International Financial Reporting Standards (IFRS)

This assignment delves into the impact of International Financial Reporting Standards (IFRS) on financial reporting. It examines various aspects, including the post-adoption effects of IFRS implementation, its influence on the quality of financial statement information, and the relationship between IFRS and factors like auditor type, intellectual capital, and operational effectiveness. The provided reading list encompasses scholarly articles and official sources such as the International Accounting Standards Board (IASB) website, offering diverse perspectives on IFRS.

Financial Reporting And
Management

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Valuation techniques as per IASB in respect of financial reporting and international
reporting standards.................................................................................................................1
1.2 Discussion over the reliability of using fair value techniques..........................................3
1.3 Disclosure requirements as per international reporting standards which governs the use of
Fair market value....................................................................................................................4
TASK 2 ..........................................................................................................................................6
2.1 Discuss the key definition of term used in clarifying the difference between debt and
equity under IAS 32, this should include financial assets, financial liabilities and equity
instruments.............................................................................................................................6
2.2 Discussion over the key characteristics or the criteria which are used to make
differentiation between debt and equity under IFRS IAS 32. Discussion of type of financial
instruments and how they recognised in financial statements................................................7
2.3 Discuss over the issues which recognises convoluted financial instruments present in
financial instruments..............................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial reporting should be in a way which can clearly show the position of firm hence
management and accountants of any firm should use some reliable measures which are scientific
and logical so that they can clearly present the data which are also reliable so that they can
manage their business operations in an efficient manner which can provide better output to the
company(Agoglia, Doupnik and Tsakumis, 2011). Report is based on the fact that whether to
adopt historical values of assets held by cited entity or to use fair market value of those assets by
the accountants of any firm(International Accounting Standards Board (IASB). 2017). To
remove the confusion to choose either of these two is clarified through the below mentioned
facts and concepts so that users can get better relevant informations in order to make any
decision regarding their investments. And this also enable the managers to ascertain the actual
financial situation of firm.
TASK 1
1.1 Valuation techniques as per IASB in respect of financial reporting and international reporting
standards
The International Accounting Standard Board (IASB) is a private institution which deals
in development and various other improvement of standards made for financial reporting i.e.
International Financial Reporting Standards. Its main work is to oversight the IFRS in order to
make the statements of finance more reliable and more credible so that healthier presentation can
be made in front of its users.
IFRS 13 Fair Value Measurement
This standard of of IFRS has been issued by international accounting standard board of
12th day of May 2011 in which the use of fair market in the valuation of assets of any enterprise
has been mentioned so that they can value them on that amount which they can get as proceeds
of such fixed as well as current assets on selling them in open market(Altamuro and Beatty,
2010). There are various other objectives which are behind issuing such standards. And these are
described below :
 Defining the fair value of any asset so that they can put that amount as their value which
they can get through selling them in open market.
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 For providing a single set of requirement for the measurement of techniques so that they
can increase the scope of exclusions of such elements which can make a unethical
fluctuation.
 To specifically describe the single set of requirements for the measurement of market
valuation.
IFRS 13 do not contain those specific criteria in which it has been mentioned that when
such assets of any entity should be valued of market value. As these criteria are described in
some other standards.
On the other hand there are some particular IFRS which specify some assets which
should valued only at fair market value(Armstrong, Guay and Weber, 2010). Which can be
measured on each reporting date, means that they should value such assets on each date so that
they can get the amount of asset on which they can get as sale proceed on selling them on same
date. In some other cases such as alteration in assets it can be possible that these are quantify on
recurring basis.
The above mentioned standard can be applied on the assets which meets the specific
criteria which have been mentioned there in other standards as well as to those assets in which
some assets are specifically described. IFRS 13 can be applied on both financial and non
financial data which are there in transaction of any company but these are guided through limited
scope exclusion(Barth and Landsman, 2010). This provides guidance which is purely based on
principle which are scientifically approved and universally accepted as through following these
principle based guidance of IFRS 13 an entity can easily and effectively quantify its available
possessions. It does not attempt to exclude any judgement which is their in valuation as every
enterprise can adopt their different and realistic methods of valuation. Rather than this it
mention the framework through which it can remove the inconsistency which is their in
quantifying the possessions of entity. It can also enhance the comparison capability during fairly
quantification measurements(Bédard and Gendron, 2010). Standard remains effective during the
whole financial year so that their can be consistency in measurement as early adoption of such
methods will continue till end.
