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A one-stop resource for understanding and applying
current International Financial Reporting Standards
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International
Financial Reporting
Standards
Understanding
Fundamentals
IFRS
IFRS
International Financial
Reporting Standards
Understanding

IFRS
Fundamentals
Nandakumar Ankarath
Kalpesh J. Mehta
Ankarath
Mehta
Ghosh
Alkafaji
Technically reviewed by Ian Hague, Principal, Accounting Standards Board (AcSB), Canada
Dr. T.P. Ghosh
Dr. Yass A. Alkafaji
T
he move to International Financial Reporting Standards (IFRS) is the single most
important initiative in the financial reporting world, with more than 100 countries
requiring or allowing the use of IFRS for the preparation of financial statements by publicly held
companies. It is expected that by 2011, more than 150 countries will be converting to it.

It’s clear that IFRS is here to stay—get the expert advice you need to properly implement IFRS
with Understanding IFRS Fundamentals: International Financial Reporting Standards.
Filled with easy-to-follow examples and case studies, Understanding IFRS Fundamentals:
International Financial Reporting Standards is your handy resource to all things
IFRS, presenting:
• Authoritative advice and simple explanations of IFRS standards
• Topical arrangement of issues of common interest to financial statement
preparers and users
• Extracts from published financial statements illustrating practical
implications for applying IFRS
• Guidance for finance professionals in more than 100 countries that
have either adopted or adapted to IFRS
• Simple explanations of complex standards
A practical reference with the answers to your issues of interest, Understanding IFRS
Fundamentals: International Financial Reporting Standards serves as an essential resource for
when you need information in a hurry.
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Fundamentals: International Financial Reporting Standards.
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International
Financial Reporting
Standards
Un der stand ing
Fu nda menta ls
I F RS

JOHN WILEY & SONS, INC.
A. Nandakumar
Kalpesh J. Mehta

Dr. T.P. Ghosh
Dr. Yass A. Alkafaji
International
Financial Reporting
Standards
Understanding
Fundamentals
I F RS
Technically reviewed by Ian Hague, Principal, Accounting Standards Board (AcSB), Canada







This book is printed on acid-free paper.
Copyright © 2010 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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ISBN: 978-0-470-39914-9
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
CONTENTS
Preface vii
About the Authors ix
Introduction xi
1 Introduction to International Financial Re
p
ortin
g
Standards 1
2 IASB Framework 11
3 Presentation of Financial Statements (IAS 1) 17
4 Inventories (IAS 2) 27
5 Statement of Cash Flows (IAS 7) 35
6 Accountin
g

Policies, Chan
g
es in Accountin
g
Estimates, and Errors
(IAS 8) 41
7 Events After the Re
p
ortin
g
Period (IAS 10) 49
8 Construction Contracts (IAS 11) 53
9 Income Taxes (IAS 12) 59
10 Pro
p
ert
y
, Plant, and E
q
ui
p
ment (IAS 16) 69
11 Leases (IAS 17) 77
12 Revenue (IAS 18) 87
13 Em
p
lo
y
ee Benefits (IAS 19) 95
14 Accountin

g
for Government Grants and Disclosure of Government
Assistance (IAS 20) 107
15 The Effects of Chan
g
es in Forei
g
n Exchan
g
e Rates (IAS 21) 111
16 Borrowin
g
Costs (IAS 23) 119
17 Related-Part
y
Disclosures (IAS 24) 123
18 Accountin
g
and Re
p
ortin
g
b
y
Retirement Benefit Plans (IAS 26) 131
19 Consolidated and Se
p
arate Financial Statements (IAS 27) 143
20 Investments in Associates (IAS 28) 155
21 Financial Re

p
ortin
g
in H
yp
erinflationar
y
Economies (IAS 29) 163
22 Interests in Joint Ventures (IAS 31) 171
23 Financial Instruments: Presentation (IAS 32) 177
24 Earnin
g
s Per Share (IAS 33) 187
25 Interim Financial Re
p
ortin
g
(IAS 34) 195
26 Im
p
airment of Assets (IAS 36) 207
27 Provisions, Contin
g
ent Liabilities, and Contin
g
ent Assets (IAS 37) 215
28 Intan
g
ible Assets (IAS 38) 223
29 Financial Instruments: Reco

g
nition and Measurement (IAS 39) 231
30 Investment Pro
p
ert
y
(IAS 40) 261
31 A
g
riculture (IAS 41) 267
32 First-Time Ado
p
tion of International Financial Re
p
ortin
g
Standards
(IFRS 1) 277
33 Share-Based Pa
y
ment (IFRS 2) 295
34 Business Combinations (IFRS 3) 305
35 Insurance Contracts (IFRS 4) 321
36 Noncurrent Assets Held for Sale and Discontinued O
p
erations
(IFRS 5) 331
37 Ex
p
loration for and Evaluation of Mineral Resources (IFRS 6) 339

