Background

Modern economies in the globalization era, rely on cross-border transactions and the free flow of international capital.

Investors and businesses which are looking for diverse investments and  opportunities across the world, and  companies which are seeking to raise capital bear the need for a common global language for business affairs where companies accounts and statements  are understandable and comparable across international boundaries, allowing businesses and individual investors to make educated financial decisions.

In the past, such cross-border activities were much more complicated as different countries maintain their own sets of standards which obligated  global & public companies to make adjustments in their statements in cases of capital raising, investments, M&A transactions and other business activities and needs.

The primary international accounting standards were the IAS’s which had been published by the IASC between 1973 until 2001 (some of them are still relevant today). Since 1 April 2001, the new International Accounting Standards Board (IASB) and IFRS foundation (non-profitable org.) published and developed the  International Financial Reporting Standards (IFRS) which provide a high quality, internationally recognised set of accounting standards that bring transparency, accountability and efficiency to financial markets around the world.

Israel first adopted the IFRS standard on Jan 1^st 2008 for domestic public companies, whereas private and small domestic companies are permitted to report according to the SMEs IFRS Standard.

For your convenience we have summarized the objectives of all IFRS & IAS standards which are relevant today:

 

IFRS 1 – First time Adoption of International Financial Reporting Standards

Specifies the procedures when an entity adopts IFRSs for the first time as the basis for preparing its general purpose financial statements.

IFRS 2 – Share-based Payment

Specifies the accounting for transactions in which an entity receives or acquires goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity’s shares or other equity instruments of the entity.

IFRS 3 – Business Combinations

Establishes principles and requirements for how an acquirer in a business combination recognises and measures:

1. The assets and liabilities acquired in the financial statements.

1. The information and disclose which 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 assets acquired and liabilities assumed at their acquisition-date.

IFRS 17 – Insurance Contracts (replacing IFRS 4)

IFRS 17 provides the information, measurement and the principles of Insurance contracts combine features of both a financial instrument and a service contract, as below:

• combines current measurement of the future cash flows with the recognition of profit over the period that services are provided under the contract;
• presents insurance service results (including presentation of insurance revenue) separately from insurance finance income or expenses; and
• Requires an entity to make an accounting policy choice of whether to recognise all insurance finance income or expenses in profit or loss or to recognise some of that income or expenses in other comprehensive income.

IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2021 with earlier application permitted as long as IFRS 9 and IFRS 15 are also applied.

IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations

Prescribe the accounting for non-current assets held for sale and the presentation and disclosure of discontinued operations.

IFRS 5 requires disclosures in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. Consequently, disclosures in other IFRSs do not apply to such assets (or disposal groups) unless those IFRSs specifically require disclosures or the disclosures relate to the measurement of assets or liabilities within a disposal group that are outside the scope of the measurement requirements of IFRS 5. 

IFRS 6 – Exploration for and Evaluation of Mineral Resources

Specifies the financial reporting for the exploration and evaluation of mineral resources (for example, minerals, oil, natural gas and similar non-regenerative resources), as well as the costs of determination of the technical feasibility and commercial viability of extracting the mineral resources.

IFRS 7 Financial Instruments: Disclosures

Prescribe disclosures that enable financial statement users to evaluate the significance of financial instruments to an entity, the nature and extent of their risks, and how the entity manages those risks.

IIFRS 8 Operating Segments

Prescribe disclosures that  enable users of its financial statements to evaluate the nature and financial effects of the different business activities in which it engages and the different economic environments in which it operates.
It specifies how an entity should report information about its operating segments in annual financial statements and in interim financial reports. It also sets out requirements for related disclosures about products and services, geographical areas and major customers.

IFRS 9 – Financial Instruments

Specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items.

The standard requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument. At initial recognition, an entity measures a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability.

IFRS 10 – Consolidated Financial Statements

Specifies principles for presenting and preparing consolidated financial statements when an entity controls one or more other entities. The standard requires & define:

• Entities (the parents) that controls one or more other entities (subsidiaries) to present consolidated financial statements;
• The principle of control, and establishes control as the basis for consolidation;
• sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee;
• Accounting requirements for the preparation of consolidated financial statements; and
• Exceptions to consolidating particular subsidiaries of an investment entity.

IFRS 11 – Joint Arrangements

Establishes principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (joint arrangements).

A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities (ie activities that significantly affect the returns of the arrangement) require the unanimous consent of the parties sharing control.

IFRS 12 – Disclosure of Interests in Other Entities

Requires information to be disclosed in an entity’s financial statements that will enable users of those statements to evaluate the nature of, and risks associated with, the entity’s interests in other entities as well as the effects of those interests on the entity’s financial position, financial performance and cash flows.

