International Financial Reporting Standards (IFRS)

1.1. What is IFRS?

Definition of IFRS: IFRS stands for International Financial Reporting Standards. It is a set of high-quality accounting standards, recognized and widely adopted globally, designed to provide guidance on how economic transactions and events should be recognized, measured, presented, and disclosed in Financial Statements.

Origin (Issuing Body): IFRS is developed and issued by an independent, non-profit organization called the International Accounting Standards Board (IASB). Based in London, United Kingdom, the IASB comprises leading accounting experts from across the globe.

Objectives (Purpose of IFRS): The core objective of IFRS is to create a "common accounting language" for the world. This serves three primary purposes:

• Consistency: IFRS aims to standardize accounting practices globally, ensuring that financial reports are prepared consistently across different countries and jurisdictions.
• Transparency: The adoption of IFRS enhances the transparency of financial reporting, thereby strengthening the confidence of investors and stakeholders.
• Comparability: IFRS enables easier comparison of financial statements between businesses and across borders, supporting effective financial analysis and investment decision-making.

1.2. The IFRS Standard-Setting Process

The development and issuance of IFRS standards are carried out by the IASB following a rigorous and transparent due process. This process ensures that standards are developed based on comprehensive research, extensive consultation, and a focus on the information needs of financial statement users.

In principle, the standard-setting process consists of the following key stages:

• Agenda Consultation: The IASB conducts public consultations on its work plan every five years to determine strategic direction and priorities.
• Research: The IASB technical team conducts extensive research on the identified topic, analyzing the issues and potential approaches.
• Publication of a Discussion Paper (optional): The IASB may publish a Discussion Paper to present the issues and preliminary solutions, seeking public feedback at an early stage.
• Publication of an Exposure Draft: This is a mandatory step before issuing an official standard. The IASB publishes a detailed draft of the new or amended standard. This draft is open for comment from all interested parties worldwide (corporations, auditors, investors, regulators, etc.) for a specific period.
• Deliberation and Refinement: The IASB reviews all feedback received. Public meetings are held to discuss the issues and decide on necessary changes to the draft.
• Issuance of the Official IFRS Standard: After completing the deliberations and revisions, the IASB votes on and issues the final standard.
• Post-implementation Review: Approximately 30-36 months after a standard becomes effective, the IASB conducts a review to assess whether the standard is performing as intended in practice and whether further adjustments or clarifications are required.

This due process ensures that IFRS standards are not based on isolated decisions but are the result of a systematic, transparent, and consistent development process, aligned with the goal of providing high-quality financial information to global capital markets.

2.1. The IFRS Structure

The International Financial Reporting Standards (IFRS) system is structured into the following components:

(a) Conceptual Framework for Financial Reporting The Conceptual Framework for Financial Reporting is not an accounting standard itself, but rather a foundational document issued by the IASB. The Conceptual Framework establishes the fundamental concepts regarding the objectives of financial reporting, the qualitative characteristics of financial information, as well as the definitions and recognition principles for the elements of financial statements.

(b) IFRS Accounting Standards The term “IFRS Accounting Standards” (or “IFRSs”) is used to refer to the entire body of effective standards and interpretations, including:

• International Financial Reporting Standards (IFRS): Standards issued by the IASB.
• International Accounting Standards (IAS): Standards previously issued by the IASC that remain in effect.
• IFRIC Interpretations: Issued by the IFRS Interpretations Committee.
• SIC Interpretations: Issued by the former Standing Interpretations Committee.

These IFRS Standards prescribe mandatory requirements for the recognition, measurement, presentation, and disclosure of specific transactions and economic events.

2.2. The Relationship between the "Conceptual Framework" and "Specific Standards"

The Conceptual Framework serves as the theoretical foundation for the development, interpretation, and application of IFRS Standards, reflected in the following aspects:

• Basis for Standard-Setting: The IASB uses the Conceptual Framework as a starting point when developing new IFRS standards or amending existing ones to ensure conceptual consistency across the entire IFRS system.
• Selection of Accounting Policies in the Absence of Specific Standards: In cases where a transaction or economic event is not specifically addressed by an IFRS Standard, management must refer to the Conceptual Framework to develop an appropriate accounting policy, following the hierarchy of guidance set out in IAS 8.
• Supporting Interpretation of Standards: The Conceptual Framework helps preparers, auditors, and users of financial statements understand the objectives and underlying logic behind the requirements of individual standards.

Despite its foundational role, the Conceptual Framework is not a standard and does not override or supersede specific requirements in IFRS Standards. In the event of a conflict, the provisions of the specific IFRS Standard or Interpretation shall prevail.

3.1. Definition & Role

The Conceptual Framework is not an IFRS Standard and does not override any specific standard. It serves as the conceptual foundation of the IFRS system, issued to:

• Assist the Board (IASB) in developing new IFRS Standards based on consistent concepts.
• Assist preparers of financial statements in developing accounting policies for transactions that are not covered by a specific standard or interpretation.
• Assist all parties in understanding and interpreting IFRS Standards.

