Accounting Harmonization PDF

HARMONIZATION: WHY? International accounting—needs harmonisation of accounting technical rules Globalisation has fuelled the search for one single set of accounting standards applied throughout the world, improving the consistency of financial reporting IASB is the INTERNAT...

HARMONIZATION: WHY? International accounting—needs harmonisation of accounting technical rules Globalisation has fuelled the search for one single set of accounting standards applied throughout the world, improving the consistency of financial reporting IASB is the INTERNATIONAL ACCOUNTING STANDARD BOARD and has developed a set of international standards for global acceptance Does not generally permit a choice of accounting treatment permitted by a IFRS —should allow some degree of flexibility in complying with standards On the other hand, the IAS standards before do allow a choice of accounting treatment IAS 1–allows an entity to depart from the requirements of a standard in the extremely rare circumstances in which compliance would prevent the financial statement from faithfully representing transactions and other items ★MAIN ISSUES IN HARMONISING ACCOUNTING: A) Comparison of financial accounting data prepared by companies which have legal headquarters in different counties B) Distribution of financial resources in and efficient and effective way, coming from investors (shareholders, banks) C) Regulation and controls —corporate governance rule harmonisations and control financial accounting document D) Audit issues, especially in case of international groups Financial accounting is the technical accounting rules body that aims at PUBLIC FINANCIAL STATEMENTS—company gives info to the public,that’s why it is highly regulated by authorities and auditors. The public has got only this set of information about the company, not internal info Harmonizing the technical rules for the preparation of the financial statements of each subsidiary, we make it easier to harmonize consolidated statements E) International market of shares, bonds and other financial instruments F) International M&A market—should benefit from the harmonization of technical rules. The financial analyst can understand easily the info of financial statements of companies scattered around the world We have three different fullset of financal statements: - Individual financial statements—> One entity that consist on one single company - Consolidated financial statements—> Fullset of financial statement that consist of a groups of companies. A group is made at least of 2 companies: § Holding company § Subsidiary, the company that is complitely controlled by one the Holding company - Separate financial statements—>prepared by an holding company. As an holding company you need to prepared 2 different financial statements the consolidated and the separate. INTERNATIONAL ACCOUNTING: THE 4-CLUSTER THEORY (DAVID AND BRIERLEY, 1978) Accounting theoretical models —wanted to classify countries according to the ACCOUNTING SYSTEM adopted in each countries. The cluster of countries depended on the technical characteristic of the accounting system  The modern accounting theories and technics of financial accounting are based on British UK IASB is located in London—very strong technical tradition in contemporary times Double entry bookkeeping system created in Tuscany during Middle Ages —he was a Franciscan friar So basically, we use this olds models because they aim to understand why differences in countries do exist. The natural bias of people who prepare the financial statements. Four clusters of accounting systems: A) ROMANO-GERMANIC Countries with a Roman law (latin) traditional in juridical systems German has a Latin legal system,that’s why we say roman Germanic Continental European countries —coincides with the old Roman Empire Characteristic —all laws are written, there is a civil and commercial code, accounting standards are written. Very often the accounting standards are included in the commercial code but not always. In some coutnries standards are the law of the state too. B) COMMON-LAW—UK and common wealth countries (UK tradition linked countries) Constitution of the state is the common law, not written but valid. Anchored to conventions Generally accepted rules which may not necessarily be codified in a code, but applicable, because ofc being based on a common law system, most of them are not written. The professional rules are strong also politically —but are not in the civil code Faster professional rules than in countries with rules included in the law—practical issue to propose a change in the civil code and have it approved, other thing is to make it through professional institutions They adapt better onto the changes of the market C) SOCIALIST There was the Soviet Union in 1978 but this cluster is still applicable Countries anchored to decisions of the state that regulates the economic system of the country Strong influence of the state authority on the life and accounting rules of companies D) PHILOSOPHICAL-RELIGIOUS State with an official state mandatory religion where the paradigm influence economic and social life of the country Islamic accounting—they have technical rules strictly dependent from religious regulations Calculation of interests—prohibited to charge explicit interests on loans Strong impacts on the rules for dividends distributions —in some of these countries directed also to workers  These cluster