March 2009
International Financial Reporting Standards
Developing an
IFRS for NPAEs
Skopje, 11 March 2009
Michael Wells, Senior Manager – Education Projects, IASC Foundation
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or the IASC Foundation
© 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Outline
• Why an IFRS for NPAEs?
• IASB’s exposure draft
• IASB’s redeliberations
• Next steps
• IASCF training material
• Prospects
2
International Financial Reporting Standards
Why
an IFRS for NPAEs?
The views expressed in this presentation are those of the presenters,
not necessarily those of the IASB or the IASC Foundation
History
4
1973-2000 voluntary adoption of IAS by
some listed, few unlisted. Since 2001:
• Old IASC restructured – full time IASB
• IFRSs’ growing complexity
• Full IFRSs required in over 100 countries
• National GAAPs converging to IFRSs
• Emerging economies – NPAEs need capital
• NPAEs: User needs? Burden? Enforcement
problems  IFRS ‘Lite’?
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
GAAP reporting required by law for all
or most private companies?
5
•USA: Generally NO.
– 5,000,000 private corporations: No
– 15,000,000 other business: No
– 25,000 SEC/others  FASB GAAP by law
•Rest of world: generally YES.
– Europe: 5,000,000 companies must prepare
GAAP f/s and have audit by law
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Benefits of IFRSs for listed entities
6
• Improved quality of reporting
• Investors invest globally
• Companies seek capital globally
• Analysts follow industries globally
• Cross-border mergers
Accounting differences obscure
comparisons and reduce understandability
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Global standards needed for NPAEs
• Bank lending decisions
• Banks monitor outstanding loans
• Vendors evaluate finances of buyers
• Credit rating
• Overseas customers
• Foreign venture capital
• Non-management investors
• Development institutions (WB etc)
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
7
Why NPAEs Standards Are Needed?
8
• Efficiency (homogeneous accounting  cost of
processing the information is lower  Allocation of
funds is more efficient)
• Financial integration (accounting could be a barrier)
• Improved quality of reporting as compared to
existing GAAP
• Ease burden where full IFRSs or full national GAAP
are now required
• Education and training
• Auditing efficiencies
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
International Financial Reporting Standards
IASB’s Exposure Draft
The views expressed in this presentation are those of the presenters,
not necessarily those of the IASB or the IASC Foundation
Focus more on short-term cash flows,
liquidity, and solvency
10
• Cash flow statement essential
• Restrict “off balance sheet” debt –
unfunded pensions, leases, derivatives,
contracts, and (at least some) deferred
taxes
• Short-term
items
at
current
measurements
Less interest in long-term earnings
forecasts or long-term cash flows
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
IASB Definition of NPAE
11
Which entities are eligible to use?
•IFRS for NPAEs is appropriate for an
entity with no public accountability:
– not publicly traded; and
– not a financial institution
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Finding an Answer
12
Self-contained standard:
• The entity must try to find answer in IFRS
for NPAE
– by analogy, and
– by using pervasive principles in Sec. 2 of
IFRS for NPAEs
• May look to full IFRSs if answer cannot be
found in IFRS for NPAEs
–But, not required
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Disclosure Simplifications
13
Full IFRSs: More than 3,000 disclosures
IFRS for NPAEs: Fewer than 400
Simplifications based on users’ needs and
cost-benefit:
Kept: Short-term cash flow, liquidity,
solvency, measurement uncertainties,
accounting policy choices
Dropped: Disaggregations, public capital
market disclosures
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Suitability for Micro-sized Entities?
14
Is the IFRS for NPAEs suitable for
companies with less than 10 employees?
•Yes
•Key issue: Is it required to prepare
general purpose f/s that present fairly
position, performance, and cash flows?
– aimed at external capital providers
– this is not IASB’s decision – rests with
government
© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
IASB Exposure Draft
• Organised by topic ED is 254 pages,
plus:
– financial statements
– disclosure checklist
– basis for conclusions
• Board vote: 13 to 1
• ED issued: 15 February 2007
• Translated: 5 languages
• Comment deadline was: 30 Nov 2007
• Re-deliberations are mostly completed
15
About the ED
16
• Simplified principles tailored for smaller,
private entities that:
– do not have public accountability
– issue general purpose financial statements
• Based on full IFRSs, which are
developed for public capital markets
• Simplifications based on:
– user needs
– cost-benefits
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Who are we aiming at?
