IFRS for SME vs Full IFRS

Pada blog post kali ini saya akan membahas perbedaan IFRS for SMEs  (International Financial Reporting Standard for Small and Medium Sized Entities) dengan Full IFRS . IFRS for SME ini disusun khusus untuk dijadikan pedoman pelaporan keuangan entitas kecil dan menengah..

Bagaimana menjadi akuntan publik ?

Beberapa mahasiswa (dan selain mahasiswa) di lingkungan perkuliahan saya bertanya :

• "Kalau udh lulus S1 program studi (prodi) akuntansi, apakah saya bisa buka KAP?"
• "Apakah dengan memperoleh gelas S1 jurusan akuntansi, saya bisa mengaudit laporan keuangan?"

Untuk bisa berpraktik sebagai akuntan publik ("buka KAP"), selain lulus program S1 akuntansi juga perlu melalui tahap-tahap sebagai berikut :

Brief Summary of Accounting Information Processing

Reference Source : Warren, Carl S.; James M. Reeve; Jonathan E. Duchac. Accounting 23rd edition. 2011. South-Western of Cengage Learning.

Conceptual Framework of Financial Reporting

Objective of Conceptual Framework of Financial Reporting

Conceptual framework is the concept/fundamental that underlie the financial reporting. Financial reporting needs this conceptual framework for these reasons :

•    The most important is : to achieve consistency in financial reporting and interpreting. If there isn’t any conceptual framework established, company can use their own subjective financial reporting standard, therefore financial reporting standard of one company and other companies will not be same (not consistent).  Finally, this will lower  financial statement user’s confidence.
•    Conceptual framework ensure company to present useful financial report to financial statement user, such as investor and creditor. To be useful, accounting information must have qualitative characteristic  : (1) Relevance (give information which meets financial report user’s requirement); (2) Faithful Representation (complete, neutral, and free from error); (3) Comparability; (4) Verifiability; (5) Timeliness; (6) Understandability.
•            Conceptual framework can be used to solve new and emerging practical problems by refering to an existing framework of basic theory. That is, good accounting concepts comprehension can help us resolve the new accounting treatment for the new accounting problem.

Basic Elements of Financial Statements

1. The first group of three elements, the real accounts--asset ,liability, and equity--describes amounts of company resources (assets) and claims to those resources (liability and equity) at a moment of time. So, we find accounting  equation that : Total company resources (assets) = Creditor's lending to company (liability) + Investor's capital in company (equity). 
2. The last group of two elements, the nominal accounts--income and expenses--describes transactions ,events, and other circumstances that affect a company during a period of time. Examples :  company sells it's merchandise so it decreases it's asset (inventory) and expense occurs (cost of good sold), also company's asset increases (cash) and this increase in asset also increasing shareholder's equity by the use of nominal account "Sales Revenue". The sales revenue then will be closed to Retained Earnings at the end of accounting period to adjust the balance of Retained Earnings.

Basic Assumptions and Principles

These basic assumptions and principles explain how the company should recognize, measure, and report financial elements and events. These concepts serve as guidelines in responding to financial reporting issues. Strong accounting concepts mastering gives us powerful accounting-comprehension-tool and ability to easily comprehend many accounting treatments.

1. Basic Assumptions : 

• Economic Entity Assumption. This assumption means that a company keeps its activity separate and distinct from its owners and any other business unit. The importances of this assumption : (1)First. to make line-of-segregation between company and its owner. If there is not this separation, the company activity and its owner activity will be incorporated and thus the owner could benefitted at the expense of shareholder. For example : the founding family of a company fraudulently record the loans guaranteed by company to pay for their own personal needs as expense and didn't make any disclosure of the purpose of the transaction, thus this blurred line between the owner's interest and the company could disserve the shareholder; (2) Second, financial statement user need to be able to distinguish the activities and performance of one company and the others.
• Going Concern Assumption. Accounting assumes that company will have a long life. Here are some  examples : (1) Company use depreciation policy to allocate the cost of depreciation over the economic useful life of long lived assets. If we know that the company will be liquidated, we don't need to depreciate the asset and instead charge it as expense for one accounting period. That is, we need to allocate the depreciation cost to the periods of asset's useful life because we expect the company has a long life; (2) We need to classify the asset and liabilities as current or non-current, depending on the basis of priority. If we know that company will be liquidated, we don't need to classify the asset and liability like this, because the asset and liability will be liquidated  as the the company liquidated.
• Monetary Unit Assumption. Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. Amounts presented in financial statement is based on certain currency, such as Rupiah in my country (Indonesia), US Dollar in United States, and Euro in the countries which are member of European Union. 
• Periodicity Assumption. To measure company's activity accurately, we would need to wait until it liquidates. Decision-makers cannot wait that long for such information. Users need to know a company's performances and economic status on a timely basis. So, the periodicity assumption implies that company can divide its economic activities into artificial time periods. These time periods vary, but the most common are monthly, quarterly, and yearly.
• Accrual Basis of Accounting. Transactions that change a company's financial statements are recorded in the periods in which the events occur. For example, companies recognize revenues when it is probable that future economic benefit will flow to the company and reliable measurement is possible, and companies recognize expenses when incurred rather than when paid. Why accrual basis is adopted rather than cash basis (recognize event when cash is received or used) in IFRS? Because accounting use matching principle that "match" every economic events, such as revenue incurred and costs incurred, in the pertaining periods. That is, if we recognize the revenue when we get the money from customer, for example next year, rather than in the period the sales occurred, we failed to match the revenue to the correct period (the period which the revenue occurred, in this case this year). Accrual basis provide the financial information about past transactions and other events that is most useful in making economic decisions. 

