Lecture 1: International Financial Reporting Standards (IFRS)
Let's now have a look at International Financial Reporting Standards, or what we often just refer to as IFRS. I'm going to just go through a basic conceptual approach, and then there are three slides of theory you can go and read by yourself.
Let’s put things in perspective here. Let’s pretend that you are an individual. Let’s call you an investor. Okay, you're an investor; you want to invest in two different companies. Let’s call them Company A and Company B.
Now, what are you going to do? You need to make a decision about which company will be the best to invest in. What will that decision be based on? How much future cash you think that business will return to you for buying shares in that company. Now, each of these companies is going to have to convince you that they are going to have good earnings or future cash flows.
How do you actually need to make that decision? Well, from each these companies you will need to look at the annual financial statements for each company.
Now for each company, they might be in the exact same sector, they're both mining companies, but how do I compare these two? Well, I need to make sure that the earnings figures - the profit or loss - and the assets and liabilities - the value of these companies - is communicated to me in a way that could compare Company A and Company B.
So if I need to compare these two – well, in order to compare these two sets of company earnings, I have to get their financial statements. To compare the financial statements, they must be prepared based on the same set of rules. That they both recognise revenue and expenses in the same period, not when they necessarily receive cash but when the revenue’s earned.
Now, in order to make them comparable, I have to have a common set of rules and that common set of rules we will call the International Financial Reporting Standards (IFRS). And these make it that the two sets of financials are comparable. I can then compare apples with apples and go ahead and make my choice based on consistent information.
Now, who sets these rules? These rules are set by the International Accounting Standards Board. South Africa is part of or has adopted IFRS International Financial Reporting Standards. Therefore our accounting standards come from the International Accounting Standards Board. Please take note, I use the word IFRS all over the place, but there are two generations worth of accounting rules.
The old accounting rules we will call International Accounting Standards (IAS). And what's happened to some of these older standards are still valid, but now some of them are being replaced. And as the old set of rules are being replaced, we are calling the new set of rules that are replacing the old ones – IFRS - but they're the same things. The IASs that have not yet been replaced are still valid and still around.
The IFRSs that are replacing the old IASs have the same authority. But now attached to that, please understand that there are sometimes standards or rules that need a bit more interpretation. So the rules aren't always so clear for my specific transaction in my business.
There are also what we call interpretation notes, and these you would hear us use over the next couple of years of your studies. They are called IFRIC - the IFRS interpretation committee notes - or the old generation are called SIC - also interpretation notes. Now, those are just rules; there’s a whole bunch of big green books where those rules are set out, three to four thousand pages.
You apply them, well, the companies, apply those set of rules when they do their financial statements. What’s the purpose? Those financial statements then are used by you the user, to make a decision. Here the decision is whether or not to invest in the company or not. Without IFRS, you as an investor, could not make proper decisions about which company to invest in. I hope that makes some sense.
In the next couple of slides, I will define IFRS for you. That's International Financial Reporting Standards. I quickly discuss the IASB. I also say that there's another set of standards developed for small to medium-sized enterprises. It's called IFRS for SMEs. You're not going to have to study that at all throughout your studies at the moment with UNISA. What happens is that IFRS is a huge amount of material and principles on rules. Smaller companies don't need as many rules, so we've just made a smaller set of standards.
What I do need you to understand is that we've got a whole bunch of different types of businesses. We have sole proprietors and partnerships. There's no legal personality for those. Those are the business owners and the account board business is the same. Then we have CCs and companies, which have their own separate Acts. Now in terms of a Companies Act, South African companies must use either IFRS or IFRS for SMEs for their businesses. Other businesses such as sole proprietors and partnerships don't need to apply IFRS, but they can if they so wish.
So in summary IFRS is a set of rules developed to make sure that financial statements are prepared consistently for companies so that:
Users can compare the financial results and performance in two ways:
The same company must be able to compare its current year results to last year in the year before financial results.
We make it possible to compare the financial position and results of one company in the industry to another company.
Great, that's giving us a high-level overview of what IFRS is. I hope that makes it clear to you, thank you.