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Table of Contents04 International GAAP 2013

Generally Accepted Accounting Practice under International Financial Reporting StandardsErnst & YoungExtract: Chapter 1 - International GAAP

42 Frequently Asked Questions on Anti-Bribery and Corruption David LawlerExtract: Chapter 1 - Timeline

58 Frequently Asked Questions on IFRSSteven CollingsExtract: Chapter 1 - What is the Role of the IASB

66 IFRS EssentialsDieter Christian, Norbert LüdenbachExtract: Chapter 1 - The Conceptual Framework for Financial Reporting

International GAAP 2013Generally Accepted Accounting Practice under International Financial Reporting StandardsErnst & Young9781118484012 • Pbk • 4,000+ pages • Jan 2013 • £135 / €162 / $220

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Chapter 1 International GAAP

1 WHY INTERNATIONAL FINANCIAL REPORTING STANDARDS MATTER ................ 3

2 THE IFRS FOUNDATION AND THE IASB ............................................................... 4 2.1 The standard setting structure ....................................................................... 4

2.1.1 The IFRS Foundation .......................................................................... 5 2.1.2 The Monitoring Board.......................................................................... 6 2.1.3 The International Accounting Standards Board (IASB)..................... 9 2.1.4 The IASB’s Due Process Handbook .................................................. 10 2.1.5 The IFRS Advisory Council (the Advisory Council) ........................ 11 2.1.6 The IFRS Interpretations Committee (the Interpretations

Committee) ........................................................................................ 12 2.1.7 The IASB’s ‘Annual Improvements Process’ .................................... 13

3 THE IASB’S TECHNICAL AGENDA AND GLOBAL CONVERGENCE ........................ 13 3.1 The IASB’s current priorities and future agenda ......................................... 13

3.1.1 The IASB’s current priorities ............................................................. 14 3.1.2 Agenda consultation 2011 .................................................................. 14

3.2 IFRS/US GAAP convergence ........................................................................ 15 3.2.1 Background ......................................................................................... 16 3.2.2 Status .................................................................................................. 17 3.2.3 The future for convergence ............................................................... 20

3.3 The impact of the financial crises ................................................................. 21

4 THE ADOPTION OF IFRS AROUND THE WORLD .................................................. 22 4.1 Worldwide adoption ....................................................................................... 22 4.2 Europe ............................................................................................................ 25

4.2.1 EU ....................................................................................................... 25 4.2.2 Russia .................................................................................................. 27

4.3 Americas ......................................................................................................... 28 4.3.1 US ........................................................................................................ 28 4.3.2 Canada ................................................................................................. 28 4.3.3 Brazil ................................................................................................... 29

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4.4 Asia ................................................................................................................. 29 4.4.1 China ................................................................................................... 29

4.4.1.A Mainland China .................................................................. 29 4.4.1.B Hong Kong .......................................................................... 30

4.4.2 Japan .................................................................................................... 31 4.4.3 India .................................................................................................... 32

4.5 Australia/Oceania – Australia ......................................................................... 32 4.6 Africa – South Africa ...................................................................................... 33

5 SUMMARY ............................................................................................................... 34

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Chapter 1 International GAAP

1 WHY INTERNATIONAL FINANCIAL REPORTING STANDARDS MATTER

With globalisation has come the increasing integration of world markets for goods, services and capital – with the result that companies that traditionally were reliant on their domestic capital markets for financing now have substantially increased access to debt and equity capital both inside and outside their national borders.

Yet – perhaps not entirely surprisingly – the world of financial reporting has historically been slow to respond reflecting, no doubt, a widespread nationalism in respect of countries’ own standards.

Undoubtedly, one of the main advantages of a single set of global accounting standards is that it would enable the international capital markets to assess and compare inter-company performance in a much more meaningful, effective and efficient way than is presently possible. This should increase companies’ access to global capital and ultimately reduce the cost thereof. Thus the request for global standards came both from regulatory bodies and from preparers of financial statements. As early as 1989 the International Organisation of Securities Commissions (IOSCO), the world’s primary forum for co-operation among securities regulators, prepared a paper noting that cross border security offerings would be facilitated by the development of internationally accepted standards. For preparers, greater comparability in financial reporting with their global peers had obvious attractions.

Notwithstanding these anticipated benefits it is only since 2000 that there has been a realistic prospect of such global standards and that has come about largely as a result of the European Commission’s announcement in June 2000 that it would present proposals to introduce the requirement that all listed European Union (EU) companies report in accordance with International Accounting Standards by 2005. This requirement has changed fundamentally not only the face of European financial reporting, but global reporting as well, as regulators in many other countries have followed Europe’s lead. Indeed, the International Accounting Standards Board (IASB) reports that almost 120 countries require or permit the use of International Financial Reporting Standards (IFRS) and that ‘all remaining major economies have established timelines to converge with or adopt’ IFRS.1

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Thus global financial reporting has ceased to be characterised by numerous disparate national systems to the point at which there are today essentially only two – IFRS and US GAAP.

Further, the fall-out from the 2007-2010 financial crisis created a strong underlying political pressure towards convergence of global accounting standards. Comments on the need to achieve this are a regular feature of communications from the Group of Twenty nations (G20).

2 THE IFRS FOUNDATION AND THE IASB

2.1 The standard setting structure The diagram below illustrates the current structure within which standards are set by the IASB. The various elements of the structure are discussed further below.

Unless indicated otherwise, references to IFRS include the following: • International Financial Reporting Standards – standards developed by the IASB • International Accounting Standards (IAS) – standards developed by the

International Accounting Standards Committee (IASC), the predecessor to the IASB

Creates

Appoints /Monitors Trustees

Strategic advice

Monitoring Board IFRS Foundation

IFRS Advisory Council IASB

IFRS Interpretations

CommitteeInterprets

Appoints, Reviews

effectiveness,

Oversees, FinancesAppo

ints

Reports to

Informs

IFRSHigh quality, enforceable

and global

Oversees

Info

rms

Reviews effectiveness

Finances

Appoints

Informs

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1 • Interpretations developed by the IFRS Interpretations Committee

(Interpretations Committee) or its predecessor, the Standing Interpretations Committee (SIC)

• International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs) – a stand-alone standard for general purpose financial statements of small and medium-sized entities (as defined).

2.1.1 The IFRS Foundation The governance of the IFRS Foundation primarily rests with the Trustees of the IFRS Foundation (Trustees) who, in turn, act under the terms of the IFRS Foundation Constitution (the Constitution).2 It is a requirement of the Constitution that, in order to ensure a broad international basis, there must be:3 • six Trustees appointed from the Asia/Oceania region; • six Trustees appointed from Europe; • six Trustees appointed from North America; • one Trustee appointed from Africa; • one Trustee appointed from South America; and • two Trustees appointed from any area, subject to maintaining overall

geographical balance.

The appointment of Trustees to fill vacancies caused by routine retirement or other reasons is the responsibility of the remaining Trustees but subject to the approval of the Monitoring Board as discussed in 2.1.2 below. The appointment of the Trustees is normally for a term of three years, renewable once.4

The Constitution requires that the Trustees should comprise individuals that, as a group, provide an appropriate balance of professional backgrounds, including auditors, preparers, users, academics, and officials serving the public interest. Two of the Trustees will normally be senior partners of prominent international accounting firms. To achieve such a balance, Trustees are selected after consultation with national and international organisations of auditors (including the International Federation of Accountants), preparers, users and academics. The Trustees are required to establish procedures for inviting suggestions for appointments from these relevant organisations and for allowing individuals to put forward their own names, including advertising vacant positions.5

The Constitution provides that ‘all Trustees shall be required to show a firm commitment to the IFRS Foundation and the IASB as a high quality global standard-setter, to be financially knowledgeable, and to have an ability to meet the time commitment. Each Trustee shall have an understanding of, and be sensitive to the challenges associated with the adoption and application of high quality global accounting standards developed for use in the world’s capital markets and by other users.’6

The Trustees are responsible also for appointing the members of the IASB, Interpretations Committee and IFRS Advisory Council (the Advisory Council).7 In addition, their duties include the following:8

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• assuming responsibility for establishing and maintaining appropriate financing arrangements;

• reviewing annually the strategy of the IFRS Foundation and the IASB and their effectiveness, including consideration, but not determination, of the IASB’s agenda;

• approving annually the budget of the IFRS Foundation and determining the basis for funding;

• reviewing broad strategic issues affecting financial reporting standards, promoting the IFRS Foundation and its work and promoting the objective of rigorous application of IFRS (the Trustees are, however, excluded from involvement in technical matters relating to accounting standards);

• establishing and amending operating procedures, consultative arrangements and due process for the IASB, the Interpretations Committee and the Advisory Council;

• approving amendments to the Constitution after following a due process, including consultation with the Advisory Council and publication of an exposure draft for public comment;

• exercising all powers of the IFRS Foundation except for those expressly reserved to the IASB, the Interpretations Committee and the Advisory Council; and

• publishing an annual report on the IFRS Foundation’s activities, including audited financial statements and priorities for the coming year.

The IFRS Foundation has developed four principles for a funding system. Those principles are that it should be:9 • Broad based; • Compelling; • Open ended; and • Country specific.

The Trustees have sought to establish national funding regimes consistent with these principles in a number of countries. In 2011, the major funders of the IFRS Foundation were the international accounting firms, the EU, the US and Japan.10

2.1.2 The Monitoring Board A frequent criticism of the IASB and of the IFRS Foundation has been of its lack of ‘accountability’ and apparent lack of responsiveness to the concerns of its constituents. This criticism increased as the level of international acceptance of IFRS has grown.

The response to these concerns was the creation of a Monitoring Board to provide a formal link between the Trustees and public authorities. This relationship seeks to replicate, on an international basis, the link between accounting standard-setters and those public authorities that have generally overseen accounting standard-setters.11

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1 The responsibilities of the Monitoring Board are to:

• Participate in the process for appointing Trustees and approve the appointment of Trustees;

• Review and provide advice to the Trustees on the fulfilment of their responsibilities – there is an obligation on the Trustees to report annually to the Monitoring Board;

• Meet with the Trustees or a sub-group thereof at least annually. The Monitoring Board has the authority to request meetings with the Trustees or separately with the chair of the Trustees and with the chair of the IASB to discuss any area of the work of the Trustees or the IASB.12

At the time of writing, the Monitoring Board comprises: (a) a member of the European Commission; (b) a representative of the IOSCO Emerging Markets Committee; (c) a representative of the IOSCO Technical Committee; (d) the commissioner of the Japan Financial Services Agency; (e) the chair of the US SEC; and (f) as an observer, a representative of the Basel Committee on Banking Supervision.13

The Charter of the Monitoring Board notes that the Monitoring Board’s mission is: • To cooperate to promote the continued development of IFRS as a high quality

set of global accounting standards; • To monitor and reinforce the public interest oversight function of the IFRS

Foundation, while preserving the independence of the IASB. In that regard; • To participate in the selection and approval of the Trustee appointments; • To advise the Trustees with respect to the fulfilment of their

responsibilities, in particular with respect to regulatory, legal and policy developments that are pertinent to the IFRS Foundation’s oversight of the IASB and appropriate sources of IFRS Foundation funding; and

• To discuss issues and share views relating to IFRS, as well as regulatory and market developments affecting the development and functioning of these standards.14

When the Trustees originally proposed the Monitoring Board, a number of commentators expressed concerns that it could threaten the independence of the IASB and lead to greater ‘political interference’ if the Monitoring Board began to influence specific decisions. Concerns about political interference in standard setting increased because of the way that both the FASB and IASB were seen to react to political pressure during the 2007-2010 financial crisis. This goes to the heart of a very difficult balancing exercise. Most observers want the Trustees and the IASB to be responsive to constituents’ concerns but they also support the principle of ‘independent standard setting’ – how does one achieve both?

Regarding the role and influence of the Monitoring Board, the Trustees were satisfied that because its role was restricted to oversight of the Trustees’ fulfilment

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of their responsibilities there was no risk to the independence of the IASB. Furthermore the preservation of the independence of the IASB is, as noted above, part of the mission of the Monitoring Board. Although the Monitoring Board does not have a mandate to set the technical agenda of the IASB, the Monitoring Board can suggest items for the IASB to consider for its agenda.

To assess whether the three-tier structure of the IFRS Foundation (i.e. the IASB, Trustees and Monitoring Board) is best achieving its goal of increasing accountability whilst maintaining independence, in April 2010 the Monitoring Board initiated a review of the governance structure supporting the development of IFRS. As part of this review, the Monitoring Board issued the Consultative Report on the Review of the IFRS Foundation’s Governance in February 2011 requesting views on the following key areas: • Composition and structure of the IASB, Trustees and Monitoring Board • Oversight, roles and responsibilities of the Trustees and Monitoring Board

In addition, in April 2011 the Trustees issued their Report of the Trustees’ Strategy Review (Strategy Review). The Strategy Review set out recommendations in the following areas: • The IFRS Foundation’s mission; • Governance; • The standard-setting process; and • Financing the IFRS Foundation.

The review of the Monitoring Board focused primarily on the institutional aspects of governance, such as composition and roles of the Monitoring Board, the IASB and the Trustees. The Strategy Review placed more emphasis on the operational aspects of governance, such as due process. Both reviews were aimed at ensuring the IFRS Foundation’s governance balances independence and accountability appropriately to facilitate the development of high quality and truly global standards.

The IFRS Foundation published reports summarising the results of these reviews in February 2012: Final Report on the Review of the IFRS Foundation’s Governance (Monitoring Board Report) and Report of the Trustees’ Strategy Review 2011, IFRSs as the Global Standard: Setting a Strategy for the Foundation’s Second Decade (Strategy Report). The highlights of the reports are the proposals made on the composition and structure of the IASB, Trustees and Monitoring Board. These include recommendations to limit the membership of the Monitoring Board to only those jurisdictions which commit to domestic use of IFRS in the jurisdiction’s capital market and participate in the funding of the IFRS Foundation. The reports also include the decision not to open membership of the Monitoring Board to stakeholders outside of capital market authorities.

