CHAPTER 3 THE CONCEPT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS. Standards. It covers the meaning of International Financial Reporting Standards,

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1 CHAPTER 3 THE CONCEPT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS Introduction The previous chapter presented the overview of literature on the research study. The aim of this chapter is to understand the concept of International Financial Reporting Standards. It covers the meaning of International Financial Reporting Standards, definition of International Financial Reporting Standards, the essential elements and structure of International Financial Reporting Standards Definition of IFRS There have been different interpretations of the concept of International Financial Reporting Standards the most commonly accepted definitions of International Financial Reporting Standards are: IFRS are a set of accounting standards promulgated by the International Accounting Standards Board (IASB), an international standard-setting body based in London. The IASB places emphasis on developing standards based on sound, clearly stated principles, from which interpretation is necessary (sometimes referred to as principles-based standards). This contrasts with sets of standards, like U.S. generally accepted accounting principles (GAAP), the national accounting standards of the United States, which contain significantly more application guidance. These standards are sometimes referred to as rules-based standards, but that is really a misnomer as U.S. standards also are based on principles they just contain more application guidance. IFRS generally do not provide bright lines when distinguishing among 31

2 circumstances in which different accounting requirements are specified. This reduces the chances of structuring transactions to achieve particular accounting effects.(ankarath, et al., 2010) International Financial Reporting Standards (IFRS), the standards promulgated by the International Accounting Standards Board (IASB), previously known as International Accounting Standards (IAS) that was issued by the International Accounting Standard Committee (IASC), the IASB s predecessor body, appear to be emerging as the global accounting standards. According to some, it could even qualify for the coveted title of the Esperanto of accounting.(mirza, Orrell, & Holt, 2010) 3.2. Meaning of IFRS International Financial Reporting Standards (IFRS) are formed as global language for accounting and business affairs which make company s accounts understandable and comparable across international boundaries. With the rapid movement towards globalization, it requires to create a common accounting language for business which is comparable and understandable to both users and preparers. IFRS started as an endeavor to harmonise accounting across the European countries but the value of harmonisation swiftly made the concept attractive around the world. They are sometimes still called by the original name of International Accounting Standards (IAS). The main objective of the IFRS Foundation is to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based on clearly articulated principles. 32

3 Introduction to the Accounting Standard Setting Process The first Statement of Standard Accounting Practice (SSAP) was published in 1970 in the United Kingdom. Prior to this, there were relatively few financial reporting requirements for companies. It was the highly publicised scandals of the late 1960s, such as the GEC takeover of AEI, that brought the need for more extensive regulations and the setting up of a standards setting body. The International Accounting Standards Committee (IASC) was set up in Between 1973 and its demise in April 2001 "IASC" published41 International Accounting Standards (IASs). These were largely drafted by part-time volunteer boards from a wide background of experience and countries. It resulted in a rather slow and protracted process of developing standards. Many of these offered a number of options and thus were largely ignored by the major standard setting countries. However, problems started to emerge with multinationals having to prepare a number of different sets of financial statements for different jurisdictions. (Epstein & Jermakowicz, 2010) 33

4 Figure.3.1 Structure of the Accounting Standard-Setting Process Proposal to create an accountants international study group The IASC expands In 2000, the initial 14 members are appointed to the IASB. In 2002, the IASB begins promulgating standards as IFRS from IAS. The SIC becomes the IFRIC. The European Union endorses IFRS for 2005 adoption. In 2002, the Norwalk Agreement is executed between the IASB and FASB. In 2005, the SEC published a roadmap (Roadmap) for elimination of a US GAAP reconciliation for FPIs. In 2006, the FASB and IASB published a Memorandum of Understanding, to set forth priorities in their joint work program. 1960s 1970s 1980s 1990s 2000s The IASC is formed in The IASC begins promulgating International Accounting Standards (IAS). In 1994, the IASC Advisory Council is formed to provide oversight of IASC. In 1997, the Standards Interpretations Committee (SIC) is formed In 1999, the IASC is restructured to form a new board: the IASB. FASB agrees to work on a joint earnings-pershare project. In 2007, the SEC eliminated the US GAAP reconciliation for FPIs. In 2008, the SEC published a proposed Roadmap anticipating the mandatory adoption of IFRS in the US. In 2009, the FASB and IASB reaffirmed their commitment to the MOU. In 2010, the SEC established a Work Plan for its 2011 IFRS adoption decision. 34

