International Accounting Standards Board - Essay Example

? Department of Accounting and Finance FINANCIAL ACCOUNITNG 2 INTERNATIONAL ACCOUNTING STANDARDS BOARD by and Number An assignment submitted in partial fulfilment of the assessment for the Financial Accounting 2 Date of submission Table of Contents Chapter 1: Introduction 3 Chapter 2: IFRS and IASB 6 Chapter 3: IFRS and Fair Value System 11 Chapter 4: Practical implementation of International Financial Reporting Standards 15 Chapter 5: Conclusions, Implication and Recommendation 16 Reference List 18 Chapter 1: Introduction The main aim of the report is to elaborate the facts and objectives of IFRS and IASB. The achievements are also elaborated along with the framework which has made them successful. The report elaborates the concept of fair value accounting system and the arguments for or against the decision of inclusion of the fair value concept in the financial reporting. The fair value system has all together improved the information to the individual users of the economy. International Financial Reporting Standard (IFRS): IFRS is a private sector organization which is working for the interest of public. The main objectives of IFRS foundation are: 1) It creates a single set of quality which is understandable and enforceable worldwide. The standard setting body that helps in formulating the standards for the organization is the International Accounting Standards Board (IASB) (IFRS Foundation. 2013k). 2) They are responsible for promoting the use and application of those standards. 3) They are accountable for reporting the financial needs of the small and medium sized companies. 4) They are also responsible for safeguarding the working of IASB thus ensuring the financing of the organization. The Trustees of the organization are accountable for Monitoring Board of the Public Authorities (IFRS Foundation. 2013k). International Accounting Standards Board: IASB is the standard setting body under the governance of IFRS Foundation. They have the duty of developing and publishing the reports, including the IFRS for the small and medium sized companies and also for accepting the interpretations of IFRS which are developed by the IFRS Interpretations Committee that was previously IFRIC. The meetings of IASB are held in public and also in webcast (IFRS Foundation. 2013g). There are few standard setting duties which IASB had to fulfil. In doing so, it has to go through an open and thorough process which is also transparent for public comment and discussion in papers or exposure to drafts. It connects successfully with the stakeholders worldwide. Like the analysts, regulators, investors, business leaders and accounting standard setters. Fair Value: IFRS 13 has defined fair value as the price that is “received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement dates” (IFRS Foundation, 2013e). The fair value system sets a single IFRS framework for measuring the fair value. After measuring it is disclosed to the public. Here, IFRS plays an important role in managing and measuring the fair value system. Supporting the objectives of the IFRS Foundation: The activities that are undertaken by the IFRS Foundation for fulfilling the objectives of organization are taken care by the staffs of IFRS Foundation. Those activities included the following: 1) The important activity of IFRS foundation was to provide the worldwide capital market with a common language of financial reporting. Thus XBRL taxonomy is created by IFRS for the SMEs to facilitate electronic usage, comparability and exchange of the financial data which are prepared according to the IFRS norms. The activity is executed by the IFRS XBRL team members. They are responsible for maintaining and developing XBRL representations of IFRS which is known as the IFRS taxonomy. Taxonomies are the organized categorization schemes which are also “computer readable dictionaries” (IFRS Foundation, 2013a) 2) They are involved in production of good quality and up to dated materials which are understandable and freely downloadable materials for the SMEs. The training consists of data about the organization’s conferences and the workshops of IFRS. These are the activities which can be grouped in the IFRS Foundation Education Initiatives. 3) Activities are undertaken to protect the IFRS brand and that is done by supporting adaptation by addressing the translation and copyright issues. Thus they contribute to the finance of organization by undertaking publication services. These are the activities which are grouped under Content Management (IFRS Foundation. 2013h). 4) Operations include the day-to-day management and support of the organization. Other activities included are expansion and improvement of the external relationships, good communication with them and promotion of understandable works of the organization. 5) An organization’s constitution and arrangement of its governing body ensure the success of the organization. It is the duty of the Trustees' to ensure that there is right governing body and that they are accepted by the whole organization. The effectiveness of the work of Trustees' is assessed by the Trustees' Due Process Oversight Committee (IFRS Foundation, 2013e). The foundation of organization’s public accountability is the following: The Monitoring Board: There has been a public accountability which is basically formal between the Trustees and the Monitoring Board of capital market authorities (IFRS Foundation, 2013b). Constitution Review: The IFRS Foundation’s constitution needs the Trustees to take a formal five yearly review of constitution (IFRS Foundation. 