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UK FSA risk outlook includes IFRSs

22 Feb 2007

The United Kingdom Financial Services Authority has published Financial Risk Outlook 2007.

This annual publication is intended to raise awareness of the priority risks which the FSA believes it, along with providers and users of financial services, should consider. In the areas of accounting and auditing, the FSA sees three potential risks stemming from:
  • the move to International Financial Reporting Standards
  • the convergence between IFRSs and US Generally Accepted Accounting Principles
  • the concentration of audit services, and international coordination.
In the area of financial reporting, the FSA sees "two major risks to the continued success of IFRSs": Inconsistent application across national economies, and the potential direction of the future development of the IFRS Framework, including decision-usefulness, greater emphasis fair value accounting, and convergence with US GAAP. Some excerpts:

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.

Notes from day 2 of the February 2007 IASB meeting

22 Feb 2007

The International Accounting Standards Board held its February 2007 Board meeting at its offices, 30 Cannon Street, London, on Tuesday through Thursday 20-22 February 2007.

Click here for Complete Meeting Notes (preliminary and unofficial) taken by Deloitte observers at the February 2007 IASB meeting.

IASCF trustees publish IFRIC's Due Process Handbook

22 Feb 2007

The trustees of the IASC Foundation (IASCF) have published the Due Process Handbook for the International Financial Reporting Interpretations Committee (IFRIC).

When the trustees initiated a review of the organisation's Constitution in November 2003, they identified the resources and effectiveness of the IFRIC as one of the major issues to review. In March 2005 the IASCF invited comment on a consultation paper IFRIC Review of Operations, and in May 2006 the trustees published the IFRIC due process handbook in draft for public comment. The Trustees approved an amended version at their meeting in January 2007. The Handbook may be downloaded from the IASB's Website. Click for Press Release (PDF 51k).

Notes from day 1 of the February 2007 IASB meeting

21 Feb 2007

The International Accounting Standards Board held its February 2007 Board meeting at its offices, 30 Cannon Street, London, on Tuesday through Thursday 20-22 February 2007.

Click here for Complete Meeting Notes (preliminary and unofficial) taken by Deloitte observers at the February 2007 IASB meeting.

Market approach to valuing share-based payment

21 Feb 2007

Because employee stock options and other share-based payment awards do not trade in a market, most companies use pricing models, such as the Black-Scholes-Merton model, to measure an award's grant date fair value for accounting purposes under IFRS 2 Share-based Payment and under the comparable US standard FAS 123(R).

In the United States, Zions Bancorporation believes, and the SEC concurs, that it has sufficiently designed an instrument to serve as a market-based approach to valuing employee share-based payment awards, including employee stock options. Based on a test auction, Zions's approach suggests a value of 68-72 percent of the value of the same stock option as determined by the Black-Scholes-Merton model. Deloitte (United States) has prepared a Special Issue of the Heads Up Newsletter (PDF 78k) explaining Zions's model, the SEC's views about it, and how it could be applied for accounting purposes. There are hyperlinks to Zions's report and related SEC reports and commentary.

Support for SME ED in Australia, Ireland, UK

20 Feb 2007

Australia, Ireland and the United Kingdom respond positively to the IASB's draft guidance on IFRSs for small and medium-sized entities.


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).

United Kingdom
United Kingdom

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).

EC opinions on consolidated and separate statements

20 Feb 2007

At the 2 February 2007 meeting of the European Commission's Accounting Regulatory Committee, the Commission presented two final interpretive opinions dealing respectively with the meaning of 'annual accounts' and the possibility to issue annual accounts prepared in accordance with IFRS before consolidated ones.

Both relate to application of the requirements of IAS 27 Consolidated and Separate Financial Statements within the European Union:
  • 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).

Special EFRAG meeting on service concessions

19 Feb 2007

The European Financial Reporting Advisory Group will hold an extra meeting on IFRIC 12 Service Concession Arrangements on Friday 9 March 2007 in its offices 13/14 Avenue des Arts, Brussels.

This is in addition to the scheduled EFRAG meeting on 14-16 March 2007. Our news story of 13 February 2007 reported that EFRAG's tentative view is to recommend that the European Commission endorse IFRIC 12 for use in Europe. However, a significant minority of EFRAG members disagree. Here is a link to download EFRAG's Draft Comment Letter (DOC 132k). Comments are requested by 28 February 2007.

SEC Commissioner speaks about IFRSs

18 Feb 2007

Kathleen L. Casey, the newest member of the US Securities and Exchange Commission, spoke about International Financial Reporting Standards in her remarks at the Practicing Law Institute's SEC Speaks conference.

 Click for Commissioner Casey's Remarks (PDF 47k). An excerpt:

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.

IFRS implementation review panel formed in Netherlands

16 Feb 2007

The Netherlands Authority for Financial Markets (Autoriteit Financiele Markten or AFM) has formed a Financial Reporting Committee of 12 external IFRS experts to advise the Authority on the application of IFRSs and the supervision thereof.

Click for AFM's Press Release (PDF 15k). The AFM is responsible for supervising the financial reporting of Dutch listed companies. They have announced that their 2007 reviews of the 2006 financial reporting will focus on the application of IAS 12 Income Taxes and IAS 7 Cash Flow Statements. Click for Letter Sent to Listed Companies (PDF 283k) setting out the results of AFM's review of 2005 reports and example questions for 2006.


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