Current Developments and

Potential of future (Global)

Standard

By:

Waqar Ahmad

To:

Berndt Andersson

Introduction:

There are so many professional accounting bodies who are working nationally and

internationally for the development of the accounting regulations. It’s the result of there

continuous effort that we have the accounting standards for the preparation of the accounting

records. My topic is about the developments in the accounting which is only possible due to the

professional bodies.

Due to the globalization and boundary less business operations there was a need of an

international accounting body that develop a common accounting standard which is acceptable

for everyone. Due to the fact in 1972 an idea to form an international accounting standard

committee (IASC) was floated by the different countries. After that in June 1973 an inaugural

meeting was held in London. At that time the members of IASC were Australia, Canada, France ,

Germany , Japan , Holland , UK , Ireland and USA. All the members agreed to form an

international standard for this purpose IASC has started its work and with the continuous effort

in 1975 they were able to publish the IAS 1.

Then in 1989 European Accounting Federation intend for international harmonization and

greater European involvement in IASC. At the same time in 1996 the development of the IAS

principles were completed. In 1997 standing interpatation committee (SIC) formed to check the

IAS before its implementation. Then in 1999 international organization of securities commission

(IOSCO) decided to review the IASC core standards. At the same time in 2000, it was proposed

and approved the restructuring of the IASC and the new IASC constitution.

At the same time European Commission announces a plan for all Europe union listed companies

from no later than 2005 will follow the IASC standard. After the restructuring IASC was

transform into the IASB. Then 2001 IASB started the work for the development of new IAS/IFRS.

Then in 2002 the Commission approved legislation to require IAS/IFRS. At the same period SIC

was transform into international Financial Reporting Committee (IFRC). In 2003 Commission

approved the legislation on IAS/IFRS.

Need and Development of IFRS for SMEs:

The IASB previously considered, in principle, the full IFRS as suitable for all entities, but

recognized at the same time different user needs and cost consideration for SMEs(IASB,

2004,pp.14-15). That’s why IASB decided its mission would allow it to extend its focus also to

SMEs. In 2003, the board voted specific standards for SMEs. Then IASB started its work with

Installment of a working group in 2003 and a hearing of 40 standard-setters. Then in June 2004

the IASB discussion paper about the Preliminary views on accounting standards for small and

medium-sized entities was published. In this paper the preliminary discussion and special

questions, issues were raised whether the special standard for SMEs is required or not. Then the

views about this were invited to be submitted by 24 September. This discussion demonstrates a

demand of specific accounting standards for small entities. The responding standard-setters

preferred higher extent of simplification in recognition and measurement principles. Then from

April 2005 – January 2006: Questionnaires and public round table discussions to identify areas

for possible simplifications of recognition and measurement principles for SMEs were

continuing. Then in August 2006 IASB published the Staff Draft IFRS for SMEs and then after less

than half year time span I mean in February 2007 the Exposure Draft of IFRS for SMEs was

published then finally IASB come up with its master piece in July 2009 named as “IFRS for

SMEs”.

IFRS for SMEs:

Definition of SMEs in IFRS-SME:

SMEs are entities that

a) Do not have public accountability

- Debt or equity instruments are traded in a public market or in the Process of filing.

- It does not hold assets in a fiduciary capacity (as one of its Primary businesses)

b) Publish general purpose financial statements

-no quantitative threshold for SMEs

- ED-SME-accounting also suited for Micros (no further simplification in recognition and

measurement principles)

Structure of the IFRS-SME-Standard

General

• Accounting for SMEs regulated in general in a single accounting standard, subdivided in 35

sections (stand-alone-document), in the compulsory application no exception to the idea of the

standalone-document

• Voluntary application of the IFRS in the following matters

- Recognition and measurement of financial instruments according to IAS 39 instead of IFRS-

SME 11 and 12 (IFRS-SME 11.2 b)

- In the case that the IFRS-SME-standard does not specifically address a particular transaction,

other event or condition: possibility of considering the requirements and guidance in full IFRS

on the last stage of selecting an accounting policy (IFRS-SME10.6)