2013i). Due process: XBRL and the IFRS Interpretation Committee provides with extensive outreach through due process which are formal in nature. The due process includes public consultation which is mandatory. The comment letters are entertained in response to the formal proposals and those comments are given in the website for the public to know about the proposals that are been received. Public meetings: Other than the administrative meetings, all the meetings of the IFRS Foundation body which includes IASB meetings, Interpretations Committee meetings and all the important formal meetings are held before the public and are webcasted. The meeting notes are given to the public as the observers note (IFRS Foundation. 2013i). Chapter 2: IFRS and IASB IASB aims at a single set of global accounting standard: IASB aims at a single set of accounting standard which is accepted globally and is transparent to every individual who ever aim to go through it. It should be understandable to everyone and thus everybody can get the essence of the accounting standard. An effective accounting standard is the one which can be comparable to others. The accounting standard expresses the economic realities of the transactions and business units. IASB Framework: The initial point of framework is to identify the basic need of the financial statement and why it is prepared. The outcome which is available is that it is prepared for providing financial information about the financial reports which is useful to the lenders, potential investors and also creditors. The financial statements are helpful for them to take any decision about investment (Fahnestock and Bostwick, n.d). The framework got approved by the IASC Board in April, 1989 and was published in July, 1989 and was initially accepted by IASB in April, 2001. To handle bigger projects the framework got revised in September, 2010.The revised project has the general objective of qualitative characterization of the useful information and the purpose of creating correct financial report. The remaining framework remained the same as was created in 1989. The framework actually dealt with the following: 1) The initial objective of creating the financial reporting. 2) The qualitative characterization of the useful information that is required for the financial reporting. 3) Another objective is to define, recognize and measure the elements from where the financial statements are created. 4) It also deals with the concepts of capital maintenance (Fahnestock and Bostwick, n.d). The primary objective of preparing the financial reports is to give the financial information to the potential and existing investors, creditors and even lenders about the financial entities. The information helps them to make decisions about selling and buying or holding the equity and debt instruments. It is to be noted that all the information that the investors or the lenders need are not always provided in the financial reports so they have to seek for information from other sources. The regulators of the system and the general public other than the investors and the lenders can also find the financial report useful for getting information about the institution (Alexander, 2009). The financial statements are created based on the accrual basis of accounting. This type of accounting reflects the effects of transactions, other circumstances and events on a particular entity’s economic resources that claim at the period when those effects are occurring even if the resulting cash payments and receipts are occurring in a different time period. Financial statements are basically created with the assumption that “an entity is a going concern and will continue in operation for the foreseeable period” (Nissim and Penman, 2008). Qualitative characterization of the information identifies the fact that this information is important to the potential investor and the lenders for making financial decisions. The financial information has to be relevant and reliable so that it should faithfully represent the information without any fraud or error. The importance of the financial information enhances if it is verifiable, comparable and understandable by the person who is going through it. Five elements of the framework 1) Asset can be defined as the resource that is controlled by the financial entity. From asset, future economic benefits can be expected to go to the entity. They are identified as the non-current or currents asset in the financial statement. They can be intangible such as goodwill. Examples of assets are plant and machinery, building and inventory (Nissim and Penman, 2008). Most of the assets are both legally owned and controlled by the entities. But it should be noted that the legal ownership is not a requirement for recognition rather it is controlled when it becomes the key issue. 2) Liability can be defined as the present obligation of entity arising from the past events. The settlement of these past events is expected to result in an outflow of resources which has embodied economic benefits. Liabilities can be classified into non-current and current liabilities. Examples of the liabilities are trade receivable and tradable, loan and tax creditors. To recognize liability there may not be an obligation which is due on demand. But there should be present obligation. 3) The residual interest after the liabilities are deducted from the assets is known as equity. 