Acca Diploma in International Financial Reporting Study Text December 2014 to June 2015

8/20/2019 Acca Diploma in International Financial Reporting Study Text December 2014 to June 2015

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Diploma in International FinancialReporting

Study Text for examsin December 2014 and June 2015

ACCA DipIFRStudy Text

ACCA APPROVED CONTENT PROVIDER


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S

T

U

D

Y

T

E

X

T

DIPLOMA IN INTERNATIONAL

FINANCIAL REPORTING

BPP Learning Media is an ACCA Approved Learning Partner – content. This means we

work closely with ACCA to ensure this Study Text contains the information you need to

pass your exam.

In this Study Text, which has been reviewed by the ACCA examination team, we:

Include the revised IFRSs and IASs

iscuss the best strategies for studying for your exams

Highlight the most important elements in the syllabus and the key skills you will need

Signpost how each chapter links to the syllabus and the study guide

Provide lots of exam focus points demonstrating what is expected of you in the exam

Emphasise key points in regular fast forward summaries

Test your knowledge of what you've studied in quick quizzes

FOR EXAMS IN DECEMBER 2 14 AND JUNE 2 15


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Tenth edition October 2014

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eISBN 9781 4727 3051 0

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Contents iii

ContentsPage

IntroductionHelping you to pass vi

Studying for the Diploma in International Financial Reporting viii

Syllabus and Study Guide xi

Part A International sources of authority 1 The IASB and the regulatory framework 3

2 The conceptual framework 27

Part B Elements of financial statements 3 Revenue recognition 45

4 Property, plant and equipment 57

5 Impairment of assets 896 Leases 99

7 Intangible assets and goodwill 119

8 Inventories and construction contracts 133

9 Liabilities – provisions, contingent assets and liabilities 151

10 Employee benefits 163

11 Financial instruments 185

12 Accounting for taxation 229

13 Foreign currency translation 257

14 Accounting for agriculture and mineral resources 267

15 Share-based payment 281

Part C Presentation and additional disclosures16 Presentation of published financial statements 297

17 Reporting financial performance 333

18 Earnings per share 349

19 Miscellaneous standards: related party disclosures and segment reporting 365

20 Reporting for small and medium-sized entities 379

Part D Preparation of external financial reports for

combined entities and joint arrangements21 Constitution of a group 389

22 The consolidated statement of financial position 401

23 The consolidated statement of profit or loss and other comprehensive income 441

24 Accounting for associates 453

25 Accounting for joint arrangements 467

26 Current developments 475

Practice question bank 491

Practice answer bank 519

List of key terms and index 579

Review form


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iv Introduction

A note about copyright

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Introduction v

Learning to Learn Accountancy

BPP's ground-breaking Learning to Learn Accountancy book is designed to be used both at the outset of

your ACCA studies and throughout the process of learning accountancy. It challenges you to consider how

you study and gives you helpful hints about how to approach the various types of paper which you will

encounter. It can help you focus your studies on the subject and exam, enabling you to acquire

knowledge, practise and revise efficiently and effectively.


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vi Introduction

Helping you to pass

BPP Learning Media – Approved Learning Partner – content

As ACCA's Approved Learning Partner – content, BPP Learning Media gives you the opportunity to use

study materials reviewed by the ACCA examination team. By incorporating the examination team'scomments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning

Media Study Text provides excellent, ACCA-approved support for your studies.

Tackling studying

Studying can be a daunting prospect, particularly when you have lots of other commitments. The

different features of the text, the purposes of which are explained fully on the Chapter features page, will

help you whilst studying and improve your chances of exam success.

Developing exam awareness

Our Texts are completely focused on helping you pass your exam.

Our advice on Studying for the Diploma in International Financial Reporting (Dip IFR) outlines the

content of the paper, the necessary skills you are expected to be able to demonstrate and any brought

forward knowledge you are expected to have.

Exam focus points are included within the chapters to highlight when and how specific topics were

examined, or how they might be examined in the future.

Using the Syllabus and Study Guide

You can find the syllabus, Study Guide and other useful resources for Dip IFR on the ACCA web site:

http://www.accaglobal.com/uk/en/student/dipifr/dipifr-resources.html

The Study Text covers all aspects of the syllabus to ensure you are as fully prepared for the exam as

possible.

Testing what you can do

Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can

recall what you have learnt.

We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as

Quick Quizzes at the end of each chapter to test your knowledge of the chapter content.

http://www.accaglobal.com/uk/en/student/dipifr/dipifr-resources.htmlhttp://www.accaglobal.com/uk/en/student/dipifr/dipifr-resources.htmlhttp://www.accaglobal.com/uk/en/student/dipifr/dipifr-resources.html


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Introduction vii

Chapter features

Each chapter contains a number of helpful features to guide you through each topic.

Topic list

Topic list Syllabus reference What you will be studying in this chapter and the relevant

section numbers, together with ACCA syllabus references.

IntroductionPuts the chapter content in the context of the syllabus as

a whole.

Study Guide Links the chapter content with ACCA guidance.

Exam GuideHighlights how examinable the chapter content is likely to

be and the ways in which it could be examined.

Knowledge brought forward from earlier studies What you are assumed to know from previous

studies/exams.Summarises the content of main chapter headings,

allowing you to preview and review each section easily.

ExamplesDemonstrate how to apply key knowledge and

techniques.

Key termsDefinitions of important concepts that can often earn you

easy marks in exams.

Exam focus pointsWhen and how specific topics were examined, or how

they may be examined in the future.

Question Give you essential practice of techniques covered in thechapter.

Chapter RoundupA full list of the Fast Forwards included in the chapter,

providing an easy source of review.

Quick QuizA quick test of your knowledge of the main topics in the

chapter.

Practice Question BankFound at the back of the Study Text with more

comprehensive chapter questions. Cross referenced for

easy navigation.

FAST FORWARD


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viii Introduction

Studying for the Diploma in International Financial

Reporting

Aim

To develop knowledge, understanding and application of International Financial Reporting Standards and

the concepts and principles which underpin them.

Objectives

On completion of the Diploma candidates should be able to:

Understand and explain the structure of the international professional and conceptual framework of

accounting

Apply relevant financial reporting standards to key elements of financial reports

Identify and apply disclosure requirements for companies relating to the presentation of financialreports and notes

Prepare group financial statements (excluding statements of cash flows for groups) including

subsidiaries, associates and joint ventures

Position of the course within the overall portfolio of ACCA's qualification framework

Dip IFR builds on the technical and/or practical knowledge acquired from recognised country specific

accountancy qualifications or relevant work experience. The course introduces the candidate to the wider

international framework of accounting and the system of standard setting.

This conversion course concentrates on the application of conceptual and technical financial accountingknowledge that candidates have already obtained to the specific requirements of financial reporting under

international professional regulation and standards.

Dip IFR also provides essential international financial reporting knowledge and principles that will prepare

candidates for the increasingly global market place and keep them abreast of international developments

and how they might apply to companies and businesses.

Dip IFR is intended for professional accountants and auditors working in practice and industry who are

qualified in accordance with national accounting standards. Official documentation is required.

