The need for IFRS Standards

Impact of globalization.
 The need for a single set of international reporting standards arise as a result of the globalization of business activities and
operations. The current reality is that the world’s capital markets operate more and more freely across borders.
 As the modern business imperative moves towards the globalization of operations and activities, there is an underlying commercial
logic that also requires a truly global capital market.
 A single set of international reporting standards is intended to provide:
 A platform for wider investment choice
 A more efficient capital market
 Lower cost of capital
 Enhanced business development
 Globally, users of FS need transparent and comparative information to help them make economic decisions.

IFRS Standards, advantages and disadvantages

 The advantages and disadvantages of adopting IFRSs have to be considered by each adopting country and have been debated for
several years, particularly in the US, which currently uses a rules-based system (as opposed to a principles-based)
 The main advantages are seen to be:
 A business can present its FS on the same basis as its foreign competitors, making comparison easier
 Cross-border listing will be facilitated, making it easier to raise capital abroad
 Companies with foreign subsidiaries will have a common, company-wide accounting language
 Foreign companies which are targets for takeovers or mergers can be more easily appraised
 The disadvantages are perceived to be:
 The cost of implementing IFRSs
 The belief by some that there is a lower level of detail in IFRSs (compared with US GAAP)

 Countries that have national standards that are very prescriptive are worried about the principles-based approach in IFRSs that
require the application of judgement. This is particularly so in the US. US accountants are subject to a high degree of litigation and
their defence in court is usually that they complied with the relevant sub-section of one of the hundreds of detailed standards which
make up US GAPP. They fear that adoption of IFRSs will remove this defence.

Trustees
 Comprise a group of individuals with diverse geographic and functional backgrounds
 The trustees appoint the Members of the Board, the IFRS Interpretation Committee and IFRS Advisory Council
 In addition to monitoring the Foundation’s effectiveness and raising its funds, the Trustees will approve the budget and have
responsibility for constitutional changes

1. The International Accounting Standards Board (IASB)

 The IASB is an independent, privately funded body that develops and approves IFRSs
 Prior to 2003, standards were issued as International Accounting Standards (IASs)
 In 2003 IFRS 1 was issued and all new standards are now designated as IFRSs
 The members of the IASB come from several countries and have a variety of backgrounds, with a mix of auditors, preparers of FS,
users of IFRS and academics.
 IASB operates under the oversight of the IFRS Foundation
 The IASB publishes an annual report of its activities during the past year and priorities for next year. This report provides a basis
and opportunity for comment by interested parties. In addition, it is required to undertake a public consultation on its future technical
agenda every five years. The IASB reports on its technical projects on its Website.
 Il also publishes a report on IASB decisions immediately after each IASB meeting in its newsletter IASB Update

2. The IFRS Foundation

 The IFRS foundation is a non for profit sector body that oversees the IASB. The objectives of the IFRS Foundation are to:
1. Develop a single set of high quality, understandable, enforceable and globally accepted IFRSs through its standard-setting body, the
IASB
2. Promote the use and rigorous application of those standards
3. Take account of the needs of a range of sizes and types of entities in diverse economic settings (entities operating in emerging
economies and small and medium-sized entities SMEs)
4. Promote and facilitate adoption of IFRSs through the convergence of national accounting standards and IFRSs

