DipIFR-Session01 d08 IFRS

SESSION 1 INTERNATIONAL FINANCIAL REPORTING STANDARDS
Accountancy Tuition Centre (International Holdings) Ltd 2008 0101

Overview
Objective
To introduce sources of authority in international financial reporting.

IASB
INTRODUCTION
Background
Objectives of the IASB
Structure
IFRIC
Standard setting
Projects and work programme
What is GAAP?
Sources of GAAP
Role of statute and standards
Role of the European Union
INTERNATIONAL
FINANCIAL REPORTING
STANDARDS (IFRSs)
GAAP hierarchy
Scope
Role in international harmonisation

1 Introduction
1.1 What is GAAP?
GAAP (Generally Accepted Accounting Principles) is a general term for a set
of financial accounting standards and reporting guidelines used to prepare
accounts in a given environment.

Commentary
UK GAAP, US GAAP are more specific statements.
The term may or may not have legal authority in a given country.
It is a dynamic concept. It changes with time in accordance with changes in
the business environment.
1.2 Sources of GAAP
1.2.1 Regulatory framework
The body of rules and regulations, from whatever source, which an entity
must follow when preparing accounts in a particular country for a particular
purpose, for example:
statute (e.g. Companies Acts);
accounting standards.
Statements issued by professional accounting bodies which lay down rules on
accounting for different issues, for example:
International Financial Reporting Standards (IFRSs);
Financial Reporting Standards (UK FRSs);
Financial Accounting Standards (USA FASs).
1.2.2 Other sources
Best practice, that is, methods of accounting developed by companies in the
absence of rules in a specific area.
Industry groups, such as:
The Oil Industry Accounting Group (OIAC);
British Bankers Association (BBA).
1.3 Role of statute and standards
Some countries have a very legalistic approach to drafting financial
statements. The legal rules are detailed and specific and the system is often
geared to the production of a profit figure for taxation purposes (e.g. in
Russia and the Ukraine).
Some countries adopt an approach where statute provides a framework of
regulation and standards then fill in the blanks. For example in the UK:
Statute Companies Act 2006;
Standards Financial Reporting Standards (FRSs) and
Statements of Standard Accounting Practice (SSAPs)
Urgent Issues Task Force consensus pronouncements (UITFs).
Some countries have relatively little in the way of statute and rely largely on
standards (e.g. in the USA).

Commentary
Although there is no accounting statute as such in the USA there is a body of the
federal government called the Securities and Exchange Commission (SEC) which
oversees the accounting regulations issued by the profession. The SEC can veto
accounting treatments and demand that regulation be enacted in new areas.
1.4 Role of the European Union
The common industrial policy of the EU calls for the creation of a unified
business environment including harmonisation of financial reporting.
This is pursued through the issue of directives to member states. These are
instructions to enact legislation in specified areas. For example:

Directive
Country
4
th

(on form and
content of company
accounts)
7
th
(on group accounts)
8
th
(on the regulation
of auditors)
UK Companies Act
1985
Companies Act
1989
Companies Act
1989
Germany Handelsgesetzbuch (HGB)
(The Third Book of The Commercial Code)
France Code de
commerce
Acts Acts

New member states of the EU (and aspiring applicants) include the
provisions of the EU directives into their own legislation as a preparatory step
for membership of the EU.
The EU originally stated that IFRSs were compatible with EU directives.
However, there is considerable divergence in GAAP between member states.
Further to the IOSCO endorsement (see later in this session), and as a result
of EU directives, all listed EU companies must publish consolidated financial
statements in compliance with IFRS with effect from 1 January 2005.

Commentary
The 2005 deadline was extended to 2007 for companies traded on the US
Stock Exchange and prepared under US GAAP and for companies that have
issued only debt, not equity, in regulated markets.
Additionally member states are allowed to extend the application of IFRSs to:
unlisted companies;
individual accounts of publicly traded companies;
other companies and limited liability partnerships.

