Introduction & ias framework


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Introduction & ias framework

  2. 2.  Introduction and the Framework  The Canadian and U.S. experiences to date  Looking ahead  Measurement model  End-of-chapter practice2
  3. 3. Introduction and the IAS Framework  A common set of global accounting standards  Conceptual framework for the preparation and presentation of financial statements  GAAP hierarchy3
  4. 4. A Common Set of Global Accounting Standards Do we need a common set of global accounting standards?  Various GAAP have been developed in many countries due to differences in the legal, regulatory, social, economic, and cultural environments.  Results in financial statements that are not comparable and difficult for users to interpret  This acts as a barrier for global capital movement  Recently, there has been a movement toward harmonization and convergence of GAAP  most significant initiative being led by the International4 Accounting Standards Board (IASB)
  5. 5. A Common Set of Global Accounting Standards IASB:  Reports to the IASC Foundation  Structure:  12 full time and 2 part time members  IFRIC assists the IASB through timely identification, discussion and resolution of issues  Mandate – single set of high quality, understandable, enforceable global standards5  Transparent, comparable information
  6. 6. A Common Set of Global Accounting Standards  The IASB works with national accounting standard setters to move toward global convergence  To date, nearly 100 countries have converged (require or allow IFRS) or are on the path to convergence.6
  7. 7. A Common Set of Global Accounting Standards Political and Regulatory Issues  One issue with convergence is enforcement  In Canada, regulation takes place at the provincial and territorial level  Once standard setting moves to a global arena, this fragmented regulatory environment will prove to be a challenge  With so many entities regulating the markets, is it possible to be consistent?  In October 2005, IOSCO announced that it would create an IFRS database for regulators to share decisions on the application of IFRS  Is there or can there ever be total acceptance of IFRS?  It may be required only for consolidated financials and for public companies  National GAAPs are still in existence and are widely used7
  8. 8. A Common Set of Global Accounting Standards Can one set of standards meet the needs of all users?  There is a concern that private companies would not benefit from using IFRS  Many operate in a local market and have more simplified business models  On the international front, there is a move to establishing more simplistic standards for these entities  Canada is also in the process of deciding what GAAP will be for these non-publicly accountable enterprises8
  9. 9. A Common Set of Global Principles orAccounting better? rules—which are Standards  IFRS is referred to as being principles based  They are more loosely framed, allowing for professional judgement to be applied  Results in accounting that is more flexible to deal with unique economic and business circumstances  Some argue that allowing professional judgement introduces bias  At the other end of the spectrum is a rules-based GAAP model that is more prescriptive  Provides a rule for every situation  Body of knowledge too large and complicated  Although more guidance is a comfort to some, it becomes difficult9 to ensure that the standards are all consistent.
  10. 10. A Common Set of Global Accounting Standards  In January 2008, the CEOs of the Big 6 accounting firms concluded that the key elements of a principles-based accounting standard were as follows:10
  11. 11. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS  Purpose  Formal status  Users and objectives  Qualitative characteristics  Elements11
  12. 12. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS What is the role of a conceptual framework?  The conceptual framework sets out the concepts that underlie the preparation of the financial statements  The purpose of the framework is to: (a) assist the IASC in the development of future International Accounting Standards (IAS) (b) assist the IASC Board in promoting harmonization of regulations (c) assist national standard-setting bodies in developing national standards (d) assist preparers of financial statements in applying IAS (e) assist auditors in forming an opinion on whether financial statements conform with IAS (f) assist users in interpreting the information contained in financial statements prepared according to IAS and12 (g) provide those who are interested in the work of IASC with information about
  13. 13. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS What is the formal status of the conceptual framework?  Not an IAS in and of itself and nothing in the framework overrides a specific accounting standard  IASB notes that there may be cases where the framework is in conflict with a specific standard and, in these cases, the standard would override the framework  Where there is no specific standard, the framework should govern the accounting  Applies to the financial statements of all entities, whether public or private  Currently the subject of a joint project between IASB and FASB13
  15. 15. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS Users and Objectives  According to the framework, users of financial statements include:  Investors, employees, lenders, suppliers, creditors, customers, governments and the public  The overall objective of financial reporting is to produce financial statements that present fairly the results of operations and the financial position  The objective is articulated in the framework as follows: -Financial statements are to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions -Financial statements prepared for this purpose meet the common needs of most users -Financial statements also show the results of the stewardship of management, or the15 accountability of management for the resources entrusted to it
  16. 16. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS Qualitative Characteristics of Useful Information Understandability:  One benefit of a common set of quality accounting standards is that they create less confusion and are more likely to be understood by users internationally Relevance:  Relevant information must at least have the following characteristics: 1. Predictive value— many users use historic information to predict the company’s future profits and cash flows. Although the past does not necessarily allow users to predict the future, it does provide information that can be used to assess the future potential of the entity16 2. Confirmatory value— many users use the information to confirm their prior expectations and to assess management performance
  17. 17. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS Relevance (continued):  The concept of materiality is useful in that it defines the level of inclusion of information  As noted in the framework, information is material and useful if its omission or misstatement could influence the economic decisions of users  Information might be material based solely on its nature or alternatively, on its size or dollar value  Currently the standard does not have a quantitative definition for what is material and what is not17  Often in the past, materiality has been defined as an item that is larger
