The Future Changes in Financial Reporting

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(No Transcript)
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• The Future Changes in Financial Reporting
• Michael Kavanagh
• Head of Financial Reporting Supervision
• IAASA

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Presentation Overview

• Current accounting regimes operating in Ireland
• Main players involved in determining the future
  of financial reporting in Ireland
• The impact IFRS has had on the financial
  reporting regime in Ireland
• What future for Irish GAAP?
• The role of the Financial Reporting Supervision
  unit of IAASA
• Current hot topics for future changes to
  financial reporting

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Re-cap on current accounting regimes operating in
Ireland

• Irish GAAP
• International Financial Reporting Standards
• Alternative Bodies of Accounting Standards

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European Communities (International Financial
Reporting Standards and Miscellaneous Amendments)
Regulations, 2005

• Mandatory IFRS financial statements for
• All consolidated group accounts for entities with
  securities listed
• on an EU regulated market for years beginning
  1/1/05
• Group accounts of debt listed entities deferred
  until years
• beginning 1/1/07

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European Communities (International Financial
Reporting Standards and Miscellaneous Amendments)
Regulations, 2005

• Choice for all other companies to prepare
  individual or group accounts as
• Companies Act accounts
• or
• IFRS accounts
• One way choice, unless relevant change of
  circumstances

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European Communities (International Financial
Reporting Standards and Miscellaneous Amendments)
Regulations, 2005

• Companies Act accounts are accounts prepared in
  accordance with the accounting rules of company
  law and Irish GAAP i.e. as issued by the UK
  Accounting Standards Board (ASB)
• IFRS accounts are accounts prepared in accordance
  with IFRS as issued by the IASB and include
  some mandatory disclosures from the Companies
  Acts
• As endorsed by the EU

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Investment Funds, Companies and Miscellaneous
Provisions Act, 2005.

• Investment companies, as defined by Part XIII of
  the Companies Act, 1990 allowed to use
  Alternative Bodies of Accounting Standards (ABAS)
• ABAS US, Japanese and Canadian GAAP

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Main players involved in determining the future
of financial reporting in Ireland
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Main players involved in financial reporting in
Ireland
IAASA
ASB
IASB

EU
Financial reporting
SEC
DETE
CESR
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International Accounting Standards Board (IASB)

• The accounting standards produced by the IASB
  (previously the IASC) are
• International Financial Reporting Standards
  (IFRS) (7)
• International Accounting Standards (30)
• Interpretations of these - IFRIC (10) and SIC
  (11)

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Accounting Standards Board

• The accounting standards produced by the UK ASB
  (previously the ASC) include
• Financial Reporting Standards (FRS) (29)
• SSAP (of ASC) (7 active)
• Interpretations of these - UITF Abstracts (23)

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Financial Reporting Review Unit of IAASA

• Principal functions include
• - Monitoring whether the accounts of certain
  classes of companies and other undertakings
  comply with the Companies Acts
• Co-operating in the development of accounting
  standards and practice notes
• Assisting the Board of IAASA to discharge its
  functions as advisor to the Minister on
  accounting and related matters
• Liaising with other countries financial
  reporting monitoring bodies and developing
  contacts with those bodies.

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Department of Enterprise Trade and Employment
(DETE) and the European Union (EU)

• Various laws relating to accounting standards
  including prescribing which accounting standards
  should be used by the different categories of
  companies, the format of those accounts, and
  other accounting related EU regulations that are
  transposed into Irish law by the DETE.

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The regulators CESR and SEC

• Primarily regulators of capital markets and
  therefore impact on financial reporting.

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Experiences of first time implementation of IFRS

• 8,000 listed groups required to report under IFRS
  in Europe including c50 in Ireland. Many others
  have done so voluntarily
• The most common adjustments seen in Ireland
• Financial instruments generally
• Share-based payments
• Pension obligations
• Foreign currency
• Business combinations
• Leasing
• Deferred tax
• Dividend distributions
• Others

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What future for Irish/UK GAAP?
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The Accounting Standards Board (ASB)

• ASB is an operating body of the UK Financial
  Reporting Council (FRC).
• In Ireland, ASB standards are promulgated by
  the ICAI.
• Section 41 of the 2003 Companies Act
  accounting standards . issued by any body or
  bodies prescribed by regulation. Not yet
  commenced.
• Accounting standards responsibilities impacted by
  move to International Financial Reporting
  Standards (IFRS).
• ASB has consulted on its future role in 2004,2005
  and 2006.

