Inconsistent application

With regard to inconsistency, the true benefit of IFRS can only be realised through enabling a better comparison of similar entities across national boundaries, which, in turn, will provide enhanced transparency for markets and a more efficient global capital market. We also acknowledge that, under a principles-based accounting framework, there may be relevant economic and legal differences between countries such that similar transactions might legitimately be reported in different ways. However, should local custom or national interest operate to threaten the consistent application of IFRS, much of this anticipated benefit could be lost.

IASB Framework

For the development of the IFRS framework itself, there are concerns that the standards in some areas are of lesser quality than those that they have replaced. There is also a growing concern that IFRS will be interpreted and audited in a more prescriptive and rules-based way than was typically the case under UK GAAP – a risk of more 'form-over-substance' when agreeing accounting treatments. Going forward, the main areas of concern arise, in part from convergence with US GAAP and in part from the move towards 'decision usefulness' and an increasing emphasis on fair-value accounting.... Should the move towards fair value for all assets and liabilities advance significantly, many question whether the resulting information would remain sufficiently reliable to enable investors to make informed decisions about the effectiveness of the stewardship of their companies. At the same time, the ability of the audit profession to apply judgement on what constitutes a 'true and fair' view might be ever more constrained by detailed rules, resulting in a 'presents fairly in accordance with' model of financial reporting. The progress made over the next 18 to 36 months will be critical in determining whether the potential benefits of IFRS and convergence are realised, or whether the costs connected and the ultimate outcomes experienced are potentially disproportionate, or even negative, for UK stakeholders.

At its February 2007 meeting, the Australian Accounting Standards Board considered staff papers on differential reporting and small and medium-sized entities (SMEs) and tentatively decided that Australia should adopt a two tiered approach in relation to Australian corporate entities, as follows:

• Australian equivalents to IFRSs (A-IFRSs) will be required for corporates that are publicly accountable
• an Australian version of the IFRS for SMEs will be adopted by corporates that are not publicly accountable but which prepare general purpose financial reports.

The AASB decided that under a revised financial reporting regime, all financial reports that are prepared and lodged with Australia Securities and Investments Commission under the Corporations Act 2001 would be regarded as general purpose financial reports, because they are available on a public register for access by users. Once the new reporting regime (based on IFRSs and the IFRS for SMEs) is put in place, this decision will effectively remove the 'reporting entity' concept for corporate entities that report under the Corporations Act 2001.

A press release issued by the Institute of Certified Public Accountants of Ireland said: 'The Institute of Certified Public Accountants positively welcomes the publication by the International Accounting Standards Board (IASB) of draft guidance on International Financial Reporting Standard for Small and Medium-sized Entities.... This initiative is designed to facilitate a move towards one common set of international financial reporting standards without disadvantaging SMEs.' Click for CPA Ireland Press Release (PDF 132k).

The United Kingdom Accounting Standards Board (ASB) has issued a press release welcoming the publication of the Exposure Draft of an IFRS for SMEs (see 15 February 2007 news item). The ASB is currently defining its strategy and approach to this Exposure Draft. The Board is minded to issue the ED of IFRS for SMEs for consultation with an accompanying ASB invitation to comment (ITC) giving an insight into the Board's initial views on the Exposure Draft and potential implications for UK and Irish entities. The ITC would also set out with any additional questions the ASB considers appropriate. The ITC would also aim to provide an analysis of the significant differences between the existing FRSSE [UK Financial Reporting Standard for Smaller Entities] and the proposed IFRS for SMEs. The ASB encourages UK and Irish constituents to comment both to our forthcoming consultation and directly to the IASB. The IASB has asked for comments on the Exposure Draft by 1 October 2007. The ASB plans to publish its formal comments by the same date after considering UK constituents feedback to their proposed consultation paper on the IFRS for SMEs Exposure Draft. Click for ASB Press Release (PDF 16k).

• If a parent company in the EU is not required by the Seventh Directive to prepare consolidated accounts, can it issue IFRS 'annual accounts' (its own separate financial statements) in conformity with IFRSs? In almost all circumstances, if a company is a parent, IAS 27 requires the preparation of consolidated financial statements. Under IAS 27, the parent's separate financial statements are an additional set of financial statements not required by IAS 27. The Commission has concluded, however, that the Seventh Directive takes precedence in Europe in determining when consolidated statements must be prepared. Therefore, if the Seventh Directive does not require consolidated financial statements, a parent company can prepare its separate financial statements using IFRSs. The Commission's view is that "the IAS 27 requirements to prepare consolidated accounts do not apply." Click for Commission's Opinion (PDF 25k).
• Can a company that prepares both individual and consolidated accounts in accordance with IFRSs adopted for use in Europe issue the individual accounts before issuing the consolidated accounts? In rejecting an agenda topic in March 2006, the IFRIC concluded that separate financial statements issued before consolidated financial statements could not be considered to comply with IFRSs, because separate financial statements are required by IAS 27 paragraph 42 to identify the consolidated financial statements to which they relate. However, the European Commission has concluded that the interpretation under the EU IAS Regulation is different. If a company chooses or is required to prepare its annual accounts in accordance with IFRSs as adopted by the EU, it is permitted to prepare and file them independently from the preparation and filing of its consolidated accounts – and thus in advance – where the national law transposing the Directives requires or permits separate publication. Click for Commission's Opinion (PDF 25k).

Likewise, as you have just heard from the prior panel, the Commission is committed to the roadmap announced in 2005 that sets out a timeline for the Commission's consideration of the various steps necessary to make a determination on the elimination of the reconciliation requirement for foreign private issuers that use International Financial Reporting Standards ('IFRS'). As we begin Year 2 of IFRS, we are working through application issues with foreign issuers and continue dialogue with international regulators to analyze the faithfulness and consistency of the application and interpretation of IFRS in financial statements.

We also continue to monitor the progress of the IASB and FASB in their convergence projects. I strongly support these efforts and am committed to identifying issues and obstacles early in order to move toward our goal in a timely manner.