The prerequisite knowledge for Dip IFR can come from:

A relevant degree plus two years' work experience Three years' work experience

ACCA affiliate status

ACCA Certificate in International Financial Reporting plus two years' work experience


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Introduction ix

Approach to examining the syllabus

The examination is a three-hour paper. Most questions will contain a mix of computational and discursive

elements. Some questions will adopt a scenario/case study approach. All questions are compulsory.

Number of

marks

One 'groups' question 40 Three scenario questions 60 100

The first question will attract 40 marks. It will Involve preparation of one or more of the consolidated

financial statements that are examinable within the syllabus. This question will include several issues that

will need to be addressed prior to performing the consolidation procedures. Some of these issues may

only relate to the financial statements of the parent prior to their consolidation.

This question will require candidates to prepare the consolidated statement of financial position and/or the

consolidated statement of comprehensive income and may additionally include possibly the consolidated

statement of changes in equity. Questions involving the preparation of the consolidated statement of cash

flows will not be set. A key purpose of this question is to assess technical consolidation skills. However,

the question will also require candidates to adjust a number of transactions (typically three or four) thathave been incorrectly or incompletely accounted for in the financial statements of group entities (usually

the parent entity). In order to make these adjustments candidates will need to apply the provisions of

relevant IFRSs. In Question 1 the emphasis will be on application rather than explanation.

The other three questions will attract 20 marks each. These will often be related to a scenario in which

questions arise regarding the appropriate accounting treatment and or disclosure of a range of issues. In

such questions candidates may be expected to comment on management's chosen accounting treatment

and determine a more appropriate one, based on circumstances described in the question. Occasionally

one of the questions might focus more specifically on the requirements of one specific International

Financial Reporting Standard. In all three questions there will be more emphasis on explanation of

financial reporting issues than of numerical financial statements preparation.

Question 2 will often present candidates with a scenario or a range of scenarios for which the correctfinancial reporting treatment is complex or uncertain. Often the question will place the candidate in a 'real-

life' role, for example chief accountant reporting to the chief executive officer or senior accountant

supervising an assistant. The question frequently requires candidates to address a series of questions that

have been posed by the other party in the scenario. The question will often ask candidates to present a

reply or report that deals with the appropriate financial reporting of the issues raised in the scenario. The

primary skill in this question is identifying and describing the issues, rather than the detailed computation

of numbers. However, some marks may be available for numerical calculations.

Question 3 will usually deal with a particular IFRS in some detail. Such a question would require

candidates to describe key features of the IFRS and apply it to two or more situations that the question

describes. In contrast with Question 1, there will only be a limited number of marks available for technical

preparation in such circumstances, the majority of marks being available for identifying and quantifyingthe appropriate adjustments.

Question 4 will often present candidates with three or four reasonably complex issues and require them to

prepare extracts from the financial statements that show the appropriate financial reporting of those

issues. This question will usually involve a little more computational work than Question 2. Examples of

issues that could be examined in this question include, but are not restricted to, impairment calculations

for a cash-generating unit, computation of the cost of a constructed item of property, plant and

equipment, and accounting for the decommissioning provision relating to an asset such as a nuclear

power station.

Some International Financial Reporting Standards are very detailed and complex. In the Dip IFR exam

candidates need to be aware of the principles and key elements of these Standards. Candidates will also be


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x Introduction

expected to have an appreciation of the background and need for international accounting and financial

reporting and issues related to harmonisation of accounting in a global context.

The overall passmark for the Diploma in International Financial Reporting is 50%.

Additional information

Candidates need to be aware that the exam year will run from 1 September to the following 31 August. The

cut off relating to examinable documents will be set 12 months before the start of the year.

Knowledge of the new examinable regulations issued by 31st August will be required in examination

sessions being held in the following calendar year. Documents may be examinable even if the effective

date is in the future.

The documents listed as being examinable are the latest that were issued prior to 31st August 2013 and

will be examinable in the December 2014 and June 2015 examination sessions.

This Study Text is for exams up to and including June 2015.


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Introduction xi

Syllabus and Study Guide

A International sources of authority

(1) The International Accounting Standards Board (IASB) and the regulatory framework

B Elements of financial statements

(1) Revenue recognition

(2) Property, plant and equipment

(3) Impairment of assets

(4) Leases

(5) Intangible assets and goodwill

(6) Inventories and construction contracts

(7) Financial instruments

(8) Liabilities – provisions, contingent assets and liabilities(9) Accounting for employment and post-employment benefits

(10) Taxation in financial statements

(11) The effects of changes in foreign currency exchange rates

(12) Agriculture

(13) Share-based payment

(14) Exploration and evaluation expenditures

C Presentation and additional disclosures

(1) Presentation of the statement of financial position, and statement of profit or loss and othercomprehensive income

(2) Earnings per share

(3) Events after the reporting date

(4) Accounting policies, changes in accounting estimates and errors

(5) Related party disclosures

(6) Operating segments

(7) Reporting requirements of small and medium-sized entities (SMEs)

D Preparation of external financial reports for combined entities, associates and jointarrangements

(1) Preparation of group consolidated external reports

(2) Business combinations – intra-group adjustments

(3) Business combinations – fair value adjustments

(4) Business combinations – associates and joint arrangements


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xii Introduction

Excluded topics

The following topics are specifically excluded from the syllabus.

Partnership and branch financial statements

Complex group structures including sub-subsidiaries or mixed groups and foreign subsidiaries

Piece-meal acquisitions, disposal of subsidiaries and group reconstructions

Financial statements of banks and similar financial institutions

Preparation of statements of cash flows (single company and consolidated)

Schemes of reorganisation/reconstruction

Company/share valuation

Accounting for insurance entities

International financial reporting exposure drafts and discussion papers

The international public sector perspective

Multi-employer benefit schemes

Information reflecting the effects of changing prices and financial reporting in hyperinflationary

economies

Share-based payment transactions with cash alternatives

Key areas of the syllabusThe key topic areas are as follows.

International sources of authority

Elements of financial statements

Presentation of accounts and additional disclosures

Preparation of external reports for combined entities, associates and joint ventures

Wider reading

Wider reading is absolutely essential, especially regular study of relevant articles from ACCA's Student

Accountant . Of particular relevance are articles written by the Dip IFR examinations team. These are

available on the ACCA website in the Dip IFR section:

http://www.accaglobal.com/uk/en/student/dipifr/dipifr-resources/technical-articles.html

http://www.accaglobal.com/uk/en/student/dipifr/dipifr-resources/technical-articles.htmlhttp://www.accaglobal.com/uk/en/student/dipifr/dipifr-resources/technical-articles.html


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Introduction xiii

Examinable Documents

International Accounting Financial Reporting Standards

The Conceptual Framework for Financial Reporting

IAS 1 Presentation of financial statements

IAS 2 Inventories

IAS 8 Accounting policies, changes in accounting estimates and errors

IAS 10 Events after the reporting period

IAS 11 Construction contracts

IAS 12 Income taxes

IAS 16 Property, plant and equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Employee benefits