3. IFRS Advisory Council

 Provides a formal vehicle for further groups and individuals with diverse geographical an functional backgrounds to give advice to
the Board, at times, to advise the Trustees
 It is consulted by the IASB on all major projects and its meetings are open to the public
 It advices the IASB on prioritization of its work and on the implications of proposed standards for users and preparers of FS
4. IFRS Interpretation Committee
 Provides timely guidance on the application and interpretation of IFRSs
 Assists the IASB by improving existing Standards
 It deals with newly identified financial reporting issues not specifically addressed in IFRSs or issue where unsatisfactory or
conflicting interpretations have developed, or seem likely to develop.
 Has two main responsibilities:
 Review, on a timely basis, newly identified financial reporting issues not specifically addressed in IFRSs
 Clarify issues where unsatisfactory or conflicting interpretations have developed or seem likely to develop in the absence of
authoritative guidance, with a view to reaching a consensus on the appropriate treatment
Authority and application of IFRS Interpretations Committee Interpretations
 The IFRS Interpretations Committee issues “Interpretations” which carry the same authority as IFRSs, in the sense that they set out
consensus views that entities must adhere to it, if they describe their FS as being prepared in accordance with IFRS
 Interpretations are applicable from the date of issue or if they specify one, from their effective date.
 Some interpretation may contain “transitional provisions” that apply to their first application
 An interpretation ceases to apply when it is overridden by a new IFRS (or other authoritative IASB document). When this happens,
this would be mentioned in the Exposure Draft of the new, overriding IFRS Standard
 The IASB would then inform the IFRS Interpretation Committee when this happens.
IFRS Interpretations Committee due process
 The IFRS Interpretations Committee discusses technical matters in meeting that are open to public observation.
 The due process for each project normally, but not necessarily, involves the following steps
*steps that are required under the term of the Constitution.
1. Staff work to identify and review all the issues associated with the topic and to consider the application of the IASB’s Conceptual
Framework to the issues
2. Study of national accounting requirements and practice and an exchange of views about the issues with national standard setters,
including national committees that have responsibility for interpretation of national standards
3. * Publication of a draft interpretation for public comment if no more than 4 of the IFRS Interpretation Committee’s member have
voted against the proposal
4. * Consideration of all comments received on a draft interpretation within a reasonable period of time
5. Approval of an Interpretation if no more than 4 of the IFRS Interpretation Committee’s member have voted against the
Interpretation after considering public comments on the draft interpretation
6. Approval of the Interpretation by at least 9 votes of the Board

Developing IFRS Standards.

 IFRSs are developed through a formal system of due process and broad international consultation involving accountants, financial
analysts and other users and regulatory bodies from around the world
 The overall agenda of the IASB will initially be set by discussion with IFRS Advisory Council.
 The process for developing an individual standard would involve the following steps:
 Step 1: During the early stages of a project, the IASB may establish an Advisory Committee to give advice on issues arising in the
project. Consultation with the Advisory Committee and IFRS Advisory Council occurs throughout the project.
 Step 2: IASB may develop and publish Discussion Papers for public comment
 Step 3: Following the receipt and review of comments, the IASB would develop and publish an Exposure Draft for public comment
 Step 4: Following the receipt and review of comments, the IASB would issue a final IFRS.

 The steps are underpinned by the following principles

 Transparency: the IASB conducts its standard-setting process in a transparent manner
 Full and Fair consultation: considering the perspectives of those affected by IFRS globally
 Accountability: the IASB analyses the potential effects of its proposals on affected parties and explains the rationale for why it made
the decisions it reached in developing or changing a Standard
 The period of exposure for public comment is normally 120 days
 However, in exceptional circumstances proposals may be issued with a comment period of 30 days
 Draft IFRS Interpretations are normally exposed for a 90-day comment period
Consultation
 The development of an IFRS Standard involves a full and fair consultation which include an open, public process of debating
technical issues and evaluating input sought through several mechanisms.
 Opportunities for interested parties to participate in the development of an IFRS Standard would include, depending on the nature of
the project:
 Participation in the development of views as a member of the IFRS Advisory Council
 Participation in advisory groups
 Participation in public hearings
 Participation in field visits and field tests.
 Submission of a comment letter in response to a discussion document
 Submission of a comment letter in response to an Exposure Draft
Scope of IFRSs. Any limitation of the applicability of a specific IFRS Standard is made clear within that standard. IFRSs are not
intended to be applied to immaterial items, nor are they retrospective. Each individual IFRS lays out its scope at the beginning of the
standard.
Conceptual Framework (CF)
 A Conceptual Framework is a statement of generally accepted theoretical principles which form the frame of reference for
financial reporting. These theoretical principles provide the basis for the IASB’s development of new accounting standards and the
evaluation of those already in existence. The financial reporting process is concerned with providing information that is useful in the
business and economic decision-making process
 Therefore a CF will form the theoretical basis for determining which events should be accounted for, how they should be measured
and how should be communicated to the users. Although it is theoretical in nature, a CF for financial reporting has a highly practical
final aims.
 The IASB’s CF for Financial Reporting describes the fundamental concepts for financial reporting and is used by the IASB to
guide the development of IFRSs. The purpose of the Conceptual Framework is to:
1. Assist the IASB to develop IFRSs that are based on consistent concepts
2. Assist preparers of accounts to develop accounting policies in cases where there is no IFRSs applicable to a particular
transaction, or where a choice of accounting policy exists
3. Assist all parties to understand and interpret IFRSs