Valuation Techniques
Scope exclusions : There are certain scope exclusions are mentioned there in IFRS 13,
which are mentioned as under :
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 Share based payments : There are certain assets amount of which are required to be paid
on the basis of shares. IFRS 2 deals in such share based valuation it can be noted here
that the objectives of IFRS 2 is entirely different and inconsistent with International
financial reporting standard 13. so IASB has separated such share based payment assets
out of the scope of this standard.
 Lease transactions : Certain assets are not owned by the company as management may
decide to lease such assets rather than to own them as this can reduce the huge
expenditure over the asset and further there is an another benefit available with them and
that is they can easily return such asset which has been taken on lease to the lessor(Beyer
and et. al., 2010). As IFRS 13 does not apply on transactions which have been made
through leasing agreement.
There are some other measurement techniques which are described as below :
 Present Value technique : This standard provide a better guidance for using present value
during the process of quantifying the assets held by any company. Company can use
discounted cash flow techniques in which cash flow from assets is multiplied with
discounting factors to get the amount which can be derived in present period. However it
is not always possible to get the fair market amount through applying present value
techniques. As some standards use this technique when they are not intended to value
asset at fair market value.
1.2 Discussion over the reliability of using fair value techniques
If an enterprise is following IFRS and then they should be acknowledged of the facts
which are like whether the measurement done by by cited entity presents the actual amount
which can be acquired from the buyers of such assets through selling them in open market.
As present value techniques defines that the assets should be valued by applying present
value or discounting factors over the cash flow which can be generated through sale of such
possessions. As some other standards are using this technique but not to value the assets on
market price(Charles, Glover and Sharp, 2010). As fair market value as per IFRS 13 means the
value which can be get through sell of asset and transfer of liability in some transactions which is
can be done between any firm and market participants as on the date of measurement.
Exit price and transactions price are two different terms as the concept behind these two
terms are entirely different. As entry price and exit price can be on the same level and at the
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same amount but transaction price has a different concept as this will not fetch the value of any
possession and liability in market.
The value which can be derived through sale proceed can be helpful for any entity to
record the exact amount which they can receive through sell of such possession and transfer of
any liability. As historical cost is that cost at which the entity has purchased such asset from the
vendor and in case they will use such historical value in decision making then it will lead to the
wrong interpretation of data and miss guidance in decision making process of any entity(Chen
and et. al.,2010). Hence they should use fair market value rather than using historical value of
asset. Because of the factor numerical quantity of any possession decreases due to to its regular
use operating business activity(IASB speech: Historical cost and fair value are not as far apart
as they may seem. 2015). Depreciation factor is not there in historical value as it specifically
ignore depreciation but as per standards issued by IASB it is mandatory to provide depreciation
over the items classified as fixed assets and used in operating activities of business. If any firm
does not provide depreciation through straight line method, diminishing value method or any
other methods mentioned there is IFRS. For taking better decisions it is very important to
consider the present by comparing it with past and to assess the future through it(Dyreng, Mayew
and Williams, 2012). And in this process present value of any possession can be helpful as it can
provide better techniques and productive methods through which the entity can make efficient
decisions in terms to achieve the objectives which have decided by them earlier.
1.3 Disclosure requirements as per international reporting standards which governs the use of
Fair market value
There are some disclosure requirements which are mentioned there in IFRS 13 and these
requirement are mandatory to comply with as the ignorance of such disclosure requirements
would lead to not following the standards as per the guidelines which are necessary to
follow(Epstein and Jermakowicz, 2010). And such guidelines related to disclosure requirements
and objectives behind such disclosure requirements which are provided by IASB are as
following:
Objectives of Disclosure requirements
 The assets and liabilities which are valued at market price through recurring and non
recurring basis in the statements of finance, after the earlier and recognition at the
beginning to develop the techniques which are utilized for the valuation.
