International Financial Reporting Standards

This report discusses harmonization and convergence of accounting standards, fair value measurement, and IFRS 15 - Revenue from contracts with customers. It also covers the Phase A of the conceptual framework for financial reporting 2010. The report concludes with the challenges and benefits of IFRS convergence.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

Contents
INTRODUCTION...........................................................................................................................3
INTERNATIONAL ACCOUNTING STANDARDS....................................................................4
Harmonization and convergence of Accounting Standards.........................................................4
The conceptual framework (Phase A)..........................................................................................6
The use of fair value in the preparation and presentation of financial statements.......................8
IFRS 15 – Revenue from contracts with customers.....................................................................9
CONCLUSION..............................................................................................................................10
Bibliography..................................................................................................................................11

INTRODUCTION
After the World War II, the initial approaches were for bringing harmonization in the accounting
principles so that the differences could be reduced all around the world. The concept of
convergence arose firstly in the late 1950s. With continuous efforts and from the perception of
fulfilling desired objectives, in the 1990s, the convergence concept replaced the harmonization
concept (Atkinson, 2012).
The report discusses about harmonization and convergence. In this report we will also discuss
about the Phase A of the conceptual framework for financial reporting 2010, the arguments
related to fair value measurement in replacement of historical measurement and evaluation of
IFRS 15- Revenue from Contracts with Customers in comparison to IAS 18- Revenue.

INTERNATIONAL ACCOUNTING STANDARDS
Harmonization and convergence of Accounting Standards
Harmonization is the process of bringing an uniformity in accounting standards used so as to
increase the comparability capability of accounting practices by having a defined set of
variations. Basically, harmonization of accounting standards is a process that brings together the
international accounting standards into an agreement so as to achieve a common platform where
accounting principles used are common (Berry, 2009).
The two terms called harmonization and convergence are in connection with IFRS and still differ
in some way. Convergence is a term used more frequently by the standard setters. As per FASB
(2012), the international convergence refers to the objective of adopting a single set of
accounting standards which are highly qualitative so as to bring consistency and uniformity all
over the world. Where harmonization practice was adopted for reducing variations in accounting
practices by setting a boundary defining the tolerable variations, Convergence refers to adoption
of measures by countries across the globe to convert from national GAAP to IFRS (Horngren,
2012). Harmonization was a voluntary attempt by standard setters for removal of obstacles that
hinders the integration of the IFRS into the converging country's financial system. Such
obstacles arise due to differences in exchange rates, quotations of international markets, holding
subsidiary operations where the two companies are located in different countries, etc. It is
observed that two terms are used interchangeably (Boyd, 2013).
The two concepts follow the same direction and adoption of convergence is indirectly adopting
harmonizing principles. The adoption would deliver a greater comparability as investors needs
varies from person to person. A consistency in accounting standards all across the globe would
help the investors to compare the financial statements of different companies. However, such
adoption is costly and can put a financial burden. Also, being new in nature for the business
world, it is obvious to not expect a thorough knowledge of such standards from business
enterprises and on the other hand, such businesses can use it to manipulate their profits so as to
win the potential investors and public confidence (Ittelson, 2009).

Approximately, there are 120 nations that has to adopt IFRS for their listed companies. However,
90 countries have successfully adopted IFRS as introduced by International Accounting
Standards Board (IASB) and also, include an acknowledgement statement that includes
conformity of such principles in audit reports. Currently, countries such as United States, Japan,
India, Malaysia, Colombia and Russia have successfully adopted IFRS (Joubert, 2017).
In adoption of a single set of accounting standards, Europe has initiated a global movement since
2000. European Union was of the opinion that a common market for providing financial services
was important for EU to exercise a healthy competition against capital markets of US. Thus, for
achieving such a common market, a common set of standards were required to be adopted by EU
for once and all (Kusano, 2018). Although EU attempted to harmonize its practices in financial
system in the 1970s and 1980s, such efforts were proved ineffective. The various attempts were
made by EU and continuous failure made EU believe that the only possible way of achieving its
objective couldn't be US GAAP. Therefore, the choices left to EU were either formulating its
own European accounting standards or adopting IFRS formulated by IASB. The failures of
attempts made by EU clearly proved that formulation of European accounting standards wasn't
possible. Thus, left with an only option that fits into the books of EU both politically and
economically, EU finally adopted IFRS convergence (Alvarez, 2013) .
The two boards called FASB and IASB signed a memorandum of understanding known as
'Norwalk Agreement' where the board decided to combine their efforts to make their financial
statements deliver full compatibility. Their future efforts would involve ensuring compatibility,
that is, compliance according to US GAAP will automatically result in compliance with IFRS. In
line with this agreement, the boards introduced a number of short term as well as long term
convergence projects that targeted to reduce the variations in the two sets of standards. The
Norwalk Agreement was updated multiple times. Steps such as G-20 have been adopted defining
a path towards a single set of global accounting standards (Bragg, 2015).

