In May the Accounting Standards Board published seven British
Financial Reporting Exposure Drafts, and the EU wants
International Accounting Standards, themselves under review, to be adopted
throughout the EU by 2005. Philip Dunn outlines the provision of International
Accounting Standards.
press release was issued by the International
Accounting Standards Board early in June and refers to the changes in reporting
requirements to come into use by 2005.
The European Commission has proposed a directive amending the existing European
Union accounting directives. The proposal brings existing EU rules into line with current best practice and complements the International Accounting
Standards (IAS) Regulation, that requires all EU companies listed on a regulated
market to use IAS from 2005 onwards and allows Member States to extend this
requirement to every company (see IP/02/417 IP/02/200). The amendments now
proposed to the Accounting Directives would allow Member States which do not
apply IAS to all companies to move towards similar, high quality financial
reporting.
They would allow appropriate accounting for special purpose vehicles, improve
the disclosure of risks and uncertainties and increase the consistency of audit
reports across the EU. The proposal is an important element in the Financial
Services Action Plan (see IP/00/1269), endorsed by the Lisbon European Committee
as a key element of the creation of an integrated financial services market. It
is also in line with the strategy outlined in the Commission's June 2000
communication on the future of financial reporting in Europe (see IP/00/606).
Internal Market Commissioner Frits Bolkestein said: 'this proposal demonstrates
again our commitment to transparent, high quality financial reporting, applied
consistently across Europe. Shareholders, potential investors and the public
need to know from companies' accounts exactly how well they are performing to be
able to compare like with like. An efficient internal market demands no less.
The amendments to Accounting > Directives complement the policy of moving
towards IAS proposal and has been in preparation since 1999, but the collapse of
Enron serves to underline its importance even more strongly'. The proposed IAS
Regulation would require every EU company listed on a regulated market to
prepare their consolidated accounts in accordance with endorsed IAS from 2005
onwards. Member States may expect this requirement to extend to unlisted
companies and to annual accounts. Where endorsed IAS is not applied, detailed
provisions of the 4th and 7th Accountin
Directives, which this proposal would amend, will continue to act as the basis
of ED accounting requirements. These Directives may therefore continue to apply
to up to 5 million companies in Europe.
The Commission's proposal would bring EU accounting requirements into line with'
modern accounting theory and practice.
In doing so, it would remove all inconsistencies with IAS. Notably, it makes it
more difficult for a company to 'hide' liabilities by setting up article
structures (so-called 'special purpose vehicles') which, in substance/ they
control but which, considering only the shareholdings, appear to be largely
unrelated. This is an important step in the proper treatment of
off-balance-sheet financing.
Given the link, in some Member States, between annual accounts and taxation, it
is important that every Member State move toward IAS at an appropriate pace.
Accordingly, most changes will be implemented as Member State options allowing
gradual alignment of national accounting requirements with IAS'.
This initiative prompted me to write this article to give a brief summary of the
IAS currently in issue.
Framework for the preparation and presentation of financial statements
The IASB outlines its framework as: 'a conceptual accounting framework that sets
out the concepts that underlie preparation and presentation of financial
statements for external users. It was approved in 1989. The IASB Framework
assists the IASB:
· In the development of future IAS and in its review of existing IAS; and
· In promoting the harmonisation of regulations, accounting standards and
procedures relating to presentation of financial statements by providing a basis
for reducing the number of alternative accounting treatments permitted by I AS.
In addition, the Framework may assist:
· Preparers of financial statements in applying IAS and dealing with
topics that are not yet the subject of an IAS.
· Auditors to form an opinion as to whether financial statements
conform with IAS.
· Users of financial statements in interpreting the information
contained in financial state- -:V ments prepared in conformity with IAS; and
· Those who are interested in.-the work of IASB, providing ..-, them
with information about its approach to the formulation of accounting standards.
Summaries of International Accounting Standards
The following is a list of IAS currently in issue:
IAS 1: Presentation of financial statements
IAS 2: Inventories
IAS 7: Cash Flow Statements
IAS 8: Net Profit or Loss for the Period. Fundamental Errors and
Changes in Accounting Policies IAS 10: Events After the Balance Sheet Date
IAS 11: Construction Contracts
IAS 12: Income Taxes
IAS 14: Segment Reporting
IAS 15: Information Reflecting the Effects of Changing Prices
IAS 16: Property, Plant and Equipment
I AS 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 22: Business Combinations
IAS 23: Borrowing Costs
IAS 24: Related Party Disclosures
IAS 26: Accounting and Reporting by Retirement Benefit Plans
IAS 27: Consolidated Financial Statements
IAS 28: Investments in Associates
IAS 29: Financial Reporting in Hyperinflationary Economies
IAS 30: Disclosures in the Financial Statements of Banks and
Similar Financial Institutions IAS 31: Financial Reporting of Interests in Joint
Ventures
IAS 32: Financial Instruments: Disclosure and Presentation
IAS 33: Earnings per Share
IAS 34: Interim Financial Reporting
IAS 35: Discontinuing Operations
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
IAS 1: Presentation of Financial Statements
The standard was revised in 1997 and defines overall considerations for
financial statements and includes such concepts as: going concern, accruals
basis of accounting, consistency of presentation, offsetting, comparative
information, materiality and aggregation, accounting policies and fair
presentation.
