International Financial Reporting Standards Short Answer Type Questions

Question 1.
State the needs and objectives of Accounting Standards.
Answer:
Needs for Accounting Standards:
Practically speaking, in order to avoid the variance which may arise between the accounting principles and accounting practice and also to find a uniformity among diversity among the various underlying principles of accounting. We emphasise the Accounting Standards framed by the IASC or IAS (Indian Accounting Standard, based on IASC) for maintaining accounting practice in our country.

However, the reasons for setting the Standards are:
(a) Comparison between two firms is possible if both of them maintain the same, principle, otherwise proper comparison is not possible. For example, if Firm A follows the FIFO method of valuation of stock whereas Firm B follows the LIFO method for valuing stock, the comparison between the two firms becomes useless. The same is possible only when both of them follow identical method of valuing closing stock.

(b) The firms are not allowed to maintain and present their accounts according to their own will or choice or cannot prepare report of financial statements for various interested groups. The same is possible only when there is some fixed standard for setting practice.

(c) The Accounting Standards recognise the principle of equity applicable for different users of accounting information, viz. creditors, investors, shareholders etc. Thus the purpose of setting Accounting Standards is nothing but to find a uniformity in accounting practice while formulating financial reports and make consistency and proper comparison of data which are contained in financial statements for the users of accounting information. Practically, Accounting standards have been presented in order to maintain fairness, consistency and transparency in accounting practice which will satisfy the users of accounting.

Objectives of Accounting Standards:

To provide a standard for the diverse accounting policies and principles.
To put an end to the non-comparability of financial statements.
To increase the reliability of the financial statements.
To provide standards which are transparent for users.
To define the standards which are comparable over all periods presented.
To provide a suitable starting point for accounting.
It contains high quality information to generate the financial reports. This can be done at a cost that does not exceed the benefits.
For the eradication the huge amount of variation in the treatment of accounting standards.
To facilitate ease of both inter-firm and intra-firm comparison.

Question 2.
State the scope and functions of Accounting Standards Board.
Answer:
The scope and functions of Accounting Standards Board are:
1. To formulate accounting standard: To formulate accounting standard so that such standards may be established by the council of the Institute in India. While formulating the accounting standards. ASB will take into consideration the applicable laws, customs, usages and business environment.

2. To support the objectives of International Accounting Standards: To support the objectives of International Accounting Standards, Committees (IASC) as the institute is one of the members of IASC. ASB will give due consideration to International Accounting Standards while formulating the Accounting standards to the extent possible in the light of the conditions are practices prevailing in India.

3. Propagate the Accounting standards: To propagate the Accounting standards and persuade the concerned parties to adopt them in the preparation and presentation of financial statements.

4. Issue guidance notes: To issue guidance notes on the accounting standards and give clarifications on issues arising therefrom.

5. Review the Accounting Standards: To review the Accounting Standards at periodical intervals.

Question 3.
Explain the history of International financial reporting standards (IFRS).
Answer:
Foundation in 1966:
1. The foundation for international accounting standards was laid in 1966, when it was proposed that an International Study Group be started comprising the Institute of Chartered Accountants of England & Wales (ICAEW), American Institute of Certified Public Accountants (AICPA) and Canadian Institute of Chartered Accountants (CICA),

2. As a result, the Accountants International Study Group (AISG) was set up in 1967, which published papers on important topics.

3. In June 1973 the International Accounting Standards Committee (IASC) came into existence, with the stated intent that the new international standards it released must “be capable of rapid acceptance and implementation world-wide”.

4. The IASC survived for 27 years, until 2001, when the organization was restructured and the International Accounting Standards Board (IASB) came into existence. Between 1973 and 2000 the International Accounting Standards Committee (IASC) released a series of standards called ‘International Accounting Standards’ in a numerical sequence that began with IAS 1 and ended with IAS 41 Agriculture which was published in December 2000.

5. IASB stated that they would adopt the body of standards issued by the Board of the International Accounting Standards Committee which would continue to be designated ‘International Accounting Standards’ but any new standards would be published in a series called International Financial Reporting Standards.

Question 4.
Explain the assumptions in IFRS.
Answer:
1. Economic Entity: Economic activity can be identified with particular unit of accountability. That means, company must separate its activity from the owners and other business.