5 3.3. The International Accounting Standards Committee (IASC) Foundation The International Financial Reporting Interpretations Committee (IFRIC) is a committee comprised mostly of technical partners in audit firms. But it also includes preparers and users. It succeeded the Standards Interpretations Committee (SIC), which had been created by the IASC. IFRIC s function is to answer technical queries from constituents about how to interpret IFRS in effect, filling in the gaps between different rules. In recent times, it has also proposed modifications to standards of the IASB, in response to perceived operational difficulties or need to improve consistency. (Epstein & Jermakowicz, 2010) The International Accounting Standards Committee (IASC), the predecessor of the IASB, was established in They came into exist through an agreement by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom and Ireland, and United States. The objective behind setting up the IASC was to develop, in the public interest, accounting standards that would be acceptable around the world it aims to improve financial reporting internationally. Over the years, the IASC faced several changes to its structure and functioning. Such fundamental changes to the IASC may have helped it achieve the objective for which it was set up: changing the perception of the global standard setters about the international environment of participation in the standard setting process. As part of their membership in IASC, professional accountancy bodies globally committed themselves to use their best endeavors to persuade governments, standard-setting bodies, securities regulators, and the business community that published financial statements to comply with IAS. The International Accounting Standards Committee was essentially the structure, rather than a 35

6 committee in the traditional sense of a group of people. There was no actual "committee" of that name. Over the years, the IASC worked hard to achieve the objective of developing accounting standards for the world. However, due to several factors the standards promulgated by the IASC were unable to achieve the status of an international accounting standard setter whose standards were accepted by leading jurisdictions. Table 3.1 List of IAS Issued by IASC IAS List IAS 1 IAS 2 IAS 7 IAS 8 IAS 10 IAS 11 IAS 12 IAS 16 IAS 17 IAS 18 IAS 19 IAS 20 IAS 21 IAS 23 IAS 24 IAS 26 Particulars Presentation of Financial Statements Inventories Statement of Cash Flows Accounting Policies, Changes in Accounting Estimates and Errors Events After the Balance Sheet Date Construction Contracts Income Taxes Property, Plant and Equipment Leases Revenue Employee Benefits Accounting for Government Grants and Disclosure of Government Assistance The Effects of Changes in Foreign Exchange Rates Borrowing Costs Related Party Disclosures Accounting and Reporting by Retirement Benefit Plans 36

7 IAS 27 IAS 28 IAS 29 IAS 31 IAS 32 IAS 33 IAS 34 IAS 36 IAS 37 IAS 38 IAS 39 IAS 40 IAS 41 Consolidated and Separate Financial Statements Investments in Associates Financial Reporting in Hyperinflationary Economies Interests in Joint Ventures Financial Instruments: Presentation Earnings per Share Interim Financial Reporting Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets Financial Instruments: Recognition and Measurement Investment Property Agriculture Source: IASB website ( The International Accounting Standards Board (IASB) Foundation. With tremendous pressure on the IASC to transform itself into a truly global standard setting body by addressing some of the serious concerns of established standard setters around the world (grievances were time and again quoted in the international media as serious shortcomings of the IASC), in the year 2001, fundamental changes were made to strengthen the independence, legitimacy, and quality of the international accounting standard-setting process. In particular, the IASC Board was replaced by the International Accounting Standards Board (IASB) as the body in control of setting international accounting and financial reporting standards. This significant structural change to the manner in which the IASC functioned for several years since its inception was brought about as a result of the recommendations of the strategy working party, which was specially formed to take a 37

