Conversion from statutory books to IFRS; ongoing adjustments for standard differences
The transition from statutory books to IFRS refers to the shift from record-keeping systems based on local accounting standards to the globally accepted IFRS (International Financial Reporting Standards) system. This process involves aligning companies' existing accounting systems with international standards, necessitating ongoing adjustments.
During the conversion from statutory books to IFRS, making adjustments due to standard differences is crucial for the accuracy and consistency of financial statements. These adjustments must be applied within the framework of the fundamental principles set by IFRS. Adjustments arising from standard differences increase the transparency of financial reporting while enhancing the company's competitiveness in international financial markets.
What are the Differences Between Statutory Books and IFRS?
Statutory books are maintained within the framework of accounting rules determined by each country's financial and tax regulations. Statutory books based on local legislation are primarily used for reporting in compliance with tax laws and local trade laws. In contrast, IFRS sets international financial reporting standards, requiring companies to prepare their financial statements in global compliance. There are many significant differences between statutory books and IFRS.
Primarily, IFRS requires a broader consideration of accounting policies. While income and expense items are reported more simply in statutory books, IFRS demands more detailed explanations, especially regarding the revaluation of assets, recognition of provisions, and depreciation methods.
While statutory books typically report only cash flows and financial results, IFRS aims to address the financial condition of companies from a broader perspective. For example, it is common for assets to be valued at cost in statutory books, but IFRS may mandate their revaluation at market value.
How to Transition from Statutory Books to IFRS?
The transition process from statutory books to IFRS is a step-by-step transformation that requires meticulous planning. This process begins with adapting existing accounting systems to IFRS standards and restructuring financial statements. Initially, companies' accounting policies are reviewed, and items that need to be aligned with IFRS are identified. At this stage, necessary adjustments are made to the accounting system, and new accounts are opened in accordance with the reporting formats required by IFRS.
The second phase of the transition involves rearranging the assets, liabilities, income, and expenses in statutory books according to IFRS standards. During this phase, assets must be revalued at market value, and provisions must be calculated according to IFRS standards. Depreciation and impairment calculations in statutory books should be restructured to comply with IFRS. Additionally, financial statements from previous years must also be aligned with IFRS during the transition. These phases are typically completed with systematic correction entries, ensuring consistency in financial statements throughout the transition process.
What are the Standard Differences?
There are significant standard differences between statutory books and IFRS, leading to the preparation of financial statements in different ways. One of the primary differences is the interpretation of accounting policies. While accounting policies used in statutory books are shaped more by local legislation, IFRS offers an approach compatible with international standards.
Another difference is in valuation and measurement bases. Assets in statutory books are generally valued at cost, whereas IFRS mandates the reporting of certain assets using the revaluation method. This creates differences, especially in items like real estate, machinery, and equipment. While depreciation calculations in statutory books are done on a fixed-rate and time-based basis, IFRS employs a more flexible depreciation method considering the economic life and usage conditions of the asset.
The recognition of provisions is another key difference. In statutory books, provisions are generally set aside for situations that are difficult to estimate but are not reflected in financial statements until they are definitively accrued. In contrast, IFRS requires provisions to be reported with a more predictable and prudent approach, allowing financial statements to reflect the true situation more accurately.
Such standard differences necessitate continuous correction entries during the transition to IFRS. Corrections should be made not only in the preparation of financial statements but also at all stages of reporting.
