International Financial Reporting Standards

(IFRS)

Lecture 1: Introduction to IFRS

Tuesday 4 September 2018
Lecturer - Dennis Jullens

1
WELCOME TO IFRS 1!

Week 1 · 2
INTRODUCTION

Week 1 · 3
 INTRODUCTION IFRS 1 COURSE

• Objectives: Knowledge of IFRS and the main IFRS standards and

being able to apply and interpret these standards

• Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne,
Janice Loftus, Leo van der Tas (2016). “Applying International
Financial Reporting Standards”, 4th edition, John Wiley & Sons.

• Topics:
• week 1: Introduction to IFRS
• week 2: Accounting for Assets
• week 3: Group Accounting
• week 4: Financial instruments
• week 5: Employee Benefits
• week 6: Recent Developments in IFRS
Week 1 · 4
 INTRODUCTION IFRS 1 COURSE

• 6 lectures of 2 hours, and 6 tutorials of 2 hours. Attendance is

mandatory.

• Assessment:
• 90% written exam / 10% home assignments

• Homework assignments (week 2-6):

• hand in at start of the lecture
• maximum of two students of same group
• 5 homework assignments, min 4 have to be handed in
• grading homework P or F, pass if P >= 4, if P = 3 then additional assignment
• if P < 3 retake course in 2019
• not handing in homework is automatically an F for missed assignment
Week 1 · 5
 INTRODUCTION IFRS 1 COURSE

• Written exam requires a minimum grade of 5,0

• Mock exams are on Canvas

• See also Canvas for planning for exam

Week 1 · 6
 INTRODUCTION IFRS 1 COURSE

• Additional material on Canvas is relevant for the exam

• Practise with www.ifrs.org/use-around-the-world/ifrs-quiz/

• For general questions: IFRS1-abs@uva.nl

Week 1 · 7
 TODAY‘S AGENDA

• The Role of Financial Reporting

• Introducing International Financial Reporting Standards

• Introducing the International Accounting Standards Board

• The Conceptual Framework

• Conclusions

Week 1 · 8
THE ROLE OF FINANCIAL REPORTING

Week 1 · 9
 THE EQUITIES BUSINESS

Equities Institutional Investors

‘The Sell Side’ ‘The Buy Side’

Week 1 · 10
INTRODUCING APPLE

Week 1 · 11
 APPLE ANNOUNCES SECOND QUARTER RESULTS

Source: Apple

Week 1 · 12
 FINANCIAL MARKETS RESPOND TO APPLE

Source: FT
Week 1 · 13
 APPROACHES FOR EQUITY VALUATION

Discounted Residual Income Valuation

Cash Flow Model* Multiples

Enterprise value INDIRECT WAY TO VALUE EQUITY

Equity value DIRECT WAY TO VALUE EQUITY

* Residual Income Model is also known as Abnormal Earnings or Economic Profit Approach

Week 1 · 14
THE STOCK RECOMMENDATIONS

Week 1 · 15
 THE NEED FOR FINANCIAL REPORTING

• ‘Joking aside, the fact is that accounting really matters. David

Tweedie, my predecessor as Chairman of the IASB, used to say
that the job of accounting is to keep capitalism honest’

• ‘High quality financial information is the lifeblood of market-based

economies. If the blood is of poor quality then the body shuts down
and the patient dies. It is the same with financial reporting. If
investors cannot trust the numbers, then financial markets stop
working’

Source: Hans Hoogervorst, speech at LSE, 6/11/2012

Week 1 · 16
FINANCIAL STATEMENTS CAPTURE THE BUSINESS

Business activities

Operating Investing Financing

activities activities activities

All these activities are captured in financial statements

Week 1 · 17
 PURPOSE OF FINANCIAL STATEMENTS

• The objective of financial statements is to provide financial

information about the reporting entity that is useful to present and
potential equity investors, lenders and other creditors in making
decision about providing resources to the entity.

• Financial statements also show the results of the management’s

stewardship of the resources entrusted to it.

