On completion of its core set of standards, the IASC proposed a new structure that would allow it and national standard setters to better work together toward global harmonization. The restructuring created the International Accounting Standards Board (IASB). In April 2001, the IASB assumed accounting standard-setting responsibilities from its predecessor body, the IASC.
The IASB consists of 14 members—12 full-time and 2 part-time.16To ensure the IASB’s inde- pendence all full-time members are required to sever their employment relationships with former employers and are not allowed to hold any position giving rise to perceived economic incentives that might call their independence into question. Seven of the full-time IASB members have a for- mal liaison responsibility with one or more national standard setters. A minimum of five IASB members must have a background as practicing auditors, three must have a background as prepar- ers of financial statements, and three as users of financial statements, and at least one member must come from academia. The most important criterion for selection as an IASB member is tech- nical competence. The initial IASB members came from nine countries: Australia, Canada, France, Germany, Japan, South Africa, Switzerland, the United Kingdom (4), and the United States (3).
International Financial Reporting Standards (IFRS)
In April 2001, the IASB adopted all international accounting standards issued by the IASC and announced that its accounting standards would be called international financial reporting standards(IFRS). IAS 1,“Presentation of Financial Statements,” was amended in 2003 and defines IFRS as standards and interpretations adopted by the IASB. The authoritative pro- nouncements that make up IFRS consist of these:
• International Financial Reporting Standards (IFRSs) issued by the IASB.
• International Accounting Standards (IASs) issued by the IASC (and adopted by the IASB).
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14Stephen H. Collins, “The SEC on Full and Fair Disclosure,”Journal of Accountancy,January 1989, p. 84.
15International Accounting Standards Committee, International Accounting Standards 1990(London: IASC, 1990), p. 13.
16In 2009, the number of IASB members was increased to 16, with a maximum of three part-time members.
LO3
List the authoritative pronounce- ments that constitute Interna- tional Financial Reporting Standards (IFRS).
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• Interpretations originated by the Standing Interpretations Committee (SIC) (until 2001) and the International Financial Reporting Interpretations Committee (IFRIC).
Under the new structure, the IASB has sole responsibility for establishing IFRS.
The IASC issued 41 IASs from 1975 to 2001, and the IASB had issued eight IFRSs as of July 1, 2009. Several IASs have been withdrawn or superseded by subsequent standards. For exam- ple, later standards dealing with property, plant, and equipment, and intangible assets have su- perseded IAS 4,“Depreciation Accounting,” originally issued in 1976. Other IASs have been revised one or more times since their original issuance. For example, IAS 2,“Inventories,” was originally issued in 1975 but was then revised as part of the comparability project in 1993.
As part of an improvements project undertaken by the IASB, IAS 2was again updated in 2003.
Of 41 IASs issued by the IASC, only 29 were still in force as of July 1, 2009. The IASB issued the first IFRS in 2003; it deals with the important question of how a company should restate its financial statements when it adopts IFRS for the first time.
Exhibit 11.5 provides a complete list of the 37 IASs and IFRSs in force as of July 1, 2009.
