Larissa Gorbatova
In June 2001, the International Accounting Standards Board (IASB) set up the Standards Advisory Council (SAC). The SAC is a new body that was set up under the Constitution of the International Accounting Standards Committee (IASC) approved in May 2000. The mission of the SAC is to ensure the maximum participation of interested parties having diverse geographic and functional backgrounds in the development of International Financial Reporting Standards (IFRS). The SAC comprises 49 members from 29 countries and 5 international bodies such as the International Federation of Accountants, World Bank, International Organization of Securities Commissions and other organizations.
The first meeting of the SAC that was held in London on 23-24 July 2001 discussed the IASB priorities for the next few years as well as other issues, including a draft of a revised Preface to IFRS. The current Preface was approved by the IASC Board in 1982 and does not reflect most of the recent trends in International Financial Reporting Standards. For example, the objectives of IASC have been modified with the approval of a new Constitution. In addition to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards, they include promoting the use and rigorous application of those standards and bringing about convergence of national accounting standards and International Financial Reporting Standards to high quality solutions.
The convergence of national accounting standards and IFRS is currently one of the most important objectives of the Board. However, IASB members kept stressing that it will not be convergence for the sake of convergence and this objective cannot be achieved by the issue of a set of primitive rules. In his article «Convergence is the Aim» published in the March issue of IASB Insight, the IASB newsletter, Sir David Tweedie, Chairman of the IASB, said that high-quality global standards cannot be produced without the active participation of national standard-setters. Consequently, the objective can be achieved only through the cooperation of efforts of different countries. However, national standard-setters might have different and, sometimes, conflicting views on issues under consideration, which can be very difficult to reconcile.
Based on its objectives and after consultations with the SAC, the IASC announced its agenda of nine technical projects (see attachment 1). In addition to these, the IASB together with national standard-setters will consider 16 other issues of developing new standards and improving existing IFRSs. Some of these issues are crucial for emerging economies. For example, the project on first-time application by an enterprise of International Financial Reporting Standards is one of the most interesting priorities. The IASB agenda also includes accounting by extractive industries as well as by small and medium entities and in emerging economies.
On the whole, recent trends in IFRS provide evidence of the move to more practical issues. For example, the enforcement of standards was considered to be beyond the competence of the IASC. Similarly, the IASC was not involved in IFRS implementation guidance (the only exception is implementation guidance on IAS 39, Financial Instruments: Recognition and Measurement, published in the form of Questions and Answers). Now the guidance on first-time application of IFRS is one of the IASB priorities. Finally, studies to explore the differences in accounting for certain transactions and items (e.g. employee benefits) between various jurisdictions and IFRS also provide evidence of the move to the implementation of the IASC standards. This is evidenced by the fact that the SAC was set up as a body intended to ensure the participation of interested parties from all over the world in the development and approval of the standards.
In this context, Russian experts have an opportunity to participate in the IFRS development process. A Financial Reporting Council (FRC) was set up with the technical support of the International Center for Accounting Reform. The major objectives of the FRC are to:
- provide more input of Russian experts into the IASB working process,
- review and summarize IFRS implementation practices by Russian enterprises,
- give recommendations to the IASB, Standing Interpretations Committee and Standards Advisory Council.
The FRC involves representatives of leading audit firms in Russia (Unicon, FBK, Andersen, Deloitte & Touche and others), enterprises preparing and presenting financial statements (Norilsk Nikel, Novolipetsk Steel-Making Factory, Pepsi Co), and academics. The FRC official observers include regulators, professional audit and accounting associations, investor associations and international organizations.
There has been a dire need for a professional dialogue on IFRS application in Russia: according to ICAR estimates, more than 400 Russian enterprises prepare IFRS-based financial statements. Many audit firms have been developing their own IFRS implementation guidance, which resulted in the lack of uniform interpretation of IASC standards and various treatments for like transactions in different enterprises.
The first FRC meeting took place on 10 October 2001 when along with organizational issues, FRC also prepared recommendations on the IASB project concerning SMEs/emerging markets accounting. In addition, the FRC addressed the IASB Sub-Committee’s proposals to withdraw some accounting treatments, which currently exist in the IFRS (IASB Project on Improvements).
The FRC recommendations were presented at a meeting of the Standards Advisory Council held on 16-17 October in Washington D.C. In particular, these recommendations stated that in drafting and discussing new and changing existing IFRS, the IASB should take into account the specific nature of emerging markets, including measurement issues arising from the lack or immaturity of markets for certain assets.