4) Income is recognised when there is increase in the asset and decrease in the liability of the current period of reporting. 5) Expenses are recognised when there is decrease in asset and increase in liability of the current period of reporting. The framework also involves measurement which is the process to determine the monetary amounts at which the financial statement elements are to be recognised and are carried forward to the income statement and balance sheet. The capital maintenance concept can be defined as how the entity defines the capital that it will be maintained. It creates a linkage between the profit concept and the capital concept as it gives a point of the reference through which profit is measurable. It is a requirement for the entity’s return and its return. Therefore it can be said that profit is the residual amount that are left after expenses are made from the income. If the expenses exceed income then the residual amount shows loss (Lewis and Pendrill, 2004). Recognition and de-recognition The initial framework has the following recognition criteria: The item that intends to meets the definition of element is to be recognised only if: i) It is “probable that any economic benefit in future is associated with item that flow to or from the entity” (IFRS Foundation, 2010). ii) The item has the cost that can be considered as reliable. The following amendments are done to the framework after it was revised in 2001: The term probable was removed from the recognition criteria: a) IASB agreed on the fact that the discussion paper should identify the distinction between the uncertainties whether a liability or asset will exist or not and the uncertainty of the outcome. b) IASB agreed that the discussion paper should discuss different approaches for different cases. The cases are whether to relate an evident probability in cases or whether the asset should be the same as the liability. IASB decided upon the following: 1) Recognition items generally provide information about the assets and the liabilities. Information is on amount, uncertainty and timing of the cash flow for the future. It also indicates whether the management is using the entity resources efficiently and effectively. 2) There may be certain cases where the entity does not recognise the liability or asset because if those elements are recognised then relevant information will not be available from them. This is because the cost to get that information is more than the benefits that are got from the information. The existing framework did not define the concept of de-recognition but the revised framework described the concept. Meetings are held by the IASB body to decide whether the de-recognition criteria will be the mirror image of the recognition criteria. They decided that an entity should de-recognise a liability or asset if it no longer meets the principles of recognition criteria (Lewis and Pendrill, 2004). Chapter 3: IFRS and Fair Value System IFRS Interpretation Committee: It is the interpretative body that is formed by IASB for reviewing the accounting issues timely. The Committee is made up of 14 voting members that are selected by the Trustees and are drawn from a number of countries who has good professional backgrounds. The permission to review the accounting issues on a timely basis has arisen in the perspective of current IFRS. The committee also gives authoritative guidance on those issues. The meetings of the committee are held before the public and are shown in the website so that there is a high level of transparency. The committee are working closely with the national committee through open due process (IFRS Foundation, 2013d). Adoption of IFRS by jurisdiction: The accounting standards have been globally supported and accepted by many organisations including the G20 countries, IMF, World Bank, Basel Committee and IFAC. IFRS is posting new profiles for improving their goals. They used different information for developing the profiles. The foundation invited the respondents and gave draft of the profiles to survey and then reviews those drafts. At last their comments were reflected. Recently, the profiles are being completed for 66 jurisdictions including all the G20 countries and 46 other countries. Translation is needed and the important part of achieving the mission of the IFRS Foundation is by developing the single set of high quality global accounting standards (IFRS Foundation, 2013d). Summaries of adoption of IFRS around the world Figure 1: Adoption of IFRS around the World Source: (Deloitte, 2013) The figures show the adaptation of financial reporting by the number of countries and also the number of countries which require audit report. It is seen that the highest preference for the countries towards these reporting goes towards the IFRS. Fair value In financial report, fair value can be defined as the price at which the asset is exchanged or liability is settled between the knowledgeable parties in arm’s length transaction. The main objective of fair value measurement is to approximate an exchange price for an asset or estimation of the liability which is done without the actual transaction for that asset or the liability (Ramanna, 2013). IASB later changed the definition of the fair value from the amount at which the asset is exchanged or liability is settled between the knowledgeable parties in an arm’s length transactions” to the definition - “the price that will be received after selling an asset or is paid for transferring liability in an orderly transaction between the participants of the market at the measurement date” (IFRS