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In the early age of civilization, the organizations or firms were confined to a small village or city and later on slowly established throughout the country with the developments in technology. The business carried out in these places had similar financial standards as it is within a single national border. But with growing technology and globalization, companies started to expand their business all over the world and this required the companies to produce their financial reports based on the GAAP (Generally accepted accounting principles) of the particular nations i.e. for example consider Coco Cola, a company that is globalized and for it to run its business in India, it require to produce the financial documents that are based on the standards set by the Indian government unlike the reports based on the standards of United States of America, its home country. And similarly, a company from India need to produce reports based on US standards (US GAAP) to invest or run business in USA. To overcome this complexity in generating the financial reports, an international set of standards are required so that the reports are accepted by every country.
Also, in the past when an investor was interested in investing in some particular countries that are not well industrialized by the time, he has to invest hoping to have trust in the accounting standards of that particular nation and also if the potential investor wants to compare the business performance of company in US or Europe with that of similar companies in China or Japan, it was very difficult to perform the comparison and only few globally recognized accountants were able to perform it. These are the few major reasons that formed the basis for IFRS (International financial reporting standards) that made the business all over the world almost transparent.
History of IFRS:
In this section, we shall have a look at some of the significant dates in the history of IFRS.
1966: Though the significance and development of IFRS picked in the past ten years, the need for the international reporting standards was actually started in 1966 when the three institutes: ICAEW (Institute of Chartered Accountants of England & Wales, AICPA (American Institute of Certified Public Accountants) andÂ CICA (Canadian Institute of Chartered Accountants) together thought of establishing a group called ISG (International study group) to take a research on the reporting standards of the nations worldwide and their compatibility with one another.
1967: The idea of establishing an international study group was implemented in February 1967 by the foundation of AISG (Accountants international study group). This group started to print papers related to some significant topics based on their study and created the situation to urge for change in the reporting standards. These papers published have formed the basis for the standards that are set later on.
1973: The AISG laid the need for a foundation of an international body to write reporting standards that can be used for international purposes and resulted in the foundation of IASC (International Accounting Standards Committee). The main aim of this body was to set new standards for reporting that are accepted and put into practice at the earliest all over the world. This body survived for twenty seven years till 2001, where the body was replaced by the IASB (International Accounting Standards Board). During its period from 1973 to 2000, the committee has released a series of standards for reporting at international level starting from IAS 1 to IAS 41 that was released in December 2000.
1997: A committee known as SIC (Standing Interpretations Committee) was set up in 1997 to tackle the controversial issues related to the international standards and to stop the widespread differences in its use.
2000: From the foundation of IASC in 1966 till 2000, there were significant dates as discussed earlier, but not as many as that have taken place from 2000. Let's have a look at the important dates that are marked as important in 2000.
In a transition letter from IASC to the replaced board IASB, it has stated that a special importance should be given in developing international reporting standards for SMEs (Small and Medium sized enterprises).
On 24th February, 2000, the United States Securities and Exchange Commission has released a press release regarding its acceptance of the international reporting standards. The ICAEW (Institute of Chartered Accountants in England and Wales) had also released an article to the press in which it has summarized its observations related to the international standards. The ICAEW deputy president, Graham Ward, has told in the press release that "We have long looked forward to the time when financial statements prepared in accordance with international accounting standards are recognized by stock exchanges throughout the world."
The IOSCO (International Organization of Securities Commissions) has issued a press release on May 17th revealing its decision to give approval to IAS in association with cross border listings.
On 3rd of August, the IOSCO issued a press release in which it stated that it has taken necessary steps to implement the international standards of reporting within EU.
2001: The replacement of IASC by the IASB came into effect on 1st of April 2001 though the decision to replace was taken in 2000. And with its operations in practice, the board has decided to adopt the standards 'IAS'  as set by the IASC, but stated that any new standards released will thereby be named as series of IFRS (International Financial reporting Standards).
On July 23rd, a proposal to change the name of Standing Interpretations Committee (SIC) to International Financial Issues Reporting Committee (IFIRC) was made by the IASB which was acknowledged afterwards. The SIC was reconstituted as IFIRC in December 2000 and then the releases by IFIRC were tagged as abstracts instead of interpretations.
2002: On 23rd of May, the IASB has released a press release publicizing the print of "Preface to International Financial Reporting Standards" in which it outlined the main purpose and operations of the board in setting international standards that are accepted globally as stated by Sir David Tweedie, the chairperson of IASB, during the press release. The publication also provided the necessary information upon how the standards are set.
The IASB board has also appointed a group to work on developing the international standards of reporting for SMEs (Small and Medium sized enterprises) and also help them in the issues encountered in using those standards.
A regulation was approved by the ministers of European council on 6th June according to which all the companies of the European Union that are listed on regulated markets are required to produce their financial reports based on the standards of IFRS for the periods beginning January 1st, 2005 and later. This decision was also welcomed by the ICAEW as it would help in creating a single capital market for the European Union. The chairman of the ICAEW's financial reporting committee, Ian D Wright, has also stated that the approval of the regulation by the European Council of Ministers has been supported through a long process so that the regulation is in effect at the earliest as it is believed to bring advantages to the business. This regulation (1606/2002) was adopted by the European parliament on 19th July, 2002.
