OVERVIEW
Objective
¾
To introduce sources of authority in international financial reporting.INTRODUCTION
NOT FOR PROFIT ORGANISATIONS IASB
INTERNATIONAL FINANCIAL REPORTING
STANDARDS
¾ What is GAAP? ¾ Sources of GAAP
¾ Role of statute and standards ¾ Role of the European Union
¾ Background ¾ Objectives ¾ Structure ¾ IFRIC
¾ Standard setting
¾ Projects and work program
¾ GAAP hierarchy ¾ Scope
¾ Role in international harmonization
1
INTRODUCTION
1.1
What is GAAP?
¾
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.UK GAAP, US GAAP are more specific statements.
¾
The term may or may not have legal authority in a given country.¾
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
¾
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.
¾
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
¾
Best practice, that is, methods of accounting developed by companies in the absence of rules in a specific area.¾
Industry groups, such as: The Oil Industry Accounting Group (OIAC); British Bankers’ Association (BBA).
1.3
Role of statute and standards
¾
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 Acts 1985 and 1989;
Standards Financial Reporting Standards (FRSs) and
Statements of Standard Accounting Practice (SSAPs)
Urgent Issues Task Force consensus pronouncements (UITFs).
¾
Some countries have relatively little in the way of statute and rely largely on standards(e.g. in the USA).
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.
¾
The structure of US GAAP is very much rule based whereas that of IFRS is principal based. At present there are a number of working parties trying to converge the two sets of standards and eliminate or minimise the differences between them.¾
The SEC now allows companies that prepare their accounts in accordance with IFRS to list their shares on US stock markets without providing a reconciliation to US GAAP.¾
It is widely felt that the US market will soon allow US companies to apply IFRS for theirfinancial statements, and that US GAAP itself may disappear fully within a few years.
1.4
Role of the European Union
¾
The common industrial policy of the EU calls for the creation of a unified business environment including harmonisation of financial reporting.¾
This is pursued though the issue of directives to member states. These are instructions to enact legislation in specified areas. For example:Directive
Country
4th(on form and content of company accounts) 7th (on group accounts) 8th
(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
¾
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.¾
The EU originally stated that IFRSs were compatible with EU directives. However,there is considerable divergence in GAAP between member states.
¾
Further to the IOSCO endorsement (see later in this session) all listed EU companies must publish consolidated financial statements in compliance with IFRS with effect from 1 January 2005.¾
The 2005 deadline is 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.¾
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.
In July 2003 the UK Department of Trade and Industry announced all British companies would be able to use IFRS as an alternative to UK accounting standards with effect from January 2005.
¾
UK government bodies must apply IFRS to their accounts in the financial year 2008/09, although this deadline has now been extended for some government departments.2
IASB
2.1
Background
¾
The International Accounting Standards Board (IASB) was formed to take over the work of the International Accounting Standards Committee (IASC) in April 2001.¾
The IASC was an independent private sector body set up by accountancy bodiesin 1973.¾
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
¾
These are set out in the IASB’s Mission Statement: To develop, in the public interest, a single set of high quality, understandable and enforceable global accountingstandards that require high quality, transparent and comparable information in financial statements;
That is, to assist participants in the world’s capital markets and other users of financial statements in making economic decisions.
To work actively with national standard-setters to achieve convergence of national accounting standards and IFRS to provide high quality solutions.
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 (19 trustees)
Standards Advisory
Council (SAC) (14 members) IASB
International Financial Reporting Interpretations Committee (IFRIC)
2.3.2
Foundation Trustees
¾
22 individuals from diverse geographical and functional backgrounds who appoint: the Council (SAC); the Board Members (IASB); and
the Interpretations Committee (IFRIC).
¾
The Trustees also: monitor the IASB’s effectiveness; secure funding;
approve the IASB’s budgets;
have responsibility for constitutional change.
2.3.3
IASB
¾
14 members (12 full time) appointed by the Trustees for an initial term of three to five years.¾
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;
¾
Each IASB member has one vote on technical and other matters. Nine members must be in favour for documents to be issued for discussion, exposure or as the final standard.2.3.4
Standards Advisory Council
¾
Comprises of thirty or more members: appointed by the Trustees for a renewable term of three year; having diverse geographic and functional backgrounds.
¾
The Council provides a forum for participation by organisations and individuals with an interest in international accounting.The SAC has membership links with National Standard Setters and other interested parties.
¾
The Council meets, in public, at least three times a year with the IASB.¾
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
¾
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
2.4.2
Approach
¾
IFRIC uses the approach described in IAS 1 “Presentation of Financial Statements”: making analogies with the requirements and guidance in IFRSs dealing withsimilar and related issues;
applying the definitions, recognition and measurement criteria for assets, liabilities, income and expenses set out in the “Framework for the Preparation and
Presentation of Financial Statements” (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).