A number of other recommendations are made in the reports that would improve transparency and visibility over the IFRS Foundation’s governance process. These include increased reporting to the public, as well as regular reporting by the Trustees’ Due Process Oversight Committee on operational aspects of due process (e.g. public consultation, outreach activities, field testing, and impact assessments). Also, the role of

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1 Chair and CEO of the IASB will be separated. The Monitoring Board will not be able to

set the IASB’s agenda, but will continue to be able to refer issues to the Trustees and the IASB Chair for their consideration. The reports also include recommendations to support consistent application of IFRS, including establishing formal cooperation arrangements with regulators and national standard setters to receive feedback on implementation and to encourage actions aimed at addressing divergence.15

Changing the criteria for members on the Monitoring Board is a signal to jurisdictions that they need to provide a clearer commitment to IFRS to continue to maintain representation. However, the criteria for determining the meaning of ‘domestic use’ is yet to be determined in order to provide more time for impacted jurisdictions to make their decisions. Reassessment of the current membership is expected to occur in early 2013 and it is likely that impacted jurisdictions will provide some public indication of their intentions before then. Importantly, at the same time, the Trustees have given a strong commitment to ensuring high quality, clear and understandable standards and to their consistent application and implementation. This is a message that the concerns about the quality and consistent application of IFRS have been heard.

The Monitoring Board expects to complete amendments to governing documents and determine candidates against the membership criteria for new permanent membership by the end of 2012. In early 2013, the Monitoring Board expects to start the assessment of existing members’ eligibility to remain members.16

2.1.3 The International Accounting Standards Board (IASB) At the time of writing the IASB comprises 15 members, however the Constitution requires that this should have been increased to 16 by no later than 1 July 2012. Up to three members may be part time and the remainder full time. The members of the IASB are appointed by the Trustees.17 The main qualifications for membership of the IASB are professional competence and practical experience.18 This was reaffirmed in the Strategy Report.

The Trustees are required to select IASB members so that the IASB as a group provides an appropriate mix of recent practical experience among auditors, preparers, users and academics.19 Furthermore, the IASB, in consultation with the Trustees, is expected to establish and maintain liaison with national standard-setters and other official bodies concerned with standard-setting to assist in the development of IFRS and to promote the convergence of national accounting standards and IFRS.20

The IASB will normally be required to comprise: (a) four members from Asia/Oceania; (b) four members from Europe; (c) four members from North America; (d) one member from Africa; (e) one member from South America; and (f) two members appointed from any area, subject to maintaining overall

geographical balance.21

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The responsibilities of the IASB are listed in Article 37 of the Constitution. Its primary role is to have complete responsibility for all IASB technical matters including preparing and issuing IFRSs (other than interpretations) and exposure drafts, each of which is required to include any dissenting opinions; and final approval of and issuing interpretations developed by the Interpretations Committee.22

Approval by at least nine members of the IASB is required for the publication of an exposure draft and IFRS (which includes final interpretations of the Interpretations Committee), if there are fewer than 16 members of the IASB. If there are 16 members, approval is required by at least 10 members.23 Other decisions of the IASB, including the publication of a discussion paper, require a simple majority of the members of the IASB present at a meeting that is attended by at least 60% of the members.24 The IASB has full discretion over its technical agenda and over project assignments on technical matters. It must, however, consult the Trustees on its agenda, and the Advisory Council on major projects, agenda decisions and work priorities. In addition, the IASB is required to carry out public consultation every three years in developing its technical agenda.25 The first public consultation was started in 2011 (see 3.1.2).

2.1.4 The IASB’s Due Process Handbook The Trustees set up a committee – the Trustees’ Due Process Oversight Committee (the Committee) – with the task of regularly reviewing and, if necessary, amending the procedures of due process in the light of experience and comments from the IASB and constituents. The Committee reviews proposed procedures for the IASB’s due process on new projects and the composition of working groups and ensures that their membership reflects a diversity of views and expertise. The ‘Due Process Handbook’ (the Handbook) for the IASB describes the consultative arrangements of the IASB.26

The procedures described in the Handbook address the following requirements:27 • transparency and accessibility; • extensive consultation and responsiveness; and • accountability.

In order to gain a wide range of views from interested parties throughout all stages of a project’s development, the Trustees and the IASB have established consultative procedures to govern the standard-setting process.28

The IASB’s standard-setting process comprises the following stages, with the Trustees having the opportunity to ensure compliance at various points throughout the process:29 • Stage 1: Setting the agenda; • Stage 2: Project planning; • Stage 3: Development and publication of a discussion paper; • Stage 4: Development and publication of an exposure draft; • Stage 5: Development and publication of an IFRS; and • Stage 6: Procedures after an IFRS is issued.

It is important to note that the IASB’s due process requirements are separated into mandatory and non-mandatory steps. ‘The following due process steps are mandatory:

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1 • developing and pursuing the IASB’s technical agenda;

• preparing and issuing IFRSs and exposure drafts, each of which is to include any dissenting opinions;

• establishing procedures for reviewing comments made within a reasonable period on documents published for comment;

• consulting the Advisory Council on major projects, agenda decisions and work priorities; and

• publishing bases for conclusions with IFRSs and exposure drafts.’30

The steps specified in the Constitution that are ‘non-mandatory’ include:31 • publishing a discussion document (e.g. a discussion paper); • establishing working groups or other types of specialist advisory groups; • holding public hearings; and • undertaking field tests (both in developed countries and in emerging markets).

If the IASB decides not to undertake any of the non-mandatory steps defined by the Constitution, it is required by the Constitution to state its reasons (known as the ‘comply or explain’ approach). Explanations are normally made at IASB meetings, and are published in the decision summaries and in the basis for conclusions with the exposure draft or IFRS in question.32

Although not mandatory, the IASB conducts public meetings and roundtables to ensure that it has appropriate input from its constituents.

As a consequence of issues arising during the 2007-2010 financial crisis, a ‘fast track’ comment process was developed. Under this process, if the matter is exceptionally urgent, the exposure draft is short, ‘and the IASB believes that there is likely to be a broad consensus on the topic, the IASB may consider a comment period of no less than 30 days, but it will set such a short period only after formally requesting and obtaining prior approval from 75 per cent of the Trustees’.33

A revised Handbook was issued for public comment in May 2012. The revised Handbook incorporates due process enhancements recommended in the Monitoring Board Report and the Strategy Report (see 2.1.2), as well as the recommendations from the Trustees’ Review of the Efficiency and Effectiveness of the IFRS Interpretations Committee (see 2.1.6). The comment period for the revised Handbook ended on 5 September 2012.34

2.1.5 The IFRS Advisory Council (the Advisory Council) The Advisory Council (whose members are appointed by the Trustees) provides a forum for geographically and functionally diverse organisations and individuals with an interest in international financial reporting to: • Give advice to the IASB on agenda decisions and priorities in the IASB’s work; • Inform the IASB on the views of the organisations and individuals on the

council on major standard-setting projects; and • Give other advice to the IASB or the Trustees.35

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The Advisory Council comprises ‘thirty or more members, having a diversity of geographical and professional backgrounds, appointed for renewable terms of three years’.36 The chair of the Council is appointed by the Trustees, and may not be a member of the IASB or a member of its staff.37 The Advisory Council normally meets at least three times a year, and its meetings are open to the public. It is required to be consulted by the IASB in advance of IASB decisions on major projects and by the Trustees in advance of any proposed changes to the Constitution.38

Members are appointed for an initial term of three years and may be asked to remain for up to three additional years.39

2.1.6 The IFRS Interpretations Committee (the Interpretations Committee) For IFRS to be truly global standards consistent application and interpretation is required. ‘The mandate of the Interpretations Committee is to review on a timely basis widespread accounting issues that have arisen within the context of current IFRSs and to provide authoritative guidance (IFRICs) on those issues.’40

The Interpretations Committee assists the IASB in improving financial reporting through timely identification, discussion and resolution of financial reporting issues within the framework of IFRS. It has 14 voting members. The chair, who is appointed by the Trustees, is a member of the IASB, the Director of Technical Activities or other appropriately qualified individual. The chair does not have the right to vote. The Trustees may appoint representatives of regulatory organisations, who have the right to attend and speak at meetings but not the right to vote.41 Currently, the European Commission and IOSCO have observer status. The quorum for a meeting is ten members, and approval of draft or final interpretations requires that not more than four voting members vote against the draft or final interpretation.42

The Interpretations Committee meets six times a year. All technical decisions are taken at sessions that are open to public observation. It reviews newly identified financial reporting issues not specifically addressed in IFRS or issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop in the absence of authoritative guidance, with a view to reaching a consensus on the appropriate treatment.43 The IASB approves and issues interpretations. Entities that prepare their financial statements in accordance with IFRS are required to comply with issued interpretations.44

In May 2012, the Trustees issued their recommendations from their review of the efficiency and effectiveness of the Interpretations Committee, started in October 2010. The main recommendations arising from the review include: • A broader range of ‘tools’ (e.g. – recommending new application guidance to

the standards and proposals for the ‘Annual Improvements Process’) to be deployed by the Interpretations Committee, to enable it to be more responsive to requests for assistance.

• A single set of agenda criteria to be applied when assessing whether the Interpretations Committee should address an issue.

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1 • The agenda rejection notices (i.e. agenda decisions), which are issued by the

Interpretations Committee when it decides not to address an issue, should: • remain outside the body of IFRSs, and not form part of the requirements; • be capable of being read without reference to the staff papers and the

original submission; and • be exposed for comment for 60 days.

• Greater use of outreach when assessing whether to add an issue to its agenda, and details of that outreach should be described to stakeholders to help them understand the basis for the Interpretations Committee’s decisions.45

Some of these recommendations will require amendments to the Handbook. Consequently, the Trustees issued an Invitation to Comment IASB and IFRS Interpretations Committee Due Process Handbook. The comment period ended on 5 September 2012.

2.1.7 The IASB’s ‘Annual Improvements Process’ The ‘Annual Improvements Process’ is designed to deal with ‘non-urgent, minor amendments to IFRSs’. Issues dealt with in this process arise from matters raised by the Interpretations Committee and suggestions from IASB staff or practitioners, and focus on areas of inconsistency in IFRS or where clarification of wording is required.

The premise behind the Annual Improvements Process is to streamline the IASB’s standard-setting process. If a number of minor amendments are processed together, there will be benefits both to constituents and the IASB. The Interpretations Committee assists the IASB by reviewing and recommending potential amendments to IFRS. ‘Annual Improvements’ is on the IASB’s work plan like its other projects and is subject to the same due process.

3 THE IASB’S TECHNICAL AGENDA AND GLOBAL CONVERGENCE

3.1 The IASB’s current priorities and future agenda The IASB’s fiscal year ended 30 June 2012 concluded the first year under the leadership of chair, Hans Hoogervorst. The emphasis of the board continues to be the convergence projects with the FASB, which have consumed a significant effort throughout much of the board’s history. In April 2012, Mr. Hoogervorst and Leslie Seidman, FASB chair, issued a joint update on convergence in which they stated that the boards are working to complete their joint projects on financial instruments, insurance contracts, leases and revenue recognition. They acknowledged the delays in completing these projects, but stated that while unfortunate, the delays are necessary to ensure that any changes are operational and will bring about much-needed improvement to financial reporting. They emphasised the need for changes to accounting standards to be appropriate; adequate opportunity for stakeholder participation in the process; and the boards to be responsive in considering stakeholder feedback.46

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Completion of these joint projects, in their entirety, is not expected before mid-2013, at the earliest. As discussed further at 3.1.2 below, the results of the IASB’s 2011 agenda consultation are expected later in 2012. In addition, the SEC’s decision on whether and how IFRS should be incorporated into the US financial reporting system, originally expected in 2011, is now not expected until 2013. All of these factors will influence the board’s future agenda and are discussed in more detail below.

3.1.1 The IASB’s current priorities The majority of the projects on the IASB’s current work plan stem from a Memorandum of Understanding between the IASB and the FASB (see 3.2.2 below).

The IASB’s work plan as of 26 July 2012 (July 2012 Work Plan) indicates an emphasis on the revenue recognition, leases, financial instruments and insurance contracts projects. As stated above, both boards consider the need for improvements in these areas to be the most urgent. Based on the July 2012 Work Plan, it appears the boards believe there is still work to be done on these projects as final standards are only projected for revenue recognition (mid-2013) and the general hedge accounting phase of financial instruments (Q4 2012), although exposure drafts are expected for the others by the end of 2012.

Other IASB projects identified on the July 2012 Work Plan are: • IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors –

Effective date and transition methods; • Annual Improvements; • Consolidation – Investment entities; • Comprehensive Review of IFRS for SMEs; • Post-implementation reviews of IFRS 8 – Operating Segments – and IFRS 3 –

Business Combinations; and • Final strategy for the future agenda (discussed below).

The IASB’s current work plan is available on its website under the ‘Standards development’ tab, ‘Workplan for IFRSs’.

3.1.2 Agenda consultation 2011 As discussed in 2.1.3, the Constitution requires that that the IASB carry out public consultation every three years in developing its technical agenda. This process commenced on 26 July 2011 when the IASB issued a Request for Views on the strategic direction and overall balance of its future agenda.

The IASB proposed the following strategic foundation for setting its future agenda: • A more diverse IFRS community will potentially lead to new issues; • A more complex market environment will create new challenges in financial

reporting; and • The new and amended IFRS that have been issued in 2011 or are expected to be

issued through 2013 will place pressure on preparers to implement the changes and users to understand the key differences; preparers and users may want a period of calm before additional significant projects are added to the agenda.

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1 The Request for Views also highlighted that the strategy of the future agenda should

not only focus on the development of new IFRS, but should also emphasise the need to perform post-implementation reviews of issued IFRS and targeted narrow scope improvements to existing IFRS.

The IASB intended to issue a Feedback Statement in the third quarter of 2012 summarising the responses from the Request for Views. The IASB discussed its future agenda at its May 2012 meeting. At this meeting, the board expressed support for prioritising the following areas: • Restarting the Conceptual Framework project, focusing on elements,

measurement, presentation, disclosure and the reporting entity; • Developing standards-level projects on:

• Rate-regulated activities • Application of the equity method in separate financial statements • Potential amendments to IAS 41 – Agriculture (for bearer biological assets);

• Re-commencing research on: • Emissions trading schemes • Business combinations under common control;

• Initiating a research programme that will initially focus on a number of key areas highlighted in the agenda consultation (e.g. discount rates, the equity method of accounting);

• Hosting a public forum to assess strategies for improving the quality of financial reporting disclosures, within the existing disclosure requirement; and

• Establishing a consultative group to assist with matters related to Islamic transactions and instruments.