make us understanding how the accounting rules are NATURALLY BIASED according to where they come from and where they are applicable NOBES’ CLASSIFICATION (1983) Nobles model has been updated though years He divided the accounting systems into 2 clusters of countries CLASS 1– MICROFAIRNESS JUDGMENTAL COMMERCIAL DRIVEN microeconomics oriented, private sector oriented Fairness of calculations Driven by the market Subclasses Business economics, social consensus, extreme judgmental Here we have countries like Netherlands —individual freedom and of single companies, less regulated from central point of view. Local legislation enforces the EU directives and allow Dutch companies to choose freely among all the options left allowed by the directive. More freedom and judgment left to the single firm Fair value and historical cost allowed for measuring assets Business practice, private sector rules, British origin UK vs USA differences UK is based on common law. Financial markets well developed. Australia,UK, New Zealand, Ireland More judgmental US—Canada is a commonwealth country. Security exchange commission is the board that regulates the financial market. Everything has got a specific written procedure to achieve a result —> very strong link to procedure in financial accounting and auditing Non listed limited liability companies—>are not obliged to prepare public financial statements, only listed companies must and are highly regulated ★CLASS 2– MACRO-UNIFORM GOVERNMENT DRIVEN, TAX DOMINATED CLUSTER  The Italian bias is the tax rule Italy—code based international influences. EU member states are subject to EU legislative authorities. Financial accounting for non listed companies is regulated by directives (legal technical central authorities tool which must be enforced in the single member state by a national law). Accounting directives normally leave option to apply rules partially but the legislative decree chose just 1 rule for building and plants (no fair value, just historical cost method allowed for non listed companies) Historical cost is based on invoices, comes from an official document. The taxation consequences are based on invoice, not a judgemental professional appraisal of the value of the asset —> depends on the cultural environment,it is a bias. The fair value of a public asset (bond) is much easier to be verified but auditors and the state —it’s the price France, Belgium,Spain—continental EU countries —>plan based They are highly regulated by the state and adopt in the national GAAP standards, specific charts of accounts. Public central authorities give to each industry a chart of account, detailed. What are these plan-based? Plan-contable-general (PCG); companies that have to apply specific charts of accounts (t accounts) different into district to district. According to the industry they belong to. Germany and japan—>statute based Statute of a company—regulation of the functions of the corporate governance bodies of a single company. By laws approved by the incorporations of the company when it is created by shareholders in front of a public officer (at the moment of the act of incorporation of the company). Sweden, Scandinavian countries —>economic control Social democratic oriented country —state regulates heavily the countries. The state is also strong into the lives of the companies. NOBES’ UPDATED CLASSIFICATION (1998)  NOBES’ UPDATED CLASSIFICATION (1998): EXAMPLES Shows the micro and macro oriented countries Lists some specific technical accounting rules I. MICRO ORIENTED UK General accounting features —fairness of rules, shareholders orientation… Specific accounting features Depreciation plan of tangible assets over useful lives (economic) No legal reserves—The value of the leased long term assets is in the balance sheet of the user. Finance leases capitalised —use long term assets as if it substantially were ours but we are just users for a decent long period, legal ownership is of others. I. MACRO ORIENTED —CONTINENTAL EUROPEAN COUNTRIES (ITALY) General accounting features —legal written laws, creditors orientation… Specific accounting features Depreciation of tangible assets by tax rules that regulated the deductibility of the depreciation Legal reserves —legislation in these countries forces company to account for a legal reserve in the net equity (balance sheet) for prudence principle No lease capitalisation —The value of the leased long term assets is not in the balance sheet of the user, but of the legal owner. The substance is analogue to a purchase with a gradual repayment of a loan to a lender. Formally the lender is the owner here. The user receives the periodic invoice and his liability is concerned to the monthly payment. INFLUENCES ON DIFFERENCES  Providers of finance (investors vs. banks & families) Legal systems (common law vs. civil code) Taxation (single accounts vs. different accounts) Accounting profession (strength and size of professional bodies) HARMONIZATION OF ACCOUNTING IN THE EU Depends on 2 legislative instruments enforced by the parliament or European Commission (2 central authorities of EU) 1.​ Directives—instruments prepared by central authorities of EU and enforced but needing a national legislation to be implemented locally. Included a starting date. Give different methods to apply the same rule. legislative acts that set out a common goal which member states must achieve Differences between states reflecting national,cultural norms—Room for the state to define their approach on reaching the goal Way to reach harmonization and get jurisdictions closer. Complicated and costly to comply—no uniformity achieved, different laws in countries Concerning only non listed companies 2.