The International Financial Reporting Interpretations Committee IFRIC

Chapter 1 – Financial Reporting Context Page 11 IFRIC consists of 12 members who are required to operate on the basis of their own independent views and not as representatives of the organisations with which they are associated. 6 The IASB’s “Stable Platform” The IASB issued in July 2006 a Press Release setting out that it would not enforce the introduction of any new accounting standards until 2009; instead there would be a period of stability. This period of stability is to assist entities as they implement international standards for the first time and to encourage countries that have yet to adopt IFRS to do so. The IASB may still issue new standards or major amendments during this period, and indeed has done so, although their mandatory implementation date will not be until 2009. Entities are permitted to adopt a new standard early if they wish. Interpretations or minor amendments that arise from existing standards during their implementation will continue to be published under the current process. Following an extensive consultation process the IASB has also agreed to the following actions:  increased lead time to prepare for the implementation of new standards – the mandatory implementation date of new standards or major amendments to existing standards will be a minimum of one year from the publication date of the standard or amendment. This is in response to entities’ pleas that they are given longer to introduce a standard into their reporting systems, as well as providing Governments and other national authorities with sufficient time to translate any new requirements. The European Commission alone is required to translate new international standards into its 23 official languages;  increased opportunity for input on conceptual issues – to allow users, preparers and other interested parties time to reflect and comment on proposals, publications of a conceptual nature will generally be issued as a discussion paper in the first instance, rather than immediately as an exposure draft. This will allow commentators two opportunities at the discussion paper stage as well as at the exposure draft stage to influence the discussions and outcomes, as well as having an official role at an earlier stage in the process and therefore increasing their ability to influence the early decisions; and  public roundtables on key topics – the IASB is using the roundtable forum to improve interested parties’ ability to influence early discussions. These forums have been used on several occasions since 2004 as an effective vehicle to bring together both interested and knowledgeable people from different organisations. Two such roundtable events were specifically mentioned in the July 2006 Press Release; these were to take place in early 2007 in the areas of the proposed amendments to the recognition and measurement principles in IAS 37 Provisions, contingent liabilities and contingent assets and the measurement phase of the Conceptual Framework. Chapter 1 – Financial Reporting Context Page 12 7 Chapter Review This chapter has been concerned with the factors leading to the development of international harmonisation through financial reporting standards, and the institutions and structures that have developed to implement and enforce these standards. The chapter has covered:  the nature, concepts and purposes underlying the international harmonisation of financial reporting, as well as its progress;  the structure of financial reporting within the EU;  the regulatory and institutional structures within which the IASB operates and the major bodies within that structure; and  the IASB’s approach to continuing its period of stability for the implementation of IFRS. Chapter 1 – Financial Reporting Context Page 13 8 Self Test Questions Chapter 1 1. Are the following statements about the Norwalk Agreement true or false? 1 The Norwalk Agreement requires the consolidated financial statements of all listed United States companies, starting after 1 January 2005, to be prepared in accordance with International Accounting Standards. 2 The Norwalk Agreement was an agreement for short-term financial reporting convergence between the European Commission and the United States government. Statement 1 Statement 2 A False False B False True C True False D True True 2. In order to adopt an IFRS, the European Commission satisfies itself that the IFRS results in a true and fair view of the financial position and performance of an entity. Which TWO of the following organisations assist the European Commission with this decision? A Accounting Regulatory Committee ARC B International Accounting Standards Committee Foundation IASCF C European Financial Reporting Advisory Group EFRAG D Standards Advisory Council SAC 3. Which ONE of the following is a statutory body that has responsibility for the endorsement of International Accounting Standards in the European Union? A European Financial Reporting Advisory Group EFRAG B International Federation of Accountants IFAC C Accounting Regulatory Committee ARC D Committee of European Securities Regulators CESR 4. Which ONE of the following bodies is responsible for reviewing accounting issues that are likely to receive divergent or unacceptable treatment in the absence of authoritative guidance, with a view to reaching consensus as to the appropriate accounting treatment? A International Financial Reporting Interpretations Committee IFRIC B Standards Advisory Council SAC C International Accounting Standards Board IASB Chapter 1 – Financial Reporting Context Page 14 D International Accounting Standards Committee Foundation IASC Foundation 5. Trustees of the International Accounting Standards Committee Foundation are responsible for appointing members to which TWO of the following bodies? A International Financial Reporting Interpretations Committee IFRIC B Standards Advisory Council SAC C European Financial Reporting Advisory Group EFRAG D Accounting Regulatory Committee ARC 6. Which ONE of the following is a private sector organisation which is made up of key interest groups associated with financial reporting and consists of two bodies: a Technical Expert Group; and a Supervisory Board? A International Federation of Accountants IFAC B Standards Advisory Council SAC C European Financial Reporting Advisory Group EFRAG D Accounting Regulatory Committee ARC 7. The International Financial Reporting Interpretations Committee IFRIC issues interpretations as authoritative guidance. For which TWO of the following should IFRIC consider issuing an Interpretation? A Narrow, industry-specific issues B Newly identified financial reporting issues not specifically addressed in IFRSs C Issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop D Areas where members of the IASB cannot reach unanimous agreement 8. Are the following statements true or false? 1 The Norwalk Agreement outlines the commitment of the IASB and FASB towards harmonisation of International and US Accounting Standards. 2 IOSCO requires mandatory preparation of financial statements in accordance with IFRS. Statement 1 Statement 2 A False False B False True C True False D True True Chapter 1 – Financial Reporting Context Page 15 9. According to the Preface to International Financial Reporting Standards, which TWO of the following are objectives of the IASB? A To harmonise financial reporting between IFRS and US GAAP B To work actively with national standard setters C To promote the use and rigorous application of accounting standards D To harmonise financial reporting within the European Union Chapter 2 – The IFRS Framework Page 17

