IFRS
IFRS stands for International Financial reporting Standards. These are the standards issued by the International Accounting Standard Board. It also covers the wide range of International Accounting Standards issued by the International Accounting Standard Committee. IFRS has replaced the GAAP (Generally Accepted Accounting Principles).
These standards are to be used by the business organisations that are engaged in commercial, financial, industrial and other similar activities.
ASSUMPTIONS UNDER IFRS
GOING CONCERN ASSUMPTION
As per this assumption, it is assumed that business will continue to operate for the indefinite period of time in future. The transactions are recorded in the books of accounts assuming that the business is a continuing enterprise.
IMPLICATIONS OF GOING CONCERN CONCEPT
- Assets are to be recorded at a cost price or original price.
- Depreciation is to be provided on assets.
- Identification of short term assets or long term assets and long term liabilities or short term liabilities as different.
- Because of this accounting concept, the outside parties enter into long term contracts with the enterprise, give loans and purchase the debentures and shares of the enterprise.
EXAMPLE: The prepaid expenses of the firm which have no realizable value are recorded in the books of accounts of the business enterprise as benefit of such expenses will be received in the future.
ACCRUAL BASIS ASSUMPTION
Accrual concept states that all the accounting records are to maintained by taking into consideration the current year incomes and expenditures. It states that income and expenditure of a particular year is to be recorded in the book of accounts and it is immaterial whether the amount for the same is paid or received or not. It means:
- Record the income of the year whether is it received or not.
- Record the expense of the year whether it is paid or not.
IMPLICATIONS OF ACCRUAL CONCEPT
- It is similar to matching concept.
- It truly depicts the accurate profit and loss of the firm for a year.
- It gives rise to the adjustments like:
- Prepaid Expenses
- Accrued Incomes
- Income received in advance
- Outstanding Expenses
- It differentiates the cash transactions and credit transactions.
- It shows the true financial position of the concern.
EXAMPLE: Credit purchase of goods, Rent paid in advance for the next year, Interest due but not yet received.
MEASURING UNIT ASSUMPTION
Measuring unit is the current purchasing power. It means that the assets are not shown in the Balance Sheet at historical cost but they are shown at current value or fair value. In other words, assets are shown at the amount that would have been paid if the same asset has been acquired currently. Similarly, liabilities are shown at the amount that would be required to settle them.
CONSTANT PURCHASING POWER ASSUMPTION
This assumption requires that the value of capital be adjusted to inflation at the end of the financial year.
NEED OR OBJECTIVES OF IFRS
Each country has its own set of rules and regulations for accounting and financial reporting. Hence, when an enterprise decides to raise capital from abroad, the rules and regulations of that country will apply and there will be differences in the financial reporting in the foreign country as compared to its own country. This leads to the rising need of IFRS:
EASY TO ACCESS THE GLOBAL MARKETS
Capital markets have now become global and companies are now in a position to access the funds globally. But investors all over the world rely on the financial statements prepared on the basis of IFRS. Hence, IFRS based financial statements are now a pre-requisite for the enterprises seeking to raise overseas funds.
EASY TO MAKE COMPARISONS
International investors would like to compare financial statements based on internationally accepted set of accounting standards. It improves the ability of the investors to compare their investments on a global basis and thus lowers the risk of errors of judgment. Financial statements based on IFRS will facilitate the investors to compare financial statements without making adjustments for national accounting differences.
UNIFORMITY IN FINANCIAL REPORTING
The adoption of IFRS brings uniformity, comparability and transparency in financial statements. It improves the standard and quality of financial reporting.
LOWER COST OF CAPITAL RAISED ABROAD
At present, companies that operate in global environment have to prepare two sets of financial statements. One set based on home country’s accounting standards and another set based on IFRS. In case of adoption of IFRS it will have to prepare only one set of financial statements and thus the cost of raising funds from abroad will be minimised.
TRUE AND FAIR VALUATION OF INVESTORS
There is a wide gap between the existing Indian Accounting Standards and IFRS. As per Indian Accounting Standards, assets are valued on historical cost whereas as per IFRS assets are reported fair value i.e. the estimated value at which the asset could be sold in the market. Adoption of IFRS would provide a uniform basis for the reporting of true and fair value of assets.
DETECT FRAUDS AND MANIPULATION OF ACCOUNTS
It is easy to manipulate the accounts and commit fraud in the traditional system of accounting. There are tough and rigid rules for the preparation and presentation of financial statements under IFRS and it is extremely difficult to manipulate the accounts.