Ms. Larissa Gorbatova is a Member of the IASB Standards Advisory Council and Chairperson of the Financial Reporting Council. For details of the Financial Reporting Council, please, contact the International Center for Accounting Reform by phone (095) 937 5417 or e-mail: council@icar.ru, or visit ICAR’s web site http://www.icar.ru under the FRC heading.
Attachment 1
Background information, projects on the initial IASB agenda
Accounting for Insurance Contracts
Insurance is an increasingly global business and insurance accounting varies considerably across jurisdictions. A number of jurisdictions have little or no guidance on the accounting for insurance contracts in general-purpose financial statements. This project will seek to develop a standard on accounting for insurance contracts that is consistent with the conceptual framework definitions of assets and liabilities.
Business Combinations
Business combination accounting is an area of considerable divergence across jurisdictions. The first phase of this project is intended to converge existing standards on the definition of a business combination, the appropriate method(s) of accounting for a business combination (purchase or pooling/merger accounting), and the accounting for goodwill and intangible assets acquired in a business combination. This project could result in the amendment or replacement of IAS 22, Business Combinations.
Performance Reporting
This project will address broadly the issues related to the display and presentation in the financial statements of all recognized changes in assets and liabilities from transactions or other events except those related to transactions with owners as owners (comprehensive income). Thus, it will consider items that presently are reported in the income statement, cash flow statement, and statement of changes in equity. Issues addressed in this project include distinguishing revenues and expenses from other sources of comprehensive income or expense, reporting of holding gains and losses, and distinguishing operating and nonoperating items.
Accounting for Share-Based Payments
Share-based compensation plans are becoming more prevalent worldwide. Few countries have standards for recognition and measurement of share-based payment and many believe that those standards that do exist are inadequate or outdated. The IASB has the opportunity to provide leadership and a basis for convergence. This project will seek to develop a standard on all aspects of accounting for share-based payments to employees (including employee stock options and their repricing), suppliers, creditors, and others.
Guidance on First-Time Application of International Financial Reporting Standards
In the coming years, entities in many jurisdictions will adopt international financial reporting standards for the first time. The problems faced by an entity that adopts an entire accounting regime for the first time are somewhat different from those faced by an entity that adopts an individual change in an existing body of accounting standards. Some constituents, including public accounting firms and entities in Europe, have expressed concerns about the complexity of this task and the existing guidance on first-time application. The Board plans to review the existing guidance with an eye to developing an approach that is both workable and conceptually sound.
Activities of Financial Institutions: Disclosures and Presentation
This project will update existing requirements related to disclosing information and presenting financial statements that reflect the specific characteristics of the business activities of banks and other institutions whose business is to take deposits, grant credits or provide other financing or investment services. This project has been supported by both financial institutions and the Basel Group of regulators as a way to bring together existing and forthcoming requirements from different organizations.
Preface to International Financial Reporting Standards
The Preface to Statements on International Accounting Standards was last revised in 1982. The revisions under consideration reflect changes in the IASC Constitution and Board decisions about the format and style of future International Financial Reporting Standards (IFRS). The Board expects to expose the proposed changes for public comment in the near future.
Improvements to Existing International Financial Reporting Standards
The objective of an improvements project is to add clarity and consistency to the requirements of existing Standards issued by the Board’s predecessor. The specific topics to address come from information already provided by sources such as International Organization of Securities Commissions, comparisons of international and national standards undertaken by various organizations, national standard setters, and the Standing Interpretation Committee. The Board intends to address these issues immediately so that companies adopting IFRSs for the first time will not be faced with significant additional change after they adopt.
Amendments to IAS 39, Financial Instruments: Recognition and Measurement
In this project, the Board will consider amendments designed to clarify application of IAS 39, based on issues identified by constituents and the IAS 39 implementation guidance committee.
Background information, Other topics
The IASB has identified 16 topics being studied by one or more national accounting standard setters. In some cases, that work involves analysis of comments received on earlier discussion documents. In other cases, the work involves the initial definition of the problem, the issues, and the possible solutions. The Board expects to consider adding these projects to its agenda in the future.
Accounting Measurement
This project would seek to resolve issues related to selection of the appropriate measurements of items recognized in the financial statements. The project would be likely to result in amendment or expansion of the discussion of measurement in the Framework for the Preparation and Presentation of Financial Statements (the Framework).
Accounting by Extractive Industries
The extractive industries (mining and oil and gas production) are an important economic sector in many economies and few jurisdictions have standards in this area. This project would seek to develop an internationally acceptable approach to resolving accounting issues in the extractive industries.
