Wiley Interpretation and Application of IFRS Standards 2019 E-Book
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- Herausgeber: John Wiley & Sons
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- Serie: Wiley Regulatory Reporting
- Sprache: Englisch
The 2019 reference for the interpretation and application of the latest international standards Wiley IFRS¯® Standards 2019 is a revised and comprehensive resource that includes the information needed to interpret and apply the most recent International Financial Reporting Standards (IFRS¯®) as outlined by the International Accounting Standards Board (IASB). This accessible resource contains a wide range of practical examples as well as invaluable guidance on the expanding framework for unified financial reporting. The authors provide IFRIC interpretations and directions designed to ensure a clear understanding of the most recent standards. The IFRS¯® standards are ever evolving, therefore it is essential that professionals and students have the information needed to apply the standards correctly in real-world cases. Wiley IFRS¯® Standards 2019 offers a complete, up-to-date reference that aids in the application of the latest international standards in a manner that is transparent, accountable and efficient. This edition includes IFRS 9 Financial Instruments; IFRS 15 Revenue from Contracts with Customers; IFRS 16 Leases and amendments issued and effective for annual periods beginning on or after 01 January 2018 and 01 January 2019 as issued by the IASB by 30 June 2018. This edition also includes some introductory guidance for IFRS 17 Insurance Contracts and incorporates the revised Conceptual Framework for Financial Reporting 2018. This important guide is written by the people passionate about IFRS¯® at PKF International. PKF International consists of over 400 offices, operating in 150 countries across five regions. PKF International specialises in providing high quality audit, accounting, tax, and business advisory solutions to international and domestic organisations around the globe. PKF International is a global family of legally independent firms bound together by a shared commitment to quality, integrity and the creation of clarity in a complex regulatory environment. PKF International is a member of the Forum of Firms - an organisation dedicated to consistent and high-quality standards of financial reporting and auditing practices worldwide. www.pkf.com. PKF International Limited administers a family of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. All rights reserved.
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IFRS®Standards
Salim Alibhai
Erwin Bakker
T V Balasubramanian
Kunal Bharadva
Asif Chaudhry
Danie Coetsee
James Dougherty
Chris Johnstone
Patrick Kuria
Christopher Naidoo
J Ramanarayanan
Edward Rands
Darshan Shah
Minette van der Merwe
This edition contains interpretations and application of the IFRS Standards, as approved by the International Accounting Standards Board (Board) for issue up to 31 December 2018, that are required to be applied for accounting periods beginning on 1 January 2019.
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CONTENTS
Cover
About the Authors
1 Introduction to International Financial Reporting Standards
Introduction
Origins and Early History of the IASB
The Current Structure
Process of IFRS Standard Setting
Convergence: The IASB and Financial Reporting in the Us
The IASB and Europe
Appendix A: Current International Financial Reporting Standards (IAS/IFRS) and Interpretations (SIC/IFRIC)
Appendix B: Projects Completed Since Previous Issue (July 2017 to June 2018)
Appendix C: IFRS for SMEs
2 Conceptual Framework
Introduction
Conceptual Framework for Financial Reporting 2018
Conceptual Framework for Financial Reporting 2010
Hierarchy of Standards
IFRS Practice Statement 1 – Management Commentary
Future Developments
US GAAP Comparison
3 Presentation of Financial Statements
Introduction
Scope
Definitions of Terms
Financial Statements
General Features
Structure and Content
Future Developments
Illustrative Financial Statements
US GAAP Comparison
4 Statement of Financial Position
Introduction
Scope
Definitions of Terms
General Concepts, Structure And Content
Classification of Assets
Classification of Liabilities
Classification of Shareholders’ Equity
Future Developments
US GAAP Comparison
5 Statements of Profit or Loss and Other Comprehensive Income, and Changes in Equity
Introduction
Future Developments
Scope
Definitions of Terms
Concepts of Income
Recognition and Measurement
Statement of Profit or Loss and Other Comprehensive Income
Presentation in the Profit or Loss Section
Other Comprehensive Income
Statement of Changes in Equity
US GAAP Comparison
6 Statement of Cash Flows
Introduction
Scope
Definitions of Terms
Background
Presentation
Other Requirements
Disclosure and Examples
Consolidated Statement of Cash Flows
US GAAP Comparison
7 Accounting Policies, Changes in Accounting Estimates, and Errors
Introduction
Scope
Definitions of Terms
Importance of Comparability and Consistency in Financial Reporting
Accounting Policy
Selecting Accounting Policies
Changes in Accounting Policies
Changes in Accounting Estimates
Correction of Errors
Future Developments
US GAAP Comparison
8 Inventories
Introduction
Definitions of Terms
Recognition and Measurement
Methods of Inventory
US GAAP Comparison
9 Property, Plant and Equipment
Introduction
Definitions of Terms
Recognition and Measurement
Derecognition
Disclosures
Examples of Financial Statement Disclosures
US GAAP Comparison
10 Borrowing Costs
Introduction
Definitions of Terms
Recognition and Measurement
US GAAP Comparison
11 Intangible Assets
Introduction
Scope
Definitions of Terms
Recognition and Measurement
Disclosures
Example of Financial Statement Disclosure
US GAAP Comparison
12 Investment Property
Introduction
Definitions of Terms
Identification
Recognition and Measurement
Presentation and Disclosure
Examples of Financial Statement Disclosures
US GAAP Comparison
13 Impairment of Assets and Non-Current Assets Held for Sale
Introduction
Definitions of Terms: Impairment of Assets
Impairment of Assets (IAS 36)
Examples of Financial Statement Disclosures
