International financial reporting standard setting

• History - International Accounting Standards Committee
• The framework for standard setting
• Current guidance
• Scope and authority of International Financial Reporting Standards and Interpretations
• Due process

History - International Accounting Standards Committee


International standard setting began in 1973 through an agreement reached by nine worldwide professional accountancy bodies. The agreement resulted in the formulation of the International Accounting Standards Committee (IASC) [P.4]
.

The IASC comprised representatives from fourteen countries and was the international standard setting body. Observer
members of the International Accounting Standards Committee included: the International Organisation of Securities
Commissions (IOSCO); the Financial Accounting Standards Board (FASB); and the European Commission. In March 1974,
the IASC issued its first exposure draft E1 - Disclosure of Accounting Policies, and went on to issue a total of 68 exposure
drafts, 41 International Accounting Standards (IAS) and 25 Interpretations of IAS.

In May 2000, the IASC's constitution was amended, and a group of trustees was appointed. The IASC was renamed the
International Accounting Standards Board (IASB) [C.1-3] [P.1,4].

The IASB's objectives were set out in a revised constitution. The ultimate goal is the development and rigorous application of
a single set of global accounting standards, which will produce high-quality financial information to help participants in the
world's capital markets to make economic decisions [C.2] [P.7-10].

The framework for standard setting


The framework for international standard setting involves several dedicated bodies, as well as the co-operation and input from standard setting bodies throughout the world [P.19-20]. Nineteen Trustees have the power to appoint the members of the Standards Advisory Council (SAC), the International Accounting Standards Board (Board) and the International Financial Reporting Interpretations Committee (IFRIC). The Trustees also monitor the IASB's effectiveness, raise funds, approve the IASB's budget and take responsibility for constitutional changes [C.4-18] [P.1-3].

The Trustees appointed the Board, which has sole responsibility for setting accounting standards, in January 2001. The Board includes twelve full-time and two part-time members, is drawn from a range of geographic locations and experience, and includes those with a background in preparing financial statements, users of financial statements, auditors and academics. In addition, the standard setting process involves the resource and input from a number of national standard setting bodies. Seven of the Board members are responsible for liasing with these groups in their home countries [C.23-33] [P.6].

A second technical committee is the International Financial Reporting Interpretations Committee (IFRIC). The role of the IFRIC is to prepare interpretations of IFRS. The Interpretations tend to deal with reporting issues where unsatisfactory practice has arisen, or, where the Standards lack guidance in particular business circumstances. The members of the IFRIC are generally practitioners, selected for their knowledge of IFRS and their experience in the application of Standards [C.34-37] [P.2,15,19].

Support and advice in the standard setting process is provided formally through the Standards Advisory Council (SAC) [C.38-40] [P.3,18]. The IASB staff (the staff) provides technical support to the Board and IFRIC [P.18,19]. The staff is headed by the IASB's Chairman, and has a technical director and research director and a number of project directors with considerable background in technical accounting matters [C.41-43].

The IASB meets monthly, and on a quarterly basis with the SAC and national standard setters. The meetings are open to public observation, except for certain administrative matters that are discussed in closed sessions [C.29].

The Standards provide guidance for preparers to deal with the recognition, measurement, presentation and disclosure requirements for transactions and events. Most IFRS are intended for application across industries, with only one standard outlining disclosure requirements for banks and other financial institutions. A second tier of guidance comes from the Interpretations developed by the Standing Interpretations Committee, now IFRIC. These pronouncements clarify or interpret the standards where the preparer community identifies the need for improved guidance [C.34,37] [P.2,19].

Once an entity adopts IFRS it must comply with all of the Standards and Interpretations, despite any differences that may exist between an entity's local GAAP and IFRS [P.16] [IAS1R.14]. However, neither the IASB, nor the accountancy profession, has the power to enforce or require compliance with IFRS.

IFRS foresees rare circumstances where compliance with a particular Standard may not result in fair presentation. In such cases, entities may choose to depart from the relevant standard. Entities are discouraged from invoking this override of IFRS. The disclosure requirements when doing so are voluminous. The entity should disclose: the standard departed from; the nature of and reason for each departure; and the financial impact of each departure on the net profit or loss, assets, liabilities, equity and cash flows [IAS1R.17-22].

The following hierarchy, in decreasing authority of guidance within IFRS, shall be followed in developing and applying an accounting policy where no IFRS specifically deals with the transaction [IAS8R.11-12]:

a)	The requirements and guidance in the International Financial Reporting Standards/International Accounting Standards and IFRIC/SIC Interpretations dealing with similar and related issues;
b)	The Framework, in particular the definitions, recognition and measurement criteria for assets, liabilities, income and expenses; and
c)	The most recent pronouncements from other standard setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practice to the extent that these do not conflict with a) and b) above.