​ Regulations—become enforceable in a single member state without mediation of a local legislation, immediately and directly. binding uniform legislative acts which must be complied with in every member state, it’s prescriptive. No flexibility or slightly inconsistency Government or the Commission sets a goal and defines how to achieve it, once the same law comes into effect it’s binding across Europe A regulation enforces the use of IFRS for listed groups in EU IFRS adoption in consolidated accounts of listed companies, provided that such standards are endorsed by EC authorities. This came by regulation. It’s mandatory for companies that are listed in every country EU ACCOUNTING AND AUDITING DIRECTIVES 1.​ Second directive—> First adopted in 1976 and then updated. Concerns the corporate governance of limited liability companies in EU member states. Modified but still applicable 2. Fourth—concerned single financial statements 3.​ Seventh —concerned the consolidated statements 4.​ Eight—concerns the functioning of professional accounting bodies  Fourth and seventh are NO more valid directives— supra seeded by EU directive 34, 2013, enforced in Italy with 2 legislative decrees A NEW EU ACCOUNTING AND AUDITING DIRECTIVE On June 26, 2013, a new EU accounting Directive was published The new Directive (2013/34/EU) REPLACED THE IV AND THE VII ACCOUNTING EU DIRECTIVES, enforced in all Member States, respectively for STATUTORY (OF THE SINGLE CORPORATION) AND FOR CONSOLIDATED ACCOUNTS OF NON LISTED EU LIMITED COMPANIES In Italy, the IV and VII Directives were enforced via the Legislative Decree 127/91. The contents of the IV Directive were included in the Civil Code, while the contents of the VII Directive were included in the Legislative Decree 127/91(this decree enforced the 2 directives and it’s still valid,unified statutory and consolidated accounts) Analogous rules apply to EU states ★MAIN FEATURES OF THE NEW DIRECTIVE: A. ​UNIFICATION of rules for statutory and consolidated accounts B. MODULAR APPROACH to the notes to the accounts and to formats Non listed EU companies—NEW DIRECTIVES provide a modular approach in preparing public financial statements. Gradual approach, the graduation is based on the dimensions of the companies. Smaller limited liability companies have fewer requirements than medium size and larger size companies in asking for detailed information, depending on the size. C. ​EXTRAORDINARY ITEMS not to be shown on the face of the Income statement Depending on unforeseen situations throughout the year, loss of value of plants and buildings (impairment losses)—extraordinary losses Extraordinary gains—sale of some companies of the group, sale of intangible old tangible assets Extraordinary items doesn’t no more have a specific section for disclosure. Are mixed around the operative net income but expressed specifically in different lines D. ​REDUCTION of types of intangibles to be capitalized—applied research costs, advertising costs incurred during the year go straight to the income statement and cannot be capitalised New Directive to be included in local legislation by July 20, 2015. Enforcement in Member States has to be done by January 1, 2016 at the latest. EU LEVEL, 2 PATHS 1.​ Non listed limited liability content —accounting and legislation relies on directives which need local legislation to be enforced in each country 2. Listed limited liability companies —through regulations, immediately enforceable in each member states - EX—consider country of listing Company legally incorporated in Switzerland but listed in Milan—complies with EU legisaltion for listed companies Firm legally incorporated in italy but listed in USA—complies with US legislation THE NEW EU DIRECTIVE: ENFORCEMENT IN ITALY On August 18, 2015, the new EU accounting Directive was enforced in Italy via TWO SEPARATE LEGISLATIVE DECREES (LOCAL LEGISLATIONS) 1.​ THE LEGISLATIVE DECREE NO. 136/2015 concerns the individual and consolidated accounts of financial institutions, which do not adopt IFRS in Italy, and replaces Leg. Decree no. 87/1992. 2.​ THE LEGISLATIVE DECREE NO. 139/2015 concerns the individual and consolidated accounts of all other Italian limited companies, which do not adopt IFRS. It modifies the Italian Civil Code in the section devoted to individual accounts. It also modifies the Leg. Decree no. 127/91, concerning the consolidated accounts. The new legislative decree modified the civil code in Italy for the individual accounts which was established by the fourth directive, and the directive of 1991 (seventh directive) MAIN FEATURES OF THE NEW ITALIAN ACCOUNTING LEGISLATION, in addition to those of the Directive 34/2013: inclusion of derivative financial instruments in the accounts and measurement at FV measurement of accounts receivable and payable at amortized cost measurement of bonds and other financial instruments at amortized cost Cash Flow Statement now mandatory for all companies except SMEs Enforcement in Italy from January 1, 2016. applies only to NON LISTED COMPANIES THE ADOPTION OF IFRS IN THE EU: THE EC REGULATION EC Regulation 1606/2002: IFRS set as MANDATORY in CONSOLIDATED accounts of groups LISTED (listed holding companies in any