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Saturday, 19th September 2020
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IASB period of stability - use it well Back  
The International Accounting Standards Board (IASB) has in recent months announced that it will not require the implementation of any new or substantially amended financial reporting standards until periods beginning on or after 1 January 2009. This will afford IFRS-adopters with an opportunity to bed down existing standards implemented for the first time by listed companies for 2005 calendar year ends. The first-time adoption of standards in 2005 was based on adopters’ best interpretation of standards in many instances, where concepts were new or relatively untested. This will present a fresh challenge to those adopters in 2006 to consider what is developing best practice and how it should be applied in their financial statements.

Plan for convergence
In addition to bedding down existing standards, IFRS-adopters need to be sharp in maintaining their awareness of standards being developed and issued over the next couple of years. The Memorandum of Understanding drawn up and committed to by the IASB and its US counterpart, the Financial Accounting Standards Board (FASB), has identified ten areas in which new converged standards will be issued between now and 2008. They have also committed to achieving measurable progress by 2008 towards convergence of standards in a further eleven areas. Time and resources will need to be devoted by IFRS-adopters towards ensuring that the implications and reporting requirements of these standards are fully understood. Surprises in 2009 will not be welcome and perhaps will be even less forgiven by investors and other market participants, given the lead time for implementation.

In 2005 IFRS-adopters were required to produce a statement showing the impact on their preceding year’s financial statements of the transition from their previous GAAP to IFRS. As yet, there has been no call for such a statement to be produced in advance of implementation of the substantial body of new and revised standards to be implemented in 2009. However, there may yet be such a call or it may otherwise be recognised as best practice to produce such a statement, in so far as practicable, in the run-up to 2009 to explain the impact of the new and/or amended standards on the reported results and financial position.

Impact of convergence plan.
While the IFRS-adopters will be the ones primarily impacted by the changing standards, private companies and other entities continuing to adopt Irish/UK standards will also need to keep their heads up on these developments. The proposals of the Accounting Standards Board (ASB) for convergence of its standards with those of the IASB are likely to lead to further extension of the scope of entities required to comply with full IFRS, perhaps subject to modification of disclosure requirements, and at the smaller end of the spectrum the application of the IASB’s standard for small and medium-sized entities. At a minimum, one may expect to see a continuation of the convergence practice of the ASB in recent years whereby many of the new standards produced by the IASB were subsequently issued by the ASB.

Developments so far
In accordance with the IASB/FASB convergence programme we have already seen this year the release of three exposure drafts in the following areas:-
- Presentation of financial statements
- Segment reporting
- Borrowing costs

The FASB has also produced a standard which provides additional guidance on the application of fair value accounting. Fair value accounting is a key area for deliberation by both the IASB and the FASB and we will see continuing developments over the coming years.

The three exposure drafts issued by the IASB have in common that they each move towards the US standard, in the same way as the standards on business combinations and asset disposals/discontinued operations have done so in recent years.

The main proposals in relation to segment reporting and borrowing costs are as follows:-

- Segment reporting - the basis of disclosures in financial statements should be the manner in which information is reported internally to the Board of Directors, rather than necessarily based on either geographic region or business class
- Borrowing costs - borrowing costs on qualifying assets should be capitalised, with the option currently available of expensing such borrowing costs being eliminated
Presentation of financial statements
It is perhaps the exposure draft on presentation of financial statements that generates the most debate. The main features of the exposure draft are:-
- Entities should present all income and expenses in one or two statements, separately from changes in equity arising from transactions with owners in their capacity as owners. Accordingly, dividends would not be shown on the face of the income statement and it would not be permitted to present any form of income or expenses in the statement of changes in equity
- Entities are required to include, as a minimum, three balance sheets with the balance sheet at the beginning of the preceding year being included in the financial statements; and
- The term ‘balance sheet’ would be replaced by ‘statement of financial position’ to reflect the function of that statement more closely.

The IASB is undertaking the performance reporting project in two segments. Segment A is as outlined in the exposure draft already issued. Segment B is being undertaken jointly by the IASB and the FASB and will address fundamental issues including:-
- Consistent principles for aggregating information in each financial statement
- The totals and sub-totals that should be presented in each financial statement
- Whether components of other recognised income and expense should be reclassified to profit or loss and, if so, the characteristics of the transactions and events that should be reclassified and
when reclassification should be made
- Whether the direct or indirect method of presenting operating cash flows provides more useful information

Some observers consider that it is not appropriate for the IASB to have issued an exposure draft based on segment A and that interests would be better served by a focus on the joint project with the development of a new comprehensive standard.

The topic is a recurring feature in discussions at IASB meetings and at IASB meetings with the FASB, with issues currently being discussed including financing liabilities and treasury assets, strategic investments, income taxes, discontinued operations and disaggregation.

The market perspective
Recent international surveys emphasise the need for a clear standard which will address the many shortcomings which currently exist. Two areas which have been subject to recent comment are:-
- IFRS financial statements currently retain a strong national identity - entities are continuing in many cases to adopt the preferred practices from earlier periods particularly with regard to the presentation of the income statement; and
- Companies do not have confidence that the manner in which information is presented is adequate for the purpose of communicating their performance to the markets.

These are very real issues for companies to address and emphasise the need for a comprehensive standard to be produced. The results of the IASB/FASB deliberations will be keenly awaited by companies and their investors and other stakeholders.

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