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The changing accounting environment

• Move towards global accounting standards
• What is the future role for ASB in setting
  accounting standards?

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Future role for ASB- UITFs

• ASB acknowledges that national interpretations of
  accounting standards should be rare.
• ASB has stated that the International Financial
  Reporting Interpretations Committee (IFRIC) is
  the appropriate body to interpret IFRS.
• Role of Urgent Issues Task Force (UITF) to be
  reviewed.

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Future role for ASB FRSs/SSAPs

• ASB sees its role as primarily trying to
• influencing future direction of IASB standards
  
• influencing EU policy on accounting
  standards, including the endorsement of IFRS
• Future role in national standard setting might
  include issuing standards in relation to
• Entity specific issues for example, smaller
  entities
• Sector specific issues for example, use of
  Statements of Recommended Practice (SORPs) and
• Improving communication between companies and
  investors narrative reporting and the Operating
  and Financial Review (OFR).

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ASB convergence policy with IFRS

• ASB policy no case for maintaining differences
  between the principles underlying Irish/UK GAAP
  and IFRS.
• Consulted on convergence strategy in 2004
  responses indicated support for phased approach.
• Responses to consultation on role in 2005
  highlighted change of view
• Phased approach complicated/difficult to
  implement
• Complicated IFRS may not be suitable for many
  companies
• Await the outcome of the IASB SME project.
• ASB now proposing to move to big bang
  convergence from 2009

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ASB convergence current proposals

• ASB issued tentative proposals in May 2006 for
  public comment
• All publicly quoted and other publicly
  accountable companies would be required to apply
  full IFRS.
• Use of the Financial Reporting Standard for
  Smaller Entities (FRSSE) extended to include
  medium-sized entities.

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ASB convergence current proposals

• Subsidiaries of group companies that apply full
  IFRS would also be required to apply full IFRS
  for measurement and recognition, but with reduced
  disclosure requirements (yet to be determined).
• No decision yet on companies that do not fall in
  1, 2 or 3. Alternatives seem to be
• extend FRSSE application further,
• apply IFRS to more companies,
• maintain Irish/UK GAAP for them, or
• some combination of (i), (ii) and (iii).

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Issues what is public accountability?

• IASB definition
• An entity has public accountability if
• (a) there is a high degree of outside interest
  in the entity from non- management investors or
  other stakeholders, and those stakeholders
  depend primarily on external financial reporting
  as their means of obtaining financial
  information about the entity or
• (b) the entity has an essential public service
  responsibility because of the nature of its
  operations.
• How to put this definition into operation still
  to be determined.

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Issues FRSSE or IASB SME standard?

• Is it appropriate to apply the FRSSE to
  medium-sized and possibly even larger companies?
• Final decisions will be made when the outcome of
  the IASB SME project is clearer.

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IAASA - Financial Reporting Supervision Units
role in the future of financial reporting in
Ireland
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Financial Reporting Review Unit of IAASA

• Principal functions include
• - Monitoring whether the accounts of certain
  classes of companies and other undertakings
  comply with the Companies Acts
• Co-operating in the development of accounting
  standards and practice notes
• Assisting the Board of IAASA to discharge its
  functions as advisor to the Minister on
  accounting and related matters
• Liaising with other countries financial
  reporting monitoring bodies and developing
  contacts with those bodies.

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Monitoring whether the financial statements of
certain companies comply with the Companies Acts

• Section 26 of the 2003 Act
• The IAS Regulation
• The Transparency Directive

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Section 26 of the 2003 Act

• The financial reporting supervision constituency
  comprises
• all plcs (whether listed or not)
• all subsidiary undertakings of plcs
• all private companies limited by shares that, in
  both in the relevant financial year and the
  immediately preceding financial year, satisfy the
  following criteria
• balance sheet total exceeds 25m and
• turnover exceeds 50m.
• all private companies limited by shares which,
  when aggregated with their subsidiary
  undertakings, exceed the aforementioned
  thresholds
• all subsidiary undertakings of the preceding
  class of private companies and
• certain other undertakings, and where applicable
  their subsidiary undertakings, that satisfy the
  aforementioned criteria, including unlimited
  companies and partnerships whose members having
  unlimited liability are themselves limited
  companies.

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IAS Regulation

• Requires EU Member States to take appropriate
  measures to ensure compliance with IFRS (applies
  to listed entities consolidated a/cs only)
• Recital no.16 of the Regulation -
• A proper and rigorous enforcement regime is key
  to underpinning investors' confidence in
  financial markets. Member States, by virtue of
  Article 10 of the Treaty, are required to take
  appropriate measures to ensure compliance with
  international accounting standards. The
  Commission intends to liaise with Member States,
  notably through the Committee of European
  Securities Regulators (CESR), to develop a common
  approach to enforcement.