3.2. Official Structure of the Conceptual Framework

According to the official document issued by the IASB (current 2018 version), the Conceptual Framework is structured into chapters, as follows:

• The objective of general purpose financial reporting: To provide financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions relating to providing resources to the entity.
• Qualitative characteristics of useful financial information:
  • Fundamental characteristics: Relevance and Faithful representation.
  • Enhancing characteristics: Comparability, Verifiability, Timeliness, and Understandability.
• Financial statements and the reporting entity: Financial statements are a set of reports reflecting the financial position, financial performance, and cash flows of a reporting entity. The reporting entity is defined by economic boundaries, not necessarily legal boundaries, to meet the information needs of users.
• The elements of financial statements: Assets, liabilities, equity, income, and expenses.
• Recognition and Derecognition: Criteria for including an item in, or removing an item from, the financial statements.
• Measurement: The primary measurement bases, including historical cost and current value. Current value includes:
  • Fair value
  • Value in use (for assets)
  • Fulfilment value (for liabilities)
  • Current cost
• Presentation and Disclosure: Principles of presentation and information provision to ensure financial statements effectively communicate the economic substance of transactions.

This constitutes the official structure of the Conceptual Framework within the IFRS system.

IFRS financial statements are prepared based on underlying assumptions to ensure that information is presented consistently and fairly reflects the economic substance of transactions and events. The two most critical assumptions are the Accrual Basis and the Going Concern assumption.

4.1. Accrual Basis of Accounting

Under IFRS, financial statements are prepared on the accrual basis of accounting. According to this basis, the effects of transactions and other events are recognized when they occur, regardless of when cash or its equivalents are received or paid.

On this basis:

• Revenue: Is recognized when the entity has satisfied a performance obligation and has the right to economic benefits.
• Expenses: Are recognized when the obligation arises or when the related economic benefits have been consumed, irrespective of the actual cash outflow.

The accrual basis allows financial statements to reflect the financial performance and financial position of the accounting period more completely and relevantly than the cash basis.

Illustrative Example:

In December 2024, a company provides consulting services to a client and issues an invoice, with payment expected in January 2025.

• Under the Accrual Basis: Revenue from this service must be recognized in 2024, as the service was completed and the company established the right to payment, even though the cash flow occurs in the subsequent period.

4.2. Going Concern Assumption

Financial statements under IFRS are prepared on the assumption that the entity is a going concern. This means the entity is assumed to continue in operation for the foreseeable future and has neither the intention nor the necessity to liquidate or cease trading, or to scale back its operations significantly.

In practice, "the foreseeable future" is generally understood to be at least 12 months from the end of the reporting period, consistent with IAS 1 requirements.

The Going Concern assumption directly impacts:

• Measurement: How assets and liabilities are measured.
• Cost Allocation: The allocation of costs over time (e.g., depreciation of long-term assets).
• Disclosures: The presentation and disclosure of material uncertainties related to the entity's ability to continue as a going concern.

Illustrative Example:

An entity invests in constructing a factory with an expected useful life of 20 years.

• Going Concern: Based on this assumption, the investment cost is allocated gradually via depreciation over the factory's useful life.
• Not a Going Concern: If the assumption is no longer appropriate (e.g., the entity is at risk of ceasing operations in the near future), the asset may need to be measured at its recoverable amount or liquidation value, and the remaining carrying amount might need to be written off as a loss immediately within the period.

Conclusion: The Accrual Basis and Going Concern are two mandatory underlying assumptions in IFRS financial reporting. The consistent application of these assumptions is a prerequisite for financial statements to faithfully represent the entity's financial position, performance, and cash flows, thereby meeting the information needs of general-purpose financial statement users.

According to the Conceptual Framework, the objective of general purpose financial reporting is to provide financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions relating to providing resources to the entity.

To achieve this objective, the information presented in financial statements must meet the Qualitative Characteristics of Useful Financial Information. These characteristics are classified into two categories: Fundamental Characteristics and Enhancing Characteristics.

5.1. Fundamental Characteristics

These are the essential attributes that information must possess to be useful.

1. Relevance

Information is relevant if it is capable of making a difference in the decisions made by users. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both.

Example: A company discloses information about a major contract recently signed. This information is relevant because it helps investors predict the company's future revenue and profitability (predictive value).

2. Faithful Representation

Relevant information is only useful if it faithfully represents the economic phenomena that it purports to represent. This means reflecting the economic substance of transactions and events, rather than merely their legal form. To be a faithful representation, information must be:

• Complete: Including all necessary information for a user to understand the phenomenon.
• Neutral: Without bias in the selection or presentation of information.
• Free from material error: No errors or omissions in the description of the phenomenon or the process used to produce the reported information.