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 For recurring fair valuation and its measurement techniques and to implement
unobservable inputs so that thy can make impact over the income statement and the
surplus or deficit which is opted from such statements. For the achievement of these objective entity requires to satisfy the level of details which
is exclusively required to meet the objectives of disclosure. They should also assess that
how much emphasis is to be given on each and every requirements. Entity should also get
acknowledged of the accumulation and dis accumulation which requires to be undertaken
by such entity which have to follow international financial reporting frame work so that
they can present exact position of entity(Hope, Thomas and Vyas, 2013). These
objectives are to be followed so that they can ensure that whether the stakeholders like
employees, shareholders, society and government etc. are demanding for some more
information so that they can evaluate the quantified data.
Types of disclosure
 Disclosure for recognised fair market value measurement:
1. In case of recurring and non recurring market price criterion fair price at the
terminal point of financial year and in case of non revenant market value criterion
reason should be disclosed properly.
2. Assets which are valued on the terminal point of year the transfer of assets and
liability between level one and level two of their fair value hierarchy then the
transfer date and reasons behind such transfers should be mentioned separately.
 Disclosures for unrecognised fair value measurements:
1. Disclosure should be made in a proper way if the organisation has made pricing of assets
and liabilities through any unrecognised method then such method should be disclosed
very specifically(Iatridis and Rouvolis, 2010).
2. Further the method which are used by managers and accountants of enterprise on which
IFRS 13 applies, should exclusively mention only those methods which are universally
accepted and they are scientifically approved.
 Disclosures regarding liabilities issued with an inseparable third-party credit
enhancement:
1. If any liability which has been measured at fare value and is issued through a third party
credit enhancement then such issuer requires to disclose such fact that liability is attached
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with third party credit enhancement(Iatridis, 2010). And such fact should be reflected in
the market price or fair value of that specific liability.
2. An extra disclosure is also required if such a liability is attached with inseparable third
party credit enhancement.
TASK 2
2.1 Discuss the key definition of term used in clarifying the difference between debt and equity
under IAS 32, this should include financial assets, financial liabilities and equity
instruments
International financial reporting standard 9 has been issued by IASB which is privately
owned and managed institute which in fact deals with the development of standards which can
act as guide in reporting of financial statements. This particular standard is specified for financial
instruments and it deals with the concepts and facts which are related with such instruments. It
mainly consist three topics which are as follow :
 Measurement of financial instruments as well as their classification.
 Impairment of those assets which are related with finance.
 Hedge accounting.
The above mentioned standard will replace IAS 39 when it gets into existence in year 2018.
Enterprises on which this standard is applicable for them it is mandatory to comply with such
standard as through its guidelines accountants of entities can make exact calculation regarding
the financial instruments which they have.
Definition
The term debt and equity is the financial instrument which includes the financial
liabilities, assets and many other instruments. It is an agreement which has risen from one
organisation to another organisation and has given them financial liabilities or equities. Their
objective is to create some principles to tell them how to present financial instrument as debt and
equity and how to balance financial assets and liabilities(Jamal and Tan,2010). When these
instrument are issued by an entity it shows them the difference between debt and equity.
These shows that it determines spontaneous and a perfect effect on the entity's results
which are being reported and even their financial position. But equity ignores such impacts but it
may give negative impact on investors if it is seen reducing existing equity interests. It includes
financial assets, liabilities and equity instrument which depends upon the variability which may
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be in number of equity shares which are being delivered or changes in the amount of financial
assets or cash that are received(Labelle, Gargouri and Francoeur, 2010). These financial
instruments are classified as liability or as equity on the basis of substance which are over form.
Some instrument are being formed with intentions to achieve tax, accounting or any regulatory
sources. With the impact that they have evaluated substance which are difficult. IAS 32 need an
entity to balance all the financial instruments like assets, liabilities and equities in the affirmation
of financial position only when these entities has a right of legal enforcement to balance or settle
their net assets and liabilities simultaneously(Li, 2010). These instrument are made and are being
structured to maintain all the element of both equities and liabilities in single instrument.
