International Financial Reporting Standards

This is an over-simplified executive summary meant for non-financial directors.  Please feel free to email [email protected] if you require more detailed information.  This information is updated to June 2021.

IFRS 1: First Time Adoption

This standard sets the procedures to adopt when a company begins to use IFRS so that fair presentation is achieved not only for the accounting year but also for the prior year.  For example, research and development costs should not be included as assets; employee liabilities should be shown as liabilities; dividends simply proposed but not declared during the accounting year should not be shown as a current liability; provisions should be made for even constructive and legal obligations; derivatives should be fully accounted for including he underlying assets; etc.  

IFRS 2: Share based payment

When you give shares to your employees recognizing their performance or when you buy goods and pay for them through shares, then you should bring the transaction into books.

IFRS 3: Business Combination

When you buy another business, all the assets that you buy should be accounted for on fair value and you recognize goodwill in your books. You should not write off this goodwill for a fixed number of years unlike in the past. You have value the goodwill every year and should reduce it only if it falls in value (called “impairment”).

IFRS 4: Insurance Contracts

This standard seeks to temporarily exempt an insurer from applying certain provision of IFRS until a substantial IFRS will be released.  (This will be replaced by IFRS 17 effective 1/1/2023)

IFRS 5: Non Current Assets Held for Sale or Discontinued Operations

Property, plant & equipment that are held for sale (not abandoned assets but which are really meant for immediate sale) and that relate to discontinued operations must be disclosed separately in the financial statements and they should not be added to Property, plant and equipment. If a division of business is held for sale, then income statement should show income from discontinued operation separately.

IFRS 6:  Mineral Resources

In view of the nature of mining industry this Standard allows the directors to make accounting policies concerning treatment of certain exploration and mining expenditure as assets and impairment of such assets.   This Standard also deals with disclosure of such assets.

IFRS 7: Financial Instruments - Disclosure

This standard requires disclosures elaborating the nature and significance of financial insruments (meaning those assets that will be converted into cash, like book debts, loans given or taken or creditors, etc.) and also the risks involved in carrying those financial instruments from the company's perspective.

IFRS 8: Operating Segments

This standard requires publicly traded companies (listed) to disclose information on operating segments including geographies, major customers, products, services, etc. as part of their audited financial statements.

IFRS 9: Financial Instruments

Financial instruments are those that are settled in cash and may or may not generate interest income or interest expense or dividend income.  The Standard specifies how they should be categorised, recognised and accounted for.  Fair Value measurement is a rule of thumb while amortised cost less impairment is used for loans and debts.  It also deals with assessing the quality of the investment in order to provide for expected (not incurred) credit losses - whether to provide for the first year or for the entire life of instrument.

IFRS 10: Consolidated Financial Statements

It requires companies controlling other companies (subsidiaries) to prepared consolidated financial statements and prescribes principles for consolidation.  So a holding company has to present both separate financial statements and also consolidated financial statements.

IFRS 11: Joint Arrangements

Joint venture is accounted for using equity method.  Joint operation (another method of joint control where income, expense, assets and liabillities are shared) should be accounted for based on the income, expense, assets and liabiliites shared.   

IFRS 12: Disclosures of Interests in Other Entities

This standard requires disclosures of nature of relationship, transactions,, shareholding percentrage, etc. when an entity has subsidiaries or joint venture operations or has shares or controlling interests in other companies.

IFRS 13: Fair Value Measurement

Fair Value is defined a step above knowledge and intention of buyer and seller and dealiing on arms' length basis, in the sense that information flow and the sale arranagement should be in a manner to attract more market participants.  Fair value is market price from active market or closer active market adjusted for factors affective current market.  Where both are not possible then future cashflows can be discounted at returns prevailing in the market considering the risks.

IFRS 14: Regulatory Deferral Accounts

This Standard guides first time IFRS adopters to recognise, account for and disclosure regulatory deferral accounts.  They are allowed show movements and balances separately and make detailed disclosures.

IFRS 15: Revenue from Contracts with Customers

This Standard offers guidance to account for turnover from customers which whom contracts exists.  The Standard relates turnover to performance obligations.  It deals with identifying performance obligations and allocating revenue to those obligations.

