paris, 2011 ifrs audit forum. 1 audit forum: ifrs contents i.introduction to iasb and ifrs ii.ifrs...

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


Prabhakar Kalavacheria – United States

KPMG

Dr Elke König – Germany

KPMG

Patricia McConnell – United States


Takatsugu Ochi - Japan


Paul Pacter – United States

Deloitte & Touche

Darrel Scott – South Africa


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.

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Contents







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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

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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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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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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







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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?

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Thank you for your attention

paris, 2011 ifrs audit forum. 1 audit forum: ifrs contents i.introduction to iasb and ifrs ii.ifrs...

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