International financial reporting standards


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This presentation talks about IFRS(International financial reporting standards) and about its Implementation.

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International financial reporting standards

  1. 1. What is IFRS? International Financial Reporting Standards (IFRS) is a set of accounting standards, developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements. The IASB is an independent accounting standards body, based in London that is unaffiliated with the AICPA, CPA2Biz or this website. What is the IASB? The IASB is an independent accounting standard-setting body, based in London. It consists of 14 members from nine countries, including the United States. The IASB began operations in 2001, when it succeeded the International Accounting Standards Committee. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, and other international and professional organizations throughout the world. The AICPA was a founding member of the International Accounting Standards Committee, but the IASB neither sponsors nor endorses this website. How widespread is the adoption of IFRS around the world? More than 12,000 companies in almost 100 nations have adopted IFRS, including listed companies in the European Union. Other countries, including Canada and India, are expected to transition to IFRS by 2011. Some estimate that the number of countries requiring or accepting IFRS could grow to 150 in the next few years. Other countries, such as Japan and Mexico, have plans to converge (eliminate significant differences) their national standards.
  2. 2. What is the possibility of the Securities and Exchange Commission substituting IFRS for GAAP? Many people believe that acceptance of IFRS in the United States by the SEC for public companies are inevitable. For many years the SEC has been expressing its support for a core set of accounting standards that could serve as a framework for financial reporting in cross-border offerings. In recent years, it has supported efforts of the Financial Accounting Standards Board (FASB) and the IASB to develop a common set of high-quality, global standards. And most recently, it issued a Concept Release seeking input on allowing U.S. public companies to use IFRS when preparing financial statements. SEC Chairman Christopher Cox also announced that later this year the SEC staff will formally propose to the Commission an updated “roadmap” that will lay out a schedule and appropriate milestones for continuing U.S. progress toward acceptance of IFRS. The bottom line is that CPAs need to begin to prepare for the day in the not- so-distant future when the SEC could designate a date for voluntary, or even mandatory, adoption of IFRS by all U.S. public companies. What are the likely costs of converting to IFRS? The costs would be determined largely by the size and nature of the respective company. While the initial cost to identify and quantify the differences between U.S. GAAP and IFRS, staff training, and implementing IT support could be significant, the conversion also might result in a reduction of capital and financial reporting related operation costs.
  3. 3. What are some of the most important specific differences between IFRS and U.S. GAAP? Because of longstanding convergence projects between the IASB and FASB, the extent of the specific differences between IFRS and GAAP has been shrinking. Yet, significant differences do remain, most any one of which can result in significantly different reported results, depending on a company’s industry and individual facts and circumstances. For example: • IFRS does not permit Last in First out (LIFO). • IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely. • IFRS has a different probability threshold and measurement objective for contingencies. • IFRS does not permit curing debt covenant violations after year-end. The Importance of IFRS Standards present themselves in different ways. In accounting terms, standards are a mark of quality. International standards are international marks of quality, and specifically the IFRS. In the most part, IFRS is widely recognized as the leading standard to be adhered to. The quicker that local organizations move to working within this framework, the quicker the investment will flow. It's all about quality and transparency, a transparency that is not so apparent in the region. "The Middle East could follow the example of India, which is experiencing major investment growth. India is moving towards IFRS because its major trading partners like Russia and China are doing so." The UAE has no legislation mandating the use of IFRS by all companies, although the banks follow IFRS on
  4. 4. directives of the Central Bank and listed companies because of stock market guidelines. Those without IFRS, looking for investment could struggle against those that do, in an increasingly competitive arena, locally in the UAE, regionally in the GCC and in the greater emerging markets. Where super powers are rising up, adopting IFRS will assist in the ease of linking with the bigger players and continue in cementing the UAE as a global hub. Advantages By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier. Furthermore, companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company-wide. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS. In addition, companies may benefit if they wish to raise capital abroad. Disadvantages Despite a general consensus of the inevitability of the global acceptance of IFRS, many people also believe that U.S. GAAP is the gold standard, and that something will be lost with full acceptance of IFRS. Further, certain U.S. issuers without significant customers or operations outside the United States may resist IFRS because they may not have a market incentive to prepare IFRS financial statements. Some other U.S. issuers may have to stick with U.S. GAAP because it is required for filings with other regulators and authorities, thus resulting in extra costs than currently incurred by following only U.S. GAAP. Another concern is that many countries that claim to be converting to international standards may never get to 100 percent compliance. Most reserve the right to carve out selectively or modify standards they do not consider in their national interest, an action that could lead to incomparability – one of the very issues that IFRS seeks to address.