IAS 20 Accounting for government grants and disclosure of

government assistance

IAS 21 The effects of changes in foreign exchange rates

IAS 23 Borrowing costs

IAS 24 Related party disclosures

IAS 27 Separate financial statements

IAS 28 Investment in associates

IAS 32 Financial instruments: Presentation

IAS 33 Earnings per share

IAS 34 Interim financial reporting

IAS 36 Impairment of assets

IAS 37 Provisions, contingent liabilities and contingent assets

IAS 38 Intangible assets

IAS 39 Financial instruments: recognition and measurement

IAS 40 Investment property

IAS 41 Agriculture

IFRS 1 First time adoption of International Financial Reporting Standards

IFRS 2 Share-based payment

IFRS 3 Business combinations

IFRS 5 Non-current assets held for sale and discontinued operations

IFRS 6 Exploration for and evaluation of mineral resources

IFRS 7 Financial instruments: disclosures

IFRS 8 Operating segments

IFRS 9 Financial instruments

IFRS 10 Consolidated financial statements


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xiv Introduction

International Accounting Financial Reporting Standards

IFRS 11 Joint arrangements

IFRS 12 Disclosure of interests in other entities

IFRS 13 Fair value measurement


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Introduction xv

Study Guide

A INTERNATIONAL SOURCES OF

AUTHORITY

1. The International Accounting Standards

Board (IASB) and the regulatoryframework

• Discuss the need for international

accounting standards and possible barriers

to their development

• Explain the structure and constitution of

the IASB and the standard setting process

• Understand and interpret the Financial

Reporting Framework

• Progress towards international

harmonisation

• Account for the first-time adoption of

International Financial Reporting

Standards.

B ELEMENTS OF FINANCIAL STATEMENTS

1. Revenue recognition

• Outline the principles of the timing of

revenue recognition

• Explain the concept of substance over

form in relation to recognising sales

revenue

• Discuss the various points in the

production and sales cycle where it may,

depending on circumstances, be

appropriate to recognise gains and losses

– give examples of this

• Describe the IASB's approach to revenue

recognition.

2. Property, plant and equipment• Define the initial cost of a non-current

asset (including a self-constructed asset)

and apply this to various examples of

expenditure, distinguishing between capital

and revenue items

• Identify pre-conditions for the

capitalisation of borrowing costs

• Describe, and be able to identify,

subsequent expenditures that should be

capitalised

• State and appraise the effects of the IASB's

rules for the revaluation of property, plant

and equipment

• Account for gains and losses on the

disposal of re-valued assets

• Calculate depreciation on:– Revalued assets, and

– Assets that have two or more major

items or significant parts

• Apply the provisions of accounting

standards relating to government grants

and government assistance

• Describe the criteria that need to be

present before non-current assets are

classified as held for sale, either

individually or in a disposal group

• Account for non-current assets and

disposal groups that are held for sale

• Discuss the way in which the treatment of

investment properties differs from other

properties

• Apply the requirements of international

accounting standards to investment

properties.

3. Impairment of assets

• Define the recoverable amount of an asset;

define impairment losses

• Give examples of, and be able to identify,

circumstances that may indicate that an

impairment of an asset has occurred

• Describe what is meant by a cash-

generating unit

• State the basis on which impairment

losses should be allocated, and allocate a

given impairment loss to the assets of a

cash-generating unit.

4. Leases

• Define the essential characteristics of a

lease

• Describe and apply the method of

determining a lease type (ie an operating

or finance lease)


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xvi Introduction

• Explain the effect on the financial

statements of a finance lease being

incorrectly treated as an operating lease

• Account for operating leases in the

financial statements of the lessor and the

lessee

• Account for finance leases in the financial

statements of the lessor and lessee

• Outline the principles of accounting

standards for leases and the main

disclosure requirements. Note: the net

cash investment method will not be

examined.

5. Intangible assets and goodwill

• Discuss the nature and possible

accounting treatments of both internallygenerated and purchased goodwill

• Distinguish between goodwill and other

intangible assets

• Define the criteria for the initial recognition

and measurement of intangible assets

• Explain the subsequent accounting

treatment, including the principle of

impairment tests in relation to purchased

goodwill

• Identify the circumstances in which

negative goodwill arises, and its

subsequent accounting treatment

• Describe and apply the requirements of

international accounting standards to

internally generated assets other than

goodwill (eg research and development)

• Describe the method of accounting

specified by the IASB for the exploration

for and evaluation of mineral resources.

6. Inventories and construction contracts

• Measure and value inventories

• Define a construction contract and

describe why recognising profit before

completion is generally considered to be

desirable; discuss if this may be profit

smoothing

• Describe the ways in which contract

revenue and contract cost may be

recognised

• Calculate and disclose the amounts to be

shown in the financial statements for

construction contracts.

7. Financial instruments

• Account for debt instruments, equity

instruments and the allocation of finance

costs

• Account for fixed interest rate and

convertible bonds

• Discuss the definition and classification of

a financial instrument

• Discuss the measurement issues relating

to financial instruments

• Explain the measurement requirements for

financial instruments including the use of

current values, hedging and the treatmentof gains and losses

• Describe the nature of the presentation and

disclosure requirements relating to

financial instruments

• Discuss the key areas where consensus is

required on the accounting treatment of

financial instruments.

8. Liabilities – provisions, contingent

assets and liabilities

• Explain why an accounting standard on

provisions is necessary – give examples of

previous abuses in this area

• Define provisions, legal and constructive

obligations, past events and the transfer of

economic benefits

• State when provisions may and may not be

made, and how they should be accounted

for

• Explain how provisions should be

measured

• Define contingent assets and liabilities –

give examples and describe their

accounting treatment

• Identify and account for:

– Onerous contracts

– Environmental and similar

provisions

• Discuss the validity of making provisions

for future repairs or renewals.


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Introduction xvii

9. Accounting for employment and post-

employment benefit costs

• Describe the nature of defined

contribution, multi-employers and defined

benefits schemes

• Explain the recognition and measurementof defined benefit schemes under current

proposals

• Account for defined benefit schemes

including the amounts shown in the

financial statements (and notes to the

accounts).

10. Taxation in financial statements

• Account for current tax liabilities and

assets in accordance with international

accounting standards

• Describe the general principles of

government sales taxes (eg VAT or GST)

• Explain the effect of taxable temporary

differences on accounting and taxable

profits

• Outline the principles of accounting for

deferred tax

• Identify and account for the IASB

requirements relating to deferred taxassets and liabilities

• Calculate and record deferred tax amounts

in the financial statements.

11. The effects of changes in foreign

currency exchange rates

• Discuss the recording of transactions and

translation of monetary/non-monetary

items at the reporting date for individual

entities in accordance with relevant


• Distinguish between reporting and

functional currencies

• Determine an entity's functional currency.

12. Agriculture

• Recognise the scope of international

accounting standards for agriculture

• Discuss the recognition and measurement

criteria including the treatment of gains

and losses, and the inability to measurefair value reliably

• Identify and explain the treatment of

government grants, and the presentation

and disclosure of information relating to

agriculture

• Report on the transformation of biological

assets and agricultural produce at the

point of harvest and account foragriculture related government grants.