Week 1 · 18
USERS OF FINANCIAL STATEMENTS

Week 1 · 19
 ACCOUNTING IS A LANGUAGE

• Since 2005, European listed companies use IFRS

• IFRS is now used by more in 120+ countries

• In the US, companies use US GAAP

Week 1 · 20
 CURRENT GLOBAL ACCOUNTING STANDARDS

IFRS US GAAP

Standards Principle based standards Rule-based standards

Authorities International Accounting The Financial Accounting

Standards Board (IASB) Standards Board (FASB)

Chairman Hans Hoogervorst Russel Golden

Board members 14 7

Countries More than 120 countries The United States

Week 1 · 21
FINANCIAL REPORTING – RULES OR PRINCIPLES?

Principles Rules

Week 1 · 22
FINANCIAL REPORTING – ART OR SCIENCE?

Week 1 · 23
OBJECTIVES OF IFRS

• Bring transparency by enhancing the international comparability

and quality of financial information, enabling investors and other
market participants to make informed economic decisions;

• Strengthen accountability by reducing the information gap

between the providers of capital and the people to whom they have
entrusted their money.

• Contribute to economic efficiency by helping investors to identify

opportunities and risks across the world, thus improving capital
allocation.
Source: IASB Document – Who we are and what we do

Week 1 · 24
IMPORTANCE OF IFRS

Week 1 · 25
USE OF IFRS AROUND THE WORLD

Source: IFRS Week 1 · 26

GLOBALIZATION OF IFRS - CONQUERING THE WORLD

Source: IFRS Week 1 · 27

GLOBALIZATION OF IFRS – GOOD OR BAD?

Week 1 · 28
FINANCIAL REPORTING – IFRS VERSUS US GAAP?

Week 1 · 29
VIEWS ON IFRS

Source: IFRS Week 1 · 30

VIEWS ON IFRS

Source: FT Week 1 · 31
THE INTERNATIONAL ACCOUNTING STANDARDS BOARD

Source: IFRS Week 1 · 32

IFRS COMMITTEES

Source: IFRS Week 1 · 33

THE IASB‘S MISSION

The principal objectives of the IFRS Foundation are:

• To develop a single set of high quality, understandable, enforceable
and globally accepted International Financial Reporting Standards
(IFRSs) through its standard-setting body, the International Accounting
Standards Board (IASB);

• To promote the use and rigorous application of those standards;

• To take account of the financial reporting needs of emerging

economies and small and medium-sized entities (SMEs);

• and to promote and facilitate adoption of IFRSs, being the standards

and interpretations issued by the IASB, through the convergence of
national accounting standards and IFRSs.

Week 1 · 34
DEVELOPING THE STANDARDS

Source: IFRS Week 1 · 35

STRUCTURE OF IFRS

• CONCEPTUAL FRAMEWORK

• STANDARDS

Week 1 · 36
INTROCUDING THE CONCEPTUAL FRAMEWORK

Week 1 · 37
INTRODUCING THE CONCEPTUAL FRAMEWORK

A practical tool that assists

Board Preparers All

• to develop • to develop consistent • to understand and
Standards accounting policies interpret Standards

Addresses fundamental issues

What are assets, liabilities, equity,

What makes financial income and expenses, when
What is the objective
should they be recognised and
of financial reporting? information useful?
how should they be measured,
presented and disclosed?
Week 1 · 38
PURPOSE OF THE CONCEPTUAL FRAMEWORK

Source: IFRS Week 1 · 39

PURPOSE OF THE CONCEPTUAL FRAMEWORK

Source: IFRS Week 1 · 40

PURPOSE OF THE CONCEPTUAL FRAMEWORK

Source: IFRS Week 1 · 41

REVISING THE CONCEPTUAL FRAMEWORK

Previous version of Conceptual Framework

useful but some improvements needed

incomplete out of date unclear

Main improvements

Filled in the gaps, for

Updated, for example, the Clarified, for example, the
example, concepts on
definitions of an asset and roles of stewardship and
measurement and
a liability and recognition prudence in financial
presentation and
criteria reporting
disclosure, including
guidance on the use of
profit or loss and OCI

Week 1 · 42
OBJECTIVE OF THE CONCEPTUAL FRAMEWORK

Provide financial information useful to users in making decisions

Users’ decisions involve decisions about

voting and influencing
buying, holding or selling providing or settling loans
management