Chapter 2 THE IFRS FRAMEWORK

1 Business Context The way that items and transactions are treated and presented in the financial statements may affect an investor’s perception of the position and performance of an entity. In addition, it may directly affect the way in which contracts based on accounting numbers are written and the size of an entity’s tax liability. There is therefore a real danger that the accounting standards setting process may be politically influenced or dominated by self-interest groups. To ensure that this threat does not become a reality, it is important that there is a framework that sets out the wider purposes that accounting standards are intended to achieve and the principles to guide the development of detailed requirements, thereby achieving consistent standards. The IASB’s Framework for the preparation and presentation of financial statements attempts to do this in the context of IFRS. It sets out consistent principles which form the basis for the development of detailed requirements in IFRS. 2 Chapter Objectives This chapter explains the standard setting process, and the concepts underpinning the development of IFRS. In particular, it looks at:  the International Financial Reporting Standard setting process;  the Preface to International Financial Reporting Standards the Preface; and  the Framework for the preparation and presentation of financial statements the Framework. On completion of this chapter you should be able to:  understand the purpose and role of accounting standards;  understand the standard-setting process applied by the IASB;  explain: o the purposes of financial reporting; and o how financial reporting can assist the management of an entity in being accountable to the entity’s shareholders and other stakeholders;  understand the qualitative characteristics of financial information set out in the Framework and the constraints on them; and  understand the elements of financial statements set out in the Framework. 3 The Purpose of Accounting Standards The overall purpose of accounting standards is to identify proper accounting practices for the preparation of financial statements. Accounting standards create a common understanding between users and preparers on how particular items, for example the valuation of property, are treated. Financial statements should therefore comply with all applicable accounting standards. Chapter 2 – The IFRS Framework Page 18 4 The Role of Accounting Standards The content of financial statements is often defined by national laws prescribing what, how, and when disclosures should be made. Such requirements, however, are often high-level with little, if any, detailed guidance on how the requirements should be implemented in practice. The role of accounting standards is therefore to translate high-level principles into reasoned procedures that an entity can apply in practice. Accounting standards may be based either on what is commonly referred to as the ‘rules- based approach’ or the ‘principles-based approach’. A rules-based approach is exactly as its name suggests, detailed rules on a subject. The rules are developed to cover every possible eventuality. If an item or transaction is not covered by a detailed rule, discretion is granted as to how to account for it in the financial statements. This leads in practice to long and often convoluted standards and can encourage a process best described as ‘loopholing’, where preparers of financial statements attempt to find loopholes in the rules which enable them to ignore the accounting requirements. The standard setters as a result are forced to issue more rules to plug the loophole, and so on. The US standard setting body, the Financial Accounting Standards Board FASB has historically issued standards using the rules-based approach. A principles-based approach involves explaining the general principles that an accounting standard is based on and then providing practical guidance and explanation on how an entity might meet those principles. While containing many detailed rules, IFRS are set on a principles-based approach. Illustration 1 IAS 17 Leases sets out the general principle that: “A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership.” The standard goes on to describe what the risks and rewards of ownership might be. However, by setting out the general principle first, entities are required to look at the overall substance of a lease transaction and not see whether they can structure a lease that does not fit into one of the specified criteria. In comparison, the US standard on leasing, Statement of Financial Accounting Standards SFAS No. 13 Accounting for leases uses the rules-based approach. It sets out that a lease should be classified as a finance lease US terminology for a finance lease is a ‘capital lease’ if it meets any one of a list of four criteria. If the lease does not meet one of the specified four criteria, then it should be classified as an operating lease. Thus whilst a rules-based approach may seem tougher, it could be argued that a principles- based approach leads to more compliance with the overall intention of the standards setters when they wrote the standard. Chapter 2 – The IFRS Framework Page 19 5 International and National Accounting Standards An entity is normally required to comply with the accounting requirements for the country in which it is registered. However, many entities are large multinational groups and they may list their shares on a number of stock exchanges around the world. Where accounting requirements are different in each country in which an entity is listed, the entity may be required to prepare its financial statements on a number of different bases. In practice, an entity will generally prepare its financial statements using the requirements for the country in which it is registered, but include a list of differences that arise as a result of applying a different set of national standards. As discussed in Chapter 1, the requirement for a reconciliation to be presented by US registrants between amounts in financial statements prepared under IFRS and amounts in those prepared under US generally accepted accounting practice GAAP has now been removed. Pressure continues for the adoption of a single set of global accounting standards. Indeed the use of IFRS is already widespread and the number of different sets of accounting standards being used is reducing. 6 Setting International Financial Reporting Standards

6.1 The IASCF

The International Accounting Standards Committee Foundation IASCF was formed in March 2001 as a not-for-profit corporation and is the parent entity of the IASB. The IASCF is an