  18. 18. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS Reliability:  Information is considered reliable if it has the following characteristics: 1. Faithful representation—the objective of financial reporting is to communicate information about the entity and its economic events and transactions. In the proposed framework, this concept replaces reliability 2. Substance over form—this is often referred to as economic substance over (legal) form. Accounting should reflect the substance of a transaction and should look beyond the legal form 3. Neutrality—unbiased information is better information. Biased information is of lesser quality since it is not objectively prepared 4. Prudence—this concept is similar to conservatism. Many uncertainties are associated with information in the statements and prudence acts to ensure that the assets and income are not overstated. In the proposed framework,18 this concept disappears
  19. 19. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS Comparability:  The main benefit of having one set of global standards is comparability  Use of the conceptual framework by all entities, whether they are publicly accountable or not, would enhance this  IFRS still allows a fair bit of choice in the various standards and the IASB is trying to reduce the number of incidences where choices are available Balance/trade-offs:  The proposed framework separates the qualitative characteristics into two categories -“fundamental” and “enhancing”  It is proposed that fundamental characteristics will include relevance and representational faithfulness, while enhancing19 characteristics will include comparable, verifiable, timely, and understandable
  20. 20. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS Elements of Financial Statements  Elements are recognized when probable and measurable with reliability Assets: a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity Liabilities: a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Liabilities may be legally enforceable via a contract or law, but need not be Equity: a residual interest in the assets of the entity after deducting all its liabilities20
  21. 21. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS Elements of Financial Statements (continued) Income: increases in economic benefits that result in increases in equity (other than those related to contributions from shareholders)  Income includes both revenues (resulting from ordinary activities) and gains  Gains are not treated as a separate element since they may also arise due to ordinary activities. Income may be realized or unrealized Expenses: decreases in economic benefits that result in decreases in equity (other than those related to distributions to shareholders)  Expenses result from ordinary activities  Similar to gains, losses may also result from ordinary activities so are not treated as separate elements  Expenses may be realized or not realized21
  22. 22. GAAP Hierarchy IAS 8 identifies the GAAP hierarchy as follows: 1. IFRS (including IFRS, IAS, IFRIC, and SIC) and implementation guidance 2. If no standards exist, financial statement preparers may look to similar situations and related issues that are covered by IFRS and the conceptual framework and 3. If there is no guidance, we may look to other22 standard-setting bodies as long as they do not conflict
  23. 23. The Canadian Experience to Date U.S. Influence  Canadian GAAP began as a principles-based body of knowledge, while the U.S. model has been predominantly rules-based  Two things caused Canada to recently migrate toward the rules-based approach: 1. For the past several years, Canada has had a harmonization mandate with respect to U.S. GAAP. The objective was to facilitate the flow of capital in the North American marketplace 2. The Canadian Securities Administrators currently allow Canadian companies to use U.S. GAAP if they are SEC reporting issuers International Influence  In January 2006, the AcSB announced that Canadian GAAP would converge with IFRS for publicly accountable entities on or after January 1, 2011  Many standards in the Handbook are already substantially converged with IFRS  In 2011, the Canadian Handbook, will cease to exist for companies that are publicly accountable and will be effectively replaced by IFRS23
  24. 24. The Canadian Experience to Date Timeline  In addition, current GAAP regarding changes in accounting policy requires that the impact of accounting standards that have been24 issued but are not yet effective/applied be disclosed in the
  25. 25. The U.S. Experience to Date The rise of principles-based standards?  Historically, U.S. GAAP developed without much outside influence and has been viewed as being a very robust model and gold star standard  The pressures to converge are mounting due to the recent and not-so-recent abuses of the rules-based GAAP such as Enron and WorldCom IFRS for Foreign Filers  Since the SEC has now allowed foreign filers to use IFRS without a reconciliation to U.S. GAAP, the question arises as to why U.S. companies are not able to follow IFRS  The SEC has just published (September 08) a roadmap that25 proposes to allow public companies to use IFRS starting in 2014
  26. 26. The U.S. Experience to Date Convergence with IASB  In terms of the convergence/harmonization mandate, the following steps have been taken:  The Norwalk Agreement (2002)  Roadmap for convergence (2006) Roadblocks in the Roadmap  The fate of the codification project?  Significant funds spent to date  Additional disclosures and safe harbour rules  IFRS requires more disclosures in the financial statements – will this mean more risk of lawsuits for preparers and auditors?  Any legal protection?  Decreasing influence of U.S. constituents  Funding for IASB – independence?26
  27. 27. Looking Ahead  The IASB is currently overhauling the framework with FASB According to the proposed framework currently being finalized:  The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential investors and creditors in making decisions as capital providers  The emphasis is on resource allocation (lending and investing) and assessment of management stewardship  With regards to the qualitative characteristics of useful financial information:  Faithful representation is attained when the substance of an economic phenomenon is depicted completely, accurately, and neutrally  Conservatism/prudence will be excluded from the qualitative characteristics of accounting information as they conflict with neutrality  Reliability is now gone from the framework (absorbed into the concept of faithful representation)27
  28. 28. Looking Ahead  The IASB and FASB have agreed on the following changes in definitions. (these views have not yet been exposed in an Exposure Draft)  The following definitions have been proposed: -An asset of an entity is a present economic resource to which, through an enforceable right or other means, the entity has access or can limit the access of others -An economic resource is something scarce that has positive economic value. It is capable of being used to carry out economic activities, such as production and exchange -A liability of an entity is a present economic obligation that is28 enforceable against the entity. The framework will define a liability
  29. 29. Measurement Model29
  30. 30. End-of-Chapter Practice30