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Chapter 3

Chapter 3. The process of harmonization. Contents. EU Directives Enforcement of IFRS in the EU The future of EU accounting regulation International Accounting Standards The structure of the IASB The objectives of the IASB The IASB’s due process of standard setting IFRS for SMEs

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Chapter 3

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  1. Chapter 3 The process of harmonization

  2. Contents • EU Directives • Enforcement of IFRS in the EU • The future of EU accounting regulation • International Accounting Standards • The structure of the IASB • The objectives of the IASB • The IASB’s due process of standard setting • IFRS for SMEs • The future?

  3. Learning objectives • Outline the role of the EU in the development of accounting harmonization • Explain the endorsement process of IAS/IFRS in the EU • Outline the history and changing role of the IASC/IASB • Describe the different steps in the due process of standard setting • Understand current developments and their implications

  4. How to improve financial communication between different countries • Through harmonization: increasing the compatibility of accounting practices by setting bounds to their degree of variation • Through standardization: the imposition of a more rigid and narrow set of rules

  5. EU-approach in the 20th century • Harmonization through the EU-Directives of financial reporting • 4th Company Law Directive of 25 July 1978 on the annual accounts of individual companies • 7th Company Law Directive of 13 June 1983 on the consolidated accounts

  6. History of financial reporting in the EU • 1978: 4th Directive • 1983: 7th Directive • 1995: The new “Accounting Strategy” • 1999: The Financial Services Action Plan • 2002: Approval of Regulation (EC) N°1606/2002 on the application of IAS • 2003: update of the 4th and 7th Directive

  7. IAS-Regulation in the EU • Scope: EU and countries of the European Economic Area • Requirement to publish consolidated accounts in compliance with IAS/IFRS for listed groups for accounting periods on or after the 1 January 2005

  8. The endorsement process of the IASs in the EU The EC decides on the applicability of individual IASs in the EU. It may adopt an IAS only if: • it is not contrary to the principles of the 4th and 7th Directives; • it is conductive to the European public good; and • it meets the criteria of understandability, relevance, reliability and comparability

  9. The endorsement process of the IASs in the EU The EC is assisted in the endorsement decision by the Accounting Regulatory Committee (ARC), the European Financial Reporting Advisory Group (EFRAG) and the Standards Advice Review Group

  10. Accounting Regulatory Committee • Consists of representatives of the member states • Its function is to provide an opinion to the Commission on proposals to adopt (endorse) IAS

  11. European Financial Reporting Advisory Group (EFRAG) • A technical group which advises the EC in its endorsement process • It provides proactive advice to the IASB • It provides advice to the EC on resulting changes to be made to the Accounting Directives and related topics

  12. The Standards Advice Review Group • Seven independent experts • To give advice to the Commission that is not influenced by governments (unlike ARC) or by stakeholders like companies and audit firms (EFRAG)

  13. Commission of European Securities Regulators (CESR) * Strive for consistent application of IFRS in accounts of listed companies * Analyse and discuss the decisions taken by independent EU National Enforcrs in respect of financial statements published by issuers with instruments (equity and debt) traded on a EU market

  14. International Accounting Standards Committee • Created in 1973 • Creation related to the set up of International Federation of Accountants • Mission statement: (a) to formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance; (b) to work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements

  15. History of the IASC • 1970s and 1980s standards with many options • 1989 “comparability project” – ED 32 • 1995 agreement with IOSCO to complete a core set of IAS by 1999 • 1999 “Recommendations on shaping IASC for the Future” • 2000 acceptation of “core” standards by IOSCO

  16. In 2001 the structure of the IASC changed The reform of the IASC

  17. Mission statement of the IASB • To develop, in the public interest, a single set of high quality, understandable and enforceable global standards that require high quality, transparent and comparable information • To promote the use and rigorous application of those standards • To take account of the special needs of SMEs and emerging countries • To bring about convergence of national accounting standards and IAS and IFRS to high quality solutions

  18. The structure of the IASB

  19. The due process of standard setting Stage 1: setting the agenda Stage 2: project planning Stage 3: development and publication of a discussion paper Stage 4: development and publication of an exposure draft Stage 5: development and publication of an IFRS Stage 6: procedures after an IFRS is issued

  20. The IASB’s due process of standard setting

  21. IASB: towards a global standard setter? • Mandatory application for listed companies in the EU, European Economic Area, Australia and New Zealand • Mandatory compliance for listed companies underway in: • Brazil from 2010 onwards • Korea from 2011 onwards • Russia for banks

  22. IASB: towards a global standard setter? (cont’d) • Canada : decision on mandatory compliance under way for 2011 (IASB Insight 2008) • A number of countries have adopted IASs as their national standards: Hong Kong, Singapore, South Africa • Voluntary adoptions in other countries

  23. SEC Decision - 2007 • For financial statements of foreign private issuers covering years ended after 15 November 2007, the SEC decided that financial statements prepared according to IFRS as issued by the IASB are accepted on American stock exchanges without reconciliation to US GAAP

  24. Most important element for the near future The further evolution of the convergence project with the FASB and the position of the SEC with regard to American listed companies FASB and IASB reaffirm commitment to complete convergence project by the end of June 2011 (november 2009)

  25. IFRS for SMEs • In 2003 discussions started on the need for such statements, they could also be of help to developing nations • Discussion paper 2005 • IFRS for SMEs published in 2009 • SME – implementation group set up in January 2010

  26. IFRS for SMEs: characteristics • IFRS for SMEs – simplification of full IFRS through • By the ommission of topics not relevant for SMEs • When IFRS have options, the simpler option is retained, the more complex ommitted • Recognition and measurement principles simplified • The number of disclosures reduced

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