13. Share-based payment

• Understand the term 'share-based

payment'

• Discuss the key issue that measurement of

the transaction should be based on fair

value

• Explain the difference between cash settled

share based payment transactions andequity settled share based payment

transactions

• Identify the principles applied to

measuring both cash and equity settled

share-based payment transactions

• Compute the amounts that need to be

recorded in the financial statements when

an entity carries out a transaction where

the payment is share based.

14. Exploration and evaluation expenditures

• Outline the need for an accounting

standard in this area and clarify its scope

• Give examples of elements of cost that

might be included in the initial

measurement of exploration and evaluation

assets

• Describe how exploration and evaluation

assets should be classified and reclassified

• Explain when and how exploration andevaluation assets should be tested for

impairment


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xviii Introduction

C PRESENTATION OF ACCOUNTS AND

ADDITIONAL DISCLOSURES

1. Presentation of the statement of financial

position, and statement of profit or loss

and other comprehensive income

• State the objectives of international

accounting standards governing

presentation of financial statements

• Describe the structure and content of

statements of financial position,

statements of profit or loss and other

comprehensive income including

continuing operations

• Discuss the importance of identifying and

reporting the results of discontinued

operations

• Define and account for non-current assets

held for sale and discontinued operations

• Discuss 'fair presentation' and the

accounting concepts/principles

• Recognise the content and format of

interim financial statements.

2. Earnings per share

• Recognise the importance of comparability

in relation to the calculation of earningsper share (EPS) and its importance as a

stock market indicator

• Explain why the trend of EPS may be a

more accurate indicator of performance

than a company's profit trend

• Define earnings

• Calculate the EPS in the following

circumstances:

– Basic EPS– Where there has been a bonus

issue of shares/stock split during

the year, and

– Where there has been a rights issue

of shares during the year

• Explain the relevance to existing

shareholders of the diluted EPS, and

describe the circumstances that will give

rise to a future dilution of the EPS

• Compute the diluted EPS in the following

circumstances:

– Where convertible debt or

preference shares are in issue

– Where share options and warrants

exist• Identify anti-dilutive circumstances.

3. Events after the reporting date

• Distinguish between and account for

adjusting and non-adjusting events after

the reporting date

4. Accounting policies, changes in

accounting estimates and errors

• Identify items requiring separate

disclosure, including their accountingtreatment and required disclosures.

• Recognise the circumstances where a

change in accounting policy is justified

• Define prior period adjustments and errors

and account for the correction of errors

and changes in accounting policies.

5. Related party disclosures

• Define and apply the definition of related

parties in accordance with international


• Describe the potential to mislead users

when related party transactions are

accounted for

• Explain the disclosure requirements for

related party transactions.

6. Operating segments

• Discuss the usefulness and problems

associated with the provision of segment

information

• Define an operating segment

• Identify reportable segments (including

applying the aggregation criteria and

quantitative thresholds).

7. Reporting requirements of small and

medium-sized entities (SMEs)

• Outline the principal considerations in

developing a set of accounting standards

for SMEs


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Introduction xix

• Discuss solutions to the problem of

differential financial reporting

• Discuss the reasons why the IFRS for

SMEs does not address certain topics.

D PREPARATION OF EXTERNAL REPORTS

FOR COMBINED ENTITIES AND JOINTVENTURES

1. Preparation of group consolidated

external reports

• Explain the concept of a group and the

purpose of preparing consolidated

financial statements

• Explain and apply the definition of

subsidiary companies

• Identify the circumstances and reasoning

when subsidiaries should be excluded

from consolidated financial statements

• Prepare a consolidated statement of

financial position for a simple group

dealing with pre and post acquisition

profits, non-controlling interests and

goodwill

• Explain the need for using coterminous

year-ends and uniform accounting polices

when preparing consolidated financial

statements and describe how it is achievedin practice

• Prepare a consolidated statement of profit

or loss, statement of statement of profit or

loss and other comprehensive income and

statement of changes in equity for a simple

group, including an example where an

acquisition occurs during the year where

there is a non-controlling interest.

2. Business combinations – intra-group

adjustments

• Explain why intra-group transactions

should be eliminated on consolidation

• Report the effects of intra-group trading

and other transactions including:

– Unrealised profits in inventory and

non-current assets

– Intra-group loans and interest and

other intra-group charges, and

– Intra-group dividends.

3. Business combinations – fair value

adjustments

• Explain why it is necessary for both the

consideration paid for a subsidiary and the

subsidiary's identifiable assets and

liabilities to be accounted for at their fair

values when preparing consolidated

financial statements

• Prepare consolidated financial statements

dealing with fair value adjustments

(including their effect on consolidated

goodwill) in respect of:

– Depreciating and non-depreciating

non- current assets

– Inventory

– Monetary liabilities

– Assets and liabilities (including

contingencies), not included in the

subsidiary's own statement of

financial position.

4. Business combinations – associates and

joint ventures

• Define associates and joint ventures (ie

jointly controlled operations, assets and

entities)

• Prepare consolidated financial statements

to include a single subsidiary and an

associated company or a joint venture.


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xx Introduction

Analysis of past papers

The analysis below shows the elements of the syllabus which have been examined so far under the current paper

including the pilot paper. Further details can be found in the exam focus points in the relevant chapters.

Covered

in Text

chapter

Dec

13

Jun

13

Dec

12

Jun

12

Dec

11

Jun

11

Dec

10

Pilot

Paper

10

Jun

10

Dec

09

Jun

09

Dec

08

Jun

08

Dec

07

Jun

07

Dec

06

International sources of authority

1 The IASB and the regulatory framework

2 Conceptual framework for financialreporting

Elements of financial statements

3 Revenue recognition

4 and 5 Accounting for tangible non-currentassets

6 Accounting for leases

7 Intangible non-current assets andgoodwill

8 Inventories and construction contracts

9 Liabilities - provisions, contingent assetsand liabilities

10 Employee benefits

11 Financial instruments

12 Accounting for taxation

13 Foreign currency translation

14 Accounting for agriculture and mineralresources

15 Share-based payment

Presentation and additional disclosures

16 Presentation of published financialstatements

17 Reporting financial performance

18 Earnings per share

19 Miscellaneous standards: related partydisclosures and segment reporting

20 Reporting for small and medium-sizedentities

Financial reports for combined entities

and joint arrangements

21 Constitution of a group

22 The consolidated statement of financialposition

23 The consolidated statement of profit orloss

24 Accounting for associates

25 Accounting for joint arrangements

26 Current developments


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1

International sources

of authority

R

T


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2


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3

Topic list Syllabus reference

1 The need for a regulatory framework A1

2 International Accounting Standards Board (IASB) A1

3 Other international influences A1

4 Scope and application of IFRSs A1

5 Progress towards global harmonisation A16 Feedback on the IASB A1

7 IFRS 1: First-time adoption of International Financial

Reporting Standards

A1

The IASB and the

regulatory

framework

IntroductionIn this chapter we are concerned with the IASB's relationship with other bodies,

with the way it operates and how IFRSs are produced.

Later in this text we look at some of the theory behind what appears in the

accounts. The most important document in this area is the IASB's Conceptual

Framework for Financial Reporting ( previously the Framework for the

preparation and presentation of financial statements). Since it was published,

all IFRSs have been based on the principles it contains.