The board is still considering the structure of the technical programme and project-level priorities. The final strategy for the future agenda is expected to be published by the end of 2012.

3.2 IFRS/US GAAP convergence ‘Convergence’ is a term used to describe the coming together of national systems of financial reporting and IFRS. Since its formation in 2001, the IASB has made great strides toward achieving global accounting convergence, with the result that the global acceptance of IFRS is rapidly becoming a reality. All listed EU companies are already required to prepare their consolidated financial statements in accordance with adopted IFRSs. Elsewhere, many non-EU countries have either adopted or are in the process of adopting or are aligning their national standards with IFRS. For an entity to assert compliance with IFRS it is required to apply IFRS 1 – First-time Adoption of International Financial Reporting Standards. The IASB has therefore established unambiguously the principle that full application of its standards and related interpretations is necessary for an entity to be able to assert that its financial statements comply with IFRS (as issued by the IASB). Consequently, it is necessary for countries that align their national standards with IFRS to require the application of IFRS 1 so that entities reporting under those standards can assert compliance

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with IFRS. In addition, an entity that applies IFRS as amended by a local authority cannot assert compliance with IFRS.

3.2.1 Background Since 2002, the IASB and FASB (the Boards) have been working together to improve IFRS and US GAAP, respectively, and to achieve convergence. Some of the significant milestones in the process include: • September 2002 Norwalk Agreement, in which the Boards each acknowledged

their commitment to the development of high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting;

• February 2006 Memorandum of Understanding (MOU) that reaffirmed the Boards’ shared objective of developing high quality, common accounting standards for use in the world’s capital markets;

• July 2007 SEC proposal to accept IFRS financial statements from foreign private issuers without reconciliation to US GAAP, which led to the August 2007 SEC Concept Release to obtain information about the extent and nature of the public’s interest in allowing US issuers to prepare financial statements in accordance with IFRS for purposes of complying with the rules and regulations of the SEC;47

• August 2008 SEC roadmap outlining the milestones and conditions that, if met, could lead to the use of IFRS in the US (Roadmap);

• September 2008 update to the MOU, which identified targets for completion of convergence projects that the IASB and the FASB believed were most critical;

• September 2009 G-20 request that the international accounting bodies redouble their efforts to achieve a single set of high quality, global accounting standards and complete their convergence project by June 2011;48

• February 2010 SEC Work Plan (IFRS Work Plan), which identified six areas that the SEC believes are most relevant to determination by the SEC regarding the use of IFRS by US issuers; and

• July 2012 SEC staff Final Report addressing its findings related to the six areas identified in the IFRS Work Plan.

Many see the convergence of accounting standards in the US as a prerequisite step towards developing a single accounting framework. As former IASB Chairman Sir David Tweedie noted at the December 2010 AICPA National Conference on Current SEC and PCAOB Developments, ‘while we can have international standards without the US, we certainly can’t have global standards without the US, and that’s why it is so important that the US is involved’. The SEC has, for many years, been committed to the goal of a single set of high-quality global accounting standards and has strongly supported the efforts of the IASB and the FASB to align their standards. Indeed, the elimination of significant accounting differences between US GAAP and IFRS should make a transition to IFRS in the US easier if the SEC ultimately decides to permit the use of IFRS in the US.

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1 3.2.2 Status

The MOU identified short-term and longer-term projects that the Boards agreed would bring the most significant improvements to IFRS and US GAAP. In April 2012, the IASB and FASB issued a joint update on convergence (April 2012 Joint Update), which concluded that most of the short-term projects had been completed or were close to completion. The following excerpt from the April 2012 Joint Update summarises the status of the short-term projects:49

Project Status Milestone

Share-based payments Completed Converged standards issued in 2004.

Segment reporting Completed IFRS 8 Segment Reporting [sic] issued in 2006.

Non-monetary assets Completed The FASB converged the treatment of certain nonmonetary exchanges to require recognition at fair value unless the transaction lacks commercial substance in FAS 153, Nonmonetary Assets [sic] issued in 2004.

Inventory accounting Completed The FASB converged the treatment of excess freight and spoilage in FAS 151, Inventory Costs issued in 2004.

Accounting changes Completed The FASB converged the treatment of voluntary changes in accounting policy by requiring retrospective application in FAS 150 [sic], Accounting Changes and Error Corrections issued in 2005.

Fair value option Completed Fair value option for financial instruments introduced into US GAAP in 2007.

Borrowing costs Completed Revised IAS 23 Borrowing Costs in 2007.

Research and development Completed US GAAP amended for acquired R&D, as part of business combinations, in 2008.

Non-controlling interests Completed Mezzanine presentation eliminated from US GAAP, as part of business combinations, in 2008.

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Joint ventures Completed IFRS 11 Joint Arrangements issued in May 2011. Establishes principles for the financial reporting by parties to a joint arrangement.

Income tax Reassessed as a lower priority project. No immediate action

Joint exposure draft published in 2009. The IASB may consider a fundamental review of the accounting for income taxes at a later date.

Investment property entities

In process The FASB issued a proposal to require investment property entities to measure their investment properties at fair value.

The Boards reported in the April 2012 Joint Update that most of the longer-term projects identified in the 2008 update to the MOU also are complete, as the following excerpt summarises:50


Business combinations Completed Joint requirements for business combination accounting and non-controlling interests issued in 2008.

Derecognition Completed Each board has introduced reforms substantially aligning the disclosure requirements and bringing US GAAP accounting requirements closer to IFRSs.

Consolidated financial statements (including disclosure about off balance sheet risks)

Completed IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Interests in Other Entities issued in May 2011.

The FASB issued proposed clarification relating to principals vs. agents in 2011.

Fair value measurement Completed FASB Statement No. 157 – Fair Value Measurements – issued in 2006. IFRS 13 – Fair Value Measurement – issued in May 2011.

Post-employment benefits Completed Amendments to IAS 19 Employee Benefits issued in 2011.

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1 Project Status Milestone

Financial statement presentation – other comprehensive income

Completed Amendments to IFRSs and US GAAP for presentation of other comprehensive income issued in 2011.

Financial instruments with the characteristics of equity

Reassessed as a lower priority.

Joint discussion paper published in 2008.

Investment entities IASB and FASB published proposals in August and October 2011, respectively.

The IASB’s proposal would exempt a class of entities whose substantive activity is investing for capital appreciation, investment income, or both from consolidating entities they control. Instead, these investment entities would measure controlled investees at fair value, with any changes in fair value recognised in profit or loss.

The FASB’s proposal would amend the existing guidance in US GAAP for investment companies to develop converged criteria for assessing whether an entity is an investment company.

At the time of writing, there are three longer-term priority MOU projects that the Boards have not finalised – financial instruments, revenue recognition and leases. The Boards have also been working on improvements to the accounting for insurance contracts. None of these projects is expected to be completed before the second half of 2013, at the earliest.

Convergence was intended to be a relatively short-term process to address major differences, thereby bringing US GAAP and IFRS closer together. While the converged standards are similar, differences remain. In addition, there are many areas of accounting with potentially significant accounting differences, for which no plans for convergence exist. Examples include, but are not limited to, depreciation of fixed asset components, inventory measurement and capitalisation of development costs. Completion of the convergence projects will not result in a single set of standards.

In February 2010, the SEC reaffirmed its longstanding commitment to the goal of a single set of high-quality global accounting standards and expressed its continued support for the convergence of US GAAP and IFRS. To aid the SEC’s evaluation of IFRS use in the US, the staff of the Office of the Chief Accountant set out its IFRS Work Plan – a comprehensive plan to address specific factors and areas of concern before the SEC makes its decision on whether, when and how it will further

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incorporate IFRS into the US financial reporting system for US issuers. The IFRS Work Plan addressed the following areas: • Sufficient development and consistent application of IFRS; • Independence of the standard setting process; • Investor understanding and education; • Examination of the US regulatory environment; • The effect of IFRS on US issuers, both large and small; and • Human capital readiness.

In July 2012, the SEC staff issued its Final Report on its IFRS Work Plan summarising what it has learned. The staff said that, based on its research, the IASB has made significant progress in developing a comprehensive set of accounting standards. However, constituents and the SEC staff expressed concerns about a variety of issues, including: consistency in application of IFRS; independence and funding of the IASB; lack of industry-specific guidance; and cost of moving to IFRS. Along with other information, the Final Report will be used by the SEC Commissioners to make their decision. The Final Report does not provide a recommendation to the SEC Commissioners. Instead, the report focuses primarily on methods other than adoption of the IASB’s standards and indicates that an endorsement approach that retains a role for the FASB may reduce or eliminate many of the concerns summarised in the Final Report.

3.2.3 The future for convergence The IASB discussed the place of convergence on its future agenda at its May 2012 meeting. The IFRS staff presented a paper summarising the feedback received from constituents on its 2011 agenda consultation and proposing an IASB response to be included in a Consultation and Feedback Statement (Feedback Statement). One of the messages the staff received from respondents to the 2011 agenda consultation was for the IASB to consider whether convergence should continue to be a priority. North American respondents supported retaining convergence as a main criterion when setting the agenda.51 An excerpt from the staff’s proposed response to this point follows:

‘Our foremost objective now is to develop, in the public interest, a single set of high-quality, understandable and enforceable global accounting standards. That objective has largely superseded convergence as a significant driver of our agenda setting process. Accordingly, our revised Due Process Handbook, which is currently out for public consultation, has removed convergence from the list of factors that are influential in setting our agenda. Our aim of developing a single set of global accounting standards will require us to be more inclusive in standard-setting and we are looking at developing a more formal framework for working collaboratively with a range of jurisdictions’.52

The Feedback Statement, which was expected to be published in the third quarter of 2012, will summarise the IASB’s proposed strategy for developing its future agenda. While several board members indicated that they intended to provide comments and suggestions on the paper outside the meeting, there was no specific

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1 discussion of the topic of convergence. However, it is clear from the staff’s response

quoted above that the IASB staff and, presumably, some board members believe that the formal convergence efforts should come to an end.

The SEC still needs to analyse and consider the primary question – whether and, if so, how and when IFRS should be incorporated into the US financial reporting system. Shortly before the issuance of the Final Report, Hans Hoogervorst was quoted as saying ‘We need the U.S. on board to be a truly global standard and what I would really appreciate is to have the expertise of the SEC on board as well’.53

We do not expect the SEC to make a decision before 2013. We continue to support a single set of high-quality global standards, and believe an endorsement approach in the US is a thoughtful and balanced way of achieving that ultimate goal. We believe that endless convergence efforts are not sustainable.

3.3 The impact of the financial crises The 2007-2010 financial crisis had a significant impact on the IASB and on the development of IFRS. At a basic level, the time the board had to spend discussing issues arising from the crisis caused delays in other projects. More importantly, it added significantly to the board’s workload. The following projects were added to the IASB agenda in 2008 and 2009 as ‘financial crisis related projects’: • Consolidation; • Replacement of IAS 27 – Consolidated and Separate Financial Statements • Disclosures about unconsolidated special purpose entities and structured

entities; • Investment companies; • Derecognition disclosures; • Fair value measurement; • Guidance; • Measurement uncertainty analysis disclosure; and • Financial instruments:

• Classification and measurement • Impairment • Hedge accounting • Asset and liability offsetting.

These projects were taken on jointly with the FASB. The intention was to complete them ‘expeditiously’ and in any event no later than 30 June 2011. Although the IASB and the FASB have made an enormous effort on these and other projects, and many have been completed, the financial instruments projects are still in progress and the goal of a common IFRS-US GAAP financial instruments standard has not yet been achieved. In particular, the IASB and the FASB have different views on how to record impairment of financial assets. Although both boards are expecting to issue exposure drafts on impairment of financial assets by the end of 2012, at the time of writing they are working on separate exposure documents.

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The Financial Stability Forum (now the Financial Stability Board) was established to enhance cooperation amongst the various national and international regulatory bodies. In 2008 it raised concerns about the difficulty of valuing financial instruments in markets that had become illiquid. The IASB responded by the appointment of an Expert Advisory Panel, which proceeded to produce valuation guidance (ultimately subsumed into IFRS 13 and by the FASB in ASC 820 – Fair Value Measurement). Subsequently, the IASB and FASB worked hard to ensure that there was consistency of guidance between IFRS and US GAAP. In May 2012, the Financial Stability Board announced the formation of the Enhanced Disclosure Task Force. One of the objectives of the task force is to develop principles for enhanced disclosures by financial institutions of their risk exposures and risk management practices, which have been the subject of some criticism in recent years. The task force will work with standard setting bodies, including the IASB and the FASB, as it develops its recommendations, which are expected in October 2012.54

Meanwhile, the more recent sovereign debt crisis has emphasised the need for consistent interpretation and regulation of IFRS. This prompted Hans Hoogervorst in August 2011 to issue a letter to the chair of the European Securities and Markets Authority commenting on the IASB’s observations on European entities’ accounting for distressed sovereign debt. In his letter, Mr. Hoogervorst observes inconsistencies among entities in Europe in the application of IAS 39 – Financial Instruments: Recognition and Measurement – with respect to the accounting requirements for fair value measurement and impairment losses.55 There has been more coordinated activity among preparers and regulators in 2012 in dealing with sovereign debt issues as evidenced by such matters being taken to the Interpretations Committee. While the IASB’s stated role is not to ensure compliance with IFRS, as noted at 2.1.2, the Strategy Report contains recommendations to support consistent application of IFRS by, among other things, working more closely with regulators.

Although the IASB had identified a need to improve standards on financial instruments and other topics before these crises emerged, weaknesses in IFRS did not cause the crises. It is to be hoped that the simpler standard on accounting for financial instruments that the IASB and FASB set out to develop ultimately will be issued. Such a standard may lead to greater consistency and transparency in financial reporting with the result that financial statements and the risks to which entities, particularly financial institutions, are exposed being more easily understood.

4 THE ADOPTION OF IFRS AROUND THE WORLD

4.1 Worldwide adoption Since 2001, there has been a tremendous increase in the adoption of IFRS around the world. The precise way in which this has happened has varied among jurisdictions. This section sets out a brief description of how a number of key jurisdictions in each continent have approached the adoption.

