1

IASBInternational Accounting Standard-Setting

Priorities for beyond 2005

2

IASB

IASB Structure

19 Trustees

StandardsAdvisoryCouncil

IASB IFRIC

National Standard Setters

5

3

IASB

IFRS Around the World

Now 2005 Total

IFRSs permitted 22 -1 21

IFRSs required

(for all domestic companies) 39 27 66

IFRS required

(for some domestic companies) 5 - 5

66 26 92

4

IASB

Beyond the Stable Platform

• Convergence

• Tackling conceptual issues and maintaining a principle based approach–Performance reporting, insurance, financial

instruments, among others

5

IASB

International ConvergenceGoal and Tactics

Goal—A single set of high-quality accounting standards used internationally

Tactics:

• Jointly develop a common conceptual framework

• Jointly develop any new standards on major topics

• Eliminate narrow differences through short-term convergence projects

• Coordinate interpretative activity

6

IASB

International ConvergenceProgress Achieved

IASB

• Completed improvements project

• Issuance of IAS 32 and IAS 39, revised

• Issuance of IFRS 3, Business Combinations

• Issuance of IFRS 5, Non-current Assets held for Sale and Discontinued Operations

• ED of amendments to IAS 37 expected soon

FASB

• Issued ED on share-based payment

• Issued four EDs relating to the short-term convergence project (final Statements expected by year end)

7

IASB

International ConvergenceWork in Progress

• Active Joint Projects– Purchase Method Procedures– Revenue Recognition– Reporting on Financial Performance

• Short-term convergence– Income taxes– Research and development costs– Interim reporting

• Agenda Alignment– Insurance (FASB to consider adding to its agenda)– Liabilities and Equity (IASB to consider adding to its agenda)– Liability Extinguishment (IASB to consider adding to its agenda)– Consolidations (work separately to common standard)

8

IASB

International ActivitiesPotential Future Projects

• Accounting for Employee Benefits (including pensions and other post-employment benefits)

• Accounting for Leases

• Accounting for Internally Developed Intangible Assets

• Financial Instruments (initial focus—shorter term convergence and improvement projects)

• Continued Work on “Short-Term Convergence”– Joint ventures– Property plant and equipment– Investment properties– Segment reporting

9

IASBConvergence and the IASB Strategy

• Objective–A single set of global accounting standards

–High quality financial reporting

• Strategy–International convergence

–Accentuating principles over rules

–Working with national standard setters

10

IASBChallenges to Convergence

• Starting from Very Different Places (IASB, FASB, ASB, ASBJ)

• Significant Cultural Differences• Getting Boards to Agree• Some fear US dominance or IASB-FASB alliance• Constituent Reactions/Willingness to

Change/Change Management• Institutional/Legal Barriers to Change• Politics??

11

IASBConvergence - Summary

• FASB and IASB Are Committed to Working Towards Convergence

• Not Just Convergence for Sake of Convergence—Better Reporting

• Convergence Considerations Embedded in our Processes

• Achieving Goal will Require Continued Vision, Determination, and Perseverance

12

IASB

Major Projects on the IASB’s Agenda

• Share-based Payment

• Business Combinations

• Performance Reporting

• Financial Instruments

13

IASB

Share-based PaymentObjective

• To specify the accounting treatment of SBP transactions

• In particular, to require recognition of SBP transactions - including expenses associated with employee share options

14

IASBGeneral overview

• Recognise goods or services when received, and

• Corresponding increase in equity or liabilities

• Recognise an expense when goods or services consumed

• Measure at fair value

15

IASBEmployee SBP overview

• Estimate fair value of shares or share options at grant date

• Estimate number expected to vest

• Recognise over vesting period

• Cumulative expense = grant date FV of shares/options × number vested

16

IASBTransactions with non- employees

• Measure at fair value of goods or services received

• If that fair value cannot be estimated reliably, then measure at fair value of equity instruments

• FV measured at date the goods or services received

17

IASBBusiness Combinations Phase I

• IFRS 3 Business Combinations

• Amendments to IAS 38 Intangible Assets

• Amendments to IAS 36 Impairment of Assets

18

IASBReasons for Issuing

• IAS 22 permitted 2 methods of accounting for business combinations

19

IASBReasons for Issuing

• Also differences across jurisdictions in accounting for–goodwill –negative goodwill – intangible assets acquired in business

combinations –provisions for terminating or reducing

acquiree’s activities (restructuring provisions)