17
In most countries, only 1% of businesses have
over 50 employees. United Kingdom (2007):
Total Entities
Owner run (no employees)
1 – 9 employees
10 – 49 employees
50 – 99 employees
100 – 199 employees
200 – 499 employees
500 or more employees
Number
Percent
4,679,000
3,460,000
1,019,000
167,000
17,000
8,000
5,000
3,000
100.0
74.0
21.7
3.6
0.4
0.2
0.1
0.1
Who are we aiming at?
18
Over 50 employees
In most countries, only 1% of businesses
have
th
are only 8/10 of
over 50 employees. United Kingdom (2007):
1%. And many
of Percent
Number
Total Entities those are ‘publicly
4,679,000
100.0
Owner run (no employees)
3,460,000
74.0
accountable’
(full
1 – 9 employees
1,019,000
21.7
IFRSs).
10 – 49 employees
50 – 99 employees
100 – 199 employees
200 – 499 employees
500 or more employees
167,000
17,000
8,000
5,000
3,000
3.6
0.4
0.2
0.1
0.1
Who are we aiming at?
19
• Which entities must produce general
purpose financial statements is not
IASB’s decision:
– public interest issue addressed by
legislature and regulators
• Present fairly financial condition,
performance, and cash flows
• For external capital providers and others
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
How did we simplify?
20
1. Some topics in IFRSs omitted if
irrelevant to NPAEs
2. Where IFRSs have options, include only
simpler option (there will be
exceptions)
3. Recognition and measurement
simplifications
4. Reduced disclosures
5. Simplified drafting
Extensive outreach and consultation
21
• Presentations at 104 conferences and
roundtables in 40 countries (55 since ED
was issued)
• + 14 SAC, IASCF, and WSS meetings
• 10 published articles
• Field tests with 116 very small
companies
– field test questionnaire in English,
French, Spanish
• 162 comment letters
International Financial Reporting Standards
IASB’s redeliberations
The views expressed in this presentation are those of the presenters,
not necessarily those of the IASB or the IASC Foundation
Board redeliberations so far
March 2008 – analysis of comment letters
April 2008 – analysis of field test results
May 2008 – February 2009 – Board review of
ED section by section, several hundred
decisions, many simplifications.
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
23
Title of the standard
24
Tentative decisions
•
•
•
•
ED—IFRS for SMEs (problem—implies size test)
May 2008—IFRS for Private Entities
January 2009—IFRS for NPAEs
March 2009—?
The National Standard Setters had recommended IFRS
for Non-publicly Accountable Entities (IFRS for NPAEs)
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Cross-references to full IFRSs
25
Tentative decisions
• Should be fully stand alone
• Drop cross-references by bringing in some
‘complex options’ (and a few omitted topics):
– lessor accounting for finance leases
– share-based payment
– fair value of agricultural assets
– hyperinflation
Exception
• Option to use full IFRSs for financial instruments
(IASs 32 & 39 and IFRS 7 and all relevant
Interpretations) included by cross-reference
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Do not anticipate changes to full
IFRSs
Tentative decision
• Consider issue by issue
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
26
Scope
27
Tentative decisions
• excludes small listed entities
• excludes an entity whose primary business is
holding funds in a fiduciary capacity
• includes an entity that holds funds in a fiduciary
capacity as a sideline to its principal business (eg
travel agency or utility company that holds
deposits) that otherwise qualifies as a NPAE.