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1 The following table summarises IFRS adoption (for consolidated financial

statements) in countries with domestic market capitalisation exceeding US$500 billion as at 30 June 2012. For further details on selected countries/regions, see 4.2 to 4.6 below.

Country Required Permitted

Australia Required for all publicly accountable entities and any entity preparing general purpose financial statements. From 1 July 2013, non-publicly accountable entities are required to apply IFRS recognition and measurement requirements with simplified disclosures.

Brazil Required for regulated public companies, with exemptions for banks and real estate companies; other companies must follow converged national standards.

Canada Required for publicly accountable entities; some deferrals to 2014.

IFRS is permitted for all other entities.

Mainland China

Substantially converged national standards, with a more simplified form of disclosures.

European Union

IFRS as adopted by the European Union (EU IFRS – see 4.2.1) required for consolidated financial statements of all listed companies and some unlisted companies. Exemption for non-EU companies applying for listing on an EU regulated market that apply certain GAAP determined by the European Commission to be equivalent to EU IFRS.

EU member states may permit or require the application of EU IFRS by unlisted companies.

France See European Union. EU IFRS permitted for the consolidated financial statements of non-listed entities.

Germany See European Union. EU IFRS permitted for the consolidated financial statements of non-listed entities.

Hong Kong Converged national standards, except for differences related to effective dates and transitional provisions for certain standards.

IFRS permitted for listed companies incorporated overseas.

India IFRS converged standards, with numerous departures, to apply from a date not yet determined.

IFRS permitted for listed companies with subsidiaries.

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Country Required Permitted

Indonesia Converged national standards to 2009 version of IFRS for fiscal years ended 31 December 2011, with prospective application and exemption from IFRS 1.

Italy See European Union.

EU IFRS is required to be used by non-listed financial institutions and insurance companies, as well as by other regulated enterprises, in the preparation of statutory consolidated financial statements.

EU IFRS permitted in the statutory consolidated financial statements of all other non-listed entities and non-regulated enterprises except for SMEs.

Japan Considering mandatory adoption. Permitted for companies with global financial or operating activities.

Mexico Required for consolidated financial statements of listed entities filed with securities regulator, except for banks and insurance companies.

Netherlands See European Union. EU IFRS permitted for the consolidated financial statements of non-listed entities.

Russia Required for banks, insurance entities and most equity-listed companies, beginning 31 December 2012; some deferrals to 2015. Substantially converged national standards.

Singapore Converged national standards; adoption deferred to 2015.

Permitted for foreign filers.

South Africa Required for all listed companies. From December 2012, non-listed companies will use either IFRS or IFRS for SMEs.

Spain See European Union. EU IFRS permitted for non-listed groups for consolidated financial statements; no reversion to local GAAP once an entity has applied EU IFRS.

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1 Country Required Permitted

Switzerland Issuers of equity securities that are incorporated in Switzerland and listed under the Main Standard on the SIX Swiss Exchange (SIX) must apply either IFRS or US GAAP. Other listed entities incorporated in Switzerland must apply IFRS, US GAAP or Swiss GAAP-FER. Entities not incorporated in Switzerland must apply IFRS, US GAAP or a national GAAP deemed by the SIX to be equivalent.

IFRS permitted in consolidated statutory financial statements of non-listed entities.

Taiwan Adopting 2010 version of IFRS (‘Taiwan-IFRS’), which is required for annual periods beginning 1 January 2013 for listed companies and certain financial institutions.

IFRS permitted for foreign issuers, with reconciliation to ‘Taiwan-IFRS’.

United Kingdom

See European Union. EU IFRS permitted for all companies, except in the charities sector; restrictions on reversion to local GAAP once an entity has adopted EU IFRS.

United States

Substantial convergence of selected standards; considering incorporation.

Permitted for foreign private issuers preparing financial statements in accordance with IFRS as issued by the IASB.

4.2 Europe

4.2.1 EU On 19 July 2002, the European Parliament adopted Regulation No. 1606/2002 (the Regulation), which required publicly traded EU incorporated companies56 to prepare, by 2005 at the latest, their consolidated financial statements under IFRS ‘adopted’ (as discussed further below) for application within the EU.

Although an EU regulation has direct effect on companies, without the need for national legislation, the Regulation provides an option for EU member states to permit or require the application of adopted IFRS in the preparation of annual unconsolidated financial statements and to permit or require the application of adopted IFRS by unlisted companies. This means that EU member states can require the uniform application of adopted IFRS by important sectors, such as banking or insurance, regardless of whether or not companies are listed. An analysis of the implementation of the Regulation published in 2010 shows that nearly all EU member states use the option to permit the application of adopted IFRS in the

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consolidated accounts of some or all types of unlisted companies. More than half of the EU member states also permit the application of adopted IFRS in the annual financial statements of some or all types of unlisted companies.57

The Regulation established the basic rules for the creation of an endorsement mechanism for the adoption of IFRS, the timetable for implementation and a review clause to permit an assessment of the overall approach proposed. The European Commission took the view that an endorsement mechanism was needed to provide the necessary public oversight. The European Commission considered also that it was not appropriate, politically or legally, to delegate accounting standard setting unconditionally and irrevocably to a private organisation over which the European Commission had no influence. In addition, the endorsement mechanism is responsible for examining whether the standards adopted by the IASB satisfy relevant EU public policy criteria.

The role of the endorsement mechanism is not to reformulate or replace IFRS, but to oversee the adoption of new standards and interpretations, intervening only when these contain material deficiencies or have failed to cater for features specific to the EU economic or legal environments. The central task of this mechanism is to confirm that IFRS provides a suitable basis for financial reporting by listed EU companies. The mechanism is based on a two-tier structure, combining a regulatory level with an expert level, to assist the European Commission in its endorsement role.

The recitals to the Regulation state that the endorsement mechanism should act expeditiously and also be a means to deliberate, reflect and exchange information on international accounting standards among the main parties concerned, in particular national accounting standard setters, supervisors in the fields of securities, banking and insurance, central banks including the European Central Bank, the accounting profession and users and preparers of accounts. The mechanism should be a means of fostering common understanding of adopted international accounting standards in the EU community.58

The European Commission is advised on IFRS by the European Financial Reporting Advisory Group (EFRAG) and specifically by its Technical Expert Group. EFRAG is a private sector body established by the European organisations prominent in European capital markets, e.g. the Federation of European Accountants (FEE) and the European Banking Federation. In addition to advising the European Commission on endorsement of IFRS, EFRAG is the mechanism by which Europe as a whole can participate in the global debate on accounting standards and it coordinates European responses to IASB proposals. The European Commission also seeks advice from its member states through the Accounting Regulatory Committee.

Concerns have been expressed about the speed of the EU endorsement process but to date, apart from the carve out from IAS 39 (refer to Chapter 42), all IASB standards to have gone through the process have ultimately been endorsed. However, a number of Interpretations Committee interpretations have had delayed application dates. At the time of writing, there are discussions about whether the preparation time for some new standards is sufficient. EFRAG does not support the mandatory effective date of 1 January 2013 for IFRS 10, IFRS 11, IFRS 12, IAS 27 and IAS 28 – Investments in Associates and Joint Ventures – because field-tests it

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1 has conducted provided evidence that some financial institutions would need more

time to implement these standards in a manner that brings reliable financial reporting to capital markets. Despite its overall positive endorsement advice, EFRAG has recommended the mandatory effective date of the standards to be 1 January 2014, with early adoption permitted.59 Finally, discussions about the adoption of IFRS 9 – Financial Instruments – could also be difficult in the future. At present, the process has not started pending finalisation of all aspects of the standard by the IASB.

4.2.2 Russia Since 1998, Russian Accounting Principles (RAP) have been gradually converging towards IFRS. Most of RAP is substantially based on IFRS, although some IFRSs have no comparable RAP standard and some RAP standards that are based on IFRS have not been updated for recent changes to the comparable IFRS.

Since 2004, the Central Bank of the Russian Federation (CBR) has required credit institutions to file financial statements prepared in accordance with IFRS as issued by the IASB. For public reporting purposes, all Russian listed companies prepare their financial statements in accordance with RAP, except for ‘A-listed’ companies, which are also required to prepare financial statements in accordance with IFRS or US GAAP. Statutory financial statements also are required to be prepared in accordance with RAP.

In 2010, Russian Federal Law (the Law) established an IFRS endorsement process in Russia. Under the Law, individual IFRSs (standards and interpretations) become mandatory starting from the beginning of the calendar year following the year of their endorsement, or from the effective date specified in the IFRS, if it is later. IFRSs can be voluntarily applied after they are endorsed but before their effective date.

The Law allows the following companies to defer the adoption of IFRS until 2015 at the latest: • Listed companies that prepare consolidated financial statements under

internationally recognised accounting principles other than IFRS (e.g. US GAAP);

• Companies with only listed debt securities.

The IFRS endorsement process involves an analysis of the Russian language text of an IFRS, provided by the IFRS Foundation, by the National Organization for Financial Accounting and Reporting Standards Foundation (NOFA), an independent, non-commercial organisation identified by the Ministry of Finance of the Russian Federation (Ministry of Finance). NOFA performs an analysis of an individual IFRS’s suitability for the Russian financial reporting system. NOFA advises the Ministry of Finance whether an IFRS should be endorsed as issued by the IASB or whether certain requirements should be ‘carved out’ to meet the needs of the financial reporting system in Russia. The Ministry of Finance, after consultation with the CBR and the Federal Service for Securities Market, makes the final decision on endorsement and publication of an IFRS.

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On 25 November 2011, the Ministry of Finance endorsed, without any ‘carve outs’, all IFRSs effective from 1 January 2012. Following this endorsement, banks, insurance entities and most equity-listed companies have to file consolidated IFRS financial statements for fiscal years ending 31 December 2012 and thereafter.

4.3 Americas

4.3.1 US See 3.2 above for a discussion of the status of US adoption of IFRS.

4.3.2 Canada For publicly accountable enterprises, the Accounting Standards Board (AcSB) has adopted IFRS as Canadian GAAP for fiscal years beginning on or after 1 January 2011, with the following exceptions: • Entities with rate-regulated activities have the option to defer their adoption of

IFRS by one year to 1 January 2013. However, such entities that are also reporting issuers filing with Canadian securities commissions will be required to adopt IFRS for financial years beginning on or after 1 January 2012, unless they seek and are granted permission to use US standards as more fully described below.

• Investment companies and segregated accounts of life insurance enterprises have the option to defer their adoption to 1 January 2014 to correspond with the anticipated completion date for the IASBs Investment Entities project.

• Pension plans, and benefit plans that have characteristics similar to pension plans, will follow the accounting standards for pension plans issued by the AcSB as of 1 January 2011, rather than IAS 26 – Accounting and Reporting by Retirement Benefit Plans.

The term ‘publicly accountable enterprises’ encompasses public companies and some other classes of enterprise that have relatively large or diverse classes of financial statement users. Canadian publicly accountable enterprises that are registered with the US SEC are permitted to apply US accounting standards rather than IFRS. SEC registered Canadian entities operating in industries dominated by US entities tend to favour US accounting standards over IFRS. In addition, securities regulators have indicated that they will consider permitting the use of US standards by Canadian rate-regulated entities that file with Canadian securities commissions even if they are not SEC registered. A number of these entities have been granted permission to use US standards.

For non-publicly accountable enterprises and not-for-profit organizations the AcSB has developed new bases of accounting that are derived from Canadian standards rather than IFRS, although IFRS is also available for use by those entities on a voluntary basis.

The adoption of IFRS in Canada for publicly accountable enterprises means that the AcSB has effectively ceased to make final decisions on most matters affecting the technical content and timing of implementation of standards applied to publicly accountable enterprises in Canada. The AcSB’s plans for incorporating new or amended IFRS into Canadian standards include reviewing all IASB documents

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1 issued for comment. As part of this process, the AcSB will seek the input of Canadian

stakeholders by issuing its own exposure draft of the IASB proposals, together with a document highlighting the key elements of the IASB proposals that are particularly relevant to Canadian stakeholders. In addition, the AcSB may perform outreach activities such as public roundtables. Any changes to IFRS must be approved by the AcSB before becoming part of Canadian GAAP.

While the AcSB retains the power to modify or add to the requirements of IFRS, it intends to avoid changing IFRS when adopting them as Canadian GAAP. Accordingly, the AcSB does not expect to eliminate any options within existing IFRS. As issues relevant to Canadian users of financial information arise in the future, the AcSB will work to resolve them through the Interpretations Committee or the IASB. In the event that a resolution by the Interpretations Committee or IASB is not possible the AcSB will stand ready to develop additional temporary guidance.

The AcSB has an IFRS Discussion Group to provide a public forum to discuss the application of IFRS in Canada and to identify matters that should be forwarded to the Interpretations Committee for further consideration. The Group does not interpret IFRS or seek consensus on its application in Canada. It meets in public four times per year and has generated several suggestions for the Interpretations Committee’s agenda.

4.3.3 Brazil Local accounting standards in Brazil (CPCs) have been converged with IFRS since 2010 and public companies regulated by the ‘Comissão de Valores Mobiliários’ (CVM) are now also required to make a formal statement of compliance with IFRS as issued by the IASB for their consolidated financial statements. The only exception is for homebuilding companies, which are temporarily permitted to continue to apply IAS 11 – Construction Contracts – rather than IAS 18 – Revenue – under IFRIC 15 – Agreements for the Construction of Real Estate.

Banks are regulated by the Brazilian Central Bank, which continues to require preparation of financial statements under its pre-existing rules. However, larger banks have also been required to prepare financial statements in accordance with IFRS since 2010, which must be made publicly available. Insurance companies were required to adopt the local CPCs, and hence IFRS, in 2011.

Non-public companies outside financial services are required to apply the CPCs. Smaller non public companies are permitted to apply an equivalent of IFRS for SMEs.

4.4 Asia

4.4.1 China

4.4.1.A Mainland China The developments in IFRS have been playing an important role in the development of accounting standards and practices in China. The Ministry of Finance (the MOF) – through its Accounting Regulatory Department – is responsible for the promulgation of accounting standards. In 1993, the MOF started a work programme

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to develop a set of Accounting Standards for Business Enterprises. Before 2006, China had promulgated and implemented Accounting Standards for Business Enterprises – Basic Standard, with 16 specific standards, as well as Accounting System for Business Enterprises, Accounting System for Financial Institutions and Accounting System for Small Business Enterprises which are applicable to various business enterprises.