38 Financial Instruments: Disclosures (IFRS 7) 345
39 O
p
eratin
g
Se
g
ments (IFRS 8) 363
40 Financial Instruments (IFRS 9) 369
41 International Financial Re
p
ortin
g
Standards (IFRS) for Small and
Medium Enterprises (SMEs) 383
Index 395

PREFACE
The International Financial Reporting Standards (IFRS) are now adopted in more than
100 countries. The recent decision of the U.S. Securities and Exchange Commission (SEC)
to allow foreign private issuers to list their securities on U.S. stock exchanges using IFRS
(without reconciling to U.S. GAAP) and the expectation that more than 150 countries will
have adopted IFRS by 2011 has made it incumbent upon accounting and finance profession-
als, bankers, regulators, educators, and trainers to understand and apply IFRS.
We embarked on this project because there was an urgent need for an easy-to-understand
IFRS book; most books covering the accounting standards contained explanations and
interpretations of complex technical issues from standards.
In this book, we have explained in simple terms the most important parts of these
complex standards through easy-to-follow examples and case studies. It also provides a
quick source of reference to find answers to issues of interest to financial statement

preparers, users, and analysts. We have also included extracts from published financial
statements to illustrate practical implications of applying IFRS.
We have received immense support and assistance on this project from several people
around the world. We express our sincere appreciation and gratitude to Ian Hague,
a
Principal with the Accounting Standards Board (AcSB) in Toronto, Canada, for his detailed
review of the entire manuscript. The various amendments to the IFRS that came into effect
during the time of writing this book required quite a few chapters to be rewritten and
amended. We will be failing in our duties if we did not thank John DeRemigis and the
editorial and marketing staff of John Wiley & Sons for their tremendous patience in bearing
with the delay in meeting the initial deadlines set for publication. We also thank Abbas Ali
Mirza, Partner with Deloitte Middle East who has been our inspiration for his valuable
guidance and unstinting support.
We are also grateful to all our family, friends, and colleagues who contributed in their
own way to ensure the completion of this book.
All the views expressed in this publication are ours and do not represent those of the
firms or organizations of which we are part.
Nandakumar Ankarath
Dr. T.P.Ghosh
Kalpesh J. Mehta
Dr. Yass A. Alkafaji

ABOUT THE AUTHORS
Ankarath Nandakumar is a Fellow Member of The Institute of Chartered Accountants
of India and a Senior Partner with Moore Stephens, Chartered Accountants, United Arab
Emirates. Nandakumar has over 25 years of postqualification experience in auditing, ac-
counting, financial and management consultancy in various business environments in India,
Bahrain, and the United Arab Emirates. He has also served as a member of the Committee on
Accounting Standards for Local Bodies formed by the governing body of the Institute of
Chartered Accountants of India to formulate accounting standards for local bodies, autonom-

ous bodies, and nonprofit organizations in India.
Dr. T.P. Ghosh is a professor of accounting and finance at Management Development
Institute, India, and a visiting professor of Wollongong University in Dubai, United Arab
Emirates. Dr. Ghosh, who has served as the Director of Studies of the Institute of Chartered
Accountants of India, New Delhi, has authored two important reference books for accounting
professionals that include Accounting Standards & Corporate Accounting Practices, 8th edi-
tion, 2008.
Dr. Yass A. Alkafaji is an Associate Professor of Accounting at the American Univer-
sity of Sharjah, United Arab Emirates. Dr. Alkafaji, who was the founder of Alkafaji &
Associates, Ltd., a Chicago-based public accounting firm, has been a faculty member at
Mississippi State University, Bowling Green State University, and Northeastern Illinois
University in the United States. He has also been published in various journals including the
International Journal of Accounting, Accounting Research Journal, International Journal of
Management, and Managerial Auditing Journal.
Kalpesh J. Mehta is a Fellow Member of the Institute of Chartered Accountants of In-
dia and is a founding member of the CA Section at M.T. EDUCARE (P) LTD., a premier
institution for imparting quality education in India. He is also a faculty member at the Insti-
tute of Chartered Accountants of India.
REVIEWER
Ian Hague is a Principal with the Accounting Standards Board (AcSB) in Toronto,
Canada, and the Chair of the AcSB IFRS Advisory Committee that is leading the AcSB’s
implementation of IFRS for Canadian publicly accountable enterprises. Ian is a Chartered
Accountant in both Canada and in England and Wales and was with Deloitte in Toronto and
in London, England, before joining the AcSB.