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Historical cost model should be
default
28
• For non-financial assets, it essentially is
• For financial assets, ED is amortised cost
for receivables, payables, loans, loan
commitments, and non-publicly traded
equity
• But ED is presented as FV model, and if
there is embedded, entire instrument at FV
• Always a ‘reliability exception’ for FV
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Financial instruments
29
Tentative decisions
• Split out ‘plain vanilla’ instruments in
separate cost-based section
• Many NPAEs won’t need to look at the other
section
• Option (by cross reference) to follow IASs
32, 39 and IFRS 7 in lieu of Section 11
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Consolidation
30
Tentative decisions
• Consolidated financial statements
required for all groups (as proposed in
ED)
• Include principles from SIC-12 SPEs
• Exemption from consolidation if
acquired for sale within 12 months
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Associates
31
Tentative decision
• Accounting policy choice:
– cost method;
– equity method; or
– at fair value through profit or loss
• If using cost model then do not separate
pre- and post-acquisition retained earnings
(ie recognise all dividends received in profit
or loss)
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Jointly controlled entities
32
Tentative decisions
• Accounting policy choice:
– cost method;
– equity method; or
– at fair value through profit or loss
• Prohibit proportionate consolidation
• If using cost model then do not separate
pre- and post-acquisition retained earnings
(ie recognise all dividends received in profit
or loss)
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Presentation of financial statements
Tentative decisions
• Conform to revised IAS 1
• Include a statement of comprehensive
income
• Use of new titles will not be required
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
33
Operating cash flows
Tentative decision
• Choose either presentation format:
– direct method, or
– indirect method
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
34
Debt-equity classification
35
Tentative decisions
• Incorporate recent ‘puttables’ changes
• Issuer must split compound financial
instrument. Add examples.
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Share-based payment
36
Tentative decisions
• Recognise an expense for equity-settled SBPs
• The expense should be measured on the basis
of observable market prices, if available, or, if
not, using the directors’ best estimate of the
fair value of the equity-settled SBPs.
• Disclosure alone, without expense recognition,
would not be permitted.
• Include principles of IFRIC 8
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Goodwill and indefinite life intangibles
37
Tentative decisions
• Impairment test (indicator approach as
in ED)
• Deemed to have finite lives
• Amortise over 10 years (maximum)
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Revaluation model
Tentative decisions
• No revaluations of property, plant & equipment
• No revaluations of intangible assets
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
38
Non-current assets held for sale
39
Tentative decisions
• No ‘held for sale’ classification
• However, the decision to sell an impairment
indicator
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Impairment
Tentative decision
• Add notions like in IAS 36:
– recoverable amount
– value in use
– cash generating unit
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
40
Investment property
41
Tentative decisions
• Circumstance driven
– fair value model if can measure reliably without undue cost
or effort
– otherwise use cost model
Full IFRS—accounting policy choice
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Government grants
42
Tentative decisions
• A grant that does not impose specified
future performance conditions on receipts is
recognised in income when the grant
proceeds are receivable
• A grant that imposes specified future
performance conditions on receipt is
recognised only when the performance
conditions are met
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Government grants continued
43
Tentative decisions continued
• Grants received before the recognition
criteria are satisfied are classified as
liabilities
• IAS 20 methods are prohibited
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Leases
44
Tentative decisions
• Include finance leases for lessors (not in ED)
• Include principle of IFRIC 4 (not in ED)
• Operating leases—modified application of straightline method for inflation adjustments
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Borrowing costs
Tentative decisions
• Expense
• No option to capitalise
Full IFRS requires capitalisation of borrowing
costs for all qualifying assets.
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
45
Research and development costs
Tentative decisions
• Expense research cost
• Expense development costs
• No option to capitalise borrowing costs
Full IFRS requires the capitalisation of
qualifying development costs
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
46
Real estate—revenue recognition
47
Tentative decision
• Include principles from IFRIC 15 Agreements for
the Construction of Real Estate
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Service concession arrangements
48
Tentative decision
• Include principles from
Concession Arrangements
IFRIC
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
12
Service
Income taxes
49
Tentative decisions
• Keep temporary difference approach (as in ED)
with some simplifications
• Retain the requirements proposed in the ED
and in IAS 12 regarding the measurement of
deferred tax when a jurisdiction imposes
different tax rates on distributed and
undistributed income
• All deferred tax assets and liabilities classified
as non-current
• Prohibit discounting (current and deferred tax)
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Defined benefit plans
Tentative decisions
• If can get information without undue cost or effort, use IAS
19 method, ie PUC etc
• If not, IAS 19 approach but ignore future salary increase,
future service, or possible mortality during an employee’s
period of service. However, take account of life expectancy
of employees after retirement age. The resulting defined
benefit pension obligation would reflect both vested and
unvested benefits.