Representatives of the China Accounting Standards Committee (CASC) – which falls under the Accounting Regulatory Department of the MOF – and the IASB met in Beijing in November 2005 to discuss a range of issues relating to the convergence of Chinese accounting standards with IFRS. At the conclusion of the meeting, the two delegations released a joint statement setting out key points of agreement, including the following: • The CASC stated that convergence is one of the fundamental goals of its

standard-setting programme, with the intention that an enterprise applying Chinese accounting standards should produce financial statements that are the same as those of an enterprise that applies IFRS; and

• The delegation acknowledged that convergence with IFRS will take time and how to converge with IFRS is a matter for China to determine.

In February 2006, the MOF issued a series of new and revised Accounting Standards for Business Enterprises (ASBE), which included the revised Basic Standard, 22 newly-promulgated accounting standards and 16 revised accounting standards. The new and revised ASBE was effective from 1 January 2007 for listed companies. Other companies are also encouraged to adopt it. In April 2010, the MOF issued the Road Map for Continual Convergence of the ASBE with IFRS (the Road Map), which requires the application of ASBE by all listed companies, some non-listed financial enterprises and central state-owned enterprises, and most large and medium-sized enterprises. The Road Map also states that ASBE will continue to maintain convergence with IFRS.

ASBE, to a large extent, represents convergence with IFRS, with due consideration being given to specific situations in China. ASBE covers the recognition, measurement, presentation and disclosure of most transactions and events, financial reporting, and nearly all the topics covered by current IFRS. Most of ASBE is substantially in line with the corresponding IFRS, with a more simplified form of disclosures. However, there are ASBE that do not have an IFRS equivalent, such as that on non-monetary transactions and common control business combinations, and there are certain standards that restrict or eliminate measurement alternatives that exist in IFRS. For example, the ASBE on investment property permits the use of the fair value model only when certain strict criteria are met. Whilst ASBE is not identical to IFRS, the substantive difference from IFRS is that the ASBE on impairment of assets prohibits the reversal of an impairment loss for long-lived assets in all situations.

4.4.1.B Hong Kong The Hong Kong Institute of Certified Public Accountants (HKICPA) is the principal source of accounting principles in Hong Kong. These include a series of Hong Kong Financial Reporting Standards, accounting standards referred to as Hong Kong

35


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1 Accounting Standards (HKAS) and Interpretations issued by the HKICPA. The term

‘Hong Kong Financial Reporting Standards’ (HKFRS) is deemed to include all of the foregoing. While HKFRS has no direct legal force, it derives its authority from the HKICPA, which may take disciplinary action against any of its members responsible, as preparer or as auditor, for financial statements that do not follow the requirements of the pronouncements.

HKFRS was fully converged with IFRS with effect from 1 January 2005. The HKICPA Council supports the integration of its standard setting process with that of the IASB.

Although the HKICPA Council has a policy of maintaining convergence of HKFRS with IFRS, the HKICPA Council may consider it appropriate to include additional disclosure requirements in an HKFRS or, in some exceptional cases, to deviate from an IFRS. Each HKFRS contains information about the extent of compliance with the equivalent IFRS. Where the requirements of an HKFRS and an IFRS differ, the HKFRS is required to be followed by entities reporting within the area of application of HKFRS. However in practice, exceptions to IFRS are few and relate to certain transitional provisions.

4.4.2 Japan In 2007, an agreement between the Accounting Standards Board of Japan (ASBJ), and the IASB, known as ‘The Tokyo Agreement’, was announced. The Tokyo Agreement advanced the gradual convergence of Japanese GAAP and IFRS, which had been taking place for a number of years. Following the initial convergence projects under this agreement, in 2008 the European Commission accepted Japanese GAAP in its markets as part of its process to accept certain GAAP as equivalent to IFRS for listing non-EU companies in a European regulated market (as defined by the European Commission). Further convergence of Japanese GAAP has continued as new standards are issued or expected to be issued. Since adoption of IFRS is being considered for consolidated financial statements only, this convergence process is expected to continue as Japanese GAAP is used by Japanese companies in their standalone financial statements.

In June 2009, the Business Advisory Council (BAC) a key advisory body to the Financial Services Agency approved a roadmap for the adoption of IFRS in Japan and the relevant related matters have subsequently been incorporated into the regulation for consolidated financial statements. The key points of this roadmap are: • Option of voluntary adoption of IFRS from fiscal years ended after 31 March

2010 for companies with global financial or operating activities; and • Decision on the mandatory adoption of IFRS to be made in 2012.

In June 2011, the BAC announced that if mandatory application of IFRS were to be decided, a period of five to seven years would be given for preparing for adoption. This is a longer period than proposed in the roadmap.

To date, only a handful of Japanese companies have taken the option to apply IFRS voluntarily in their financial statements, with several other Japanese companies planning to take the option in the coming years.

At the time of writing, no announcement has been made by the BAC on whether to require IFRS in Japan.

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32 Chapter 1

4.4.3 India Accounting standards in India are issued by the Institute of Chartered Accountants of India (ICAI) and are ‘notified’ by the Ministry of Corporate Affairs (MCA) under the Companies Act, 1956 (Companies Act). The MCA had originally issued an IFRS conversion roadmap in which it had proposed a date for IFRS conversion in a phased manner from 2011. The phasing was done based on certain criteria, such as the listing status, net worth and nature of the industry. The MCA had also clarified that companies subject to the IFRS conversion roadmap would not have the option of using ‘full IFRS’; rather, they would need to comply with IFRS converged standards that would be issued by the ICAI. This effectively created a separate body of accounting standards known as ‘Indian Accounting Standards’ (Ind-AS) to be followed by all companies registered under the Companies Act, other than non-listed companies with net worth less than the Indian Rupee equivalent of approximately US$100 million.

At the time of writing, the MCA has notified 35 Ind-AS standards. Further, the MCA has stated that these standards will be applied in a phased manner, after resolving various issues, including tax-related ones. Therefore, Ind-AS may not apply from the dates announced in the original roadmap. At the time of writing, these dates of application are not fixed. Notified Ind-AS contains numerous departures from IFRS. The MCA felt that these departures were necessary to reflect the accounting principles, practices and economic conditions prevailing in India.

The departures from IFRS may be summarised into the following broad categories: • Departures from IFRS that result in Ind-AS financial statements not being

compliant with IFRS, when the issues addressed in those IFRS apply to an entity;

• Removal of options available under IFRS; • Additional options provided in Ind-AS that, if selected, would result in Ind-AS

financial statements not being compliant with IFRS when those additional options under Ind-AS are used by an entity; and

• Deferral or non-adoption of certain IFRS.

The Securities and Exchange Board of India (SEBI), the securities regulator in India, permits listed companies with subsidiaries to submit their consolidated financial statements in accordance with IFRS as issued by IASB. Few companies in India have availed themselves of this option.

4.5 Australia/Oceania – Australia The standards and interpretations issued by the IASB are issued as Australian equivalents to IFRS (AIFRS) by the Australian Accounting Standards Board (AASB). These standards apply to all publicly listed companies and any entity preparing general purpose financial statements. Private entities not preparing general purpose financial statements are required to comply with all of the recognition and measurement requirements of IFRS, but are permitted to follow simplified disclosure requirements, as described below. Not-for-profit entities and public sector

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1 organisations not preparing general purpose financial statements are required to

comply with AIFRS as well as additional local requirements.

In 2010, the AASB introduced a differential reporting framework based on the IASB’s definition of publicly accountable entities. When producing general purpose financial statements, non-publicly accountable entities will be able to apply Australian Accounting Standards – Reduced Disclosure Requirements (RDR). This framework will require entities to apply all of the recognition and measurement requirements of IFRS, but only a reduced number of the disclosure requirements determined on the principles adopted by the IASB in its development of the IFRS for SMEs. The mandatory application date of this framework is annual reporting periods beginning on or after 1 July 2013. Entities may apply the framework to annual reporting periods beginning on or after 1 July 2009 but before 1 July 2013.

In 2007, the Australian Auditing and Assurance Standards Board (AUASB) issued a revised auditing standard requiring the auditor to opine on the entity’s compliance with IFRS (as issued by the IASB) where it has made the statement under the Australian equivalent of paragraph 16 of IAS 1 – Presentation of Financial Statements. This is in addition to the auditor’s opinion on compliance with Australian Accounting Standards. In effect, both the reporting entity and the auditor make a statement of dual compliance with IFRS as issued by the IASB and Australian Accounting Standards. The reference to ‘as issued by the IASB’ is to distinguish this from other jurisdictions that refer to their standards as IFRS, e.g. IFRS as issued by the EU.

4.6 Africa – South Africa In 2004, South Africa completed a convergence project between the standards contained within South Africa GAAP (SA GAAP) and all IFRS in issue at that time. After this convergence project, the only remaining differences between companies reporting under SA GAAP and an IFRS reporter were the legacy effects of different effective dates (between the equivalent IFRS and SA GAAP standards) and the non application of IFRS 1. Since 2004, until early 2011, all standards and interpretations that had been issued by the IASB were adopted into SA GAAP without change.

In addition to the disclosure requirements of IFRS, IFRS for SMEs and SA GAAP, the South African Companies Act and the South African securities exchange, JSE Limited (JSE) imposed certain additional disclosure requirements on reporting entities. The South African standard setter – the Accounting Practices Board (APB) – has also issued four interpretations. While these interpretations are specific to issues in the South African environment and SA GAAP, both SA GAAP and IFRS reporters in South Africa make use of them as they are based on a framework equivalent to that used for IFRS.

For all periods beginning on or after 1 January 2005, the JSE has required that all listed companies prepare financial statements under IFRS. Non-listed companies in South Africa continued to use either IFRS, IFRS for SMEs or SA GAAP as the framework for preparing their financial statements in accordance with the then Companies Act.

34 Chapter 1

On 1 May 2011 a new Companies Act became effective in South Africa. Since then, different accounting frameworks apply to different categories of companies based on their ‘public interest score’. Listed companies are still required to use IFRS, however other companies (depending on their public interest score) may apply IFRS, IFRS for SMEs, SA GAAP, or in certain situations entity specific accounting policies as determined by themselves.

In addition, the APB was replaced with the Financial Reporting Standards Council (FRSC) as the new standard setting body in South Africa in the second half of 2011. Further, in 2012 it was announced that SA GAAP will be withdrawn with effect for financial periods commencing on or after 1 December 2012. Hence, companies that have been reporting on SA GAAP will now have to transition to one of the remaining frameworks, which include IFRS or IFRS for SMEs.

5 SUMMARY IFRS is now, together with US GAAP, one of the two globally recognised financial reporting frameworks. Although there remains some uncertainty as to what view the SEC will take on the role of IFRS in the US there is strong demand among policy makers and regulators for there to be just one set of high quality accounting standards recognised globally. Although the goal of a single set of high quality global accounting standards has not yet been fulfilled, given the number of countries that have adopted or converged with IFRS or have plans to in the future, it is safe to say that IFRS has become ‘International GAAP’.

However, for there to be a truly International GAAP it is necessary that there is consistent application, interpretation and regulation of those standards to mirror the processes that have traditionally supported national GAAPs. Whilst complete consistency does not exist today, many mechanisms to achieve it are in place. The Interpretations Committee plays a key role not just through its interpretations but also through its agenda decisions. In the Strategy Review, the Trustees propose a number of ways to help ensure consistent application of IFRS, including working with a network of securities regulators, audit regulators, standard setters and other stakeholders to identify areas of divergence.60 We agree that the IFRS Foundation needs to focus on discouraging local interpretations of IFRS and support the proposals to involve regulators in the process.

References 1 IFRS Foundation, Who we are and what we

do, February 2012. 2 IFRS Foundation Constitution, Updated

December 2010, Article 3. 3 IFRS Foundation Constitution, Updated

December 2010, Article 6.

4 IFRS Foundation Constitution, Updated



December 2010, Article 6.

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1

7 IFRS Foundation Constitution, Updated

December 2010, Article 15(b). 8 IFRS Foundation Constitution, Updated

December 2010, Articles 13 and 15. 9 IFRS Foundation, Who we are and what we

do, February 2012. 10 IFRS Foundation Annual Report 2011, ‘2011

financial supporters’. 11 IFRS Foundation Constitution, Updated


December 2010, Article 19. 13 Website of the IFRS Foundation and IASB,

http://www.ifrs.org/The+organisation/Governance+and+accountability/Monitoring+Board.htm (accessed 20 August 2012).

14 Charter of the IASCF Monitoring Board, 1 April 2009.

15 IFRS Foundation, Report of the Trustees’ Strategy Review 2011, IFRSs as the Global Standards: Setting a Strategy for the Foundation’s Second Decade, February 2012.

16 IFRS Foundation Monitoring Board, Final Report on the Review of the IFRS Foundation’s Governance, 9 February 2012.

17 IFRS Foundation Constitution, Updated December 2010, Article 24.





22 IFRS Foundation Constitution, Updated December 2010, Article 37(a).



25 IFRS Foundation Constitution, Updated December 2010, Article 37(d) and (h).

26 Due Process Handbook for the IASB, Updated February 2012, paras. 1 and 2.

27 Due Process Handbook for the IASB, Updated, February 2012, para. 9.

28 Due Process Handbook for the IASB, Updated February 2012, para. 6.

29 Due Process Handbook for the IASB, Updated February 2012, paras. 18-53.




33 Due Process Handbook for the IASB,

Updated February 2012, para. 100 34 IFRS Foundation Press Release, ‘Trustees

publish proposed enhancements to IFRS Foundation Due Process Handbook’, 8 May 2012.





39 Due Process Handbook for the IASB, Updated February 2012, Appendix III, para. 5.

40 Website of the IFRS Foundation and IASB, http://www.ifrs.org/The+organisation/IASCF+and+IASB.htm, About the IFRS Foundation and the IASB (accessed 21 August 2012).



43 Due Process Handbook for the IFRS Interpretations Committee, Updated December 2010, para. 6.

44 Due Process Handbook for the IFRS Interpretations Committee, Updated December 2010, para. 45.

45 IFRS Foundation, Report on the Trustees’ Review of the Efficiency and Effectiveness of the IFRS Interpretations Committee.