Definitions of Terms: Non-Current Assets Held for Sale
Non-Current Assets Held for Sale
Discontinued Operations
Examples of Financial Statement Disclosures
US GAAP Comparison
14 Consolidations, Joint Arrangements, Associates and Separate Financial Statements
Introduction
Definitions of Terms
Consolidated Financial Statements
Examples of Financial Statement Disclosures
Joint Arrangements
Associates
Equity Method of Accounting
Examples of Financial Statement Disclosures
Separate Financial Statements
Disclosure Requirements
US GAAP Comparison
15 Business Combinations
Introduction
Definitions of Terms
Business Combinations and Consolidations
Business Combinations
Disclosure Requirements
Examples of Financial Statement Disclosures
Future Developments
US GAAP Comparison
16 Shareholders’ Equity
Introduction
Definitions of Terms
Recognition and Measurement
Presentation and Disclosure
Classification Between Liabilities and Equity
Share Issuances and Related Matters
Future Developments
US GAAP Comparison
17 Share-Based Payment
Introduction
Scope
Definitions of Terms
Overview
Recognition and Measurement
Equity-Settled Share-Based Payments
Cash-Settled Share-Based Payments
Share-Based Payment Transactions With Cash Alternatives
Share-Based Transactions Among Group Entities
Disclosure
Examples of Financial Statement Disclosures
Appendix: Employee Share Options Valuation Example
18 Current Liabilities, Provisions, Contingencies and Events After the Reporting Period
Introduction
Definitions of Terms
Recognition and Measurement
Disclosures
Practical Examples
Reporting Events Occurring After the Reporting Period
Examples of Financial Statement Disclosures
US GAAP Comparison
19 Employee Benefits
Introduction
Definitions of Terms
Background
Basic Principles of IAS 19
Post-Employment Benefit Plans
Employer’S Liability and Assets
Minimum Funding Requirement
Other Pension Considerations
Disclosures for Post-Employment Benefit Plans
Examples of Financial Statement Disclosures
Other Employee Benefits
US GAAP Comparison
20 Revenue From Contracts with Customers
Introduction
Definitions of Terms
Scope
The Revenue Model
Contract Cost
Presentation
Disclosure
Example of Financial Statement Disclosures
Specific Transactions in IFRS 15
Other Specific Transactions
US GAAP Comparison
21 Government Grants
Introduction
Scope
Definitions of Terms
Recognition of Government Grants
Presentation and Disclosure
Other Issues
Service Concessions
US GAAP Comparison
22 Leases
Introduction
Definitions of Terms
Classification of Leases
Recognition and Measurement
Disclosure Requirements Under IAS 17
Examples of Financial Statement Disclosures
US GAAP Comparison
23 Foreign Currency
Introduction
Definitions of Terms
Scope, Objectives and Discussion of Definitions
Foreign Currency Transactions
Translation of Foreign Currency Financial Statements
Guidance Applicable To Special Situations
Disclosure
Hedging
Examples of Financial Statement Disclosures
US GAAP Comparison
24 Financial Instruments
Introduction
Definitions of Terms
Recognition, Measurement and Derecognition of Financial Instruments
Financial Liabilities
Subsequent Measurement of Financial Liabilities
Embedded Derivatives
Financial Instruments Measured At Amortised Cost
Fair Valuation Gains and Losses
Impairment of Financial Instruments
Hedge Accounting
Effective Date and Transition Requirements of Ifrs 9
Presentation of Financial Instruments Under Ias 32
Disclosures
Future Developments
25 Fair Value
Introduction
Scope
Definitions of Terms
Fair Value Measurement Principles and Methodologies
Fair Value Disclosure
Future Developments
US GAAP Comparison
26 Income Taxes
Introduction
Scope
Definitions of Terms
Identification
Recognition and Measurement of Current Tax
Recognition and Measurement of Deferred Tax
Recognition in Profit or Loss
Calculation of Deferred Tax Asset or Liability
Effect of Changed Circumstances
Specific Transactions
Presentation and Disclosure
Example of Financial Statement Disclosures
US GAAP Comparison
27 Earnings Per Share
Introduction
Scope
Definitions of Terms
Concepts, Rules and Examples
Example of Financial Statement Disclosures
US GAAP Comparison
28 Operating Segments
Introduction
Scope
Definitions of Terms
Identification
Concepts and Requirements Under IFRS 8
Disclosure Requirements
Example of Financial Statement Disclosures Under Ifrs
US GAAP Comparison
29 Related Party Disclosures
Introduction
Definitions of Terms
Identification
Disclosures
Example of Financial Statement Disclosures
US GAAP Comparison
30 Accounting and Reporting By Retirement Benefit Plans
Introduction
Definitions of Terms
Scope
Defined Contribution Plans
Defined Benefit Plans
Disclosures
US GAAP Comparison
31 Agriculture
Introduction
Scope
Definitions of Terms
Identification
Recognition and Measurement
Examples of Financial Statement Disclosures
32 Extractive Industries
Introduction
Definitions of Terms
Exploration and Evaluation of Mineral Resources
Assets Subject To IFRS 6
Example of Financial Statement Disclosures
IFRIC 20, Stripping Cost in the Production Phase of A Surface Mine
Example of Financial Statement Disclosures
US GAAP Comparison
33 Accounting for Insurance Contracts
Introduction
Definitions of Terms
Insurance Contracts
Recognition and Measurement Guidance
Disclosure
Future Developments
US GAAP Comparison
34 Interim Financial Reporting
Introduction
Scope
Definitions of Terms
Objectives of Interim Financial Reporting
Application of Accounting Policies
Presentation
Recognition and Measurement Issues
US GAAP Comparison
35 Hyperinflation
Introduction
Financial Reporting in Hyperinflationary Economies
US GAAP Comparison
Appendix: Monetary vs. Non-Monetary Items
36 First-Time Adoption of International Financial Reporting Standards
Introduction
Definitions of Terms
First-Time Adoption Guidance
Optional Exemptions
Presentation and Disclosure
Index
End User License Agreement
List of Illustrations
Chapter 17
Figure 17.1 Fair value hierarchy
Figure 17.2 Modifications and cancellations to the terms and conditions
Guide
Cover
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ABOUT THE AUTHORS
Salim Alibhai, FCCA, CPA (K), is an audit partner at PKF Kenya and heads the IT assurance including methodology function across the Eastern Africa PKF member firms.