INTRODUCTION
International Financial Reporting Standards (IFRS) are presently being followed in more
than 100 countries and it is expected that by 2011, more than 150 countries will have adopted

them. The recent decision of the U.S. SEC to allow foreign private issuers to list their secur-
ities on U.S. stock exchanges using IFRS and without reconciling to U.S. GAAP has also
made it incumbent upon accountants, finance professionals, analysts, and bankers, even in
the United States, to become proficient in IFRS.
This large-scale global adoption of IFRS has created an urgent need for an easy-to-
understand IFRS book.
Most books covering the accounting standards contain explanations and interpretations
of complex technical issues from standards. What they do not contain is simple explanations
of the most important parts of these complex standards through easy-to-follow examples and
case studies. This book contains basic explanations of IFRS to demonstrate their practical
application and provides
• A quick source of reference to find answers to issues of interest to financial statement
preparers, users and analysts;
• An easy way to understand IFRS through simple explanations of the most important
parts of IFRS standards;
• Easy-to-follow illustrations explaining IFRS standards, keeping in mind the layman;
and
• Excerpts from published financial statements to illustrate practical implications of
applying IFRS.


1 INTRODUCTION TO INTERNATIONAL
FINANCIAL REPORTING
STANDARDS (IFRS)
THE NEED FOR A COMMON SET OF ACCOUNTING
AND FINANCIAL REPORTING STANDARDS
With the rampant rise of globalization, one would find it rather difficult to disagree with
Thomas L. Friedman, the author of the world-renowned book, The World Is Flat, who said
that right around the year 2000 we entered a new stage of globalization (a whole new era that
he refers to as Globalization 3.0) which, according to him, is shrinking (figuratively, of

course) the size of the world from small to tiny. Some people believe that this magical phe-
nomenon of globalization has led to the emergence of a global village that we all live in.
With such a robust wave of globalization surging through the world, businesses across
the globe cannot remain unaffected by it no matter how hard they try. With the advent of the
World Wide Web and the knocking down of trade barriers across national boundaries
through global initiatives such as the setting up of the World Trade Organization (WTO),
international trade between businesses across the globe has become quite simple and attrac-
tive.
If we agree with the old adage, ”accounting is the language of business,” then business
enterprises around the world cannot afford to be speaking in different languages to each other
while exchanging and sharing financial results of their international business activities and
also reporting the results of business and trade to their international stakeholders. As one
school of thought believes, since business enterprises around the world are so highly global-
ized now and need to speak to each other in a common language of business, there is a real
need for a single, universal set of accounting standards that would unify the accounting
world and, more important, solve the problem of diversity of accounting practices across
borders.
Historically, countries around the world have had their own national accounting stan-
dards (some countries have treasured these for whatever reason, most likely due to the pride
of national sovereignty). However, with such a compulsion to be part of the globalization
movement, wherein businesses across national boundaries are realizing that it is an astute
business strategy to embrace the world as their workplace and marketplace, having different
rules (standards) of accounting for the purposes of reporting financial results would not help
them at all; rather, it would serve as an impediment to the smooth flow of information. Busi-
nesses, therefore, have realized that they need to talk to each other in a common language.
The adoption of accounting standards that require high-quality, transparent, and compar-
able information is welcomed by investors, creditors, financial analysts, and other users of
financial statements. It is difficult to compare worldwide financial information without a
common set of accounting and financial reporting standards. The use of a single set of high-
quality accounting standards would facilitate investment and other economic decisions across

borders, increase market efficiency, and reduce the cost of raising capital. International
2 Understanding IFRS Fundamentals
Financial Reporting Standards (IFRS) are increasingly becoming the set of globally accepted
accounting standards that meet the needs of the world’s increasingly integrated global capital
markets.
WHAT ARE IFRS?
IFRS are a set of standards promulgated by the International Accounting Standards
Board (IASB), an international standard-setting body based in London. The IASB places
emphasis on developing standards based on sound, clearly stated principles, from which in-
terpretation is necessary (sometimes referred to as principles-based standards). This con-
trasts with sets of standards, like U.S. generally accepted accounting principles (GAAP), the
national accounting standards of the United States, which contain significantly more
application guidance. These standards are sometimes referred to as rules-based standards, but
that is really a misnomer as U.S. standards also are based on principles—they just contain
more application guidance (or rules). IFRS generally do not provide bright lines when
distinguishing among circumstances in which different accounting requirements are
specified. This reduces the chances of structuring transactions to achieve particular account-
ing effects.
According to one school of thought, since IFRS are primarily principles-based standards,
the IFRS approach focuses more on the business or the economic purpose of a transaction
and the underlying rights and obligations instead of providing prescriptive rules (or guid-
ance). IFRS provides guidance in the form of principles.
This significant difference in approach to standard setting between IFRS and U.S.
GAAP is the main reason that the length of the text of the IFRS is less than that of U.S.
GAAP. U.S. GAAP extends more than 20,000 pages of accounting literature as opposed to
IFRS, which is approximately 2,000 to 3,000 pages in length.
A BRIEF HISTORY OF THE INTERNATIONAL
ACCOUNTING STANDARDS COMMITTEE (IASC)
The International Accounting Standards Committee (IASC), the predecessor of the
IASB, was established in 1973 and came into being through an agreement by professional

accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Nether-
lands, the United Kingdom and Ireland, and the United States. The objective behind setting
up the IASC was to develop, in the public interest, accounting standards that would be ac-
ceptable around the world in order to improve financial reporting internationally. Over the
years, the IASC saw several changes to its structure and functioning. For example, by the
year 2000, IASC’s sponsorship grew from the original nine sponsors to 152 accounting bo-
dies from 112 countries, that is, all professional accountancy bodies that were members of
the International Federation of Accountants (IFAC). Such fundamental changes to the IASC
may have helped it achieve the objective for which it was set up: changing the perception of
the global standard setters about the international nature of participation in the standard-
setting process. As part of their membership in IASC, professional accountancy bodies
worldwide committed themselves to use their best endeavors to persuade governments,
standard-setting bodies, securities regulators, and the business community that published
financial statements to comply with IAS. This also drew the world’s attention to the fact that
there exists a truly representative international accounting body that could ultimately qualify
as a global standard setter and be able to develop a single set of accounting standards that
would be acceptable to most, if not all, countries worldwide.
Over the years, the IASC worked hard to achieve the objective of developing accounting
standards for the world. However, due to several factors (the most important one, according
Introduction to International Financial Reporting Standards (IFRS) 3
to one school of thought, being availability of national accounting standards in certain lead-
ing jurisdictions that were quite well developed and recognized by other leading jurisdictions
as well) the standards promulgated by the IASC were unable to achieve the status of an in-
ternational accounting standard setter whose standards were accepted by leading jurisdic-
tions.
A BIRD’S EYE-VIEW OF THE STANDARDS PROMULGATED BY THE IASC
AND INTERPRETATIONS COMMITTEE (SIC) THAT ARE STILL IN FORCE
During its existence, the IASC issued 41 standards, known as the International Ac-
counting Standards (IAS), as well as a Framework for the Preparation and Presentation of
Financial Statements. While some of the standards issued by the IASC have been since

withdrawn or superseded (for example, IAS 30, Disclosures in the Financial Statements of
Banks and Similar Financial Institutions, was withdrawn and IAS 22, Business Combina-
tions, was superseded by IFRS 3, Business Combinations), many are still in force. In addi-
tion, some of the interpretations issued by the IASC’s interpretive body, the Standing
Interpretations Committee (SIC), are still in force.
IAS Still in Force for 2009 Financial Statements
IAS 1, Presentation of Financial Statements
IAS 2, Inventories
IAS 7, Statement of Cash Flows
IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10, Events After the Reporting Period
IAS 11, Construction Contracts
IAS 12, Income Taxes
IAS 16, Property, Plant, and Equipment
IAS 17, Leases
IAS 18, Revenue
IAS 19, Employee Benefits
IAS 20, Accounting for Government Grants and Disclosure of Government Assistance
IAS 21, The Effects of Changes in Foreign Exchange Rates
IAS 23, Borrowing Costs
IAS 24, Related-Party Disclosures
IAS 26, Accounting and Reporting by Retirement Benefit Plans
IAS 27, Consolidated and Separate Financial Statements
IAS 28, Investments in Associates
IAS 29, Financial Reporting in Hyperinflationary Economies
IAS 31, Interests in Joint Ventures
IAS 32, Financial Instruments: Presentation
IAS 33, Earnings Per Share
IAS 34, Interim Financial Reporting
IAS 36, Impairment of Assets

IAS 37, Provisions, Contingent Liabilities and Contingent Assets
IAS 38, Intangible Assets
IAS 39, Financial Instruments: Recognition and Measurement
IAS 40, Investment Property
IAS 41, Agriculture
4 Understanding IFRS Fundamentals
SIC Interpretations Still in Force for 2009 Financial Statements
SIC 7, Introduction of the Euro
SIC 10, Government Assistance—No Specific Relation to Operating Activities
SIC 12, Consolidation—Special-Purpose Entities
SIC 13, Jointly Controlled Entities—Nonmonetary Contributions by Ventures
SIC 15, Operating Leases—Incentives
SIC 21, Income Taxes—Recovery of Revalued Nondepreciable Assets
SIC 25, Income Taxes—Changes in the Tax Status of an Entity or Its Shareholders
SIC 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease
SIC 29, Disclosure—Service Concession Arrangements
SIC 31, Revenue—Barter Transactions Involving Advertising Services
SIC 32, Intangible Assets—Web Site Costs
THE BIRTH OF THE INTERNATIONAL ACCOUNTING
STANDARDS BOARD (IASB)
With tremendous pressure on the IASC to transform itself into a truly global standard-
setting body by addressing some of the serious concerns of established standard setters
around the world (grievances were time and again quoted in the international media as se-
rious shortcomings of the IASC), in the year 2001, fundamental changes were made to
strengthen the independence, legitimacy, and quality of the international accounting
standard-setting process. In particular, the IASC Board was replaced by the International Ac-
counting Standards Board (IASB) as the body in control of setting international accounting
and financial reporting standards. This significant structural change to the manner in which
the IASC functioned for several years since its inception was brought about as a result of the
recommendations of the Strategy Working Party, which was specially formed to take a fresh

