I STARTED my journey to accountancy as an articled clerk, joining the then called Deloitte Touché Tomatsu straight after my A levels.
To say I was green is an understatement. I was clueless about accounting and I am sure I gave my managers several hernias as I navigated the auditing world.
It was during my second year that one of my managers encouraged me to get into and understand the accounting standards, which were then known as IASs (International Accounting Standards), which are now commonly referred to as IFRSs (International Financial Reporting Standards).
To me, IFRSs were at best, another language for which I had no lens to be able to understand or apply them. I am very much indebted to AS2, which was the software that broke this down for us, well enough to carry out our work.
Years later, I ended up working in the technical department of an International banking conglomerate. It is here that my journey to simplifying IFRSs both in the understanding and application came together.
So what I am sharing with you is a summarisation of my journey but in a way that I hope will give you what would be a great ‘aha’ moment for you. Or alternatively, I am just another geeky accountant extolling the virtues of account-speak.
What are IFRSs?
IFRSs are a set of standards that ensure that companies have a common way of reporting their profits and their assets in a way that is consistent and ensures that records are not falsified.
Given this being the basis for defining IFRSs, each standard has its own principles that need to be applied in accounting.
Regardless, each standard basically has three tenets that make up the standard:
- Measurement and
- Presentation and disclosure
Each standard applies to a specific set of standards. For example, IFRS 2 applies to share based payments and IFRS 16 is applied to lease contracts.
What this means is that you do not apply a single standard to all transactions. Instead you classify your transactions and use this to determine which IFRS to apply.
The recognition of the transactions determines how the transaction is accounted for on day one and what to do after. So the recognition for leases for example, would determine what type of lease contracts would be within scope and what contracts do not qualify as leases.
The recognition would help determine the journal entries that would be raised on initial recognition and what accounts would be impacted as well as how, if the initial recognition is not an income statement, how this is done over time.
Within this section, the guidance also covers when a contract or transaction has to be derecognised, i.e. removed from the accounting records.
The measurement principles of the standard give the criteria for calculating amounts recognised in the balance sheet and income statement. This is where for inventory for example, entities make the choice to use a weighted average stock valuation approach or actual or first in first out costing methods. Usually such metrics are built into the sub-ledgers driven by the accounting choices determined by management.
Presentation and disclosure
The final set of principles determines how the information is reported. It gives the considerations in aggregating amounts, the descriptions that need to be provided as well as the information that needs to be shown on the face of the financial statements or in the notes.
It is in the section that the minimum information that needs to be reported it is called out.
A good example is the property, plant and equipment reporting requirements under IAS 16.
Under the standard, a company has to show the total amount of property, plant and equipment and within the notes show the breakdown of this into the relevant categories as well as show the movement for the period split into additions and depreciation that has been charged to the income statement over the period as a minimum.
But it is not that simple
Having started off with simplifying the standards, I now conclude by saying that the standards are not as simple as that.
The overview that I have just shared about the principles underlying the drafting of the standards helps you know where to look for the answers in relation to accounting questions or, if perchance you are in the meeting room with auditors, this will help in having a layman’s understanding.
There are other standards that do not fit neatly into this simple view and this is expected given that the remit of the standards is over everything in terms of accounting and reporting, including non-IFRS metrics included within the annual reports.
But I consider this a good start into understanding the complexity that is IFRSs, and if you are in the board meeting with auditors discussing the implications of IFRSs, I am hoping that this gives you enough information to ask the right questions whilst relying on the expertise of the Chief Financial Officer to oversee and provide expertise.
Sango is a member of the Institute of Chartered Accountants of Zimbabwe (Icaz) based in the United Kingdom. Icaz is the largest and longest standing professional accounting organisation in Zimbabwe, having been established on January 11, 1918. Icaz provides leadership on the development, promotion and improvement of the accountancy profession focusing in the areas of accounting education, assurance, good governance practices and leadership and organisational excellence. — firstname.lastname@example.org.