Erwin Bakker, RA, is international audit partner of PKF Wallast in the Netherlands, and acts as audit partner, mainly for international (group) audits. He serves as chairman of the IFRS working group of PKF Wallast and is a member of the Technical Bureau of PKF Wallast in the Netherlands.
T V Balasubramanian, FCA, CFE, CFIP, is a senior partner in PKF Sridhar & Santhanam LLP, Chartered Accountants, India, and previously served as a member of the Auditing and Assurance Standards Board of the ICAI, India. He is a part of the technical team of the firm engaged in transition to Ind AS (the converged IFRS Standards).
Kunal Bharadva, FCCA, CPA (K), ACA, is a Director at PKF Kenya and is responsible for technical training across the Eastern Africa PKF member firms.
Asif Chaudhry, FCCA, CPA (K), MBA, is an audit partner at PKF Kenya and heads the technical and quality control functions across the Eastern Africa PKF member firms. He is also a member of the Kenyan Institute’s Professional Standards Committee and the PKF International Africa Professional Standards Committee.
Danie Coetsee, CA (SA), is Professor of Accounting at the University of Johannesburg, specialising in financial accounting. He is the chair of the Financial Reporting Technical Committee of the Financial Reporting Standards Council of South Africa.
James Dougherty, MAcc, CPA, CGMA is an audit partner at JLK Rosenberger LLP with specialists skills for single audits under Uniform Guidance, P&C insurance and is a qualified peer reviewer. He is also a member of the AICPA, CalCPA and Insurance Accounting and Systems Association (IASA). Active in the community, he is a board member of the Glendale Chamber of Commerce in Glendale, California.
Chris Johnstone is a member of the ICAEW and also holds ICAEW’s Diploma in IFRS. She is the Audit Technical Director at Johnston Carmichael. She joined Johnston Carmichael in 2014 having previously worked at Baker Tilly and MacIntyre Hudson in London. She is also a member of the Accounting and Auditing Technical Committee of the PKF firms in the United Kingdom and Republic of Ireland and ICAS’s Corporate and Financial Reporting Panel.
Patrick Kuria, B/Ed (Hons), CPA (K), is an audit partner at PKF Kenya and specialises in the audits of financial services and the not-for-profit sector. He is a member of the Institute of Certified Public Accountants of Kenya (ICPAK). He is a member of PKF Eastern Africa Technical Committee and also serves as the chair of PKF Eastern Africa CSR Committee. He is also a Life Member of Award Holders Alumni (AHA) − President’s Award Kenya and a member of the finance committee for President’s Awards Kenya.
Christopher Naidoo, CA (SA), is a member of the South African Institute of Chartered Accountants, serves as the International Accounting and Assurance Technical Specialist at PKF International Ltd. He is also a member of PKF’s International Professional Standards Committee (IPSC), Assurance Strategy Group and Risk Advisory Group.
J Ramanarayanan, FCA, Cert. in IFRS (ICAEW), is a partner in PKF Sridhar & Santhanam LLP, Chartered Accountants, India. He is a part of the technical team of the firm engaged in transition to Ind AS (the converged IFRS Standards).
Edward Rands, FCA, was for eleven years the Risk and Professional Standards partner at PKF Cooper Parry. He led the firm’s technical team, which was responsible for maintaining and updating accounting knowledge and for dealing with complex problems and queries as they arose. He was also the founder chairman of the Accounting and Auditing Technical Committee of the PKF firms in the United Kingdom and Republic of Ireland. He now works as an independent consultant, advising firms on technical and regulatory matters.
Darshan Shah, FCCA, CPA (K), CPA (U), ACA, is an audit partner at PKF Kenya and the Head of Audit and Assurance for the Eastern Africa PKF member firms. He also heads the technical training function across the Eastern Africa.