member states) on any regulated market in the EU; options to EXTEND THE USE OF IFRS DEMANDED TO SINGLE MEMBER STATES Not necessarily incorporated in member states, but mandatory use in LISTED companies IN a EU MEMBER STATE and must apply IFRS for consolidated accounts Mandatory use of IFRS in consolidated accounts only starting from 2005—each state can autonomously decide what to do with single accounts, to extend or not the regulation Immediately enforced in all Member States (it is not a “directive”)—directly applicable FIRST FINANCIAL YEAR OF ENFORCEMENT: 2005 THE ITALIAN CASE OF AN EXTENSIVE APPROACH: MANY OPTIONS FOR INDIVIDUAL COMPANIES AND HOLDINGS  ★Example use of IFRS in Italy ​ Legislative Decree 38 (Feb. 28, 2005)—beginning of first year of concrete IFRS application ​ Preparation of financial statements for 2005 takes place in first 2 months of 2006 1.​ IFRS, for Italian companies, are mandatory in consolidated accounts of non listed banks and insurance companies from 01-01-2005 to 31-12-2018; Some exceptions for small banks, local tiny banks—> IFRS allowed, but not mandatory, since 01-01- 2019 2. IFRS mandatory in separate accounts of listed companies and non listed banks (2006; allowed since 2005) ​ Separate accounts—> according to the IFRS we have 3 full sets of financial statements ​ -Individual ​ - Separate ​ - Consolidated 3. IFRS not allowed for separate and individual accounts of insurance companies, unless they are listed (mandatory only for stand-alone listed insurance companies, since 2006) ​ If insurance companies are listed holdings, use the IFRS only for the consolidated accounts ​ If insurance companies are not listed holdings—do not use IFRS ​ Standalone not listed—must not use IFRS ​ Standalone listed insurance company—must use the IFRS. The state of being listed prevails 4. IFRS allowed for consolidated accounts of non listed groups (2005) ​ In Italy also non listed group can use IFRS for consolidated accounts 5.​ IFRS allowed for separate and individual accounts of entities included in consolidation area (2005, except insurance companies) ​ Non listed companies 6. IFRS allowed for stand-alone companies, since 2014 (art. 20, co.2, D.L. 24/6/2014, nr. 91, converted into Law 1/8/2014, nr. 116) ​ Individual acocunt of a company which doesn’t belong to any group 7. IFRS not allowed for SMEs (art. 2435-bis Civil Code), also when included in IFRS consolidated accounts ​ Not even in the case they belong to an IFRS group. The SMEs are basically the Small/Medium size entities. THE ADOPTION OF IFRS IN ITALY: SEPARATE AND INDIVIDUAL ACCOUNTS Theoretical point of view in extending the set of international accounting standards instead of using the Italian GAAP—when we change the set of accounting standards, the results of the companies change When a company can freely choose to adopt or not IFRS—you deliberately decide to change your final results, therefore we have biases The choice is legal but makes a difference in net equity (balance sheet) and income statement  Accounting standards choice do not impact the cash flow statements—it discloses and measures the cash flows which do not change with accounting policy using the IFRS or Italian GAAP The tax amount change, The dividends will change since we change the result of the income statement— the cash flow statement may therefore change too Ex. To enhance the market value of the real estate assets—we can use IFRS to enhance the historical cost Use the professional judgment within the law, professional responsibility of auditors is a key aspect Some states didn’t want to create distortion with the tax system — these limited liability companies decided not to adopt IFRS But they are less expensive in the application, a lot of companies adopt them A company must be consistent over time—but it is not in absolute terms, there are restrictions for companies which cannot decide over time to change accounting standards applied between IFRS and local Italian GAAP. They can adopt IFRS and then reconvert to local GAAP with restrictions Groups included small limited liability companies that own just few assets—the group creates a new corporation which includes just few assets or one (ex. A real estate building). The reason is for liability motives. The creditors of the big company, if on financial difficulty to repay the debt, cannot attack this smaller separate company which protects therefore asset. It is advisable for groups The newco cannot be created at the specific moment the big company has got troubles These tiny companies have to file the Italian GAAP, therefore the group needs to convert the single financial statements in IFRS in order to prepared the consolidated group financial statements following the IFRS Subsidiaries, if allowed, are incentivised to apply IFRS too in order to reach uniformity for practical reasons IFRS are MANDATORY: ​ Separate accounts of listed companies ​ Separate and individual accounts of banks and other financial institutions (until 31th December 2018) ​ Individual accounts of stand-alone listed insurance companies ★IFRS are ALLOWED: ​ Separate accounts of parent companies choosing IFRS for consolidation ​ Individual accounts of all companies included in IFRS consolidated accounts ​ Individual accounts of stand-alone non listed companies (since 2014: previously prohibited)  ​ Separate and individual accounts of banks and other financial institutions (since 1st January 2019) IFRS are NOT