look at the then-existing IASC’s structure and strategy. One dramatic change in the structure
and functioning of the Board that is worthy of mention was the replacement of part-time vol-
unteer board members who sat on the IASC Board with, for the most part, full-time IASB
board members.
Based on the recommendations of the Strategy Working Party a new constitution was
adopted effective July 1, 2000. Under these new rules of governance of the international
standard-setting body was born the IASC Foundation. The name of the organization that
comprises both the IASB and its Trustees is the International Accounting Standards Com-
mittee Foundation (IASC Foundation). The objectives of the IASC Foundation, as stated in
its Constitution, are
a. To develop, in the public interest, a single set of high-quality, understandable, and en-
forceable global accounting standards that require high-quality, transparent, and com-
parable information in financial statements and other financial reporting to help par-
ticipants in the various capital markets of the world and other users of the information
to make economic decisions;
b. To promote the use and rigorous application of those standards; and
c. In fulfilling the objectives associated with (a) and (b), to take account of, as appropriate,
the special needs of small and medium-sized entities and emerging economies; and
d. To bring about convergence of national accounting standards and International Finan-
cial Reporting Standards to high-quality solutions.
At its first meeting in 2001, the IASB adopted all outstanding IAS and SIC issued by the
IASC as its own standards. Those IAS and SIC continue to be in force to the extent they are
not amended or withdrawn by the IASB. New standards issued by the IASB are known as
IFRS. New interpretations issued by the International Financial Reporting Interpretations
Introduction to International Financial Reporting Standards (IFRS) 5
Committee (IFRIC) are known as IFRIC Interpretations. When referring collectively to
IFRS, that term includes IAS, SIC, IFRS, and IFRIC Interpretations.
GOVERNANCE AND STRUCTURE OF THE IASC FOUNDATION,
IASB, IFRIC, AND THE SAC
IASC Foundation and the Trustees

The governance of IASC Foundation rests on the shoulders of the Trustees of the IASC
Foundation (the IASC Foundation Trustees or, simply, the Trustees). The Trustees comprise
22 individuals who are chosen from around the world. In order to ensure a broad interna-
tional representation, it is required that six Trustees are appointed from North America, six
from Europe, six from Asia/Oceanic region, and four from any part of the world, subject to
establishing overall geographical balance.
The Trustees are independent of the standard-setting activities (which is the primary re-
sponsibility of the Board members of the IASB). The Trustees, on the other hand, are respon-
sible for broad strategic issues, such as
• Appointing the members of IASB, the IFRIC, and the Standards Advisory Council
(SAC);
• Approving the budget of the IASC Foundation and determining the basis of funding
it;
• Reviewing the strategy of the IASC Foundation and the IASB and its effectiveness
including consideration, but not determination, of the IASB’s agenda (which if
allowed may impair the Trustees’ independence of the standard-setting process);
• Establishing and amending operating procedures, consultative arrangements and due
process for the IASB, the IFRIC, and the SAC;
• Approving amendments to its constitution after consulting the SAC and following
the required due process;
• Fostering and reviewing the development of the educational programs and materials
that are consistent with the objectives of the IASC Foundation; and
• Generally, exercising all powers of the IASC Foundation except those expressly re-
served for IASB, the IFRIC, and the SAC.
Lastly, in order to enhance public accountability of the IASC Foundation, while main-
taining the operational independence of the IASC Foundation and the IASB, the Monitoring
Board, a new body, was created in 2009. The Monitoring Board comprises capital market
authorities (e.g., representatives of institutions such as the International Organization of
Securities Commissions [IOSCO], the U.S. Securities and Exchange Commission [SEC], and
the European Commission) and its responsibilities include participating in the appointment