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4 1: The IASB and the regulatory framework Part A International sources of authority

Study guide

A INTERNATIONAL SOURCES OF AUTHORITY

A1 The International Accounting Standards Board and the regulatory framework

(a) Discuss the need for international financial reporting standards and possible barriers to this

process(b) Explain the structure and constitution of the IASB and the standard setting process

(c) Progress towards international harmonisation

(d) Account for the first-time adoption of International Financial Reporting Standards

1 The need for a regulatory framework

1.1 IntroductionThe regulatory framework is the most important element in ensuring relevant and faithfully presented

financial information and thus meeting the needs of shareholders and other users.

Without a single body overall responsible for producing financial reporting standards (the IASB) and a

framework of general principles within which they can be produced (the Conceptual Framework ), there

would be no means of enforcing compliance with accounting regulations. Also, accounting regulations

would be unable to evolve in any structured way in response to changes in economic conditions.

1.2 Principles-based versus rules-based systems

A principles-based system works within a set of laid down principles. A rules-based system regulates for

issues as they arise. Both of these have advantages and disadvantages.

The Conceptual Framework , which is discussed in more detail in the following chapter, provides the

background of principles within which standards can be developed. This system is intended to ensure that

standards are not produced which are in conflict with each other and also that any departure from a

standard can be judged on the basis of whether or not it is in keeping with the principles set out in the

Conceptual Framework . This is a principles-based system.

In the absence of a reporting framework, a more rules-based approach has to be adopted. This leads to a

large mass of regulation designed to cover every eventuality, as in the US. As we have seen over the past

few years, a large volume of regulatory measures does not always detect or prevent financial irregularity.

One presumed advantage of rules-based systems is that the exercise of judgement is minimised. Auditors

who fear litigation tend to prefer rules-based systems. It could be that a rules-based approach is

appropriate for controversial areas in accounting.

1.3 Impact of globalisation

The need for harmonised financial reporting standards arises as a result of the globalisation of business

activities and operations. Harmonised financial reporting standards are intended to provide:

A platform for wider investment choice A more efficient capital market Lower cost of capital Enhanced business development

The current reality is that the world's capital markets operate more and more freely across borders. The

impacts of rapid globalisation are encapsulated by the words of Paul Volker, Chairman of the IFRSFoundation Trustees in November 2002, in a speech to the World Congress of Accountants.

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Part A International sources of authority 1: The IASB and the regulatory framework 5

'Developments over the past year and more have strongly reinforced the logic of achieving and

implementing high-quality international accounting standards. In an age when capital flows freely

across borders, it simply makes sense to account for economic transactions, whether they occur in

the Americas, Asia, or Europe, in the same manner. Providing improved transparency and

comparability will certainly help ensure that capital is allocated efficiently. Not so incidentally,

generally accepted international standards will reduce the cost of compliance with multiple national

standards.'

As the modern business imperative moves towards the globalisation of operations and activities, there isan underlying commercial logic that also requires a truly global capital market. Harmonised financial

reporting standards are intended to provide:

A platform for wider investment choice A more efficient capital market Lower cost of capital Enhanced business development

Globally, users of financial statements need transparent and comparative information to help them make

economic decisions.

Since 2005 EU listed companies have been required to use IFRSs to prepare their consolidated financial

statements. This is an important step towards eventual harmonisation.

A question in the December 2011 paper covered the implications to an international organisation of

switching to IFRS. The June 2004 paper required candidates to discuss lack of commonality between

IFRSs and the requirements of securities exchanges in USA and Japan.

2 The International Accounting Standards Board (IASB)

The organisational structure consists of:

The IFRS Foundation

The IASB The IFRS Advisory Council The IFRS Interpretations Committee

2.1 Introduction

The International Accounting Standards Board is an independent, privately-funded accounting standard

setter based in London.

In March 2001 the IASC Foundation was formed as a not-for-profit corporation incorporated in the USA.

The IASC Foundation is the parent entity of the IASB. In July 2010 it changed its name to the IFRS

Foundation.

From April 2001 the IASB assumed accounting standard setting responsibilities from its predecessor

body, the International Accounting Standards Committee (IASC). This restructuring was based upon the

recommendations made in the Recommendations on Shaping IASC for the Future.

2.2 How the IASB is made up

The 15 members of the IASB come from nine countries and have a variety of backgrounds with a mix of

auditors, preparers of financial statements, users of financial statements and an academic. The Board

consists of 12 full-time members and two part-time members.

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2.3 Objectives of the IASB

The formal objectives of the IASB, formulated in its mission statement are:

(a) To develop, in the public interest, a single set of high quality, understandable and enforceable

global accounting standards that require high quality, transparent and comparable information in

general purpose financial statements

(b) To promote the use and vigorous application of those standards

(c) To work actively with national accounting standard setters to bring about convergence of nationalaccounting standards and IFRS to high quality solutions.

Knowledge of the objectives of the IFRS Foundation is important so as to provide you with the background

to IFRS.

2.4 Structure of the IASB

The structure is as follows.

Source: http://www.ifrs.org/About-us/Pages/How-we-are-structured.aspx

Trustees. The Trustees comprise a group of individuals with diverse geographic and functional backgrounds.

The Trustees appoint the Members of the Board, the IFRS Interpretations Committee and the IFRS Advisory

Council. In addition to monitoring the Foundation's effectiveness and raising its funds, the Trustees will

approve the budget and have responsibility for constitutional changes. Trustees were appointed so that

initially there were six from North America, six from Europe, four from Asia Pacific, and three others from

any area, as long as geographic balance is maintained. Trustees were selected as follows:

(a) The International Federation of Accountants (IFAC) suggested candidates to fill five of the nineteen

Trustee seats and international organisations of preparers, users and academics each suggested

one candidate.

(b) The remaining Trustees are 'at-large' in that they were not selected through the constituency

nomination process.

IFRS Advisory Council. The IFRS Advisory Council provides a formal vehicle for further groups and

individuals with diverse geographic and functional backgrounds to give advice to the Board and, at times, to

advise the Trustees. It comprises about fifty members and meets at least three times a year. It is consulted

by the IASB on all major projects and its meetings are open to the public. It advises the IASB on prioritisation

of its work and on the implications of proposed standards for users and preparers of financial statements.

IFRS Interpretations Committee. The Interpretation Committee provides timely guidance on the

application and interpretation of International Financial Reporting Standards. It deals with newly identified

financial reporting issues not specifically addressed in IFRSs, or issues where unsatisfactory or conflictinginterpretations have developed, or seem likely to develop.

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2.5 IFRS-advantages and disadvantages

The advantages and disadvantages of adopting IFRS have to be considered by each adopting country and

are being widely debated in the US at the moment.

The main advantages are seen to be:

A business can present its financial statements on the same basis as its foreign competitors,making comparison easier.

Cross-border listing will be facilitated, making it easier to raise capital abroad.

Companies with foreign subsidiaries will have a common, company-wide accounting language.

Foreign companies which are targets for takeovers or mergers can be more easily appraised.