  5. 5. “I See Opportunities, Not Challenges, For Indian Companies” With India on the road to IFRS, companies are worried about the transition. The sole Indian on the board that drafts the IFRS clears the confusion. Prabhakar Kalavacherla: IASB Member What are the challenges facing Indian firms during the transition to International Financial Reporting Standards (IFRS)? I see opportunities and not challenges. The new standards will give them access to resources around the world at reduced costs. Moreover, it will make it easy for FDI to come into the country. The International Accounting Standards Board (IASB) can help countries cope with transitional challenges they face. Many countries have gone through this period. It’s unlikely that India will have some unique problems.
  6. 6. Do you think the government is on track to bring about the implementation of IFRS by 2011? The decision to switch to IFRS by 2011 is an important one. There will be challenges along the way, but the benefits far outweigh them. The Ministry of Corporate Affairs has formed a core group and two sub-groups to work on the roadmap. These groups have tight deadlines but I am sure they will come out with their recommendations by November. As a member of the IASB and an Indian, I will lead discussions from the IASB side with these groups in order to effect a smooth transition. Adoption of IFRS IFRS are used in many parts of the world, including the European Union, Hong Kong, Australia, Malaysia, Pakistan, and GCC countries, Russia, South Africa, Singapore and Turkey. As of 27 August 2008, more than 113 countries around the world, including all of Europe, currently require or permit IFRS reporting. Approximately 85 of those countries require IFRS reporting for all domestic, listed companies. Australia The Australian Accounting Standards Board (AASB) has issued 'Australian equivalents to IFRS' (A-IFRS), numbering IFRS standards as AASB 1-8 and IAS standards as AASB 101 - 141. Australian equivalents to SIC and IFRIC Interpretations have also been issued, along with a number of 'domestic' standards and interpretations. These pronouncements replaced previous Australian generally accepted accounting principles with effect from annual reporting periods beginning on or after 1 January 2005 (i.e. 30 June 2006 was the first report prepared under IFRS-equivalent standards for June year
  7. 7. Ends). To this end, Australia, along with Europe and a few other countries, was one of the initial adopters of IFRS for domestic purposes. The AASB has made certain amendments to the IASB pronouncements in making A-IFRS; however these generally have the effect of eliminating an option under IFRS, introducing additional disclosures or implementing requirements for not-for-profit entities, rather than departing from IFRS for Australian entities. Accordingly, for-profit entities that prepare financial statements in accordance with A-IFRS are able to make an unreserved statement of compliance with IFRS. The AASB continues to mirror changes made by the IASB as local pronouncements. In addition, over recent years, the AASB has issued so- called 'Amending Standards' to reverse some of the initial changes made to the IFRS text for local terminology differences, to reinstate options and eliminate some Australian-specific disclosure. There are some calls for Australia to simply adopt IFRS without 'Australianising' them and this has resulted in the AASB itself looking at alternative ways of adopting IFRS in Australia. Canada The use of IFRS will be required for Canadian publicly accountable profit- oriented enterprises for financial periods beginning on or after 1 January 2011. This includes public companies and other “profit-oriented enterprises that are responsible to large or diverse groups of shareholders.”
