History of International Accounting Standards Board - Assignment Example

INTERNATIONAL ACCOUNTING STANDARDS BOARD The International Accounting Standards Board (IASB) is an independent organisation internationally recognised for its struggle concerning the formulation, development and implementation of International Accounting Standards (IAS). History of International Accounting Standards Board (IASB) In the year 1966, a collaboration of the Institute of Chartered Accountants of England and Wales (ICAEW), American Institute of Certified Public Accountants (AICPA) and Canadian Institute of Chartered Accountants (CICA) explicated and raised the issues arising out of discrepancies in the accounting standards around the world and reached a consensus on the formation of an International Study Group. This group formulating and developing accounting standards turned out to be the basis of the establishment of an independent accounting body for the purpose of issuing accounting standards to be used worldwide, which was named as International Accounting Standards Committee (IASC) (Knowledge Guide to International Accounting Standards, accessed 14.02.06). The International Accounting Standards Committee (IASC) was formed in the year 1973 in the pursuit of international community towards the development of accounting standards capable of being used throughout the world and IASC focused on this mission soon after its creation. Initially ten countries collaborated their efforts for the formation of International Accounting Standards Committee. During the reign of IASC, several accounting standards were developed but the goal of harmonisation could not be achieved due the lack of implementation of those standards. Furthermore, those standards provided great room for the manipulators to play around with the rules and regulation. It was in 1997 that IASC realised the significance of harmonised accounting standards and the increasing need for comparability of financial statements at a global level leading to the restructuring and remodelling of IASC. In the year 2001, the standard setting responsibilities of International Accounting Standards Committee was taken over by the new International Accounting Standards Board (IASB) with a view to restructure it to meet the challenges of the 21st century (Accounting: Introduction: background to the introduction of International Accounting Standards: a brief history, accessed 14.02.06). Role and Structure of International Accounting Standards Board (IASB) The International Accounting Standards Board (IASB) works under the supervision of International Accounting Standards Committee Foundation (IASCF), which was created in March 2001. The existing new structure consists of IASB, being given the responsibility to formulate and implement the International Financial Reporting Standards (IFRS) and revise the existing International Accounting Standards, IASCF being responsible to raise funds and supervise the activities of IASB, International Financial Reporting Interpretations Committee (IFRIC) being responsible for the interpretation of approval by IASB, Standards Advisory Council (SAC) acting as an advisory to the IASB and IASCF and lastly, working groups playing the role of special task forces for individual projects. The IASB has its headquarters in London and has been constantly engaged in the formulation, development, amendments and implementation of the international accounting standards all over the world extending its efforts towards the promotion of harmonisation of accounting standards. The efforts and endeavours of International Accounting Standard Board have won enormous support and coordination from the worldwide communities in the promotion of accounting standard setting, however it does not impose any obligation on any country to adopt IAS. The IASB has acquired the support of several international organisations such as IOSCO (International Organisation of Securities Commission), other accountancy bodies, business and trade unions and various chartered accountancy firms in view of its leadership in the pursuit of global harmonisation of accounting standards (Larson, Robert, Kenny, York, 1999) IASB has been working towards a tough goal, an objective that is hard to reach— i.e., the harmonisation of international accounting standards, which implies more than just the formulation and implementation of standards that could be implemented globally. It also implies convincing other countries and organisation regarding the materiality and significance of the standards formed by IASB. It works towards its goal with the help of its policies, procedure and processes on which stands the structure of IASB. It issues its accounting standards in the name of International Financial Reporting Standards (IFRS). The IASB constantly keeps on amending and reviewing the standards and the functioning of IFRS for the purpose of revision with the changing time. During the past few years, it has successfully reviewed and revised numerous accounting standards that it had issued