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Your revision guide - IFRS 1 to 5

06 November 2017

Your IFRS pocket guide starts here...

The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. The Conceptual Framework deals with:
• The objective of financial reporting (which is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity);
• The qualitative characteristics of useful financial information (relevance, faithful representation, comparability, verifiability, timeliness, and understandability); and
• The definition, recognition and measurement of the elements from which financial statements are constructed (assets, liabilities, equity, income, and expenses). 

IFRS 1 requires an entity that is adopting IFRS Standards for the first time to prepare a complete set of financial statements covering its first IFRS reporting period and the preceding year. 
The entity uses the same accounting policies throughout all periods presented in its first IFRS financial statements. Those accounting
policies must comply with each Standard effective at the end of its first IFRS reporting period. IFRS 1 provides limited exemptions from the requirement to restate prior periods in specified areas in which the cost of complying with them would be likely to exceed the benefits to users
of financial statements. IFRS 1 also prohibits retrospective application of IFRS Standards in some areas, particularly when retrospective application would require judgements by management about past conditions after the outcome of a particular transaction is already known. 
IFRS 1 requires disclosures that explain how the transition from previous GAAP to IFRS Standards affected the entity’s reported financial position, financial performance and cash flows. 

IFRS 2 specifies the financial reporting by an entity when it undertakes a 
share-based payment transaction, including the issue of share options. It requires an entity to recognise share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets or equity instruments of the entity. It requires an entity to reflect in its reported profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.

IFRS 3 establishes principles and requirements for how an acquirer in a business combination:
• Recognises and measures in its financial statements the assets and liabilities acquired, and any interest in the acquiree held by other parties;
• Recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
• Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. 
The core principles in IFRS 3 are that an acquirer measures the cost of the acquisition at the fair value of the consideration paid, allocates that cost to the acquired identifiable assets and liabilities on the basis of their fair values, allocates the rest of the cost to goodwill and recognises any excess of acquired assets and liabilities over the consideration paid (a ‘bargain purchase’) in profit or loss immediately. The acquirer discloses information that enables users to evaluate the nature and financial effects of the acquisition.


Will be superseded by IFRS 17 Insurance Contracts.
IFRS 4 specifies some aspects of the financial reporting for insurance contracts by any entity that issues such contracts and has not yet applied IFRS 17. 
An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. 
IFRS 4 applies to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other Standards. It does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IFRS 9. Furthermore, it does not address accounting by policyholders. 
IFRS 4 exempts an insurer temporarily (ie until it adopts IFRS 17) from some requirements of other Standards, including the requirement to consider the Conceptual Framework in selecting accounting policies for insurance contracts. However, IFRS 4:
• Prohibits provisions for possible claims under contracts that are not in existence at the end of the reporting period (such as catastrophe and equalisation provisions);
• Requires a test for the adequacy of recognised insurance liabilities and an impairment test for reinsurance assets; and
• Requires an insurer to keep insurance liabilities in its statement of financial position until they are discharged or cancelled, or they expire, and to present insurance liabilities without offsetting them against related reinsurance assets. 
A 2016 amendment to IFRS 4 addresses some consequences of applying IFRS 9 before an entity adopts IFRS 17. 

IFRS 5 requires:
• A non-current asset or disposal group to be classified as held for sale if its carrying amount will be recovered principally through a sale transaction instead of through continuing use.
• Assets held for sale to be measured at the lower of the carrying amount and fair value less costs to sell.
• Depreciation of an asset to cease when it is held for sale.
• Separate presentation in the statement of financial position of an asset 
classified as held for sale and of the assets and liabilities included 
within a disposal group classified as held for sale.
• Separate presentation in the statement of comprehensive income of 
the results of discontinued operations. 

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