Difference between debt and equity
Debt and equity are formed to contain some element of both in a single instrument. It is
not solely an equity instrument which may result in receipt of an entity's equity instrument, it
depends on variability of number of equity share which includes financial instruments. An equity
is a contract which is settled by entities who are receiving or delivering a fixed number of their
own equity or financial assets as application . Sometime both debt and equity contains an
element which are in single instrument, e.g. bonds which are convertible into equity shares and
carry interest are addressed as equity components and separate liability(Maditinos and et. al.,
2011). These liability components are measured as fair value at equal liability which do not have
any conversion option. Equity in any contract can determine interest in any entity after
redeeming all the liabilities. The debt are mainly for issuing or delivering either financial asset or
cash of the holder. This are the written agreements which are responsible, and require to repay
interest dividends or principal. Such requirement occur indirectly but only through or in terms of
agreement. These debts requires to make interest payments and lesser the bond for cash as debt.
Financial instruments are equity instrument only when it includes no agreements to deliver cash
or any financial instruments or assets to any other entity.
2.2 Discussion over the key characteristics or the criteria which are used to make differentiation
between debt and equity under IFRS IAS 32. Discussion of type of financial instruments
and how they recognised in financial statements.
Under IAS 32 there are some criteria available which can used by any user to make any
differentiation between debt and equity. As debts are the in fact the liabilities of the company
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which are related with the outsiders but on the other hand equity consist of that amount which is
used by any enterprise for carrying out its activities.
 It is the contract which provides evidence of some residual interest which are covered in
any asset of cited entity after making deduction of all other outsider liabilities.
 There are some financial instruments which are described in IAS 32 as puttable
instruments which have to be put back to the person who have issued such instruments or
any other financial instrument which have been put back to the issuer when any uncertain
future event occurs such as death or retirement of the person who is holding the financial
instrument.
 Differentiation between equity and liability as per IAS 32 : there is a basic principle that
financial instruments must be differentiated in some categories. They should be classified
either as a liability which is related with finance or as an equity instrument as per the
conditions of the contract signed between the enterprise and holder of that equity or
liability. There are some exceptions to this prominent principle i.e. puttable instruments
which are as per the specific measures mentioned there in agreement between the parties .
Enterprises should maintain such decision at beginning time when such instrument has
been recognised by the managers but such classification should not be changed later on
which are based on changes in situation or circumstances.
 Equity consists of amount of equity shares and preference shares, retained earnings of
company etc. on the other hand debt consists of outsiders liability such as loan,
debentures and tax liability.
2.3 Discuss over the issues which recognises convoluted financial instruments present in
financial instruments.
There are some issues which can assist the users or stakeholders which can recognise
convoluted instruments of finance which are there in financial statements of any enterprise:
 Preference shares: These are the shares which have preferential right over the dividend
of the company. Only a company form of organisation can issue shares as per the rules
mentioned in companies act(Steve’s guide to complex financial instruments. 2017). They
doesn't carry the voting rights, as the preference share holders cannot vote against or in
favour of any agenda which is there in shareholders meeting.
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 Equity shares: This type of shares possess the preferential right in shareholders meeting
as they can vote in favour or in against of any agenda(Feng and et. al., 2014). There is a
issue which is equity shareholders possess more risk as it is not confirmed to them that
weather they will get the dividend or not.
 Debentures: They are such debt instruments through which any business enterprise can
raise funds from outsiders. They carries some fixed charges and it may be possible that
they have been secured with some fixed assets.
These are the characteristics or issues which can assist the user of financial statement to
recognise the financial instruments.
CONCLUSION
As per the concepts mentioned therein the report which consists that, The International
Accounting Standard Board has issued some guidelines through International Financial
Reporting Standards through which the users of financial statements or financials can evaluate
its elements in a better way so that they can frame a healthier and effective decision through
which they can invest in right instruments of finance. Presented issue was whether to use
historical value or to work as per fair market value of any asset or liability contained in
statements has been resolved through defining the importance of fair value in decision making
through following guidelines of IFRS 13.