2. Going Concern: The company will have long life and will be operate for foreseeable future.

3. Monetary Unit Assumption: Money is used as common denominator of economic activity and provides appropriate basic accounting measurement and analysis. It ignores price-level changes such as inflation and deflation because it assumes that the unit of measure currency remains stable, except if the dramatically change such as hyperinflation.

4. Accrual Basis: The transactions in accounting are recorded when the events are recognized as they occur, not when cash is paid or received.

Question 5.
Explain the relevance of IFRS to India.
Answer:
1. Investors:
Convergence with IFRS makes accounting information more reliable, relevant, timely and comparable across different legal frameworks and requirements as it would then be prepared using a common set of accounting standards thus facilitating those who want to invest outside India.

2. Industry:
Industry which is in the process to convergence with IFRS will be benefited because of –

Increased confidence in the minds of the foreign investor.
Decreased burden in financial reporting.
It leads to lower cost of preparing the financial statements using different sets of accounting standards.

3. Accounting Professionals:
Although there would be initial starting problems, convergence with IFRS would definitely benefit the accounting professionals as the later would then be able provide the services of their expertise.

4. Corporate world:
Convergence with IFRS would raise the reputation and relationship of the Indian corporate world with the international financial community. Moreover, the corporate houses back in India would be benefited because of achievement of higher level of consistency between the internal and external reporting, because of better access to international market.

5. Economy:
The discussions made above explains how convergence with IFRS would help industry grow and is advantageous to the corporate houses in the country as this would bring higher level of consistency between the internal and external reporting along with improving the risk rating among the international investors.

Question 6.
Explain the process of setting IFRS.
Answer:
IFRS Standards are developed through an international consultation process the “due process”, which involves interested individuals and organizations.
1. Setting the agenda:
The IASB evaluates the merits of adding a potential item to its agenda mainly by reference to the needs of investors. The IASB considers:

The relevance to users of the information and the reliability of information that could be provided.
Whether existing guidance is available.
The possibility of increasing convergence.
The quality of the standard to be developed.
Resource constraints.

2. Planning the project:
When adding an item to its active agenda the IASB also decides whether to:

Conduct the project alone.
Jointly with another standard-setter.

3. Developing and publishing the Discussion Paper, including public consultation:

A comprehensive overview of the issue.
Possible approaches in addressing the issue.
The preliminary views of its authors or the IASB.
An invitation to comment.

4. Developing and publishing the Exposure Draft, including public consultation
The development of an Exposure Draft begins with the IASB considering:

Issues on the basis of staff research and recommendations.
Comments received on any discussion paper.
Suggestions made by the IFRS Advisory Council, Consultative groups and accounting standard-setters, and arising from public education sessions.

After resolving issues at its meetings, the IASB instructs the staff to draft the exposure draft.

5. Developing and publishing the Standard – In considering the need for re-exposure, the IASB:

Identifies substantial issues that emerged during the comment period on the exposure draft that it had not previously considered.
Assesses the evidence that it has considered.
Evaluates whether it has sufficiently understood the issues and actively sought the views of constituents.
Considers whether the various viewpoints were aired in the exposure draft and adequately discussed and reviewed in the basis for conclusions.

6. Procedures after a Standard is issued:
After a Standard is issued, the staff and the IASB members hold regular meetings with interested parties, including other standard-setting bodies, to help understand unanticipated issues related to the practical implementation and potential impact of its proposals. The IFRS Foundation also fosters educational activities to ensure consistency in the application of IFRS Standards

Question 7.
Discuss the practical challenges in implementing IFRS. Nov 2017
Answer:
1. First time reporting of financial statements as per IFRS will be a critical factor. IND-AS 101 has been issued by ICAI in this regard that requires preparation of opening Balance Sheet which requires recognition and reclassification of certain items of assets and liabilities. First time adoption has its own challenges.

2. Regrouping/Reclassification; Current items shall have to be regrouped or reclassified to conform to the new method of preparation. Under IND-AS if any reclassification needs to be done the same shall have to be disclosed separately.

3. Planning for Effective Transition Audit: The changeover to IFRS poses a fundamental shift in financial reporting. Changes in the application of new policies, the configuration of systems and maintenance of internal controls will all have an effect on audit risk, significantly increasing the risk of misstatements and fraud. Planning should focus on two major areas: assessing and updating the knowledge of professionals and participating in the company’s conversion process.