IFRS 16: Leases

This Standard seems to present value lease obligations and account for them as Right To Use Assets and Lease Liabilities.  Further the Standard requires Right to Use Assets to be depreciated according to IAS 16.  In other words most of operating expenses such as long term lease, etc. now get shown on the face of the balance sheet. 

IFRS 17: Insurance Contracts

This deals with recognition, measurement and disclosure of insurance contracts and this takes effect on 1st January 2023.

IAS 1: Presentation of financial statements

Financial Statements = Income Statement, Balance Sheet, Changes in Equity Statement, Cash Flow Statement, Accounting Policies Statement and Notes to the financial statements.  The standard deals with line items or contents of these parts of financial statement.  It also tells you that you can’t merge or combine or net off items.  All important items have to be shown separately.  Financial Statements should indicate if International Financial Standards are complied with.  If you do not comply with any IFRS, then your financial statements should include explanations for non-compliance.  There are lot of estimates and judgments that you make in preparing financial statements for provisions, depreciation, etc.  Your financial statements should explain the assumptions behind these estimates.

IAS 2: Stocks

You should value your stocks at cost. If net realizable value is lower, then you should value stocks at net realizable value. You should use First In First Out method of stock valuation. Last In First Out is not the correct method. You can also use Weighted Average Cost Method. Stock value should include all expenses incurred in bringing it to the present location, like transport, customs, duty etc. Foreign exchange changes should not be included in Stocks.

IAS 7: Cash Flow Statement

A cash flow statement is a must for financial statements. Cash comes or goes because of investing activities (fixed assets), financing (loans & shares) activities or operating (business) activities. These should be separately shown. Cash should include bank balance, call account, short-term investments which can be readily converted to cash.

IAS 8: Accounting Policies, Errors & Accounting Estimates

All your accounting policies should comply with IFRS. For example you can’t have an accounting policy to value stock on LIFO (Last in First out basis). You should follow accounting policies year-after-year without changing. You can only change where IFRS requires a change or when financial statements will make more sense. Where an accounting policy changes you have to account for it retrospectively, as if the changed policy was always there. When you make an error in previous years, you correct these errors not in the current year but in the year in which you made the error. You are changing your estimate, you can however make changes for the present and future and not the past financial statements.

IAS 10: Post Balance Sheet Events

Events happen after the balance sheet date but before the release date. Some of these events confirm the conditions that prevailed on the balance sheet date. Under these circumstances you can adjust the balance sheet figures. In other cases, you can’t adjust them just because your assumption was wrong on the balance sheet date or market changed after the balance sheet date against your expectation. Major non-adjusting events (market changes) should be disclosed in the financial statements. For example, destruction of stock by fire, or change in tax rates, major sale of business.

IAS 12: Income Tax

In addition to current tax, even deferred tax (future tax payable for current income) should be accounted for. Sometimes you pay less because of current loss. This should also be accounted for (called Deferred Tax Asset), provided you will make enough income to absorb that tax loss. Deferred tax relates to all differences between the carrying amount of assets and liabilities in the balance sheet, and the tax base of assets and liabilities. So, your income statement will not only have current tax but also deferred tax.

IAS 16: Property, Plant & Equipment (Fixed Assets)

You recognize these property, plant and equipment initially at cost.  All expenses to get an asset ready should be included in the cost of asset like transfer duty, erection charges, commissioning charges, etc. (not repairs & maintenance).  You depreciate the assets when you keep the asset ready and not when you start using it.

Sometimes, you have an asset but one part of an asset has a useful life different from other part or parts of the asset.  For example, your building can live for 40 years but the air-conditioning plant in the building may live for 20 years.  In such cases, you should use component-wise depreciation – you can’t just have one depreciation rate.

Every year-end you should estimate the useful life of the asset and change depreciation.  It is not necessary that you write off an asset at 10% every year.  At he end of 7th year, if you think that the asset would still come for 5 years than you can change the depreciation for the 8th year to 12th year.  Sometimes an asset may suffer a big damage.  You should estimate a reduction in value of asset (impairment) and account for it. 