Advantages
1. The situation is avoided whereby standards are developed on a haphazard basis, where a particular accounting problem is
recognized as having emerged, and resources were then channelled into standardizing accounting practice in that area, without
regard to whether that particular issue was necessarily the most important issue remaining at that time without standardization
2. The development of certain standards (particularly national standards) has been subject to considerable political interference from
interested parties. Where there is a conflict of interest between user groups on which policies to choose, policies deriving from a CF
will be less open to criticism that the standard-setter buckled to external pressure
3. Without a CF, some standards my concentrate on profit or loss whereas some may concentrate on the valuation of net assets
(SOFP), so that they conflict with one another

Disadvantages
1. FS are intended for a variety of users and it is not certain that a single CF can be devised which will suit all users
2. Given the diversity of user requirements, there may be a need for a variety of accounting standards each produced for a different
purpose, and with different concepts as a basis
3. It is not clear that a CF makes the task of preparing and then implementing standards any easier than without a framework.

 The CF was revised and reissued in 2018. The revision follows criticism that the previous CF was incomplete and out of date and
unclear in some areas. The revised CF now include: New definition of elements in the FS, Guidance on de-recognition, Considerable
guidance on measurement, High-level concepts for presentation and disclosure
 Content. The CF is divided into chapters:
1. The objective and general purpose Financial Reporting 5. Recognition and de-recognition
2. Qualitative characteristics of useful Financial Information 6. Measurement
3. Financial Statements and the Reporting Entity 7. Presentation and disclosure
4. The elements of FS 8. Concept of capital and capital maintenance

Current IFRSs and the revised CF

 All existing IFRSs were written before the revised CF was issued (although some, such as IFRS 16 were under development at the
same time as the revised CF). As such, there are inconsistencies between the Standards and the CF in term of the definition and
other criteria used.
 For example, IAS 38 retains the 2010 CF definition of an asset which specifies that an asset is an economic resources from with
future economic benefits are expected to flow to the entity. In the revised CF an asset is a right with the potential to produce
economic benefits.
 Thus is not problematic in this instance because:
 The criteria in IAS 38 are more specific than those in the CF, and are therefore not inconsistent with it
 The CF is not an IFRS standard and does not override the requirements of an IFRS Standard
 The 2010 CF definitions of assets and liabilities are also retained in IAS 37 and IFRS 3

Chapter 1: The objective and general purpose of Financial Reporting.

 The CF defines that objective of the general purpose of FR as being to provide financial information about the reporting entity that
is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity
 Existing and Potential investors, lenders and other creditors are referred to as the primary users of FS
 To make decisions, the primary users need information about:
 The economic resources of the entity, claims against the entity and changes in those resources and claims
 Management stewardship: how efficiently and effectively the entity’s management and governing board have discharged their
responsibilities to use the entity’s economic resources
Chapter 2: Qualitative characteristics of useful Financial Information

Fundamental qualitative characteristics. Relevance and Faithful representation

 Information is useful if it is relevant and faithfully represents what it purports to represent

1. Relevant information is capable of making a difference in decisions made by users if it has predictive value, confirmatory value or
both.
 The relevance of information is affected by its nature and its materiality
 Materiality. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions
that the primary users of general purpose FS make on the basis of those FS, which provide information about a specific
reporting entity