ALLOWED: ​ Separate accounts of insurance companies ​ Individual accounts of non listed insurance companies ​ Individual accounts of SMEs (also when included in IFRS consolidation area) THE EC REGULATION (AND ‘EUROPEAN STANDARDS’ VS. IFRS) What it exactly says.... “Companies...shall prepare their CONSOLIDATED ACCOUNTS* in conformity with IAS adopted in accordance with the procedure laid out at Article 6(2) if, at their balance sheet date, their securities are admitted on a regulated market” * Member States can opt to extend this to separate or individual financial statements ADOPTION OF IFRS ​ At the EU level we have a procedure, because the technical committee that prepares the IFRS is an international board called IASB (located in London) ​ IASB is independent from the EU, independently of Brexit—> members of the board come from any country of the world, also countries in which IFRS are not adopted (for instance USA) ○​ As any other international board, It is rules by politics and economic relevance of countries in the world — economic power matters ○​ It creates sub committees ○​ They used to come only for the profession but nowadays they come even for regulations bodies, legislative bodies, banks, analyst etc. ​ There are interest groups that influence the board and the EFRAG—European Financial Reporting Advisory Group. Technical committee at a EU level ​ IASB prepares the draft of the financial accounting standards, the drafts are disclosed to the public (called exposure drafts). Once a standard is ready, before enforcing it and make it come at use, and exposure draft is exposed to the public asking for comments ○​ The EFRAG sends comments to the IASB ○​ Not necessarily what the EFRAG says on the drafts is taken into account ○​ Academic people,individuals, national regulators cooperate with EFRAG in order to then send the comments ​ IASB produces then the real final standard—which is not immediately enforced in the EU  ​ There is the endorsement process—stays between publication by the board and adoption in EU member states. It takes time ​ The standards must be endorsed by… ○​ Article 6.2 says about this procedure ○​ First which intervenes in the process is the EFRAG—needs to approve the technical aspects of the standard. ○​ The ARC (accounting regulatory committee) says yes or no to the standard. It is a juridical board, considers the juridical aspects because the standards will then become regulations and laws through the parliament ○​ A company which adopts IFRS and it is not from EU—may adopt some standards not enforced in EU. There could be a time delay in the EU endorsements, the standards IFRS could be endorsed prior in countries outside EU ​ !! The local Italian GAAP are technical rules but not laws ​ !! The IFRS are regulations, laws of the states in EU ​ Difference in terms of liability ​ It is interesting enough to know that IFRS have adopted much faster in smaller economies. Why are they so fast and the EU are so boring? Because of politics, foreign investments of multinational companies in smaller economies; so it’s much more easier for smaller companies to adopt the IFRS in their country. SEC – FOREIGN ISSUERS Elimination of the requirement for foreign issuers to present a reconciliation of net income and equity from IFRS to US GAAP Applies to form 20-F filed on or after 4 March 2008 and relating to periods ending after 15 November 2007 The ongoing process of globalisation of GAAP Although the headlines often focus on divergence of GAAPs, the achievements over the last few years in moving towards a single global set of standards has been remarkable More than 100 countries on all five continents require or permit the use of IFRS, and major economies in Asia-Oceania, North America and South America have set out a timeline towards the full adoption of IFRSs As to the US, it has created another catalyst to use US SECURITIES AND EXCHANGE COMMISSION THE IASB MISSION STATEMENT The INTERNATIONAL ACCOUNTING STANDARDS BOARD is an independent, privately-funded accounting standard setter based in London, UK. Board Members come from nine countries and have a variety of functional backgrounds. The Board is committed to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the Board cooperates with national accounting standard setters to achieve convergence in accounting standards around the world. IASB - STRUCTURE IASB develops and publishes the international accounting standards IFRS (financial reporting standards) Formed in 2001 as a replacement for the INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE IASC (that published the IAS standards). Many IAS are still in force since they were adopted by the IASB when it was formed IASB consists of 24 members of who up to thee may be part time, chosen for their professional competence and relevant experience, Maintaining a geographical balance on the board The IASB is responsible to the TRUSTEES OF THE IFRS FOUNDATION The IFRS foundation has also established in 2021 the ISSB  (INTERNATIONAL SUSTAINABILITY STANDARD BOARD) body providing sustainability disclosure standards, that meet the information needs of investors with regard to climate change and sustainability issues Investors and lenders of capital need to assess the risks and opportunities from environmental matters to which companies are exposed, the entity’s environmental policies and targets, strategies for reaching them, analysis of the performance in achieving them The