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REFERENCES
Books and Journals
Agoglia, C. P., Doupnik, T. S. and Tsakumis, G. T., 2011. Principles-based versus rules-based
accounting standards: The influence of standard precision and audit committee strength
on financial reporting decisions. The accounting review. 86(3). pp.747-767.
Altamuro, J. and Beatty, A., 2010. How does internal control regulation affect financial
reporting?. Journal of Accounting and Economics. 49(1). pp.58-74.
Armstrong, C. S., Guay, W. R. and Weber, J. P., 2010. The role of information and financial
reporting in corporate governance and debt contracting. Journal of Accounting and
Economics. 50(2). pp.179-234.
Barth, M. E. and Landsman, W. R., 2010. How did financial reporting contribute to the financial
crisis?. European accounting review. 19(3). pp.399-423.
Bédard, J. and Gendron, Y., 2010. Strengthening the financial reporting system: Can audit
committees deliver?. International journal of auditing. 14(2). pp.174-210.
Beyer, A., and et.al., 2010. The financial reporting environment: Review of the recent literature.
Journal of accounting and economics. 50(2). pp.296-343.
Charles, S. L., Glover, S. M. and Sharp, N. Y., 2010. The association between financial reporting
risk and audit fees before and after the historic events surrounding SOX. Auditing: A
Journal of Practice & Theory. 29(1). pp.15-39.
Chen, H., and et. al., 2010. The role of international financial reporting standards in accounting
quality: Evidence from the European Union. Journal of International Financial
Management & Accounting. 21(3). pp.220-278.
Dyreng, S. D., Mayew, W. J. and Williams, C. D., 2012. Religious social norms and corporate
financial reporting. Journal of Business Finance & Accounting. 39(7‐8). pp.845-875.
Epstein, B.J. and Jermakowicz, E.K., 2010. WILEY Interpretation and Application of
International Financial Reporting Standards 2010. John Wiley & Sons.
Feng, M., and et. al., 2014. Does ineffective internal control over financial reporting affect a
firm's operations? Evidence from firms' inventory management. The Accounting
Review. 90(2). pp.529-557.
Hope, O. K., Thomas, W. B. and Vyas, D., 2013. Financial reporting quality of US private and
public firms. The Accounting Review. 88(5). pp.1715-1742.
Iatridis, G. and Rouvolis, S., 2010. The post-adoption effects of the implementation of
International Financial Reporting Standards in Greece. Journal of international
accounting, auditing and taxation, 19(1), pp.55-65.
Iatridis, G., 2010. International Financial Reporting Standards and the quality of financial
statement information. International Review of Financial Analysis. 19(3). pp.193-204.
Jamal, K. and Tan, H. T., 2010. Joint effects of principles-based versus rules-based standards and
auditor type in constraining financial managers’ aggressive reporting. The Accounting
Review. 85(4). pp.1325-1346.
Labelle, R., Gargouri, R. M. and Francoeur, C., 2010. Ethics, diversity management, and
financial reporting quality. Journal of Business Ethics. 93(2). pp.335-353.
Li, S., 2010. Does mandatory adoption of International Financial Reporting Standards in the
European Union reduce the cost of equity capital?. The accounting review. 85(2).
pp.607-636.
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Maditinos, D., and et. al., 2011. The impact of intellectual capital on firms' market value and
financial performance. Journal of intellectual capital. 12(1). pp.132-151.
Online
International Accounting Standards Board (IASB). 2017. [Online]. Available through
:<https://www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/iasb>. [Accessed on 29th
March 2017]
IASB speech: Historical cost and fair value are not as far apart as they may seem. 2015.
[Online]. Available through :<http://www.ifrs.org/Alerts/PressRelease/Pages/Historical-
cost-and-fair-value.aspx>. [Accessed on 29th March 2017]
Steve’s guide to complex financial instruments. 2017. [Online]. Available through
:<http://stevecollings.co.uk/steves-guide-to-complex-financial-instruments/>.
[Accessed on 29th March 2017]
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