¾
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.¾
IFRICs are described as IFRIC-1, IFRIC-2, etc (formerly SIC-1, SIC-2, etc).¾
After approval by the Board the interpretations become part of the IASB’s authoritative literature. The pronouncements have the same status as an IFRS (see later).2.5
Standard setting
¾
Due process normally involves the following steps (those in bold are required under the terms of the IASC Foundation’s 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 IASB’s 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 eight votes of the IASB
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.
2.5.1
Discussion Documents
¾
IASB may develop and publish Discussion Documents for public comment.¾
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.
¾
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
¾
An Exposure Draft invites comment on any aspect of specific questions and the proposed IFRS.¾
It sets out the proposed standards and transitional provisions.2.5.3
Voting
¾
The publication of a Standard, Exposure Draft, or final IFRIC Interpretation requires approval by nine of the IASB’s Members.¾
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
¾
Within the IASB’s Constitution this is for a “reasonable period”.¾
Formerly this was normally 120 days for Exposure Drafts and Discussion Documents for public comment.¾
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 IASB’s first ED on an Amendment to IAS 19 “Employee Benefits” (concerning “the Asset Ceiling” – this is not examinable).2.6
Projects and work program
2.6.1
Improvements Project
¾
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 “allowedalternative”) in IASs (published by IASC).
¾
The release of the ED in May 2002 marked IASB’s initial response to a market demand for the continued development and rapid improvement of IFRSs by market regulators (through IOSCO), national standard-setters, etc.¾
It addressed topics that could be dealt with relatively quickly.¾
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.
¾
13 revised IASs were published in December 2003:¾
As part of this project, IAS 15 “Information Reflecting the Effects of Changing Prices” was withdrawn in December 2003.2.6.2
2005 stable platform
¾
Improved versions of IAS 32 “Financial Instruments: Disclosure and Presentation” and IAS 39 “Financial Instruments: Recognition and Measurement” were issued inDecember 2003 with an amendment to IAS 39 dealing with macro hedging issued in March 2004.
IAS 32 was further amended in 2005 when the IASB issued IFRS 7 Financial Instrument – Disclosures. IAS 32 now only deals with the presentational issues related to Financial Instruments.
¾
As part of the IASB’s 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 2004.¾
In addition, IFRS 1 was issued in June 2003 with IFRS2 to IFRS 5 being issued in the first quarter of 2004. IFRS 1 “First-time Adoption of International Financial Reporting Standards” IFRS 2 “Share-based Payment” **
IFRS 3 “Business Combinations” IFRS 4 “Insurance Contracts” **
¾
All of these plus the standards updated in the improvements project and thosestandards and interpretations unadjusted, form the “stable platform” of standards and interpretations for application from 1 January 2005.
¾
The following standards have been issued by the IASB since its stable platform was introduced. IFRS 6 “Exploration for and the Evaluation of Mineral Resources”
IFRS 7 “Financial Instruments – Disclosures”. This standard has replaced IAS 30 and the disclosure requirements of IAS 32.
IFRS 8 “Operating Segments”. This standard replaces IAS 14 “Segment Reporting”. ** IFRS 6 is not examinable within this syllabus.
** Knowledge that IFRS 8 exists is required, but specific knowledge of the standard is not required within the syllabus.
2.6.3
Work program
¾
The IASB’s current work program includes: Insurance contracts (phase II) Liabilities and Equity
Consolidation and special purpose entities Income taxes.
Performance Reporting Conceptual framework Accounting for Joint Ventures
IFRS for small and medium-sized entities.
¾
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; IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations” is the first standard developed from the convergence project with the FASB.
Employment benefits (“pension accounting”); and
Replacement of IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance”.
Although Exposure Drafts and Discussion Documents are not examinable it is important to appreciate that IFRSs are not static.
¾
The IASB now also issues an annual improvement standard that is intended to deal with non-urgent, minor amendments to standards. The changes are split into two types, those resulting in accounting changes and those that are terminology or editorialchanges.
2.6.4
Public information
¾
The aim of the IASB is to make its deliberations, activities and intentions as transparent and open as possible.¾
Extensive information on the IASB and its activities is available on the IASB’s website at www.IASB.org. This includes all discussion documents, exposure drafts, publiccomments, current activities and timetables of IASB and IFRIC meetings.
¾
IASB and IFRIC meetings are open to the public and may be received as a web cast through the IASB website.¾
IASB Update and IFRIC Update are issued after every IASB and IFRIC meeting detailing the issues discussed and conclusions reached.¾
A quarterly newsletter, “Insight”, provides regular project updates and timetable, news on IASB activities, SAC meetings and articles on current “hot issues”.¾
Issue from time to time, various publications to assist in the understanding of the work of the IASB and in IFRS.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
¾
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
¾
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.