need for these standards results in globally comparable sustainability reporting IASB and ISSB cooperate ensuring standards compatibility. The 2 bodies are independents but both overseen by the Foundation IFRS FOUNDATION OBJECTIVES - Develop, through the IASB and ISSB (sustainability standard board), in the public interest high quality, understandable, enforceable, comparable and globally accepted standards IFRS for financial reporting based on clear principles. Useful to investors in making economic decisions - Promote the use and application of the standards - Taking into account the sizes and types of entities in different economic settings - Facilitate the adoption of the IFRS standards through the convergence of national and regional standards and IFRS standards The activities of the IFRS foundation are directed by 22 trustees who are appointed by a MONITORING BOARD. They appoint the members of the IASB, ISSB and maintain the funding of their work and review their effectiveness The monitoring board comprises high level representatives of public authorities —such as European Commission and US securities and exchange commission Financial support for the IFRS foundation’s activities come from countries, income from publications and major international accounting firms IFRS ADVISORY COUNCIL Provides a forum for participation by organisations and individuals with an interest in international corporate reporting Comprises 30 or more members and provides strategic advice to the trustees, IASB and ISSB Chair of this council cannot be a member of either IASB or ISSB IFRS INTERPRETATIONS COMMITTEE Interprets the application of the IFRS and provides guidance on financial reporting matters not addressed by them THE STANDARD-SETTING PROCESS The IASB develops standards by means of a "due process" which involves accountants, users of financial statements, the business community, stock exchanges, regulatory authorities, academics and other interested individuals and organisations throughout the world.  The main steps in this process (which are listed in the Preface to International Financial Reporting Standards) are as follows: identification and review of all the issues associated with the topic concerned consideration of the way in which the IASB Conceptual Framework applies to these issues a study of national accounting requirements in relation to the topic and an exchange of views with national standard-setters consultation with the Trustees and the Advisory Council about the advisability of adding this topic to the IASB's agenda publication of a discussion document for public comment consideration of comments received within the stated comment period publication of an exposure draft for public comment consideration of comments received within the stated comment period approval and publication of the standard. Publication of an international standard requires approval by at least nine of the fourteen members of the IASB. The Preface states that the international standards are designed to apply to the general purpose financial statements and other financial reporting of profit-oriented entities, whether these are organised in corporate form or in other forms. For this reason, the standards refer to "entities" rather than companies. THE STRUCTURE OF AN INTERNATIONAL STANDARD ​ An IFRS Standard or an IAS Standard consists of a set of numbered paragraphs and is typically made up of some or all of the following sections: ​ introduction ​ objectives and scope of the standard ​ definitions of terms used in the standard (these may be in an Appendix) ​ the body of the standard ​ effective date and transitional provisions ​ approval by the IASB and any dissenting opinions by IASB members A standard may be accompanied by a Basis for Conclusions, which is not part of the standard itself but which sets out the considerations which were taken into account when the standard was devised. There may also be application or implementation guidance and illustrative examples. HOW MANY STANDARDS AND INTERPRETATIONS ARE CURRENTLY IN ISSUE? ​ The all IFRS CORPUS—> it is made of STANDARDS and INTERPRETATIONS, they all come from the board. ​ International financial reporting standard is a series of documents that goes from 1 to 17 ​ Each standard comes with an application guidance—but it is not for free ​ Basis for conclusions—document of the final meeting which decided to apply the standard, not included in the law (final regulation of EU on the standard) ​ IFRS 14–>not allowed in EU, never been endorsed. At a worldwide level is applicable since 2016 ​ There can be standards applicable in the world but not in EU,they didn’t pass the endorsement process ​ IFRS17–>newest ○​ 1. IFRSs— designed to apply to the general purpose financial statements of profit oriented entities, whether organised in corporate or other forms. ○​ 2. IASs—old series of standards, which is still valid ​ The rules of the institution changed. When they changed, the original was called in 1973 IASCommitee ​ which issued the series of IAS documents and specific interpretations ​ In 2001 a new regulation for the functioning of the board came in, the new board changed name in IASB which started a new series of documents and interpretations called IASB ​ But, all series still exists and are endorsed There are gaps in IAS numbers continuity since some standards in between have been surpassed by new standards IFRS 2.