International Financial
Reporting Standards
From accounting directives to the
global standards
USAID “International Business Standards and Corporate Governance” Project, Ukraine
Prepared by:
Boris Palienko
Tallinn
September 15 -19, 2003
FMI
McKinsey Global Investor Opinion on
Corporate Governance in 2002
Surveyed 201 professional investors from institutions
with an estimated $9 trillion under management.
Covered 31 countries.
• To what extent is a single global accounting standard
desirable
• If an existing standard were to be chosen as a global
one, which one would you prefer
• What are the clear issues at all levels that impact on
the investment decision
• What are the top reform priorities for policymakers
International Financial Reporting Standards – from accounting directives to the global standards
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Single Accounting Standard
5% - Undesirable
5% - Not sure
90% - desirable
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What standard to chose as a global standard ?
Western Europe
78
22
IAS
Eastern Europe/Africa
76
24
GAAP
Asia
Latin America
North America
65
41
24
41
35
59
76
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Issues that impact the investment decisions
Accounting disclosure
Shareholder equality
71
47
43
42
Market regulation and infrastructure
International Accounting Standards
Market liquidity
Property rights
Pressure on corruption
Insolvency and bankruptcy regulation
Fiscal environment
Banking system
37
46
32
32
31
30
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What are the top reform priorities for policymakers
33
Strengthen shareholder rights
Improve accounting standards
More effective disclosure
Stronger enforcement
32
31
27
Percentage of investors selecting this option;
multiple responses possible
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IAS / IFRS - Recent progress in Europe
June 2000
February 2001
April 2001
July 2001
EC Recommendations on IAS
submitted to Council and Parliament
Proposal to require IAS for listed
companies
EC Comparisons of IAS with
Directives
EU Economic and Social Committee
indorsed the Proposal that would
adopt IAS in Europe by 2005
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IAS / IFRS - Recent progress in Europe (cont’d)
October 2001
Parliament and Council amend the
accounting Directives
December 2001
EFRAG Reports on Consistency of
modernized Directives and IAS
December 2001
ECOFIN, European Parliament
discuss the proposed IAS regulation
March 2002
European Parliament
overwhelmingly adopts IAS
resolution
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IAS / IFRS - Recent progress in Europe (cont’d)
April 2002
Parliament and Council amend the
accounting Directives
May 2002
EU proposes revised accounting
Directives
June 2002
The Council of the EU has adopted
an “IAS Regulation”
May 2003
The Council of Ministers has
adopted proposals to modernize the
existing Accounting Directives
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IAS - Key challenges
•
Convergence with US GAAP and acceptance
of IAS by the US SEC
NYSE - total number of listed companies - 2,800
companies valued at nearly $15 trillion in global market
capitalization. Non-U.S. issuers - 470 companies are
valued at $4.6 trillion.
Nasdaq - About 5,000 companies listed, 342 are nonUS companies.
All these non-U.S. issuers have to prepare
or reconcile their reports to US GAAP
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Convergence of US GAAP and IFRS
US GAAP
IFRS
150 standards
34 standards and 33
interpretations
Rule based
Principle based
No concept of true
and fair view
Overriding principle of true
and fair view/fair
presentation
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Selected examples of differences between
IFRS and US GAAP
Experts identify about 95 KEY Differences !
Comparative prior year financial statements
IFRS: One year comparative financial information is
required.
US: US GAAP states that comparatives are "desirable". SEC
regulations generally require two years of comparative
financial information.
.
.
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Selected examples of differences between
IFRS and US GAAP
Classification of interest received and paid in the cash
flow statement
IFRS: May be classified as an operating, investing, or
financing activity.
US: Must be classified as an operating activity.
Basis of reportable segments
IFRS: Lines of business and geographical areas.
US: Components for which information is reported internally
to top management, which may or may not be based on lines
of business or geographical areas.
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Selected examples of differences between
IFRS and US GAAP
Basis of property, plant, and equipment
IFRS: May use either fair value or historical cost.
US: Generally required to use historical cost.
.
Special purpose entities (SPE)
IFRS: Consolidate if "controlled". Generally follow the same
principles for commercial entities in determining whether or
not control exists.
US: Consolidate if certain criteria for "qualifying SPEs" are
not met. Generally look to whether or not the SPE has a
sufficient level of equity "at risk".
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Selected examples of differences between
IFRS and US GAAP
Different accounting policies of investor and associate
IFRS: Must either (a) conform policies or, (b) if that is not
practicable, disclose that fact.
US: No requirement to conform policies.
Classification of convertible debt instruments by the
issuer
IFRS: Split the instrument into its liability and equity
components.
US: Classify the entire instrument as a liability.
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IAS - Key challenges
•
Enforcement of IAS / IFRS
In the US, SEC examines the reports and in the event of
non-compliance with GAAP can force the companies to
restate their financials.
In Europe, the Committee of European Securities
Regulators (CESR) is developing the standards for
enforcement of IAS / IFRS. Deadline - January 2005.
But if the capital markets are intended to be global
and that accounting standards are to be truly global, it
seems only logical to have global enforcement.