IFRS 14 – Regulatory Deferral Accounts

Specify the financial reporting requirements for ‘regulatory deferral account balances’ that arise when an entity provides goods or services to customers at a price or rate that is subject to rate regulation.

According to the standard provision a regulatory deferral account balance is an amount of expense or income that would not be recognised as an asset or liability in accordance with other Standards, but that qualifies to be deferred in accordance with IFRS 14, because the amount is included, or is expected to be included, by a rate regulator in establishing the price(s) that an entity can charge to customers for rate-regulated goods or services.

IFRS 15 – Revenue from Contracts with Customers

Establishes the principles that an entity applies when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer. Applying IFRS 15, an entity recognises revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

IFRS 16 Leases

The standard objective is to provide information that is faithfully represents lease transactions and to provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet that objective, a lessee should recognise assets and liabilities arising from a lease.

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.

IAS 1 – Presentation of Financial Statements

IAS 1 sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. It requires an entity to present a complete set of financial statements at least annually, with comparative amounts for the preceding year (including comparative amounts in the notes). A complete set of financial statements comprises.

IAS 7 – Statement of Cash Flows

Prescribes how to present information in a statement of cash flows (cash &cash equivalents) changed during the period.
Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.

The statement classifies cash flows during a period into cash flows from operating, investing and financing activities.

IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors

Prescribes the criteria for selecting and changing accounting policies, accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. When an IFRS Standard or IFRS Interpretation specifically applies to a transaction, other event or condition, an entity must apply that Standard.

IAS 10 – Events after the Reporting Period

Prescribes when an entity should adjust its financial statements for events after the reporting period; and the disclosures that an entity should give about the date when the financial statements were authorized for issue and about events after the reporting period.

IAS 12 – Income Taxes

Prescribes the accounting treatment for income taxes which includes all domestic and foreign taxes that are based on taxable profits and the establishment of the principles and guidance in accounting for the current and future tax consequences of:

1. The future recovery (settlement) of carrying amounts of assets (liabilities) recognised in an entity’s statement of financial position, and
2. Transactions and other events of the current period that are recognised in an entity’s financial statements.

IAS 16 – Property, Plant and Equipment

Establishes principles for recognising property, plant and equipment as assets, measuring their carrying amounts, and measuring the depreciation charges and impairment losses to be recognised in relation to them.

Property, plant and equipment are tangible items which are held or use in the production or supply of goods or services, for rental to others, or for administrative purposes; and are expected to be used during more than one period.

IAS 19 – Employee Benefits

Prescribe the accounting and disclosure for employee benefits, including short-term benefits (wages, annual leave, sick leave, annual profit-sharing, bonuses and non-monetary benefits); pensions; post-employment life insurance and medical benefits; other long-term employee benefits (long-service leave, disability, deferred compensation, and long-term profit-sharing and bonuses); and termination benefits.

IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance

Prescribe the accounting for, and disclosure of, government grants and other forms of government assistance.

Government grants are transfers of resources to an entity by government in return for past or future compliance with certain conditions relating to the operating activities of the entity. Government assistance is action by government designed to provide an economic benefit that is specific to an entity or range of entities qualifying under certain criteria.

IAS 21 – The Effects of Changes in Foreign Exchange Rates

Prescribe the accounting treatment for an entity’s foreign currency transactions and foreign operations.

IAS 23 – Borrowing Costs

Establishes guidance on how to measure borrowing costs, particularly when the costs of acquisition, construction or production are funded by an entity’s general borrowings.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense. Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.

IAS 24 – Related Party Disclosures

Ensure that financial statements draw attention to the possibility that the financial position and results of operations may have been affected by the existence of related parties and by transactions and outstanding balances, including commitments, with such parties.

IAS 26 – Accounting and Reporting by Retirement Benefit Plans

Specify the measurement and disclosure principles for the financial reports of retirement benefit plans.  It requires that the financial statements of a defined benefit plan must contain either:

1. statement that shows the net assets available for benefits; the actuarial present value of promised retirement benefits, distinguishing between vested benefits and non-vested benefits; and the resulting excess or deficit; or
2. A statement of net assets available for benefits including either a note disclosing the actuarial present value of promised vested and non-vested retirement benefits or a reference to this information in an accompanying actuarial report.

IAS 27 – Separate Financial Statements

Prescribes the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity elects, or is required by local regulations, to present separate financial statements.

Separate financial statements are those presented in addition to consolidated financial statements.

IAS 28 – Investments in Associates and Joint Ventures

Requires an investor to account for its investment in associates using the equity method and prescribes how to apply the equity method when accounting for investments in associates and joint ventures.