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Transparency Directive

• Article 24(4)(h) of the Transparency Directive
  (TD)
• - ..to examine that information referred to in
  this Directive is drawn up in accordance with the
  relevant reporting framework and take appropriate
  measures in case of discovered infringements.

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Liaising with other countries financial
reporting monitoring bodies

• IAASA an active participant in EECS (European
  Enforcement Co-ordination Sessions) sub
  committee of CESR monthly meetings
• EECS Forum for discussing and co-ordinating
  enforcement decisions in EU/EEA
• A database of IFRS enforcement decisions in the
  EU/EEA has been established not precedents but
  likely to be persuasive reference point
• Has been Irish EECS case which was brought to EU
  Roundtable on Consistent Application of IFRS
• CESR/EECS liasing with IASB and SEC on various
  matters of mutual interest
• EECS - very important part of SEC and EU road
  map

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Other financial reporting functions

• Assisting the Board to discharge its functions as
  an advisor to the Minister on accounting related
  matters
• - Advice on various matters as have arisen
• - Member of CLRG and advice on part A6 of
  forthcoming Consolidation Bill dealing with
  accounting and auditing
• Co-operating in the development of accounting
  standards and practice notes
• - Irish Observer at ASB Board twice monthly
  meetings
• - Liaison with IASB

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Current hot topics for future changes in
financial reporting
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What direction are accounting standards going in?

• ASB convergence with IASB standards
• IASB formal agreements with US FASB and Japan.
• Convergence roadmap between IFRS and US GAAP
  2008.
• The potential impact of China and other emerging
  economies.

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Current hot topics for future changes in
financial reporting

• Financial Statement presentation
• Fair value measurement
• Business combinations
• Revenue recognition
• Conceptual framework
• ... and many more

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Financial Statement presentation

• Current proposals are for 3 primary financial
  statements -

Statement of FinancialPosition Statement of Earnings and Comprehensive Income Statement of Cash Flows
Business    Operating Assets and Liabilities   Treasury Assets Business    Operating Income   Treasury Income Business    Operating Cash Flows   Treasury Cash Flows
Financing   Equity   Financing Liabilities Financing Expenses Financing Cash Flows   Equity   Non-equity
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Financial Statement presentation

• Each set of accounts will consist of
• - 3 statements of financial position,
• - 2 statements of earnings and comprehensive
  income/recognised income and expense,
• - 2 statements of changes in equity, and
• - 2 statements of cash flows.

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Fair value measurement

• The objective of IASB/FASB joint project is to
• Define fair value,
• Establish a framework for measuring fair value
• Enhance disclosures about fair value, and
• Codify existing fair value measurement guidance
• Canadian DP Measurement on initial
  recognition
• FASB is nearing completion of its project on fair
  value measurements

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Business combinations

• Joint IASB/FASB ED issued 30 June 2005 proposing
  major changes to acquisition accounting. For
  example e.g.
• If acquirer purchases less than 100 recognise
  assets and liabilities at the full amount of
  their fair values and goodwill as the difference
  between the fair value of the acquiree, as a
  whole, and the fair value of assets acquired and
  liabilities assumed.
• the acquirer to account for acquisition-related
  costs incurred in connection with the business
  combination separately from the business
  combination (generally as expenses).

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Revenue recognition

• Objectives are to
• Eliminate weaknesses in existing concepts and
  standards.
• - Focus on changes in assets and liabilities
• - Insufficient guidance on multiple-element
  revenue arrangements
• - Deal more comprehensively with recognition
  criteria for various other types of transactions
  
• Converge IFRSs and US requirements approx 200
  sources of standards and guidance on revenue
  recognition in US GAAP.

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Conceptual framework

• IASB and FASB joint agenda project to develop a
  common conceptual framework.
• Multi-phase project over a number of years
  converged framework 2010?
• More than an academic exercise. Will have major
  impact on way in which the IASB/FASB will develop
  and revise standards.
• First discussion paper issued July 2006

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Questions ?
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Further Information

• Further information on the Authority and its
  activities may be obtained from
• IAASA
• 2nd Floor, Willow House
• Millennium Park
• Naas
• Co. Kildare
• Tel [phone] Fax 353 (0)45
  983601
• Email info_at_iaasa.ie Web www.iaasa.ie
• 
  www.iaasa.eu