Introduction

International Financial Reporting Standards (IFRS) are a set of accounting rules for public companies that aim to bring consistency and transparency to financial statements, making them easily comparable worldwide. IFRS is issued by the International Accounting Standards Board (IASB), and its primary goal is to foster greater corporate transparency and accountability. This article explores the main assumptions of IFRS, drawing upon insights from various sources, including Investopedia, Chartered Education, and PwC.

Underlying Assumptions of IFRS

There are two fundamental assumptions that underpin the preparation of financial statements under IFRS:

Accrual Basis

The accrual basis is a fundamental principle of IFRS that requires transactions and events to be recognized when they occur, regardless of when cash is received or paid. This means that revenues and expenses are recorded in the accounting records and reported in the financial statements of the periods to which they relate. The accrual basis provides a more accurate representation of a company’s financial performance and position by matching revenues and expenses to the periods in which they are earned or incurred.

Going Concern Basis

The going concern assumption is a critical principle in IFRS that assumes an entity will continue to operate for the foreseeable future and does not intend to liquidate or curtail its operations. This assumption is essential for the valuation of assets, as they may need to be valued on a break-up basis if the company ceases trading. If there is any doubt about the going concern assumption, the financial statements may need to be prepared on a different basis, and such a basis must be disclosed.

Implications of IFRS Assumptions

The accrual basis and going concern assumption have significant implications for the preparation of financial statements:

Accrual Basis and Financial Statement Presentation

Under the accrual basis, financial statements provide information not only about past transactions involving cash receipts or payments but also about future obligations to pay cash and future cash or cash equivalents to be received. This comprehensive approach allows users to gain a more accurate understanding of a company’s financial position and performance.

Going Concern Assumption and Asset Valuation

The going concern assumption is crucial for asset valuation, particularly for long-lived assets such as property, plant, and equipment. These assets are typically valued based on their expected future cash flows, assuming the company will continue to operate. If the going concern assumption is in doubt, the assets may need to be valued on a break-up basis, which could result in a lower valuation.

Conclusion

The accrual basis and going concern assumption are fundamental principles of IFRS that significantly impact the preparation and presentation of financial statements. The accrual basis ensures that revenues and expenses are recognized in the periods to which they relate, providing a more accurate representation of a company’s financial performance. The going concern assumption allows for the valuation of assets based on their expected future cash flows, assuming the company will continue to operate. These assumptions contribute to the transparency and comparability of financial statements, facilitating informed decision-making by investors, creditors, and other stakeholders.

References

1. Investopedia. (2022, September 13). What Are International Financial Reporting Standards (IFRS)? Investopedia. https://www.investopedia.com/terms/i/ifrs.asp
2. Chartered Education. (2015, March 20). 2 Underlying Assumptions of the IFRS Conceptual Framework. Chartered Education. https://www.charterededucation.com/ifrs/2-underlying-assumptions-of-the-ifrs-conceptual-framework/
3. PwC. (n.d.). IFRS 17 – the most important assumptions of the regulation. PwC. https://www.pwc.pl/en/articles/ifrs-17-the-most-important-assumptions-of-the-regulation.html

FAQs

What is the accrual basis assumption in IFRS?

The accrual basis assumption in IFRS requires transactions and events to be recognized when they occur, regardless of when cash is received or paid. This means that revenues and expenses are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

What is the going concern assumption in IFRS?

The going concern assumption in IFRS assumes that an entity will continue to operate for the foreseeable future and does not intend to liquidate or curtail its operations. This assumption is essential for the valuation of assets and impacts the preparation of financial statements.

How does the accrual basis assumption affect the presentation of financial statements?

Under the accrual basis assumption, financial statements provide information not only about past transactions involving cash receipts or payments but also about future obligations to pay cash and future cash or cash equivalents to be received. This comprehensive approach allows users to gain a more accurate understanding of a company’s financial position and performance.

How does the going concern assumption impact asset valuation?

The going concern assumption is crucial for asset valuation, particularly for long-lived assets such as property, plant, and equipment. These assets are typically valued based on their expected future cash flows, assuming the company will continue to operate. If the going concern assumption is in doubt, the assets may need to be valued on a break-up basis, which could result in a lower valuation.

What are the implications of the accrual basis assumption for revenue recognition?

The accrual basis assumption requires revenues to be recognized when they are earned, not necessarily when cash is received. This means that a company may recognize revenue even if it has not yet received payment for the goods or services provided.

What are the implications of the going concern assumption for the valuation of long-term assets?

Under the going concern assumption, long-term assets are valued based on their expected future cash flows, assuming the company will continue to operate. If the going concern assumption is in doubt, the assets may need to be valued on a break-up basis, which could result in a lower valuation.

How does the accrual basis assumption affect the timing of expense recognition?

The accrual basis assumption requires expenses to be recognized when they are incurred, not necessarily when cash is paid. This means that a company may recognize an expense even if it has not yet paid for the goods or services received.

How does the going concern assumption impact the preparation of financial statements?

The going concern assumption allows financial statements to be prepared on a historical cost basis, assuming the company will continue to operate. If the going concern assumption is in doubt, the financial statements may need to be prepared on a liquidation basis, which could result in different asset and liability valuations.