Minette van der Merwe, CA (SA), is PKF South Africa’s IFRS technical expert responsible for the interpretation and application of IFRS within the Southern African region.
1INTRODUCTION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
Introduction
Origins and Early History of the IASB
The Current Structure
Process of IFRS Standard Setting
Convergence: The IASB and Financial Reporting in the US
The IASB and Europe
Appendix A: Current International Financial Reporting Standards (IAS/IFRS) and Interpretations (SIC/IFRIC)
Appendix B: Projects Completed Since Previous Issue (July 2017 to June 2018)
Appendix C: IFRS for SMEs
Definition of SMEs
IFRS for SMEs is a Complete, Self-Contained Set of Requirements
Modifications of Full IFRS made in IFRS for SMEs
Disclosure Requirements under IFRS for SMEs
Maintenance of the IFRS for SMEs
SME Implementation Group
Implications of the IFRS for SMEs
Application of the IFRS for SMEs
INTRODUCTION
The mission of the IFRS Foundation and the International Accounting Standards Board (IASB) is to develop International Financial Reporting Standards (IFRS) that bring transparency, accountability and efficiency to financial markets around the world. They seek to serve the public interest by fostering trust, growth and long-term stability in the global economy.
The driver for the convergence of historically dissimilar financial reporting standards has been mainly to facilitate the free flow of capital so that, for example, investors in the US would become more willing to finance business in, say, China or the Czech Republic. Access to financial statements which are written in the same “language” would help to eliminate a major impediment to investor confidence, sometimes referred to as “accounting risk,” which adds to the more tangible risks of making such cross-border investments. Additionally, permission to list a company’s equity or debt securities on an exchange has generally been conditional on making filings with national regulatory authorities. These regulators tend to insist either on conformity with local Generally Accepted Accounting Practice (GAAP) or on a formal reconciliation to local GAAP. These procedures are tedious and time-consuming, and the human resources and technical knowledge to carry them out are not always widely available, leading many would-be registrants to forgo the opportunity of broadening their investor bases and potentially lowering their costs of capital.
There were once scores of unique sets of financial reporting standards among the more developed nations (“national GAAP”). The year 2005 saw the beginning of a new era in the global conduct of business, and the fulfilment of a 30-year effort to create the financial reporting rules for a worldwide capital market. During that year’s financial reporting cycle, the 27 European Union (EU) member states plus many other countries, including Australia, New Zealand and South Africa, adopted IFRS.
Since then, many countries, such as Argentina, Brazil, Korea, Canada, Mexico and Russia, have adopted IFRS. Indeed, at the time of writing, more than 130 countries now require or permit the use of IFRS. China has moved its national standards significantly towards IFRS. All other major economies, such as Japan and the United States, have either moved towards IFRS in recent years or established time lines for convergence or adoption in the near future.
2007 and 2008 proved to be watershed years for the growing acceptability of IFRS. In 2007, one of the most important developments was that the US Securities and Exchange Commission (SEC) dropped the reconciliation (to US GAAP) requirement, which had formerly applied to foreign private registrants. Since then, those reporting in a manner fully compliant with IFRS (i.e., without any exceptions to the complete set of standards imposed by IASB) have no longer been required to reconcile net income and shareholders’ equity to the amounts which would have been presented under US GAAP. In effect, the SEC was acknowledging that IFRS was fully acceptable as a basis for accurate, transparent, meaningful financial reporting.
This easing of US registration requirements for foreign companies seeking to enjoy the benefits of listing their equity or debt securities in the US led understandably to a call by domestic companies to permit them also to choose freely between financial reporting under US GAAP and IFRS. By late 2008 the SEC appeared to have begun the process of acceptance, first for the largest companies in those industries having (worldwide) the preponderance of IFRS adopters, and later for all publicly held companies. However, a new SEC chair took office in 2009, expressing a concern that the move to IFRS, if it were to occur, should perhaps take place more slowly than had previously been indicated.
It had been highly probable that non-publicly held US entities would have remained restricted to US GAAP for the foreseeable future, both from habit and because no other set of standards would be viewed as being acceptable. However, the American Institute of Certified Public Accountants (AICPA), which oversees the private-sector auditing profession’s standards in the US, amended its rules in 2008 to fully recognise IASB as an accounting standard-setting body (giving it equal status with the Financial Accounting Standards Board (FASB)), meaning that auditors and other service providers in the US could now issue opinions (or provide other levels of assurance, as specified under pertinent guidelines) which affirmed that IFRS-based financial statements conformed with “generally accepted accounting principles.” This change, coupled with the promulgation by IASB of a long-sought standard providing simplified financial reporting rules for privately held entities (described later in this chapter), might be seen as increasing the likelihood that a more broadly-based move to IFRS will occur in the US over the coming years.
The historic 2002 Norwalk Agreement—embodied in a Memorandum of Understanding (MoU) between the US standard setter, FASB, and the IASB—called for “convergence” of the respective sets of standards, and indeed a number of revisions of either US GAAP or IFRS have already taken place to implement this commitment. The aim of the Boards was to complete the milestone projects of the MoU by the end of June 2011.
