International Financial Reporting Standards (IFRS) are changing the way financial statements are being formatted. For the layperson, a financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity.
What elements make up financial statements?
The financial position of an enterprise is typically provided in the Statement of Financial Position or Financial Statement, which includes:
- Assets: An asset is a resource controlled by an enterprise from which future economic benefits are expected to flow to the enterprise. (Ex: goods that can be sold or property that brings revenue).
- Liabilities: A liability is a present obligation of an enterprise, the settlement of which is expected to result in an outflow of enterprise assets.
- Equity: Equity is the residual interest in the assets of the enterprise after deducting all the liabilities under the Historical Cost Accounting model.
The financial performance of an enterprise is provided primarily through an income statement or profit and loss account. The elements of an income statement, which measure a company’s financial performance, are as follows:
- Revenues: increases in economic benefit during an accounting period in the form of inflows or enhancements of assets, or decrease of liabilities that result in increases in equity. “Revenue” does not include the contributions made by the equity participants, i.e., proprietor, partners and shareholders.
- Expenses: decreases in economic benefits during an accounting period in the form of outflows, or depletions of assets or incurrences of liabilities that result in decreases in equity.
An important change that IFRS brings is reformatted financial statements. The biggest changes are as follows:
1. The income statement will now be the first page.
2. Balance sheet and income statements will be categorized and classified by operating, investing and financing in a manner similar to the current cash flow statement.
3. The current financial statements and balance sheet are split up into four different sections.
4. There will now be separate sections or "balance sheets" for
a. operating assets and liabilities
b. investing assets and liabilities
c. financing assets and liabilities
d. plus a separate component for income taxes
5. All ratios and performance metrics will change around this.
Why would a company consider IFRS Conversion?
· Conversion provides a fresh look at current practices.
If your organization’s close process includes reconciling multiple GAAPs, and dealing with a variety of sub-ledgers, manual adjustments, data hand-offs, and accounting overrides, IFRS provides an opportunity to take a fresh look at your accounting policies and procedures.
· Conversion can be a catalyst for streamlining and consolidation.
As your organization expands through organic growth and acquisitions, information technology systems may become increasingly convoluted. Many banks and capital markets institutions operate a patchwork of legacy accounting and enterprise resource planning (ERP) systems — systems that can’t talk directly, leading to error-prone adjustments. Moving to IFRS provides a chance to streamline and consolidate these disparate systems.
· International Financial Reporting Standards (IFRS) offers an opportunity to use principles-based accounting.
Many finance professionals have become increasingly frustrated with U.S. GAAP and its voluminous rules for dealing with accounting issues. For a decade or more, many CFOs and other finance executives have cried out for principles-based accounting to help standardize and improve the reliability of financial reporting. IFRS provides this.
· IFRS helps open the doors of the global marketplace.
Adopting IFRS may improve access to foreign capital markets by giving foreign investors greater insight into a company’s financial performance. Such investors may be more comfortable with or have more confidence in a globally accepted set of accounting standards. Companies themselves can also benefit from improved ability to benchmark with peers and competitors.
Organizations such as the U.S. Securities Exchange Commission (SEC) are already using XBRL to report all their documents. But what exactly does that mean?
XBRL stands for eXtensible Business Reporting Language and it is quite important. Put simply, it is a universal code for classifying financial numbers. Moving to XBRL can provide the following benefits:
· In the future, banks and financial institutions around the world will record, store and transmit business financial information using this universal coding language.
· If “cash” equals “A947” around the world, then institutions will be able to import and export their data to anywhere and the programs on the other side will have the ability to read it, transcending traditional barriers such as language or software.
· The amount of money that can be saved is staggering. Rather than companies and governmental agencies paying to have data converted from one system to another (Ex: IBM to SAP to Oracle), XBRL allows different accounting and ERP systems to work together. (We can only say, “Wow!”)
Do you have questions about IFRS and XBRL? Feel free to give us a call to discuss further what might be involved in your conversion.
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