• Deviation table (cross-reference to the IAS/IFRS) and a glossary (with IFRS-SME or IFRS-specific

accounting terms) as appendices

• IFRS-SME-Implementation Guide contains an illustrative financial statements and a complete

disclosure checklist (with cross reference to the IFRS-SME-section which prescribes the relevant

disclosures)

Accounting choices identical in the IFRS-SME- and full IFRS-accounting

In general:

Significant reduction of accounting choices in the IFRS-SME Standard in comparison to the

former Exposure Draft:

Remaining accounting choices identical in the IFRS-SME-accounting:

• Measurement after recognition of inventories which are ordinarily interchangeable and not

segregated for specific projects (IFRS-SME13.17; IAS 2.25)

• Measurement methods for investments in subsidiaries, joint ventures and in associates in the

separate financial statements (IFRS-SME 9.26; IAS 27.37).

Accounting choices in the IFRS-SME-accounting without a corresponding

choice in the full IFRS accounting

IFRS-SME accounting choice Regulation in the IAS/IFRS

application of IFRS-SME 11 and 12 or IAS 39

(IFRS-SME 11.2 b)

IAS 39 and IFRS 7

Accounting for investments in associates:

- Cost model,

- Equity method or

- Fair value through profit or loss model

as alternatives (IFRS-SME 14.4)

Equity-Method (IAS 28.13

Accounting for investments in joint ventures:

- Cost model,

- Equity method,

- Fair value through profit or loss model

as alternatives (IFRS-SME 15.9

accounting choice between

Equity Method and

proportionate consolidation

(IAS 31.30 and 31.38)

(hidden) accounting choice: projected unit

credit

method for measuring the obligation and cost

under a defined benefit plan: simplified

calculation method is allowed (ignoring

estimated future salary increases, future

service

of current employees and in-service

Projected unit credit method

IAS 19.64

mortality):

IFRS-SME 28.19

accounting treatment for actuarial gains or

losses (IFRS-SME 28.24)

- recognize all actuarial gains or losses in

profit

or loss

- recognize all actuarial gains or losses in

other

comprehensive income

IAS 19.92 – 19.93 D

In addition to the accounting

choices in the IFRS-SME standard:

corridor method (IAS 19.92 –

19.9

Accounting policies in the IFRS-SME-accounting deviating from the full IFRS-

accounting:

Topic IFRS-SME-accounting IFRS-accounting

Subsequent

measurement

of property,

plant and

equipment and

intangible

assets

cost less accumulated

depreciation

and less

impairment losses (IFRS-SME

17.15 and IFRS-SME 18.18

accounting option between cost model

and revaluation model (IAS 16.29 and IAS

38.72)

Subsequent

measurement

of investment

property

in the case that the fair value

can be measured reliably

without undue cost or effort:

measurement at fair value

through profit or loss;

Otherwise: cost model

according to IFRS-SME 17

accounting option between the

cost model and the revaluation

model (IAS 40.30)

Borrowing

costs

no capitalization of borrowing

costs (IFRS-SME 25.2)

capitalization of borrowing

costs only in the case of

qualifying assets (IAS 23.8)

internally

generated

intangible

asset

prohibition of capitalizing

research and development

costs, unless the internally

generated intangible asset

forms part of another asset

that meets the recognition

criteria in the IFRS-SME

(IFRS-SME 18.14)

capitalize the development costs, if

the entity fulfills the capitalizing

criteria in IAS 38.57

Subsequent

measurement

of intangibles

assume a useful life of 10

years

no regular amortization, therefore

- asset impairment test annually

without the existence of an

with an

indefinite

useful life

obvious impairment indicator

- annual review if the useful life is

still indefinite

Goodwill

acquired

(initial

measurement)

Measuring of the noncontrolling

interest`s at the

non-controlling interest`s

share of the acquiree`s

identifiable net assets

option for each business

combination: measure the non

controlling-interest in the acquiree

-at the fair value (full-goodwill method)

or

- the non-controlling interest`s share

of the acquirers identifiable net

assets (IFRS-SME 3.19)