The focus of international standard setting is on profit-oriented reporting entities, including non-corporate entities such as mutual funds. Despite concentrating on profit-type entities, the IASB envisages that non-profit entities in the private and public sectors may nevertheless find its Standards an appropriate basis for financial reporting. The specific needs of the public sector have been acknowledged by the International Federation of Accountants (IFAC), whose Public Sector Committee has on its agenda the preparation of standards based on IFRS, for use by public sector entities [P.9] [IAS1R.5]. A non-profit entity that states compliance with IFRS should, however, comply with IFRS in full.

A profit-oriented reporting entity is one that reports to users, who rely on the financial statements as a major source of financial information about the entity [F.8]. IFRS are directed to the information needs of users such as investors and potential investors, employees, lenders, suppliers, creditors, customers, governments and the public at large [F.9].

The term financial statements refers to several statements that display different aspects of the entity's financial performance. Financial position is reflected in the balance sheet and a statement of changes in shareholders' equity (excluding transactions with shareholders) [F.47-52]. Financial performance is reported in the income statement and liquidity position in the cash flow statement [F.69-73]. These statements are supplemented by a series of detailed notes [F.7] [IAS1R.8].

The Standards permit different treatments for certain types of transactions or events. One treatment is designated as the benchmark treatment, and the other the allowed alternative. Neither is designated as the IASB's preferred approach [P.12]. The Board intends to develop future Standards that require similar transactions and events to be accounted for in the same way. The IASB intends to reconsider the choices given in current IFRS with a view to reducing and potentially eliminating them [P.13].

The Standards issued by the IASC include paragraphs in bold type (black letter) and plain type (grey letter). Paragraphs in bold type indicate the main principles whereas those in plain type explain the application of those principles to a particular situation. One of the first matters that the Board confirmed is that these paragraphs have equal authority. The Board has asked for comment about whether future IFRS should be presented in one typeface [P.14].

a)	whether the project is consistent with the IASB's organisational objectives and plans;
b)	whether the project will lead to convergence of accounting standards; and
c)	whether the project addresses an area in which current guidance is deficient, for example where there is diversity in national standards or where no guidance exists .

IFRS
Once a project has been accepted on to the Board's agenda, the Board may form an advisory group to give it advice on the project [P.18(d)]. On major projects the Board develops and publishes a discussion paper. The paper sets out all of the key issues for discussion, and poses a series of questions to which the public is invited to respond. To give the reader a view of the advisory group's position, the Board may include in the document their own response to particular questions [P.18(e)].

Following analysis of public comment, the Board issues an Exposure Draft. The draft must be approved by eight of the Board's fourteen members [C.31] [P.18(j)]. Each Board member has one vote on technical and other matters. The Exposure Draft should include a basis for conclusions and highlight any dissenting opinions that arose during the approval process [C.32(a)-(d)] [P.18(f)-(g)].

The Board may use public hearings to discuss proposed standards although there is no requirement in the constitution to do so. The Board may "field test" a particular draft Standard in "live" situations across different countries as a way of ensuring that its proposals are practical and effective [C.32(e)-(f)] [P.18(i)].

A Standard must be approved by eight of the Board's fourteen members [C.31] [P.18(j)]. The published Standard must include a basis for conclusions, to explain among other things how the Board dealt with public comments, and highlight any dissenting opinion that arose during the approval process [P.18(j)].

Interpretations
The IFRIC considers national accounting requirements and consults widely with national committees and other interest groups, in setting Interpretations [C.37] [P.19]. The IFRIC publishes a draft Interpretation for public comment if no more than three of the IFRIC's twelve members have voted against the draft [C.37] [P.19(c)]. Following consideration of public comments, the IFRIC may approve a final interpretation on the same basis as for draft interpretations [P.19(d)-(e)]. Final interpretations must be approved by at least eight votes of the Board [C.37] [P.19(f)].

Application
An IFRS or Interpretation applies from the date specified in the document. Some standards encourage early adoption. If a new standard is early adopted all changes of the standard must be implemented at the same time. Selective application of different elements within an individual standard is not permitted. A new standard can only be early adopted if it was in effect at the time the financial statements were issued, that is, the proposals included in an exposure draft cannot be applied where they conflict with an existing standard.

New Standards set out transitional provisions to be applied upon the initial application of the Standard or Interpretation. An entity will either have to adopt new guidance retrospectively and restate past transactions for the effect of the requirement, or prospectively to transactions that occur after the date the Standard or Interpretation was introduced, depending on the transitional guidance [P.20-22].

The IASB has not specifically addressed the issue of an entity wishing to adopt only some of the improved standards early . A case by case approach should be followed in assessing the reasoning behind any proposal to selectively adopt standards.

Paragraph 30 of IAS 8R requires entities that choose not to early adopt a new standard or interpretation to disclose this fact and the known or reliably estimable information relevant to assessing the possible impact that the new Standard or Interpretation will have on the entity's financial statements in the period of initial application.