Commentary
In the UK unlisted companies are permitted to use IFRS as an alternative to
UK accounting standards with effect from January 2005.
2 IASB
2.1 Background
The International Accounting Standards Board (IASB) was formed to take over the work
of the International Accounting Standards Committee (IASC) in April 2001.
The IASC was an independent private sector body set up by accountancy bodies in 1973.
IASC had complete autonomy in the setting of international accounting standards and in
the issue of discussion documents on international accounting issues from 1981.
2.2 Objectives
These are set out in the IASBs Mission Statement:
To develop, in the public interest, a single set of high quality, understandable
and enforceable global accounting standards that require high quality,
transparent and comparable information in financial statements;

Commentary
That is, to assist participants in the worlds capital markets and
other users of financial statements in making economic decisions.
To promote the use of rigorous application of those standards;
To work actively with national standard-setters to achieve convergence of
national accounting standards and IFRS to provide high quality solutions.

Commentary
In addition, several UK standards have been, or are in the process of, being
updated to reflect IFRS. Where a new IFRS is issued with no UK equivalent,
the standard has also been exposed and issued as a UK standard after
inconsequential amendments to reflect UK terminology.
2.3 Structure
2.3.1 Overview
IASC Foundation
(22 trustees)

Standards Advisory
Council (SAC)

IASB
(14 members)
International Financial
Reporting Interpretations
Committee (IFRIC)

The International Accounting Standards Committee (IASC) Foundation is an
independent body that oversees the International Accounting Standards Board
(IASB).
2.3.2 Foundation Trustees
22 individuals from diverse geographical and functional backgrounds who appoint:
the Council (SAC);
the Board Members (IASB); and
the Interpretations Committee (IFRIC).
The Trustees also:
monitor the IASBs effectiveness;
secure funding;
approve the IASBs budgets;
have responsibility for constitutional change.
2.3.3 IASB
14 members (12 full time) appointed by the Trustees for an initial term of
three to five years.
The IASB has complete responsibilities for all technical matters including:
preparation and issue of IFRSs;
preparation and issue of exposure drafts;
setting up procedures for reviewing comments received on
documents published for comment;
issuing bases for conclusions.

Commentary
Each IASB member has one vote on technical and other matters. A simple
majority (nine votes) is required for documents to be issued for discussion,
exposure or as the final standard.
2.3.4 Standards Advisory Council
About 40 members:
appointed by the Trustees for a renewable term of three year;
having diverse geographic and functional backgrounds.
The Council provides a forum for participation by organisations and
individuals with an interest in international accounting.

Commentary
The SAC has membership links with National Standard Setters and other
interested parties.
The Council meets, in public, at least three times a year with the IASB.
Objectives:
to advise the IASB on agenda decisions and priorities of work;
to pass on views of the Council members on the major standard
setting projects and the implications of proposed standards for users
and preparers of financial statements;
to give other advice to the Trustees and the IASB.
2.4 IFRIC
2.4.1 IFRIC Interpretations
The forerunner of the IFRIC, the Standing Interpretations Committee (SIC),
was founded in April 1997 with the objective of developing conceptually
sound and practicable interpretations of IFRSs to be applied on a global basis:
for newly identified financial reporting issues not specifically
addressed in IFRSs; and
where unsatisfactory, conflicting, divergent or other unacceptable
interpretations have developed, or seem likely to develop in the
absence of authoritative guidance.

Commentary
The SIC was reconstituted as IFRIC in March 2002.
The Committee is made up of a team of accounting experts from 12 countries
appointed by the trustees. Non-voting observers who have the right to attend
and speak at IFRIC meetings are also appointed by the Trustees. Currently
these include IOSCO and the European Commission.
2.4.2 Approach
IFRIC uses the approach described in IAS 1 Presentation of Financial Statements:
making analogies with the requirements and guidance in IFRSs dealing
with similar and related issues;
applying the definitions, recognition and measurement criteria for assets, liabilities,
income and expenses set out in The Framework (see next session); and
taking into consideration the pronouncements of other standard setting bodies
and accepted industry practices (only to the extent that these are consistent
with IFRSs).
The IFRIC works closely with comparable groups from national standard-setting bodies to
reach similar conclusions on issues where underlying standards are substantially the same.
IFRICs are described as IFRIC-1, IFRIC-2, etc (formerly SIC-1, SIC-2, etc).
After approval by the Board the interpretations become part of the IASBs authoritative
literature. The pronouncements have the same status as an IFRS (see later).
2.4.3 SICs in issue
Examinable SICs are identified in the Syllabus.
Twenty of the 31 SICs issued (1-33 excluding 4 and 26) were withdrawn as a result
of the Improvements Project (see later in this session).
The number of remaining SICs will be reduced as existing standards are updated
and new standards issued.
2.4.4 IFRICs in issue
14 IFRICs have so far been issued (as at 1 December 2007):
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
IFRIC 2 Members Shares in Co-operative Entities and Similar Instruments
IFRIC 4 Determining Whether an Arrangement Contains a Lease
IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds
IFRIC 6 Applying the Restatement Approach under IAS 29 Financial
Reporting in Hyperinflationary Economies
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial
Reporting in Hyperinflationary Economies
IFRIC 8 Scope of IFRS 2
IFRIC 9 Reassessment of Embedded Derivatives
IFRIC 10 Interim Financial Reporting and Impairment
IFRIC 11 IFRS 2Group and Treasury Share Transactions
IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes.
IFRIC 14 IAS 19The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction

Commentary
Only IFRICs 1, 5 and 10-13 are examinable documents. IFRIC 3 Emission
Rights was withdrawn in July 2005.
2.5 Standard setting
Due process normally involves the following steps (those in bold are required under
the terms of the IASC Foundations Constitution):
Identification and review of associated issues and consideration of the
application of the Framework to the issues.

Study of national accounting requirements and practice and an
exchange of views with national standard-setters.

Consultation with SAC about adding the topic to the IASBs agenda.

Formation of an advisory group to advise IASB.

Publishing a Discussion Document (DD) for public comment.

Publishing an exposure draft (ED) for public comment.

Consideration of all comments received within the comment period.

If considered desirable, holding a public hearing and conducting field tests.

Approval of a standard by at least nine votes of the IASB

Commentary
A basis for conclusions is usually included within an ED and the published
standard. Any dissenting opinions of IASB board members must be included
within an ED and the published standard.
A similar due process is also undertaken for Interpretations by the IFRIC.
2.5.1 Discussion Documents
IASB may develop and publish Discussion Documents for public comment.
A Discussion Document:
sets out the problem, the scope of the project and the financial
reporting issues;
discusses research findings and relevant literature; and
presents alternative solutions to the issues under consideration and
the arguments and implications relative to each.
Following the receipt and review of comments, IASB develops and publishes
an Exposure Draft, which is also for public comment.
2.5.2 Exposure Draft
An Exposure Draft invites comment on any aspect of specific questions and
the proposed IFRS.
It sets out the proposed standards and transitional provisions.

Commentary
The basis of the IASBs conclusions, which summarises the Boards
considerations, is also published for comment.
2.5.3 Voting
The publication of a Standard, Exposure Draft, or final IFRIC Interpretation
requires approval by nine of the IASBs Members.
The issue of a Discussion Document requires a simple majority of the IASB
Members present at a meeting attended by at least 60% of the IASB Members.
2.5.4 Comment period
Within the IASBs Constitution (as revised in 2002) this is for a reasonable period.
Formerly this was normally 120 days for Exposure Drafts and Discussion
Documents for public comment.

Commentary
IASB envisages that periods may be shortened in extreme circumstances. However,
serious concerns were expressed, by the profession, about the shortness of the 30-
day comment period on IASBs first ED on an Amendment to IAS 19 Employee
Benefits (concerning the Asset Ceiling this is not examinable).
60 days for Draft IFRIC Interpretations.
2.6 Projects and work program
2.6.1 Improvements Project 2003
The project sought to raise the quality and consistency of financial reporting by
drawing on best practice from around the world and removing options (the
allowed alternative) in IASs (published by IASC).

Commentary
The release of the ED in May 2002 marked IASBs initial response to a
market demand for the continued development and rapid improvement of
IFRSs by market regulators (through IOSCO), national standard-setters, etc.
It addressed topics that could be dealt with relatively quickly.
It did not deal with topics that are individually significant enough to be:
a major project on their own; or
part of a separate convergence project.
13 revised IASs were published in December 2003.
2.6.2 2005 stable platform
Improved versions of IAS 32 Financial Instruments: Disclosure and
Presentation and IAS 39 Financial Instruments: Recognition and
Measurement were issued in December 2003.
As part of the IASBs project on business combinations resulting in the issue
of IFRS 3 Business Combinations, revised standards IAS 36 Impairment
of Assets and IAS 38 Intangible Assets were issued in March 2004.
In addition, IFRS 1 was issued in June 2003 with IFRS2 to IFRS 6 being
issued in 2004.
IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts **
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration and Evaluation of Mineral Resources

Commentary
** This industry standard is not examinable within the Diploma syllabus.
All of these plus the standards updated in the improvements project and those
standards and interpretations unadjusted, form the stable platform of
standards and interpretations for application from 1 January 2005.

