The International Financial Reporting Standards establish 34 new accounting policies that in general affect how companies value their assets and report on their business performance. The regulation creates new, higher standards for transparency in business operations by requiring more detailed presentation of balance sheets and cash flow.
We believe the impact of International Financial Reporting Standards can be grouped into four high-level areas:
Reporting and disclosure. IFRS imposes new, more stringent requirements on the preparation and make up of a company’s balance sheet and cash-flow statements. Individual balance sheet items will need to be shown as long-term or short-term assets or liabilities. A similar requirement for granularity applies to cash-flow statements where cash generated by financial activities, operations, and investment activities will have to be presented separately.
Assets and inventories. Under IFRS, companies will need to present assets and inventories in a way that reflects their actual value to the business as accurately as possible. Inventories will need to be presented using first-in, first out (FIFO) or average weighted cost methods, precluding the use of last in, first out (LIFO). The result will be a more accurate and fair value picture of the company’s inventory management.
Foreign currency. IFRS requires more exacting treatment of how currency rates impact a transaction and how the transaction is recorded by the corporation. For example, the prevailing rate at the time of the transaction must be used in financial statements rather than the common practice of applying the prevailing currency rate at the close of the period. For companies doing business in a number of countries, there must be systems in place to capture the different rates of exchange between the local and the parent country currencies at month end for balance sheet and income statements.
Revenue recognition. Under IFRS, revenue must be recognised at fair value. In normal circumstances, this is easily accomplished by measuring cash received for goods and services. But IFRS addresses more complex circumstances in an effort to produce better transparency. For example, when an interest-free loan is part of the transaction, IFRS requires that at each stage of a construction project there is recognition of the potential revenue and also consideration for the costs to complete the project.
In the next post, we will discuss the differences between IFRS and VAS. If you want to find out now, get the full white paper “FROM VAS TO IFRS: Building business efficiencies and greater competitiveness for Vietnamese companies”.