46 Joint Update Note from the IASB and FASB on Accounting Convergence, Note from IASB on Governance Enhancements, April 2012.

47 Securities and Exchange Commission, 17 CFR Parts 210, 228, 229, 230, 239, 240 and 249 [Release No. 33-8831; 34-56217; IC-27924; File No. S7-20-07] RIN 3235-AJ93, Concept Release on allowing U.S. issuers to prepare financial statements in accordance with International Financial Reporting Standards, August 7, 2007. The comment date of this Concept Release was 13 November 2007.

48 ‘Pittsburgh summit declaration’, www.g20.org/images/stories/docs/eng/pittsburgh.pdf (accessed 21 August 2012).

49 Joint Update Note from the IASB and FASB on Accounting Convergence, Note from IASB on Governance Enhancements, April 2012.

50 Joint Update Note from the IASB and FASB on Accounting Convergence, Note from

36 Chapter 1

IASB on Governance Enhancements, April 2012.

51 IFRS Staff Paper, Request for views – Agenda Consultation 2011, May 2012, IASB Agenda ref 13A.

52 IFRS Staff Paper, Request for views – Agenda Consultation 2011, May 2012, IASB Agenda ref 13A.

53 ‘SEC to Take Position in “Weeks, if not Days” on International Accounting Standards – IASB Head’, online.wsj.com (accessed 7 August 2012).

54 Financial Stability Board Press Release, ‘Formation of the Enhanced Disclosure Task Force’, 10 May 2012.

55 Letter from Hans Hoogervorst, IASB Chair, to Steven Maijoor, Chair of European Securities and Markets Authority, Accounting for available-for-sale (AFS) sovereign debt, 4 August 2011, website of the IFRS Foundation and IASB.

56 This means those with their securities admitted to trading on a regulated market within the meaning of Article 1(13) of Council Directive 93/22/EEC (on investment services in the securities field) or those offered to the public in view of their admission to such trading under Council Directive 80/390/EEC (coordinating the requirements for the drawing up, scrutiny and distribution of the listing particulars to be published for the admission of securities to official stock exchange listing).

57 European Commission, Implementation of

the IAS Regulation (1606/2002) in the EU and EEA, 1 July 2010.

58 European Commission, Implementation of the IAS Regulation (1606/2002) in the EU and EEA, 1 July 2010, Recital 11.

59 EFRAG, Final endorsements advice on IFRS 10, IFRS 11, IFRS 12, IAS 27 and IAS 28– letter to the European Commission, 30 March 2012.

60 IFRS Foundation, Report of the Trustees’ Strategy Review 2011, IFRSs as the Global Standards: Setting a Strategy for the Foundation’s Second Decade, February 2012.

40

Frequently Asked Questions on Anti-Bribery and CorruptionDavid Lawler978-1-1199-7197-9 • Pbk • 584 pages • April 2012 • £39.99 / €48.00

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Chapter 1

Timeline

COPYRIG

HTED M

ATERIAL

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6 Frequently Asked Questions in Anti-Bribery and Corruption

Up to 1970: The Dark Ages forCommercial Bribery

Bribery is certainly not a recent phenomenon, and there areseveral reports of bribery among ancient Egyptian writingsand in the books of The Old Testament. Leaving these histor-ical accounts aside, though, bribery was first properly out-lawed when the UK passed the Corrupt Practices Act of 1695,a law designed to prevent bribery during parliamentary elec-tions. This forerunner of the modern bribery laws preventedprospective candidates or their associates from making any‘gift, reward or entertainment’ in exchange for votes.

Although most lawmakers slowly reflected popular opinion bycriminalizing political corruption, the prevailing wisdom wasthat bribery was a fact of life when doing business, particu-larly internationally, and so for the first 80% of the twentiethcentury there were almost no prosecutions for bribery out-side the political arena anywhere in the world.

The UK was one of the first countries in the world to haveexplicit statutory provisions outlawing bribery. But althoughthey sounded impressive, they were little used, and piece-meal reforms over the years had given rise to a myriad ofoverlapping offences contained in the common law, and indated legislation.

1971: LockheedIn 1971 the US government helped Lockheed Corporation, atthe time the country’s second largest defence contractor, toavoid bankruptcy by providing it with a $250m loan guaran-tee. Soon afterwards, regulators discovered that Lockheedhad been paying numerous bribes to foreign governments

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Chapter 1: Timeline 7

over the course of many years, with multi-million dollarbackhanders having been made to obtain contracts inHolland, Japan and Italy. These were not just payments tolow and mid-ranking bureaucrats, but bribes to very seniorfigures. The scandal that resulted damaged relations bothinside and outside the US.

Lockheed was reluctant to cooperate with subsequent gov-ernmental investigations and refused to stop making politicalpayments, claiming that it was simply doing what was nec-essary to carry out business in certain parts of the world.Such payments, it said, were essential to maintaining salesand were ‘consistent with practices engaged in by numerousother companies abroad’.

1972: WatergateIn June 1972, the US Democratic Party offices at the Water-gate hotel complex were broken into. The subsequent FBIinvestigation revealed that the Watergate episode was justone part of a huge operation to spy on and sabotage theDemocrats’ election chances.

Republican candidate Richard Nixon was ultimatelyre-elected, and although he maintained that he knew nothingabout the matter, when he refused to comply with an orderof the Supreme Court to hand over tapes of conversationsthat took place inside the White House, he was impeachedand charged with obstruction of justice.

Meanwhile, in 1973, during his fifth year as Nixon’s VicePresident, Spiro Agnew was under investigation by the USAttorney’s office in Maryland on charges of extortion, taxfraud, bribery and conspiracy. Rather than face a briberytrial, he was allowed to plead ‘no contest’ to a chargeof evading income tax, with the condition that he resignhis office.

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In August 1974, Nixon – facing increasing pressure over hisrole in the Watergate scandal – resigned, the first US pres-ident to do so. When Vice President Gerald Ford becamepresident in his place, he later pardoned Nixon of all chargesrelated to the Watergate case.

1976: Post-Watergate RepercussionsDuring his investigation of corporate payments to Nixon’selection campaign, the Watergate special prosecutor foundevidence of hidden ‘slush funds’ being set up by some of theUS’s largest companies, including such stalwarts as 3M, Amer-ican Airlines and Goodyear Tire & Rubber. These paymentshad been used to make illegal payments to the Republicanelection campaign. Subsequent probes uncovered numerouscases of corporate money being illicitly passed to domesticpoliticians, foreign officials or often both.

Motivated more by an attempt to reduce share price volatil-ity resulting from major contracts being obtained by briberyas any moral imperative to try to eliminate it, the US regula-tors proposed a programme of voluntary disclosure. The SECencouraged any company to come forward and self-reporta bribe or illicit payment, whereupon they would be infor-mally assured that they would not face prosecution. In return,however, the company would have to conduct an indepen-dent investigation into the payments and disclose the resultsbefore putting right any problems uncovered.

Some companies complied, others partly complied; someresisted. The resulting 1976 SEC publication, Report on Ques-tionable and Illegal Corporate Payments and Practices, anal-ysed information obtained from 89 companies, many of whichwere part of the Fortune 500, which had self-reported bribesor other illicit payments made to foreign governmental offi-cials. The SEC recommended establishing new and stricter

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accounting, record-keeping and management practices forlarge US companies.1

Mid-1970s: Easing of Tensionsin the Cold War

The 1970s also represented a period of more cordial relationsbetween NATO and the Warsaw Pact countries. Both sideswere feeling that the financial cost of the nuclear arms racewas becoming unsustainable, particularly in the US, wherethe economy was under pressure from having to pay for theVietnam War at the same time as the welfare state was beingexpanded. Diplomats recognized there was no longer a press-ing reason for the US government or its agents to supportcorrupt regimes around the world under the guise of nationalsecurity, and became conscious that paying bribes tarnishedthe US image abroad and weakened its standing in globalpolitics. To build and preserve alliances, the US governmentembarked on a post-Cold War agenda of transparency.

1977: Foreign Corrupt PracticesAct Passed

Fuelled by scandals of Watergate, news of widespreadinternational bribery and the easing of international politicalrelations, US voters had grown wary of shady deals andquestionable dealings by the country’s political and businessleaders, and started to demand a new accountability. UnderUS law, bribery of domestic politicians had for some timebeen illegal, however, even the most blatant bribery overseaswas not an offence. Senator William Proxmire proposed newrules to extend existing anti-bribery legislation to paymentsto overseas officials.

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After considerable debate, the Foreign Corrupt Practices Act1977 was enacted by President Jimmy Carter on 19 December1977. The legislation was designed not only to ensure moreethical conduct by US business by punishing those caughtbribing, but also as a foreign policy tool to build economicand political goodwill by encouraging US businesses to investin developing economies.

1978: First FCPA SettlementThe US-listed oil exploration company, Katy Industries,together with two of its directors, settled claims brought bythe SEC under the new FCPA.2 The company acknowledgedthat it had used an agent to pay bribes to governmentofficials in Indonesia to obtain an oil exploration concession.

1988: Amendment of the FCPADespite the FCPA having been in place for nine years, smallpetty bribes were still occurring largely unabated. The legis-lation was reworded to refocus efforts on the ‘grand bribery’schemes that caused the most economic harm. Under the leg-islative amendments, overseas ‘facilitation payments’ wereexempted from the FCPA, meaning that businesses would notbe prosecuted in the US for making certain small paymentsoverseas to secure basic services.

1994: The ‘Cash for Questions’Scandal

The tortuous history of legal reforms that eventually gaverise to the UK’s Bribery Act has its roots in the 1994 ‘cashfor questions’ scandal. The revelation that two Conservative

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Members of Parliament had accepted money for askingquestions in the House of Commons led to the UK PrimeMinister, John Major, setting up the Committee on Stan-dards in Public Life to address concerns about unethicalconduct amongst MPs. Former judge Lord Nolan chaired theCommittee.3

1997: OECD ConventionThe OECD Convention on Combating Bribery of ForeignPublic Officials in International Transactions – which forobvious reasons I shorten in this book to simply ‘the OECDConvention’ – was signed in December 1997 after severalyears of private and not-so-private international diplomacy.The OECD Convention created a degree of parity betweenUS businesses – which had felt themselves disadvantagedhaving been subject to the FCPA since 1977 – and businessesin the other OECD countries. US business concerns werenot satisfied this time by relaxing the FCPA, but insteadby strengthening the laws of other countries, and also byenforcing the FCPA in particular against non-US companies.The OECD Convention entered into force on 15 February1999, once it had been ratified by the required number ofmember states.

The OECD Convention is the most effective international con-vention to date, with widespread support by governmentsand business organizations.

1998: Further Amendmentsto the FCPA

With the signing into law of the International Anti-Briberyand Fair Competition Act 1998, the FCPA was amended onceagain to comply with the US’s obligation to enact the OECD

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Convention. These amendments expanded the scope of theFCPA to include jurisdiction over some foreign nationals, aswell as acts by US nationals overseas.4

1990s Onwards: Vigorous Prosecutionof the FCPA

The DOJ and SEC made the FCPA a prosecution priority,targeting not only US firms for their overseas corruption,but also non-US overseas firms operating in the US. Mostof these cases did not come to court, but instead settledunder non-prosecution agreements or deferred prosecutionagreements, with heavy fines and a period of supervisedcorporate probation.

1996–2010: Multi-LateralAnti-Bribery Treaties

During this period, most of the major country groups enactedconventions and treaties against bribery, committing theirmembers to enacting their own anti-bribery legislation. Theseinclude:

• Inter-American Convention Against Corruption (adopted1996)5

• The European Union Convention on the Fight againstCorruption involving Officials of the European Communitiesor Officials of Member States of the EU (1997)6

• Council of Europe Conventions (1998 and 1999)7

• The Asian Development Bank/OECD Action Plan (2001)8

• European Union Framework Decision on CombatingCorruption in the Private Sector (2003)9

• African Union (2003)10

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• United Nations Convention against Corruption (2003)11

• The G20 committed to adopt and enforce laws againsttransnational bribery, such as the OECD Anti-BriberyConvention (2009).12

2001: UK Enacts the OECDIn December 2001, the UK enacted aspects of the OECD Con-vention. It achieved this by including provisions within theAnti-Terrorism, Crime and Security Act 2001 that extendedUK jurisdiction to bribery committed abroad by UK nationals,and widened the bribery laws to encompass foreign publicofficials.13

2003: Draft UK Corruption BillThe Nolan Committee’s first report in 1995 created waves inParliament by recommending full disclosure of MPs’ outsideinterests. More interestingly for present purposes, it also sug-gested that the Law Commission should consider a revisionof the law on bribery. The subsequent report, Raising Stan-dards and Upholding Integrity: The Prevention of Corruption wascrafted into the UK’s (first) Corruption Bill.14

The draft Bill did not however win the necessary Parliamen-tary backing; the Joint Committee that subjected the bill toscrutiny was critical of its vague nature. The fact that privatesector bribery was reduced to the betrayal of trust placed inan agent by a principal meant that some corruption wouldnot be covered by the proposed rules (for example, whenprincipals bribe each other). A further government consulta-tion paper, Bribery: Reform of the Prevention of Corruption Actsand SFO Powers in Cases of Bribery of Foreign Officials, waspublished in 2005 – but no clear consensus emerged on howthis should be achieved and the project floundered.15

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2003, 2005, 2007 and 2008:OECD Criticism of the UK

Meanwhile, the OECD produced a series of reports thatcontinued to be critical of the UK’s outdated and fragmentedbribery laws and apparent reluctance to put in place aneffective regime for corporate liability for bribery. It statedthat there was:

‘a lack of clarity among the different legislative and regulatory instru-ments in place. . . . The current substantive law governing bribery inthe UK is characterized by complexity and uncertainty.’16

In its October 2008 report the OECD expressed continueddisappointment with the UK’s lack of progress in fully imple-menting the OECD Convention, and requested that the UKgovernment enact:

‘modern bribery legislation and establish effective corporate liabilityfor bribery as a matter of high priority.’17

2008: Balfour Beatty Settles BriberyAllegations in the UK

An important result for the Serious Fraud Office came whenit obtained the UK’s first civil recovery order against UK-based engineering company Balfour Beatty plc. The matterrelated to irregular payments made in connection with a hugeEgyptian engineering project, the Bibliotheca Alexandrina. Bal-four Beatty was not charged with a criminal offence; instead,the matter was dealt with using the SFO’s new civil powers,

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allowing property obtained by illegal actions to be recoveredwithout the need for a criminal prosecution.18

2008: Siemens SettlementIn December 2008 Siemens settled charges brought by USand German prosecutors, paying a record-breaking $1.6bn inpenalties.19

2009: Second UK Bribery BillFollowing the failure of the first UK Bribery Bill, the Law Com-mission was asked to draft a law that was simpler and moreappropriate to modern times. In its report Reforming Bribery,published in October 2008, it rejected the principal/agent, orthe breach of trust approaches to defining bribery. Instead itsnew definition of bribery was based on offering or acceptingan advantage in connection with the improper performance ofthe recipient’s functions. The draft Bribery Bill was publishedby the Ministry of Justice in March 2009.20

2010: BAE SettlementThe DOJ and SEC continued to prosecute the FCPA very vig-orously and successfully, and out-of-court settlements hadbecome routine. In 2010, BAE Systems entered into a simul-taneous plea agreement with the US and UK prosecutors toresolve bribery charges. While the US court had no prob-lems approving a $400m fine against the company, the UK

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court had a number of criticisms and reservations. Eventu-ally, however, it approved the agreed penalty of £500,000 plus£28.5m in reparations to be made to the people of Tanzania.22

2010: UK Bribery Act Passed,then Delayed

The Bribery Act 2010 received Royal Assent on 8 April 2010.It did not immediately though come into force. The mostimportant changes to the legislative structure – the corpo-rate offence of failing to prevent bribery carried out on itsbehalf – was a sweeping change to existing practice and thegovernment stated that this would only became law onceguidance on the ‘adequate procedures’ defence had beenpublished by the Ministry of Justice. It was initially expectedthat these would be published in early 2011, and the Actwould become fully effective in April 2011.