An associate is an entity over which the investor has significant influence (the power to participate in the financial and operating policy decisions of the investee without the power to control or jointly control those policies).

If an entity holds, directly or indirectly (through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the entity has significant influence.  A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. 

IAS 29 – Financial Reporting in Hyperinflationary Economies

Provide specific guidance for entities reporting in the currency of a hyperinflationary economy, so that the financial information provided is meaningful.

In a hyperinflationary environment, financial statements, including comparative information, must be expressed in units of the functional currency current as at the end of the reporting period. Restatement to current units of currency is made using the change in a general price index. The gain or loss on the net monetary position must be included in profit or loss for the period and must be separately disclosed.

IAS 32 – Financial Instruments: Presentation

Prescribes principles for classifying and presenting financial instruments as liabilities or equity, and for offsetting financial assets and liabilities.

Financial instruments are classified into financial assets, financial liabilities and equity instruments. Differentiation between a financial liability and equity depends on whether an entity has an obligation to deliver cash (or some other financial asset). When a transaction will be settled in the issuer’s own shares, classification depends on whether the number of shares to be issued is fixed or variable.

A compound financial instrument, such as a convertible bond, is split into equity and liability components. When the instrument is issued, the equity component is measured as the difference between the fair value of the compound instrument and the fair value of the liability component.

Financial assets and financial liabilities are offset only when the entity has a legally enforceable right to set off the recognised amounts, and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

IAS 33 – Earnings per Share

Prescribe principles for determining and presenting earnings per share (EPS) amounts in order to improve performance comparisons between different entities in the same period and between different accounting periods for the same entity.

It applies to entities whose ordinary shares or potential ordinary shares (for example, convertibles, options and warrants) are publicly traded. Non-public entities electing to present EPS must also follow the Standard.

According to the standard an entity must present basic EPS and diluted EPS with equal prominence in the statement of comprehensive income. In consolidated financial statements, EPS measures are based on the consolidated profit or loss attributable to ordinary equity holders of the parent.

Dilution is a potential reduction in EPS or a potential increase in loss per share resulting from the assumption that convertible instruments are converted, options or warrants are exercised, or ordinary shares are issued upon the satisfaction of specified conditions.

When the entity also discloses profit or loss from continuing operations, basic EPS and diluted EPS must be presented in respect of continuing operations. Furthermore, if an entity reports a discontinued operation, it must present basic and diluted amounts per share for the discontinued operation either in the statement of comprehensive income or in the notes. 

IAS 34 – Interim Financial Reporting

Prescribe the minimum content of an interim financial report (period shorter than a financial year) and the recognition and measurement principles for an interim financial report.

The minimum content is a set of condensed financial statements for the current period and comparative prior period information, i.e. statement of financial position, statement of comprehensive income, statement of cash flows, statement of changes in equity, and selected explanatory notes. In some cases, a statement of financial position at the beginning of the prior period is also required. Generally, information available in the entity’s most recent annual report is not repeated or updated in the interim report. The interim report deals with changes since the end of the last annual reporting period.

IAS 36 – Impairment of Assets

The core principle in IAS 36 is that an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. If the carrying amount exceeds the recoverable amount, the asset is described as impaired. The entity must reduce the carrying amount of the asset to its recoverable amount, and recognise an impairment loss

IAS 36 refers to all assets except those for which other Standards address impairment. The exceptions include inventories, deferred tax assets, assets arising from employee benefits, financial assets within the scope of IFRS 9, investment property measured at fair value, biological assets within the scope of IAS 41, some assets arising from insurance contracts, and non-current assets held for sale.

IAS 37 – Provisions, Contingent Liabilities and Contingent Assets

Ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets, and to ensure that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount.

A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation which arises from the entity’s actions, such as warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to make refunds to customers.

IAS 38 – Intangible Assets

Sets out the criteria for recognising and measuring intangible assets and requires disclosures about them. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights.

Intangible assets include computer software, licences, trademarks, patents, films, copyrights and import quotas. Goodwill acquired in a business combination is accounted for in accordance with IFRS 3 and is outside the scope of IAS 38. Internally generated goodwill is within the scope of IAS 38 but is not recognised as an asset because it is not an identifiable resource.

IAS 40 – Investment Property

Prescribes the accounting treatment for investment property and related disclosures. 

Investment property is land or a building or both that is held to earn rentals or for capital appreciation or both, not owner-occupied,not used in production or supply of goods and services, or for administration and not held for sale in the ordinary course of business.

IAS 41 – Agriculture 

Prescribes the accounting for agricultural activity – the management of the biological transformation of biological assets (living plants and animals) into agricultural produce.