The standard prescribes the minimum structure and content of four basic
financial statements: income statement, balance sheet, cash flow statement (IAS
7) and an analysis showing changes in equity.
The standard gives a number of definitions and also illustrative pro formas of
financial statements.
IAS 2: Inventories
The standard became effective in 1995 and its objectives include:
· Inventories should be valued at the lower of cost and net realisable
value.
· Cost should include all relevant costs of bringing the inventories to
their present state and location.
· The benchmark treatment to determine cost is either FIFO or weighted
average cost formula.
· The cost of the inventory should be recognised as an expense in line
with the matching principle.
Other disclosures include: accounting policy, inventories carried by category
and the carrying amount at net realisable value.
IAS 7: Cash Flow Statement
The standard became effective for financial statements after 1 January 1994. Its
structure had an influence on the revision of FRS 1.
· The statement is required and identified in IAS 1, Presentation of
Financial Statements, as a basic financial statement.
· It identifies movement in cash and cash equivalents during the
financial period.
· Cash equivalents are defined as short-term, highly liquid investments.
· The statement should classify the changes in cash and cash equivalents
to operating, investing and financing activities.
IAS 8: Net Profit or Loss for the Period, Fundamental Errors and Changes in
Accounting Policies
Revised in 1993 and effective from 1 January 1994 it provides that:
· Extraordinary items of profit or loss should be separately disclosed
after the profit or loss on ordinary activities.
· Any activities that are abnormal are separately disclosed, usually in
notes.
· Any corrections of fundamental errors should be treated as a prior
period adjustment.
· Changes in accounting policies must be treated retrospectively by
restating the prior periods where possible. » A full statement for the reason
behind the change in policy must be disclosed.
IAS 10: Events After the Balance Sheet Date
Approved by the IASB in March 1999, its objectives are that:
· Adjustments to financial statements for events after the balance sheet
date should relate to further evidence and conditions that existed at the
balance sheet date.
· Adjustments must not be made for events that are indicative and
occurred after the balance sheet date. »
· Dividends proposed or declared after the balance sheet date should not
be recognised as a liability.
· Financial statements must not be prepared on a going concern basis, if
the management determines after the balance sheet date that it is the intention
to liquidate or to cease trading.
· Disclosures must be updated that relate to conditions which existed at
the balance sheet date, based on any new information it received after the
balance sheet date relating to those conditions.
IAS 11: Construction Contracts
The standard became effective in January 1995.
· Where costs and revenues can be estimated reliably to the completion
stage of a contract then they should be recognised by stage of completion.
· Anticipated losses should be recognised at once. Disclosures should
also include:
· Contract revenue should be recognised.
· Basis of determining that revenue.
· Basis of determining the stages of completion.
· Work-in-progress, aggregate costs, recognised profits and losses,
advances and retentions should be reported.
· Amounts due from customers under contract.
IAS 12: Income Taxes
The standard was revised in 1996 and became effective in January 1998. It
requires that:
· Deferred tax liability and/or asset for nearly all temporary
differences be accrued.
· Unused tax losses and credits should be accrued if it is probable that
they will be realised.
· Tax rates used should be those at settlement.
· Capital gains accrue tax at the expected rate.
IAS 14: Segment Reporting
The standard became effective
in July 1998.
It requires that:
· Public Limited Companies must report financial information by
categorising products and services and their geographical distribution.
· The reporting formats are primary or secondary segmentation.
· Disclosures include: revenue; segment assets; liabilities; costs to
acquire assets; depreciation; inter-segment pricing and operating result before
interest and tax.
IAS 15: Information Reflecting the Effects of Changing Prices
The standard was issued in 1989 but is voluntary.
Its objectives include (those formerly embedded in the UK Standard SSAP 16, now
discarded
· Disclosure of information on general buying power or current cost
basis.
· Depreciation adjustment.
· Cost of sales adjustment.
· Monetary items adjustment.
· The overall effect of the above concepts.
IAS 16: Property, Plant and Equipment
The standard became effective in January 1995.
Its requires that:
· Such assets should be recognised when it is probable that future
benefits will flow from them and that their cost may be measured reliably.
· The initial measurement must be based on cost.
· Thereafter, the benchmark is net book value ie depreciated (amortised)
cost but an allowed alternative would be an updated fair value.