     2. Basic Principles of Accounting

These principles are : measurement, revenue recognition, expense recognition, and full disclosure principle. 

a. Measurement Principles. There are two measurement principle : 

- Cost Principle. IFRS requires that companies account for and report many assets and liabilities on the basis of acquisition price. This is often referred to as the historical cost principle. Cost has advantage over other valuations : it represent the actual amount paid for a given item, rather than fair value measurement that is more subjective.  Examples of the use of cost principles are : equipment's purchase price and the amount of merchandise owed by the company to its supplier recorded as accounts payable.

- Fair Value Principle. Fair value is defined as : "the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm's length transaction." Fair value is market-based measure. Fair value may be more useful than historical cost for certain types of assets and liabilities in certain industries. Thus, for certain case, IFRS requires company to use the fair value. The examples : (1) company which conduct business in trading securities must value its investments in fair value that based on the securities price in the securities market, (2) agricultural industries value their livestock on the basis of net realizable value (NRV). NRV approximates the fair value.

b. Revenue Recognition Principle indicates that revenue is to be recognized when it is probable that future economic benefits will flow to the company and reliable measurement of the amount of revenue is possible. Furthermore, various transactions have certain revenue recognition criteria. For example : (1) the most critical criteria of revenue recognition in sales transaction is whenever the company has transferred significant risk and benefit of ownership of the merchandise to the customer; (2) revenue is recognized whenever company has rendered the service to customer.

c. Expenses Recognition Principle says, "Let the expense follow the revenues." This means that efforts (expense) must be matched to the accomplishment (revenue). To get something, there must be sacrifice to obtain that. To illustrate, companies that signed a contract to build a long-term construction accrued materials and wages contributed to the project as construction expense for 1 accounting period during the construction process, even tough the project hasn't been completed.

d. Full Disclosure Principle. Companies must provide sufficient information to influence the judgement and decisions of an informed user. A fully disclosed financial statement not only present basic financial statement like statement of financial position, income statement, statement of retained earnings, and statement of cash flows, but also notes to financial statements and other supplementary informations. Information included in the notes like for example : accounting principle adopted by company, the nature of economic event, implication of economic event to company.


Reference Sources :
Kieso,Donald E.; Jerry J. Weygandt; and Terry D. Warfield. Intermediate Accounting IFRS Edition. 2011. New York : John Wiley and Sons.

Prologue : Financial Accounting and Accounting Standard

Hi  :)

My name is Ivan. I'm studying accounting in Maranatha Christian University, Indonesia.
I interested in sharing accounting knowledge each other with all of you, especially IFRS based financial accounting.

Now, International Accounting Standard Board (IASB) and Financial Accounting Standard Board (FASB) work on joint venture to develop the international financial reporting standard (IFRS) that will be applied to all business financial reporting. This is done to achieve the "harmony" in financial reporting and interpreting of all financial statement user.

In my country, Indonesia, IFRS will be adopted by 2012 (next year). So, universities in Indonesia that is currently still using US GAAP will adopt the IFRS rule in their accounting course.

Due to worldwide IFRS convergence, the accounting materials I posted in my blog are based on IFRS.

I hope this blog will be usefull for you.

Also, I really thankful for your correction to the content of my blog. 

Thank you. :)