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News

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Study on impact of expensing stock options

01 Dec 2005

Standard & Poor's has published a report of the impact of expensing stock options on the S&P 500 companies.

FAS 123(R) requires expensing of stock options (mandatory for most SEC registrants in 2006). IFRS 2 is nearly identical to FAS 123(R). S&P found:

  • Option expense will reduce S&P 500 earnings by 4.2%. Information Technology is affected the most, reducing earnings by 18%.... P/E ratios for all sectors will be increased, but will remain below historical averages.
  • The impact of option expensing on the Standard & Poor's 500 will be noticeable, but in an environment of record earnings, high margins and historically low operating price-to-earnings ratios, the index is in its best position in decades to absorb the additional expense.
S&P takes issue with those companies that try to emphasise earnings before deducting stock option expense and with those analysts who ignore option expensing. The report emphasises that:

Standard & Poor's will include and report option expense in all of its earnings values, across all of its business lines. This includes Operating, As Reported and Core, and applies to its analytical work in the S&P Domestic Indices, Stock Reports, as well as its forward estimates. It includes all of its electronic products.... The investment community benefits when it has clear and consistent information and analyses. A consistent earnings methodology that builds on accepted accounting standards and procedures is a vital component of investing. By supporting this definition, Standard & Poor's is contributing to a more reliable investment environment.

The current debate as to the presentation by companies of earnings that exclude option expense, generally being referred to as non-GAAP earnings, speaks to the heart of corporate governance. Additionally, many equity analysts are being encouraged to base their estimates on non-GAAP earnings. While we do not expect a repeat of the EBBS (Earnings Before Bad Stuff) pro-forma earnings of 2001, the ability to compare issues and sectors depends on an accepted set of accounting rules observed by all. In order to make informed investment decisions, the investing community requires data that conform to accepted accounting procedures. Of even more concern is the impact that such alternative presentation and calculations could have on the reduced level of faith and trust investors put into company reporting. The corporate governance events of the last two-years have eroded the trust of many investors, trust that will take years to earn back. In an era of instant access and carefully scripted investor releases, trust is now a major issue.

Click to download The Impact of Option Expensing on S&P 500 Earnings (PDF 399k). Please note that the report remains copyright Standard & Poor's, all rights reserved, and is posted here with the kind permission of S&P.
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EC begins study of limitation of auditor liability

01 Dec 2005

The European Commission has formed a European Forum on Auditors' Liability to gather market players' views on limiting financial burdens for auditors.

Members include Hendrik Descheemaeker, President of the Deloitte Board in Belgium. Early in 2006 the Commission will launch a study on the economic impact of alternative liability regimes, competition in the market, and availability of insurance. The forum will provide data for this study and will give feedback on proposals. The results of the study will be available in autumn 2006. The Forum is expected to complete its work by 31 December 2006. Click for:
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PCAOB report on audits of internal controls

01 Dec 2005

The US Public Company Accounting Oversight Board (PCAOB) has published a report summarising issues identified in implementing Auditing Standard No.

2 An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements (AS2). The PCAOB's monitoring revealed that some audits "were not as effective or efficient as Auditing Standard No. 2 intends and as the Board expects they can be in the future, given the benefits of experience, adequate time and resources." The report cites specific examples of inefficiency and ineffectiveness. It also explains and clarifies certain aspects of AS2 and amplifies certain guidance it has previously issued. Click for:
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Report from the ARC 30 November 2005 meeting

01 Dec 2005

The Accounting Regulatory Committee of the European Commission met on 30 November 2005 in Brussels.

