IFRS Accounting Standards

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IFRS Accounting Standards

  1. 1. Contents PageCover Sheet ………………………………………………………………….……..…. 1Front Page …………………………………………………………………….………. 2Contents Page ……………………………………………………………..….………. 3Bibliography ……………………………………………………………..…….…..…. 4Section 1 ……………………………………………………………………..….……. 5 Monitoring Board ………………………………………………….…….…… 5 Trustees of the Foundation ………………………………………………..….. 6 International Accounting Standards Board ………………………………..…. 6 Interpretations Committee ………………………………………………….… 7 Advisory Council …………………………………………………………..…. 7 Comments ………………………………………………………………….…. 7Section 2 ………………………………………………………………………..….…. 8 Benefits ………………………………………………………….……..….….. 8 Challenges …………………………………………………………………….. 9 Criticisms ……………………………………………………………………… 9 Conclusions ……………………………………………………………………. 10Section 3 ……………………………………………………………………………….. 11 Purpose of the IFRS Framework ………………………………………………. 11 Investor Decisions ……………………………………………………………… 12 Conclusions …………………………………………………………………….. 13References …………………………………………………………………...…………. 14 Section 1 ………………………...……………………………………..……….. 14 Section 2 ……………………………………………………...……..………….. 14 Section 3 ………………………………………………………………………… 15
  2. 2. Jason Cates Accounting Regulation Bibliography Section 1 IASB IFRS The International Organization of Securities Commissions Section 2 Beddington. J. and Song. E. Stokdyk. J. Section 3 Alexander, D. and Britton, A. Deloitte IAS Plus IASCF IFRS 2
  3. 3. Jason Cates Accounting Regulation IFRS International Financial Reporting Standards Foundation The independent IFRS Foundation is a private not-for-profit organisation which aimsto; • Develop a unilateral set of international financial reporting standards (IFRSs) that are globally accepted and are understandable to users. The Foundation looks for these standards to be globally enforceable through the IASB,(IFRS, 2011), • The foundation seeks the promotion of the rigorous application of these international standards,(IFRS, 2011), • To take into account the requirements of emerging economies as well as small to medium-sized enterprises when setting international standards,(IFRS, 2011) • To promote the convergence of national financial reporting standards.(IFRS, 2011)Monitoring Board It is through the Monitoring Board that capital market authorities that use the IFRS’scan more effectively carry out their regulatory roles. This includes protecting investors,capital formation and ensuring market integrity.(IOSCO, 2012) The Monitoring Board was established to ensure the Trustees carry out their duties asstated by the Foundations Constitution. This includes approving the appointment andreappointment of Trustees to whom it is expected they meet at least once a year. However, itis often the case they meet on a more regular basis when appropriate.(IOSCO, 2012) 3
  4. 4. Jason Cates Accounting RegulationTrustees of the IFRS Foundation The Trustees aim to promote the rigorous application of the international accountingstandards, but are generally not concerned with the day-to-day technicalities of the IFRSstandards.(IFRS, 2011) Trustees are appointed every three years and are able to serve multiple terms. Trusteesare expected to understand how global concerns relate to the success of an organisation suchas the IFRS Foundation. This includes being responsible for developing global accountingstandards that can be used by varies users such as the world’s capital markets.(IFRS, 2011)There are 22 trustees at any one time made up as follows (IFRS, 2011); • 6 from the Asia/Oceania region, • 6 from the North American, • 6 from Europe, • 1 from Africa, • 1 from the South America and • 2 from the rest of the world.International Accounting Standards Board The board was founded on April 1st 2001 and consists of 15 full-time members and isthe successor to the International Accounting Standards Committee. (IASB, 2005) The IASB is responsible for developing and promoting the IFRS’s. The IASB aims todo this by engaging with varies stakeholders, including analysts, investors, regulators and 4
  5. 5. Jason Cates Accounting Regulationaccounting professionals. All IASB meetings are held in public to enhance transparency ofthe organisation.(IFRS, 2011)Interpretations Committee The role of the Committee is to regularly review and provide guidance on accountingissues in relation to the IFRS standards.(IFRS, 2011) The IFRS Interpretations Committee consists of 14 Trustee appointed votingmembers. The Committee members range in professions and nationalities. Like the IASB,meetings are publically held to enhance the transparency of the organisation and worksclosely with comparative national committees.(IFRS, 2011)Advisory Council The Advisory council is the body that advisories the IASB and the IFRS Trustees. It is made up of representatives from a wide-range of areas. This includes financialanalysts, regulators, auditors and investor groups as well as many more that are affected bythe IASB’s work. The Advisory Council is appointed by the IFRS Trustees. The AdvisoryCouncil meets three times a year in which they advice the IASB on broad issues as well onindividual projects. In these meetings, there is an emphasis implementation and on practicalapplication of the IFRS standards.Comments It can be viewed that this structure offers a well rounded perspective. This includestaking into account varies stakeholders and users or financial reports. However it can also beviewed that the current system is complicated and should be simplified. This includes having 5