3.2
Scope
3.2.1
General purpose financial statements
¾
IFRSs apply to the published financial statements of all profit-oriented entities (i.e. those engaged in commercial, industrial and financial activities).¾
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.¾
IFRSs apply to all “general purpose financial statements” (i.e. those aimed at the common information needs of a wide range of users).¾
Both individual entity and consolidated financial statements.¾
Any limitation on the applicability of a specific IFRSs is made clear in the “scope” section to the standard.¾
An IFRS applies from a date specified in the standard and is not retroactive unless indicated to the contrary.This is often the case.
3.2.2
Benchmark and allowed alternative treatments
¾
In some IASs, the IASC permitted two accounting treatments for like transactions and events: one was designated the benchmark treatment; the other was the allowed alternative treatment.
¾
The perceived advantage of allowing two treatments (in cases where there is an allowed alternative) was that it increased the acceptability of the standard.¾
However, like transactions and events need to be accounted for and reported in a consistent way to ensure true comparability of financial statements. Consequently the IASB intends not to permit choices in accounting treatment.¾
All standards that previously allowed a choice between the benchmark and allowed alternative have now been revised and the terms benchmark and allowed alternative have been withdrawn from use.¾
However, some standards still have options available, ie IAS 16 Property, Plant and3.3
Role in international harmonisation
¾
The IASB 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
¾
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
¾
The members of International Organisation of Securities Commissions are securities commissions and other stock exchange regulators. Harmonisation of financial reporting standards is high on IOSCO’s agenda.¾
In 1993 IOSCO agreed a list of core standards needed for use in financial statements for listing purposes.¾
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 IASC’s “core program”.¾
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.3.3.3
Use around the world
¾
More than 100 countries are reported to be either permitting or requiring the use of IFRS, for example: Bangladesh, Czech Republic, Estonia – 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;
Russia, Ukraine, Kazakhstan, United Arab Emirates – IFRSs required for banks.
¾
IFRS financial statements not permitted, for example: Brazil – must follow that jurisdiction’s gaap/accounting principles;
Chile – foreign countries must use their own national principles with reconciliation to Chilean gaap.
The above examples are illustrative of the range and extent of us use of IFRS around the world. This is constantly changing, for example, in March 2006 the Brazilian Central Bank announced that IFRS financial statements would be required by financial institutions by 2010.
3.3.4
Impact of endorsement on US listings
¾
The US SEC is a prominent member of IOSCO. It used to require a full schedule 20F reconciliation of equity and profit to a US GAAP basis. This reconciliation is no longer required if the entity prepares financial statements in accordance with IFRS.¾
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.¾
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
4
NOT FOR PROFIT ORGANISATIONS
¾
Not all organisations primary objectives are to make profit. Specialised organisations, not-for-profit and public sector entities have other functions to perform in the economy.¾
These types of organisations still enter into economic transactions and therefore stillhave accounting issues to deal with, the question is do these organisations need to comply fully with IFRS.
4.1
Primary objectives
¾
Most of these types of organisations do not have as their primary objective the making of profits. In many cases these organisations are providing a service for the community as a whole. National governments have amongst their many objectives to provide health, education and policing to all members of the community, they do not seek to make a profit out of giving these services.¾
Other organisations such as charities and many museums do not have profit as their primary objective, they again seek to provide a service to various groups within the local and international community.4.2
Value for money
¾
Many not-for-profit organisations and public sector entities follow a value for money approach to how they perform their services. Value for money considers the 3 E’s: Economy, in that the organisation looks to minimise the cost of their inputs; Efficiency, here the organisation looks to maximise their outputs in proportion tothe cost of the inputs; and
Effectiveness, the fact that the organisation has managed to perform the objectives set of it.
4.3
Accounting
¾
Most of these types of organisation enter into accounting transactions leading to the requirement for the transactions to be recorded by one means or another. Accruals accounting is used by the vast majority of these organisations, however cash based accounting is still used in some public sector institutions.¾
The International Federation of Accountants (IFAC), has published International Public Sector Accounting Standards prescribing the accounting treatment to be followed by public sector bodies. These standards are derived from IFRS, with adaptations being made to put them in a public sector context, when appropriate. The preface to these standards state that the conceptual framework of the IASB is still relevant in public sector accounting.FOCUS
You should now be able to:
¾
explain why a regulatory framework is needed;¾
explain why accounting standards on their own are not a complete regulatory framework;¾
distinguish between a principles based and a rules based framework and discuss whether they can be complementary;¾
describe the structure and objectives of the IASC Foundation, the IASB, the SAC and IFRIC;¾
describe the IASB’s standard setting process including revisions to and interpretations of standards;¾
explain the relationship of national standard setters (e.g. FASB and ASB) to the IASB in respect of the standard setting process;¾
distinguish between the primary aims of not-for-profit and public sector entities and those of profit oriented entities;