July 2011: UK Bribery Act Comesinto Force

The Bribery Act Guidance was finalized on 30 March 2011; theBribery Act fully came into effect on 1 July 2011.

September 2011: First Prosecutionunder the Bribery Act

A court clerk, Munir Patel, was the first person to be prose-cuted under the Bribery Act. He admitted to taking £500 from

55


a member of the public to avoid putting details of a trafficsummons on the court database. The now former clerk wascharged under Section 2 of the Act (as well as charges of mis-conduct in public office and perverting the course of justice,which related to other alleged misconduct during his employ-ment) for allegedly requesting and receiving a bribe intendingto improperly perform his functions. He was sentenced to sixyears’ imprisonment.21

2012 OnwardsIt remains to be seen what the impact of the Bribery Act willbe. I set out some of my predictions in ‘What Are My Predic-tions for 2012 and Beyond?’ on page 455.

Further readingCarr, I. and Outhwaite, O., The OECD anti-bribery conventionten years on, Manchester Journal of International EconomicLaw, 5(1), 3–35, 2008. Available from: http://bit.ly/ogRaFP(http://epubs.surrey.ac.uk/578/1/fulltext.pdf).

Corruption in the crosshairs: a brief history of interna-tional anti-bribery legislation, Public Broadcasting Service,7 April 2009. Available from: http://to.pbs.org/nXdjM7(http://www.pbs.org/frontlineworld/stories/bribe/2009/04/timeline.html).

Lockheed’s defiance: a right to bribe?, Time, 18August 1975. Available from: http://ti.me/rnuzzo(http://www.time.com/time/magazine/article/0,9171,917751,00.html).

Martin, A.T., The development of international bribery law,Natural Resources & Environment, 14(2), 1999. Available from:


http://bit.ly/rmYzII (http://www.transparency.ca/Reports/Readings/SR-G02.pdf).

Posadas, A., Combating corruption under internationallaw, Duke Journal of Comparative & International Law,10, 345–414, 2000. Available from: http://bit.ly/oe8QAT(https://www.law.duke.edu/journals/djcil/downloads/djcil10p345.pdf).

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Frequently Asked Questions on IFRSSteven Collings9781119998976 • Pbk • 416 pages • April 2013 • £24.99 / €30.00 / $40.00

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Chapter 1

What is theRole of theInternational

AccountingStandardsBoard (IASB)?

Whatexactly does the IASBdoandwhatare its objectives?

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10 Frequently Asked Questions in IFRS

AnswerThe IASB was previously known as the International Account-ing Standards Committee (IASC) until April 2001, when itbecame the IASB.

The IASC was originally set up in 1973 and was the sole bodyto have both responsibility and authority to issue internationalaccounting standards. In 2001, when the IASB took over respon-sibility for international financial reporting, it took on all of theIASC’s standards (which were all prefixed with ‘IAS’ – e.g. IAS2 Inventories, IAS 10 Events After the Reporting Period). TheIASB amended many of the standards, but then began to issueits own standards, which were known as International FinancialReporting Standards (IFRS). This is why you see standards pre-fixed with IAS (IASC standards) and IFRS (IASB standards). Theterm ‘IFRS’ has become a somewhat generic term that refers toall the standards (both IAS and IFRS).

The setup of the IASB is as follows:

Monitoring BoardApprove and

oversee trustees

IFRS Foundation(22 trustees)

IFRS AdvisoryCouncil

IASB(16 members)

IFRS InterpretationsCommittee

Working groupsfor major agenda

projects

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Chapter 1: What is the Role of the IASB 11

Monitoring BoardThe Monitoring Board has been subject to criticism over theyears because of its lack of accountability and lack of respon-siveness to the concerns of its constituent members. However,the responsibilities of the monitoring board are to oversee theIFRS Foundation trustees, participate in the trustee nominationprocess and approve appointments of new trustees.

It also has responsibility to review and provide advice to thetrustees on the fulfilment of their responsibilities: there is anobligation for the trustees to report, on an annual basis, to theMonitoring Board. The Monitoring Board also has the authorityto request meetings with the trustees, or separately with thechairs of the trustees and the IASB, to discuss any area of thetrustees’ or IASB’s work.

IFRS FoundationThe 22 trustees within the IFRS Foundation act under the termsof the IFRS Foundation Constitution. It is a requirement of thisconstitution that in order to ensure a broad international basis,the Foundation must comprise of:

• six trustees that are appointed from Asia/Oceania regions;• six trustees that are appointed from Europe;• six trustees that are appointed from North America;• one trustee that is appointed from Africa;• one trustee that is appointed from South America; and• two trustees that are appointed from any area, but this is

subject to the Foundation maintaining an overallgeographical balance.

The IFRS Foundation oversees the IASB, and in addition thetrustees appoint members of the:

• IASB;• IFRS Advisory Council; and• Interpretations Committee.

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Other responsibilities include monitoring the IASB’s effective-ness, securing funding and approving the IASB’s budgets.

IASBThe IASB comprises 16 members (of whom only three may bepart-time) that are appointed for a term of three to five years.The IASB has overall responsibility for all technical matters,which include:

• preparing and issuing IFRSs;• preparation, and issuance, of exposure drafts;• setting up procedures for reviewing comments received on

documents that have been published for comment; and• issuing bases for conclusions.

It is expected that by July 2012, the IASB will comprise of thefollowing:

• four members from Asia/Oceania;• four members from Europe;• four members from North America;• one member from Africa;• one member from South America; and• two members appointed from any area (subject to the IASB

retaining overall geographical balance).

Each member of the IASB has one vote and the approval often members is required for exposure drafts to be issued asdiscussion or as the final standard. If there are fewer than 16members of the IASB, approval by at least nine members isrequired.

IFRS Advisory CouncilThere are approximately 40 members appointed to Council bythe trustees for a renewable term of three years. Each memberhas a diverse geographic and functional background.

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Chapter 1: What is the Role of the IASB 13

Council provides a forum for participation by organizationsand those individuals that have an interest in internationalfinancial reporting. It meets at least three times a year and itsprimary responsibilities include:

• advising the board on agenda decisions and priorities;• giving advice to the trustees and the board; and• passing on the views of the council members on the major

standard-setting projects.

Ultimately, IFRSs are the basis of international financial report-ing and must be complied with in their entirety; in otherwords, financial statements can never be prepared using a mixof IFRSs and national accounting standards. There are severalsteps involved in the creation of an IFRS, which include:

1. Setting the agenda.2. Planning the project.3. Developing and publishing a discussion paper.4. Developing and publishing an exposure draft.5. Developing and publishing an IFRS.6. Procedures after the IFRS is published.

Clearly, once a standard has been published, that is not nec-essarily the end of the line. There is often a need to amend astandard for a variety of reasons, and any necessary (but noturgent) changes are incorporated within the IASB’s AnnualImprovements Project. There are generally two types ofamendments required to an IFRS/IAS:

• To clarify a standard due to ambiguous wording or becauseof unintentional gaps within the standard itself.

• To correct a minor (and unintended) consequence, conflictresolution, and to deal with any oversights. It is important toemphasize that the correction does not introduce, orchange, the existing principles contained within thestandard.

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However, in situations when the amendment is consideredpriority, the IFRS interpretations committee will deal withsuch issues. IFRS interpretations committee does not issuestandalone standards, but it is important to point out thatIFRICs are authoritative. There are seven steps that IFRSinterpretations committee must follow to achieve transparencyand consistency:

1. Identify the issue(s).2. Set an agenda.3. Hold the IFRIC meeting and vote.4. Draft an interpretation.5. IASB release the draft interpretation.6. Allow the comment period and deliberation process to take

place.7. IASB release the interpretation.

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IFRS EssentialsDieter Christian, Norbert Lüdenbach9781118494714 • Pbk • 560 pages • Mar 2013 • £49.99 / €60.00 / $80.00

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JWBK561-c01 JWBK561-Christian Printer: Yet to Come January 25, 2013 9:16 Trim: 235mm × 187mm

THE CONCEPTUAL FRAMEWORK FORFINANCIAL REPORTING

1 INTRODUCTION

The Conceptual Framework sets out the concepts that underlie the preparation and presentationof financial statements for external users (Conceptual Framework, Section “Purpose andstatus”). The relationship between the Conceptual Framework and individual IFRSs can bedescribed as follows.

� In the absence of regulation, management has to develop an accounting policy. Thataccounting policy has to be compatible with the Conceptual Framework if there are norequirements in IFRSs which deal with similar and related issues (IAS 8.11).� In a limited number of cases, there may be a conflict between the Conceptual Frame-work and the requirements of an IFRS. In such cases, the requirements of the IFRSprevail over those of the Conceptual Framework (Conceptual Framework, Section“Purpose and status”).

2 THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

The objective of general purpose financial reporting is to provide financial information aboutthe reporting entity that is useful to existing and potential investors, lenders, and other creditorsin making decisions about providing resources to the entity (e.g. providing loans to the entityor buying equity instruments of the entity) (OB2).

Existing and potential investors, lenders, and other creditors are the primary users towhom general purpose financial reports are directed (OB5). They require useful informationin order to be able to assess the future cash flows of the entity they are evaluating. Normally,general purpose financial reports are not primarily prepared for use by management, regulatorsor other members of the public, although they may also find those reports useful (OB9-OB10).

General purpose financial reports are not designed to show the value of a reporting entity.Instead, they help the primary users to estimate such value (OB7).

Changes in the reporting entity’s economic resources and claims against the entity result fromthat entity’s financial performance and from other events or transactions such as issuingdebt or equity instruments. To properly assess the entity’s future cash flow prospects, usersneed to be able to distinguish between both of these changes (OB15).

Accrual accounting is applied when preparing the financial statements. Accrual accountingdepicts the effects of transactions and other events and circumstances on the reporting entity’seconomic resources and claims against the entity in the periods in which those effects occur,even if the resulting cash receipts and payments occur in a different period (OB17). However,the statement of cash flows is not prepared on an accrual basis (IAS 7).

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2 IFRS Essentials

3 GOING CONCERN

The financial statements are normally prepared on the assumption that the entity is a goingconcern and will continue in operation for the foreseeable future. Thus, it is assumed that theentity has neither the intention nor the need to liquidate or curtail materially the scale of itsoperations. However, if such an intention or need exists, the financial statements may have tobe prepared on a different basis and, if so, the basis used is disclosed (F.4.1).

4 QUALITATIVE CHARACTERISTICS OF USEFULFINANCIAL INFORMATION

4.1 Introduction

The objective of general purpose financial reporting (see Section 2) is a very broad concept.Consequently, the IASB provides guidance on how to make the judgments necessary to achievethat overall objective. The qualitative characteristics of useful financial information describedsubsequently identify the types of information that are likely to be most useful to the existingand potential investors, lenders, and other creditors for making decisions about the reportingentity on the basis of information in its financial report (QC1). The following chart representsan overview of the qualitative characteristics.1

Qualitativecharacteristics

Fundamental

Relevance

Predictivevalue

Confirmingvalue

Neutrality

Freedom frommaterial error

VerifiabilityUnderstand-

abilityCompleteness

TimelinessComparabilityFaithful

representation

Enhancing

4.2 Fundamental Qualitative Characteristics

Financial information must be both relevant and faithfully represented if it is to be useful (QC4and QC17).

1 See KPMG, Briefing Sheet, Conceptual Framework for Financial Reporting: Chapters 1 and 3, October2010, Issue 213.

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The Conceptual Framework for Financial Reporting 3

4.2.1 Relevance Financial information is relevant if it is capable of making a differencein the decisions made by users (QC6). Financial information is capable of making a differencein decisions if it has predictive value, confirmatory value, or both (QC7).

Predictive value means that the financial information can be used as an input to processesemployed by users to predict future outcomes. Financial information need not be a predictionor forecast itself in order to have predictive value. Instead, financial information with predictivevalue is employed by users in making their own predictions (QC8). Confirmatory value meansthat the financial information provides feedback about (i.e. confirms or changes) previousevaluations (QC9).

The predictive value and confirmatory value are interrelated. Financial information that haspredictive value often also has confirmatory value (QC10).

Financial information about a specific reporting entity is material if omitting it or misstating itcould influence the decisions of users. In other words, materiality is an entity-specific aspectof relevance based on the magnitude or nature, or both, of the items to which the informationrelates in the context of an individual entity’s financial report. Hence, the IASB cannot specifya uniform quantitative threshold for materiality or predetermine what could be material in aparticular situation (QC11).