You can always revalue a building and bring the valuation figure in the balance sheet.  But you should then revalue it consistently and regularly – say every three years.

IAS 19: Employee Benefits

You should bring into books severance benefits, gratuities, leave pay and other cash benefits due to employees as a liability specifies accounting for and disclosure of employee benefits by employers. You should not wait until you actually pay. Contributions to defined contribution plan should be recognized as expense since it is for employees’ services already rendered. If you contribute to defined benefit plan, then the liability of the benefit plan becomes your liability and you have to recognize it in your financial statements, soon or later depending on the extent of increase in liability.

IAS 20: Government Grants

You recognize grants when you are sure that you will comply with grant conditions and you will receive grants. If the grant is in kind, recognize it at fair value. If a grant relates to an expense recognize it when the expense is recognized. If it relates to assets, then you bring into income the grant as you bring depreciation of that asset into expense.

IAS 21: Foreign Currency

Pula is the reporting currency for a business in Botswana – even if it imports and exports 100% of its merchandise.  When it imports it has to convert the import costs into Pula on the date of purchase and NOT on the date of payment to supplier.  In the same way when you export, you convert to Pula on the date of export invoice and not on the date of collection of sale proceeds.

Debtors, creditors, foreign bank account balances, etc. are converted to Pula at the rate prevailing on balance sheet date.  Foreign currency fixed assets are converted on the date of original purchase (not at balance sheet date rate).

Exchange differences on debtors, creditors, foreign bank accounts (monetary assets) are taken to income statement.  But if these relate to a foreign operation, you bring the differences into income statement only when you sell that foreign operation.

This Standard allows you to prepare your financial statements in any currency, but then you should follow a different foreign currency translation practice.  Assets & liabilities should be converted at closing rate.  Income & expenses should be converted at transaction (or average) rate.  The resulting difference should be taken to equity and not to profit and loss account.

IAS 23: Interest on Loans

You should always take interest to profit and loss. Sometimes you may borrow for machines (or building or any productive asset) that may take a long time to construct and put to use. In these cases you can capitalize the interest during the construction period and increase the value of the asset. Of course, you can also take the interest to profit & loss.

IAS 24: Related Parties

All transactions with related parties should be disclosed in the Notes to financial statements – sales, purchases, debtors, creditors, etc. Related parties include companies with same directors / shareholders, in which your company has more than 20% shares, joint ventures, directors and shareholders. Notes should include the nature of relationship, nature of transaction, interest, security, terms of repayment, etc.

IAS 29: Financial Reporting in Hyper-Inflationary Economies

The essential element of a joint venture is a contractual arrangement, which establishes joint control. If your company is in joint venture with another company, then your assets that you use in the joint venture should still be accounted for as your assets in your financial statement. You should also account for your share of joint venture’s assets, liabilities and profits. You can use the equity method as in IAS 28 or you can also use proportionate consolidation method where you do line by line consolidation (totaling). Again there is no need to following these methods under certain circumstances.

IAS 32: Presentation of financial instruments

IAS 32 specifies rules for presentation of financial instruments. A financial asset (debtors and, receivables) can not set of a financial liability (creditors and payables) in the absence of a legal right. Equity may be a financial instrument in the sense that your company may have an obligation to pay interest (or dividends), may have given security, may have an obligation to repay after a certain time or upon fulfillment of a certain condition. In such cases, it is in fact a long term obligation or a financial instrument although termed “legally” as “share” or “equity”. Remember that accounts are not so much based on law as are based on “substance” or the practical business sense.

IAS 33: Earnings Per Share

This Standard applies to publicly traded companies and it requires information relating to earnings per share to be computed and disclosed in a certain manner.

IAS 34: Interim Financial Reporting

This Standard applies to public traded companies and it prescribes presentation and disclosure of interim financial statements including the periods that they cover.

