International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards

by International GAAP 2019 (pdf)

  1 WHY

  INTERNATIONAL

  FINANCIAL REPORTING

  STANDARDS MATTER

  With globalisation has come the increasing integration of world markets for goods,

  services and capital – with the result that companies that traditionally were reliant on

  their domestic capital markets for financing now have substantially increased access to

  debt and equity capital, both inside and outside their national borders.

  Yet – perhaps not entirely surprisingly – the world of financial reporting was slow to respond

  reflecting, no doubt, a widespread nationalism in respect of countries’ own standards.

  Undoubtedly, one of the main advantages of a single set of global accounting standards is

  that it would enable the international capital markets to assess and compare inter-company

  performance in a much more meaningful, effective and efficient way. This should increase

  companies’ access to global capital and ultimately reduce the cost thereof. Thus the request

  for global standards came both from regulatory bodies and from preparers of financial

  statements. As early as 1989 the International Organisation of Securities Commissions

  (IOSCO), the world’s primary forum for co-operation among securities regulators,

  prepared a paper noting that cross border security offerings would be facilitated by the

  development of internationally accepted standards. For preparers, greater comparability

  in financial reporting with their global peers had obvious attractions.

  Notwithstanding these anticipated benefits, it has only been since 2000 that there has

  been a serious effort made toward such global standards. This came about largely as a

  result of the European Commission’s announcement in June 2000 that it would present

  proposals to introduce the requirement that all listed European Union (EU) companies

  report in accordance with International Accounting Standards by 2005. This

  requirement not only changed the face of European financial reporting, but global

  reporting as well after many other countries followed Europe’s lead. Indeed, the IFRS

  Foundation reports that 144 jurisdictions require IFRS standards for all or most

  domestic publicly accountable entities (listed companies and financial institutions) in

  their capital markets.1

  Thus global financial reporting has ceased to be characterised by numerous disparate

  national systems to the point at which there are today essentially only two – IFRS and

  US GAAP.

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  1

  2

  THE IFRS FOUNDATION AND THE IASB

  2.1

  The standard-setting structure

  The diagram below illustrates the structure within which standards are set by the

  International Accounting Standards Board (IASB).

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  Technical advice

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  The various elements of the structure are discussed further below.

  Unless indicated otherwise, references to IFRS include the following:

  • International Financial Reporting Standards – standards developed by the IASB;

  • International Accounting Standards (IAS) – standards developed by the International

  Accounting Standards Committee (IASC), the predecessor to the IASB;

  • Interpretations developed by the IFRS Interpretations Committee (Interpretations

  Committee) or its predecessor, the Standing Interpretations Committee (SIC); and

  • International Financial Reporting Standards for Small and Medium-sized Entities

  (IFRS for SMEs) – a stand-alone standard for general purpose financial statements

  of small and medium-sized entities (as defined).

  2.2

  The IFRS Foundation

  The governance of the IFRS Foundation primarily rests with the Trustees of the IFRS

  Foundation (Trustees) who, in turn, act under the terms of the IFRS Foundation Constitution

  (the Constitution).2 Section 17 of the Constitution requires a review, every five years, of the

  structure and effectiveness of the IFRS Foundation. The last review was completed in 2016

  and, as a result, the Constitution was revised effective from 1 December 2016.

  It is a requirement of the Constitution that, in order to ensure a broad international basis,

  there must be:3

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  • six Trustees appointed from the Asia/Oceania region;

  • six Trustees appointed from Europe;

  • six Trustees appointed from the Americas;

  • one Trustee appointed from Africa; and

  • three Trustees appointed from any area, subject to maintaining overall

  geographical balance.