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One more survey - GAAP Convergence 2002
59 countries surveyed. Some of the concerns expressed
about impediments to achieving IFRS convergence.
%
51
47
39
35
–
–
–
–
Complicated nature of particular standards
Tax driven nature of the national accounting regime
Disagreement with certain significant IFRS
Insufficient guidance on first time application of
IFRS
30 – Limited capital markets
21 – Satisfaction with national accounting standards
among investors/users
18 – Translation difficulties
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Understanding IAS / IFRS
Existing IAS / IFRS - basically represent the set of
standards and interpretation on how to account for certain
transaction and what disclosure should be made in the
financial statements.
The spirit, concepts and principles of IAS/IFRS are
proclaimed in:
Framework For The Preparation And Presentation Of
Financial Statements
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Framework for the preparation and
presentation of IAS/IFRS financial statements
• describes the basic concepts by which financial
statements are prepared
• serves as a guide to the IAS Board in developing
accounting standards and as a guide to resolving
accounting issues that are not addressed directly in an
IAS or IFRS.
Framework is not the standard !
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Framework for the preparation and
presentation of IAS/IFRS financial statements
• defines the objective of financial statements;
• identifies the qualitative characteristics that make
information in financial statements useful; and
• defines the basic elements of financial statements and
the concepts for recognising and measuring them in
financial statements.
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Framework for the preparation and
presentation of IAS/IFRS financial statements
Financial position - balance sheet
Performance - income statement and statement of
changes in equity
Changes in financial position - cash flow statement.
Notes and supplementary schedules
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Framework for the preparation and
presentation of IAS/IFRS financial statements
Underlying assumptions
Accrual Basis. The effects of transactions and other events
are recognized when they occur, rather than when cash or its
equivalent is received or paid, and they are reported in the
financial statements of the periods to which they relate.
Going Concern. The financial statements presume that an
enterprise will continue in operation indefinitely or, if that
presumption is not valid, disclosure and a different basis of
reporting are required.
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Framework for the preparation and
presentation of IAS/IFRS financial statements
Qualitative characteristics of financial statements
 Understandability
 Relevance
 Reliability
 Comparability
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Framework for the preparation and
presentation of IAS/IFRS financial statements
Elements of financial statements
The elements directly
related to financial position
(balance sheet):
Assets
= Liabilities
Equity
The elements directly
related to performance
(income statement).
Income
Expenses
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Framework for the preparation and
presentation of IAS/IFRS financial statements
Measurement of the elements of financial statements
Measurement involves assigning monetary amounts at which
the elements of the financial statements are to be recognised
and reported.
The Framework acknowledges that a variety of measurement
bases are used today to different degrees and in varying
combinations in financial statements, including:
Historical cost
Net realizable (settlement) value
Current cost
Present value (discounted)
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New vision of IFRS - Fair value measurement
It is a new vision of IFRS that considers fair value
measurement to be paramount.
A Balance Sheet Oriented, Fair Value Model
This vision is based on an approach to company financial
reporting that has been developed over the past several years
by a group of Anglo-Saxon accounting standard setters, and
has now been adopted by the International Financial
Reporting Standards Board. It is a balance sheet oriented,
fair value model, where the emphasis is on measuring the
fair values of companies' assets and liabilities.
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New vision of IFRS - Fair value measurement
The accounting process will be focused extensively on
the recognition, de-recognition and measurement at
fair value of companies' assets and liabilities.
The measurement of income will rely heavily on
changes in the fair value of net assets. Income will be
reported in a single statement of financial performance
that aggregates all accrual-based income with all value
changes, whether realized or unrealized
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New vision of IFRS - Fair value measurement
Measurement using the fair value will create big
challenges for many companies, especially in
developing countries, where the capital markets are not
liquid:
- fair value estimate should be accurate
- fair value estimate should be reliable
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Conclusion and summary
• Globalization of capital markets requires the single global
accounting, reporting and disclosure set of standard;
• IFRS makes significant progress toward global recognition
- Europe adopts IFRS for listed companies beginning
January 2005;
• Major differences between US GAAP and IFRS impede
recognition of IFRS by the US SEC;
• Development of IFRS enforcement standards will be
completed in Europe by 2005;
• IFRS Framework - foundation of the international
financial reporting standards;
• IFRS new vision - emphasis on fair value measurement
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• For Indonesia and GAAP comparison,
please refer to the additional material
(Deloitte, 2007: IFRS and Indonesian
GAAP – A Comparison)
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Assignments
• Answer, Discuss, Evaluate and Present the
following questions:
– Do you think IFRS will promote more relevance,
reliability and comparable financial statements and
information? Why and Why not?
– Should Indonesia FULLY ADOPTING IFRS, or
SELECTED AND ADJUSTABLE IFRS only??
– For complementary reading: please refer to the
additional material:
• A Globally Conceptual Framework (Barth, Hague and
Linsmeier, 2008)
• IFRS and Indonesian GAAP: A Comparison (Deloitte, 2007)
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