Example: Under IFRS 16 Leases, when a business enters into a long-term lease contract, even though it does not legally own the asset, it controls the use of the asset and derives economic benefits from it. The standard requires the recognition of a "Right-of-Use Asset" and a "Lease Liability." This accounting treatment ensures the financial statements faithfully represent the economic substance of the leasing transaction (substance over form).

5.2. Enhancing Characteristics

These characteristics enhance the usefulness of information that is already relevant and faithfully represented.

1. Comparability

Financial information should enable users to identify and understand similarities in, and differences among, items. This applies to comparing information between different periods for the same entity (consistency) and between different entities.

Example: When all airlines apply IFRS 16 to account for leased aircraft, investors can compare their asset structures and leverage ratios more fairly and effectively.

2. Verifiability

Verifiability means that different knowledgeable and independent observers could reach a consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

Example: The value of a building recognized in the financial statements is based on a valuation report from an independent and reputable valuation firm. This information is verifiable.

3. Timeliness

Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is, the less useful it becomes.

Example: Releasing quarterly financial statements within 45 days of the quarter-end is significantly more useful for investment decisions than releasing them 6 months later.

4. Understandability

Financial information should be classified, characterized, and presented clearly and concisely. However, IFRS emphasizes that information should not be excluded simply because it is complex, provided that the information is necessary for decision-making.

Example: In the notes to the financial statements, a company explains its revenue recognition policy using simple, clear language, allowing investors without specialized accounting backgrounds to understand the principles applied.

The Qualitative Characteristics of Useful Financial Information serve as a critical conceptual foundation within IFRS, governing how transactions are recognized, measured, presented, and disclosed. Balancing Relevance and Faithful Representation with the Enhancing Characteristics is a prerequisite for financial statements to truly serve the decision-making objectives of users.

Under IFRS, the accounting for and reporting of a transaction or item in the financial statements follows a coherent logical framework consisting of four main components: Recognition, Measurement, Presentation, and Disclosure. This framework ensures that transactions and economic events are reflected consistently, represent their economic substance, and provide useful financial information to users.

6.1. Recognition

Recognition is the process of determining whether a transaction or event should be included in the financial statements. According to the Conceptual Framework, an item is recognized when:

• It meets the definition of a financial statement element (Asset, Liability, Equity, Income, or Expense); and
• Recognizing it provides useful information to users of financial statements (relevant and faithfully represented), at a cost that does not outweigh the benefits.

Example: Under IFRS 15 - Revenue from Contracts with Customers, revenue is only recognized when the entity transfers control of goods or services to the customer. Simply signing a contract, without the transfer of goods or services, does not give rise to revenue recognition in the financial statements.

6.2. Measurement

Once recognized, IFRS requires the determination of the monetary value of the item. Measurement encompasses both initial measurement and subsequent measurement.

6.2.1. Initial Measurement

Initial measurement determines the value of an item at the moment of first recognition, based on the measurement basis prescribed by the relevant standard (e.g., historical cost, fair value).

Example: Under IAS 16, the cost of an item of Property, Plant and Equipment (PPE) comprises its purchase price and any directly attributable costs required to bring the asset to the location and condition necessary for it to be capable of operating (e.g., transport, installation, and testing costs).

6.2.2. Subsequent Measurement

After initial recognition, items are re-measured in subsequent accounting periods according to the appropriate model permitted by the standard. This reflects the consumption of economic benefits, changes in value, or changes in risk.

Example: Also under IAS 16, an entity may choose between:

• The Cost Model; or
• The Revaluation Model

...to measure PPE in subsequent periods.

Note: Revaluation or updating values at the reporting date (e.g., measuring financial instruments at fair value under IFRS 9) is part of the subsequent measurement process, not an independent step in the IFRS framework.

6.3. Presentation

Presentation involves the arrangement and classification of recognized and measured items in the financial statements to communicate information clearly and consistently.

According to IAS 1, the presentation of financial statements must ensure:

• Appropriate classification (e.g., Current vs. Non-current);
• Consistency of presentation between periods;
• Reflection of economic substance of transactions and events.

Example: A bank loan with a remaining maturity of more than 12 months at the reporting date is presented as a Non-current liability in the Statement of Financial Position.

6.4. Disclosure

Disclosure is an integral part of the financial statements, designed to supplement, explain, and clarify the information presented numerically.

IFRS requires the disclosure of:

• Significant accounting policies applied;
• Significant assumptions and estimates;
• Risks and uncertainties associated with recognized items.

Example: Under IFRS 7, an entity must provide detailed disclosures regarding credit risk, liquidity risk, and market risk arising from its financial instruments.

Summary: Under the official IFRS framework, the accounting and reporting of an item follow a logical chain: Recognition → Measurement → Presentation → Disclosure. This approach ensures that financial information is not only recorded and valued appropriately but also presented and explained fully and transparently, effectively serving the economic decision-making of users.