Despite this commitment by the Boards, certain projects such as financial instruments (impairment and hedge accounting), revenue recognition, leases and insurance contracts were deferred due to their complexity and the difficulty in reaching consensus views. The converged standard on revenue recognition, IFRS 15, was finally published in May 2014, although both Boards subsequently deferred its effective date to annual periods beginning on or after January 1, 2018. The standard on leasing, IFRS 16, was published in January 2016, bringing to completion the work of the Boards on the MoU projects. Details of these and other projects of the standard setters are included in a separate section in each relevant chapter of this book.
Despite the progress towards convergence described above, the SEC dealt a blow to hopes of future alignment in its strategic plan published in February 2014. The document states that the SEC “will consider, among other things, whether a single set of high-quality global accounting standards is achievable,” which is a significant reduction in its previously expressed commitment to a single set of global standards. This leaves IFRS and US GAAP as the two comprehensive financial reporting frameworks in the world, with IFRS gaining more and more momentum.
The completed MoU with FASB (and with other international organisations and jurisdictional authorities) has been replaced by a MoU with the Accounting Standards Advisory Forum (ASAF). The ASAF is an advisory group to the IASB, which was set up in 2013. It consists of national standard setters and regional bodies with an interest in financial reporting. Its objective is to provide an advisory forum where members can constructively contribute towards the achievement of the IASB’s goal of developing globally accepted high-quality accounting standards. FASB’s involvement with the IASB is now through ASAF.
ORIGINS AND EARLY HISTORY OF THE IASB
Financial reporting in the developed world evolved from two broad models, whose objectives were somewhat different. The earliest systematised form of accounting regulation developed in continental Europe in 1673. Here a requirement for an annual fair value statement of financial position was introduced by the government as a means of protecting the economy from bankruptcies. This form of accounting at the initiative of the state to control economic participants was copied by other states and later incorporated into the 1807 Napoleonic Commercial Code. This method of regulating the economy expanded rapidly throughout continental Europe, partly through Napoleon’s efforts and partly through a willingness on the part of European regulators to borrow ideas from each other. This “code law” family of reporting practices was much developed by Germany after its 1870 unification, with the emphasis moving away from market values to historical cost and systematic depreciation. It was used later by governments as the basis of tax assessment when taxes on business profits started to be introduced, mainly in the early twentieth century.
This model of accounting serves primarily as a means of moderating relationships between the individual entity and the state. It serves for tax assessment, and to limit dividend payments, and it is also a means of protecting the running of the economy by sanctioning individual businesses which are not financially sound or are run imprudently. While the model has been adapted for stock market reporting and group (consolidated) structures, this is not its main focus.
The other model did not appear until the nineteenth century and arose as a consequence of the industrial revolution. Industrialisation created the need for large concentrations of capital to undertake industrial projects (initially, canals and railways) and to spread risks between many investors. In this model, the financial report provided a means of monitoring the activities of large businesses in order to inform their (non-management) shareholders. Financial reporting for capital markets purposes developed initially in the UK, in a common-law environment where the state legislated as little as possible and left a large degree of interpretation to practice and for the sanction of the courts. This approach was rapidly adopted by the US as it, too, became industrialised. As the US developed the idea of groups of companies controlled from a single head office (towards the end of the nineteenth century), this philosophy of financial reporting began to become focused on consolidated accounts and the group, rather than the individual company. For differing reasons, neither the UK nor the US governments saw this reporting framework as appropriate for income tax purposes, and in this tradition, while the financial reports inform the assessment process, taxation retains a separate stream of law, which has had little influence on financial reporting.
This second model of financial reporting, sometimes referred to as the Anglo-Saxon financial reporting approach, can be characterised as focusing on the relationship between the business and the investor, and on the flow of information to the capital markets. Government still uses reporting as a means of regulating economic activity (e.g., the SEC’s mission is to protect the investor and ensure that the securities markets run efficiently), but the financial report is aimed principally at the investor, not the government.
Neither of the two approaches to financial reporting described above is particularly useful in an agricultural economy, or to one that consists entirely of microbusinesses, in the opinion of many observers. Nonetheless, as countries have developed economically (or as they were colonised by industrialised nations) they have tended to adopt variants of one or the other of the two models.
IFRS are an example of the second, capital market-oriented, system of financial reporting rules. The original international standard setter, the International Accounting Standards Committee (IASC), was formed in 1973, during a period of considerable change in accounting regulation. In the US, the FASB had just been created, in the UK the Accounting Standards Committee had recently been set up, the EU was working on the main plank of its own accounting harmonisation plan (the Fourth Directive), and both the UN and the Organisation for Economic Co-operation and Development (OECD) were shortly to create their own accounting committees. The IASC was launched in the wake of the 1972 World Accounting Congress (a five-yearly get-together of the international profession) after an informal meeting between representatives of the British profession (the Institute of Chartered Accountants in England and Wales—ICAEW) and the American profession (the American Institute of Certified Public Accountants—AICPA). A rapid set of negotiations resulted in the professional bodies of Canada, Australia, Mexico, Japan, France, Germany, the Netherlands and New Zealand being invited to join with the US and UK to form the international body. Due to pressure (coupled with a financial subsidy) from the UK, the IASC was established in London, where its successor, the IASB, remains today.
