Key Principles of IFRS

Why This Matters

International Financial Reporting Standards aren't just a checklist of rules—they're the global language of financial communication. When you're tested on IFRS, you're being asked to demonstrate that you understand why certain transactions get recognized, when they hit the financial statements, and how different standards interact to create a coherent picture of a company's financial health. Examiners want to see that you can apply these principles to real scenarios, not just recite definitions.

The standards covered here fall into distinct conceptual buckets: recognition and measurement principles, presentation and disclosure requirements, and special transaction accounting. Each standard addresses a specific question that financial statement users need answered. Don't just memorize the standard numbers—know what problem each one solves and how it connects to the Conceptual Framework's goals of relevance, faithful representation, and comparability.

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Recognition and Measurement Foundations

These standards establish the fundamental rules for when items appear on financial statements and how they're valued. Mastering these concepts is essential because nearly every other IFRS standard builds on these measurement principles.

IAS 2: Inventories

• Lower of cost and net realizable value (NRV)—this conservative measurement ensures inventories aren't overstated on the statement of financial position
• Cost determination methods include FIFO and weighted average cost; note that LIFO is prohibited under IFRS
• Net realizable value equals estimated selling price minus costs to complete and sell—triggers write-downs when markets decline

IAS 16: Property, Plant and Equipment

• Initial measurement at cost includes purchase price plus directly attributable costs to bring the asset to working condition
• Subsequent measurement offers two models: cost model (cost less depreciation and impairment) or revaluation model (fair value less subsequent depreciation)
• Component depreciation requires separating significant parts with different useful lives—a frequent exam topic for calculating depreciation expense

IAS 38: Intangible Assets

• Recognition criteria require the asset to be identifiable, controlled by the entity, and expected to generate future economic benefits
• Internally generated intangibles face strict rules—research costs are expensed, while development costs can be capitalized if six criteria are met
• Amortization applies to intangibles with finite lives; indefinite-life intangibles undergo annual impairment testing instead

IAS 36: Impairment of Assets

• Recoverable amount equals the higher of fair value less costs of disposal and value in use—impairment exists when carrying amount exceeds this figure
• Value in use requires discounting expected future cash flows using a pre-tax rate reflecting current market assessments
• Cash-generating units (CGUs) group assets that don't generate independent cash flows—critical for testing goodwill impairment

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Revenue and Income Recognition

These standards govern when economic performance translates into reported earnings. The timing of revenue recognition significantly impacts profitability metrics, making this a heavily tested area.

IFRS 15: Revenue from Contracts with Customers

• Five-step model provides a universal framework: identify contract → identify performance obligations → determine transaction price → allocate price → recognize revenue
• Performance obligations are satisfied either over time or at a point in time—the distinction determines revenue recognition timing
• Variable consideration must be estimated using expected value or most likely amount, constrained to amounts highly probable not to reverse

IAS 12: Income Taxes

• Deferred tax arises from temporary differences between carrying amounts and tax bases of assets and liabilities
• Deferred tax assets require recognition only when it's probable that future taxable profits will be available for utilization
• Tax rate changes require remeasurement of deferred tax balances—a common exam calculation testing the impact on profit or loss

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Financial Position Presentation

These standards dictate how financial statements communicate an entity's resources, obligations, and cash movements. Presentation standards ensure users can make meaningful comparisons across entities and periods.

IAS 1: Presentation of Financial Statements

• Complete set of financial statements includes statement of financial position, profit or loss, other comprehensive income, changes in equity, cash flows, and notes
• Current/non-current distinction requires classification based on the entity's operating cycle or twelve months, whichever is longer
• Consistency and comparability mandate presenting comparative information for prior periods and maintaining consistent presentation across years

IAS 7: Statement of Cash Flows

• Three-category classification separates cash flows into operating, investing, and financing activities
• Operating activities can be presented using the direct method (preferred) or indirect method (more common)—both arrive at the same figure
• Interest and dividends classification offers flexibility under IFRS—interest paid can be operating or financing; dividends received can be operating or investing

IFRS 13: Fair Value Measurement

• Fair value definition: the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
• Fair value hierarchy prioritizes inputs: Level 1 (quoted prices), Level 2 (observable inputs), Level 3 (unobservable inputs)
• Highest and best use concept applies to non-financial assets—fair value reflects the use that maximizes value to market participants

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Complex Transactions and Arrangements

These standards address transactions that don't fit neatly into basic recognition rules—leases, financial instruments, provisions, and business combinations each require specialized accounting treatment.

IFRS 16: Leases

• Single lessee model requires recognizing a right-of-use asset and lease liability for virtually all leases exceeding twelve months
• Lease liability equals present value of future lease payments, discounted at the implicit rate or lessee's incremental borrowing rate
• Exemptions exist for short-term leases (≤12 months) and low-value assets—these can be expensed straight-line

IFRS 9: Financial Instruments

• Classification depends on the entity's business model and the instrument's contractual cash flow characteristics—driving amortized cost, FVOCI, or FVTPL measurement
• Expected credit loss (ECL) model requires forward-looking impairment recognition—12-month ECL initially, moving to lifetime ECL if credit risk increases significantly
• Hedge accounting aligns risk management with financial reporting through fair value hedges, cash flow hedges, and net investment hedges

IAS 37: Provisions, Contingent Liabilities and Contingent Assets

• Recognition criteria require a present obligation, probable outflow of resources, and reliable estimate of the amount
• Contingent liabilities are disclosed but not recognized—they represent possible obligations or obligations that can't be measured reliably
• Best estimate measurement uses expected value for large populations of items; most likely outcome for single obligations

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Group Accounting and Foreign Operations

These standards govern how entities present combined results and handle cross-border transactions. Group accounting questions frequently appear in advanced-level examinations.

IFRS 10: Consolidated Financial Statements

• Control is the single basis for consolidation—defined as power over the investee, exposure to variable returns, and ability to use power to affect returns
• Consolidation procedures eliminate intragroup transactions and balances, combining assets, liabilities, income, and expenses line by line
• Non-controlling interests (NCI) represent the portion of equity not attributable to the parent—measured at fair value or proportionate share of net assets

IFRS 3: Business Combinations

• Acquisition method requires identifying the acquirer, determining acquisition date, and recognizing identifiable assets and liabilities at fair value
• Goodwill equals consideration transferred plus NCI plus previously held equity interest, minus net identifiable assets acquired—tested annually for impairment, never amortized
• Bargain purchases (negative goodwill) are recognized immediately in profit or loss after reassessing the measurement of all components

IAS 21: The Effects of Changes in Foreign Exchange Rates

• Functional currency is the currency of the primary economic environment—all transactions initially recorded at the spot rate on transaction date
• Monetary items are retranslated at closing rate with exchange differences in profit or loss; non-monetary items remain at historical rates
• Foreign operation translation uses closing rate for assets/liabilities, average rate for income/expenses—differences go to other comprehensive income

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Quick Reference Table

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Self-Check Questions

1. Which two standards both permit a revaluation model for subsequent measurement, and what key difference limits its use for one of them?

2. Under IFRS 15's five-step model, what determines whether revenue is recognized over time versus at a point in time, and why does this distinction matter for financial statement users?

3. Compare IAS 36's recoverable amount calculation with IFRS 16's lease liability measurement—what role does discounting play in each, and what rates are used?

4. If an FRQ presents a scenario where a company has incurred costs on a new product, how would you determine whether those costs should be expensed under IAS 38 or capitalized as development costs?

5. Explain how IFRS 10 and IFRS 3 work together when a parent company acquires 80% of a subsidiary—which standard governs what, and where does goodwill appear in the consolidated financial statements?