  8. 8. European Union All listed EU companies have been required to use IFRS since 2005. In order to be approved for use in the EU, standards must be endorsed by the Accounting Regulatory Committee (ARC), which includes representatives of member state governments and is advised by a group of accounting experts known as the European Financial Reporting Advisory Group. As a result IFRS as applied in the EU may differ from that used elsewhere. Parts of the standard IAS 39: Financial Instruments: Recognition and Measurement were not originally approved by the ARC. IAS 39 was subsequently amended, removing the option to record financial liabilities at fair value, and the ARC approved the amended version. The IASB is working with the EU to find an acceptable way to remove a remaining anomaly in respect of hedge accounting. Russia The government of Russia has been implementing a program to harmonize its national accounting standards with IFRS since 1998. Since then twenty new accounting standards were issued by the Ministry of Finance of the Russian Federation aiming to align accounting practices with IFRS. Despite these efforts essential differences between national accounting standards and IFRS remain. Since 2004 all commercial banks have been obliged to prepare financial statements in accordance with both national accounting standards and IFRS. Full transition to IFRS is delayed and is expected to take place from 2011.
  9. 9. Turkey Turkish Accounting Standards Board translated IFRS into Turkish in 2006. Since 2006 Turkish companies listed in Istanbul Stock Exchange are required to prepare IFRS reports. Hong Kong Starting in 2005, Hong Kong Financial Reporting Standards (HKFRS) are identical to International Financial Reporting Standards. While Hong Kong had adopted many of the earlier IAS as Hong Kong standards, some had not been adopted, including IAS 32 and IAS 39. And all of the December 2003 improvements and new and revised IFRS issued in 2004 and 2005 will take effect in Hong Kong beginning in 2005. Implementing Hong Kong Financial Reporting Standards: The challenge for 2005 (August 2005) sets out a summary of each standard and interpretation, the key changes it makes to accounting in Hong Kong, the most significant implications of its adoption, and related anticipated future developments. There is one Hong Kong standard and several Hong Kong interpretations that do not have counterparts in IFRS. Also there are several minor wording differences between HKFRS and IFRS. Singapore In Singapore the Accounting Standards Committee (ASC) is in charge of standard setting. Singapore closely models its Financial Reporting Standards (FRS) according to the IFRS, with appropriate changes made to suit the Singapore context. Before a standard is enacted, consultations with the IASB are made to ensure consistency of core principles.
  10. 10. India The Institute of Chartered Accountants of India. India’s blue-chip companies have begun to align their accounting standards to the International Financial Reporting Standards (IFRS), three years ahead of the mandatory time for the switchover. The list of companies includes IT firms like Wipro, Infosys Technologies and NIIT, automakers like Mahindra & Mahindra and Tata Motors; textile companies like Bombay Dyeing and pharma firm Dr Reddy’s Laboratories. For companies with exposure in European markets through equity or debt, such transparency is essential to raise capital cheap and hence, the proactive approach. The Indian accounting standards body, the Institute of Chartered Accountants of India (ICAI), has set a time line of 2011 for compulsory switchover to the new standard. IFRS is the accounting benchmark developed by the International Accounting Standards Board. Suresh Senapaty, CFO and executive director, Wipro Ltd, said, “We welcome the initiative of ICAI in driving convergence with international financial reporting standards by 2011. We have adopted AS-30 from April this year,
  11. 11. much ahead of its scheduled implementation. We are also actively considering early adoption of AS-31, which is the next standard.” Ved Jain, president, ICAI, said, “Many companies have already started following the new accounting standards because these ensure transparency and uniformity. The implementation would strengthen the confidence of stakeholders in the companies’ financial statements, which, in turn, will bring value to the corporate.” The ICAI’s accounting standard –30 mandates companies to provide for mark-to-market losses as well as profits from April 2009 on a voluntary basis. All complexities regarding derivatives have been addressed in AS-30, which is in line with the IFRS norms. If an entity does not opt for either AS-30 or AS-1, the auditors will need to make a suitable disclosure. Analysts note that the total mark-to-market losses of Indian companies from forex derivative exposures could be about $5 billion. The company auditors would need to disclose the figures separately if the company balance sheet does not bring them out. Companies with international presence are not willing to take this risk. Says Rajendra S Pawar, chairman, NIIT Technologies: “AS-30 was started from January 2008, and by 2012, it is expected that we would start... Japan The Accounting Standards Board of Japan has agreed to resolve all inconsistencies between the current JP-GAAP and IFRS wholly by 2011.