  6. 6. Jason Cates Accounting Regulationentities carrying out some roles already carried out by other entities. An example includes theTrustees and the IASB both, to some degree, promote the IFRS standards. The International Financial Reporting Standards: The Benefits and Challenges This report will analyse the benefits and challenges of conforming to the InternationalFinancial Reporting Standards. Standards can vary dramatically between countries, creating complications for entitiesinvolved in the preparation, audit and interpretation of financial statements. Also, the highlyintegrated relationship between internal financial controls and the development of publishedaccounts further complicate these issues. This report will consider the European Union’s implementation of IFRS’s. This willinclude analysing the benefits and challenges faced by EU during the process of conformingto international standards.Benefits The benefits of implementing a system of common international standards, relating tothe EU, include taking a step towards a common European market, which has been an aim ofthe EU. A benefit of common international standards includes companies being more able toobtain foreign investment from varies member states. This results in cheaper more efficientoptions available to European companies relating to raising capital investment. Therefore, 6
  7. 7. Jason Cates Accounting Regulationproviding companies with a competitive advantage and supporting future growth which hasbeen an issue of concern in recent years. These standards also allow for more cross-border trading and merger/acquisitionactivity.(Stokdyk. J,2010)This allows companies to become more cost efficient due toeconomics of scale and allows for greater profit levels due to increase market share andpossible tax gains. This will provide companies using the standards with a competitiveadvantage compared to other international companies currently in non-compliance.Challenges The main motivation of accounting standards harmonisation across the EU as stated inthe treaty establishing the EEC(Article 54) is to “reach an economic equal level playing fieldwithin the Community”.(Beddington and Song, 2005) This harmonisation is achievedthrough directives which member states are obliged to incorporate into their legal systems.(Beddington and Song, 2005) A challenge that arose during the EU implementation process was the reluctance ofmember states to compromise. This reluctance was due to both political reasons and thescepticism of the financial markets.(Beddington and Song, 2005) There was also the issuethat each member state had different systems concerning financial reporting, income and taxlevels.(Beddington and Song, 2005) These differences are considered a result of the differentmodels used by member states. This includes the Anglo-Saxon model used in the UK andIreland, and the continental model used on continental Europe. (Beddington. J. and Song. E,2005)Criticisms 7
  8. 8. Jason Cates Accounting Regulation Criticisms of IFRS’s include the complexity of these standards and the strain theyplace on companies. It is considered that the IFRS’s are unsuitable for SME’s who also do not require thecross-border comparability.(Stokdyk,2010) Imposing these standards onto SME’s increasestheir costs of preparing and auditing their accounts. Also, greater disclosure requirementsgive companies adopting less stringent rules a competitive advantage.(Stokdyk,2010) The concerns of banks relate to the volatility these standards may cause in relation tohedge ineffectiveness and demand deposits.(Beddington and Song, 2005) Demand depositsare considered vital to banks and the IASB argues their maturity should be based on theircontractual on-call maturity rather than their expected maturity.(Beddington and Song, 2005)This volatility arises from the inability of banks to use “Fair value hedge accounting” inrelation to risk exposure.(Beddington and Song, 2005) Resulting in banks being required toadopt “cash-flow hedging “, which causes false volatility in bank equity levels.(Beddingtonand Song, 2005)Conclusions To conclude, the benefits of the IFRS’s can be considered to be more related tointernational enterprises, whereas the challenges are considered to be faced more by SME’s.Therefore, which organisations the IFRS’s apply to is crucial. In relation to the EU, thisreport concludes that the IRFS’s are beneficial enough to incorporate into national standardsacross the union. However, the motivation of the EU adopting these standards comes from itsaim of having a unified monetary union not currently shared by non-EU countries. IFRS’swill therefore, be less beneficial for non-EU countries to implement. Even taking this intoaccount, this report concludes that the benefits of implementing IFRS’s outweigh anychallenges that may arise. 8
  9. 9. Jason Cates Accounting Regulation Summarise the purpose of the IFRS Framework for the Preparation and Presentationof Financial Statements. Evaluate how the qualitative characteristics in the Framework contribute to the decisions made by investors.Purpose of the IFRS Framework The IFRS Framework outlines core concepts concerning the final presentation of keyfinancial statements as well as their initial preparation considering varies users. ThisFramework acts as a guide for the development of Future IFRS’s and helps resolve issues notdirectly addressed by a current standard or interpretation.(Deloitte IAS Plus, 2010) The framework is designed to address a number of issues. These include: • The aims and objectives relating to financial reporting, • The varies reporting entities, • Concept(s) of capital and capital maintenance, • Qualitative characteristics of material financial information and • How principle elements of financial statements are defined, recognised and measured. (Deloitte IAS Plus, 2010) These provide a foundation for internationally converged accounting standards that areconsistent and based upon core principles.(IFRS, 2010) This fundamental purpose provides guidance to a number of stakeholders involved inthe preparation and presentation of financial statements. This guidance is provided through- 9
