gusau ifrs

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AS BASIS FOR PREPARATION OF

FINANCIAL STATEMENTS

Dr. Malami Muhammad Maishanu

Department of Business AdministrationUDU. Sokoto

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INTRODUCTIONAccounting standards are ‘policy documents’ issued by professional accountancy bodies at national and international levels, in relation to different aspects:

Measurement; Treatment; Disclosure; and Presentation of accounting information.

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INTRODUCTIONThe use of International Financial Reporting Standards (IFRS) as a universal financial reporting language is gaining momentum across the globe.

This is especially as compared to a few years ago when a number of different national accounting standards existed. 3

INTRODUCTIONThe primary focus of IFRS is on

facilitating investors’ decision-making by enhancing

transparency, governance, uniformity and understandability - through

imposing a common accounting language.

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INTRODUCTIONOnce the IFRS has been adopted, financial statements should be prepared in compliance with those standards.

The financial statements should be prepared on the historical cost basis, except for certain financial instruments that are measured at fair value. 5

INTRODUCTIONThis paper examines IFRS as basis for the preparation of financial statements for the purpose of reporting to relevant stakeholders. The paper answers the following questions:

What is the meaning and importance of IFRS?

What are the benefits of adopting IFRS? 6

INTRODUCTIONWhat is the relationship between IFRS and Nigerian accounting standard?

And what needs to be done in applying IFRS in the preparation of financial statements?

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MEANING AND IMPORTANCE OF IFRS

IFRS are defined as Standards and Interpretations adopted by the International Accounting Standards Board (IASB). They comprise:

International Financial Reporting Standards (IFRS);

International Accounting Standards (IAS); Interpretations originated by the International

Financial Reporting;Standards Interpretations Committee (IFRSIC) or

the former Standing; andInterpretations Committee (SIC).

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IFRS are considered "principles based" set of standards in that they establish broad rules as well as dictate specific treatments.

There is an increasing acceptance and use of IFRS in major capital markets all over the world.

Since 2001 more than 100 countries have required or permitted the use of IFRS while the remaining major economies have established timelines for convergence with, or adoption of, IFRS.

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IFRS are important because globalization of financial markets and indeed capital market is an irreversible process, and there are many potential benefits abound from mutually recognized and respected international accounting standards.

It has been argued that common standards cut the costs of doing business across borders by reducing the need for supplementary information.

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Common standards also make information more comparable, thereby enhancing evaluation and analysis by users of financial statements.

Consequently, users become more confident of the information they are provided, and presumably this reduced uncertainty, promotes efficient allocation of resources and reduces capital costs.

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There are several approaches to embracing IFRS in a jurisdiction. These include situations where:

IFRS are, by definition, domestic accounting principles;

IFRS are integrated into domestic accounting standards, using the exact words in the IFRS, but with the possibility of local jurisdiction restricting accounting alternatives provided in the IFRS and the provision of additional commentary to assist implementation;

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MEANING AND IMPORTANCE OF IFRSIFRS are incorporated into local legislation without amendments after a formal review;

IFRS are the benchmark towards which domestic accounting domestic accounting standards are moving, through a gradual process of convergence or harmonization.

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MEANING AND IMPORTANCE OF IFRSIFRS have been hailed as a leap forward in the

convergence of global financial reporting. However, the content of IFRS appears to have

essentially been designed to benefit public listed companies – particularly multinationals operating in multiple markets – and their shareholders.

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BENEFITS OF IFRSThe benefits of IFRS adoption are numerous. In general, it offers organizations opportunity for a fresh look at their processes and policies.

It also gives room for one basis of accounting (simplify local statutory reporting, cross-border transactions, strengthening of controls and efficiencies in future reporting).

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BENEFITS OF IFRSIt leads to standardization of practices

across countries (that is, consistency of global accounting policies and procedures, shared service center deployment and streamlined merger and acquisition activities).

Finally, it can lead to improved comparability across borders and within global industries, with worldwide peers and competitors.

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BENEFITS OF IFRSA more specific consideration may reveal individual benefits as hereunder:

International Investors Ability to make useful and meaningful comparisons of investments portfolios in different countries.