• Comprehensive valuations normally every three years.
Interim periods, valuations rolled forward for aggregate
adjustments for employee composition and salaries, but
without changing the turnover or mortality assumptions.
• Further guidance would be added on insured benefits.
International Financial Reporting Standards
Next steps
The views expressed in this presentation are those of the presenters,
not necessarily those of the IASB or the IASC Foundation
Redrafting of the ED
52
January to March 2009
• Reflect all Board decisions
• Additional guidance examples
• Editorial corrections and improvements
– many indentified in comment letters
• Send pre-ballot draft to Board
• Then one or more ballot drafts
• Then, finally, the ballot (vote)
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Re-exposure? IASB handbook says:
53
In considering re-exposure, the IASB
• Identifies substantial new issues arising in
ED comments not previously considered
• Assesses evidence that it has considered
－
－
• Evaluates whether it has
understood the
issues and sought views of constituents
• Considers whether the various viewpoints
were aired in the ED and adequately
discussed and reviewed in the ED basis for
conclusions
International Financial Reporting Standards
IASC Foundation
training material
The views expressed in this presentation are those of the presenters,
not necessarily those of the IASB or the IASC Foundation
Overview
• IASCF does not certify accountants…
• However, is developing training material for use by others
• +35 standalone modules (1 for each section of the IFRS for
NPAEs)
• Training material = +1,000 A4 pages. IFRS for NPAEs =
+250 A5 (half size) pages
• Developed by IASCF education staff
• Extensive multi-level peer review
• Expect in H2 2009 (after IASB issues IFRS for NPAEs)
Access
• Free to download (PDF files of modules)
• Self study
• You can incorporate the modules (PDF files)
into your IFRS for NPAEs education and training
programmes
• Ask development agencies to fund official
translations into multiple languages
• High quality home-language material is
essential for quality implementation in SMP/SME
environment
Content
• Each module includes:
– introductory material
– explanation of the requirements (including the full text
of the requirements, ‘how to’ examples and
explanations)
– discussion of important judgements
– comparison with full IFRSs
– test your knowledge—multiple choice
– apply your knowledge—case studies
Proposal to the world’s development
agencies and others
• Fund the official translation of the IASC Foundation’s IFRS
for NPAEs training material?
• Organise regional ‘train the trainers’ workshops?
– IASCF education staff willing to lead regional workshops
• Assist developing nations build sustainable IFRS for
NPAEs application capacity?
International Financial Reporting Standards
Prospects
The views expressed in this presentation are those of the presenters,
not necessarily those of the IASB or the IASC Foundation
Use in the United States
60
Could private companies in the US use the
IFRS for NPAEs?
•No reason why not
•No statutory audit requirement in US
•Basis of presentation note would refer to
conformity with IFRS for NPAEs
•If audited, auditor would report on
conformity with IFRS for NPAEs
AICPA: Designated IASB under Rule 203
Considerable support in US
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Use in Europe
61
IAS regulation applies only to full IFRSs
•IFRS for NPAEs not required or prohibited
•Each jurisdiction must decide
•We believe it is consistent with Directives
EC staff and some MEP stated concerns –
not enough simplifications
•Hint at developing an EU SME standard
Expressed interest in adopting:
•Denmark, Norway, UK, Sweden, others
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Use elsewhere
62
South Africa
•Already adopted the ED as their final standard
World Bank, IDB, other development
agencies
•Strong support
•Expect regional conferences
Others under serious consideration
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Next steps
63
Board re-deliberations: Finish in Q1 2009
Pre-ballot draft and ballot drafts: Q2 2009
Final Standard: Late H1 2009
Effective: Whenever adopted locally
IASCF training material: H2 2009
© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Questions or comments?
Expressions of individual views
by members of the IASB and
their staff are encouraged.
The views expressed in this
presentation are those of the
presenters. Official positions of
the IASB on accounting matters
are determined only after
extensive due process
and deliberation.
64