previously. Although, this might be considered a positive approach towards alteration, but this trend keeps various countries sceptical in adopting IAS at this stage because of continuous revisions to the standards and it is obviously not convenient for a country to keep amending its accounting standards and policies keeping pace with the changing IAS (Larson, Robert, Kenny, York, 1999). The new and unique accounting standards introduced by international Accounting Standards Board (IASB) are termed as the International Financial Reporting Standards (IFRS). The newly formed board has retained all the standards formulated and developed by the previous IASC. However, the board has continuously been making amendments to the old standards inherited from the IASC and those standards are termed as International Accounting Standards (Accounting: Introduction: background to the introduction of International Accounting Standards: a brief history, accessed 14.02.06) The IASB has also allied with the United States’ standard setting board i.e., FASB (Financial Accounting Standards Board), which is one of the greatest efforts to hasten the process of global harmonisation of accounting standards, in the promotion of IFRS in the United States. In its pursuit of harmonisation, it has taken the path of choosing and implementing the best suitable and acceptable standard from each of both IAS and US GAAP in order to blend symphonise the accounting standards prevalent in United States as well as other countries of the world. Although, the International Accounting Standards Board has not been the only one extending its efforts towards the harmonisation of accounting standards, but due to its continuous struggle and endeavours it is considered as the most important figure in the implementation of globally harmonised accounting standards (Larson, Robert, Kenny, York, 1999) The role played by International Accounting Standards Board (IASB) for the harmonisation of International Accounting Standards (IAS) offers enhanced protection for the interest of a company’s local and international stakeholders such as government, shareholders, investors, creditors, suppliers and others. If the IASs are implemented successfully around the world, every country will require same standards to be followed in the course of the companies’ financial statements preparation and presentation, which will lead to improved comparability, integrity, disclosure and transparency in financial statements produced by the companies around the world. Besides, it also saves a company from the hassle of using different countries’ standards simultaneously for listing purposes and also builds investor trust in the company. The Introduction of International Financial Reporting Standards in UK The consequences arising out of the accounting issues due to the lack of transparency, lack of integrity, lack of disclosure, lack of fair representation and lack of comparability, in the form of incidences such as Enron and WorldCom etc led the regulatory authorities in the United Kingdom to move towards the harmonisation of UKGAAP with the IFRS. Under this effect, the Financial Services Authority (FSA) announced in September 2003 requiring all the listed companies to adopt IFRS for the purpose of preparation of their financial statements from the beginning of January 2005. This change is not only supposed to take place in United Kingdom, European Union has also required all the listed companies to prepare their financial statements in full compliance with the IFRS starting for the financial years starting on or after January 2005 (The Other Transition Deadline, accessed 15.02.2006). The introduction of International Financial Reporting Standards (IFRS) is supposed to influence and improve the transparency and comparability of the financial statements produced by various companies around the world. This, in turn will foster and protect the local and foreign investors’ trust in UK companies in terms of providing value to their funds invested. However, it would be difficult for the companies to switch over to an entirely new practice affecting their financial reporting, negatively and positively both. The implementation of these standards on the financial reporting by the UK listed companies was regarded as the one following a significant change and adaptation of the company’s financial statement preparation and presentation for the year 2004 and 2005, while the corporations feared to lose investor confidence due to the variability of the two years’ results being prepared under two different accounting standards i.e., UK GAAP and IFRS (The Other Transition Deadline, accessed 15.02.2006). Impact of IFRS Adoption on the Profits of UK Listed Companies The adoption of IFRS was about to be implemented on the financial year beginning from January 1, 2005. However, the listed companies were even required by the UK financial regulatory bodies to provide the companies’ 2004 financial statement data in order to present comparative analysis of the companies’ financial