In the first phase of its existence, the IASC had mixed fortunes. Once the International Federation of Accountants (IFAC) was formed in 1977 (at the next World Congress of Accountants), the IASC had to fight off attempts to make it a part of IFAC. It managed to resist, coming to a compromise where IASC remained independent but all IFAC members were automatically members of IASC, and IFAC was able to nominate the membership of the standard-setting Board.
IASC’s efforts entered a new phase in 1987, which led directly to its 2001 reorganisation, when the then-Secretary General, David Cairns, encouraged by the US SEC, negotiated an agreement with the International Organization of Securities Commissions (IOSCO). IOSCO was interested in identifying a common international “passport” whereby companies could be accepted for secondary listing in the jurisdiction of any IOSCO member. The concept was that, whatever the listing rules in a company’s primary stock exchange, there would be a common minimum package which all stock exchanges would accept from foreign companies seeking a secondary listing. IOSCO was prepared to endorse IFRS as the financial reporting basis for this passport, provided that the international standards could be brought up to a level of quality and comprehensiveness stipulated by IOSCO.
Historically, a major criticism of IFRS was that it essentially endorsed all the accounting methods then in wide use, effectively becoming a “lowest common denominator” set of standards. The trend in national GAAP had been to narrow the range of acceptable alternatives, although uniformity in accounting had not been anticipated as a near-term result. The IOSCO agreement energised IASC to improve existing standards by removing the many alternative treatments which were then permitted, thereby improving comparability across reporting entities. The IASC launched its Comparability and Improvements Project with the goal of developing a “core set of standards” that would satisfy IOSCO. These were complete by 1993, not without difficulties and spirited disagreements among the members, but then—to the great frustration of the IASC—the standards were not accepted by IOSCO. Rather than endorsing the standard-setting process of IASC, as was hoped for, IOSCO appeared to want to cherry-pick individual standards. Such a process could not realistically result in near-term endorsement of IFRS for cross-border securities registrations.
Ultimately, the collaboration was relaunched in 1995, with IASC under new leadership, and this began a further period of frenetic activity, where existing standards were again reviewed and revised, and new standards were created to fill perceived gaps in IFRS. This time the set of standards included, among others, IAS 39, on recognition and measurement of financial instruments, which was endorsed, at the very last moment and with great difficulty, as a compromise—and purportedly interim—standard.
At the same time, the IASC had undertaken an exercise to consider its future structure. In part, this was the result of pressure exerted by the US SEC and also by the US private sector standard setter, the FASB, both of which were seemingly concerned that IFRS were not being developed by “due process.” While the various parties may have had their own agendas, in fact the IFRS were in need of strengthening, particularly in the way of reducing the range of diverse but accepted alternatives for similar transactions and events. The challenges presented to IASC would ultimately serve to make IFRS stronger.
If IASC was to be the standard setter endorsed by the world’s stock exchange regulators, it would need a structure which reflected that level of responsibility. The historical Anglo-Saxon standard-setting model—where professional accountants set the rules for themselves—had largely been abandoned in the twenty-five years since the IASC was formed, and standards were mostly being set by dedicated and independent national boards such as the FASB, and not by profession-dominated bodies like the AICPA. The choice, as restructuring became inevitable, was between a large, representative approach—much like the existing IASC structure, but possibly with national standard setters appointing representatives—or a small, professional body of experienced standard setters which worked independently of national interests.
The end of this phase of international standard setting, and the resolution of these issues, came about within a short period in 2000. In May of that year, IOSCO members voted to endorse IASC standards, albeit subject to a number of reservations (see discussion later in this chapter). This was a considerable step forward for the IASC, which itself was quickly exceeded by an announcement in June 2000 that the European Commission intended to adopt IFRS as the requirement for primary listings in all member states. This planned full endorsement by the European Union (EU) eclipsed the lukewarm IOSCO approval, and since then the EU has appeared to be the more influential body insofar as gaining acceptance for IFRS has been concerned. Indeed, the once-important IOSCO endorsement has become of little importance given subsequent developments, including the EU mandate and convergence efforts among several standard-setting bodies.
In July 2000, IASC members voted to abandon the organisation’s former structure, which was based on professional bodies, and adopt a new structure: beginning in 2001, standards would be set by a professional board, financed by voluntary contributions raised by a new oversight body.
THE CURRENT STRUCTURE
The formal structure put in place in 2000 has the IFRS Foundation, a Delaware corporation, as its keystone (this was previously known as the IASC Foundation). The Trustees of the IFRS Foundation have both the responsibility to raise funds needed to finance standard setting, and the responsibility of appointing members to the International Accounting Standards Board (IASB), the IFRS Interpretations Committee (IFRIC) and the IFRS Advisory Council (AC). The structure was amended to incorporate the IFRS Foundation Monitoring Board in 2009, renaming and incorporating the SME Implementation Group in 2010 as follows:
The Monitoring Board is responsible for ensuring that the Trustees of the IFRS Foundation discharge their duties as defined by the IFRS Foundation Constitution and for approving the appointment or reappointment of Trustees. The Monitoring Board consists of the Board and the Growth and Emerging Markets Committees of the International Organization of Securities Commissions (IOSCO), the European Commission (EC), the Financial Services Agency of Japan (JFSA), the US Securities and Exchange Commission (SEC), the Brazilian Securities Commission (CVM), the Financial Services Commission of Korea (FSC) and Ministry of Finance of the People’s Republic of China (China MOF). The Basel Committee on Banking Supervision participates as an observer.
