In the absence of an IFRS: the hierarchy of sources

Learning objectives

• Determine, in the absence of an applicable IFRS, the sources to be considered in the prescribed order (IFRSs dealing with similar issues, the Conceptual Framework, then other sources).L2, L3
• Justify an accounting policy developed by management against the required qualities (relevance, reliability, substance, neutrality, prudence, completeness).L3, L4

Normative references

• IAS 8 §10In the absence of an IFRS that specifically applies, management uses its judgement in developing and applying an accounting policy that results in information that is relevant to the economic decision-making needs of users and reliable, i.e. financial statements that represent faithfully the financial position, financial performance and cash flows, reflect the economic substance and not merely the legal form, and are neutral, prudent and complete in all material respects.
• IAS 8 §11In making that judgement, management refers to, and considers the applicability of, in descending order, the requirements in IFRSs dealing with similar and related issues, and then the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework.
• IAS 8 §12Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in para. 11.
• IAS 8In the absence of an IFRS that specifically applies to a transaction, an entity may apply a policy drawn from the most recent pronouncements of another standard-setting body (para. 12); if, following an amendment of that pronouncement, it chooses to change its policy, the change is accounted for and disclosed as a voluntary change in accounting policy.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

22 questions

• In which case must management use its judgement to develop an accounting policy itself?L1
• The finance director of the Dremine group, used to a foreign GAAP, wants to apply that GAAP's practice to its property, plant and equipment, although an IFRS specifically deals with these assets. What is the answer?L2
• When no IFRS applies, which quality must the information produced by a policy developed by management have?L2
• To develop a policy when no IFRS applies, which source does management consult first?L2
• Which of the following characteristics is part of the reliability required of a policy developed by management?L3
• What role does IAS 8 give to pronouncements of other standard-setters?L3
• After IFRSs dealing with similar and related issues, which source does management consider?L2
• Under IAS 8, which characteristics must reliable information resulting from a policy developed by management have?L3
• Which sources may management also consider, provided they do not conflict with the higher sources?L3
• For a transaction that no IFRS specifically addresses (case data), which steps taken by Bromia comply with IAS 8?L3
• The Stélia group is choosing between two policies developed for a transaction not covered by IFRSs (case data). Policy X follows the legal form of an arrangement; policy Y reflects the actual economic exposure and relies on an industry practice consistent with the Conceptual Framework. Which conclusions are justified?L4
• A director of Raumois asks why the accounting team did not simply adopt a foreign standard-setter's rule for a transaction not covered by IFRSs. Explain the order of the sources to be consulted.L3
• Sidard enters into an unusual arrangement not covered by IFRSs (case data): legally it transfers an asset, but it keeps most of its benefits and risks. Explain why the policy developed cannot rely on legal form alone.L3
• Braunal receives tradable rights free of charge from a public authority; no IFRS specifically deals with these rights (case data). The accountant proposes to apply a national GAAP rule straight away. Which approach should be followed?L3
• The Fétède group enters into a new kind of capacity-sharing contract that no IFRS addresses (case data). A consultant recommends a foreign standard-setter's pronouncement, which the team has compared neither with neighbouring IFRSs nor with the Conceptual Framework. How should this be assessed?L3
• Plaline is developing a policy for an arrangement not covered by IFRSs (case data). The draft policy follows the legal form (a sale) although Plaline keeps, in substance, the use and risks of the asset. What is the conclusion?L3
• In Quavence's industry, a widespread practice is to recognise no obligation for a commitment that nevertheless meets the Conceptual Framework definition of a liability. No IFRS specifically addresses this commitment (case data). May Quavence follow this practice?L4
• Semard developed a policy for a transaction not covered by IFRSs (case data). The closing file contains only the policy adopted, with neither the sources examined nor the reasoning. What is the main risk?L3
• For a transaction not covered by IFRSs (case data), Gerède's management picks, out of two defensible policies, the one that spreads a large income item to 'smooth' profit over three years, with no other justification. Which requirement of the standard is at stake?L4
• Vergac holds a new kind of asset that no IFRS specifically addresses (case data). Two IFRSs deal with neighbouring assets, with different measurement models. Write the policy paper for the audit committee.L4
• The Nimède group proposes to adopt, for a transaction not covered by IFRSs (case data), the standard of a foreign GAAP whose conceptual framework is similar. Write an opinion on the conditions for doing so.L3
• Sylbède entered into an unusual arrangement (case data): its legal form is a securities loan, but Sylbède bears all changes in the value of the securities lent. No IFRS specifically addresses this arrangement (case data). Write an analysis of the policy to be developed.L4