Introduction Flashcards
What are the different financial statements?
Balance sheet
Cash flow statement
Income Statement (P&L)
Notes to the financial statements
Statement of changes in Equity
Who are the users of the financial statements?
Current and potential investors (shareholders)
Capital lenders
Suppliers and other creditors
Customers
Employees and their representatives
Government and public organizations
General public
Main differences between anglo-saxon and latin models
EU standards are based on tax rules
US/UK are based on economic standards
Why do we need IFRS?
Investors: need to compare financial statements
Bringing together the notions of true value and fair value
Use globally applicable standards
Use standards that are not decided by a single country (US GAAP = USA)
Since when have IFRS and IAS been used?
The International Financial Reporting Standards (IFRS) and the International Accounting Standards (IAS) have been the reference accounting language in the world since January 1st 2005.
Mandatory for listed companies and cross-border groups, IAS-IFRS standards harmonize balance sheets and improve accounting transparency worldwide.
What are the differences between IAS and IFRS?
IAS are the predecessors to IFRS
How are IFRS standards developed?
They are created within the IFRS Foundation the International Accounting Standards Board (IASB) is responsible for developing them, and the International Financial Reporting Interpretations Committee (IFRIC) for interpreting them.
Every 5 years, the agency consults to define international standardization priorities.
Research is then carried out to identify problems and find solutions to them. The ideas are then set out in a discussion paper that can be commented on by the public. This is followed by proposals for new standards or amendments to a standard.
Who is affected by IFRS?
Over 160 countries (Canada, Australia, Japan => not US). All EU listed companies must use it for their consolidated accounts
What are IFRS standards based on?
the primacy of substance over form;
the balance sheet approach (priority of the balance sheet over the income statement);
the principles of neutrality and prudence;
fair value valuation of the company’s assets and liabilities;
the priority given to the investor’s vision;
the importance given to interpretation;
the absence of sector-specific texts.
(to be relevant and reliable)
Can SMEs apply IFRS?
They can, but they use a simplified framework called IFRS private entities to remove irrelevant standards and lower costs
Benefits of IFRS?
Common language for corporate reporting
Without IFRS each EU member state would use its own national standards as for statutory accounts
Necessary to compare companies from different countries
Improves the quality of financial information
Facilitates group reporting and consolidation procedures
Main differences between IFRS and US GAAP?
Inventory valuation (no LIFO in IFRS)
Impairment losses (US GAAP uses a 2-step process method while IFRS uses 1-step write-offs)
Consolidation rules: under US GAAP a group has to have a majority of the rights (what allowed the Enron case to happen), the SEC defines a minimum % of the vote rights
Fair Value concept
Value is based on historical costs
Information was testable and objective
Fair value is a fundamental concept in both systems
Valuation of an asset :
With transparency
With improvement of financial information
Without the risk of undervaluation
To link the accountancy with market value
What are the limits of fair value?
Evaluation is subjective
Market volatility
What is market value?
It’s the net amount that you can obtain by selling the asset at the end of the year, in ordinary economic conditions