The IFRS Foundation is governed by trustees and reports to the Monitoring Board. The IFRS Foundation has fundraising responsibilities and oversees the standard-setting work, the IFRS structure and strategy. It is also responsible for a five-yearly formal, public review of the Constitution.
The IFRS Advisory Council is the formal advisory body to the IASB and the Trustees of the IFRS Foundation. Members consist of user groups, preparers, financial analysts, academics, auditors, regulators, professional accounting bodies and investor groups.
The IASB is an independent body that is solely responsible for establishing International Financial Reporting Standards (IFRS), including the IFRS for SMEs. The IASB also approves new interpretations.
The IFRS Interpretations Committee (the Interpretations Committee) is a committee comprised partly of technical partners in audit firms but also includes preparers and users. The Interpretations Committee’s function is to answer technical queries from constituents about how to interpret IFRS—in effect, filling in the cracks between different requirements. It also proposes modifications to standards to the IASB, in response to perceived operational difficulties or the need to improve consistency. The Interpretations Committee liaises with the US Emerging Issues Task Force and similar bodies and standard setters in order to preserve convergence at the level of interpretation.
Working relationships are set up with local standard setters who have adopted or converged with International Financial Reporting Standards (IFRS), or are in the process of adopting or converging with IFRS.
PROCESS OF IFRS STANDARD SETTING
The IASB has a formal due process, which is currently set out in the IFRS Foundation Due Process Handbook issued in February 2013 by the Due Process Oversight Committee (DPOC), and updated in June 2016 to include the final IFRS Taxonomy due process.
The DPOC is responsible for:
reviewing regularly, and in a timely manner, together with the IASB and the IFRS Foundation staff, the due process activities of the standard-setting activities of the IASB;
reviewing, and proposing updates to, the Due Process Handbook that relates to the development and review of Standards, Interpretations and the IFRS Taxonomy so as to ensure that the IASB procedures are best practice;
reviewing the composition of the IASB’s consultative groups to ensure an appropriate balance of perspectives and monitoring the effectiveness of those groups;
responding to correspondence from third parties about due process matters, in collaboration with the Director for Trustee Activities and the technical staff;
monitoring the effectiveness of the IFRS Advisory Council (“Advisory Council”), the Interpretations Committee and other bodies of the IFRS Foundation relevant to its standard-setting activities; and
making recommendations to the Trustees about constitutional changes related to the composition of committees that are integral to due process, as appropriate.
As a minimum, a proposed standard should be exposed for comment, and these comments should be reviewed before issuance of a final standard, with debates open to the public. However, this formal process is rounded out in practice, with wider consultation taking place on an informal basis.
The IASB’s agenda is determined in various ways. Suggestions are made by the Trustees, the IFRS Advisory Council, liaison standard setters, the international accounting firms and others. These are debated by IASB and tentative conclusions are discussed with the various consultative bodies. Long-range projects are first put on the research agenda, which means that preliminary work is being done on collecting information about the problem and potential solutions. Projects can also arrive on the current agenda outside that route.
Once a project reaches the current agenda, the formal process is that the staff (a group of about 20 technical staff permanently employed by the IASB) drafts papers which are then discussed by IASB in open meetings. Following that debate, the staff rewrites the paper, or writes a new paper, which is then debated at a subsequent meeting. In theory at least, there is an internal process where the staff proposes solutions, and IASB either accepts or rejects them. In practice, the process is more involved: sometimes (especially for projects such as financial instruments) individual Board members are delegated special responsibility for the project, and they discuss the problems regularly with the relevant staff, helping to build the papers that come to the Board. Equally, Board members may write or speak directly to the staff outside of the formal meeting process to indicate concerns about one matter or another.
The due process comprises six stages: (1) setting the agenda; (2) project planning; (3) developing and publishing a Discussion Paper; (4) developing and publishing an Exposure Draft; (5) developing and publishing the IFRS; and (6) procedures after an IFRS is issued. The process also includes discussion of Staff Papers outlining the principal issues and analysis of comments received on Discussion Papers and Exposure Drafts. A pre-ballot draft is normally subject to external review. A near final draft is also posted on the limited access website. If all outstanding matters are resolved, the final ballot is applied.
Final ballots on the standard are carried out in secret, but otherwise the process is quite open, with outsiders able to consult project summaries on the IASB website and attend Board meetings if they wish. Of course, the informal exchanges between staff and Board on a day-to-day basis are not visible to the public, nor are the meetings where IASB takes strategic and administrative decisions.
The basic due process can be modified in different circumstances. The Board may decide not to issue Discussion Papers or to reissue Discussion Papers and Exposure Drafts.