of the Trustees of the IASC Foundation, advising the Trustees in the fulfillment of their
responsibilities, and holding meetings with the Trustees to discuss matters referred by the
Monitoring Board to the IASC Foundation or the IASB.
International Accounting Standards Board (IASB)
The IASB is responsible for standard-setting activities, including the development and
adoption of IFRS. The Board usually meets once a month and its meetings are open to the
public—in person and via the Internet.
The IASB shall comprise 14 members appointed by the Trustees; 12 full-time members
and 2 part-time members. With recent amendments to the constitution of the IASC Founda-
tion, the size of the IASB is to be increased from 14 to 16 members by 2012.
6 Understanding IFRS Fundamentals
Stringent criteria have been laid out in the IASC Foundation constitution for the ap-
pointment of IASB Board members. They are
• Demonstrated technical competency, knowledge of financial accounting and
reporting, and ability to analyze,
• Effective communication skills,
• Awareness and understanding of the global economic environment,
• Ability to work in a congenial manner with other members and show respect, tact,
and consideration for one another’s views and the views of the constituents, and
• Capability to take into consideration varied viewpoints presented, weighing the evi-
dence presented in an impartial manner, and arriving at well-reasoned and support-
able decisions in a timely fashion.
The Board members, who are appointed for a term up to five years, renewable once, are
chosen from a mix of backgrounds, including auditors, preparers of financial statements,
users of financial statements, and academics. The members of the IASB are usually individu-
als who possess professional competence, high levels of technical skills, and have diversity
of international business and market experience; possessing such personal attributes would
normally ensure that the Board members are able to contribute to the development of high-
quality, global accounting standards.
The IASB has the complete responsibility for all IASB technical matters including prep-

aration and issuing of IFRS and Exposure Drafts that precede issuance of the final standards
(i.e., the IFRS).
IFRS Issued by the IASB to December 31, 2009
IFRS 1, First-Time Adoption of International Financial Reporting Standards
IFRS 2, Share-Based Payment
IFRS 3, Business Combinations
IFRS 4, Insurance Contracts
IFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations
IFRS 6, Exploration for and Evaluation of Mineral Resources
IFRS 7, Financial Instruments: Disclosures
IFRS 8, Operating Segments
IFRS 9, Financial Instruments
IFRS for SMEs**
**In July 2009, the IASB promulgated the much-awaited IFRS for Small and Medium Enterprises (SMEs). It
provides standards applicable to private entities (those that are not public accountable as defined in this
standard).
Standards Advisory Council (SAC)
The Trustees appoint the members of the Standards Advisory Council (SAC). The pri-
mary responsibility of the SAC is to provide advice to the IASB on agenda decisions and
priorities in the IASB’s work. The SAC provides a forum for organizations and individuals
who have an interest in international financial reporting and who have diverse geographical
and professional backgrounds.
The SAC shall comprise 30 or more members. Members are appointed for a three-year
renewable term. Currently, the membership of the SAC includes chief financial and ac-
counting officers from some of the world’s largest corporations and international organiza-
tions, leading financial analysts and academics, regulators, accounting standard setters, and
partners from leading accounting firms.
Introduction to International Financial Reporting Standards (IFRS) 7
International Financial Reporting Interpretations Committee (IFRIC)
The Trustees appoint the members of the International Financial Reporting Interpreta-

tion Committee (IFRIC). The IFRIC is the IASB’s interpretive body and is in charge of de-
veloping interpretive guidance on accounting issues that are not specifically dealt with in
IFRS or that are likely to receive divergent or unacceptable interpretations in the absence of
authoritative guidance. The Trustees select members of the IFRIC keeping in mind personal
attributes such as technical expertise and diversity of international business and market expe-
rience in the practical application of IFRS and analysis of financial statements prepared in
accordance with IFRS.
The IFRIC shall comprise 14 voting members. The Trustees, if they deem fit, may also
appoint nonvoting observers representing regulatory bodies, who shall have the right to at-
tend and speak at the meetings of the IFRIC. A member of the IASB, the Director of Tech-
nical Activities or another senior member of the IASB staff, or another appropriately quali-
fied individual, shall be appointed by the Trustees to chair the IFRIC. The IFRIC shall meet
as and when required, and 10 voting members present in person or by telecommunication
shall constitute a quorum. Meetings of the IFRIC (and the IASB) are open to the public but
certain discussions may be held in private at the discretion of the IFRIC. It is important to
note that an IFRIC Interpretation requires the IASB’s approval before its final issuance.
IFRIC Interpretations Issued to December 31, 2009
IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities
IFRIC 2, Members’ Shares in Cooperative Entities and Similar Instruments
IFRIC 3, Emission Rights (withdrawn)
IFRIC 4, Determining Whether an Arrangement Contains a Lease
IFRIC 5, Rights to Interests Arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds
IFRIC 6, Liabilities Arising from Participating in a Specific Market—Waste Electrical
and Electronic Equipment
IFRIC 7, Applying the Restatement Approach Under IAS 29 Financial Reporting in
Hyperinflationary Economies
IFRIC 8, Scope of IFRS 2 (withdrawn)
IFRIC 9, Reassessment of Embedded Derivatives
IFRIC 10, Interim Financial Reporting and Impairment

