International Accounting Standards

1
International Accounting Standards

• David Cairns

2
National Accounting

• Each jurisdiction has a financial reporting
  system
• some jurisdictions have different systems for
  different entities
• Each financial reporting system is affected by
  various influences and pressures

3
Financial Reporting Systems

• Which institutions determine the requirements?
• What is the form of the requirements?
• What are the enforcement mechanisms?
• What are the objectives of financial reporting?
• What financial information has to be published?
• What are the specific accounting requirements
  (rules)?

4
National Accounting

• Each jurisdiction has a financial reporting
  system
• some jurisdictions have different systems for
  different entities
• Each financial reporting system is affected by
  various influences and pressures
• Changes in one part of a system do not
  necessarily result in changes in another component

5
Reasons for Differences
Roberts, Weetman and Gordon

• Political and economic system
• Legal system
• Taxation system
• Corporate financing system
• Accounting profession
• Other

6
Reasons for Differences
Gray (1988)

• Structural elements of culture (Hofstede)
• Cultural influences on accounting
• professionalism versus statutory control
• uniformity versus flexibility
• conservatism versus optimism
• secrecy versus transparency

7
Influence of Taxation
Hoogendoorn Lamb, Nobes and Roberts

• Taxation as the objective of financial reporting
• Connection between financial reporting and
  taxation for profit measurement

8
Different National Accounting

• Different jurisdictions
• require different information
• account for like transactions and events
  differently
• measure performance and financial performance
  differently
• may allow bad accounting

9
Goodwill

• Fair value of purchase consideration
• less
• Fair value of net assets acquired
• equals
• Goodwill
• Book value is used in some jurisdictions

10
Goodwill

• Possible accounting treatments
• immediate write-off to equity
• immediate write off to income statement
• capitalise and amortise over useful life
• capitalise and write down only when impaired
• As goodwill is a residual, further differences
  arise in the calculation of goodwill

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Goodwill

• Immediate write-off to equity
• UK (old), EU, IAS (old), Netherlands
• Immediate write off to income statement
• Japan
• Capitalise and amortise
• USA (old), Canada, Australia, Germany, Japan,
  UK (old, new), EU, IAS (old, new)
• Capitalise - write down only when impaired
• UK (new), USA (new)
• option

12
Intangible Assets

• Possible accounting treatments
• immediate write off to income statement
• capitalise and amortise over useful life
• capitalise and write down only when impaired
• Method of acquisition
• acquisition (separately or in business
  combination)
• internally generated
• capitalisation is usually subject to strict
  conditions

13
Brands

• Stolowy, Haller Klockhaus
• IAS 38 France Germany
• Capitalisation
• internally generated X ? X
• business combination X? ? X
• Amortisation 20 years None 3-5 years
• Emphasis Reliability Relevance Reliability

14
International Accounting Standards

• Improve and harmonise financial reporting
• private sector initiative
• accounting standards
• enforcement by national bodies
• relevant information for decisions of users
• account for like transactions and events in the
  same way

15
From IASC to IASB

• Old (1973 to 2000)
• International Accounting Standards Committee
  (IASC)
• International Accounting Standards (IAS)

• New (2001 onwards)
• International Accounting Standards Board (IASB)
• International Financial Reporting Standards (IFRS)

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IASB Objectives (2001 onwards)

• Develop a single set of high quality,
  understandable and enforceable global accounting
  standards
• Require transparent and comparable information in
  general purpose financial statements
• Co-operate with national standard setters to
  achieve convergence of accounting standards
  around the world

17
IASB Work Programme

• Adoption of existing IAS ? (2000)
• Improve existing IAS
• Easier application of IAS
• Provide international leadership and convergence

18
Improve Existing IAS

• Improvements project
• internal inconsistencies
• implicit and explicit alternatives
• exposure draft 5/02
• amendments to IAS 1, 2, 8, 10, 15, 16, 17, 21,
  24, 27, 28, 33 and 40
• completion early 2003

19
Improve Existing IAS

• Financial Instruments
• amendments to IAS 32 39
• exposure draft 7/02
• completion 2003
• ongoing fair value project

20
Easier Application of IAS

• First-time application of IAS/IFRS
• restatement of prior periods with limited
  exceptions
• ignore transitional provisions
• helps companies meet EU 2005 deadline
• exposure draft 8/02
• completion 2003

21
Easier Application of IAS

• Financial institutions
• update IAS 30
• conform with IAS 32 39
• extend to all banking, treasury and securities
  activities
• update disclosures
• exposure draft 2003

22
Leadership and Convergence

• Insurance
• Business combinations (phase 1)
• purchase, pooling, fresh start, goodwill
• Share-based payments
• when and how should expense be measured?
• Reporting performance
• components of performance

23
Other IASB Projects

• Extractive industries
• Leases
• Business combinations (phase 2)
• Consolidation policy
• Intangible assets
• Liabilities and revenue recognition

• Derecognition
• non-IAS 39 issues
• Financial instruments
• comprehensive (Joint Working Group) project
• Impairment of assets
• Revaluation of assets

24
Other IASB Projects

• Small and medium sized entities
• Emerging economies
• Management discussion and analysis

• Framework issues
• accounting measurement
• definitions of elements
• Convergence projects
• income taxes
• employee benefits

25
Use of IAS

• European Union
• IAS regulation
• current practices
• company compliance
• International securities markets
• IOSCO
• SEC (USA)

26
IAS Regulation

• Requires listed EU companies to publish IAS
  consolidated financial statements
• from 2005 - in virtually all cases
• from 2007 - if listed on non-EU market and comply
  with other internationally accepted standards
  (e.g., US GAAP)
• from 2007 - if only bonds listed
• Regulation approved June 2002
• requires no national legislation