The IASB also has regular public meetings with the Capital Markets Advisory Committee (CMAC) and the Global Preparers Forum (GPF), among others. Special groups are set up from time to time. An example was the Financial Crisis Advisory Group, which was set up to consider how improvements in financial reporting could help enhance investor confidence in financial markets in the wake of the financial crisis of 2008. Formal working groups are established for certain major projects to provide additional practical input and expertise. Apart from these formal consultative processes, IASB also carries out field trials of some standards (examples of this include performance reporting and insurance), where volunteer preparers apply the proposed new standards. The IASB may also hold some form of public consultation during the process, such as roundtable discussions. The IASB engages closely with stakeholders around the world such as investors, analysts, regulators, business leaders, accounting standard setters and the accountancy profession.
The revised IFRS Foundation Due Process Handbook has an introduction section dealing with oversight, which identifies the responsibilities of the Due Process Oversight Committee. The work of the IASB is divided into development and maintenance projects. Developments are comprehensive projects such as major changes and new IFRS Standards. Maintenance consists of narrow scope amendments. A research programme is also described that should form the development base for comprehensive projects. Each phase of a major project should also include an effects analysis detailing the likely cost and benefits of the project.
CONVERGENCE: THE IASB AND FINANCIAL REPORTING IN THE US
Although IASC and FASB were created almost contemporaneously, FASB largely ignored IASB until the 1990s. It was only then that FASB became interested in IASC, when IASC was beginning to work with IOSCO, a body in which the SEC has always had a powerful voice. In effect, both the SEC and FASB were starting to consider the international financial reporting arena, and IASC was also starting to take initiatives to encourage standard setters to meet together occasionally to debate technical issues of common interest.
IOSCO’s efforts to create a single passport for secondary listings, and IASC’s role as its standard setter, while intended to operate worldwide, would have the greatest practical significance for foreign issuers in terms of the US market. It was understood that if the SEC were to accept IFRS in place of US GAAP, there would be no need for a Form 20-F reconciliation, and access to the US capital markets by foreign registrants would be greatly simplified. The SEC has therefore been a key factor in the later evolution of IASC. It encouraged IASC to build a relationship with IOSCO in 1987, and also observed that too many options for diverse accounting were available under IAS. SEC suggested that it would be more favourably inclined to consider acceptance of IAS (now IFRS) if some or all of these alternatives were reduced. Shortly after IASC restarted its IOSCO work in 1995, the SEC issued a statement (April 1996) to the effect that, to be acceptable, IFRS would need to satisfy the following three criteria:
It would need to establish a core set of standards that constituted a comprehensive basis of accounting;
The standards would need to be of high quality, and enable investors to analyse performance meaningfully both across time periods and among different companies; and
The standards would have to be rigorously interpreted and applied, as otherwise comparability and transparency could not be achieved.
IASC’s plan was predicated on its completion of a core set of standards, which would then be handed over to IOSCO, which in turn would ask its members for an evaluation, after which IOSCO would issue its verdict as to acceptability. It was against this backdrop that the SEC issued a “concept release” in 2000 that solicited comments regarding the acceptability of the core set of standards, and whether there appeared to be a sufficiently robust compliance and enforcement mechanism to ensure that standards were consistently and rigorously applied by preparers, whether auditors would ensure this and whether stock exchange regulators would verify such compliance.
This last-named element remains beyond the control of IASB, and is within the domain of national compliance bodies or professional organisations in each jurisdiction. The IASC’s Standards Interpretations Committee (SIC, which was later succeeded by IFRIC and thence the IFRS Interpretations Committee (the Interpretations Committee)) was formed to help ensure uniform interpretation, and the Interpretations Committee has taken a number of initiatives to establish liaison channels with stock exchange regulators and national interpretations bodies—but the predominant responsibilities remain in the hands of the auditors, the audit oversight bodies and the stock exchange oversight bodies.
The SEC’s stance at the time was that it genuinely wanted to see IFRS used by foreign registrants, but that it preferred convergence (so that no reconciliation would be necessary) over the acceptance of IFRS as they were in 2000 without reconciliation. In the years since, the SEC has in many public pronouncements supported convergence and, as promised, waived reconciliations in 2007 for registrants fully complying with IFRS. Thus, for example, the SEC welcomed various proposed changes to US GAAP to converge with IFRS.
Relations between FASB and IASB have grown warmer since IASB was restructured, perhaps influenced by the growing awareness that IASB would assume a commanding position in the financial reporting standard-setting domain. The FASB had joined the IASB for informal meetings as long ago as the early 1990s, culminating in the creation of the G4+1 group of Anglophone standard setters (US, UK, Canada, Australia and New Zealand, with the IASC as an observer), in which FASB was an active participant. Perhaps the most significant event was the signing by IASB and FASB of the Norwalk Agreement in October 2002, which set out a programme for the convergence of their respective sets of financial reporting standards. The organisations’ staffs subsequently worked together on a number of vital projects, including business combinations and revenue recognition and, later, supplemented by the 2006 and 2008 Memoranda of Understanding (MoU) between these bodies.
In June 2010, the Boards announced a modification to their convergence strategy, responding to concerns from some stakeholders regarding the volume of draft standards due for publication in close proximity. The strategy retained the June 2011 target date to complete those projects for which the need for improvement was the most urgent. In line with this strategy, the Boards completed the consolidation (including joint arrangements) and fair value measurement project before the June 2011 target date. The derecognition project was cancelled and only disclosure amendments were incorporated in the standard. Projects on financial instruments, leases, revenue and insurance contracts were extended to create significant time for reconsultation after comments were received.