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BENEFITS OF IFRSMulti-national companiesEasy consolidation of financial statements;

Better management control; as harmonization would aid internal communication of financial information; and

Easier to comply with the reporting requirements of overseas stock exchanges. 18

BENEFITS OF IFRSLocal and domestic companies

Easier access to external capital;

Global comparability of financial statements; and

Transparency and enhanced disclosures and seal of quality.

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BENEFITS OF FIRSGovernments and National standard setting bodies

Assist governments in attracting international investors as adoption of IFRS enables international investors easy monitoring of overseas investments.

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BENEFITS OF FIRSEven though the standards are subject to

change and the propagation of best practice of IFRS is still evolving, there are some far-reaching gains in adopting it.

Adopting IFRS reduces information asymmetry which would lower costs of equity and debt financing; It smoothens the communication between operators, shareholders, lenders and other interested parties resulting in lower costs.

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THE IFRS AND NIGERIAN ACCOUNTING STANDARD

Nigeria like many countries currently has its own set of national accounting standards, i.e. about thirty (30) Statement of Accounting Standards (SASs).

These standards cover some IFRS topics and include pronouncements on a few issues not yet addressed in the IFRS but relevant to Nigeria.

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Most SASs seek to comply with IFRS (or IAS) and include references to this fact.

However, there are still some critical gaps in the SASs, as noted in the Nigeria Accounting and Auditing ROSC conducted by the World Bank in 2004.

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However, Nigeria takes pride in its SASs – a significant achievement considering that most developing countries do not actively set national accounting standards.

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Therefore the Nigeria Accounting Standard Board (NASB), the national standards setter, needs to encourage the adoption of IFRS and guide preparers, auditors and users of financial statements to implement IFRS properly in Nigeria.

This is also where professional accounting bodies such as ICPAN, ICAN and ANAN, can play major roles in promoting the use of IFRS.

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According to NASB, a sovereign state as Nigeria cannot afford to adopt wholesale accounting standards that are not in tune with its own peculiarities and political circumstances, but it is not against convergence.

Nigerian organizations have therefore been urged to embrace wholesale IFRS adoption with caution in order not to hurt the local environment.

It allows companies to follow international standards whenever there are no local standards but believes that Nigeria should work toward adaptation of IFRS rather than adoption. 26


On 28 July 2010 however, the Nigerian Federal Executive Council approved 1 January 2012 as the effective date for convergence of accounting standards in Nigeria with International Financial Reporting Standards (IFRS).

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APPLYING IFRS IN THE PREPARATION OF FINANCIAL

STATEMENTSThe International Accounting Standards Board (IASB or the Board) published IFRS 1 to provide guidance for all entities to follow on their initial adoption of IFRS.

IFRS 1 prescribes the methodology to be followed in preparation of an entity’s first set of IFRS financial statements, beginning with its opening IFRS balance sheet.

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STATEMENTSThe opening IFRS balance sheet then

serves as the starting point for an entity’s future accounting under IFRS.

While full retrospective application of IFRS is required upon adoption, the IASB recognized there were certain situations in which the cost of a full retrospective application of IFRS would exceed the potential benefit to investors and other users of the financial statements.

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STATEMENTSIn other situations, it was noted that

retrospective application would require judgments by management about past conditions after the outcome of a particular transaction is already known.

As a result, IFRS 1 contains a number of exemptions from the requirements of certain IFRS and mandatory exceptions from full retrospective application of IFRS.

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STATEMENTS

Although it will be beyond the scope of this paper to discuss the whole contents of IFRS 1, it only presents some excerpt from the document worth noting in the following bullets:

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STATEMENTSThe objective of IFRS 1 is to ensure that an

entity's first IFRS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that:

is transparent for users and comparable over all periods presented;

provides a suitable starting point for accounting in accordance with International Financial Reporting Standards (IFRSs); and

can be generated at a cost that does not exceed the benefits.

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STATEMENTSAn entity that presents financial statements

in accordance with IFRS for the first time is a “first-time adopter” as that term is used in IFRS 1, and it should apply IFRS 1 in preparing its financial statements.

IFRS 1 defines an entity’s first IFRS financial statements as being the first annual financial statements in which an entity adopts IFRS by making an “explicit and unreserved statement” of compliance with IFRS in those financial statements.