IFRIC 11, IFRS 2—Group and Treasury Share Transactions (withdrawn)
IFRIC 12, Service Concession Arrangements
IFRIC 13, Customer Loyalty Programs
IFRIC 14, IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and Their Interaction
IFRIC 15, Agreements for the Construction of Real Estate
IFRIC 16, Hedges of a Net Investment in a Foreign Operation
IFRIC 17, Distribution of Noncash Assets to Owners
IFRIC 18, Transfer of Assets from Customers
POPULARITY AND ACCEPTANCE OF IFRS WORLDWIDE
In the last few years, the popularity of IFRS has grown tremendously. The international
accounting standard-setting process has been able to claim a number of successes in achiev-
ing greater recognition and use of IFRS.
A major breakthrough came in 2002 when the European Union (EU) adopted legislation
that required listed companies in Europe to apply IFRS in their consolidated financial state-
8 Understanding IFRS Fundamentals
ments. The legislation came into effect in 2005 and applies to more than 8,000 companies in
30 countries, including countries such as France, Germany, Italy, Spain, and the United
Kingdom. The adoption of IFRS in Europe means that IFRS has replaced national account-
ing standards and requirements as the basis for preparing and presenting group financial
statements for listed companies in Europe, which is considered by many as a major milestone
in the history of international accounting.
Outside Europe, many other countries also have been moving toward IFRS. By 2005,
IFRS had become mandatory in many countries in Africa, Asia, and Latin America. In addi-
tion, countries such as Australia, Hong Kong, New Zealand, Philippines, and Singapore had
adopted national accounting standards that mirror IFRS.
Today, IFRS are used in more than 100 countries. A significant number of Global For-
tune 500 companies already use IFRS and this number is expected to increase by 2011 with
further conversions to IFRS by major global players (most notably, Brazil, Canada, and In-
dia) and substantial convergence of local GAAPs in China and Japan to IFRS.

FAVORABLE AND HISTORIC BREAKTHROUGHS
IN THE UNITED STATES
In the United States, since 2002, efforts have been underway to converge IFRS and U.S.
GAAP; the earliest initiative was in the form of a well-known agreement entered into be-
tween the IASB and the U.S. standard setter (the FASB), referred to as the Norwalk Agree-
ment. In the last few years, media reports are replete with news about the U.S. SEC devel-
oping an IFRS road map.
In November 2007, in a surprise move that is considered by some as the most significant
nod of friendliness and an astounding move toward convergence in recent times, the U.S.
SEC opened its doors to IFRS. This defining moment in the fast-tracked race of the IASB
has helped gain global acceptance of the SEC’s standards. In fact, this is the first time in the
history of United States standard setting that a non-U.S. set of accounting standards were
allowed to be used for listings on U.S. stock exchanges without requiring mandatory recon-
ciliation to U.S. GAAP. Before this groundbreaking announcement was made by the U.S.
SEC, all foreign private issuers (FPIs) were required to reconcile to U.S. GAAP the financial
statements that they file with the U.S. SEC if the financial statements were prepared using
any standards other than U.S. GAAP. While this exception to file financial statements with-
out reconciliation to U.S. GAAP was made in a limited manner by the U.S. SEC, that is, only
in the case of foreign private issuers (FPIs), such an exception to using U.S. GAAP for pur-
poses of listing on the largest capital market of the world is undoubtedly a major break-
through for the IFRS, the only non-U.S. GAAP standards that can boast of this special treat-
ment.
In August 2008, the U.S. SEC went a step forward with its acceptance of IFRS and pro-
posed to relax its rules further and permit the use of IFRS by U.S. issuers (i.e., domestic
companies in the United States) provided certain milestones are achieved leading to manda-
tory use of IFRS by U.S. issuers starting for fiscal years ending on or after December 15,
2014. The milestones that need to be addressed before mandatory adoption of IFRS in the
United States are
• Improvements in accounting standards, in accordance with a memorandum of under-
standing established between the IASB and FASB;