Together these two sets of standards (along with several interpretations) create what the IASB EXHIBIT 11.5
International Financial Reporting Standards as of January 2010
Title Originally Issued
IAS 1 Presentation of Financial Statements 1975
IAS 2 Inventories 1975
IAS 7 Cash Flow Statements 1977
IAS 8 Net Profit or Loss for the Period, Fundamental Errors
and Changes in Accounting Policies 1978
IAS 10 Events after the Balance Sheet Date 1978
IAS 11 Construction Contracts 1979
IAS 12 Accounting for Taxes on Income 1979
IAS 16 Property, Plant, and Equipment 1982
IAS 17 Leases 1982
IAS 18 Revenue 1982
IAS 19 Employee Benefits 1983
IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance 1983
IAS 21 The Effects of Changes in Foreign Exchange Rates 1983
IAS 23 Borrowing Costs 1984
IAS 24 Related Party Disclosures 1984
IAS 26 Accounting and Reporting by Retirement Benefit Plans 1987
IAS 27 Consolidated Financial Statements and Accounting for
Investments in Subsidiaries 1989
IAS 28 Accounting for Investments in Associates 1989
IAS 29 Financial Reporting in Hyperinflationary Economies 1989
IAS 31 Financial Reporting of Interests in Joint Ventures 1990
IAS 32 Financial Instruments: Disclosure and Presentation 1995
IAS 33 Earnings per Share 1997
IAS 34 Interim Financial Reporting 1998
IAS 36 Impairment of Assets 1998
IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1998
IAS 38 Intangible Assets 1998
IAS 39 Financial Instruments: Recognition and Measurement 1998
IAS 40 Investment Property 2000
IAS 41 Agriculture 2001
IFRS 1 First-Time Adoption of IFRS 2003
IFRS 2 Share-Based Payment 2004
IFRS 3 Business Combinations 2004
IFRS 4 Insurance Contracts 2004
IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations 2004
IFRS 6 Exploration for and Evaluation of Mineral Resources 2004
IFRS 7 Financial Instruments: Disclosures 2005
IFRS 8 Operating Segments 2006
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refers to as IFRSand what can be thought of as IASB GAAP. IFRS constitute a comprehen- sive set of financial reporting standards that cover the major accounting issues. In addition, the IASB’s Framework for the Preparation and Presentation of Financial Statements, which is very similar in scope to the FASB’s Conceptual Framework, provides a basis for determining the appropriate accounting treatment for items not covered by a specific standard or interpretation.
As was true for its predecessor, the IASB does not have the ability to enforce its standards. It develops IFRS for the public good and makes them available to any organization or nation that wishes to use them.
The IASB Framework states that the “objective of financial statements is to provide infor- mation about the financial position, performance and changes in financial position of an en- tity that is useful to a wide range of users in making economic decisions.”17The Framework lists the range of users of financial statements to include investors, lenders, employees, cus- tomers, suppliers, government agencies, and the public. However, the objective of financial statements can be achieved by focusing on the information needs of investors because the
“provision of financial statements that meet their needs also will meet most of the needs of other users that financial statements can satisfy.”18With its emphasis on providing relevant in- formation to investors, IFRS clearly fall into the category of being a Class A accounting sys- tem as defined by Nobes.
Use of IFRS
A country can use IFRS in a number of different ways. For example, a country could (1) adopt IFRS as its national GAAP, (2) requiredomestic listed companies to use IFRS in preparing their consolidated financial statements, (3) allow domestic listed companies to use IFRS, and/or (4) require or allow foreigncompanies listed on a domestic stock exchange to use IFRS. See Exhibit 11.6 for a summary of the extent to which IFRS are required or permitted to be used by domestic listed companies in preparing consolidated financial statements in countries around the world.
Of the 152 countries included in Exhibit 11.6, as of July 2009, 86 required all domestic listed companies to use IFRS. In addition, Brazil and South Korea were scheduled to adopt IFRS in 2010, Canada and India in 2011, and Mexico in 2012. Most significant among this group of IFRS users are the 27 countries of the European Union. All publicly traded compa- nies in the EU have been required to use IFRS to prepare their consolidated financial state- ments since January 1, 2005. The only exceptions were those companies that were using U.S.
GAAP, which several jurisdictions allowed, or that had publicly traded debt securities only.
These companies began using IFRS in 2007. In most cases, EU companies continue to use domestic GAAP to prepare parent company financial statements, which often serve as the basis for taxation. With the EU’s adoption of IFRS, the IASB gained a substantial amount of legitimacy as the global accounting standard setter.
Most countries of economic importance require or permit domestic listed companies to use IFRS in preparing their consolidated financial statements. The most important exceptions are China, Japan, and the United States, the three largest economies in the world. In 2006, China adopted a completely new set of Chinese Accounting Standards that is based on IFRS. In addition, Chinese companies listed on the Hong Kong stock exchange are permitted to use either Hong Kong GAAP or IFRS. In 2007, the Accounting Standards Board of Japan and the IASB agreed on a process for converging Japanese GAAP and IFRS by reducing differences between the two sets of standards. More recently, in June 2009, the Business Accounting Council in Japan indicated that it would allow some Japanese companies to use IFRS beginning in 2010, with mandatory use of IFRS by all public companies contem- plated for 2015 or 2016.
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17IASB, Framework for the Preparation and Presentation of Financial Statements, para. 12.
18Ibid., para. 10.
LO4
Describe the ways and the extent to which IFRS are used around the world.
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