The disadvantages are perceived to be:

The cost of implementing IFRS

The belief by some that there is a lower level of detail in IFRS (compared with US GAAP).

Countries which have national standards which are very prescriptive are worried about the principles-

based standards in IFRS which require the application of judgement. This is particularly so in the US. US

accountants are subject to a high degree of litigation and their defence in court is usually that theycomplied with the relevant sub-section of one of the hundreds of detailed standards which make up US

GAAP. They fear that adoption of IFRS will remove this defence.

Question Harmonisation

In accounting terms what do you think are:

(a) The advantages to international harmonisation?

(b) The barriers to international harmonisation?

Answer(a) Advantages of global harmonisation

The advantages of harmonisation will be based on the benefits to users and preparers of accounts,

as follows.

(i) Investors, both individual and corporate, would like to be able to compare the financial results

of different companies internationally as well as nationally in making investment decisions.

(ii) Multinational companies would benefit from harmonisation for many reasons including the

following.

(1) Better access would be gained to foreign investor funds.

(2) Management control would be improved, because harmonisation would aid internalcommunication of financial information.

(3) Appraisal of foreign entities for take-overs and mergers would be more

straightforward.

(4) It would be easier to comply with the reporting requirements of overseas stock

exchanges.

(5) Preparation of group accounts would be easier.

(6) A reduction in audit costs might be achieved.

(7) Transfer of accounting staff across national borders would be easier.

(iii) Governments of developing countries would save time and money if they could adopt

international standards and, if these were used internally, governments of developingcountries could attempt to control the activities of foreign multinational companies in their


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own country. These companies could not 'hide' behind foreign accounting practices which

are difficult to understand.

(iv) Tax authorities. It will be easier to calculate the tax liability of investors, including

multinationals who receive income from overseas sources.

(v) Regional economic groups usually promote trade within a specific geographical region. This

would be aided by common accounting practices within the region.

(vi) Large international accounting firms would benefit as accounting and auditing would be

much easier if similar accounting practices existed throughout the world.

(b) Barriers to harmonisation

(i) Different purposes of financial reporting. In some countries the purpose is solely for tax

assessment, while in others it is for investor decision-making.

(ii) Different legal systems. These prevent the development of certain accounting practices and

restrict the options available.

(iii) Different user groups. Countries have different ideas about who the relevant user groups are

and their respective importance. In the USA investor and creditor groups are given

prominence, while in Europe employees enjoy a higher profile.

(iv) Needs of developing countries. Developing countries are obviously behind in the standard

setting process and they need to develop the basic standards and principles already in placein most developed countries.

(v) Nationalism is demonstrated in an unwillingness to accept another country's standard.

(vi) Cultural differences result in objectives for accounting systems differing from country to

country.

(vii) Unique circumstances. Some countries may be experiencing unusual circumstances which

affect all aspects of everyday life and impinge on the ability of companies to produce proper

reports, for example hyperinflation, civil war, currency restriction and so on.

(viii) The lack of strong accountancy bodies. Many countries do not have strong independent

accountancy or business bodies which would press for better standards and greater

harmonisation.

2.6 The IASB and current accounting standards

The IASB's predecessor body, the IASC, had issued 41 International Accounting Standards (IASs) and on

1 April 2001 the IASB adopted all of these standards and now issues its own International Financial

Reporting Standards (IFRSs). So far fourteen new IFRSs have been issued.

2.7 The IASB and FASB

The IASB is currently involved in a joint project with the FASB (Financial Accounting Standards Board –

the body responsible for setting accounting standards in the USA) to develop a common conceptual

framework. This would provide a sound foundation for developing future accounting standards. The aim isthat future standards should be principles-based and internationally-converged. This represents a

movement away from the rules-based approach which has characterised US accounting standards.

The new framework will build upon the existing IASB and FASB frameworks and take into account

subsequent developments.

2.8 European Commission and IFRSs

All listed entities in member states have been required to use IFRSs in their consolidated financial

statements since 2005.

To this end the IASB undertook improvements projects, dealing with revisions to IFRS, for example in the

area of materiality, presentation, leases, related parties and earnings per share. This has been matched in, forexample, the UK, by a convergence project, bringing UK GAAP into line with IFRSs where these are better.


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3 Other international influences

The EC, the UN, the IFAC, the OECD and the FASB all influence the harmonisation process.

This section is very much background. There may be one or two points you may be able to use in a

question on a topic for example, such as, harmonisation.

The role of the EC and IOSCO is also useful background knowledge.

3.1 Other international influences

There are a few other international bodies worth mentioning. You are not required to follow their

workings in detail, but knowledge of them will aid your studies and should help your general reading

around the subject area.

3.1.1 IASB and the EC/intergovernmental bodies

The European Commission has acknowledged the role of the IASB in harmonising world-wide accounting

rules and EC representatives attend IASB Board meetings and have joined Steering Committees involved in

setting IFRSs. This should bring to an end the idea of a separate layer of European reporting rules.

The EC has also set up a committee to investigate where there are conflicts between EU norms and

international standards so that compatibility can be achieved. In turn, the IASB has used EC directives in

its work.

The IASB also works closely with the United Nations Working Groups of Experts on International

Standards of Accounting and Reporting (UN IASR group), and with the Working Group in Accounting

Standards of the Organisation for Economic Co-operation and Development (OECD Working group). These

bodies support harmonisation and improvement of financial reporting, but they are not standard-setting

bodies and much of their output draws on the work of the IASB (eg using the IASB's Framework

document).

3.1.2 United Nations (UN)

The UN has a Commission and Centre on Transnational Reporting Corporations through which it gathers

information concerning the activities and reporting of multinational companies. The UN processes are

highly political and probably reflect the attitudes of the governments of developing countries to

multinationals. For example, there is an inter-governmental working group of 'experts' on international

standards of accounting and reporting which is dominated by the developing countries.

3.1.3 International Federation of Accountants (IFAC)

The IFAC is a private sector body established in 1977 and which now consists of over 100 professional

accounting bodies from around 80 different countries. The IFAC's main objective is to co-ordinate the

accounting profession on a global scale by issuing and establishing international standards on auditing,

management accounting, ethics, education and training. You are already familiar with the International

Standards on Auditing produced by the IAASB, an IFAC body. The IFAC has separate committees working

on these topics and also organises the World Congress of Accountants, which is held every five years. The

IASB is affiliated with IFAC.

3.1.4 Organisation for Economic Co-operation and Development (OECD)

The OECD was established in 1960 by the governments of 21 countries to 'achieve the highest sustainable

economic growth and employment and a rising standard of living in member countries while maintaining

financial stability and, thus, to contribute to the world economy'. The OECD supports the work of the IASB

but also undertakes its own research into accounting standards via ad hoc working groups. For example,

in 1976 the OECD issued guidelines for multinational companies on financial reporting and non-financial

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disclosures. The OECD appears to work on behalf of developed countries to protect them from the extreme

proposals of the UN.

3.1.5 International Organisation of Securities Commissions (IOSCO)

IOSCO represents the world's securities markets regulators and has worked closely with the IASB on the

development of standards. In 2000 it recommended to all its members that they allow multinational users

to submit financial statements based on IFRS.