2. Faithful representation: Financial reports represent economic phenomena in words and numbers. To be useful, financial
information must not only represent relevant phenomena but must faithfully represent the substance of the phenomena that it purports
to represent.
A faithful representation reflects economic substance rather than legal form and is:
a. Complete: all information necessary for understanding
b. Neutral: means that the information should be provided without bias, which is supported by exercise of prudence
c. Free from error: processes and descriptions without error, does not mean perfect

Prudence is the exercise of caution when making judgements under conditions of uncertainty.
 The term prudence was removed from the 2010 CF as it was deemed to be implied within the depiction of neutrality, and that the term
was being interpreted in different ways. However, it was felt that the exercise of prudence, along with understanding the substance on
the transactions, rather than the pure legality of them, was required to be explicitly stated in the 2018 revisions to the CF.
Furthermore, the CF 2018 revision included a clear definition of the term in order to clarify any potential areas of confusion

Applying the fundamental qualitative characteristics

1. Identify the economic phenomena
2. Identify the type of information about it, that would be most relevant
3. Determine if that information is available and if it would give faithful representation.
 If so, use that information
 If not, then identify the next most relevant information and apply step 3 again.
This process reflect the fact that the most relevant information may have such a high level of measurement uncertainty that, instead, the
most useful information is that which is slightly less relevant, but is subject to lower measurement uncertainty.

Enhancing qualitative characteristics. Comparability, Verifiability, Timeliness, Understandability.

 Information is more useful if the enhancing qualitative characteristics are maximized. Enhancing qualitative characteristics cannot
make information useful if the information is irrelevant or if it is not faithful representation.

1. Comparability is the qualitative characteristics that enables users to identify and understand similarities in, and differences among
items.
 The disclosure of accounting policies is particularly important here. Users must be able to distinguish between different
accounting policies in order to be able to make a valid comparison of similar items in the accounts of different entities. When an
entity changes an accounting policy the change is applied retrospectively so that the results from one period to the next can still be
usefully compared
 Comparability is not the same as uniformity. Accounting policies should be changed if the change will result in information that is
reliable and more relevant, or where the change is required by an IFRSs

2. Verifiability: assure users that information faithfully represents the economic phenomena it purports to represent
 Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily
complete agreement, that a particular depiction is a faithful representation
 Information can be verified to a model or formula or by direct observation, such as undertaking an inventory count.
 Independent verification, such a valuation by a specialist is also useful.

3. Timeliness: Means having information available to decision-makers in time to be capable of influencing their decisions. Generally,
the older information is the less useful it is
 There is a balance between timeliness and the provision of reliable information. If information is reported on a timely basis when
not all aspects of the transaction are known, it may not be complete of free from error
 Conversely, if every detail of a transaction is known, it may be too late to publish the information because it has become irrelevant
 The overriding consideration is how best to satisfy the economic decision-making needs of the users.

4. Understandability. Classifying, characterizing and presenting information clearly and concisely makes it understandable
 Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review
and analyse the information diligently

Cost constraint: The benefits of reporting information should justify the costs incurred in reporting it.
Chapter 3: Financial Statements and the Reporting Entity.

Objective of FS
 To provide financial information about the reporting entity’s assets, liabilities, equity, income and expenses that is useful to users of
FS in assessing the prospects for future net cash-inflows to the reporting entity and in assessing management’s stewardship of the
entity’s economic resources. Useful Financial Information is presented in:
 SOFP by recognizing assets, liabilities and equity
 SPLOCI by recognizing income and expenses
 Other statements and notes by presenting and disclosing information about:
o The nature of recognized items and associated risks
o The nature of unrecognized assets and liabilities and associated risks
o Cash-flows
o Transaction with equity holders
o Methods, assumptions and judgements used to estimate amounts presented or disclosed
 FS are prepared for a period of time, with comparative information, include information about transaction after the reporting date if
necessary. FS are presented from perspective of the reporting entity as a whole, not from the perspective of a particular group of
users
 FS are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future

The Reporting Entity

 A reporting entity is an entity that is required, or chooses to prepare FS
 A reporting entity can be a single entity or a portion of an entity or can comprise more than one entity. A reporting entity is not
necessarily a legal entity. Where a reporting entity is not a legal entity or group liked by parent-subsidiary relationship, then the
boundary of a reporting entity is driven by the information needs of the users of the reporting entity’s FS

