PRACTICAL APPLICATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
The International Financial Reporting Standards (IFRS) operate on a principle-based framework. This approach to financial reporting entails the application of substance-based principles and the use of professional judgement, offering a limited number of precise rules and minimal guidance for implementation. In this regard, companies have a responsibility to ensure that their financial reports accurately reflect the principles of IFRS in a fair and impartial manner.
Evaluating business topics and transactions in line with IFRS involves a detailed examination of the unique features of each case. This assessment prioritizes substance over form, signifying that the economic reality of a transaction takes precedence over its formal or contractual structure.
The aforementioned approach diversifies the application of IFRS principles across various corporate practices. Despite variations in interpretation and execution accross industries are inevitable, IFRS’s ultimate goal is to ensure that the global financial reporting adheres to the core principles.
Financial statements prepared in accordance with IFRS need to fullfill fundamental qualitative characteristics which are relevance and faithful representation.
- Relevance: Financial information is relevant if it has:
- predictive value of being used as an input to predict future outcomes;
- confirmatory value by providing feedback to previous evaluations by confirming or changing them;
- or both.
- Faithful representation:
Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena,but it must also faithfully represent the substance of the phenomena that it purports to represent.
In many circumstances, the substance of an economic phenomenon and its legal form are the same. If they are not the same,providing information only about the legal form would not faithfully represent the economic phenomenon.
To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and free from error to the highest extent possible.
- A complete depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations.
- A neutral depiction is without bias in the selection or presentation of financial information. A neutral depiction is not slanted, weighted, emphasised,de-emphasised or otherwise manipulated to increase the probability that financial information will be received favourably or unfavourably by users.
Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements under conditions of uncertainty. The exercise of prudence means that assets and income are not overstated and liabilities and expenses are not understated. Equally, the exercise of prudence does not allow for the understatement of assets or income or the overstatement of liabilities or expenses.
Free from error means there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. In this context, free from error does not mean perfectly accurate in all respects. For example, an estimate of an unobservable price or value cannot be determined to be accurate or inaccurate. However, a representation of that estimate can be faithful if the amount is described clearly and accurately as being an estimate, the nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an appropriate process for developing the estimate.
In addition to aforementioned characteristics comparability, verifiability, timeliness and understandability are enhancing qualitative characteristics of financial statements in accordance with IFRS.
An important aspect of relevant financial information is materiality. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of financial reports make on the basis of those reports.
Materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report. In other words, companies define their level of materiality individually based on their specific considerations and judgements.