Subsequent

measurement

of goodwill

acquired

assume a useful life of 10

years

no regular amortization, therefore

- asset impairment test annually

without the existence of an

obvious impairment indicator

- annual review if the useful life is

still indefinite

Deferred taxes -different systematic in

comparison to IAS 12

- measuring current and

deferred tax assets and

liabilities using the

probability-weighted

average amount of all

possible outcomes by a

review of the tax

authorities (IAS 29.24)

- valuation allowance

against deferred tax assets

so that the net carrying

amount equals the highest

amount that is more likely

than not to be recovered

on current or future

taxable profit.

exception for outside basis

differences in IFRS-SME

29.16 a):

- only for foreign

subsidiaries, joint ventures

and associates

- no differences between

subsidiaries on the one

side and joint ventures and

IAS 12

-No explicit topic of IAS 12 (more in

the scope of IAS 37)

- probability is a recognition criterion

for tax assets

exception for outside basis

differences in IAS 12.39 and 12.44:

- no limitation on foreign companies

- subsidiaries: ability to control the

timing of the reversal of the

temporary differences (in the

associates on the other

side

- no differences between

deferred tax assets and

liabilities

opposite in the normal case no

ability to control the reversal for

joint ventures and associates)

- slight differences between deferred

tax assets and liabilities (IAS 12.39

vs. 12.44)

non-current

assets held for

sale or

disposal group

no special measurement

rules in IFRS-SME

accounting, but plans to

discontinue or to

restructure the operation

are an indicator for an

asset impairment (IFRSSME

27.9 f)

no separate disclosure on

the face of the financial

statements, but disclosure

in notes according to

IFRS-SME 4.14

measurement of a non-current asset

classified as held for sale or a

disposal group at the lower of its

carrying amount and fair value less

costs to sell (IFRS 5.15)

compare the separate disclosure on

the face of the financial statement of

position (IAS 1.54)

currency

translation

in the consolidated

financial statements:

exchange differences

arising on a monetary item

in a foreign operation shall

be recognized initially in

the other comprehensive

income and reported as a

component of equity; no

reclassification in the case

of a later disposal of this

foreign operation (IFRSSME

30.13

difference to the IFRS-SME

accounting: The exchange

difference initially recognized in the

other comprehensive income has to

be reclassified (it means has to be

recognized in profit or loss) in the

case of a disposal of the foreign

operation (IAS 21.32 and IAS 21.48

Relation of The IFRS AND IFRS for SMEs

Although the final standard is intended to be stand-alone document. However, reference to full

International Financial Reporting Standards (IFRS) will be required or permitted in the following

circumstances:

• When an SME elects to apply an accounting policy option that is permitted by reference to full

IFRS. The proposed IFRS for SMEs includes the simpler accounting policy option from the full

IFRS. The other option(s) are permitted by cross-reference to full IFRS.

• When an SME encounters a transaction which is not dealt with in the proposed IFRS for SMEs

because the IASB believes that a typical SME is not likely to encounter such a transaction. The

ED contains a cross-reference to the relevant IFRS or a section of the IFRS for the accounting for

these transactions. Examples include equity-settled share based payment transactions, interim

financial reporting, lessor accounting for finance leases and hyperinflation.

If the proposed IFRS for SMEs does not address a transaction or other event or provide a cross-

reference to another IFRS, an SME is to select an accounting policy that results in relevant and

reliable information. When making this judgment, an SME should consider the requirements in

the proposed IFRS for SMEs dealing with similar and related issues, and the definitions,

recognition criteria and measurement concepts for assets, liabilities, income and expenses and

the pervasive principles in Section 2 of the ED. If an SME cannot find sufficient guidance in the

proposed IFRS for SMEs, the SME may look to the requirements and guidance in full IFRS and

Interpretations of IFRS dealing with similar and related issues

IFRS for SMEs is the Mini Version

In comparison to the full IFRS, the IFRS for SMEs has been reduced from to 2500 to 250 pages;

the disclosure of information requirement has been reduced from 2000 to 400 pages.