20

IASBIFRS 3: Method

• All business combinations accounted for using purchase method

–Pooling of interests method prohibited

• Identify an acquirer for all combinations

–Entity that obtains control of other combining entities or businesses

21

IASBIFRS 3: Goodwill

• Recognise as an asset

• Initially measure at excess of cost over acquirer’s interest in net fair value of identifiable assets, liabilities and contingent liabilities satisfying recognition criteria

• Subsequently measure at cost less accumulated impairment losses – DON’T AMORTISE

22

IASBIFRS 3: Negative Goodwill

• Reassess identification and measurement of:

–cost

–acquiree’s identifiable assets, liabilities and contingent liabilities

• Recognise remaining excess as income

23

IASBIAS 36: Goodwill impairments

• Allocate goodwill to CGUs

• Measure recoverable amount of CGU and compare with carrying amount

• If RA < carrying amount, allocate loss first to goodwill, then to other assets based on relative carrying values

24

IASBBusiness Combinations - II

4 parts

1. Purchase method procedures

2. Applying purchase method to combinations involving 2 or more mutuals, and combinations solely by contract (eg DLCs)

3. Formation of joint ventures and possible applications for ‘fresh start’ method

4. Combinations of entities under common control

25

IASB

Performance Reporting – Which statements?

• Income statement

• Other comprehensive income

• Cash flow

• Statement of changes in equity

• MD&A?

26

IASB

Background

• Income statement presentations vary greatly among and within countries

• It would be helpful, to users and preparers alike, to present clearly items that differ in nature, e.g.– sales, cost of sales, operating expenses– vs. impairment of goodwill, revaluations of PPE, fair

value changes in financial instruments

27

IASB

Context

• IASB joint project with FASB, ASBJ and ASB, and working closely with all national standard setters

• IASB has conducted a project review– International advisory group being formed

–Discussion paper due in 2005

28

IASB

Principles-based approach - possible project objective

• The objective is to categorise and display all income and expenses for the period in a way that enhances users’ understanding of the entity’s financial results and that assists users in forming expectations of future income, expenses and profit or loss.

29

IASBSome practical issues on which the IASB

will seek guidance

• Should income statement categories be standardised?– Under the ‘Management approach’ the preparing entity has

discretion– Under the ‘Standardised approach’ the accounting standard

defines categories and requires consistent presentation across entities

– To date the FASB has leaned towards the management approach and the IASB to the standardised approach

• Are users’ information needs best served by having some income and expenses reported initially outside the income statement?

• Should financial services entities be treated as a special case?

30

IASB

Classification criteria on which the IASB will seek guidance

• Operating vs. non-operating

• Core vs. non-core

• Recurring vs. one-off

• Within vs. outside management control

• Realised vs. unrealised

• Initial recognition vs. subsequent remeasurement

• Historical cost vs. fair value

31

IASBSome ‘problem items’

• Property, Plant and Equipment– Depreciation

• Financial Instruments– Interest

income/expense

• Impairment

• Revaluation

• Disposal gains/losses

• Fair value changes

32

IASB

Possible formats – (1)

BUSINESS/OPERATING xxx

FINANCIAL xx

TAX (x)

DISCONTINUING

NET INCOME

OTHER COMPREHENSIVE INCOME

x

X

X

COMPREHENSIVE INCOME X

33

IASBPossible formats – (2)

TOTAL Before remeasurements Remeasurements

BUSINESS Operating

Other business

Financial

xxx

xx

xx

xxx

xx

x

xx

x

x

FINANCING (xx) (x) (x)

TAX (x)

DISCONT-

INUED

CASH FLOW HEDGES

COMP. INCOME

x

x

x

x x

x

34

IASB

Summary

• The IASB (ASBJ and ASB) has entered a joint working relationship with the FASB

• Nothing is decided, and all possible schemes are under consideration

• An international advisory group is being formed

35

IASB

Financial Instruments

• IASB inherited IAS 39

• Efforts to date have focussed on 2005 implementation

36

IASB

IAS 39 : Going Forward

• A fresh look at financial instruments accounting

• Desire to simplify complex rules• Want to converge requirements with

similar standards (US, Japanese, Canadian GAAP)

• Introduce improvements as soon as possible

37

IASB

IAS 39 : Next Steps

• International Working Group being established (similar to insurance)

• Subgroup to examine interest rate margin hedging

38

IASB