Chapter 4: The elements of Financial Statements

Assets: A present economic resource controlled by the entity as a result of past events.
 An economic resource is a right that has the potential to produce economic benefits.
Economic benefits include
 Cash flows, such as returns on investment sources
 Exchange of goods, such as by trading, selling goods, provision of service
 Reduction or avoidance of liabilities, such as paying loans

Liabilities: A present obligation of the entity to transfer an economic resource as a result of past events
 Obligation: a duty or responsibility that the entity has no practical ability to avoid. An essential characteristic of a liability is that the
entity has an obligation
 A present obligation exists as a result of past event only if:
 The entity has already obtained economic benefits or taken an action
 As a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer.

Equity: The residual interest in the assets of the entity after deducting all its liabilities. Claim that did not meet the definition of a
liability

Income: Increases in assets or decrease in liabilities that result in increases in equity, other than those relating to contributions from
holders of equity claims.

Expenses: Decreases in assets or increases in liabilities that result in decrease of equity, other than those relating to distributions to
holders of equity claims.

 Different transactions generate income and expenses with different characteristics. Showing information about income and expenses
with different characteristics separately can help users to understand the entity’s financial performance.
 Contributions from owners (issue of share capital) are not income and distributions to owners are not expenses (dividends)
Chapter 5: Recognition and De-recognition

Recognition process: Recognition is the process of capturing for inclusion in the SOFP or SPLOCI an item that meets the definition of
one of the elements of FS: an asset, a liability, equity, income or expenses.
Recognition of one item requires the recognition or de-recognition of one or more other items. An item is recognized in the FS if:
1. The item meets the definition of an element: asset, a liability, equity, income or expenses.
2. Recognition of that element provides users of the FS with information that is useful:
 Relevant information about the element
 A faithful representation of the element
 Recognition is subject to cost constraints: the benefits of the information provided by recognizing an element should justify the costs
of recognizing that element

De-recognition
 De-recognition normally occurs:
 For an asset – when control is lost
 For a liability – when there is no longer a present obligation
 The requirements for de-recognition aim to faithfully represent both
 Any assets and liabilities retained after de-recognition
 The change in the entity’s assets and liabilities as a result of de-recognition
 To ensure that the FS meet the faithful representation characteristic, it may also be necessary to provide explanatory information
and/or to present separately related income/expenses and retained components in the FS

Chapter 6: Measurement

 Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction, between market
participants at the measurement date

 Value in use is the present value of the cash-flows, or other economic benefits, that an entity expects to derive from the use of an asset
and from its ultimate disposal
 Fulfilment value is the present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it
fulfils a liability

 Current cost of an asset is the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid
at the measurement date plus the transaction costs that would be incurred at that date
 Current cost of a liability is the consideration that would be received for an equivalent liability at the measurement date minus the
transaction costs that would be incurrent at that date

 The CF describes the different measures bases used in IFRSs and the factors to consider in selecting a measurement basis. IFRSs use
a mixed measurement approach, which means that different measurement bases are used for different classes of elements. This is
opposed to a single measurement basis in which all items are measured using the same basis – all items are measure at fair value. The
IASB believes that a mixed measurement approach provides the most useful information to the primary users of FS
 Individual IFRSs specify which particular measurement basis should be used in most circumstances. The measurement principles
in the CF will therefore mainly be used by the IASB to develop Standards. However, preparers of FS can use the measurement
principles to help them choose a measurement basis where a choice is offered in a Standard

Measurement bases
 There are two main measurement bases
 Historical cost
 Current value (which include, fair value, value in use, fulfilment value and current cost)

 Historical cost for an asset is the cost that was incurred when the asset was acquired or created and, for a liability is the value of
the consideration received when the liability was incurred.
 Historical cost is updated as the asset is consumed or as the liability is settled
 Additionally, if an asset carried at historical cost suffers an impairment loss, the historical cost carrying amount of that asset is
adjusted to reflect that impairment loss