The IASB resolves these issues by reducing the accounting options, requires less information

disclosure and simplifies the explanation or instruction on its standard. Thomas Jones has

expressed the difficulties that the IASB Board is facing as he explains: “When we started out, the

requirement was very straightforward people wanted a short simple standard arranged by

subject, stand alone, no automatic fall back to the main standard (the Full IFRS), real

simplification in recognition measurement and disclosure. The dilemma that we have that is if

we made this standard too simple it would not be credible to its users and if we made them too

complicated the standard will not be used.”

IFRS Fulfill The Needs:

The IFRS for SMEs is designed to meet the needs of investors, lenders, creditors, rating

agencies, employees, customers and others outside the business. At the same time, the IASB

has acknowledged that the tax authorities also tend to be key recipients of SME accounts.

Prior work shows that the major uses of SME financial statements by the tax authorities

include: to determine gross profit, assess directors’ fees, tax provisions, ensure that expenses

are reasonable and check for clean audit reporting. As for the question of whether the standard

would be suitable for a tax authority, the IASB explains that determining taxable income

requires a special-purpose financial statement that will comply with the tax law and

regulations. But the IASB considers however, that the IFRS for SMEs can serve as a starting

point for determining taxable income in a given jurisdiction by means of a reconciliation that

is easily developed at national level.

Criticism Of The IFRS for SMEs:

The main criticisms of the IFRS for SMEs on the suitability of the standard, are from

countries such as Germany. As one respondent strongly expressed in a public comment that,

the IASB has not taken SME-users into consideration meaning that the IFRS for SMEs just

emphasizes the interests of shareholder values and does not consider the needs of medium

sized enterprises. The respondent argued that the often long-term strategies of medium-sized

entities implies a conservative accounting policy with hidden reserves which are not taken

into consideration in these standards. The respondent argues further that with German

medium-sized businesses and their partners/shareholders, the annual financial statements

mainly have the function of providing information to the banks and the partners. The

provision of information to customers and subcontractors is of secondary importance.

Medium-sized businesses finance themselves primarily through bank credits and not through

including external investors in the group of partners.

The IASB is aware that the reception of the IFRS for SMEs differs from one country to

another as Thomas Jones from the IASB pointed out, “Some countries are very enthusiastic

and other countries are very unenthusiastic due to the fear that it may mess up the tax

position and of course a lots of things can be solved over time”

Importance of IFRS for SMEs Standard:

Despite criticism that the standard may not be suitable for many countries for various reasons,

Paul Pactor IASB project director maintained that the IFRS for SMEs conforms to the fourth and

seventh directives;

“The existing fourth and seventh the directives neither require nor prohibit the IFRS for

private entities when it is issued, so a country is able to make their own decision, Secondly,

we have gone through our exposure draft literally sentence by sentence comparing it with the

fourth and seventh directives, because of course, in Europe a country can only use a standard

that is consistent with those directives”

Efforts for Global Standard:

It is the fact that due to the rapidity in the globalization of the trade and investment, which has

been increasing in recent years and it requires the definite efforts for financial reports. So that

financial data could be easily accessed and comparable internationally without the hurdle of

following the different accounting methods. Moreover the importance of regulating the

financial reporting under the single standard is necessary to ensure that all companies in a

country will present the similar transactions in a regular way.

Fourth and Seventh Directive:

The first effort towards globalization of accounting standards within the EU began in

1978 with the implementation of the Fourth and Seventh Directive. The purpose of

Implementing these two directives as described by Haller was: “the Fourth Directive aimed at

harmonizing the national laws on the accounting regulations of companies. The main features

of the Fourth Directive include the requirement to prepare annual accounts, which provide a

true and fair view (TFV) of the company’s assets, liabilities, financial position and profit or loss,

as well as substantial requirements on information which has to be provided by means of notes.

These two directives were not only try to conform national law and consolidated accounts

within the EU but it is also demonstrates the willingness to adjust to the new regulations among

EU countries.

