Chapter 7 Flashcards
International Financial Reporting Standards (IFRS) Foundation
A non-profit international organisation responsible for developing IFRS Standards
IFRS Foundation Mission
To bring transparency, accountability and efficiency to financial markets worldwide
How many jurisdictions require IFRS standards?
More than 144 jurisdictions require IFRS
Three Tiers of the IFRS Foundation’s Governance Model
- IASB (International Accounting Standards Board)
- Trustees
- Monitoring Board
International Sustainability Standards Board (ISSB)
Develops sustainability related disclosure standards for investors and capital market participants
IFRS Advisory Council
Provides strategic support and advice to the IFRS Foundation
IFRS Interpretations Committee
Provides guidance on IFRS application where divergence in practice occurs
Accounting Standards Advisory Forum (ASAF)
Provides input from standard-setters into the IASB’s technical projects
How does the IASB cooperate with national standard-setters?
It works towards global convergence, collaboration with bodies like the FRC and FASB
Who is required to use IFRS in the UK?
UK companies listed on the London Stock Exchange must follow UK-adopted IFRS
Which major capital markets do not mandate IFRS?
The USA (no plans to adopt) and Japan (voluntary adoption permitted but not required)
UK Endorsement Board (UKEB)
The body that formally endorses IFRS in the UK, ensuring:
- providing a true and fair view
- serve the public good
- meet criteria for understandability, relevance, reliability and comparability
Two key assumptions of the IRFS framework
Accrual Basis - transactions are recorded when they occur, not when cash is received/paid
Going Concern - financial statements assume the entity will continue operating unless otherwise stated
2019 Revised Going Concern Standard
- stronger auditor scrutiny of management’s assessment
- thorough testing of supporting evidence
- evaluation of management bias in reporting
IFRS Definition of Useful Financial Information
Financial Information should be:
- comparable
- verifiable
- timely
- understandable
Statement of Financial Position (Balance Sheet)
- assets
- liabilities
- equity
Statement of Comprehensive Income (Income Statement)
- income
- expenses
Financial Policy Committee (FPC)
A Bank of England committee, created in 2013
- monitors emerging risks and vulnerabilities
- reports to the government on it’s actions or reasons for inaction
- includes members from Bank of England, FCA and HM Treasury
IFRS 17
A new accounting standard for insurance contracts issued in May 2017, effective from 1st January 2023
Introduced to improve comparability of insurance companies’ financial statements by requiring consistent accounting
Issues with IFRS 4
Allowed insurers to use national accounting standards, leading to inconsistent financial reporting and making company comparisons difficult for investors
How does IFRS 17 change insurance accounting?
- uses current values instead of historical cost
- regular updates to financial information for better transparency
- ensures insurance liabilities remain in the balance sheet until settled
- prohibits offsetting insurance liabilities against reinsurance assets
IFRS 17 Key Tests
- adequacy test for recognised insurance liabilities
- impairment test for reinsurance assets
- no provisions for future potential claims
Key Terminology and Disclosure Changes in IFRS 17
GWP - still available but not presented in income statement
Net Written Premium - no deductions for ceded premiums or acquisition costs
Earned Premium - now called “insurance revenue”
Unearned Premium Reserve - now called “liability for remaining coverage”
Outstanding Claims Provision - now called “liability for incurred claims”
Deferred Acquisition Costs - no longer presented as an asset, but included in contract fulfilment cash flows
Claims Development Tables (CTDs)
Required under both IFRS 17 and IFRS 4, shows how accurate past estimates of outstanding claims were, helping assess insurance liability risks
Key Components of IFRS financial statements
- balance sheet
- income statement
- cash flow statement
- notes (accounting policies, disclosures, etc)
- either a statement of changes in equity (SOCE) or a statement of recognised income and expense (SORIE)
What is IFRS for SMEs?
A simplified IFRS standard (250 pages) for small and medium-sized enterprises, designed to meet their needs without full IFRS complexity
FRS 102
The main UK GAAP accounting standard, introduced in 2015.
Based on the IFRS for SMEs but retains certain accounting treatments from the old UK GAAP that are not permitted under IFRS
Financial Reporting Council (FRC)
The UK’s independent regulatory for corporate reporting and governance, responsible for setting accounting standards and reviewing corporate accounts
The Audit, Reporting and Governance Authority (ARGA)
Proposed to replace the FRC following the 2018 Kingman Review, which criticised the FRC for being slow to act on corporate failures
FRC Mission
Promote transparency and integrity in business to serve the public and UK economy
Key Governance Committees under the FRC
- people committee
- audit & risk committee
- regulatory standards & codes committee
- supervision committee
- conduct committee
FRC’s Conduct Committee
Ensures financial information from public and large private companies complies with reporting requirements and investigates potential reporting breaches
Criteria for a Small Entity under FRS 102
Meets any two of the following:
Turnover < £10.2m
Total Assets < £5.1m
< or = to 50 employees
What is the key financial reporting requirement for small entities under FRS 102?
Accounts must present a true and fair view, meaning additional disclosures may be necessary
FRS 105
The Financial Reporting Standard for Micro-Entities, designed for the smallest businesses
- limited disclosure requirements
- no need for additional judgements to ensure true and fair presentation
- no accounting policy choices available
FRS 105 Criteria
Meets any of the following two:
Turnover < £632,000
Total Assets < £316,000
< or = to 10 employees
Why do some UK companies avoid adopting IFRS?
- higher disclosure requirements
- potential tax consequences
- impact on distributable profits
- effect on regulatory solvency calculations
- possible debt covenant breaches
- time, cost and training requirements
FRS 101
Provides reduced disclosure requirements for UK parent and subsidiary companies using UK-adopted IFRS
FRS 103
FRS 103 governs accounting for insurance contracts under FRS 102
In what situations might a business need multiple reporting bases?
UK GAAP for Companies House Filings
IFRS if the parent company reports under IFRS
US GAAP if the parent reports under US GAAP
PRA Statutory Returns for regulatory compliance