Accounting for Financial Instruments, Comprehensive Project
Under IAS 39, some financial assets and liabilities are measured at cost, while others are measured at fair value. The IAS 39 «mixed-attribute» measurement model leads to a number of difficulties and complexities, and this project could consider moving toward a fair value model for measurement of virtually all financial instruments. The result would be an IFRS to replace all or most of IAS 39 and, perhaps, amend IAS 32, Financial Instruments: Disclosure and Presentation.
Accounting for Leases
Leasing is a global business, and differences in accounting standards can lead to considerable noncomparability. This project would seek to improve the accounting for leases by developing an approach that is more consistent with the conceptual framework definitions of assets and liabilities. The project would result in an amendment or replacement of IAS 17, Leases.
Accounting by Small and Medium Entities and in Emerging Economies
This project would explore whether there is a need for special guidance to clarify financial reporting requirements in the context of financial reports used in emerging economies or for certain types of enterprises, for example, for small enterprises or for privately-held enterprises.
Accounting for Taxes on Income (Convergence Topics)
This project would examine the differences in accounting for incometaxes in the accounting literature of various jurisdictions.
Business Combinations, Phase Two
The objective of this project would be to develop a single standard to converge the approaches in various existing standards on the accounting procedures for business combinations including issues such as purchase price allocation, liability and asset recognition at date of combination, contingent consideration, planned restructurings, transactions involving entities under common control (including joint ventures), step acquisitions, and new-basis issues. This project would result in the amendment of IAS 22 or the issuance of a new IFRS with guidance to supplement IAS 22. Another group of issues involve questions broadly described as business combination or consolidation «procedures» and would be considered in either this project or a separate stage of a consolidations project.
Consolidation Policy
The objectives of this project would be to reconfirm the basis upon which an entity should consolidate its investments and to provide more rigorous guidance around the concept of «control.» Most standard setters (including the IASB) have identified control as the appropriate basis for consolidation, however, there appear to be differences in the way «control» is interpreted in deciding whether consolidation is required. The end product would likely amend or supplement IAS 27, Consolidated Financial Statements and Accounting for Subsidiaries.
Definitions of Elements of Financial Statements
This project would explore similarities and differences between the definitions of the elements (assets, liabilities, equity, revenues, expenses, gains, and losses) in the existing conceptual frameworks of the IASB and national standard setters to determine whether there are differences that are impediments to convergence.
Derecognition Issues, Other Than Those Addressed in IAS 39
Derecognition refers to the removal of an asset or liability (or a portion thereof) from an entity’s balance sheet. Derecognition questions can arise with respect to all types of assets and liabilities and often arise in connection with off-balance-sheet financing schemes. Derecognition questions also arise when considering certain special purpose entities and whether those entities should be included in a set of consolidated financial statements.
Employee Benefits (Convergence Topics)
This project would examine the differences in accounting for employee benefits (including retirement benefits) in the accounting literature of various jurisdictions.
Impairment of Assets
This project would examine a limited number of issues addressed in existing standards on impairment in various jurisdictions to arrive at a common resolution. Issues might include: use of impairment triggers, definition of impairment, and reversals of impairment losses. A final product on this project would likely amend IAS 36, Impairment of Assets.
Intangible Assets
This project would seek to develop a consistent approach to recognition and measurement of intangible assets, including purchased and internally generated intangible assets not related to a business combination. Although many support the approach taken in IAS 38, Intangible Assets, many also are concerned that guidance in IAS 38 is not sufficiently robust. The project would result in an amendment or replacement of IAS 38.
Liabilities and Revenue Recognition
This heading includes three potential projects that are grouped here under a single heading because of the significant relationships between the issues in each.
The first project would explore the distinction between liabilities and equity. The second project would explore liability recognition, including the need for more robust guidance on whether an item meets the definition of a liability and, if so, under what circumstances it should be recognized in the financial statements. The third project would seek to establish workable general principles as a basis for determining when revenue should be recognized in the financial statements.
Management’s Discussion and Analysis
This project would explore whether the IASB should provide guidance on the presentation of information presented outside the financial statements in the form of management’s explanation of the enterprise’s financial condition, changes in financial condition, results of operations, and causes of changes in material line items.
Revaluations of Certain Assets
This project would seek to converge the various approaches in different jurisdictions to accounting for revaluations of assets. It would be a limited-scope project to ensure that whenever and wherever revaluations are permitted they are measured and reported consistently and in a comparable fashion.