8 fresh look at the then-existing IASC s structure and strategy. One dramatic change in the structure and functioning of the board that is worthy of mention was the replacement of part-time trustees board members who sat on the IASC Board with, for the most part, full-time IASB board members. Based on the recommendations of the strategy working party a new constitution was adopted effective July 1, Under these new rules of governance of the international standard setting body was born the IASC foundation. The name of the organization that comprises both the IASB and its trustees is the International Accounting Standards Committee Foundation (IASC Foundation). The objectives of the IASC foundation, as stated in its constitution, are; I. 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 and other financial reporting to help participants in the various capital markets of the world and other users of the information to make economic decisions; II. III. To promote the use and rigorous application of those standards; In fulfilling the objectives associated with (I) and (II), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and IV. To bring about convergence of national accounting standards and International Financial Reporting Standards to high-quality solutions. 38

9 Table 3.2 IASB Agenda Year Particular 1973 Creation of IASC is approved by delegate of the professional s accountancy bodies in different countries: 1975 First finalised IASs published: IAS 1 (1975) Disclosure of Accounting Policies, and IAS 2 (1975) Valuation and Presentation of Inventories in the Context of the Historical Cost System IASC Board is increased to up to 17 associates, encompassing 13 state associates appointed by the Council of the International Federation of Accountants (IFAC) The Federation of European Accountants (FEE) supports international harmonisation of accounting and European involvement in the IASC. IFAC adopts a public-sector guideline to require government business enterprises to follow IASs IASC Council of the Advisory has been established, with duties for oversight and finances European Commission (EC) supports the agreement between IASC and IOSCO to complete core standards and concludes that IASs should be followed by European Union multinationals U.S. Securities and Exchange Commission (US SEC) gives notice its support of the IASC s objective to develop, as expeditiously as possible, accounting standards that could be used in preparing financial statements for the purpose of cross-border offerings SIC is established with 12 members with voting right. Mission to develop translation of IASs for final approval by IASC. Strategy of social unit is made to create recommendations concerning the longer term structure and operation of IASC IFAC/IASC membership expands to 140 accountancy bodies in 101 countries. ASC completes the core Standards with approval of IAS G7 Finance Ministers and International Monetary Fund urge support for IASs to strengthen the international financial architecture. 39

10 2000 IOSCO recommends that its associates permit multinational publishers to use IASC standards in cross-border offerings and listings Members and new condition of IASB are introduced. IASC Foundation is formed on 1 April 2001, the new IASB assumes its standard-setting task from the IASC. Consecutive IASs and also SICs adopted by IASB. IASB meets alongside chairs of the eight liaison nationwide accounting standard-setting bodies to onset coordinating agendas and setting out convergence goals SIC is renamed as the IFRIC alongside a mandate not merely to elucidate continuing IASs and IFRSs but additionally to furnish timely guidance on matters not addressed in an IAS or IFRS First finalized IFRS and also first IFRIC draft translation are published Webcasting of IASB meetings begins Constitutional changes. Meetings of Working Groups opened to the public IASB/FASB update agreement on convergence. IASB announced its protocol on working with other standard setters bodies IFRIC is expanded from 12 to 14 members. Board proposes separate IFRS for small and medium-sized entities (SMEs) IASB s reply to globe commercial disaster includes new fair value measurement guidance, corrections to IAS IASB is increased to 16 associates (including maximum three part-time) and geographic blend established. IASCF forms a Monitoring Board of area authorities. Reply to globe commercial disaster endures, alongside undertakings on the substitute of IAS 39, encompassing measurement of advance impairments Trustees finished portion 2 of Constitution Review, encompassing term adjustments as follows: IFRS Foundation (formerly the IASC Foundation); IFRS Interpretations Group (formerly the IFRIC) and IFRS Advisory Council (formerly the Standards Advisory Council) Hans Hoogervorst takes over the Chairmanship of the IASB from Sir David Tweedie. IASB issues request for views on its first three-yearly agenda consultation Trustees finished portion 2 of Constitution Review, encompassing 40

11 term adjustments as follows: IFRS Foundation (formerly the IASC Foundation); IFRS Interpretations Group (formerly the IFRIC) and IFRS Advisory Council (formerly the Standards Advisory Council) Hans Hoogervorst seizes above the Chairmanship of the IASB from Sir David Tweedie. IASB subjects appeal for sights on its early three-yearly agenda consultation Report of the Trustees Strategy Study 2011, IFRSs as the Globe Standards: Setting a Strategy for the Foundation s Subsequent Decade, is issued. IASB and FASB set a new target for finishing the staying main convergence undertakings to the early half of 2013 in their report to G20. Trustees finished their study of the efficiency and effectiveness of the IFRIC. IFRSF subjects invitation to comment on the new due procedure to be pursued by IASB and IFRIC as well as Due Process Oversight Committee (DPOC) of the IFRS. The early global workplace beyond of London was opened in Tokyo ASB establishes the ASAF which holds its first meeting in April. (Source: Literature Survey) 41