  10. 10. Jason Cates Accounting Regulationout the financial reporting process, from the initial development of standards up until the finalinterpretation of financial statements. This guidance starts at the development and reviewing process of InternationalAccounting Standards, as well being used in the absence of an applicable standard orinterpretation. This carries onto how national regulators implement international standardsand the providing of support to the preparers and auditors of financial statements. Thepurpose of this is to better inform users of financial statements alongside providing supporton their interpretation.Investor Decisions This report will now discuss how the qualitative characteristics of the IFRSFramework shown below support the decision making process for investors. Qualitative Characteristics Original 4 Recent Revision Faithful Timeliness Materiality Representation Understand- Relevance Comparability Reliability ability Objectivity Completeness(Deloitte IAS Plus, 2010) A recent revision to the qualitative characteristics addresses the issues of materiality andfaithful representation. Faithful representation means the financial statements are complete, 10
  11. 11. Jason Cates Accounting Regulationneutral and free from material error, providing a well-rounded and accurate picture of theeconomic state of affairs at the organisation. Each of the characteristics listed above relate to investor decisions. Reliability givesusers confidence in the information that is presented to them. Although, this does notnecessarily mean that the information presented to them is completely accurate, but merelycredible.(Alexander and Britton, 2004) Information should also be objective and free frombiased opinion. This is to ensure the continued reliability of the information provided.(Alexander and Britton, 2001) Completeness means giving a total and well-rounded picture of the organisationseconomic activities. However, this may come into conflict with understandability due tocomplex calculations being required.(Alexander and Britton, 2001) Information should beprovided in time for use to be made of it. This may require completeness of information to becompromised in order to maintain its usefulness.(Alexander and Britton, 2004) Information should be understandable by varies users who have different levels ofaccounting ability. Therefore, a balance should be struck between experts who requiredetailed reports and simplicity for non-specialists.(Alexander and Britton, 2001) Relating torelevance, it should be considered who reports are for and what they require from financialstatements. These user-groups range from investors, governments, analysts and many morewho will all have their individual needs.(Alexander and Britton, 2004) Finally, the information provided should be comparable. This is to allow performanceto be compared to past and/or competitor performance. Therefore, treatment and applicationof accepted standards should remain consistent.(Alexander and Britton, 2004)Conclusions 11
  12. 12. Jason Cates Accounting Regulation To conclude, it can be viewed that these characteristics do aid decision making, butnot necessarily aid accurate decision making. This is due to investors perhaps making“wrong” decisions as a result of the information provided. However, this would largely bedue to inappropriate analysis of information, rather than the quality of information provided.Therefore, it is concluded that these qualitative standards do provide a sound basis forinvestor decisions.ReferencesSection 1The International Accounting Standards Board (2005) History. Available athttp://archive.iasb.org.uk/about/history.asp [Accessed: 5th February, 2011]The International Financial reporting standards (2011) The Organisation, Trustees. Availableat http://www.ifrs.org/The+organisation/Trustees/Trustees.htm [Accessed: 5th February,2011]The International Financial reporting standards (2011) The Organisation, About the IFRSFoundation and the IASB. Available athttp://www.ifrs.org/The+organisation/IASCF+and+IASB.htm [Accessed: 5th February, 2011]The International Organization of Securities Commissions (2011) Monitoring Board of theInternational Financial Reporting Standards Foundation. Available athttp://www.iosco.org/monitoring_board/ [Accessed: 5th February, 2011]Section 2Beddington. J. and Song. E. (2005) ‘The adaption of IFRS in the EU and New Zealand.’[Online]. Available at:http://www.europe.canterbury.ac.nz/research/pdf/finance_nz_prelim_report.pdf [Accessed:10th February, 2011] 12
  13. 13. Jason Cates Accounting RegulationStokdyk. J. (2010) EU uncovers resistance to IFRS for SMEs. Available at:http://www.accountingweb.co.uk/topic/financial-reporting/eu-uncovers-resistance-ifrs-smes/429509 [Accessed: 10th February, 2011]Section 3Alexander, D. and Britton, A. (2001) Financial Reporting. 6th edn, London: ThomsonLearning.Alexander, D. and Britton, A. (2004) Financial Reporting. 7th edn, London: ThomsonLearning.Deloitte IAS Plus (2010) Summaries of International Financial Reporting Standards.Available at: http://www.iasplus.com/standard/framewk.htm [Accessed: 15th February, 2011]IASCF (1989) Framework for the Preparation and Presentation of FinancialStatements [B1709].IFRS (2010) Work Plans for the IFRS: Conceptual Framework. Available at:http://www.ifrs.org/Current+Projects/IASB+Projects/Conceptual+Framework/Conceptual+Framework.htm [Accessed: 15th February] 13

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