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INTRODUCTION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
THE NEED FOR A COMMON SET OF ACCOUNTING AND FINANCIAL REPORTING STANDARDS
With the rampant rise of globalization, one would find it rather difficult to disagree with Thomas L. Friedman, the author of the world-renowned book, The World Is Flat, who said that right around the year 2000 we entered a new stage of globalization (a whole new era that he refers to as Globalization 3.0) which, according to him, is shrinking (figuratively, of course) the size of the world from small to tiny. Some people believe that this magical phenomenon of globalization has led to the emergence of a global village that we all live in.
With such a robust wave of globalization surging through the world, businesses across the globe cannot remain unaffected by it no matter how hard they try. With the advent of the World Wide Web and the knocking down of trade barriers across national boundaries through global initiatives such as the setting up of the World Trade Organization (WTO), international trade between businesses across the globe has become quite simple and attractive.
If we agree with the old adage, âaccounting is the language of business,â then business enterprises around the world cannot afford to be speaking in different languages to each other while exchanging and sharing financial results of their international business activities and also reporting the results of business and trade to their international stakeholders. As one school of thought believes, since business enterprises around the world are so highly globalized now and need to speak to each other in a common language of business, there is a real need for a single, universal set of accounting standards that would unify the accounting world and, more important, solve the problem of diversity of accounting practices across borders.
Historically, countries around the world have had their own national accounting standards (some countries have treasured these for whatever reason, most likely due to the pride of national sovereignty). However, with such a compulsion to be part of the globalization movement, wherein businesses across national boundaries are realizing that it is an astute business strategy to embrace the world as their workplace and marketplace, having different rules (standards) of accounting for the purposes of reporting financial results would not help them at all; rather, it would serve as an impediment to the smooth flow of information. Businesses, therefore, have realized that they need to talk to each other in a common language.
The adoption of accounting standards that require high-quality, transparent, and comparable information is welcomed by investors, creditors, financial analysts, and other users of financial statements. It is difficult to compare worldwide financial information without a common set of accounting and financial reporting standards. The use of a single set of high-quality accounting standards would facilitate investment and other economic decisions across borders, increase market efficiency, and reduce the cost of raising capital. International Financial Reporting Standards (IFRS) are increasingly becoming the set of globally accepted accounting standards that meet the needs of the worldâs increasingly integrated global capital markets.
WHAT ARE IFRS?
IFRS are a set of standards promulgated by the International Accounting Standards Board (IASB), an international standard-setting body based in London. The IASB places emphasis on developing standards based on sound, clearly stated principles, from which interpretation is necessary (sometimes referred to as principles-based standards). This contrasts with sets of standards, like U.S. generally accepted accounting principles (GAAP), the national accounting standards of the United States, which contain significantly more application guidance. These standards are sometimes referred to as rules-based standards, but that is really a misnomer as U.S. standards also are based on principlesâthey just contain more application guidance (or rules). IFRS generally do not provide bright lines when distinguishing among circumstances in which different accounting requirements are specified. This reduces the chances of structuring transactions to achieve particular accounting effects.
According to one school of thought, since IFRS are primarily principles-based standards, the IFRS approach focuses more on the business or the economic purpose of a transaction and the underlying rights and obligations instead of providing prescriptive rules (or guidance). IFRS provides guidance in the form of principles.
This significant difference in approach to standard setting between IFRS and U.S. GAAP is the main reason that the length of the text of the IFRS is less than that of U.S. GAAP. U.S. GAAP extends more than 20,000 pages of accounting literature as opposed to IFRS, which is approximately 2,000 to 3,000 pages in length.
A BRIEF HISTORY OF THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC)
The International Accounting Standards Committee (IASC), the predecessor of the IASB, was established in 1973 and came into being through an agreement by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States. The objective behind setting up the IASC was to develop, in the public interest, accounting standards that would be acceptable around the world in order to improve financial reporting internationally. Over the years, the IASC saw several changes to its structure and functioning. For example, by the year 2000, IASCâs sponsorship grew from the original nine sponsors to 152 accounting bodies from 112 countries, that is, all professional accountancy bodies that were members of the International Federation of Accountants (IFAC). Such fundamental changes to the IASC may have helped it achieve the objective for which it was set up: changing the perception of the global standard setters about the international nature of participation in the standard-setting process. As part of their membership in IASC, professional accountancy bodies worldwide committed themselves to use their best endeavors to persuade governments, standard-setting bodies, securities regulators, and the business community that published financial statements to comply with IAS. This also drew the worldâs attention to the fact that there exists a truly representative international accounting body that could ultimately qualify as a global standard setter and be able to develop a single set of accounting standards that would be acceptable to most, if not all, countries worldwide.
