Friday, November 12, 2010

In the Absence of an IFRS, where to turn to ?

The IASB publishes its standards in a series of pronouncements called International Financial Reporting Standards (IFRSs). The term ‘International Financial Reporting Standards’ includes IFRSs, IASs and Interpretation developed by the IFRIC or its predecessor, the former SIC.

The Interpretation of IFRSs are prepared by the IFRIC to give authoritative guidance on issues that are likely to receive divergent or unacceptable treatment, in the absence of such guidance.

As stated in paragraph 9 of IAS 8, Accounting Policies, Changes in Accounting Estimates, and Errors that IFRS are accompanied by guidance to assist entities in applying their requirements. All such guidance states whether it is an integral part of IFRS. Guidance that is an integral part of the IFRSs is mandatory. Guidance that is not an integral part of the IFRSs does not contain requirements for financial statements.

Further, paragraph 10 states that in the absence of an IFRS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is :

(1)  relevant to the economic decision-making needs for users; and

(2)  reliable, in that the financial statements :

  1. represent faithfully the financial position, financial performance and cash flows of the entity;
  2. reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
  3. are neutral, ie. free from bias;
  4. are prudent; and
  5. are complete in all material respects

Following, paragraph 11 states that in making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order :

  1. the requirements in IFRSs dealing with similar and related issues; and
  2. the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.

Paragraph 12 states that in making the judgement described in paragraph 10, management may also consider the most recent pronouncements of other standard-setting bodies that use a similar concept framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11 (HRD).

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