4. Users Concerns and Professional Risks: The first IFRS financial statements will be closely scrutinized by the various stakeholders, including financial investors, market analysts and regulators. All the stakeholders will be concerned about the impact, the changes will have and how it will affect them. This issue and its impact on audit engagements will naturally need to be addressed.

5. High Risks: In their risk assessment, the changeover is a convenient opportunity to embellish the results and financial position or to conceal previously undetected errors in the opening balance adjustment. Early in the planning process, auditors should identify the files that present the greatest risk, either because of their complexity, major differences between GAAP and IFRS. This will enable them to take the necessary precautions to ensure the audit is properly performed.

6. Management’s transition Plans: The active involvement in ail stages of the planning, development and implementation of the company’s conversion process is critical to the engagement and essential to their work and conclusions, given the extent of the change, the high level of professional risk and the potential adverse effects inherent in the process.

Question 8.
Explain the Merits of IFRS.
Answer:

IFRS users can increase ability to secure cross boarder listing their companies.
IFRS provides better financial information for the shareholders and regulatory system in India.
IFRS enhance global ability and improve transparency of results.
To help of IFRS one can improve management of global operations and better access the capital market.
IFRS facilitate global investment opportunities inbound and outbound and also reduced cost of capital.
It reduces barriers to enter global market and lowered the risk associated with dual filings of accounts.
With the help of IFRS one can conduct review only one of financial reporting and information system for control.
Uniform accounting standard enabled investors to understand investment opportunity as against two different set of national standard.

Question 9.
What are the limitations of IFRS.
Answer:

IFRS implementation brings change in new standard to this it’s become complex for users to how to finalize the old and new accounting data.
In India there is no separate committee for implementation, follow up and feedback process of IFRS.
Indian GAAP is different from US GAAP. Due to this it’s become difficult to synchronising the financial statement.
Lack of proper training and guidance program in India, postponed the process of IFRS implementation.
A new system always considers value of money, so that it becomes mandatory for companies to find out cost-benefit analysis.
Taxation system also impacts after the implementation process of IFRS in India.
IFRS simply a principal set by IASC but it does not provide detailed rules to follow up.
IFRS mainly focuses on presenting its financial statement and focus is very less on the users of accounting standard.
Lack of awareness between users about the international financial reporting practices.
Lack of proper data impacts the effective implementation of IFRS process.
Lack of proper resources also effects the IFRS implementation successfully.

Question 10.
List the Indian Accounting Standards.
Answer:
AS 1 Disclosure of Accounting Policies : The Standard deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. The view presented in the financial statements of an enterprise of its state of affairs and of the profit or loss can be significantly affected by the accounting policies followed in the preparation and presentation of the financial statements. The accounting policies followed vary from enterprise to enterprise. Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated.

AS 2 Valuation of Inventories : A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements until the related revenues are recognised. This Statement deals with the determination of such value, including the ascertainment of cost of inventories and any write-down thereof to net realisable value.

AS 3 Cash Flow Statements : The Statement deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of. a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.

AS 4 Contingencies and Events Occuring after the Balance Sheet Date: This Statement deals with the treatment in financial statements of (a) contingencies 4 and (b) events occurring after the balance sheet date.

AS 5 Net Profit or Loss for the period,Prior Period Items and Changes in Accounting Policies: The objective of this Statement is to prescribe the classification and disclosure of certain items in the statement of profit and loss so that all enterprises prepare and present such a statement on a uniform basis.

Accordingly, this Statement requires the classification and disclosure of extraordinary and prior period items, and the disclosure of certain items within profit or loss from ordinary activities. It also specifies the accounting treatment for changes in accounting estimates and the disclosures to be made in the financial statements regarding changes in accounting policies.

AS 6 Depreciation Accounting : This Statement deals with depreciation accounting and applies to all depreciable assets. Different accounting policies for depreciation are adopted by different enterprises. Disclosure of accounting policies for depreciation followed by an enterprise is necessary to appreciate the view presented in the financial statements of the enterprise.

AS 7 Construction Contracts (revised 2002): The objective of this Statement is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods.

AS 8 Accounting for Research and Development : Accounting Standard (AS) 8, Accounting for Research and Development, is withdrawn from the date of AS 26, Intangible Assets, becoming mandatory for respective enterprises.

AS 9 Revenue Recognition : This Statement deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise arising from the sale of goods, the rendering of services, and the use by others of enterprise resources yielding interest, royalties and dividends.