Commentary
Since then only IFRS 7 Financial Instruments: Disclosure and IFRS 8
Operating Segments have been issued.
2.6.3 Work program
The IASBs current work program includes:
Conceptual framework;
Financial statement presentation (phase B);
Insurance contracts (phase II);
Revenue recognition;
Consolidations (including special purpose entities, SPEs);
IFRS for Small and Medium-sized Entities (SMEs);
Related party transactions; and
Discontinued operations.

Commentary
Phase A of the financial statement presentation project was completed in
September 2007 with the issue of IAS 1 (as revised in 2007).
Current projects also include the short-term convergence of IFRSs and
national accounting standards:
Joint project with the FASB (the US Financial Accounting Standards Board);

Commentary
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
was the first standard developed from the convergence project with the
FASB. IFRS 8 Operating Segments was published in November 2006 as
part of this project also. Investment properties, research and development
and subsequent events are still being addressed under this project.
Leases;
Post-retirement benefits (pension accounting);
Impairment;
Income tax;
Joint ventures.

Commentary
Although Exposure Drafts and Discussion Documents are not examinable it
is important to appreciate that IFRSs are not static.
The IASB has now committed itself to review the effect and impact of all
new standards issued by reviewing those standards two years after issue.
2.6.4 1 January 2009
In recognition of the fact that many countries require time for translations and
implementation of new standards into practice, the IASB intends to allow a minimum
of one year between the date of publication of wholly new IFRSs (or major
amendments to existing IFRSs) and the date when implementation is required.
On 1 July 2006 IASB announced that it will not require the application of
new IFRSs or major amendments before 1 January 2009. This will provide
countries yet to adopt IFRSs with a clear target date for adoption.

Commentary
This also provides four years of stability in the IFRS platform for those
companies that adopted IFRSs in 2005.
2.6.5 Annual Improvements Project
The IASBs annual improvements project provides the means to make non-
urgent but necessary minor amendments to IFRSs.
In May 2008 IASB published final amendments to 20 IFRSs (and related Bases for
Conclusions and Implementation Guidance). Amendments are of two types:
those that result in accounting changes for presentation, recognition
of measurement purposes; and
terminology or editorial changes that are expected to have no or
minimal effect.

Commentary
To the extent that the IFRSs are examinable within the syllabus of the Diploma these
amendments have been incorporated in the relevant sessions of this Study System.
Most of the improvements are effective for annual periods beginning of or after 1
January 2009, with earlier adoption permitted. Where the general rule of
retrospective application does not apply prospective application is specified.
2.6.6 Public information
The aim of the IASB is to make its deliberations, activities and intentions as
transparent and open as possible.
Extensive information on the IASB and its activities is available on the
IASBs website at www.IASB.org.

Commentary
This includes all discussion documents, exposure drafts, public comments,
current activities and timetables of IASB and IFRIC meetings.
IASB and IFRIC meetings are open to the public and may be received as a webcast
through the IASB website.
IASB Update and IFRIC Update are issued after every IASB and IFRIC meeting
detailing the issues discussed and conclusions reached.
A quarterly newsletter, Insight, provides regular project updates and timetable,
news on IASB activities, SAC meetings and articles on current hot issues.
Issue from time to time, various publications to assist in the understanding of the
work of the IASB and in IFRS.

Commentary
For example, A Briefing for Chief Executives, Audit Committees and Boards
of Directors was issued in July 2004 to provide summaries of all current
IFRSs in non-technical language.
3 International Financial Reporting Standards

Commentary
IFRSs are a major international GAAP. They are widely used and accepted as a
basis for the preparation of financial statements across many jurisdictions.
3.1 GAAP hierarchy
In descending order of authoritativeness:
IFRS, including any appendices that form part of the Standard;
Interpretations;
Appendices to an IFRS that do not form part of the Standard;
Implementation guidance issued by IASB.

Commentary
All Standards and Interpretations issued under the previous constitution (i.e. IASs and
SICs) continue to be applicable unless and until they are amended or withdrawn.
The term IFRSs includes standards and interpretations approved by the
IASB and IASs and SICs issued by the IASC.
3.2 Scope
IFRSs apply to the published financial statements of all profit-oriented
entities (i.e. those engaged in commercial, industrial and financial activities).