performance and position under the IFRS regulation. It meant that the UK listed companies were required to produce two sets of accounts, first being prepared under the UK GAAP, and second being under the IFRS rules and regulations (The Other Transition Deadline, accessed 15.02.2006). The major changes that affected the reporting of the company profits were the non-amortisation of goodwill and certain losses in asset values. The non-amortisation of goodwill resulted in increased reporting of company profits in the profit and loss account whereas the losses in asset values were realised by most of the companies as expense offsetting the company’s earnings account (The Other Transition Deadline, accessed 15.02.2006). . Following are the examples of some of the UK listed companies and the impact of IFRS adoption on the companies’ reporting of profits: Oxford Instruments Plc The Oxford Instruments plc’s profit and loss account (Oxford Instruments plc - Summary of impact of International Financial Reporting Standards (IFRS), accessed 15.02.06) for the year ended March 31, 2005 shows a decline £1.2m in the company’s Profit Before Tax. There had been the following elements affecting the profit reporting of the company: The company has charged Amortisation of £1.1m in respect of acquired intangible assets There is a pension net finance charge of £0.5m Impairment of empty property carrying value of £0.5m Goodwill of £0.9m is no longer amortised BHP Billiton The company’s net after tax profit for December 31, 2004 (BHP Billiton, accessed 15.02.06) increased under IFRS by US$70 million dollars to US$2.827 billion dollars. The following factors affected the reporting profit by the company: Due to the requirement of non-amortisation of goodwill, the company’s goodwill increased by US$389 million dollars The company recorded a benefit to profit of US$92 million dollars for the December 2004 half year, and additional tax liabilities recognised of US$677 million dollars. Aviva Plc The company’s first set of account that were prepared under IFRS for the year ended 31 December 2004 (Aviva Plc, accessed 15.02.06) showed an increase in net profit by 17.41% due to the following significant changes: The change in valuation of debt securities from amortised cost to fair value increases the valuation of investments by £2,459 million at 31 December 2004 The non-amortised negative goodwill of £37 million at 31 December 2004 Scottish and Southern Energy The company’s profit and loss account for the year ended March 31, 2005 (Scottish and Southern Energy, accessed 15.02.06) showed an increase of £4.9m by 0.75% from UK GAAP in the reported profit of the company. The major factors affecting are: Goodwill has not been amortised but is subject to review for impairment GUS plc The GUS plc’s profit and loss account for the year ended 31 March 2005 showed a declining profit before tax under IFRS as compared to the GAAP. The company’s profit before tax under IFRS amounted to £906m and under the UK GAAP amounted to £910m. The following were the causes of this difference: Expensing additional share-based payments reduces profit before tax and exceptional items by £6.6m in the year to 31 March 2005. The change in the way that the cost of pension and other postretirement benefits is calculated increases profit before tax and exceptional items by £2.3m in total in the year to 31 March 2005. Catalogue costs are expensed as incurred under IFRS, reducing profit before tax by £1.2m Reference List Accounting: Introduction: Background To The Introduction Of International Accounting Standards: A Brief History, accessed February 14, 2006 form the World Wide Web: http://www.hmrc.gov.uk/manuals/bamanual/bam20010.htm Aviva Plc, accessed February 15, 2006 form the World Wide Web: http://www.aviva.com/files/pdf/050705_auditors.pdf BHP Billiton, accessed February 15, 2006 form the World Wide Web: http://www.bhpbilliton.com/bbContentRepository/Presentations/NCscript.pdf GUS Plc, accessed February 15, 2006 form the World Wide Web: http://www.gusplc.com/gus/news/gusarchive/gus2005/2005-06-14/2005-06-14b.pdf Knowledge Guide to International Accounting Standards, accessed February 14, 2006 form the World Wide Web: http://www.icaew.co.uk/library/index.cfm?AUB=TB2I_25594 Larson, Robert K, Kenny, Sara York (spring 1999), “Harmonization Of International Accounting Standards: Progress In The 1990s”, Multinational Business Review Oxford Instruments plc - Summary of impact of International Financial Reporting Standards (IFRS), accessed February 15, 2006 form the World Wide Web: http://www.oxinst.com/OIGNWP773.htm Scottish and Southern Plc, accessed February 15, 2006 form the World Wide Web: http://www.scottish-southern.co.uk/shareholder/ReportsAndPresentations/PDFs/Sept2005/IFRS_statementFinal.pdf The Other Transition Deadline, accessed February 15, 2006 form the World Wide Web: http://www.iqa.org/publication/c4-1-92.shtml The IASB Structure, accessed February 14, 2006 form the World Wide Web: http://www.iasplus.com/restruct/restruct.htm#new Read More