4.2.2 Faithful Representation A faithful representation of economic phenomena wouldhave three characteristics. It would be complete, neutral, and free from error. The IASB intendsto maximize those qualities to the extent possible (QC12).

A complete depiction includes all information necessary for a user to understand the economicphenomenon being depicted. That information includes the necessary numerical information,descriptions, and explanations (QC13).

A neutral depiction is without bias in the selection or presentation of information. A neutraldepiction is not slanted, weighted, emphasized, de-emphasized or otherwise manipulated inorder to increase the probability that the information will be received favorably or unfavorablyby users (QC14).

Free from error means that there are no errors or omissions in the description of an economicphenomenon, and the process used to produce the reported information has been selected andapplied with no errors in the process. Nevertheless, free from error does not mean perfectlyaccurate in all respects. For example, there is always some uncertainty when estimating anunobservable price or value (QC15).

Faithful representation excludes prudence because it was considered to be in conflict withneutrality (FBC3.19 and BC3.27–BC3.28).

In the Conceptual Framework, substance over form does not represent a separate componentof faithful representation because it would be redundant. This is because representing a legalform that differs from the economic substance of the underlying economic phenomenoncould not result in a faithful representation. Consequently, faithful representation implies thatfinancial information represents the substance of an economic phenomenon rather than merelyrepresenting its legal form (FBC3.19 and BC3.26). This means that substance over form is

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4 IFRS Essentials

an important principle in IFRS. The following are examples for applying the principle ofsubstance over form with regard to the issue of revenue recognition when selling goods.

� The assessment of when to recognize revenue is based on the transfer of beneficialownership and not on the transfer of legal title or the passing of possession (IAS 18.15).For example, when goods are sold under retention of title, the seller recognizes revenuewhen the significant risks and rewards of ownership have been transferred, the sellerretains neither effective control nor continuing managerial involvement to the degreeusually associated with ownership, and the general criteria (the revenue and the costscan be measured reliably and it is probable that the economic benefits will flow to theseller) are met (IAS 18.14). This means that revenue is recognized by the seller and thegoods are recognized by the buyer when beneficial ownership is transferred.� In an agency relationship, an agent may sell goods of the principal in his own name.The agent receives a commission from the principal as consideration. In the agent’sstatement of comprehensive income, the amounts collected by the agent on behalf ofthe principal do not represent revenue. Instead, revenue of the agent is the amount ofcommission (IAS 18.8). This procedure results from the application of the principle“substance over form.” Moreover, the agent does not recognize the goods received fromthe principal in his statement of financial position because beneficial ownership is nottransferred to the agent. The principal recognizes revenue and derecognizes the goodswhen he loses beneficial ownership as a result of the sale of the goods to a third party(IAS 18.IE2c and IAS 2.34).� In an agency relationship in which an agent sells goods of his principal, the accountingtreatment described above applies. However, in some cases determining whether anentity is acting as a principal or as an agent is not straightforward. That determinationrequires judgment and consideration of all relevant facts and circumstances. An entityis acting as a principal when it has exposure to the significant risks and rewardsassociated with the sale of the goods. Features that indicate that an entity is acting as aprincipal include (IAS 18.IE21):� The entity has the primary responsibility for fulfilling the order, for example by

being responsible for the acceptability of the goods.� The entity has inventory risk before or after the customer order, during shipping oron return.� The entity has latitude in establishing prices, either directly or indirectly (e.g. byproviding additional goods or services).� The entity bears the customer’s credit risk for the amount receivable from thecustomer.

One feature indicating that an entity is acting as an agent is that the amount the entity earnsis predetermined (being either a fixed fee per transaction or a stated percentage of the amountbilled to the customer).

4.3 Enhancing Qualitative Characteristics

The enhancing qualitative characteristics enhance the usefulness of information that is relevantand faithfully represented. However, they cannot make information useful if that informationis irrelevant or not faithfully represented. They may also help to determine which of two waysshould be used to depict an economic phenomenon if both are considered equally relevant andfaithfully represented (QC19 and QC33).

70



Enhancing qualitative characteristics should be maximized to the extent possible. However,one enhancing qualitative characteristic may have to be diminished in order to maximizeanother qualitative characteristic (QC33–QC34).

4.3.1 Comparability Information about a reporting entity is more useful if it can becompared with similar information about the same entity for another period or another dateand with similar information about other entities (QC20).

Consistency, although related to comparability, is not the same. Consistency refers to the useof the same methods for the same items, either in a single period across entities or from periodto period, within the reporting entity. Comparability is the goal whereas consistency helps toachieve that goal (QC22).

The IASB also notes that permitting alternative accounting methods for the same economicphenomenon diminishes comparability (QC25).

4.3.2 Verifiability Verifiability means that different knowledgeable and independent ob-servers could reach consensus although not necessarily complete agreement that a particulardepiction constitutes a faithful representation (QC26).

Quantified information need not be a single point estimate in order to be verifiable. A rangeof possible amounts and the related probabilities can also be verified (QC26).

It may not be possible to verify some explanations and forward-looking information until afuture period, if at all. To help users decide whether they want to use that information, itis normally necessary to disclose the underlying assumptions, the methods of compiling theinformation and other factors, and circumstances that support the information (QC28).

4.3.3 Timeliness Timeliness means having information available to decision-makers intime to be capable of influencing their decisions. Normally, the older the information is theless useful it is (QC29).

4.3.4 Understandability Information is made understandable by classifying, characteriz-ing and presenting it clearly and concisely (QC30).

Financial reports are prepared for users who have a reasonable knowledge of business and eco-nomic activities and who review and analyze the financial information diligently. Sometimeseven well-informed and diligent users may need to seek the aid of an adviser to understandinformation about complex phenomena (QC32).

5 THE COST CONSTRAINT ON USEFUL FINANCIAL REPORTING

Cost is a pervasive constraint on the information that can be provided by financial reporting.Reporting information imposes costs and it is important that those costs are justified by thebenefits of reporting that information (QC35). Hence, when applying the cost constraint indeveloping an IFRS, the IASB assesses whether the benefits of reporting particular informationare likely to justify the costs incurred to provide and use that information (QC38).

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6 IFRS Essentials

6 THE ELEMENTS OF FINANCIAL STATEMENTS

6.1 Definitions

The elements directly related to the measurement of financial position are defined as followsin the Conceptual Framework (F.4.4):

� An asset is a resource which is controlled by the entity as a result of past events andfrom which future economic benefits are expected to flow to the entity.� A liability is a present obligation of the entity that arises from past events, the settlementof which is expected to result in an outflow from the entity of resources embodyingeconomic benefits.� Equity is the residual interest in the assets of the entity after deducting all itsliabilities.

Assets and liabilities (as defined above) are not always recognized in the statement of financialposition. This is because recognition in the statement of financial position requires that therecognition criteria (see Section 6.2) are met (F.4.5).

Furthermore, the elements of performance are defined in the Conceptual Framework asfollows (F.4.25):

� Income encompasses increases in economic benefits during the period in the form ofinflows or enhancements of assets or decreases of liabilities that result in increases inequity, other than those relating to contributions from equity participants.� Expenses are decreases in economic benefits during the period in the form of outflowsor depletions of assets or incurrences of liabilities that result in decreases in equity,other than those relating to distributions to equity participants.

Income and expenses (as defined above) are not always recognized in the statement of com-prehensive income. This is because recognition in the statement of comprehensive incomerequires that the recognition criteria (see Section 6.2) are met (F.4.26).

Income encompasses both gains (e.g. from the disposal of non-current assets) and revenue(e.g. from the sale of merchandise). Similarly, expenses encompass losses as well as otherexpenses (F.4.29–4.35).

6.2 Recognition

Recognition is the process of incorporating an element (see Section 6.1) in the statement offinancial position or in the statement of comprehensive income (F.4.37).

An asset is recognized in the statement of financial position when it is probable that the futureeconomic benefits associated with the asset will flow to the entity and the asset has a cost orvalue that can be measured reliably (F.4.44).

A liability is recognized in the statement of financial position when it is probable that anoutflow of resources which embody economic benefits will result from the settlement of apresent obligation and the amount at which the settlement will take place can be measuredreliably (F.4.46).

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The so-called matching principle applies to the recognition of income and expenses in thestatement of comprehensive income. Expenses are recognized in the statement of comprehen-sive income on the basis of a direct association between the costs incurred and the earning ofspecific items of income. This means that expenses and income that result directly and jointlyfrom the same transactions or other events are recognized simultaneously or combined. Forexample, the costs of goods sold are recognized at the same time as the income derived fromthe sale of the goods. However, the application of the matching principle does not allow therecognition of items in the statement of financial position that do not meet the definition ofassets or liabilities (F.4.50).

6.3 Measurement

The measurement of the items recognized in the statement of financial position items is definedin the individual standards. The description of different types of measurement in F.4.55 is ofno importance in practice.

7 EXAMPLES WITH SOLUTIONS

Example 1

Relevance: Predictive value and confirmatory value

Entity E discloses revenue information for 01 in its financial statements as at Dec 31, 01.

Required

Assess whether E’s revenue information is relevant within the meaning of the ConceptualFramework.

Hints for solution

In particular Section 4.2.1.

Solution

Predictive value means that the financial information can be used as an input to processesemployed by users to predict future outcomes. Financial information need not be a pre-diction or forecast itself in order to have predictive value. Instead, financial informationwith predictive value is employed by users in making their own predictions. E’s revenueinformation for the current period (01) can be used as the basis for predicting revenues infuture periods. Consequently, it has predictive value (QC8 and QC10).

Confirmatory value means that the financial information provides feedback about (i.e.confirms or changes) previous evaluations (QC9). E’s revenue information for the currentperiod (01) can be compared with revenue predictions for 01 that were made in past periods.Hence, it also has confirmatory value (QC9–QC10).

Financial information is relevant if it has predictive value, confirmatory value or both(QC6–QC7). Since E’s revenue information has predictive value as well as confirmatoryvalue, it is relevant within the meaning of the Conceptual Framework.


8 IFRS Essentials

Example 2

Substance over form – retention of title

On Dec 31, 01, wholesaler W delivers merchandise under retention of title to retailer R. Onthat date, the significant risks and rewards of ownership are transferred. W retains neithereffective control nor continuing managerial involvement to the degree usually associatedwith ownership. The carrying amount of the merchandise in W’s statement of financialposition is CU 4. They are sold for CU 5.

Required

Prepare all necessary entries in the financial statements as at Dec 31, 01 of (a) W and(b) R.

Hints for solution


Solution

General aspects

Irrespective of the retention of title, beneficial ownership is transferred from W to R onDec 31, 01. This is because the significant risks and rewards of ownership have beentransferred and W retains neither effective control nor continuing managerial involvementto the degree usually associated with ownership. Moreover, it can be assumed that thecriterion “probability of the inflow of economic benefits” is met because there are noindications to the contrary. In addition, it is obvious that the revenue and the costs can bemeasured reliably (IAS 18.14).

(a) W’s perspective

On Dec 31, 01, W loses beneficial ownership. Therefore, the criteria for revenue recognitionare met. The carrying amount of the merchandise sold has to be recognized as an expensein the period in which the related revenue is recognized, i.e. in 01 (IAS 2.34):

Dec 31, 01 Dr Cash 5Cr Revenue 5

Dec 31, 01 Dr Cost of sales 4Cr Merchandise 4

(b) R’s perspective

R recognizes the merchandise in its statement of financial position when obtaining benefi-cial ownership:

Dec 31, 01 Dr Merchandise 5Cr Cash 5

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Example 3

Determining whether the entity is acting as a principal or as an agent

Entity E operates an internet business. E’s customers pay via credit card. After a credit cardcheck, the order is automatically sent to producer P who immediately sends the goods tothe final customer.

E is responsible for any defects of P’s products to the final customers. However, E and Phave stipulated that all claims of final customers are forwarded to and resolved by P at P’scost.

E receives commission of 10% of the amount billed to the final customer for each sale. Theselling prices and the conditions of sales are determined by P alone.

On Dec 07, 01, E sells goods to the final customer in the amount of CU 50. All paymentsare carried out on the same day.

Required

Assess whether E is acting as a principal or as an agent and prepare all necessary entries inE’s financial statements as at Dec 31, 01.

Hints for solution


Solution

E considers the following criteria when assessing whether it acts as a principal or as anagent (IAS 18.IE21):

� E is responsible for any defects of P’s products to the final customers. However, Eand P have stipulated that all claims of final customers are forwarded to and resolvedby P at P’s cost. This means that, in fact (i.e. when applying the principle “substanceover form”), E does not have any obligations with regard to defective goods.� E has no inventory risk, i.e. no risk of a decline in value of the goods.� The selling prices and the conditions of the sales are determined by P alone. Hence,E has no latitude in establishing prices.� The amount that E earns is predetermined, being a stated percentage of the amountbilled to the final customer.� Since the final customers have to pay via credit card, E does not bear the customers’credit risk.

According to the characteristics of E’s business, E is acting as an agent. Consequently, E’srevenue is the amount of commission:

Dec 07, 01 Dr Cash 5Cr Revenue 5

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10 IFRS Essentials

Example 4

Is recognition of an intangible asset in the statement of financial position appropriate?

In Jun 01, entity E spent CU 100 for employee training. E’s management believes that itsemployees will make a more competent impression on E’s clients as a result of the trainingwhich will then increase E’s revenue.

Required

Assess whether the expenses for employee training have to be recognized as an intangibleasset in E’s statement of financial position. In doing so, also discuss the impact of thematching principle (F.4.50).

Hints for solution

In particular Sections 6.1 and 6.2.

Solution

Considering the matching principle (F.4.50) would suggest the following procedure: theexpense of CU 100 is at first recognized as an intangible asset in E’s statement of financialposition. It affects profit or loss in the same periods in which the related increases in revenueoccur. According to that procedure, the increases in revenue would be recognized in profitor loss in the same periods as the training costs that are necessary for creating the higherrevenue.

However, the application of the matching principle does not allow the recognition of itemsin the statement of financial position that do not meet the definition of assets or liabilities(F.4.50), or of items that are assets but do not meet the recognition criteria.

Consequently, the procedure described above (capitalization of the training costs initiallyand subsequent recognition in profit or loss when the related increases in revenue occur)cannot be applied because the training costs do not represent an intangible asset that meetsthe recognition criteria (IAS 38.69b). Consequently, they are recognized in profit or loss inJun 01.

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