Foundation, 2013c). For financial assets, fair value is an appropriate approach because it is aimed at estimating the value exchange of the assets and liabilities that are in use. It thus provides the investors with estimated amounts that appear in the balance sheet. The fair value recognition that is shown as the income is included as the component of the comprehensive income that is accumulated and recognised at an amortised cost periodically. Use of the fair value accounting in the financial reporting Fair value gives important information about the financial liabilities and the assets which can be compared with the values that are based on historical costs. As fair value reflects the current market scenario, it thus provides with the comparable values of the financial instruments that are bought at different times. The fair values also disclose the market value of the financial instruments that helps the investors to take any decision for investment. It measures to comply with the reporting requirements of the public and the companies measure their financial instruments at a fair value for the number of internal processes. It will make trading and investing decisions as well as managing and measuring the risks by ascertaining the amount of capital to devote to the various businesses (Littmann and Dan, n.d). Measurement of fair value Fair value is used for measuring assets and liabilities as it portrays their condition on the day of acquisition. In the process of acquisition, if there is mutilation of an asset then the asset is measured with the help of fair value and thus is limited till the recovery of the asset. It is also determined by using the accounting policies of the acquirers for the similar types of assets and liabilities. The issue of fair value has been addressed by the IASB exposure draft and it has been issued on May 2009. Some assets are also measured at its initial recognition state by using the fair value measurement method. Fair value is used to measure the assets and liabilities for each balance sheet date. Though it was accepted by many organisations but the accounting standard that is related to fair value measurement did not give good performance. It showed that it did not give clear measurement objectives or a very good measurement framework. Arguments for the inclusion of fair value in financial reporting Fair value helps in identifying the original cost of an asset as it is the market to market value of the asset. It helps the investor because if the liabilities and assets are measured at market value then the investor will not make any losses. It increases the visibility of accounting and thus reduces the risk of losing any amount (Krumwiede, 2008). Arguments against the inclusion of fair value in financial reporting It does not help to determine the future cost accurately. It is seen as an unreliable method and signals risk but it is used by many investors. The fair value system creates a volatile system as the earnings and also the reserves are volatile. It makes the balance sheet over stated and thus there comes wrong figures (Herz and MacDonald, 2008). It is observed that the main reason for credit crunch is the fair value system. William Isaac, the former chairman of FDIC has criticised the fair value system. He has pointed out that the assets are being valued with the current market value when there is no market for those assets. Tom Selling wrote an accounting blog The Accounting Onion in which he wrote that the people should avoid this type of system since it is based on the exit prices. The investors only know about the worth of the asset that he has bought or he has sold. He may even know the basic information about the asset i.e. the risk that is involved and the rules and the conditions that are attached to it. But it is not showing the certainty of the information (Hanselman, 2009). Chapter 4: Practical implementation of International Financial Reporting Standards The practical implementation of IFRS varies from countries to countries. The applications with respect to the few countries are as follows: 1) In Brazil, the listed companies and the financial institutions are entailed to follow the national standards that have been converging with IFRS gradually. 2) In Germany, only the listed companies are entailed to apply IFRS for the preparation of the consolidated financial statements. The non-listed companies are allowed to apply IFRS for the preparation of group financial statements. Both the non-listed and the listed are prohibited from applying IFRs for preparing individual or separate financial statement of their own (Ryan, 2008). 3) In Jamaica and Kenya, all the companies both listed and non-listed are allowed to apply IFRS in preparing both the non-consolidated and consolidated financial statements. 4) In South Africa IFRS are allowed to apply to those listed companies who have widely sold their shares. 5) In India, there exists a three tier system of entities. Those companies who are listed under Tier I they are allowed to apply IFRS. The remaining two tiers consist of the small and the medium sized industries which are not allowed to use IFRS except in few cases (IFRS Foundation, 2013f). There are few issues when IFRS was introduced in a jurisdiction as they formed the part of the pre-existing laws and regulations that are pertained to the business entity governance. It is seen that in Jamaica there are a number of regulatory institutions that have implemented the financial reporting standards and they have faced problems (IFRS Foundation. 