IAS 36: Impairment of Assets

If you show an asset in the balance sheet at P 100,000, you should be able to recover P 100,000 from sale or use. If you can only recover P 85,000 for example, then there is an impairment of asset for P 15,000. This is an impairment loss and is an expense. The standard also applies to groups of assets (known as cash-generating units), like when you have two or three businesses operated by the same company. You should assess the recoverable amount at each year-end for goodwill in business combination and intangible assets (for example, development cost). For fixed assets, like building or furniture, you can assess impairment when there is an indication that it may be impaired (not at each year-end). If there is an impairment of a revalued asset, then revaluation surplus can be decreased instead of calling it an expense. There are disclosure requirements, since you make assumptions to decide on impairment.

IAS 37: Provisions and Contingent Liabilities

A liability is a definite, legal or constructive (imputed by law) obligation like for purchases, electricity, water, phone, etc.  You know when you have to pay and how much to pay.  Some times you may not know how much to pay or when to pay but you that you have to pay.  This is a provision.  If you sell goods on warranty, you make a provision.  Sometimes you know you may have to pay but you are not certain if you will pay.  This is a contingent liability.  If you are sued and if you are think that you may be on the losing side, it is a contingent liability.  But you can not call any future loss a provision.

A liability is shown in the balance sheet.  A provision is shown in the balance sheet and a contingent liability is not shown in the balance sheet but is disclosed in the notes to the balance sheet if there is a good probability that you may have to pay it.

IAS 38: Intangible Assets

It is like fixed asset that gives you the benefit of income for foreseeable future but you can’t see it like a table or chair.  You should be able to separate it practically (not necessarily legally) from the business and sell it – for example, a franchise fee or licence fee for software, a licence fee for a production technology or pattern, trade mark and patents.  Goodwill is an intangible asset but it is covered by IFRS3 so you can’t call it intangible asset for this Standard.  If you generate goodwill internally, like your training or research, or trading style, etc., you can not recognize it as goodwill because it is not separable from your business.
An intangible asset is expensed off and not shown in the balance sheet.  If you want to show in the balance sheet, then you have to prove that (1) future economic benefits will be there and (2) cost of the asset can be measured accurately (reliably)

Intangible assets are measured initially at cost.  Every year you depreciate intangible assets, if useful life is definite.  If it is indefinite, then you don’t amortise it (depreciate it) but test it for impairment every year (See IAS 36 to understand the meaning of impairment).  You can choose to measure you intangible asset at fair value, if there is an active market for it (very rate)

IAS 40: Investment Properties

Investment property is land or a building (including part of a building) or both, held to earn rentals or for capital appreciation or both.  It is not owner-occupied, and is not used in production or supply of goods and services, or for administration.  It is not property that is for sale in the ordinary course of business.  It is not property that is being constructed or developed for future use by the entity as an investment property but may include investment property that is being redeveloped.

An investment property is measured initially at cost.  For subsequent measurement an entity must adopt either the fair value model or the cost model for all investment properties.   All entities must determine fair value, for measurement (if the entity uses the fair value model) or for disclosure (if it uses the cost model).  Fair value reflects market conditions at the reporting date.  Simply put, investment properties should revalued regularly.  Under the fair value model, investment property is remeasured at each reporting date.  Changes in fair value are recognised in the income statement as they occur.  Fair value is the price at which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction, without deducting transaction costs.

Under the cost model, investment property is measured at cost less accumulated depreciation and any accumulated impairment losses.  Gains and losses on disposal are recognised in profit or loss.

IAS 41: Agriculture

IAS 41 prescribes the accounting treatment, financial statement presentation, and disclosures related to agricultural activity- animals & plants.  Biological assets and agricultural produce at the point of harvest is also measured at fair value less estimated point-of-sale costs.  Changes in the value of biological assets are included in profit or loss.  Biological assets that are attached to land (e.g., trees in a plantation forest) are measured separately from the land.

The fair value of a biological asset or agricultural produce is its market price less any costs to get the asset to market. Point-of-sale costs include commissions, levies, and transfer taxes and duties.

When an agricultural company gets a government grant, it does not have to follow IAS 20.  Grants can be accounted on receivable (accrual) basis, if they are unconditional.  If they are conditional, then conditions should be met before you account for grants.

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