Anthony CareyRSM InternationalECMI-CEPS-ICAEW workshopBrussels, 22 November 2005

Reflecting economic reality: Challenges in moving from theory to practice

What is economic reality?

Hicksian concept of income

Review of key areas from economic reality perspective

Properties (including investment properties)

Intangibles/business combinations

Financial Instruments

Pensions

Deferred taxation

Properties

Hold at cost or revaluation

Depreciation

Operating leases

Intangibles

Allocation of purchase price

Inclusion of contingent assets/liabilities in PPA

Non-recognition of internally generated goodwill

Barriers to carrying internally generated intangibles at a valuation

Non-amortisation of acquired goodwill/impairment test

Acquisitions on first implementation of IFRS

Financial Instruments

Hedge accounting

Issues relating to measurement at fair value

Pensions

Use of corridor/spreading of actuarial gains or losses

Legacy employees

Assumptions

Deferred taxation

Impact of revaluations

Discounting

The sources of challenge to economic reality

Forecasting uncertainty

Valuation methodologies

Estimation in allocation

Accounting conventions

Changing price levels

Standard-setting processes

Relevance and reliability

Where do you strike the balance?

Depth of markets varies – important issue internationally

Need for debate – risks v benefits of alternative approaches

Need to set standard-setting in context

Information needed on:

Assumptions

Valuation methodologies

Independence of valuations

Forecasts v out-turns

Good quality reporting

Relies on:

Accounting standard-setting

Auditing

Audit inspection

Financial reporting enforcement

Looking ahead

Important focus on MD&A

Thorough review of conceptual framework

Learn from practical experience of implementing IFRS

More research on users’ needs on intangibles

Focus on quality of reporting not just standard-setting

Fostering the right culture

A busy agenda!