Over the years, the IASC worked hard to achieve the objective of developing accounting standards for the world. However, due to several factors (the most important one, according to one school of thought, being availability of national accounting standards in certain leading jurisdictions that were quite well developed and recognized by other leading jurisdictions as well) the standards promulgated by the IASC were unable to achieve the status of an international accounting standard setter whose standards were accepted by leading jurisdictions.
A BIRDâS EYE-VIEW OF THE STANDARDS PROMULGATED BY THE IASC AND INTERPRETATIONS COMMITTEE (SIC) THAT ARE STILL IN FORCE
During its existence, the IASC issued 41 standards, known as the International Accounting Standards (IAS), as well as a Framework for the Preparation and Presentation of Financial Statements. While some of the standards issued by the IASC have been since withdrawn or superseded (for example, IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, was withdrawn and IAS 22, Business Combinations, was superseded by IFRS 3, Business Combinations), many are still in force. In addition, some of the interpretations issued by the IASCâs interpretive body, the Standing Interpretations Committee (SIC), are still in force.
IAS Still in Force for 2009 Financial Statements
IAS 1, Presentation of Financial Statements
IAS 2, Inventories
IAS 7, Statement of Cash Flows
IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10, Events After the Reporting Period
IAS 11, Construction Contracts
IAS 12, Income Taxes
IAS 16, Property, Plant, and Equipment
IAS 17, Leases
IAS 18, Revenue
IAS 19, Employee Benefits
IAS 20, Accounting for Government Grants and Disclosure of Government Assistance
IAS 21, The Effects of Changes in Foreign Exchange Rates
IAS 23, Borrowing Costs
IAS 24, Related-Party Disclosures
IAS 26, Accounting and Reporting by Retirement Benefit Plans
IAS 27, Consolidated and Separate Financial Statements
IAS 28, Investments in Associates
IAS 29, Financial Reporting in Hyperinflationary Economies
IAS 31, Interests in Joint Ventures
IAS 32, Financial Instruments: Presentation
IAS 33, Earnings Per Share
IAS 34, Interim Financial Reporting
IAS 36, Impairment of Assets
IAS 37, Provisions, Contingent Liabilities and Contingent Assets
IAS 38, Intangible Assets
IAS 39, Financial Instruments: Recognition and Measurement
IAS 40, Investment Property
IAS 41, Agriculture
SIC Interpretations Still in Force for 2009 Financial Statements
SIC 7, Introduction of the Euro
SIC 10, Government AssistanceâNo Specific Relation to Operating Activities
SIC 12, ConsolidationâSpecial-Purpose Entities
SIC 13, Jointly Controlled EntitiesâNonmonetary Contributions by Ventures
SIC 15, Operating LeasesâIncentives
SIC 21, Income TaxesâRecovery of Revalued Nondepreciable Assets
SIC 25, Income TaxesâChanges in the Tax Status of an Entity or Its Shareholders
SIC 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease
SIC 29, DisclosureâService Concession Arrangements
SIC 31, RevenueâBarter Transactions Involving Advertising Services
SIC 32, Intangible AssetsâWeb Site Costs
THE BIRTH OF THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
With tremendous pressure on the IASC to transform itself into a truly global standard-setting body by addressing some of the serious concerns of established standard setters around the world (grievances were time and again quoted in the international media as serious shortcomings of the IASC), in the year 2001, fundamental changes were made to strengthen the independence, legitimacy, and quality of the international accounting standard-setting process. In particular, the IASC Board was replaced by the International Accounting Standards Board (IASB) as the body in control of setting international accounting and financial reporting standards. This significant structural change to the manner in which the IASC functioned for several years since its inception was brought about as a result of the recommendations of the Strategy Working Party, which was specially formed to take a fresh look at the then-existing IASCâs structure and strategy. One dramatic change in the structure and functioning of the Board that is worthy of mention was the replacement of part-time volunteer board members who sat on the IASC Board with, for the most part, full-time IASB board members.
Based on the recommendations of the Strategy Working Party a new constitution was adopted effective July 1, 2000. Under these new rules of governance of the international standard-setting body was born the IASC Foundation. The name of the organization that comprises both the IASB and its Trustees is the International Accounting Standards Committee Foundation (IASC Foundation). The objectives of the IASC Foundation, as stated in its Constitution, are
a. To develop, in the public interest, a single set of high-quality, understandable, and enforceable global accounting standards tha...