On 7th of November, 2002, the ASB (Accounting Standards Board) was issued a memorandum by the ICAEW as 'The transition to IAS: The role of the ASB' which states that the ICAEW institute have supported to change the accounting standards of the United Kingdom in accordance with the international accounting standards as this would help in bringing the differences between UK GAAP and IAS to a minimum thereby minimizing the complexity in comparing the companies that are listed and the larger companies that are not-listed and also to minimize the difficulties for companies seeking to attain the status of a listed company.
2003: The IASB published its first standard 'IFRS 1' (First-time adoption of International Financial Reporting Standards) in June 2003, after replacing IASC. On 17th July, in a press release released by DTI (Department of trade and industry), it has announced that the regulated market listed companies can make use of the international standards in their individual accounts from 1st January 2005 as per the regulation approved by the European parliament, while the other companies that doesn't trade publicly and the companies having partial liabilities partnerships in UK can make use of the international standards in both their individual and combined accounts from the same date. The use of international standards by the unlisted companies was also supported by the IACEW through an article "ICAEW welcomes announcement that unlisted companies can opt to use IAS from 2005" released to the press.
On 29th September, to further extend its support to the use of international reporting standards, the EC (European Commission) has adopted a regulation making the IASs use mandatory from January 2005 for all the companies within the European Union. Frits Bolkestein, the Internal Market Commissioner at that time has also stated that the IASs are published in the official languages of the European Union by the EC to make it easy for the companies to adopt the standards and thereby get ready to produce the reports in international standards starting from 2005. He also stated that the use of international standards would increase the competition and make the business more transparent and create easy flow of capital.
On 10th December, in his speech on "Pre-budget report 2003", Gordon Brown, the EU's chancellor has told that the companies preparing accounts based on the international standards need not prepare another set of their accounts for the Inland Revenue as it was done till then.
To set international standards for SMEs, the IASB board has developed a few preliminary and timid analyses regarding the approach to be followed by the SMEs to use international standards and have applied these analyses to most of the standards it released.
The IASB, besides working on developing new standards as IFRS has also made changes to the 15 previous standards released by the International Accounting Standards and this has been done between September 2003 and March 2004.
2004: On February 24th, in an article published in its official site, the Inland Revenue has stated that both the companies opting to use international standards and the companies still using the UK GAAP standards in preparing their accounting reports will have the equal tax treatment for the 2004 financial year.
In March, the Department of Trade and Industry has provided a document to the companies and building societies as a guide to help them get ready to use the international standards for accounts reporting. The IASB board has published its preliminary views as a discussion paper and was open to get responses on its views and has received about 120 responses most of them stating that SMEs require international standards instead of the standards that are local or region based. The board has also set March 31st of 2004 as the date by which it has to finalize the standards so that the companies planning to adopt the international standards for the first time in 2005 are well assisted in preparing their statements.
"The companies act 1985 (IAS and other accountings amendments) 2004" regulation has come into implementation 12th November.
2005: All the companies within EU were asked to submit their accounting reports prepared based on the international standards supported by the EU for the period beginning on or after 1st January 2005.
2006: The AcSB (Accountings Standards Board of Canada) has issued an article to the press in support of the use of international reporting standards. The use of the international reporting standards (IFRS) by the companies in Europe and all over the world has been completed 10th of October.
2008: The US SEC (Securities and Exchange Commission) on 14th of November, released a projected 'Roadmap' on the use of the international standards as released by the IASB and with this the US was expected to adopt the international standards in the near future.
International financial reporting standards (IFRS):
As discussed in the previous sections, the international financial reporting standards are the series of standards released by the ISAB board. The companies that trade publicly (listed) and sometimes the companies that are not publicly traded are required to prepare their financial reports based on the international standards adopted by their respective countries. In EU, it has passed a regulation to make use of the international standards while US has still not made the international standards as a mandatory requirement for its companies.
From the time the IASB replaced the IASC, it has released a series of standards under IFRS from IFRS 1 to IFRS 9. Let us discuss each standard and it's working.
IFRS 1: To guide all the companies in their initial implementation of the IFRS standards, the IASB board has released its first standard IFRS 1 in which it has given clear instructions on how to adopt the standards beginning with the preparation of first IFRS balance sheet. This IFRS balance sheet is required as the basis for preparing future financial reports following the IFRS standards. The board has made some exemptions under IFRS 1 as a fact of recognizing that a full and fair application from the companies and other IFRS users under international standards would cost them more than the potential benefits given by IFRS. In other cases where there is no exemption, the board stated that the management will decide on the cost incurred (whether to give exemption or not) in the full application only after the output of a business is known and the decision taken will be based on the past situations after the outcome is known. In other words it can be said that the IFRS 1 has some mandatory exemptions and some restricted (optional) exemptions from the requirements of preparing the statements. The optional exclusions are in the regions of;
Fair cost or revaluation as estimated rate.