4 Scope and application of IFRSs

4.1 Setting of International Financial Reporting Standards

IFRSs are developed through a formal system of due process and broad international consultation

involving accountants, financial analysts and other users and regulatory bodies from around the world.

4.2 Due process

The overall agenda of the IASB will initially be set by discussion with the IFRS Advisory Council. The

process for developing an individual standard would involve the following steps.Step 1 During the early stages of a project, the IASB may establish an Advisory Committee to give

advice on issues arising in the project. Consultation with the Advisory Committee and the

IFRS Advisory Council occurs throughout the project.

Step 2 IASB may develop and publish Discussion Papers for public comment.

Step 3 Following the receipt and review of comments, the IASB would develop and publish anExposure Draft for public comment.

Step 4 Following the receipt and review of comments, the IASB would issue a final InternationalFinancial Reporting Standard.

The period of exposure for public comment is normally 90 days. However, in exceptional circumstances,

proposals may be issued with a comment period of 60 days. Draft IFRS Interpretations are exposed for a60 day comment period.

4.3 Co-ordination with national standard setters

Close co-ordination between IASB due process and due process of national standard setters is important

to the success of the IASB's mandate.

The IASB is exploring ways in which to integrate its due process more closely with national due process.

Such integration may grow as the relationship between the IASB and national standard setters evolves. In

particular, the IASB is exploring the following procedure for projects that have international implications.

(a) IASB and national standard setters would co-ordinate their work plans so that when the IASB starts

a project, national standard setters would also add it to their own work plans so that they can playa full part in developing international consensus. Similarly, where national standard setters start

projects, the IASB would consider whether it needs to develop a new Standard or review its

existing Standards. Over a reasonable period, the IASB and national standard setters should aim to

review all standards where significant differences currently exist, giving priority to the areas where

the differences are greatest.

(b) National standards setters would not be required to vote for the IASB's preferred solution in their

national standards, since each country remains free to adopt IASB standards with amendments or

to adopt other standards. However, the existence of an international consensus is clearly one factor

that members of national standard setters would consider when they decide how to vote on

national standards.

(c) The IASB would continue to publish its own Exposure Drafts and other documents for public

comment.

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(d) National standard setters would publish their own exposure document at approximately the same

time as IASB Exposure Drafts and would seek specific comments on any significant divergences

between the two exposure documents. In some instances, national standard setters may include in

their exposure documents specific comments on issues of particular relevance to their country or

include more detailed guidance than is included in the corresponding IASB document.

(e) National standard setters would follow their own full due process, which they would ideally choose

to integrate with the IASB's due process. This integration would avoid unnecessary delays in

completing standards and would also minimise the likelihood of unnecessary differences between

the standards that result.

4.4 IASB liaison members

Seven of the full-time members of the IASB have formal liaison responsibilities with national standard

setters in order to promote the convergence of national accounting standards and International Financial

Reporting Standards. The IASB envisages a partnership between the IASB and these national standard

setters as they work together to achieve convergence of accounting standards world-wide.

In addition all IASB members have contact responsibility with national standards setters not having liaison

members and many countries are also represented on the IFRS Advisory Council.

4.5 Scope

Any limitation of the applicability of a specific IFRS is made clear within that standard. IFRSs are not

intended to be applied to immaterial items, nor are they retrospective . Each individual IFRS lays out its

scope at the beginning of the standard.

4.5.1 Application

Within each individual country local regulations govern, to a greater or lesser degree, the issue of

financial statements. These local regulations include accounting standards issued by the national

regulatory bodies and/or professional accountancy bodies in the country concerned.

The IASB concentrated on essentials when producing IFRSs. They tried not to make IFRSs too complex,

because otherwise they would be impossible to apply on a worldwide basis.

IFRSs/IASs do not override local regulations on financial statements. Financial statements prepared in

accordance with IFRS should simply disclose the fact where IFRSs/IASs are complied with in all material

respects. Members of the IASB in individual counties will attempt to persuade local authorities, where

current regulations deviate from IFRSs/IASs, that the benefits of harmonisation make local change

worthwhile.

The following is our brief summary of the main points.

It is difficult if not impossible to comply with both local regulations /statutes as well as IFRS/IAS.

In the past the regulatory bodies have either amended their standards and/or lobbied for changes inthe regulations/statutes.

Financial statements do not comply with the requirements of IAS, as per IAS 1, unless allIFRSs/IASs are complied with

It is not appropriate to try to rectify non-compliance by resorting to disclosure or explanatorymaterial.

A pragmatic and practical response may be to prepare two sets of financial statements

– Set 1 For local filing purposes and complying with local regulations

– Set 2 For international publication purposes and complying with IASs/IFRSs.

Note. The company might also resort to the fair presentation override.


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4.6 Interpretation of IFRSs/IASs

The IFRS Interpretations Committee assists the IASB by improving existing Standards. It was established

in July 2010, and replaced the IFRIC (International Financial Reporting Interpretations Committee), which

had itself replaced the Standing Interpretations Committee (SIC) in 2002.

The IFRS Interpretations Committee has two main responsibilities:

Review, on a timely basis, newly identified financial reporting issues not specifically addressed in

IFRSs

Clarify issues where unsatisfactory or conflicting interpretations have developed, or seem likely todevelop in the absence of authoritative guidance, with a view to reaching a consensus on the

appropriate treatment.

The IFRS Interpretations Committee also helps the IASB move towards international harmonisation by

working with its equivalent national-level bodies (such as the UITF in the UK).

The IFRS Interpretations Committee, like the IASB itself, adopts a principle-based approach. Its intention

is to provide guidance that is in line with the rest of the IFRSs. It therefore bases itself, like each of the

individual Standards, first and foremost on the IASB Framework . It will then look at any relevant

IFRSs/IASs for principles applying the Conceptual Framework to that particular area. It is absolutely

essential to the work of the IFRS Interpretations Committee that its interpretations are in line with IASBFramework principles, rather than any other accounting principles.

The IFRS Interpretations Committee then in turn informs the IASB of any inadequacies that it finds in the

Conceptual Framework or in existing IFRSs. If it believes that they should be modified or that a new

Standard should be developed, the IFRS Interpretations Committee informs the IASB so that it can

consider whether or not to do so. This helps to ensure that the Conceptual Framework and existing IFRSs

are kept up to date for the actual financial reporting issues that the IFRS Interpretations Committee has

found with them.

The IFRS Interpretations Committee develops its interpretations through a due process of consultation and

debate which includes making Draft Interpretations available for public comment. The IFRS Interpretations

Committee's Interpretations that it makes publicly available are the consensus views that it has reached as

a result of this process.

The role of the IFRS Interpretations Committee is another area which could form the basis of a small

question.

4.6.1 Authority and application of IFRS Interpretations Committee Interpretations

IFRS Interpretations Committee Interpretations carry the same authority as IFRSs, in the sense that they

set out consensus views that entities must adhere to if they describe their financial statements as being

prepared in accordance with IFRS.

IFRS Interpretations Committee Interpretations are applicable from the date of issue or if they specify one,

from their effective date. Some Interpretations may contain 'transitional provisions' that apply to their firstapplication.

