IAS 36 Impairment of Assets

1
Significance of International Financial Reporting
Standards (IFRS)
NIRC - Conference on Accounting Standards and IFRS
New Delhi 3 February, 2007
JITENDRA AGARWAL
2
The Reporting Landscape
3
The Reporting Landscape

• Global Markets the Services Revolution
• Accountability
• Cross border Capital flows
• Bases for business decisions
• Corporate Reporting failures
• Corporate Governance
• Regulatory Framework
• Changes in Technology and Products

4
Accountability

• A business enterprise receives capital from
  outside investors, lenders, and other creditors.
• It is accountable to them it has an obligation
  to keep them informed about performance,
  conditions, and prospects.
• Also accountable to others who provide resources
  or environment in which to operate Employees,
  government, community at large.

5
Bases for business decisions

• Capital Market transactions
• Mergers Acquisitions
• Employee Stock Options
• Borrowing and Lending

6
Company failure director failure !!
January 31, 2002
October 16, 2001
June 20, 2002
March 28, 2002
Issue Off-Balance Sheet Accounting and
Financial Reporting Fraud Impact 3 billion in
undisclosed losses
Issue Financial Reporting Fraud Impact 9
billion in unreported expenses
Issue Financial Reporting Fraud and
embezzlement Impact 2.5 billion of hidden
debt
Issue Financial Reporting Fraud through
improper revenue recognition Impact 12.4
billion in overstated earnings
7
Corporate Governance Pillars
Corporate Governance
Primary characteristics
F A I R N E S S
A C C O U N T A B I L I T Y
T R A N S P A R E N C Y
D I S C I P L I N E
D I S C I P L I N E
I N D E P E N D E N C E
R E S P O N S B I L I T Y
S O C I A L R E S P. N
T R A N S P A R E N C Y
8
Regulatory Framework

• Sarbanes Oxley
• Reporting in the financial services sector
• Quotas, obligations, etc.
• Taxation
• Eligibility for business transactions

9
Changes in Technology and Products

• Intangible Assets Licenses, Rights, etc
• Tangible Assets component accounting
• Barter transactions
• Options and Swaps
• Futures
• Complex arrangements BOOT, BOT, BOMT, Service
  concession agreements, etc

10
Accountability

• This is what corporate accounting is all about.
• Accounting standards help ensure the financial
  information is

Understandable
11
Evolution of Accounting Standards
12
Evolution of Accounting Standards

• Historically accounting standards have evolved
  country by country.
• Standards set by government, or accounting
  profession, or independent board.
• In the USA Independent board Financial
  Accounting Standards Board (FASB) since 1973.
  Before that accounting profession.
• In Hong Kong Accounting profession Hong Kong
  Society of Accountants.
• In China Government Ministry of Finance.

13
Evolution of Accounting Standards

• National standards made sense when companies
  raised money in, and investors looked for
  investment opportunities in, only their home
  country.
• But that is no longer the case.

14
Global Accounting Standards Are Needed

• Big change in 4th quarter of 20th century
  Globalisation of capital markets.
• Now, investors seek investment opportunities all
  over the world.
• Companies seek capital at the lowest price
  anywhere.
• Cross-border mergers.
• Accounting differences can completely obscure
  comparisons.

15
Cross border Capital flows
16
Global Accounting Standards Are Needed
World 51 stock exchanges, 2700 foreign (cross
border listings) out of 40,000 companies
17
Global Accounting Standards Are Needed
18
Global Accounting Standards Are Needed
19
Globalisation of Capital Markets
Capital inflows
Capital Outflows
Source IMF Workpaper
20
Global Accounting Standards Are Needed

• On many stock exchanges foreign listings are a
  large of total - USA October 2006
• NASDAQ 10 (329 cos., 36 countries).
• NYSE 20 (453 companies, 47 countries).
• Foreign is 33 of market value.
• US SEC total
• 1981 173 foreign companies listed in US.
• 1991 439 foreign companies listed in US.
• 20021,400 foreign out of 16000 total
• 2004 1,236 foreign companies from 53 countries
• 2005 1240 foreign companies from 55 countries

21
Global Accounting Standards Are Needed

• Foreign companies that sell securities publicly
  in the US must either
• Prepare their financial statements using US
  Generally Accepted Accounting Principles (GAAP),
  
• or
• Use their national GAAP and include a
  reconciliation of earnings and net assets to
  comparable US GAAP figures.
• The 1,240 foreign companies registered with the
  SEC use about 55 GAAPs!

