reporting Standards is a defined method of reporting financial transaction and presenting financial statements. As referred in the earlier section, IFRS as issued by IASB.
IFRS brings accountability and transparency into the financial market around the world. IFRS is an attempt to create a uniform accounting standard for companies across the world.
Benefits of Global Accounting Standard over local GAAP accounting standard
Increased efficiency in raising capital.
Reduced information processing cost.
It will be easier to win contracts.
Listing shares on the foreign stock exchange will become easier.
Consistency in financial statements across the borders.
As of 30th June 2017, new procurements were made under IFRS, which will be discussed below
IFRS 9 Financial Instruments
Replacement for IAS 39, IFRS 9 will be effective for annual periods on or after 1st January 2018. IFRS 9 is categorized by three phases.
i. It defines how classification and measurement of financial assets, financial liabilities should be performed.
ii. The new expected loss impairment model helps in the timely recognition of expected credit losses.
iii. Hedge accounting.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 replaced IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18, and SIC-31. The IFRS standard will be effective for annual periods on or after 1st January 2018.
The IFRS 15 defines the principles that entity must apply for measuring and recognizing the revenue.
IFRS 2 Classification and Measurement of Share-Based Payment Transactions
The main aim of IFRS 2 standard is to account the shared-based payment activities of organizations in the financial statements.
Amendments to IFRS 4: Applying IFRS 9 Financial Instruments to with IFRS 4 Insurance Contracts
If the entities are issued insurance contracts, then the amendment has two options
i. Provisional exemption from applying IFRS 9.
ii. An overlay approach.
The amendment will be effective on or after 1st January 2018.
IFRS 16 Leases
IFRS 16 leases come into effect for annual periods beginning on or after 1st January 2019.
The standard is directed towards entities that use leasing or rentals as a financial solution. The standard defines two exemptions for lessees on,
i. Low-value assets
ii. Short-term leases
Amendments to IAS 40 – Transfer of Investment Property
The standard will be effective from January 1st, 2018. The issue addressed is whether any property under development can be transferred to investment property.
IFRIC Interpretation 22 foreign currency transactions and advanced considerations
IFRIC Interpretation 22 to be effective as on January 1st, 2018. The standard explains the exchange rate to be used in transactions that involve advance payment in foreign currency.
IFRIC Interpretation 23 Uncertainty over Income Tax Treatments
IFRIC 23 will be effective as on 1st January 2019.
The standard sheds light on how tax laws will differ to a particular transaction as it affects IAS 12.