Implementation of The Full IFRS

The second effort towards the globalization of accounting standards within the EU and to the

other non European nations was the implementation of the Full IFRS. On 19 July 2002, the

European Union (EU) Parliament passed a regulation that requires all companies listed in the EU

to adopt International Financial Reporting Standards (IFRS) or the full IFRS for fiscal years

starting after 1 January 2005

IFRS for SME

A recent effort for the globalization of accounting standards is just reached called the IFRS for

SMEs. Due to the difficulties for the small and medium sized entities in following the full IFRS

the IASB introduce the SME version of IFRS in July 2009.

Consequences to the Global Accounting Standard:

It is very easy to expect that the global standard should be there but it is very hard as practically

there are so many problems that can be considered as obstacles while thinking about the global

standard these are as follows:

National Tax Differences:

One of the consequences that has arisen due to the failure to global GAAP due to national

national tax differences between countries are several numbers of GAAP, and according to Paul

Pacter, project director of the IFRS for SMEs who stated that, there are in fact, around 55

GAAPs adherents in Europe alone. Moreover he says,

“50% to 80% of private entities in almost all countries of the world have at least a bank loan”

and “The reality in Europe today is that there are at least 55 different GAAPs-based SMEs

around Europe and many European countries have two or even three levels of GAAP.” The

consequence of this as Paul Pacter put it “It is a nightmare for the bank to make comparisons

between these with so many different GAAP applications”.

Political and economic systems:

Another reason towards the delay in the global standard is the political and economic systems

of different countries varies from each other. And that’s why users need differs.

Use of ‘‘International’’ Standards and Institution

A company’s decision to use ‘‘international’’ accounting standards will be affected by the

institutional framework (the body of accounting law, rules and accepted practices as well as the

institutions that formulate, administer and enforce these requirements) of its home country.

Since institutional frameworks vary between countries, a company’s country of origin will

impact on its use of ‘‘international’’ standards. In theory and subject to meeting minimum legal

requirements, a company could prepare financial statements for the public based on any

accounting standards it chooses. However, in practice cost considerations mean that a

company’s choice of standards reflects the requirements of the institutional framework of its

home country.

Other Factors:

Despite these consequences studies identify that there are so many other factors which are

hindering the global standard these are competitive market forces and managerial incentives

have been shown to affect the form and content of financial statements. These factors could

affect the use of ‘‘international’’ standards.

Impacts of Global Standard:

It is no doubt that there are so many consequences in the way of global GAAP but beside these,

there are so many positive aspects which are also in considerations:

Comparability of international financial information:

Because of the globalization it is the need of hour for the organizations to have a global

standard. Due to the global standard the business institutions having subsidiaries in different

countries will able to judge the performance of firm and at same time will compare it with the

other subsidiaries.

Saving of time and money

Current era is known as, the era of competition where the every organization has need of

timely decisions. Because there is no need to spent time on consolidate divergent financial

information, and the benefits to the multi-national companies as the communication of

financial information within the groups would become easier. This ultimately leads towards the

saving of time and money.

Beside the above mentioned impacts there are so many which could be avail only by

implementing the global or international GAAP:

These are the possibility of increasing the availability of capital and lowering its cost; quality of

the standards; and preferences of institutional investors and analysts.

Analysis of The Paper:

The paper is about the development of The IFRS and IFRS for SMEs and the potential if future

standard I mean the global standard. The first part is about the IFRS for SMEs because it is the

newest arrival in the accounting world, although I agree with the fact the IFRS was available but

it was the very much necessary for the IASB to come up with the full fledge SME based

standard. It is really a big achievement of the IASB and no doubt the business world and the

general public will reap the fruit of this effort. Although there is the criticism on the new

standard but hopefully it will be over with the passage of time when the critics will find the

answer of their questions and ultimately it will increase the worth of the standard.