 Current value uses information available at the reporting date to update the carrying amounts of assets and liabilities

Factors to consider when selecting a measurement basis

There are several key factors when selecting a measurement basis for the FS

1. Nature of the information provided

 Different information is produced by applying a different measurement basis to the same asset or other element
 So it is important to consider what information is produced by a measurement basis in both the SOFP and SPL
 Which one is more important will depend on the particular circumstances
2. Usefulness of the information. To be useful, the information provided by a measurement basis must be relevant and faithfully
represent the underlying information in the FS

 Relevance is affected by:

o How the asset/liability contributes to future cash-flows, historical cost or current cost is likely to provide relevant information
for assets (PPE) which indirectly contribute to future cash-flows when used in combination with other asset
o The characteristics of the asset or liability and related income/expense, if the value of an asset is subject to market fluctuation
then fair value may be more relevant than historical cost

 Faithful representation is affected by:

o Measurement inconsistency. Using different measurement bases for related assets and liabilities can result in measurement
inconsistency (accounting mismatch). More useful information may be provided by selecting the same measurement basis for
related assets and liabilities
o Measurement uncertainty, which arises when a measurement must be estimated and cannot be determined by observing
prices in an active market. High level of measurement uncertainty may result in information that is not faithful representation.

3. Other factors, including the cost constraint and with reference to the enhancing qualitative characteristics
 Cost constraint: do the benefits of the information provided by the selected measurement basis justify the costs
 Enhancing qualitative characteristics: consistency using the same measurement basis aids comparability, verifiability is
enhanced by using measures that can be independently corroborated.

Chapter 7: Presentation and Disclosure

 Effective communication of information in FS makes information more relevant, contributes to a faithfully representation of
financial position and performance and enhances understandability and comparability of information. Effective presentation and
disclosure requires:
 Focusing on presentation and disclosure objectives and principles rather than on rules
 Classifying information by grouping similar items and separating dissimilar items
 Aggregating information appropriately so that it is not obscured by unnecessary detail or excessive aggregation

Profit or loss and other comprehensive income

 The SOPL is the primary source of information about an entity’s performance.
 In developing IFRSs, the IASB will, in principle, require all income and expenses to be included in the SOPL.
o However, in exceptional circumstances, the IASB may decide that income or expenses arising from a change in the current
value of an asset or liability should be classified as other comprehensive income.
o This will only be the case where it provides more relevant information or a more faithful representation

 Similarly, in principle, OCI is reclassified to PL in a future period when doing so results in the provision of more relevant
information or a more faithful representation.
o However, for some items there is no clear basis for determining when the appropriate future period would be, the IASB
may, in developing Standards, decide that specific items of OCI should not be reclassified.

Interaction with IAS 1

 FS should represent fairly the financial position, financial performance and cash flows of an entity
 Compliance with IFRSs is presumed to result in FS that achieved a fair presentation. IAS 1 stipulates that FS shall present fairly the
financial position, financial performance and cash flows of an entity.
 Fair presentation requires the faithful representation of the effect of Financial Reporting in accordance with the definition and
recognition criteria for assets, liabilities, income, expenses, equity set out in the CF

 The following points made by IAS 1 expand on this principle

 Compliance with IFRSs should be disclosed
 All relevant IFRSs must be followed if compliance with IFRSs is disclosed
 Use of an inappropriate accounting treatment cannot be rectified either by disclosure of accounting policies or
notes/explanatory material.
 IAS 1 states what is required for a fair presentation
 Selection and application of accounting policies
 Presentation of information in a manner which provides, relevant, reliable, comparable and understantable information
 Additional disclosures where required
Chapter 8: Concept of capital and Capital maintenance

 The concept of capital maintenance links the concepts of capital and the concepts of profit:
 The measurement of profit depends on the method used to value capital
 Profit is only generated if the capital at the end of the reporting period is greater than that at the start.
 Only inflows of assets in excess of amounts needed to maintain capital are profits

 There are two concepts:

Financial Capital Maintenance
 Capital refers to the net assets or equity of the entity
 Profit is made if the financial amount of net asset at the end of the reporting period is greater than the financial
amount at the start, after excluding contribution from and distribution to, owners

Physical Capital Maintenance

 Capital refers to the productive capacity of the entity
 Requires the use of the current cost basis of measurement
 Profit is made if the operating capability at the end of the reporting period is greater than at the start, over and above
increases due to changes in prices

 If primary users are concerned mainly with the maintenance of nominal investment capital, then the financial concept of capital
should be used. Most entities adopt a financial concept of capital
 If primary users are concerned mainly with the operating capability of the entity, a physical concept of capital should be adopted
Applying the CF
The DipIFR syllabus requires you to „critically discuss and apply the definitions of the elements of FS and the reporting of items in
the FS”. A real life example of where the CF can be used in this way is in the accounting for cryptocurrencies.
Cryptocurrencies work in a similar way to conventional currencies in as much that they can be used to pay for (and receive payment
to) goods and services purchased online, with a growing number of vendors accepting this form of payment. Transactions made using
cryptocurrencies make use of blockchain technology, which helps to ensure that all transactions made between participants are verified
and recorded.
We can use the CF to classify cryptocurrencies as an asset.
The CF defines an asset as a „present economic resource controlled by an entity as a result of past events. An economic resource is a
right that has the potential to produce economic benefits”
Cryptocurrencies fall into this definition as they represent specific amounts of digital resources which the entity has the right to
control, and whose control can be reassigned to third parties. They are subject to price volatility and therefore have the potential to
produce economic benefits. As cryptocurrencies meet the definition of an asset, we must consider how they are recognised in the FS.
There are no IFRSs that specifically deal with cryptocurrencies.
Where there are no accounting standards dealing with an issue, accountants should develop an accounting policy relating to the
matter that can be applied and disclosed.

In developing the policy, IAS 8 requires the following hierarchy to be used

1. IFRSs dealing with similar issues
2. The CF
3. The most recent pronouncements of other national GAPPs based on a similar CF and accepted industry practice.

The current discussion on cryptocurrencies from professional bodies and accountancy firms focuses on which IFRSs can be applied
to this area. They are generally agree that cryptocurrencies:
 Do not meet the definition of cash (per IAS 32, they are not a widely accepted medium of exchange as they are not legal tender,
although an increasing number of companies do choose to accept them as tender), nor the definition of cash equivalent under IAS 7
Statement of Cash Flows, as they are not subject to an insignificant risk of changes in value due to the significant volatility there are
subject to.
 Do not meet the definition of financial assets as they are not cash, do not result in an equity interest in an entity and do not give a
contractual right to receive cash or another financial instrument
 Do not have physical substance and therefore cannot be any form of tangible assets
 Most closely meet the criteria in IAS 38 in that they are identifiable (as they are capable of being separated from the holder and
transferred individually), they are non-monetary (as they do not result in fixed or determinable units of currency) and do not have
physical substance. They should therefore be:
o Initially measured at cost
o Subsequently measured at either:
 Cost less accumulated amortisation (although then are likely to have an indefinite useful life and will not be
amortised) and impairment losses, or
 Revalued amount (provided an active market exists, which is likely to be the case for the most common
cryptocurrencies which are traded, but may not be the case for all cryptocurrency)

Given the extent of judgement and estimates involved in accounting for cryptocurrency, extensive disclosure are likely to be required.
The IFRS Interpretations Committee issued an agenda decision on cryptocurrencies in June 2019.

The decision relates to cryptocurrency which they defined as:

1. A digital or virtual currency recorded on a distributed ledger that uses cryptography for security
2. Not issued by a jurisdictional authority or other party
3. Does not give rise to a contract between the holder and another entity.

The committee concluded that cryptocurrency should be accounted for as an intangible asset because:
 It is capable of being separated from the holder and sold or transferred individually, and
 It does not give the holder a right to receive a fixed or determinable number of units of currency

The Committee further conclude that a holding of cryptocurrency that is held for sale in the ordinary course of business should be
accounted for under IAS 2 Inventories.