  The appointment of Trustees to fill vacancies caused by routine retirement or other

  reasons is the responsibility of the remaining Trustees but subject to the approval of the

  Monitoring Board as discussed at 2.3 below. The appointment of the Trustees is

  normally for a term of three years, renewable once.4

  The Constitution requires that the Trustees comprise individuals that, as a group,

  provide a balance of professional backgrounds, and have an interest in promoting and

  maintaining transparency in corporate reporting globally. This includes individuals with

  global experience at a senior level in securities market regulators, firms representing

  investors, international audit networks, preparers, users, academics and officials serving

  the public interest. To achieve
such a balance, Trustees are selected after consultation

  with the accounting and audit profession, the securities market and other public interest

  bodies, regulators, investors, preparers, users and academics. The Trustees are required

  to establish procedures for inviting suggestions for appointments from these relevant

  organisations and for allowing individuals to put forward their own names, including

  advertising vacant positions.5

  The Constitution provides that ‘all Trustees shall be required to show a firm commitment

  to the IFRS Foundation and the IASB as a high quality global standard-setter, to be

  financially knowledgeable, and to have an ability to meet the time commitment. Each

  Trustee shall have an understanding of, and be sensitive to, the challenges associated with

  the adoption and application of high quality global accounting standards developed for

  use in the world’s capital markets and by other users’.6

  The Trustees are responsible also for appointing the members of the IASB, Interpretations

  Committee, IFRS Advisory Council (the Advisory Council)7 and the Accounting Standards

  Advisory Forum (ASAF).8 In addition, their duties include the following:9

  • appointing the Executive Director, in consultation with the IASB Chair, and

  establishing his or her contract of service and performance criteria;

  • reviewing annually the strategy of the IFRS Foundation and the IASB and its

  effectiveness, including consideration, but not determination, of the IASB’s agenda;

  • assuming responsibility for establishing and maintaining appropriate financing

  arrangements;

  • approving annually the budget of the IFRS Foundation and determining the basis

  for funding;

  • reviewing broad strategic issues affecting financial reporting standards, promoting

  the IFRS Foundation and its work and promoting the objective of rigorous

  application of IFRS, provided that the Trustees are excluded from involvement in

  technical matters relating to financial reporting standards;

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  • establishing or amending operating procedures for the Trustees;

  • establishing and amending operating procedures, consultative arrangements and

  due process for the IASB, the Interpretations Committee and the Advisory Council

  and reviewing their compliance;

  • approving amendments to the Constitution after following a due process, including

  consultation with the Advisory Council and publication of an exposure draft for

  public comment and subject to the voting requirements given in the Constitution;

  • exercising all powers of the IFRS Foundation except for those expressly reserved

  to the IASB, the Interpretations Committee and the Advisory Council;

  • fostering and reviewing the development of educational programmes and materials

  that are consistent with the IFRS Foundation’s objectives; and

  • publishing an annual report on the IFRS Foundation’s activities, including audited

  financial statements and priorities for the coming year.

  The IFRS Foundation’s funding is derived primarily from voluntary contributions from

  jurisdictions that have put in place national financing regimes. While funding

  mechanisms differ, most jurisdictions have established either a levy on companies or a

  system of publicly supported financing. The IFRS Foundation is continuing its work

  towards a global funding system characterised by a long-term commitment by

  jurisdictions, public sponsorship (either direct or implicit governmental or regulatory

  support), flexibility, proportionally allocated contributions and public accountability in

  the budget process.10 In 2017, the major funders of the IFRS Foundation were the

  international accounting firms, the European Commission, Japan and China.11

  2.3

  The Monitoring Board

  The Monitoring Board was created to address a perceived lack of accountability and

  responsiveness by the IASB and the IFRS Foundation to the concerns of its constituents.

  The Monitoring Board provides a formal link between the Trustees and public

  authorities. This relationship seeks to replicate, on an international basis, the link

  between accounting standard-setters and those public authorities that have generally

  overseen accounting standard-setters.12

  The Charter of the Monitoring Board notes that the Monitoring Board’s mission is:13

  • to cooperate to promote the continued development of IFRS as a high quality set

  of global accounting standards;

  • to monitor and reinforce the public interest oversight function of the IFRS

  Foundation, while preserving the independence of the IASB. In that regard;

  • to participate in the selection and approval of the Trustee appointments;

  • to advise the Trustees with respect to the fulfilment of their responsibilities,

  in particular with respect to regulatory, legal and policy developments that

  are pertinent to the IFRS Foundation’s oversight of the IASB and appropriate

  sources of IFRS Foundation funding; and

  • to discuss issues and share views relating to IFRS, as well as regulatory and market

  developments affecting the development and functioning of these standards.

