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USAID “International Business Standards and Corporate Governance” Project, Ukraine. FMI. International Financial Reporting Standards From accounti n g directives to the global standards. Prepared by: Boris Palienko. Tallinn September 15 -19, 2003. - PowerPoint PPT Presentation
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International Financial Reporting Standards
From accounting directives to the global standards
Prepared by:
Boris Palienko
TallinnSeptember 15 -19, 2003
USAID “International Business Standards and Corporate Governance” Project, UkraineFMI
2International Financial Reporting Standards – from accounting directives to the global standards
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
3International Financial Reporting Standards – from accounting directives to the global standards
Single Accounting Standard
5% - Undesirable5% - Not sure
90% - desirable
4International Financial Reporting Standards – from accounting directives to the global standards
What standard to chose as a global standard ?
78
76
65
41
Western Europe
Eastern Europe/Africa
Asia
Latin America
North America
22
24
35
41 59
24 76
IAS
GAAP
5International Financial Reporting Standards – from accounting directives to the global standards
Issues that impact the investment decisions
Accounting disclosure 71
47
43
42
37
46
32
32
31
30
Shareholder equality
Market regulation and infrastructure
International Accounting Standards
Market liquidity
Property rights
Pressure on corruption
Insolvency and bankruptcy regulation
Fiscal environment
Banking system
6International Financial Reporting Standards – from accounting directives to the global standards
What are the top reform priorities for policymakers
Strengthen shareholder rights
Improve accounting standards
More effective disclosure
Stronger enforcement
33
32
31
27
Percentage of investors selecting this option; multiple responses possible
7International Financial Reporting Standards – from accounting directives to the global standards
IAS / IFRS - Recent progress in Europe
EC Recommendations on IAS submitted to Council and Parliament
Proposal to require IAS for listed companies
EC Comparisons of IAS with Directives
June 2000
February 2001
April 2001
July 2001 EU Economic and Social Committee indorsed the Proposal that would adopt IAS in Europe by 2005
8International Financial Reporting Standards – from accounting directives to the global standards
IAS / IFRS - Recent progress in Europe (cont’d)
Parliament and Council amend the accounting Directives
EFRAG Reports on Consistency of modernized Directives and IAS
ECOFIN, European Parliament discuss the proposed IAS regulation
October 2001
December 2001
December 2001
March 2002 European Parliament overwhelmingly adopts IAS resolution
9International Financial Reporting Standards – from accounting directives to the global standards
IAS / IFRS - Recent progress in Europe (cont’d)
Parliament and Council amend the accounting Directives
EU proposes revised accounting Directives
The Council of the EU has adopted an “IAS Regulation”
April 2002
May 2002
June 2002
May 2003 The Council of Ministers has adopted proposals to modernize the existing Accounting Directives
10International Financial Reporting Standards – from accounting directives to the global standards
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 non-US companies.
All these non-U.S. issuers have to prepare or reconcile their reports to US GAAP
11International Financial Reporting Standards – from accounting directives to the global standards
Convergence of US GAAP and IFRS
US GAAP
150 standards
Rule based
No concept of true and fair view
IFRS
34 standards and 33 interpretations
Principle based
Overriding principle of true and fair view/fair presentation
12International Financial Reporting Standards – from accounting directives to the global standards
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.
13International Financial Reporting Standards – from accounting directives to the global standards
Selected examples of differences between IFRS and US GAAP
Basis of reportable segments
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.
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.
14International Financial Reporting Standards – from accounting directives to the global standards
Selected examples of differences between IFRS and US GAAP
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".
Basis of property, plant, and equipment
IFRS: May use either fair value or historical cost.
US: Generally required to use historical cost.
.
15International Financial Reporting Standards – from accounting directives to the global standards
Selected examples of differences between IFRS and US GAAP
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.
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.
16International Financial Reporting Standards – from accounting directives to the global standards
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.
17International Financial Reporting Standards – from accounting directives to the global standards
One more survey - GAAP Convergence 200259 countries surveyed. Some of the concerns expressed about impediments to achieving IFRS convergence.
– 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– Limited capital markets– Satisfaction with national accounting standards
among investors/users– Translation difficulties
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3021
18
18International Financial Reporting Standards – from accounting directives to the global standards
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
19International Financial Reporting Standards – from accounting directives to the global standards
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 !
20International Financial Reporting Standards – from accounting directives to the global standards
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.
21International Financial Reporting Standards – from accounting directives to the global standards
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
22International Financial Reporting Standards – from accounting directives to the global standards
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.
Framework for the preparation and presentation of IAS/IFRS financial statements
23International Financial Reporting Standards – from accounting directives to the global standards
Qualitative characteristics of financial statements
Understandability
Relevance
Reliability
Comparability
Framework for the preparation and presentation of IAS/IFRS financial statements
24International Financial Reporting Standards – from accounting directives to the global standards
Elements of financial statements
Framework for the preparation and presentation of IAS/IFRS financial statements
The elements directly related to financial position (balance sheet):
Assets = Liabilities
Equity
The elements directly related to performance (income statement).
Income
Expenses
25International Financial Reporting Standards – from accounting directives to the global standards
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)
Framework for the preparation and presentation of IAS/IFRS financial statements
Measurement of the elements of financial statements
26International Financial Reporting Standards – from accounting directives to the global standards
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.
27International Financial Reporting Standards – from accounting directives to the global standards
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
New vision of IFRS - Fair value measurement
28International Financial Reporting Standards – from accounting directives to the global standards
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
29International Financial Reporting Standards – from accounting directives to the global standards
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
30International Financial Reporting Standards – from accounting directives to the global standards
• For Indonesia and GAAP comparison, please refer to the additional material (Deloitte, 2007: IFRS and Indonesian GAAP – A Comparison)
31International Financial Reporting Standards – from accounting directives to the global standards
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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