Commentary
Entities may be corporate or organised in other forms (e.g. mutual co-
operatives or partnerships). IFRSs may also be appropriate to not-for profit
activities, government business enterprises and other public sector entities.
IFRSs apply to all general purpose financial statements (i.e. those aimed at
the common information needs of a wide range of users).

Commentary
Both individual entity and consolidated financial statements.
Any limitation on the applicability of a specific IFRSs is made clear in the scope
section to the standard.
An IFRS applies from a date specified in the standard and is not retroactive
unless indicated to the contrary.

Commentary
This is often the case.
3.3 Role in international harmonisation
The IASCF has had considerable influence on the harmonisation of financial
reporting :
through adoption by multinationals and local regulators;
through working with the International Organisation of Securities
Commissions (IOSCO).
3.3.1 Adoption
IFRSs are used:
as national requirements or as the basis for national requirements;
as an international benchmark for countries developing their own requirements;
by regulatory authorities and companies;
by large multinationals for the purpose of raising finance on
international capital markets.
3.3.2 IOSCO
The members of International Organisation of Securities Commissions are
securities commissions and other stock exchange regulators. Harmonisation
of financial reporting standards is high on IOSCOs agenda.
In 1993 IOSCO agreed a list of core standards needed for use in financial
statements for listing purposes.

Commentary
Although many were already dealt with by IASs, the IASC needed to amend
some existing standards, complete existing projects and start new ones (e.g.
on financial instruments). This was IASCs core program.
The core program was completed in 1999 and in 2000 IOSCO endorsed the
IASC 2000 standards for use in the preparation of financial statements for
cross-border offerings and listings.

Commentary
This endorsement means that IOSCO recommends that its members allow
entities quoted on the stock exchanges of the world to adopt IFRS for filing
purposes. (It is not binding.)
3.3.3 Use around the world
Nearly 200 jurisdictions are reported to be either permitting or requiring the
use of IFRS, for example:
Bangladesh, Czech Republic, Estonia, Ukraine, Kazakhstan all
listed companies, including domestic, must follow IFRS;
The European Union, European Economic Area member states all
domestic listed companies have been required to adopt IFRS on or before 1
January 2005;
Russian Federation, Belarus, United Arab Emirates IFRSs required for
banks.
IFRS financial statements not permitted, for example, Argentina, Brazil,
Korea, Saudi Arabia and Indonesia.

Commentary
The above examples are illustrative of the range and extent of us use of IFRS
around the world. This is constantly changing, for example, Korea has
announced a plan to adopt IFRSs as Korean Financial Reporting Standards
effective 2011, with early adoption permitted from 2009..
3.3.4 Impact of endorsement on US listings
The US SEC is a prominent member of IOSCO. However, it still requires a
full 20F reconciliation of equity and profit to a US GAAP basis.

Commentary
Not to require a reconciliation would be unconstitutional.
In February 2002, the SEC issued a Concept Release on IFRS seeking views
on whether IFRS financial statements of foreign investors should be accepted
without reconciliation to US GAAP.
In October 2002 FASB and IASB made a joint announcement:
to undertake a short-term project to remove certain individual differences;
to remove other differences that will remain at 1 January 2005;
to continue progress on current joint projects; and
to encourage their respective interpretative bodies to coordinate
their activities.

Commentary
Referred to as the Norwalk Agreement.
In May 2007 the SEC announced its plan to eliminate the reconciliation
requirement by 2009. The need for the 20F reconciliation has now been
lifted for those companies compliant with IFRS. However, there is still an
issue for those companies that use the EU version of IFRS, for whom the
reconciliation is still required.
In July 2007 the SEC published a Concept Release for public comment on
whether to allow US issuers to prepare their financial statements using IFRSs
as published in English by the IASB. US companies now have the option to
prepare their financial statements in accordance with IFRS.

Focus
You should now be able to:
discuss the need for international financial reporting standards and possible
barriers to this process;
explain the structure and constitution of the IASB and the standard setting process;
identify the purpose and functions of the IFRIC.

DipIFR-Session01 d08 IFRS

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

DipIFR-Session01 d08 IFRS

Uploaded by

Copyright:

Available Formats

SESSION 1 INTERNATIONAL FINANCIAL REPORTING STANDARDS

Accountancy Tuition Centre (International Holdings) Ltd 2008 0101

You might also like