12 Table 3.3 List of IFRS Issued by IASB IAS List IFRS 1 IFRS 2 IFRS 3 IFRS 4 IFRS 5 IFRS 6 IFRS 7 IFRS 8 IFRS 9 IFRS 10 IFRS 11 IFRS 12 IFRS 13 Particulars First-time Adoption of IFRS Share-based Payment Business Combinations Insurance Contracts Non-current Assets Held for Sale and Discontinued Operations Exploration for and evaluation of Mineral Resources Financial Instruments: Disclosures Operating Segments Financial Instruments Consolidated Financial Statements Joint Arrangements Disclosure of Interests in Other Entities Fair Value Measurement (Source: IASB website ) 3.6 IFRS Foundation On 24 May 2000, the first IASC foundation constitution was approved by the members of IASC and on 5 March 2002, certain paragraphs were revised by the trustees of the IASC foundation, effective on that date. Those revisions were necessary to implement certain aspects of the IASB's Preface to IFRS relating to the Standing Interpretations Committee. The International Financial Reporting Standards foundation, or IFRS foundation, is a nonprofit accounting organization. Its main objectives consist of the development and 42

13 promotion of the International Financial Reporting Standards (IFRSs) through the International Accounting Standards Board (IASB), which it oversees. The objectives of the IFRS Foundation are: To develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. These standards should require high quality, transparent and comparable information in financial statements and other financial reporting to help investors, other participants in the world s capital markets and other users of financial information make economic decisions. To promote the use and rigorous application of those standards In fulfilling the above objectives, to take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings To promote and facilitate adoption of International Financial Reporting Standards (IFRSs), being the standards and interpretations issued by the IASB, through the convergence of national accounting standards and IFRSs. 43

14 Figure.3.2 Structure of the IFRS Foundation IASB: International Accounting Standards Board The IASB is the independent standard setting body of the IFRS Foundation. The IASB comprises 16 board members, including the Chairman and Vice Chairman. Mr. Takatsugu Ohchi is appointed from Japan Trustees The Trustees undertake governance and oversight of the IFRS Foundation, for example, funding, approving the annual budget, amending operating procedures and so on. The Trustees comprises 22 Trustees, including the Chairman and Vice- Chair.Mr. Tsuguoki Fujinuma (Immediate Past Chairman and President of JICPA)was appointed Vice-Chair and Mr. Noriaki Shimazaki (Special Advisor, former CFO and Member of the Board, Sumitomo Corp.) attends from Japan. Monitoring Board The Monitoring Board was established in April 2009 to enhance the organization s public accountability. The members include representatives of the European Commission, the IOSCO (2 people), the Financial Services Agency of Japan, and the U.S. Securities and Exchange Commission. The working group of the governance review of the IFRS Foundation was established in July 2010 and Mr. Masamichi Kono, Vice Commissioner for International Affairs of FSA was appointed the Chairman of the working group. 44

15 IFRS Interpretations Committee The IFRS Interpretations Committee is the interpretative body of the IASB. The Committee comprises 14 voting members and Mr. Kazuo Yuasa (Fujitsu Ltd.) attends the committee from Japan. IFRS Advisory Council The IFRS Advisory Council is the formal advisory body to the IASB. The Advisory Council is comprised of 45 members and Mr. Seiichi Kaneko (Executive Vice President of Securities Analysis Association of Japan) and Mr. TomioMuraoka (Director Chairman of the Audit Committee, Toshiba Corp.) attend from Japan. The FSA also has a voice as an observer. Summery This chapter throws a light on the concept of International Financial Standards, Feature and structure and foundation process. In summery this chapter explained about accounting standard setting process foundation of International Accounting Standards Committee and International Accounting Standards Board as well as Impact of IFRS Conversion. 45

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