An Interpretation then ceases to apply when it is overridden by a new IFRS (or other authoritative IASB

document). When this happens, this would be mentioned in the Exposure Draft of the new, overriding IFRS

(or other document). The IASB would then inform the IFRS Interpretations Committee when this happens.

4.7 IFRS Interpretations Committee due process

Interpretations of IFRS are developed through an international due process that involves accountants,

financial analysts and other users of financial statements, the business community, stock exchanges,

regulatory and legal authorities, academics and other interested individuals and organisations from around

the world. The IFRS Interpretations Committee discusses technical matters in meetings that are opento public observation. The due process for each project normally, but not necessarily, involves the

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following steps (the steps that are required under the terms of the Constitution are indicated by an

asterisk*):

(a) Staff work to identify and review all the issues associated with the topic and to consider the

application of the IASB's Conceptual Framework to the issues

(b) Study of national accounting requirements and practice and an exchange of views about the issues

with national standard setters, including national committees that have responsibility for

interpretations of national standards

(c) Publication of a draft Interpretation for public comment if no more than three of the IFRS

Interpretations Committee's members have voted against the proposal *

(d) Consideration of all comments received on a draft Interpretation within a reasonable period of time *

(e) Approval by the IFRS Interpretations Committee of an Interpretation if no more than three of the

IFRS Interpretations Committee's members have voted against the Interpretation after considering

public comments on the draft Interpretation

(f) Approval of the Interpretation by at least eight votes of the Board

5 Progress towards global harmonisation

Harmonisation is always a hot topic and could come up in your exam as a small discursive question.

You should try to keep up to date by reading publications such as the Financial Times, the Economist and

articles posted on the ACCA website.

Close co-ordination between IASB due process and due process of national standard setters is important

to the success of the IASB's mandate.

The IASB is exploring ways of further integrating its due process with that of national standard setters.

This integration may grow as the relationship between IASB and national standard setters evolves. In

particular, the IASB is exploring the following procedure for projects that have international implications.

(a) IASB and national standard setters would co-ordinate their work plans so that when the IASB starts

a project, national standard setters would also add it to their own work plans so that they can play

a full part in developing international consensus. Similarly, where national standard setters start

projects, the IASB would consider whether it needs to develop a new standard or review its existing

standards. Over a reasonable period, the IASB and national standard setters should aim to review

all standards where significant differences currently exist, giving priority to the areas where the

differences are greatest.

(b) National standards setters would not be required to vote for IASB's preferred solution in their

national standards, since each country remains free to adopt IASB standards with amendments or

to adopt other standards. However, the existence of an international consensus is clearly one factor

that members of national standard setters would consider when they decide how to vote on

national standards.

(c) The IASB would continue to publish its own Exposure Drafts and other documents for publiccomment.

(d) National standard setters would publish their own exposure document at approximately the same

time as IASB Exposure Drafts and would seek specific comments on any significant divergences

between the two exposure documents. In some instances, national standard setters may include in

their exposure documents specific comments on issues of particular relevance to their country or

include more detailed guidance than is included in the corresponding IASB document.

(e) National standard setters would follow their own full due process, which they would ideally choose

to integrate with the IASB's due process. This integration would avoid unnecessary delays in

completing standards and would also minimise the likelihood of unnecessary differences between

the standards that result.

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5.1 IASB liaison members

Seven of the full-time members of the IASB have formal liaison responsibilities with national standard

setters in order to promote the convergence of national accounting standards and International Financial

Reporting Standards. The IASB envisages a partnership between the IASB and these national standard

setters as they work together to achieve convergence of accounting standards world-wide.

In addition all IASB members have contact responsibility with national standards setters not having liaison

members and many countries are also represented on the IFRS Advisory Council.

This topic is likely to be examined as a short discussion question.

5.2 World-wide effect of IFRSs and the IASB

The IASB, and before it the IASC, has now been in existence for around 39 years, and it is worth looking at

the effect it has had in that time.

As far as Europe is concerned, the consolidated financial statements of many of Europe's top

multinationals are already prepared in conformity with national requirements, EC directives and IASs.

These developments have been given added impetus by the internationalisation of capital markets. As

discussed, IFRSs/IASs have been implemented in EU since 2005.In Japan, the influence of the IASB had, until recently, been negligible. This was mainly because of links in

Japan between tax rules and financial reporting. The Japanese Ministry of Finance set up a working

committee to consider whether to bring national requirements into line with IFRSs/IASs. The Tokyo Stock

Exchange has announced that it will accept financial statements from foreign issuers that conform with

home country standards, which would include IFRS.

The Japanese standpoint was widely seen as an attempt to attract foreign issuers, in particular companies

from Hong Kong and Singapore. As these countries base their accounting on international standards, this

action is therefore implicit acknowledgement by the Japanese Ministry of Finance of IFRS/IAS

requirements.

In America, the Securities and Exchange Commission (SEC) agreed in 1993 to allow foreign issuers (of

shares, etc) to follow IFRS/IAS treatments on certain issues, including cash flow statements under IAS 7.The overall effect is that, where an IFRS/IAS treatment differs from US GAAP, these treatments will now be

acceptable. The SEC is now supporting the IASB because it wants to attract foreign listings.

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The following table summarises the status for listed companies as at June 2012:

Country Status for listed companies

Argentina Required for fiscal years beginning on or after 1 January 2012

AustraliaRequired for all private sector reporting entities and as the basis for

public sector reporting since 2005

Brazil Required for consolidated financial statements of banks and listedcompanies from 2013 and for individual company accounts

progressively since January 2008

CanadaRequired since 1 January 2011 for all listed entities and permitted for

private sector entities including not-for-profit organisations

China Substantially converged national standards

European UnionAll member states of the EU are required to use IFRSs as adopted by

the EU for listed companies since 2005

France Required via EU adoption and implementation process since 2005

Germany Required via EU adoption and implementation process since 2005

India India is converging with IFRSs phased in from 2014.

IndonesiaConvergence process ongoing; a decision about a target date for full

compliance with IFRSs is expected to be made in 2012

Italy Required via EU adoption and implementation process since 2005

JapanPermitted since 2010 for a number of international companies;

decision about mandatory adoption by 2016 expected around 2012

Mexico Required from 2012

Republic of Korea Required since 2011

Russia Required from 2012

Saudi ArabiaRequired for banking and insurance companies. Full convergence with

IFRSs currently under consideration.

South Africa Required for listed entities since 2005

Turkey Required for listed entities since 2005

United Kingdom Required via EU adoption and implementation process since 2005

United States

Allowed for foreign issuers in the US since 2007; target date for

substantial convergence with IFRSs was 2011 and decision about

possible adoption for US companies has been put back for the

foreseeable future.

Source: http://www.ifrs.org/Use-around-the-world/Pages/Use-around-the-world.aspx

However, there are several countries where the use of IFRSs/IASs are not permitted. The following are

some of the countries, but the list is not exhaustive: Bangladesh, Iran, Malaysia, Pakistan, Senegal,

Taiwan, Thailand, Tunisia and Vietnam.

5.3 Harmonisation in Europe

The objective of the European Commission (EC) is to build