The conceptual framework (Phase A)
The conceptual framework project has been conducted in eight phases where PHASE A deals
with the objectives of financial reporting and such qualitative characteristics that make the
financial information useful. As on September 28th 2018, the Phase A of the framework was
completed.
The financial reporting forms the basis of Conceptual Framework (Girard, 2014). The ultimate
objective of general purpose financial reporting is providing financial information through the
best possible preparation and presentation of it that acts useful for potential investors, creditors
and other lenders so that necessary decisions can be made such as buying or holding equity
instruments, sanctioning of loan, providing resources to the entity and such other decisions
(Lerner, 2009).
As we know, different investors have different needs and desires. Thus, financial reporting
standards are to be implemented in such a way that it can satisfy all kinds of investor's
requirements. Such reporting standard doesn't really define the value of a reporting entity but
they tend to provide sufficient information to external users that can be used for estimating the
value. In the nutshell, we can say that financial information requires to be understood properly
by the management because it is important for it to provide sufficient information that delivers
quality like relevance, transparency (McLaney & Adril, 2016). Also, it doesn't mean that all the
information is to be provided because at the end, that would be a burden more as well as bulky
for investors serving less qualitative reports. Thus, financial reporting standards aim at guiding
the management for the best preparation and presentation.
With the term qualitative financial reports, it is important to understand quality in what terms.
Few qualitative characteristics of financial reports :
 Fundamentals: This includes relevance and faithful representation. Relevance refers to
the reliability of the information provided that they are capable enough to influence the
financial user’s decisions. A number of information is based on assumptions, judgments
and predictions. Therefore, it is important for the management to use the most relevant
techniques and methods that investors can rely upon. An economic phenomenon is

represented by the reports both in words and numbers (Noreen, 2015). Not only relevance
is important but also a faithfulness is required that whatever it was targeting to represent
is represented. For a perfect faithful representation, three characteristics are important
called complete, neutral and free from errors. It is obvious that perfection is a rare thing
but the targets are to achieve it to the extent possible. Financial information is needed to
be both relevant and faithfully represented, that is, neither an unfaithful representation of
a relevant data nor a faithful representation of an irrelevant data can help users make
potential decisions (Picker, 2016).
 Enhancing: The relevant financial information are enhanced when the information serves
characteristics such as comparability, timeliness, understandability and verifiability. The
reports are required to be made in such a way that the external users can compare various
alternatives in terms of financial information and accordingly, make decisions.
Verifiability is important as if defines the match between the expectations and actual
presentation, that is the information management wanted to deliver is actually delivered
or the information presented verifies with the intentions of the management. Timeliness
is important as information if not provided on time can lead to unfavourable decisions.
Thus, timeliness influences a user's decisions. A proper classification, characterization
and clear presentation of financial information helps in clear understanding by the
external users (Ramírez, 2018). The complex information of the entity has to be moulded
and presented in such a manner that the users can understand it from the company's
perception. It is important for a company that their users understand the information in
the way they wanted them to understand.

The use of fair value in the preparation and presentation of financial statements
IFRS 13 states about the fair value measurements where fair value is defined as the price
expected to be received or paid when selling an asset or transferring of a liability respectively
between the market participants in the form of a transaction at the measurement date. Basically,
accounting standards requires a business to record its assets and liabilities at the current price
prevailing in the market (Lyon, 2010). Such fair value estimation delivers more accuracy and
relevance. Such measurements consider the internal factors such as manner of use of asset,
location of it, depreciation method used, etc and external factors such as market fluctuations,
economic and social environment etc. A business value is defined by the value of its assets and
liabilities and therefore, for that purpose, it is important that such elements are measured at their
fair value so that the external users can accurately estimate the fair value of the business and
make important decisions accordingly (Robinson, 2014).
Historical measurement believes in recording of assets and liabilities at their historical value or
their original value. This method involves easy calculations and is reliable. It shows the original
worth of an asset or a liability. What differentiates both of them is relevance (Piper, 2015). Since
fair value measurement is based on current market conditions, it is more relevant for external
users to make decisions. For example, an asset bought today will not have the same worth after
twenty years. While historical cost will show it at the original value, it will unnecessarily show
high business value which would be considered as vague or would even serve as a way of
manipulating the external users. That is why, fair value measurement is preferred over historical
measurement (Simpson, 2012).

IFRS 15 – Revenue from contracts with customers
IFRS 15 involves recognition of revenue of those goods or services which has been promised to
be provided and also on the other hand, reflects the consideration amount that the entity expects
to receive during exchange of those goods or services. Usually, the following steps defines the
model of such a standard.
 Step 1 : Identification of contract with the customer : IFRS 15 involves making of a
contract between the buyer and the seller so as to create legal obligations and rights.
 Step 2 : Identification of performance obligations : The contract defines the performance
obligations on both the buyer and the seller, that is, a seller is expected to transfer the
goods or services on time while a buyer is expected to fulfill its performance by making
payment against such receipt.
 Step 3 : Determination of transaction price : The transaction price refers to the amount of
consideration that is to determined, agreed between the two parties and stated in the
contract.
 Step 4 : Allocation of transaction price to the performance obligations : There should be a
clear match between the services or goods provided and the consideration charged against
it. Sometimes, such price includes discounts or variable considerations etc.
 Step 5 : Recognition of Revenue : When the performance obligations are fulfilled from
both the parties, the entity is required to recognize the revenue in its books.
In contrast to IAS 18, the two standards differ in revenue recognition. IAS 18 recognizes revenue
when the risks and rewards are transferred on the sale of goods while IFRS 15 recognizes
revenue when the control of such goods is transferred to the customers (Skonieczny, 2012). For
IAS 18, there are different criteria of revenue recognition for different activities such as sale of
goods, interests, royalties, rendering of services, dividends, etc. Thus, IAS 18 requires a lot of
information, making it complicated in nature and also, creating a lot of confusions among the
companies. However, IFRS 15 provides a uniform method of revenue recognition, that is, it uses
its standardized five step model as stated above. IFRS 15 has been effective from January 2018
and has replaced IAS 18 (Holtzman, 2013).

CONCLUSION
IFRS convergence is a complex procedure and demands comprehensive disclosures, yet
considering the corporate scandals and the increasing demand for transparency, understandability
, fair presentation etc , it is better to prepare financial reports in such a manner. The total
convergence has been dreamt for more few years but only time would show the results of global
efforts. Adoption of single set of accounting standards across the globe would bring world
economic growth and consistency. Thus, the challenges faced and that will be faced might be
tough but the results would be worth.

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