Key agenda items:

  • The Commission noted that a question has arisen regarding what date should be used for the applicability of endorsed IFRS? This is especially relevant where the IASB publishes a standard before the balance sheet date of a company but it is endorsed by the EU and published in the Official Journal only after that date. The Commission informed Member States that Regulations endorsing IFRS published in the Official Journal and entering into force after the balance sheet date but before the date the financial statements are signed can be used in those financial statements if early application is permitted in the Regulation and the related IFRS.
  • The ARC voted unanimously to endorse IFRS 7 Financial Instruments: Disclosures; the 'comparative disclosures' amendments to IFRS 1 and 6; the 'capital disclosures' amendment to IAS 1; the amendments to IAS 39 and IFRS 4 on financial guarantee contracts; and IFRIC 6.
  • The ARC, at its 8 November 2005 meeting, voted unanimously to endorse the amendment to IAS 39 on cash flow hedge accounting of forecast intragroup transactions.
An important consequence of the above is that – assuming IFRS 7 and the various amendments are adopted by the Commission and published in the Official Journal early in 2006 – European IFRS companies can early adopt IFRS 7 and those amendments for calendar 2005 financial statements if they wish. Adoption and publication are expected by March 2006 or earlier. The Commission has posted the foregoing information Here.
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Australian bank regulator makes IFRS proposals

01 Dec 2005

The Australian Prudential Regulation Authority (APRA) has issued a consultation package outlining its proposed prudential response to the adoption of IFRSs in Australia by deposit-taking institutions and general insurers.

APRA's approach addresses a range of issues including fair value measurement, excess of market value over net assets (EMVONA) employer sponsored defined benefit superannuation fund surpluses and deficits, and loan loss provisioning. APRA's Chairman, Dr John Laker, said:

APRA's approach seeks to align its prudential and reporting standards with IFRS-based financial reports to the extent practicable.... Where APRA has chosen to depart from accounting standards, it has done so in the interests of depositors and policyholders and after taking into account the approach of other prudential regulators.

The consultation package includes draft prudential standards, guidance notes, and reporting forms. Comments are due by 16 January 2006. The standards will come into force from 1 July 2006.
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Near-final draft of revised IFRS 4 disclosure guidance

01 Dec 2005

The IASB has posted to the subscriber area of its Website a near-final draft of Revised Guidance on Implementing IFRS 4 Insurance Contracts.

The revised guidance relates to the disclosure sections of IFRS 4. Those disclosures are intended to help the users of an insurer's financial statements evaluate the nature and extent of risks arising from insurance contracts.
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Agenda for the December 2005 IASB meeting

30 Nov 2005

The IASB will hold its monthly Board meeting at its offices, 30 Cannon Street, London, on Tuesday to Friday, 13-16 December 2005. The agenda for the meeting is set out below. .

The IASB will hold its monthly Board meeting at its offices, 30 Cannon Street, London, on Tuesday to Friday, 13-16 December 2005. The agenda for the meeting is set out below.

Board Meeting Agenda

13-16 December 2005, London

Tuesday 13 December 2005 (Afternoon only)

Wednesday 14 December 2005 Thursday 15 December 2005 Friday 16 December 2005 (Morning Only)
  • Technical Plan
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Measurement discussion paper may now be downloaded

30 Nov 2005

Our News Story of 17 November 2005 reported that the IASB has invited comment on a Canadian Discussion Paper Measurement Bases for Financial Reporting - Measurement on Initial Recognition.

The Discussion Paper is now available for download without charge from the IASB Website.
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IAS Plus Newsletters for third quarter 2005 are posted

29 Nov 2005

The November 2005 IAS Plus newsletter has been published.

The newsletter reports on the 3rd quarter 2005 activities of the IASB, the IFRIC, and the IASC Foundation, and also on worldwide issues and events relating to international financial reporting. The Asia-Pacific edition has the same 24-page news content as the Global Edition plus five pages of accounting standards updates for the Asia-Pacific region. You will find all Past IAS Plus Issues Here.
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EFRAG endorsement status reports

29 Nov 2005

The European Financial Reporting Advisory Group (EFRAG) has begun publishing a report showing the status of endorsement, under the EU Accounting Regulation, of each IFRS, including standards, interpretations, and amendments.

We are grateful to EFRAG for giving us permission to post them:

We have made a separate page for EFRAG status reports. We will announce each update as a news item.

You can also find Official EC Information about the Status of Adoption on the European Commission's website.

 

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