AS 10 Accounting for Fixed Assets : Financial statements disclose certain information relating to fixed assets. In many enterprises these assets are grouped into various categories, such as land, buildings, plant and machinery, vehicles, furniture and fittings goodwill, patents, trade marks and designs. This statement deals with accounting for such fixed assets

AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003): An enterprise may carry on activities involving foreign exchange in two ways. It may have transactions in foreign currencies or it may have foreign operations. In order to include foreign currency transactions and foreign operations in the financial statements of an enterprise, transactions must be expressed in the enterprise’s reporting currency and the financial statements of foreign operations must be translated into the enterprise’s reporting currency. The principal issues are to decide which exchange rate to use and how to recognise in the financial statements the financial effect of changes in exchange rates.

AS 12 Accounting for Government Grants : This Statement deals with accounting for government grants. Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, etc.

AS 13 Accounting for Investments : This Statement deals with ac¬counting for investments in the financial statements of enterprises and related disclosure requirements.

AS 14 Accounting for Amalgamations : This statement deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves. This statement is directed principally to Companies although some of its requirements also apply to financial statements of other enterprises.

AS 15 (revised 2005) Employee Benefits: The objective of this Statement is to prescribe the accounting and disclosure for employee benefits. The Statement requires an enterprise to recognise: (a) a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and (b) an expense when the enterprise consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.

AS 15 (issued 1995)Accounting for Retirement Benefits in the Financial Statement of Employers : This Statement applies to retirement benefits in the form of provident fund, superannuation/pension and gratuity provided by an employer to employees, whether in pursuance of requirements of any law or otherwise. It also applies to retirement benefits in the form of leave encasement benefit, health and welfare schemes and other retirement benefits.

AS 16 Borrowing Costs : The objective of this Statement is to prescribe the accounting treatment for borrowing costs. Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds.

AS 17 Segment Reporting : The objective of this Statement is to establish principles for reporting financial information, about the different types of products and services an enterprise produces and the different geographical areas in which it operates.

AS 18, Related Party Disclosures: The objective of this Statement is to establish requirements for disclosure of: (a) related party relationships; and (b) transactions between a reporting enterprise and its related parties.

AS 19 Leases : The objective of this Statement is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures in relation to finance leases and operating leases.

AS 20 Earnings Per Share : The objective of this Statement is to prescribe principles for the determination and presentation of earnings per share which will improve comparison of performance among different enterprises for the same period and among different accounting periods for the same enterprise. The focus of this Statement is on the denominator of the earnings per share calculation.

AS 21 Consolidated Financial Statements : The objective of this Statement is to lay down principles and procedures for preparation and presentation of consolidated financial statements.

AS 22 Accounting for Taxes on Income: The objective of this Statement is to prescribe accounting treatment for taxes on income. This includes the determination of the amount of the expense or saving related to taxes on income in respect of an accounting period and the disclosure of such an amount in the financial statements.

AS 23 Accounting for Investments in Associates in Consolidated Financial Statements: The objective of this Statement is to set out principles and procedures for recognising, in the consolidated financial statements, the effects of the investments in associates on the financial position and operating results of a group.

AS 24 Discontinuing Operations : The objective of this Statement is to establish principles for reporting information about discontinuing operations, thereby enhancing the ability of users of financial statements to make projections of an enterprise’s cash flows, earnings-generating capacity, and financial position by segregating information about discontinuing operations from information about continuing operations.

AS 25 Interim Financial Reporting : The objective of this Statement is to prescribe the minimum content of aninterim financial report and to prescribe the principles for recognition and measurement in a complete or condensed financial statements for an interim period. Timely and reliable interim financial reporting improves the ability of investors, creditors, and others to understand an enterprise’s capacity to generate earnings and cash flows, its financial condition and liquidity.

AS 26 Intangible Assets: The objective of this Statement is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Accounting Standard. This Statement requires an enterprise to recognise an intangible asset if, and only if, certain criteria are met

AS 27 Financial Reporting of Interests in Joint Ventures : The objective of this Statement is to set out principles and procedures for accounting for interests in joint ventures and reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors.

AS 28 Impairment of Assets : The objective of this Statement is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and this Statement requires the enterprise to recognise an impairment loss.

AS 29 Provisions, Contingent Liabilities and Contingent Assets : The objective of this Statement is to ensure that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount.