Finance and Accounting : The International Financial Reporting Standards - Research Paper Example

Task The International Financial Reporting Standards (IFRS) are a set of guidelines that are sued to guide accountantsand financial professionals in preparation and reporting financial information. This paper will discuss the IFRS in terms of its basic information; by discussing its foundation, and how it was formed. The founder of the IFRS, the IASB, is described, and its history as a global accounting body. This is followed by a description of the SAC, and the requirements of the IFRS. The GAAP, its difference with the IFRS, and the steps being taken to converge the two accounting models are then discussed. The International Financial Reporting Standards The International Financial Reporting Standards (IFRS) are a set of guidelines and rules that guide accounting and financial professionals all over the world in preparing and reporting the financial information of business entities (AICPA, 2008). The IFRS set of guidelines were adopted by the International Accounting Standards Board (IASB) to guide the board in the regulation of the accounting professional industry. The IASB continually seeks to provide better quality accounting information for all its users; therefore, the IFRS were developed to address the growing demand for this quality information. The development and acceptance of the IFRS as internationally accepted guidelines is a process that started more than a decade ago, with the first introduction of the Financial Accounting Standards Board (FASB) to produce the Generally Accepted Accounting Principles (GAAP). The setting of US accounting standards by the FASB needed to be universalized; therefore, the IASB was formed in 2001 to set internationally accepted accounting standards. This led to the development of the IFRS, which are standards that tend to converge on a solution for the international body of accounting. The formation of the IFRS included an adoption of the International Accounting Standards (IAS) that was being used by the IASC before the introduction of the IASB. The current composition of the IASB is still overseen by the IFRS foundation and a number of members drawn from the international body of accountants. According to the AICPA (2008), the IFRS are considered a set of guidelines that set apart accountants and presenters of financial information from other professions. The structure of the IFRS is determined by the bodies that are mandated to determine their validity and application. As already stated, the IFRS are determined by the IASB, but the specific treatments contain therein comprise of four major factors, the IFRS, the International Accounting Standards (IAS), the Standing Interpretations Committee (SIC), and the conceptual framework (PWC, 2011). The construction of the IFRS is mainly based on the requirements of these bodies of rules, since the standards were formed as a means of unifying accounting reporting practice in the international community. As already stated, the IFRS were formed as a prelude to the IASC, and the IASC members are still considered members of the IFRS supervisory committee. The IASC board that was replaced by the IFRS was mainly composed of five member groups; the IASC board, the consultative group that represented a range of financial partners, the SIC, an advisory council, and steering committees that oversaw individual projects (PWC, 2011). This means that the IASC board was mainly a structure rather than a committee that oversaw the accounting profession. In 1997, the IASC was restructured to include a more internalized accounting field and perform its role more effectively. The restructuring of the IASC bore the IASB, which took effect in 2001 (PWC, 2011). The new accounting body, IASB, was organized under a new foundation called the IFRS foundation that sought to make accounting practices concerning financial reporting more effective (IASPLUS, 2011). The components of the new structure include the IASB, which has the full mandate of establishing the IFRS and the IFRS foundation to oversee the work of the IASB. The IFRS foundation was previously named the International Accounting Standards Committee Foundation (IASCF), and some of its main purposes include fundraising for the body and overseeing the performance of the IASB. Other components of the new structure include the monitoring board that oversees the IFRS foundation, the IFRS interpreting Committee, and the IFRS advisory council that advises the IASB and the IASCF. The last component of this body is the working groups that are tasked with the responsibility of developing individual projects concerning the IFRS (IASPLUS, 2011). As already mentioned, the main member of the IFRS board is the IASB, which is a body tasked with two main responsibilities (IASPLUS, 2011). The first responsibility of the IASB is the development and issue of international financial reporting standards that guide accounting and financial professionals, and the approval of the intentions of the IFRIC. The International Financial Reporting Interpretations Committee (IFRIC) is a body that interprets the financial reporting standards regulations for the various entities that form part of the IFRS. The IASB is usually composed of 16 members of the accounting body, 13 members who serve full-time and not more than 3 who serve on short-term contracts (IASPLUS, 2011). The members of the IASB are expected to possess basic professional competence and integrity in the accounting field and practical experience as financial accountants. Since the accounting profession requires the analysis of financial statement, the other qualifications required of members of the IASB include demonstration of accounting competency and knowledge of financial reporting measures, and the ability to analyze and review financial statements. Other qualifications include basic communication skills, decision-making skills, an awareness of the accounting environment, and ability to work in an ever-changing environment. The IFRS members are also required to be committed to the IFRS foundation’s mission and accounting interests and posses a measure of integrity and discipline (IASPLUS, 2011). The due process of formation of accounting policies is followed by the IASB, since the setting of accounting standards has to follow a specific procedure (AASB, 2004). The first step in the due process is the identification of a topic of interest, which is then reviewed by the staff to identify the issues surrounding the topic. This review is concerned with the identification of the relevant framework relating to the topic. This is followed by a study of international accounting standards relevant to the issue, which is done by considering the views of different national standard setters. The SAC is then consulted on the matter to determine the advisability of the topic concerning the agenda of the IASB, after which an advisory team is formed to determine the agenda of the project (Center for Audit Quality, 2009). A discussion document and an exposure draft are then published for public comment on the views of the IASB council (AASB, 2004). The conclusions of the votes and views on the discussion document and exposure document are ten determined, after which all the views are considered by the council. Field tests and discussions are then held to determine the applicability of the standard, and if it is approved, the voting process determines whether the standard is acceptable to all members (Center for Audit Quality, 2009). The last step is publishing the standard with a basis for conclusion and its applicability in the accounting field, the steps in the due process in the determination of the standard, and the way the IASB dealt with public opinion on the standard (Center for Audit Quality, 2009). The other important member of the IFRS is the advisory council, which, as previously stated, provides a platform for the participation of individuals and organizations in the due process of advising the IASB (Center for Audit Quality, 2009; IASPLUS, 2011). The advisory council brings together all individuals interested in the international financial reporting profession to advise the IASB on agenda decisions and priority work, informing the IASB on the opinions of the council on the standards being set, and advising the IASB and its trustees. The council members of the IFRS advisory council (SAC) are usually not fixed in number; they can be more than 30 members, with the current composition being around 40 members (Center for Audit Quality, 2009; IASPLUS, 2011). The appointment of the members is done by the previously mentioned trustees, who chose members from different geographical and functional backgrounds in the accounting field. The trustees also chose and independent chairperson for the SAC, who oversees the functions of the body. After the formation of the SAC, the council meets at least thrice a year at meetings that include the public, for the purpose of interpreting IASB standards and providing advice for the IFRS board. The SAC and the IFRS interpretation committee both work to find the best advice to the IFRS foundation (Center for Audit Quality, 2009). This discussion will also focus on the main requirements of the IFRS, which are mainly determined by the IAS 8, a chapter that deals with the basic factors that should be included in the IFRS statements (AASB, 2004). The first requirement of the IFRS is a statement of financial position, which is a statement of the financial capability of a business entity at the end of a period. The statement of financial position presents the assets, liabilities, and equity held by a financial entity (AASB, 2004). The statement of financial position is considered a summary of the financial balances of a business entity at the end of an operating period, usually one fiscal year. The main elements of they statement of financial position are expected to add up; the equity held by an entity equals the difference between the assets and liabilities (IASPLUS, 2011). The second requirement of the IFRS is a presentation of a statement of comprehensive income for a business entity for a fiscal period (AASB, 2004). The statement of comprehensive income comprises of two parts, an income statement that reflects the operations of an entity and the profit or loss at the end of the period, and the reconciliation of the income with the comprehensive income for the firm. The other requirement is a presentation of a statement of changes in owners’ equity, which represents the movements in the equity held by the business entity through the financial period. The cash flow statement is also presented to display the movements in cash and cash equivalents by held by a business entity (AASB, 2004). The last major requirement of the IFRS is a presentation of the notes to the financial statements, which mainly indicate the accounting policies used in the presentation and any relevant changes in the presentation (AASB, 2004). As already stated, IFRS are mainly used in the international accounting body, while GAAP are mainly used in the United States accounting field. The uses of these two different methods for accounting are differentiated by some clauses in the IAS (Illiano, and Thornton 2007). The use of the IFRS in the US is usually differentiated by one main factor; they are different from the US Generally Accepted Accounting Principles. The main differences between the Gap and the IFRS require reconciliation for their adoption for the use by US entities (Illiano, and Thornton 2007). The first difference between the GAAP and the IFRS is seen in the use of comparative financial statements, where the GAAP advocates the use of three-year financial statements while the IFRS advocates the use of one-year comparative statements (IAS 1) (Illiano, and Thornton 2007). IAS 2, which deals with the measurement of inventory at realizable value regardless of whether they are above cost. IFRS allows this practice but only for producers and brokers while GAAP does not restrict its use to producers and brokers. IAS 12 deals with the recognition of deferred tax assets, where the IFRS recognizes it only if the realization of tax benefits is