IFRS update December 2005 – Phase two

When the International Accounting Standards Board came out with its
back in March 2004, most people -­ including the IASB -­ knew that
it was far from perfect. Some of what was put forward were just quick fixes,
providing a foundation for the mandatory introduction of international financial
reporting standards for listed companies across the EU. In that sense, it has
largely succeeded.

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The platform has had its teething troubles, most famously with financial
instruments standard IAS39, and its success will not truly be known until the
first sets of annual reports under IFRS appear, but companies at least knew,
more or less, what they were dealing with.

The fear for many companies now is the IASB’s drive to introduce radical
standards as it searches for more permanent solutions to the technical issues
that have arisen during the last few years while the current set of rules are
still bedding down.

Fortunately, the IASB seems to have taken this into account. 2005 has seen
little more than tinkering around the edges of existing standards. Some work has
been done on the IAS19 pension standard and there have been several amendments
to the accounting treatments of financial instruments -­ the IASB even managed
to get the European Commission to reinstate one of the sections of IAS39 that it
carved out of the endorsed standard.

Such tinkering will require some changes in future accounting practice for
IFRS accounts preparers, but nowhere near the amount of work that needed to be
done in the run-up to 2005.

The outlook over the next couple of years is that changes will remain fairly
small. During 2006 and 2007, likely amendments to standards include those for
deferred tax (IAS12), segmental disclosures (IAS14) and government grants
(IAS20). None of this is expected to be too radical, although there is some
debate on how major the changes in deferred tax will be.

But there is one huge exemption to this gentle pace of change over the next
two years: the revamping of acquisition accounting.

IFRS3 on business combinations formed part of the stable platform, but will
be overhauled in the near future alongside changes to minority interests
(IAS27), intangible assets (IAS38), and provisions and contingencies (IAS37)
that deal with acquisitions.

The move is part of a convergence project the IASB is undertaking with the US
Financial Accounting Standards Board to remove the need for IFRS users
registered with the Securities and Exchange Commission to reconcile their
accounts to US GAAP.

Recent proposals published on business combinations, which FASB chairman Bob
Herz has openly admitted are ‘dramatic’ and ‘controversial’, have provoked some
highly critical responses from accountants and the EC.

‘There is some good content in the proposals but there are some things about
which we are concerned,’ says Peter Hogarth, accounting technical director at
PricewaterhouseCoopers. ‘The current standard isn’t that broken, so why fix it?’

He echoes similar comments made by both the ICAEW and the UK Accounting
Standards Board.

Internal market commissioner Charlie McCreevy insists that during the process
of convergence the EC ‘will not take on board any revolutionary new standards’.
Yet revolutionary is exactly what the new regime is. If McCreevy sticks to his
word, further divergence between IFRS produced by the IASB and that endorsed in
the EU is likely ­ a situation that would hurt the convergence process.

But this project is merely a storm in a teacup compared to what is coming
further down the line. Hogarth says issues on the agenda for 2008 and later,
such as revenue, reporting comprehensive income, leases and pensions, are ‘where
they are really proposing to start from scratch and bring in some pretty radical
new thinking’.
Of these, the project on reporting comprehensive income ­ another joint project
with the FASB ­ is the one that could bring by far the biggest changes to how
accounts are presented. It is also the one most likely to stir up fierce

IASB board member Jim Leisenring agrees that this standard, more than any
other, has the potential to bring about the greatest improvements in accounting,
but ‘nothing causes more consternation than this. We get hate mail virtually
daily with respect to this project’.

The aim is for companies to produce a single statement that accurately
reflects underlying performance rather than focusing purely on a profit figure.

‘There was talk a couple of years ago about what became know as a matrix
approach to performance reporting, which would have a historical cost basis of
accounting in one column and then remeasurement in another to give a total
measurement of performance,’ says Hogarth.

‘That may well still be where we end up, but the IASB now seems to be taking
the project much more slowly.’

The project has been split up into two segments, and while some of the work
is under way, many of the hard-to-swallow proposals are being held back for a
while longer. Some still doubt whether this project will be able to deliver its
intended benefits.

Revenue is another joint project, in which both boards are currently
exploring new ways to improve the recognition of revenue in accounts. But
concerns over it persist, as most models being looked at result in earlier
recognition of revenue.

‘A feature of some of the accounting scandals that we have seen over the last
few years was that revenue was being recognised earlier than it should have
been,’ says Hogarth. ‘Many will find it ironic that there is a project out there
that may accelerate the recognition of revenue.’

Leases and pensions are also projects that have been floating around on the
IASB’s timetable for a while now, but may finally see some significant work done
to them. The potential impacts of any changes will be huge.

And on top of this there is the not insignificant matter of a complete
overhaul of the accounting for financial instruments to be addressed. If that
debate goes in anything like the same direction as the one on IAS39 last year,
the IASB could be in for a very rough ride.


2005: Stable platform for IFRS but more changes imminent:

  • IAS39: fair value option, cashflow hedge accounting of forecast intra-group
  • IAS39 and IFRS4: financial guarantee contracts and credit insurance
  • IFRS 7: financial instruments, disclosures


  • Intangibles: amendments to IAS38
  • Phase II:application of the purchase method ­ amendments to IFRS3 
  • Minority interests: amendments to IAS27 
  • Amendments to IAS20 government grants 
  • IAS37 provisions, contingent liabilities and contingent assets 
  • IAS32 shares at fair valuel IAS12 income taxes 
  • Segment disclosures (replacement of IAS14) 
  • Accounting standards for small and medium-sized entities

2008 and onwards

  • Consolidation 
  • Control 
  • Special purpose entities 
  • Joint ventures 
  • Liabilities and equity 
  • Insurance contracts phase II 
  • Performance reporting 
  • Liabilities and revenue recognition 
  • Conceptual framework

    Source: PwC

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