2013j). This is because often in many cases the law overlap or can even become inconsistent when the roles of different institutions are not defined clearly. Lack of consistency in the regulatory structure becomes the main cause for the serious inefficiencies and misunderstandings. The responsibility of enforcement of IFRS in the system rests on many parties which includes stock exchanges, capital market, insurance supervisory authority and the banking authority (Dennis, 2008). The practical implementation of the IFRS also needs adequate technological back up among the users, auditors and the regulatory authorities. Countries who have implemented IFRS have faced a number of technical related issues which is dependent on the approach they have undertaken (Barry and Jammie, 2008). Chapter 5: Conclusions, Implication and Recommendation IASB has been fulfilling their objectives under the governance of IFRS and thus it can be concluded that the financial reporting are taking place in accordance with the standards set by IFRS. The fair value system under the supervision of IFRS has been criticized in many cases. But the abolition of the fair value accounting from the system will discomfort the investors as that will increase uncertainty. The consideration of only the historic cost which is referred to the cost allocation and not to the value of asset is not meet by the IASB framework of reliability. It does not provide with the possibility of measuring the increase and decrease of the market value. The management will be responsible for whatever report it is providing to the investor and it will be unrealistic for the investors to get affected by the fair value accounting. Thus the management should perform the accounting correctly and efficiently. Thus the IFRS should review the fair value system that will motivate the investors for investing. Apart from the criticisms that are faced by the fair value system, there are advantages too which cannot be ignored. Fair value helped the banks to reduce the credit risks as by the system different faults of accounting are exposed. Fair value accounting has the essential assumption that financial statements are qualitatively and objectively proficient presentations for investors and the market. Based on the arguments for and against the inclusion of fair value accounting the following can be recommended. The fair value system should be of full use to both the economist and the investors who have the fair knowledge about the worth of the system. It is quite easy to work with a system about which full knowledge is gained. It gives a clear view of the system and as time is passing by the system is becoming more reliable to them. Reference List Alexander, D., 2009. International financial reporting and analysis. New Jersey: Prentice hall. Barry, E. and Jammie, E., 2008. Financial accounting and reporting. New Jersey: Prentice hall. Deloitte, 2013. Uses of IFRs by Jurisdiction”. [online] Available at: [Accessed 2 August 2013]. Dennis, N., 2008. Fair value accounting: Is it an appropriate measure of value for today’s financial instruments. [pdf] Available at: [Accessed 2 August 2013]. Fahnestock,R. and Bostwick, E., n.d. An analysis of the fair value controversy. Journal of Finance and Accountancy, 157, pp. 1-11. Hanselman, O., 2009. Full fair value accounting: Its time has come. Journal of Performance Management, 22(3), pp. 3-19. Herz, R. and MacDonald, A., 2008. Understanding the issues: some facts about fair value. FASB. p. 14. IFRS Foundation, 2010. The International Financial Reporting Standards: Framework-Based Understanding and Teachings. [pdf] Available at: [Accessed 2 August 2013]. IFRS Foundation, 2013a. The IFRS Taxonomy. [online] Available at: [Accessed 2 August 2013]. IFRS Foundation, 2013b. The Meetings. [online] Available at: [Accessed 2 August 2013]. IFRS Foundation, 2013c. IFRS 13 Fair Value Measurement. [pdf] Available at: [Accessed 2 August 2013]. IFRS Foundation, 2013d. Jurisdiction. [online] Available at :< http://www.ifrs.org/use-around-the-world/Pages/Jurisdiction-profiles.aspx> [Accessed 2 August 2013]. IFRS Foundation, 2013e. About Us. [online] Available at: [Accessed 2 August 2013]. IFRS Foundation, 2013f. Practical Implementation of IFRS. [online] Available at: [Accessed 2 August 2013]. IFRS Foundation, 2013g. Governance and Accountability. [pdf] Available at: [Accessed 2 August 2013]. IFRS Foundation, 2013h. Interpretations Committee’s Activities. [online] Available at: [Accessed 2 August 2013]. IFRS Foundation, 2013i. How to Develop IFRS. [online] Available at: [Accessed 2 August 2013]. IFRS Foundation, 2013j. Unaccompanied Standards and their Technical Summaries. [online] Available at: [Accessed 2 August 2013]. IFRS Foundation, 2013k. Interpretation Process. [online] Available at: [Accessed 2 August 2013]. Krumwiede, T., 2008. Why historical accounting makes sense. Strategic Finance, 90(2), pp. 33-39. Lewis, R. and Pendrill, D., 2004. Advanced financial accounting. New Jersey: Prentice hall. Littmann, M. and Dan, T., n.d. An Investigation of Practical Matters Related to Implementing Fair Value Accounting for Property Loses. [pdf] Available at: [Accessed 2 August 2013]. Nissim, D. and Penman, S., 2008. Principles for the Application of Fair value Accounting. [pdf] Available at: [Accessed 2 August 2013]. Ramanna, K., 2013. Why fair value is the rule. Harvard Business Review, 91(3), pp. 99-10. Ryan, S., 2008. Fair Value Accounting: Understanding the Issues Raised by the Credit Crunch. [pdf] Available at: [Accessed 2 August 2013]. Read More