foreseen, while the GAAP always recognizes this factor. Other differences include IAS 8, which deals with the changes in depreciation methods for existing assets (Deloitte, 2004). The IFRS provides that the changes in depreciation methods should be focused on estimates while GAAP proposes that it should be reflected as a change in overall accounting policy. A related difference is the non-mandated changes in accounting policy, for which IFRS states that prior financial statements must be restated, while the GAAP proposes that the cumulative effect in the net profit or loss be included in the current financial statements (Deloitte, 2004). The IFRS also states that overdrafts in cash must be included in the financial statements if they form an important part of an entity’s cash management policy, while the GAAP excludes it from the financial statements. The IFRS also propose that interest payment may be included as part of operating, financing or investing activities, while according to the GAAP; interest paid or received is specifically an operating activity (Deloitte, 2004). The IFRS also uses an enacted or substantially tax rate to measure deferred tax assets or liabilities while the GAAP only uses an enacted tax rate. These are some of the differences between the GAAP and the IFRS, and reconciliation has to be done if the IFRS are to be used by US business entities (Deloitte, 2004). Currently, there is a number of accounting standards that seek to converge the GAAP and IFRS. The convergence of these two accounting standards will affect many areas of the financial presentation, including the financial instruments used, reporting methods, accounting policies and leases (Deloitte, 2004). The convergence projects are currently continuing with the FASB and the IASB responding to requests by US firms to reconcile the practices of the two accounting principles. According to PWC (2010), the convergence of these two accounting standards will result in major changes in accounting practices in the US. Nearly a dozen projects are currently underway to improve the US GAAP in accordance with the IFRS (Austin and Tschakert, 2009). The major aim of the IASB is to improve the financial reporting environment in the US while at the same time aligning the use of the IFRS and the GAAP. This will lead to the development of a common accounting framework for aligning accounting standards in the accounting field. The main convergence projects for the alignment of the GAAP and the IFRS include the use of financial instruments, revenue recognition, and Leases, projects that the IASB and FASB consider high-priority (Deloitte, 2004). These projects are considered high-priority because of the big divergence in the accounting principles and the need to reconcile these standards. The main impacts of the reconciliation of the US GAAP and the IFRS are directed at the business entities operating in the US environment (Austin and Tschakert, 2009). Even though the changes are targeted at the accounting practices of US firms, the effects will not just be accounting related. Most of the changes in the accounting policy will have major business and operational effects on the companies currently using GAAP, and may require a huge period before implementation (Austin and Tschakert, 2009). The ongoing changes to the GAAP will affect shareholder communication about the operations of the business, agreements made between the parties to the firms, and start a restatement of the importance of systems and operations. The other impact of the proposed changes is that training and budgeting methods will have to be reassessed (Austin and Tschakert, 2009). The main challenge for the convergence project for the IFRS and GAAP mainly deals with the fact that many firms in the US currently use the GAAP; therefore, changing accounting policies will be cumbersome (Austin and Tschakert, 2009). The IFRs has lately been updated by the IASB, to include a number of changes that are beneficial to the business environment. Some of the changes included in the 2011-2012 versions include changes to IAS 12 on deferred tax, IAS 1 on other comprehensive income, and an improvement of the conceptual framework for accounting reporting. The new standards published in 2011 also include changes to consolidated financial statements, which deals with the separation of financial statements. Other updates refer to the accounting for associates and joint ventures, and fair value reporting and consideration for employee benefits and compensation. The benefits for the future in the proposed changes to the GAAP and the IFRS include a more advanced conceptual framework and an ease in reporting practices in the financial and accounting world. The convergence of the GAAP and the IFRS will ensure that the reporting in the US and the other parts of the international community are synchronized. References AICPA. (2008). International Financial Reporting Standards (IFRS). An AICPA Backgrounder. Austin, S., and Tschakert, N. (2009). Major Differences in U.S. GAAP & IFRS and Latest Developments. San Diego State University. Australian Accounting Standards Board (AASB). (2004). Framework for the Preparation and Presentation of Financial Statements. AASB. Retrieved on November 17, 2011 from: Center for Audit Quality. (2009). Guide to International Financial Reporting Standards. Center for Audit Quality. Deloitte. (2004). Key Differences between IFRSs and GAAP. Special Edition Newsletter. IASPLUS. (2011). The IASB Structure. Retrieved on November 17, 2011 from: Illiano, G., and Thornton, G. (2007). Who's Left? The Process of IFRS/US GAAP Convergence. LLP 03. PWC. (2011). IFRS and US GAAP: Similarities and Differences. Retrieved on November 17, 2011 from: PWC. (2011). Manual of Accounting: IFRS 2012. Retrieved on November 17, 2011 from: PWC. (2011). US GAAP & IFRS Convergence. Retrieved on November 17, 2011 from: PWC. (2011). US GAAP Convergence and IFRS: What You Need to Know about the FASB and IASB’s Joint Projects. Retrieved on November 17, 2011 from: PWC. (2011). IFRS and US GAAP: Similarities and Differences. IFRS Readiness Series. Read More