· The concepts of depreciation and revaluation are reviewed thoroughly.
· Required disclosures include: reconciliation of movements; capital
commitments; items pledged as security: where assets are revalued historical
amounts must be disclosed and changes in revaluation surplus shown.
IAS 17: Leases
The standard became effective in January 1998.
It is meant to:
· Distinguish between finance and operating leases.
· Define a finance lease as one that transfers all risks and rewards
mostly to the lessee.
· Provide that a finance lease should be capitalised by the losses at the
lower of the fair value and present value of lease payments.
· Ensure that depreciation is calculated on leased assets using useful
life.
· Make a lessee show expense operating lease payments.
· IAS 18: Revenue
The standard became operative in January 1995. It rules that revenue should be
recognised when:
· Substantial risks and rewards of ownership are transferred to the
buyer.
· Managerial span of control has passed.
· The revenue can be measured reliably.
· Economic benefit is expected to flow to the business.
· The costs of the transactions can be measured reliably.
Revenues and related expenses must be matched.
Consideration is also given to both the treatments of interest and dividend
revenues.
IAS 19: Employee Benefits
The standard became effective in 1999 but was amended in 2001.
Its coverage includes post employment benefits including pensions.
Its rules cover:
• Defined contribution plans;
• Defined benefit plans; and
• Other employee benefits.
IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
The standard was introduced in 1984 reformatted in 1994 and amended in 2001.
It rules that:
· Grants must not be credited to equity. Income should be recognised in
such a way as it is matched to related cost.
· Grant aid directly related to assets should be deducted from the cost
or treatment as deferred income.
IAS 21:The Effects of Changes in Foreign Exchange Rates
The standard became effective in 1995 and focuses on:
· Foreign currency transactions.
· Investments in foreign entities that are internal to the parent's
operations.
· Investments in other foreign entities.
· Disclosures.
IAS 22: Business Combinations
The standard became effective in 1995 and has been subject to amendments in 2001
Its objectives include:
· Distinguishing between acquisitions and uniting of interests.
· Considering in-depth acquisition - purchase method of accounting,
including the recognition and treatment of goodwill.
· Uniting of interests - pooling of interests method of accounting.
IAS 23:Borrowing Costs
The standard became effective in 1995.
Its objectives include:
· Setting a standard for the treatment of borrowing costs as expenses.
· Considering alternative treatment of capitalising those attributable to
construction.
· Detailing the treatment of capitalisation of borrowing costs.
IAS 24: Related Party Disclosures
The standard was introduced in 1984 and reformatted in 1991. Its objectives
include:
· Defining related parties.
· Focusing on control and the exercise of significant influence such as
parent-subsidiary relationships, entities under common control, associates,
individuals and important managers.
· Disclosing the nature of relationships and amounts of transactions.
IAS 26: Accounting and Reporting by Retirement Benefit Plans
Introduced in 1986 and reformatted in 1991.
The standard focuses on:
· Accounting and reporting retirement benefit plans.
· Establishing separate standards for reporting by defined benefit plans
and defined contribution plans.
IAS 27: Consolidated Financial Statements
Introduced in 1988, reformatted in 1994 and
altered from 1998 to 2000.
Its objectives include defining a subsidiary company. It lays down that:
· where a parent has one or more subsidiaries then consolidated
statements must be produced;
· that accounts must include all subsidiaries with minor exceptions;
· uniform accounting policies must be followed;
· disclosures should include details of name, country, ownership, nature
of relationship.
IAS 28:Investments in Associates
Originally approved by the board in 1988 and reformatted in 1994 it has been
subject of recent amendment.
The standard defines an associate as an enterprise other than a subsidiary over
which the investor has a significant influence. This influence is said to
exist where an investor owns more than a fifth of the associate.
It rules that:
· accounting for associates in consolidated statements must be on the
equity method;
· associates can be reported as equity or as long-term investments or
revalued amounts;
· the equity method should be discontinued if the investor no longer has
significant influence over the associate and;
· such investments are reported as noncurrent assets.
IAS 29: Financial Reporting in Hyperinflationary Economies
The standard was approved by the board in 1989 and reformatted in 1994.
It defines hyperinflation as when cumulative inflation over three years is 100
per cent or more.
Under such circumstances, financial statements should be presented in a unit
that is current at the balance sheet date.
Comparative figures for earlier periods should be restated in that unit
measure.
IAS 30: Disclosures in the Financial Statements of Banks and Similar Financial Institutions
The standard was introduced in 1990 and reformatted in 1994. Small amendments
were made in 1999.
It lays down that:
· Special disclosures be prescribed for banks and similar financial
institutions.
· The income statement should group income and expense by nature.
· The balance sheet should group assets and liabilities by nature.
It also outlines in depth other required disclosures.