​ SICs—old interpretations 3. IFRICs—new series with already some gaps in it. Interpretations are normally issued after the single standards enforcement. Must be applied by the companies which are complaints with IFRS, they need to comply both with IFRS and their interpretations.  The board gives interpretation to apply standards in specific situations, in order to clarify the rules When a single standard is updated, the old interpretation of the existing standard is included in the new updated IFRS HOW MANY INTERPRETATIONS ISSUED BY IFRIC ARE CURRENTLY IN ISSUE? HOW MANY INTERPRETATIONS ISSUED BY SIC ARE CURRENTLY IN ISSUE AND VALID? IFRS ADOPTION ACROSS THE WORLD ​ Smaller countries are more favourably to the adoption of IFRS than large economies —they have a weaker accounting profession permission and are more dependent on foreign investments by multinationals which adopt IFRS ​ The concept of International Financial Reporting Standards has been in existence since mid 1990s ​ Since the universal common application of IFRS in mid 2000s nearly 200 different jurisdictions have adopted IFRS for their domestic financial reporting - Each jurisdiction has DIFFERENT RULES for the mandatory or voluntary application of IFRS, usually based on: A. ​ Whether companies are listed or unlisted; and B. Whether consolidated or individual financial statements are being prepared  THE UK ENDORSEMENT BOARD UKEB After 1 January 2021,the companies act 2006 requires UK listed companies to apply UK adopted international accounting standards preparing their group financial statements. These include all international standards approved by EU (IFRS) as the end of 2021 and any further standards issued by the IASB and endorsed for use in the Uk by the UKEB ​ THE US CASE: HISTORY OF ACCOUNTING PROFESSION AND REGULATION ​ Accounting profession dates back to nearly hundred years, AICPA American Institute of Certified Public Accountants ​ CPA certified public accountant or CA chartered accountantOnly listed companies prepare mandatory public financial statements according to US GAAP ​ Securities and Exchange Commission (SEC)—regulator for financial markets. The SEC intervenes heavily ​ Established by Act of Congress ​ Securities Act of 1933 ​ Securities and Exchange Act 934 ★US GAAP ​ Rule based = standards and guidance are very detailed, tend to provide specific rules for specific problems.procedures and steps to be followed ​ Strong implications for professional liability IFRS or IAS ​ Principle based = rules are not so detailed. Standards and interpretations give the principle,the single professional must apply professional judgment in the application of the principles ​ More room for discretion ​ PROS= Corpus is smaller, do not need specific rules for specific situations, corpus of principles is flexible and can adapt easily to changes ​ CONS= must motivate choices which are therefore included in the notes of the accounts,which are massive. More professionals responsibility THE SEC ​ Responsible for financial reporting of public companies ​ Requires companies to adhere to GAAP ​ Has enforcement authority ​ Has traditionally delegated rule setting to private organizations TIMELINE OF DEVELOPMENT OF US GAAP THROUGH PRIVATE ORGANIZATIONS ​ Committee on Accounting Procedures (1939-1959) ​ Issued 51 Accounting Research Bulletins (ARBs) ​ Accounting Principles Board, or APB (1959-1973) ​ Issued 39 APB Opinions ​ Financial Accounting Standards Board or FASB (Pronounced “Faas-bee”) (1973-to date) OTHER SOURCES FOR US GAAP ​ US GAAP also included the following: ​ FASB—typical profession body that prepares standards and interpretations  ​ Widely prevalent industry practices —feed the corpus. Industries can feed the corpus ​ AICPA pronouncements ​ SEC ​ Others THE FASB ​ Technical board for accounting standards - Small companies not listed are not obliged to publish their financial statements - Foreign companies can be listed in US markets by bringing IFRS accounts without converting them to US GAAP -Before 2010=In order to be listed in US you had to change into US GAAP in the financial statements -In 2010 the SEC decided to allow foreign companies to list in US without converting standards - US companies must adopt US GAAP—no concession to adopt IFRS, it is just for foreign firms - Convergence project between IASB and FASB which implies that the boards agree and try to converge— but documents are still different ​ Starting in 1973, it issued: ​ More than 170 Statements of Financial Accounting Standards (SFASs) ​ About 10 Statements of Financial Accounting Concepts (SFACs) ​ About 50 interpretations (FINs) ​ Several Emerging Issue Task Force (EITF) pronouncements ​ Numerous other technical bulletins, and implementation guidelines FIRST-TIME ADOPTION OF INTERNATIONAL STANDARDS In 2003, the IASB issued IFRS1 FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS. A revised version was issued in 2010. The objective of IFRS1 is to ensure that an entity's first financial statements which comply with international standards should contain high-quality information that: - is transparent for users and comparable for all periods presented - provides a suitable starting point for accounting under international standards - can be generated at a cost that does not exceed the benefits to users. ★The main features of IFRS1 are as follows: (a) An entity's "first IFRS financial statements" are defined as the first financial statements in which the entity adopts international standards and makes an explicit statement of compliance with those.  † This standard uses the term "IFRS" to refer to the international standards in their entirety, including IFRS Standards, IAS Standards and IFRIC Interpretations. (b) The "first IFRS reporting period" is defined as the reporting period covered by the first IFRS financial statements. (c) The "date of transition" to international standards is defined as the beginning of the earliest period for which an entity presents comparative information in its first IFRS financial statements. Most financial statements cover a period of one year and give comparative information for the previous year. So the date of transition is normally the date which falls two years before the end of the first IFRS reporting period. (d) When first adopting international standards, an entity must prepare an "opening IFRS statement of financial position" as at the date of transition. This is the starting point for accounting in accordance with international standards. The opening IFRS statement of financial position must comply with international standards as at the end of the first IFRS reporting period and should: (i) recognise all assets and liabilities whose recognition is required by international standards, but not recognise items as assets or liabilities if this is not permitted by international standards (ii) reclassify items which were recognised as one type of asset or liability under previous GAAP but which are classified as a different type of asset or liability under international standards (iii) apply international standards in measuring all recognised assets and liabilities. Note that the term "statement of financial position" has now replaced the term "balance sheet" throughout the international standards (e) The same accounting policies must be used in the entity's opening IFRS statement of financial position and in all periods presented in the first IFRS financial statements (i.e. the first IFRS reporting period and the comparative period(s)). In general, these accounting policies must comply with all international standards in effect at the end of the first IFRS reporting period, even if some of those standards were not in effect at the date of transition or during some or all of the periods for which information is being presented. (f) The first IFRS financial statements must include the following reconciliations: (i) a reconciliation of equity (share capital and reserves for a company) as reported under previous GAAP with equity re-calculated under international standards, for the date of transition and for the end of the last period in which the entity reported under previous GAAP (ii) a reconciliation of total comprehensive income for the last period in which the entity reported under previous GAAP with total comprehensive income as it would have been calculated under international standards. Note that the term "total comprehensive income" refers to an entity's profit or loss together with certain other gains or losses such as revaluation gains. (g) IFRS1 grants limited exemptions from some of its requirements where the cost of compliance would be likely to exceed the benefits to users of the financial statements. Introduction to International Accounting and its Regulatory Context ACCOUNTING REGULATION: THE FUNDAMENTALS ​ Two main groups of countries: ​ ​ A) common-law countries  ​ ​ B) Roman codified law countries ​ From the inclusion in either group some relevant consequences for accounting regulation systems arise ​ We have biases in preparation and interpretation of financial statements ​ Stakeholders are holders of interests—must be informed MAIN CONSEQUENCES ​ A) Common-law countries: ○​ relevance of public markets (investors...) ○​ relevance of accounting bodies (CPA bodies, auditors’ associations...) ○​ changes occur more often ​ B) Civil-law countries: ​ relevance of banks, the State (IRS and civil authorities), the civil code and other written companies acts ​ more influence of taxation on accounting rules ​ more likely that small entities have to prepare public financial statements (PFS) ​ changes occur less often ​ sometimes, codified charts of accounts are required (France, Belgium, Spain.) SOME ELEMENTS TO BE AWARE OF.... I. Companies Acts—typical for different sector industries, sectors of public interest for a country (publishers, utilities, guns manufacturers) Golden share—normally a minority share, owned by the State (ministry of economics and finance), because even though it is minor, the state has power of prohibit some relevant operations in the firms. For instance the sale of the majority of share to an investor. This happens when the company operates in the public interest, the state has to protect the national and public interest from interference coming from foreign entities The minority interest doesn’t come in the ordinary management of the company, but on specific aspects and events The ownership of the golden share doesn’t give the state the power to prepare the consolidated statements. It’s the holding of the group that does it Ex. National defence, telecommunications, broadcasting, energy II. Commercial Code III. Accounting plans IV. Mandatory accounting standards V. Professional guidelines VI. Stock exchange requirements VII. Requirements of a stock exchange regulator DIFFERENT FORMS OF ENTITIES... ​ Sole trader  ​ Partnership ​ Private company ​ Public company... AND DIFFERENT CONSEQUENCES