27
EU Endorsement of IAS

• Criteria for endorsement
• results in true and fair view
• conducive to European public good
• financial statements useful to users
• Process
• Accounting Regulatory Committee (political)
• European Financial Reporting Advisory Group
  (technical)
• likely to endorse all current IAS

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IAS Regulation

• What does it mean for listed companies with
  December year ends?
• consolidated IAS financial statements for
  December 2005
• comparative amounts for December 2004
• IAS opening balance sheet as at January 2004
• comparative amounts for December 2003 and IAS
  opening balance sheet as at January 2003 (SEC
  registrants)

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IAS Regulation

• What companies will it affect?
• about 7,000 EU listed companies
• about 500 EU listed companies already comply with
  IAS
• over 6,500 EU listed companies, along with their
  subsidiaries and associates, will have to change
  their accounting

30
EU IAS Regulation

• IAS consolidated financial statements
• listed companies
• from 2005 - in virtually all cases

31
EU IAS Regulation

• IAS consolidated financial statements
• listed companies
• from 2005 - in virtually all cases
• Already apply IAS
• Austria
• Denmark
• Germany

32
EU IAS Regulation

• IAS consolidated financial statements
• listed companies
• from 2005 - in virtually all cases
• Already apply IAS
• Austria
• Denmark
• Germany

• Close to IAS
• Ireland
• Netherlands
• Sweden
• UK
• Some companies on IAS
• Finland
• Greece
• Italy

33
Use of IAS by European Companies

• IAS Survey 2000
• Full compliance
• Several forms of IAS lite
• accounting policies comply .
• IAS as residual standards
• disclosed exceptions from full compliance
• undisclosed conflicts with IAS

34
Full Compliance with IAS

• The financial statements are prepared in
  accordance and in compliance with IAS.
• Stora Enso (Finland/Sweden)
• Required approach from 2005

35
Accounting Policies Comply ...

• The valuation principles applied conform with
  IAS. It should be noted that the notes do not in
  all respects conform with the disclosure
  requirements of IAS and therefore the financial
  statements as a whole are not in full compliance
  with them.
• Richemont (Switzerland)
• Not permitted by EU from 2005 (or IAS 1)

36
IAS Used as Residual Standards

• Accounting policies are consistent with
  legislation principles established by the
  Italian accounting profession and, in their
  absence, by the IASC.
• Olivetti (1999 and 2000)
• Not permitted by EU from 2005

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Disclosed Exceptions
Comply with IAS except for .

• Pension costs
• Kemira, Metra, TEGE
• Development costs
• Metra, Micronas, Renault, Compart, Montedison
• Goodwill
• Wienerberger, Disetronic

• Hyperinflation
• PKN ORLEN
• Consolidation
• OTP Bank, Compart
• Segment disclosures
• Erste Bank, SanoChemia, Micronas

38
Pooling of Interests Method

• Panafon (claims full compliance)
• In accordance with IAS, the cash acquisition
  of Panafox was accounted for in a manner similar
  to the pooling of interests method.
• Deloitte Touche
• unqualified IAS audit opinion

39
Pooling of Interests Method

• HypoVereinsbank (claims full compliance)
• at the merger date, Bayerische Vereinsbank held a
  44.2 interest in HYPO-BANK
• pooling of interests method
• KPMG
• unqualified IAS audit opinion

40
Changes in Accounting Policy

• Preussag(2000)
• Four voluntary changes in accounting policy
• Cumulative effect of changes
• included in divisional results (profit)
• adds 34 million (10) to profit
• no restatement of prior year
• Unqualified IAS audit opinion (PwC)

41
Incomplete Statements

• Hellenic Petroleum (2001)
• IAS financial statements consist of
• balance sheet, income statement, cash flow
  statement
• no accounting policies, statement of changes in
  equity, other required disclosures
• Unqualified IAS audit opinion (SOL Ernst Young)

42
Reasons for Poor Compliance

• Companies and auditors
• historical reason for adopting IAS
• assume compliance with national GAAP compliance
  with IAS
• poor or non-existent securities regulation and
  enforcement

43
European Enforcement of IAS

• Current practice
• significant variations in enforcement mechanisms
  among EU member states (www.fee.be)
• SEC regulates IAS financial statements of foreign
  registrants
• for example, use of pooling of interests method
  by Novartis
• Future practice
• Committee of European Securities Regulators
  (CESR)

44
IOSCO Use of IAS/IFRS

• IOSCO endorsement of IAS for use in cross border
  offerings and other foreign listings
• IAS 7 Cash Flow Statements (endorsed November
  1993)
• IAS 2000 (endorse May 2000)
• subject to supplemental treatments including
  reconciling items, waivers and additional
  disclosures

45
IOSCO Use of IAS/IFRS

• IOSCO endorsement requires implementation by
  IOSCO members to become effective
• no action required as foreign issuers on LSE may
  use IAS instead of domestic GAAP
• UK, rest of Europe
• action required
• Canada, Japan and USA
• currently do not accept IAS financial statements
  without restatement or reconciliation

46
SEC Concept Release

• Should the SEC allow foreign issuers to file IAS
  financial statements without a US GAAP
  reconciliation?
• Responses
• European yes
• US no (unless US companies can opt for IAS)
• Big firms yes (EY, KPMG) no (DTT, PwC)

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Further Research

• IASB
• www.iasb.org.uk
• European standard setting and enforcement
• www.fee.be
• www.europa.eu.int
• Securities regulators
• IOSCO www.iosco.org
• SEC www.sec.gov

48
Further Research

• Other useful sources
• ICAEW library www.icaew.co.uk
• Deloitte Touche www.iasplus.com
• Links to international, EU and national bodies
• www.cairns.co.uk

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International Accounting Standards

• David Cairns