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STATEMENTSIn the Board’s view, an entity should not be regarded as having adopted IFRS if it does not provide all disclosures required by IFRS.

Therefore, IFRS 1 contains a simple test that gives a clear answer: an entity has adopted IFRS if, and only if, its financial statements contain an explicit and unreserved statement of compliance with IFRS.

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STATEMENTSEntities that adopt a new set of local

accounting standards that are identical to IFRS should consider including a statement of compliance with both the local accounting standards and IFRS.

In such situations, failure to make such a dual statement of compliance may subject the entity to the application of IFRS 1 whenever it decides to state compliance with IFRS.

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STATEMENTSThe first IFRS reporting period is the latest period covered by the first-time adopter’s first IFRS financial statements.

For example, fiscal year ending 31 December 2014 would be the first IFRS reporting period for a calendar year-end entity that begins reporting under IFRS in its 2014 financial statements.

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STATEMENTSAt the date of transition to IFRS a first-

time adopter must prepare, and present as part of its first IFRS financial statements, an opening IFRS statement of financial position (that is, the opening balance sheet).

For example, 1 January 2012 is the date of transition to IFRS for a first-time adopter that presents two years of comparative figures with a first IFRS reporting period ended 31 December 2014.

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STATEMENTSWhen a first-time adopter is preparing

its first IFRS financial statements, there may be standards at the reporting date that have been issued by the IASB but that are not yet effective.

If those standards have transitional provisions that allow early application, the first-time adopter may — but is not required to — apply them in its first IFRS financial statements.

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STATEMENTSIn addition to IFRS 1, Conceptual Framework for Financial Reporting 2010 describes the basic concepts that underlie the preparation and presentation of financial statements for external users.

Some of these concepts cover the following issues:

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STATEMENTSThat the primary users of general purpose

financial reporting are present and potential investors, lenders and other creditors, who use that information to make decisions about buying, selling or holding equity or debt instruments and providing or settling loans or other forms of credit.

The primary users need information about the resources of the entity not only to assess an entity's prospects for future net cash inflows but also how effectively and efficiently management has discharged their responsibilities to use the entity's existing resources (i.e., stewardship).

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STATEMENTSThe IFRS Framework notes that general purpose

financial reports cannot provide all the information that users may need to make economic decisions. They will need to consider pertinent information from other sources as well.

The IFRS Framework notes that other parties, including prudential and market regulators, may find general purpose financial reports useful. However, the regulators are not considered a primary users and general purpose financial reports are not primarily directed to regulators or other parties.

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STATEMENTS

Financial statements are generally to be prepared annually.

If the date of the year end changes and financial statements are presented for a period other than one year, disclosure thereof is required.

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STATEMENTS

IFRS recognises the fundamental principles underlying the preparation of financial statements such as:

going concern assumption, consistency in presentation and classification,

accrual basis of accounting, and materiality.

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STATEMENTSIAS 1 specifies minimum note disclosures.

These must include information about: accounting policies followed; – the judgements

that management has made in the process of applying the entity’s accounting policies that have the most significant effect on the amounts recognised in the financial statements; and

the key assumptions concerning the future, and other key sources of estimation uncertainty, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

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STATEMENTSFinancial statements should portray the

financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics.

These broad classes are termed the elements of financial statements.

The elements directly related to financial position (balance sheet) are: Assets; Liabilities; Equity.

The elements directly related to performance (income statement) are: Income; and Expenses.

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STATEMENTSThe cash flow statement reflects both income statement elements and some changes in balance sheet elements.

Thus a complete set of financial statements should include a balance sheet, income statement, statement of changes in equity, cash flow statement, accounting policies and explanatory notes.

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CONCLUSIONSNigeria is set to comply with IFRS in the preparation of financial statements and reporting thereof this year (2012).

It is important beyond these types of Mandatory Training Programmes, other more intensive training exercises are instituted for in-depth knowledge acquisition on the various aspects of IFRS.

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CONCLUSIONSThis undoubtedly makes implementation

hitch-free. This also makes Nigeria become part and parcel of the global community in terms of standard preparation and dissemination of accounting information amongst users both domestic and international.

This paper is therefore intended to serve as a motivation to push accountants increase their desire to acquire more knowledge in the area and be ready for smooth implementation.

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