In the other part as I have discussed about the global standards importance no doubt it is very

much necessary in the era globalized world that, there should be a global standard in which

could meet the requirements of the business world. As we know there is an on going

convergence project for achieving worldwide convergence of accounting standards. Whish is a

discouraging task, and some continue to question whether it is even possible. The U.S. Financial

Accounting Standards Board (FASB) and its predecessors have worked for the past 50 years to

achieve the goal of a comprehensive set of rules-based accounting standards for U.S. GAAP. The

international standard (IFRS) is a principles-based system, and for the past five years, the FASB

has worked with the International Accounting Standards Board (IASB) on various projects to

converge these standards. However, from a practical standpoint, much remains to be done and

there are many unanswered questions. But it is the reality the US and other countries should

think about the global standard. It could be analyze from the following data.

New US Treasury Department data show that US owners held over US$4.2 trillion of foreign

securities at 31 December 2008, including US$2.7 trillion of foreign equity securities and

another US$1.3 billion of foreign long-term debt. On the flip side, foreign owners held around

US$3.0 trillion of US equities and US$6.5 trillion of US long-term debt. These data are further

evidence for a single set of accounting standards for both US and non-US reporting entities it is

more clear from the following statement:

Following their meeting in Pittsburgh, Pennsylvania USA on 24-25 September 2009, the leaders

of the G20 nations issued a Final statement identifying a range of additional steps that should

be taken to strengthen international financial regulatory system to avoid a future global

financial crisis.

“We call on our international accounting bodies to redouble their efforts to achieve a single set

of high quality, global accounting standards within the context of their independent standard

setting process, and complete their convergence project by June 2011. The International

Accounting Standards Board's (IASB) institutional framework should further enhance the

involvement of various stakeholders”.

Conclusion:

We can see and imagine that a few years ago the development of the International Financial

Reporting Standards (IFRS) were a far-off possibility. Today, the reality is far different. We can

see the dramatic shift that is fast making IFRS the most widely accepted accounting model in the

world. As the business environment becomes increasingly global and companies routinely list on

stock exchanges in many countries, the need for consistent worldwide reporting standards

intensifies. IFRS, formerly known as International Accounting Standards, clearly addresses this

issue; its goal is to create comparable, reliable, and transparent financial statements that will

facilitate greater cross-border capital raising and trade. This fact can be seen from the following

evidence today, more than 100 countries around the world, including all of Europe, currently

require or permit IFRS reporting. Approximately 85 of those countries require IFRS reporting for

all domestic, listed companies.

No doubt While converting to IFRS is a complex process, these standards have important and

positive implications for organizations and individuals that adopt them:

1. Companies could reduce the cost of capital and the ease of using one consistent

reporting standard from subsidiaries in many different countries.

2. Investors could obtain the better information for decision making, leading to broader

investment opportunities.

3. National regulatory bodies could get better information for market participants in a

disclosure-based system.

Another turning point for the global standard is just arriving. Companies in the United States are

being affected by the standards now: the forces driving IFRS call for prompt action.

IFRS signifies a new era of financial reporting that will eventually touch thousands of U.S.

companies. Its impact on U.S. GAAP will deepen as it becomes the prevailing global accounting

standard. Ultimately, a new global standard will emerge that represents critical aspects both of

IFRS and U.S. GAAP.

References:

Lectures:

Aug 31: Inroduction and recent developments - slides

2009-08-26 By Hanno Kirsch

Sep 29: Current International Developments

2009-09-09 By Gunnar Rimmel

Sep 15: Introduction to IFRS

2009-09-16 By Dominique Rachez

Articles:

Accounting in Europe vol.2, 2005

Problems and Opportunities of an IFRS for SMEs.

LISA EVANS (principal and Co-Author)GUENTHER GEBHARDT(chair)

FRSB to consult on IASB exposure draft for SMEs

By Vanessa Sealy-Fisher

The Pain versus The gain….. IFRS “Light” anyone Byr: Weena Göransson Journal of International Financial Management and Accounting 15:1 2004 International Convergence of Accounting Practices: Choosing between IAS and US GAAP Ann Tarca

Web Sources:

The Future of Global Accounting Standards: 2009 & Beyond http://www.nyif.com/courses/aatx_1010.html http://www.iasplus.com/pastnews/2009sep.htm http://www.iasplus.com/dttpubs/usifrs.pdf

SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily http://www.sec.gov/news/press/2008/2008-184.htm