• Funding and accountability of the IASC Foundation;
• Improvement in the ability to use interactive data for IFRS reporting; and
• Education and training on IFRS in the United States.
Introduction to International Financial Reporting Standards (IFRS) 9
According to this road map to convergence, in 2011, the U.S. SEC will assess the
progress of the these milestones and will decide whether to mandate the use of IFRS for U.S.
issuers. If, after assessment, the U.S. SEC is satisfied with the achievements of the mile-
stones, then U.S. issuers may be allowed to make the transition to IFRS as early as 2014.
The other good news is that under this new friendly approach to convergence with IFRS
(which some refer to as the sudden urge to merge or converge with IFRS in the United
States), more specifically, under the U.S. SEC IFRS road map, limited early use of IFRS has
also been permitted for eligible entities; under this limited exception, certain U.S. issuers
may even begin using IFRS soon. However, the final decisions in this regard are yet to be
made as of this date.
THE WAY FORWARD
IFRS are clearly emerging as a global financial reporting benchmark and most countries
have already started using them as their benchmark standards for listed companies. With the
recent issuance of IFRS for SMEs, a stand-alone set of standards for private entities that do
not have public accountability, the global reach of the IASB is further enhanced. However, if
these international standards are not applied uniformly across the world due to interpreta-
tional differences, then their effectiveness as a common medium of international financial
reporting will be in question. If different entities within the region apply them differently
based on their interpretation of the standards, it would make global comparison of published
financial statements of entities using IFRS difficult. Debate still rages amongst accountants
and auditors globally on many burning and contentious accounting issues that need a com-
mon stand based on proper interpretation of these standards.
According to one school of thought, IFRS are emerging as the much-awaited answer to
the “billion-dollar question” on the minds of accountants, financial professionals, financial
institutions, and regulators, that is, which set of accounting standards would solve the conun-
drum of diversity in accounting practices worldwide by qualifying as a single or a common

set of standards for the world of accounting to follow and rely upon?
Undoubtedly, for years, U.S. GAAP was leading this much-talked about international
race to qualify as the most acceptable set of accounting standards worldwide. However, due
to several reasons, including the highly publicized corporate debacles such as that at Enron in
the United States, the global preference (or choice) of most countries internationally has now
clearly tilted in favor of IFRS as the most acceptable set of international accounting and fi-
nancial reporting standards worldwide.
With the current acceptance of IFRS in more than 100 countries (and with several more
expected to adopt IFRS in the coming years), one can probably argue that IFRS could possi-
bly qualify as an Esperanto of international accounting (Esperanto refers to the well-known
universal language). However, some people still believe that the race for global acceptance
of IFRS is not over yet. While more than 100 countries have adopted IFRS as their national
accounting standards, there are some important jurisdictions in the financial world (such as
the United States) that have not yet fully accepted IFRS for financial reporting of their do-
mestic companies. Therefore, unless the United States, the largest economic superpower of
the world for years now, accepts IFRS as its national GAAP (replacing U.S. GAAP), it may
be difficult to call IFRS the world’s standards. There is, however, a strong possibility of the
U.S. SEC’s accepting IFRS ultimately. Judging from the amazing change in attitude of the
U.S. SEC, which has already allowed use of IFRS by foreign private issuers for filings on
U.S. stock exchanges, one may expect—that is, if the SEC’s road map to convergence with
IFRS goes through successfully without any glitches—that by the year 2014 (unless the date
of convergence is extended further for whatever reason), the world of accounting may be
10 Understanding IFRS Fundamentals
rejoicing and celebrating under a strong common banner of a global set of accounting and
financial reporting standards, namely, the IFRS. Some believe that the idea of a single set of
standards for the world may be wishful thinking especially if the U.S. SEC’s road map is
amended adversely. As things stand presently, however, it may be expected that there is a
strong possibility of allowing the use of IFRS in the United States in some form or another.
2 IASB FRAMEWORK
The IASB Framework for the Preparation and Presentation of Financial Statements

(the Framework) sets out the concepts that underlie the preparation and presentation of fi-
nancial statements (i.e., the objectives, assumptions, characteristics, definitions, and criteria
that govern financial reporting). Therefore, the Framework is often referred to as the con-
ceptual framework.
The Framework deals with
1. The objective of financial statements
2. Underlying assumptions
3. The qualitative characteristics that determine the usefulness of information in finan-
cial statements
4. The definition, recognition, and measurement of the elements from which financial
statements are constructed
5. Concepts of capital and capital maintenance
The Framework is not a standard nor does it have the force of a standard. Instead, its
importance can be judged from the following purposes for which it is made available to users
of the standards:
• To assist and guide the International Accounting Standards Board (IASB) as it devel-
ops new or revised standards;
• To assist national standard setters in developing their national standards on a consis-
tent basis with international principles; and
• To assist preparers of financial statements in applying standards and in dealing with
topics that are not addressed by a standard.
Thus, in case of a conflict between the Framework and a specific standard, the standard
prevails.
OBJECTIVE OF FINANCIAL STATEMENTS
The objective of financial statements is to provide information about the financial posi-
tion, performance, and changes in financial position of an entity that is useful to a wide range
of users in making economic decisions such as an investor deciding whether to sell or hold
an investment in the entity, or employees assessing an entity’s ability to provide benefits to
them.
Users include present and potential investors, employees, lenders, suppliers, and other

trade creditors, customers, governments and their agencies, and the public. Because investors
are providers of risk capital, it is presumed that financial statements that meet their needs will
also meet most of the needs of other users.
UNDERLYING ASSUMPTIONS
Two assumptions underlying the preparation and presentation of financial statements
are: the accrual basis and going concern.