IAS 31: Financial Reporting of Interests in Joint Ventures
The standard was approved by the board in
1990, reformatted in 1994 and subject of minor amendment in 1998 - 2000.
Its objectives include the definition of three types of joint venture a
contractual arrangement subject to joint control):
· Jointly controlled operations.
· Jointly controlled assets.
· Jointly controlled entities.
IAS 32: Financial Instruments: Disclosure and Presentation
The standard was approved by the board in 1995, and was subject to minor
amendment in 1998 and 2000.
Its requirements include:
· Financial instruments should be classified into liabilities and equity.
· Classification should reflect substance not form.
· An obligation to deliver cash or other financial asset is to be treated
as debt.
· Redeemable stock is debt.
· The cost of servicing a financial liability by interest is charged to
profit and loss account.
· Equity financing by dividends is a distribution of equity.
· IAS 33: Earning per Share
The standard was approved by the board in 1997 and became effective in 1998.
The standard only applies to public listed companies.
It requires that:
· Undiluted and diluted net income per ordinary share be disclosed on the
face of the income statement.
· The numerator for basic EPS is profit after minority interest and
preference dividends.
· The denominator for basic EPS is a weighted average outstanding
ordinary share.
IAS 34: Interim Financial Reporting
The standard was
approved by the board in February 1998 and became effective in 1999.
Its objectives include:
· Giving guidance on both presentation and measurement.
· Defining the minimum content of such report.
· Prescribing accounting recognition and measurement principles.
It rules that basic statements include:
· Balance sheet;
· Income statement;
· Changes in equity; and
· Cash flow statement.
· IAS 35: Discontinuing Operations
The standard became effective in January 1999.
It establishes a basis for segregating information on discontinuing operations
from continuing operations.
Required disclosures include:
· A description of the discontinuing operation.
· The business or geographical segment in which it was reported under IAS 14.
· The effective date of discontinuance and date of completion.
· The carrying amounts of assets and liabilities to be disposed of.
· Revenues, expenses and pretax profits.
· Gains or losses recognised on disposal of assets.
· Net cash flows attributable to the operation.
· IAS 36:Impairment of Assets
The standard became effective in July 1999.
Its objectives include:
· Addressing principal accounting for impairment of goodwill, intangible
assets, property plant and equipment.
· Prescribing procedures for testing assets for impairment:
- identifying
- measuring
- recognising
- disclosing.
IAS 37: Provisions, Contingent Liabilities and Contingent Assets
The standard became effective in July 1999.
Its states that:
· Provisions are to be recognised when an entity has a present
obligation as a result of a past event.
· Such provisions should be measured in the balance sheet at the best
estimate of the expenditure.
· A provision should not be reduced by gains from the expected disposal
of assets.
· Provisions should be used only for expenditures for which it was
originally recognised, reversible if an outflow
· of resources is no longer expected.
· IAS 38: Intangible Assets
The standard became effective in 1999, and supersedes IAS 4 Depreciation
Accounting and IAS 9 Research and Development Costs.
It applies to all intangible assets that are not dealt with specifically in
other standards.
· It lays down that an intangible asset should be recognised at cost if:
· It meets the definition of an intangible asset. It must be an
identifiable asset and distinguishable from goodwill.
· It is probable, as with all other assets, that future economic benefit
attributable to the asset will add value to the enterprise.
· Cost can be measured reliably.
· After initial recognition, an intangible asset should be amortised over
its useful economic life.
IAS 39: Financial Instruments: Recognition and Measurement
The standard became effective in January 2001.
It is a comprehensive statement for recognising, measuring and
presenting information relating to financial instruments.
Its provides that:
· Financial assets and liabilities
· are recognised on the balance sheet including all derivatives and are
measured initially at cost.
· After initial recognition, financial assets are measured again at fair
value with a number of exceptions.
· IAS 40: Investment Property
The standard became effective in2001.lt:
· Covers all investment property held by businesses and is not limited to
those, whose main area of activity is concerned with investment property.
· Defines investment property as that which is held to earn rentals or
for capital appreciation, or both.
· Lists what is not included as investment property.
· Lets an enterprise choose to use the fair value model or cost model in
recognising and measuring investment property in financial statements.
IAS 41: Agriculture
This does not become effective until January 2003.'
It is a comprehensive standard prescribing the accounting treatment and
financial statement presentation and disclosures relating to farming.
It deals with treatment of:
· Biological assets
· Agricultural produce
· Grants
· Gains and losses on disposal
· of biological assets
· Depreciation.
International Accounting Standards are becoming more important. UK standards are
now set with regard to international requirements while a European Union
regulation requires all EU listed companies to produce consolidated financial
statements prepared according to international accounting standards by 2005 at
the latest.
IASC operates a website giving information on its standards at www. iasc. org.
uk. It can be contacted on 020 7246 6410
МСФО - A question of standards