22
Global Accounting Standards Are Needed

• Even with the reconciliation, perhaps 95 of the
  financial figures in a foreign companys annual
  report are based on their national GAAP not
  comparable to US GAAP.

• Pity the poor investor who has to compare foreign
  GAAP companies with US investment alternatives.
• Pity the SEC staff reviewer, too.

23
Global Accounting Standards Are Needed

• Same problem all over the world.
• And these exchanges do not even require a
  reconciliation to national GAAP.
• London Stock Exchange (Jan 2006)
• 17 of companies are non-UK.
• 550 foreign companies, 65 countries.
• 66 of market value is non-UK.
• Euronext 25 foreign (345 / 1,392)
• Switzerland 32 (132 / 419)
• Germany 21 (182 / 866)

24
Examples of Reconciling items USGAAP vs. Other
GAAPs
25
Examples of Reconciling Items
26
Examples of Reconciling Items
27
Examples of Reconciling Items
28
Examples of Reconciling Items
29
Examples of Reconciling Items
30
Topics covered by IASs
31
Shortcomings of Old IASC

• Weak relationships with national standard
  setters.
• Lack of convergence of IAS and major national
  GAAPs.
• Part-time Board, full-time work load.
• Needed broader sponsorship than accounting
  profession.
• Needed recognition by regulators.
• Needed resources.
• Structure review 1999-2000. Results . . .

32
Topics Covered by Existing IASs
33
Topics Covered by Existing IASs
34
Topics Covered by Existing IASs
35
Topics Covered by Existing IASs

• IFRS 1 First time adoption of IFRS
• IFRS 2 Share based Payment
• IFRS 3 Business Combinations
• IFRS 4 Insurance Contracts
• IFRS 5 Non-current Assets held for Sale and
• Discontinued Operations
• IFRS 6 Exploration for and Evaluation of
• Mineral Resources
• IFRS 7 Financial Instruments Disclosures
• (issued 18 August 2005)

36
IFRS 8 Operating Segments

• Issued 30 November
• Effective 1 January 2009
• Earlier adoption permitted
• Replaces IAS 14

37
IFRS 8

• No significant changes from ED
• Adopts FAS 131 approach to determining
  segmentsmanagement approach
• Focus on the information presented to the chief
  operating decision maker
• Vertically-integrated operations can have
  segments
• Measurement
• Based on measures reported to chief operating
  decision maker
• No requirement for IFRS-based measurement

38
IFRS 8

• Disclosure
• Enhanced from those in IAS 14
• Reconciliation to IFRS-based reporting required
• IAS 34 disclosures amended

39
IFRIC developments

• Group and Treasury Share Transactions IFRIC 11
• Service Concession Arrangements IFRIC 12

40
IFRIC 11 Group share plans

• Issues
• Share-based payments involving own shares
• Share-based payments involving shares of the
  parent
• Intra-group transfers
• Share-based payments involving own shares
• Will always be equity-settled if equity-settled
  under IFRS 2

41
IFRIC 11 (ii)

• Share-based payments involving parent shares
• Parent offers its shares to employees of the
  subsidiary
• Always equity-settled
• Subsidiary offers its employees shares of the
  parent
• Cash-settled in the individual accounts of the
  subsidiary
• Intra-group transfersnon-market vesting
  conditions

42
IFRIC 12

• IFRIC 12 Service Concession Arrangements
• Approved, to be issued 30 November
• Effective date 1 January 2008
• Public-to-private arrangements only
• Grantor controls or regulates what services are
  provided to whom and the price
• Grantor controls any significant residual
  interest in the infrastructure
• Whole life assets are within the scope if the
  Grantor controls services, intended customers and
  price
• Operators pre-existing PPE
• Grantor accounting is not addressed

43
IFRIC 12 (ii)

• Some significant issues
• Arrangement consideration
• Financial asset vs. intangible asset
• Repairs, restoration and maintenance
• Borrowing costs
• Applicability of other IFRS
• Amends IFRIC 4
• Scope exclusion for concession arrangements
  subject to IFRIC 12

44
The IFRICs agendastatus

• Draftcomment period closed
• D19 - The Asset Ceiling Availability of Economic
• Benefits and Minimum Funding
  Requirements
• D20 - Customer Loyalty Programmes
• In development
• IAS 18 - Real estate sales
• IAS 18 - Initial fees received by a fund manager
• IAS 18 - Identifying agency arrangements
• IAS 38 - Advertising and promotional costs
• IAS 41 - Recognition and measurement of
  biological
• assets

45
The IFRICs agenda (ii)

• Early stages
• IFRS 2 - Accounting for employee benefit trusts
• IAS 11 - Allocation of profit in unsegmented
• contracts
• IAS 17 - Sales and leasebacks with repurchase
• agreements
• IAS 21 - Hedging a net investment
• IAS 39 - various hedge accounting issues

46
Recent and Emerging Trends in International
Accounting Standards

• Greater use of fair values in measuring
  transactions
• Impairment recognition.
• Prohibit poolings.
• Non-monetary exchanges.
• Fair values on balance sheet for both financial
  and non financial assets
• Financial Instruments.
• Agriculture.
• Investment property.
• Commodity inventories.

47
Recent and Emerging Trends in International
Accounting Standards

• More unrealised components of income
• Performance reporting becomes key.
• No income smoothing, cost deferrals, general
  provisions
• Remove corridor approach to pensions.
• Balance sheet approach to deferred tax.
• No accruals for future losses.
• Rigorous hedge accounting rules.

48
Recent and Emerging Trends in International
Accounting Standards

• Eliminate off-balance sheet items
• Derivatives.
• Special purpose entities.
• Stock compensation.
• More disclosure, especially judgements, plans,
  assumptions
• Judgement in applying accounting policies.
• Risk management policies.
• Sensitivity analyses.
• Eliminate accounting choices.
• Convergence with US GAAP.

49
Endorsement of IFRS in Past Few Years

• International Organization of Securities
  Commissions 100 securities regulators (including
  the US SEC).
• Basel Committee Global bank regulators
  (including the US Federal Reserve)
• The World Bank and IMF.
• The G7 Finance Ministers.
• And many others.
• These are non-binding endorsements.

50
Use of IFRS around the world
51
Use of IFRS Around the World
52
Use of IFRS Around the World
53
Use of IFRS Around the World
54
Use of IFRS Around the World
55
Use of IFRS Around the World
56
Use of IFRS Around the World

• Europe domestic listed companies
• IFRS required in consolidated financial
  statements of all European listed companies
  starting 2005.
• About 9,000 companies
• in 28 countries (15 current EU 10 joining May
  2004 3 EEA).
• Member states may require or permit IFRS for
  unlisted companies, for individual-company
  statements and/or for foreign companies listed on
  EU exchanges.

57
Use of IFRS Around the World
58
Use of IFRS Around the World

• IFRS already required or permitted for some
  domestic companies
• Antilles, Bangladesh, Bolivia, China
  (B-shares), Egypt, Hong Kong (if incorporated
  outside HK), Hungary, Kuwait, Russia, South
  Africa, Switzerland, Turkey.
• IFRS is the fallback if national GAAP does not
  address a question
• Mexico, Venezuela.
• IFRS permitted for foreign registrants
• Most European countries, USA, and many others.

59
Asia-Pacific Summary

• Adoption of IFRS in place of national GAAP
• Bangladesh.
• National GAAP mostly word for word IFRS
• Australia (new policy), Hong Kong, New Zealand
  (new policy), Philippines, Singapore. Also
  several recent standards in India.
• IFRS looked to in setting national GAAP
• Most other A-P countries. To varying degrees.
• Some domestic listed companies use IFRS
• China, Laos, Myanmar.
• Foreign listed companies may use IFRS
• Australia, Hong Kong, New Zealand, Pakistan,
  Singapore, Thailand. Several in Japan also.

60
Use of IFRS Around the World

• Other developed countries
• Canada Domestic companies not allowed to use
  IFRS. In Jan 2006 the Accounting Standards Board
  of Canada adopted a plan which includes a
  decision to move financial reporting for Canadian
  publicly accountable enterprises to IFRSs.
• Canadian companies registered with US SEC may use
  US GAAP.
• South Africa All listed companies must follow
  IFRS starting 2005.
• Switzerland Most listed companies already use
  IFRS.
• Russia IFRS required for listed holding
  companies and all banks starting 2004. Phased in
  for other large companies to 2007.

61
Use of IFRS Around the World
IFRS accepted in about 75 jurisdictions

• In terms of largest companies included in Fortune
  500 list, 176 prepare their accounts under US
  GAAP , 200 under IFRS and 81 under Japanese GAAP

Out of worldwide market capitalisation of over 36
trillion dollars at end 2005 11 trillion
corresponds to markets where IFRS are required or
permitted and 17trillion where US GAAP is the
rule
62
Benefits Criticism of Global Accounting
Standards
63
Benefits of Global Accounting Standards

• Positive Findings on IFRS
• Overall increase in comparability and
  transparency
• Enables level playing fields and strengthens
  market discipline
• Provision of early warning signals on exposure or
  risks relevant for risk assessment
• Use of a principles-based framework, which
  provides for adequate degree of flexibility in
  implementation
• Source Report titled Assessment of Accounting
  Standards from a Financial Stability Perspective
  published by European Central Bank December,
  2006

64
Benefits of Global Accounting Standards

• Easier access to foreign capital markets.
• Credibility of domestic capital markets to
  foreign capital providers.
• Lower cost of capital to companies.
• Comparability of financial data across borders.
• Understandability.
• Companies keep one set of books.
• Global education and training.

65
Convergence criticism

• Meaningless without convergence in local
  practices and laws as national standards are
  drawn up having regard to local laws, customs,
  usages and business environment.
• Convergence of local practices is a distant dream
• Implementation may result in an economic
  disadvantage to the user considering that
  national statutes either do not accept the basis
  on which the standard has been formulated or
  accept a different basis that secures an economic
  benefit for the user

66
Convergence
Business Issues
67
Convergence process
In content and quality facilitate convergence
Guided by some vision of the desired outcome
Improving quality
National standards-identical
Convergence
Shared objectives
Eliminating numerous options
Participation
In developing international standards
Active participation of US
68
U.S. views

• As regulators around the world continue the
  process of developing a set of international
  accounting standards, some would like the U.S. to
  embrace standards that would be of higher quality
  than those currently used in many countries but
  less rigorous than U.S. GAAP. That would be a
  mistake. - Arthur Levitt
• ..the trend particularly in the U.S. to have a
  detailed accounting rule for everything, no
  matter how narrow or obscure the issue
  Accountants should encourage the new IASB to
  emphasize a principles-based approach. Further,
  as part of the commitment to convergence, it is
  time for the FASB and SEC to change their
  behaviour and become more like the rest of the
  world. - Dennis R. Beresford, former chairman
  FASB

69
U.S. views

• I have always wondered if some of those
  advocating the use of international standards
  failed to recognize and give appropriate credit
  to the fact that we in the U.S. have the worlds
  largest, most liquid capital markets because we
  do in fact have the best of breed financial
  reporting today. This in turn has provided
  companies with capital at the lowest possible
  cost that has been used to generate jobs and an
  improved global economy. - Lynn Turner
  final speech as Chief Accountant of SEC

70
Convergence

• The coherent consistent application of IFRS is
  an essential prerequisite to the elimination of
  the reconciliation requirement in the U.S. It
  will take us some time to assess how IFRS is
  being implemented and enforced, but I am
  optimistic that we will complete our assessment,
  well within the 2009 goal for reconciliation, and
  be able to determine that the reconciliation
  requirement is unnecessary. Our new Chief
  Accountant, Conrad Hewitt, is committed to
  working to achieve this objective as quickly as
  possible. Paul S. Atkins U.S. SEC Commissioner

71
Convergence concerns

• Inadequate compliance with international
  standards
• Global auditing standards
• International standard oversight function

72
Conclusion
73
Conclusion

• The accounting confusion that results from dozens
  of national GAAPs in a global financial market is
  a disservice to investors, creditors, and others
  who use corporate financial statements.
• No one country not even the USA has a
  monopoly on the best financial reporting
  standards and practices.
• The accounting scandals of the past few years
  have driven that point home in the United States.

74
Conclusion

• Accounting is not a science. Truth is not
  discovered by scientific experiments in a
  laboratory. Truth is what the standard setters
  say it is!
• Based on a Conceptual Framework.
• Focused on users needs.
• Without bias.
• Users have pretty much the same needs all over
  the world.

75
Conclusion

• Clear lesson from Enron, WorldCom, Parmalat, etc
  Accounting Does Matter!
• A single set of accounting standards leading to
  high quality, transparent, and comparable
  financial statements makes a lot of common sense.
• An opportunity for the Indian profession to rise
  to global standards and be amongst the premier
  and much sort after professionals of the world.

76
Thank you.