Paris, 2011
IFRS
Audit Forum
2Audit Forum: IFRS
Contents
I. Introduction to IASB and IFRS
II. IFRS Structure – Framework & Standards
III. Reformation of IFRS
IV. Example of Reformation: Revenue Recognition
V. Example of Reformation: Financial Statement Presentation
VI. Conclusion: Burning Questions
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IASB Organisational Structure
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Who is the Board?
Hans Hoogervorst (chairman) – Netherlands
Financial government organisations
Ian Mackintosh (vice-chairman) – New Zealand
Leyman & Coopers
Stephen Cooper – United Kingdom
Banking and financial markets
Philippe Danjou – France
Aurthur Anderson
Jan Engström – Sweden
Automotive
Patrick Finnegan – United States
Financial government organisation
Amaro Luiz de Oliveira Gomes - Brazil
Banking and financial markets
Prabhakar Kalavacheria – United States
KPMG
Dr Elke König – Germany
KPMG
Patricia McConnell – United States
Banking and financial markets
Takatsugu Ochi - Japan
Banking and financial markets
Paul Pacter – United States
Deloitte & Touche
Darrel Scott – South Africa
Banking and financial markets
John Smith – United States
Deloitte & Touche
Zhang Wei-Guo – China
Financial government organisation
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IFRS Around the World
Country Status for listed companies as of April 2010
Argentina Required for fiscal years beginning on or after 1 January 2011
Australia Required for all private sector reporting entities and as the basis for public sector reporting since 2005
Brazil Required for consolidated financial statements of banks and listed companies from 31 December 2010 and for individual company accounts progressively since January 2008
Canada Required from 1 January 2011 for all listed entities and permitted for private sector entities including not-for-profit organisations
China Substantially converged national standards
European Union All member states of the EU are required to use IFRSs as adopted by the EU for listed companies since 2005
France Required via EU adoption and implementation process since 2005
Germany Required via EU adoption and implementation process since 2005
India India is converging with IFRSs at a date to be confirmed.
Country Status for listed companies as of April 2010
Indonesia Convergence process ongoing; a decision about a target date for full compliance with IFRSs is expected to be made in 2012
Italy Required via EU adoption and implementation process since 2005
Japan Permitted from 2010 for a number of international companies; decision about mandatory adoption by 2016 expected around 2012
Mexico Required from 2012
Republic of Korea Required from 2011
Russia Required for banking institutions and some other securities issuers; permitted for other companies
Saudi Arabia Not permitted for listed companies
South Africa Required for listed entities since 2005
Turkey Required for listed entities since 2005
United Kingdom Required via EU adoption and implementation process since 2005
United States Allowed for foreign issuers in the US since 2007; target date for substantial convergence with IFRSs is 2011 and decision about possible adoption for US companies expected in 2011.
6Audit Forum: IFRS
Contents
I. Introduction to IASB and IFRS
II. IFRS Structure – Framework & Standards
III. Reformation of IFRS
IV. Example of Reformation: Revenue Recognition
V. Example of Reformation: Financial Statement Presentation
VI. Conclusion: Burning Questions
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IFRS Standardisation System
Implementation guidance
Basis for conclusions
Framework
Conceptual basis
Initial thoughts / Interpretation assistance
IFRIC/SIC – Interpretation of standards
IFRS-/IAS-StandardsBinding characters
No obligation character
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Basic Principles – IFRS Accounting
Relevance (QC 6-10)
Materiality (QC 11)
Faithful representation
(QC 12-16)
Comparability (QC 20-25)
Verifiability (QC 26-28)
Timeliness (QC 29)
Understandability (QC
30-32)
Underlying Assumptions - Accrual Basis (F 4.51) and Going Concern (F 4.1)
The cost constraint of
useful financial reporting
(QC 35-39)
Qualitative Characteristics of Useful Financial Information
True and Fair View
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Construction of a Standard
Objective
Scope
Standards (black text): Actual requirements
Guidance (grey text): Notes
Benchmark-method vs. Allowed alternative treatment
Transitional provisions
Effective date
Definitions
10Audit Forum: IFRS
Contents
I. Introduction to IASB and IFRS
II. IFRS Structure – Framework & Standards
III. Reformation of IFRS
IV. Example of Reformation: Revenue Recognition
V. Example of Reformation: Financial Statement Presentation
VI. Conclusion: Burning Questions
11Audit Forum: IFRS
International
Accounting
Standards
Committee
began
Issued IASs
History, Present, and Future of IFRS
1973 2001 2005 2006 2007-2011 Forward
IASF was
formed to replace IASC
Adopted existing IASs
Began issuing IFRSs
The EU,
Australia,
Turkey, and
South Africa
began adopting and converging to IFRS
A roadmap was formed for
convergence of US GAAP
and IFRS
Continual convergence of U.S. GAAP and
IFRS
G-20 urging convergence
More countries adopting IFRS
Financial crisis
Ongoing reform
More profound changes
No rest in site
Innovation for daily accounting and
auditing practices
IFRS 2.0
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Financial Crisis and IFRS
Harsh criticism of IFRS rules
Considerable pressure from the Group of 20 (G-20) on the IASB to make changes quickly
Accusation: Orientation of IFRS on fair value would have strengthened the crisis
Is fair value really a pro-cyclical accelerant?
Another problem: The consolidation of special purpose entities
IKB, Sachsen LB
IASB responded with immediate action and reform projects
Facilitate the reclassification of financial instruments
Meanwhile, new standards for fair value accounting and consolidation
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Reform Projects Completed in 2010 and 2011
Projects recently completed with effective date for annual periods beginning 1 January 2013, with earlier application permitted
IFRS 9: Financial Instruments
Fundamental review in relation to the accounting for financial assets and liabilities
Impairment provisions on hedge accounting is pending
IFRS 13: Fair Value Measurement
Independent standard for fair value measurement
IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements
– New concept of domination for consolidation purposes
IFRS 12 Disclosure of Interests in other Entities
– Summary and extension of the disclosures for subsidiaries, SPVs and joint ventures
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IASB Projected Timetable as of 30 September 2011 (1)
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IASB Projected Timetable as of 30 September 2011 (2)
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Other Projects
IFRS taxonomy - eXtensible Business Reporting Language (XBRL) for IFRS
Issued in March 2011
Intended to address the ‘demand’ for an electronic standard to transmit IFRS financial information
IFRS for small and medium-sized entities (SME‘s)
Published in July 2009
Suggested for any non publicly responsible, for profit entity, where permitted
Intended to create a simpler global standard of accounting principles
Entities are likely only beginning to use IFRS for SME’s
Revisions to IFRS for SME’s are forthcoming after two years of financial statements are published
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Contents
I. Introduction to IASB and IFRS
II. IFRS Structure – Framework & Standards
III. Reformation of IFRS
IV. Example of Reformation: Revenue Recognition
V. Example of Reformation: Financial Statement Presentation
VI. Conclusion: Burning Questions
18Audit Forum: IFRS
Core Principle of Revenue Recognition
Recognise revenue to depict the transfer of goods or services in an amount that reflects the consideration the entity receives
Implementation of a contract-based revenue recognition principle
Revenue is recognised if the contractual obligation is satisfied
Risk and reward approach is no longer applicable
Applies to all contracts with customers
Five main steps
Identify the contract(s) with a customer
Identify the definable performance obligations in the contract
Ascertain the transaction price
Allocate the transaction price to the definable performance obligations
Recognise revenue when each performance obligation is satisfied
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Contract and Performance Obligation
In most cases the new recognition principles will apply to a single contract
‘Ordinary’ contracts normally generate just one performance obligation
Combine two or more contracts if prices are interdependent
They are entered into at or nearly at the same time
Contracts are negotiated as a package with a single commercial objective
Contracts are performed either concurrently or consecutively
Disaggregate a single contract into two or more contracts, if some goods or services are priced independently
Account for performance obligations separately if promised good or service is distinct
Good or service is distinct if an identical or similar good is sold separately
If not sold separately, goods and services are distinct if function and margin is distinct
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Ascertain the Transaction Price
Transaction price = Expected (probability-weighted) consideration from the customer
Reasonable estimates of contingent amounts
Individual credit risk of the customer
Time value of money (if a finance component is included)
Non-cash considerations
aNo recognition of gross amounts in general
Allocate the transaction price to all separately identified performance obligations in proportion to the stand-alone selling prices
If not observable, stand-alone selling prices have to be estimated
If the transaction price is contingent on future events, an entity would recognise revenue from satisfying a performance obligation only if the expected outcome can be reliably estimated
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Illustration
An entity enters into a contract to sell product A, B and C for EUR 55
Stand-alone selling price for A EUR 10, B EUR 20 and C EUR 30
Product A and B are regularly sold together for EUR 25
Product C is never sold with a discount
The original contract need to be segment into two contracts
1. contract: product A and B; price EUR 25
2. contract: product C; price EUR 30
Stand-alone selling price of product A and B together is independent of the stand-alone selling price of product C
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Recognise Revenue When Performance Obligation is Satisfied
A customer obtains control when the customer has the ability to direct the use of, and receive the benefits from a good or service (control-concept)
Recognise revenue when a performance obligation is satisfied by transferring a good or service
Warranties will be treated as a separate performance obligation
Transfer of control can be at a point in time or can be continuous
Applying Percentage-of-Completion method according to the stage of completion (continuous transfer of control) depends on local law regulation
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Contents
I. Introduction to IASB and IFRS
II. IFRS Structure – Framework & Standards
III. Reformation of IFRS
IV. Example of Reformation: Revenue Recognition
V. Example of Reformation: Financial Statement Presentation
VI. Conclusion: Burning Questions
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Replacement of IAS 1 and IAS 7 (1)
Discussion paper
Completely new format of financial statements
Common structure for all components presented in the financial statement by sections
– Business
– Financing
– Income Taxes
– Discontinued Operations
Disaggregation of disclosed information
– Similar assets and liabilities with different measurement bases, shall be presented in separate line items
aFor example: Financial instruments measured at fair value or at amortised cost
Statement of financial position
Statement of comprehensive income
Statement of cash flow
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Replacement of IAS 1 and IAS 7 (2)
Cost of sales format obligatory for income statement
Direct method obligatory for statement of cash flow
Reconciliation of operating income to operating cash flow
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IAS 1/IAS 7: Overview
Financial statement presentation
statement of financial position statement of comprehensive income statement of cash flows
Business
operating/investing assets and liabities
Business
operating/investing income an expenses
Business
operating/investing
cash flows
financing
financing assets/liabilities
financing
financing income/expenses
financing
financing assets/liabilities cashflows
income taxes income taxes on continuing operations income taxes
discontinued operations discontinued operations
net of tax
discontinued operations
other comprehensive income
net of tax
equity equity
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DP: IAS 1/IAS 7: New Structure of Statement of Financial Position
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Contents
I. Introduction to IASB and IFRS
II. IFRS Structure – Framework & Standards
III. Reformation of IFRS
IV. Example of Reformation: Revenue Recognition
V. Example of Reformation: Financial Statement Presentation
VI. Conclusion: Burning Questions
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Questions
Why have the IFRS become so complex?
Will the United States converge to IFRS or will IFRS converge to US GAAP?
How much more reform is forthcoming?
When will the changes subside?
Your Questions?
30Audit Forum: IFRS
Thank you for your attention