Increasing translation differences.
Multifaceted financial instruments.
Assets and liabilities of subsidiaries.
Designation of earlier accepted monetary instruments.
Share based payment.
Alteration in existing decommissioning, re-establishment and related liabilities.
The exemptions that are mandatory are:
De-recognition of financial assets and liabilities.
Hedge accounting (measuring items at reasonable value and remove assets and liabilities under preceding GAAP).
Accounting estimates and
Assets that are categorized as apprehended for sale or discontinued functions.
A company's 1st financial statements under IFRS are considered to be its 1st annual statements by an open and unconditional statement in the statements that they are complied with IFRS i.e. for example, consider that a company or an entity has submitted its previous past financial statements and these statements are considered as their first financial statements under IFRS only if
The statements are in agreement with the national requirements that are not in harmony with that of the IFRS in every respect;
The statements are in accord with the IFRSs but do not contain an open and unconditional statement in the statements that they are complied with IFRSs;
The statements contain an open and unreserved statement that the statements are in compliance with some IFRSs;
The statements are in use of a single IFRS for the items that do not have a national requirement.
The statements prepared under the standards of IFRS and used for in-house purposes but not for use by the company's owner or external use.
The statements prepared under IFRSs are used for preparing a reporting package for purposes of merging, security and strength but not for the preparation of total set of financial statements.
The entity did not submit or present any previous financial statements for its previous periods.
The accounting policies that are applied by the entity in its first IFRS financial statements will only be applied to the future periods as presented by the entities in the financial statements.
The IFRS 1, like the series of standards in IFRS is an active document i.e. the standard is subject to undergo adjustments and advancements as supposed by the board. The main objective of IFRS 1 is to guide the companies from European Union and Australia in the issues raised from their conversion into IFRS standards from their respective GAAPs. But as new countries started to adopt the IFRS standards, the issues raised in the conversion have also increased resulting in more amendments as decided necessary by the board. And the changes to the already existing IAS standards were also addressed in the IFRS 1 increasing the initial exemptions number of six to about 15 by 2008. The board has further added three more exemptions in September 2008 in order to consider the jurisdiction issues that are expected to be experienced by the entities in the near future. These exemptions and modifications are expected to increase as the roadmap issued by US SEC is expected to make large number of US entities to adopt IFRS standards and thereby increasing the issues for conversion in relation to US entities.
Besides guiding all the entities in the conversion to IFRS, the other main objective of IFRS 1 is to make it easy for all the entities to compare the business over time in both, either single entity or in different entities that are making use of the international standards for the first time. The comparability done is between entities that are adopting IFRS for the 1st time at a given particular date and not between entities that are adopting the IFRS for the 1st time and the entities that are already using the IFRS standards. The information provided by the entities for comparison period should be in agreement by the IFRS i.e. for example consider the entities within EU; the information provided by these entities for the period 2004 to compare on 1st January 2005 should be according to IFRS with exemptions as decided by the board. The board does not require information of more than a year for comparison.
The assets and liabilities of an entity are recognized only if they are in accordance with the IFRS and derecognize those not within IFRS standards. The assets and liabilities that are recognized under the previous GAAP are required to be presented as a different set of assets and liabilities from that of which are recognized under IFRS. These assets and liabilities will be measured according to the standards of IFRS. The changes in equity will be seen in the first balance sheet under IFRS. The assets and liabilities that are recognized and unrecognized under IFRS can be categorized as;
The items that are recognized under IFRS are
Retirement fund / pension liability.
Delayed tax assets and liabilities.
Business let out assets and liabilities.
Rations that are officially authorized or productive.
Derived useful instruments.
Acquired indefinable assets.
In-house development cost.
The items that are unrecognized under IFRS are;
Common funds as liabilities.
Unlikely delayed tax assets.
Capital shares as assets.
Rations without obligations.
Indefinable assets that do not meet the standards.
IFRS 1 effective date: IFRS 1 is effective to all the entities that are adopting IFRS for the first time on or after January 1st, 2004. The initial reporting period for an entity is the period presented by the entity in its first financial statements under IFRS i.e. the financial year ending 31st December 2004 will be the period of reporting for entities who have started reporting under IFRS in 2004.
The 1st reporting period for a listed company in the US will be authorized by the SEC, and according to the roadmap issued by SEC in relation to IFRS, the 1st reporting period for listed companies in US will be the financial years finishing on or after 15th December 2014 for big accelerated filers, 15th December 2015 for accelerated filers or 15th December 2016 for non-accelerated filers correspondingly.
IFRS 2: The foremost purpose of this standard is to indicate the entities that they need to present the financial reporting whenever a share based transaction is done. The IFRS 2 especially indicates to the entities that they need to reflect the consequences of the share based transactions in all their profits or losses and their financial position along with the cost incurred in transactions in which the employees are approved with share options.
A share based payment can be defined as a transaction where the company or entity receives or purchases goods and services for its equity tools or by its shares.