To make these decisions, users assess

prospects for future net cash inflows to management’s stewardship of the

the entity entity’s economic resources

To make both these assessments, users need information about both

how efficiently and effectively
economic resources, claims and
management has discharged its
changes in those resources and claims
responsibilities
Week 1 · 43
Source: IFRS
QUALITATIVE CHARACTERISTICS

Fundamental qualitative characteristics

Relevance Faithful representation

• Information is relevant if it is • Information must faithfully

capable of making a difference to represent the substance of
the decisions made by users what it purports to represent

Enhancing characteristics

Comparability Verifiability Timeliness Understandability

Cost constraint
Week 1 · 44
Source: IFRS
ASPECTS OF FAITHFUL REPRESENTATION

• Exercise of caution under conditions of uncertainty

Prudence • Does not allow for overstatement or understatement of
assets, liabilities, income or expenses
• Supports neutrality

• Arises when monetary amounts cannot be observed directly

and need to be estimated
Measurement
• Does not prevent information from being useful
uncertainty • If very high, may affect whether a sufficiently faithful
representation can be achieved

• Economic substance of the underlying economic

phenomenon is normally the same as the legal form
Substance over form • If not, need to represent the substance to provide faithful
representation

Week 1 · 45
Source: IFRS
ELEMENTS OF FINANCIAL STATEMENTS

A present economic resource controlled by the entity as a result

of past events
Asset • An economic resource is a right that has the potential to
produce economic benefits

A present obligation of the entity to transfer an economic

resource as a result of past events
Liability • An obligation is a duty or responsibility that the entity has
no practical ability to avoid

The residual interest in the assets of the entity after deducting all
its liabilities
Equity • Financial Instruments with Characteristics of Equity research
project further explores how to distinguish liabilities from
equity
Week 1 · 46
Source: IFRS
ELEMENTS OF FINANCIAL STATEMENTS

Increases in assets, or decreases in liabilities, that result in

Income increases in equity, other than those relating to contributions
from holders of equity claims

Decreases in assets, or increases in liabilities, that result in

Expenses decreases in equity, other than those relating to distributions
to holders of equity claims

Information about income and expenses is just as important as information

about assets and liabilities

Week 1 · 47
Source: IFRS
RECOGNITION

Recognition criteria

Relevance Faithful representation

Whether recognition of an item results in Whether recognition of an item results in

relevant information may be affected by,
for example:
• low probability of a flow of economic
benefits
• existence uncertainty
a faithful representation may be affected
by, for example:
• measurement uncertainty
• recognition inconsistency
• presentation and disclosure of resulting
income, expenses and changes in equity

Cost constraint

Week 1 · 48
Source: IFRS
PROFIT OR LOSS AND OCI

Statement of profit • Primary source of information about performance

or loss • Default location for income and expenses

Other • Exceptional circumstances

• Only changes in current values of assets and
comprehensive
liabilities
income • In principle, OCI items are recycled

Classification into profit or loss and OCI and recycling

Relevance Faithful representation

Only the Board can take decisions on OCI and recycling

Week 1 · 49
Source: IFRS
MEASUREMENT

Historical cost measurement Current value measurement

bases bases
• include amortised cost • include fair value, value in use,
fulfilment value and current cost

Selecting a measurement basis

Relevance Faithful representation

• characteristics of the asset or liability • measurement inconsistency
• contribution to future cash flows • measurement uncertainty

Information in both the statement of financial position and the

statement(s) of financial performance

Enhancing qualitative characteristics and cost constraint

Week 1 · 50
Source: IFRS
IFRS, MEASUREMENT AND CREDIT CRISIS

Week 1 · 51
CONCLUSION – RELEVANCE OF THE FRAMEWORK

• Framework tries to answer the following important questions

• Who are the users?
• Which are the users’ information needs?
• What are the objectives of financial reporting?
• How is the reporting entity defined?
• How should be measured?

Week 1 · 52
CONTACT DETAILS

Dennis Jullens

Email – j.f.jullens@uva.nl
Location – M1.25

Week 1 · 53