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  The responsibilities of the Monitoring Board are to:14

  • participate in the process for appointing Trustees and approve the appointment

  of Trustees;

  • review and provide advice to the Trustees on the fulfilment of their responsibilities –

  there is an obligation on the Trustees to report annually to the Monitoring Board; and

  • meet with the Trustees or a sub-group thereof at least annually; the Monitoring

  Board has the authority to request meetings with the Trustees or separately with

  the chair of the Trustees and with the chair of the IASB to discuss any area of the

  work of the Trustees or the IASB.

  At the time of writing, the Monitoring Board comprises representatives of:15

  • the IOSCO Board;

  • the Securities and Exchange Commission (SEC), United States of America;

  • the European Commission;

  • the Financial Services Agency, Japan;

  • the IOSCO Growth and Emerging Markets Committee;

  • the Comissão de Valores Mobiliários, Brazil;

  • the Financial Services Commission, Republic of Korea;

  • the Ministry of Finance, People’s Republic of China; and

  • the Basel Committee on Banking Supervision (observer).

  The current chairman is the representative of the IOSCO Board.

  Membership of the Monitoring Board is assessed based on the following criteria:16

  • the member must be a capital market authority responsible for setting the form and

  content of financial reporting in its jurisdiction;

  • the jurisdiction has made a clear commitment to moving towards application of

  IFRS and promoting global acceptance of a single set of high-quality international

  accounting standards as the final goal;

  • the IFRSs to be applied should be essentially aligned with IFRSs developed by the IASB;

  • the jurisdiction can be regarded as a major market for capital-raising based on the size

  of market capitalization, the number of listed companies and capital market activity;

  • the jurisdiction makes financial
contributions to setting IFRS;

  • the jurisdiction has a robust enforcement mechanism to ensure proper

  implementation of relevant accounting standards; and

  • the relevant national or regional standard-setting body is committed to

  contributing actively to the development of IFRS.

  Historically the motivation for the use of IFRS was to facilitate cross-border capital

  raising and, therefore, the membership of the Monitoring Board was focused on capital

  markets authorities that were committed to the development of high-quality global

  accounting standards. While this continues to be a criterion for membership, beginning

  with the 2016 review of its members, the Monitoring Board will evaluate the integration

  of IFRS for domestic issuers in that member’s jurisdiction.17

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  2.4

  The International Accounting Standards Board (IASB)

  The members of the IASB are appointed by the Trustees.18 Currently, the IASB comprises

  14 members as required by the Constitution. The main qualifications for membership of

  the IASB are professional competence and recent relevant professional experience.19

  The Trustees are required to select IASB members so that the IASB, as a group, will

  comprise the best available combination of technical expertise and diversity of

  international business and market experience, including auditors, preparers, users,

  academics and market and/or financial regulators. No individual should be both a

  Trustee and a member of the IASB at the same time.20 Furthermore, the IASB, in

  consultation with the Trustees, is expected to establish and maintain liaison with

  national standard-setters and other official bodies concerned with standard-setting to

  assist in the development of IFRS and to promote the convergence of national

  accounting standards and IFRS.21

  The IASB will normally be required to comprise:22

  • four members from Asia/Oceania;

  • four members from Europe;

  • four members from the Americas;

  • one member from Africa; and

  • one member appointed from any area, subject to maintaining overall geographical

  balance.

  The responsibilities of the IASB are listed in Section 36 of the Constitution. Its primary

  role is to have complete responsibility for all IASB technical matters including preparing

  and issuing IFRSs (other than interpretations) and exposure drafts, each of which is

  required to include any dissenting opinions; and final approval of and issuing

  interpretations developed by the Interpretations Committee.23