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<p>4 The transition to International Financial Reporting Standards (IFRSs) involves major change for companies as IFRSs<br/>introduce significant changes in accounting practices that were often not required by national generally accepted<br/>accounting practice. It is important that the interpretation and application of IFRSs is consistent from country to<br/>country. IFRSs are partly based on rules, and partly on principles and management’s judgement. Judgement is more<br/>likely to be better used when it is based on experience of IFRSs within a sound financial reporting infrastructure. It is<br/>hoped that national differences in accounting will be eliminated and financial statements will be consistent and<br/>comparable worldwide.<br/>Required:<br/>(a) Discuss how the changes in accounting practices on transition to IFRSs and choice in the application of<br/>individual IFRSs could lead to inconsistency between the financial statements of companies. (17 marks)<br/>(b) Discuss how management’s judgement and the financial reporting infrastructure of a country can have a<br/>significant impact on financial statements prepared under IFRS. (6 marks)<br/>Appropriateness and quality of discussion. (2 marks)<br/>(25 marks)</p><p></p><p>4 (a) The transition to International Financial Reporting Standards (IFRS) involves major change for companies as IFRS introduces<br/>significant changes in accounting practices that often were not required by national GAAPs. For example financial instruments<br/>and share-based payment plans in many instances have appeared on the statements of financial position of companies for<br/>the first time. As a result IFRS financial statements are often significantly more complex than financial statements based on<br/>national GAAP. This complexity is caused by the more extensive recognition and measurement rules in IFRS and a greater<br/>number of disclosure requirements. Because of this complexity, it can be difficult for users of financial statements which have<br/>been produced using IFRS to understand and interpret them, and thus can lead to inconsistency of interpretation of those<br/>financial statements.<br/>The form and presentation of financial statements is dealt with by IAS1 ‘Presentation of Financial Statements’. This standard<br/>sets out alternative forms or presentations of financial statements. Additionally local legislation often requires supplementary<br/>information to be disclosed in financial statements, and best practice as to the form or presentation of financial statements<br/>has yet to emerge internationally. As a result companies moving to IFRS have tended to adopt IFRS in a way which minimises<br/>the change in the form of financial reporting that was applied under national GAAP. For example UK companies have tended<br/>to present a statement of recognised income and expense, and a separate statement of changes in equity whilst French<br/>companies tend to present a single statement of changes in equity.<br/>It is possible to interpret standards in different ways and in some standards there is insufficient guidance. For example there<br/>are different acceptable methods of classifying financial assets under IAS39 ‘Financial Instruments: Recognition and<br/>Measurement’ in the statement of financial position as at fair value through profit or loss (subject to certain conditions) or<br/>available for sale.<br/>IFRSs are not based on a consistent set of principles, and there are conceptual inconsistencies within and between standards.<br/>Certain standards allow alternative accounting treatments, and this is a further source of inconsistency amongst financial<br/>statements. IAS31 ‘Interests in Joint Ventures’ allows interests in jointly controlled entities to be accounted for using the equity<br/>method or proportionate consolidation. Companies may tend to use the method which was used under national GAAP.<br/>Another example of choice in accounting methods under IFRS is IAS16 ‘Property, Plant and equipment’ where the cost or<br/>revaluation model can be used for a class of property, plant and equipment. Also there is very little industry related accounting<br/>guidance in IFRS. As a result judgement plays an important role in the selection of accounting policies. In certain specific<br/>areas this can lead to a degree of inconsistency and lack of comparability.<br/>IFRS1, ‘First time Adoption of International Financial Reporting Standards’, allows companies to use a number of exemptions<br/>from the requirements of IFRS. These exemptions can affect financial statements for several years. For example, companies</p><p>can elect to recognise all cumulative actuarial gains and losses relating to post-employment benefits at the date of transition<br/>to IFRS but use the ‘corridor’ approach thereafter. Thus the effect of being able to use a ‘one off write off’ of any actuarial<br/>losses could benefit future financial statements significantly, and affect comparability. Additionally after utilising the above<br/>exemption, companies can elect to recognise subsequent gains and losses outside profit or loss in ‘other comprehensive<br/>income’ in the period in which they occur and not use the ‘corridor’ approach thus affecting comparability further.<br/>Additionally IAS18 ‘Revenue’ allows variations in the way revenue is recognised. There is no specific guidance in IFRS on<br/>revenue arrangements with multiple deliverables. Transactions have to be analysed in accordance with their economic<br/>substance but there is often no more guidance than this in IFRS. The identification of the functional currency under IAS21,<br/>‘The effects of changes in foreign exchange rates’, can be subjective. For example the functional currency can be determined<br/>by the currency in which the commodities that a company produces are commonly traded, or the currency which influences<br/>its operating costs, and both can be different.<br/>Another source of inconsistency is the adoption of new standards and interpretations earlier than the due date of application<br/>of the standard. With the IASB currently preparing to issue standards with an adoption date of 1 January 2009, early adoption<br/>or lack of it could affect comparability although IAS8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’<br/>requires a company to disclose the possible impact of a new standard on its initial application. Many companies make very<br/>little reference to the future impact of new standards.<br/>(b) Management judgement may have a greater impact under IFRS than generally was the case under national GAAP. IFRS<br/>utilises fair values extensively. Management have to use their judgement in selecting valuation methods and formulating<br/>assumptions when dealing with such areas as onerous contracts, share-based payments, pensions, intangible assets acquired<br/>in business combinations and impairment of assets. Differences in methods or assumptions can have a major impact on<br/>amounts recognised in financial statements. IAS1 expects companies to disclose the sensitivity of carrying amounts to the<br/>methods, assumptions and estimates underpinning their calculation where there is a significant risk of material adjustment<br/>to their carrying amounts within the next financial year. Often management’s judgement is that there is no ‘significant risk’<br/>and they often fail to disclose the degree of estimation or uncertainty and thus comparability is affected.<br/>In addition to the IFRSs themselves, a sound financial reporting infrastructure is required. This implies effective corporate<br/>governance practices, high quality auditing standards and practices, and an effective enforcement or oversight mechanism.<br/>Therefore, consistency and comparability of IFRS financial statements will also depend on the robust nature of the other<br/>elements of the financial reporting infrastructure.<br/>Many preparers of financial statements will have been trained in national GAAP and may not have been trained in the<br/>principles underlying IFRS and this can lead to unintended inconsistencies when implementing IFRS especially where the<br/>accounting profession does not have a CPD requirement. Additionally where the regulatory system of a country is not well<br/>developed, there may not be sufficient market information to utilise fair value measurements and thus this could lead to<br/>hypothetical markets being created or the use of mathematical modelling which again can lead to inconsistencies because of<br/>lack of experience in those countries of utilising these techniques. This problem applies to other assessments or estimates<br/>relating to such things as actuarial valuations, investment property valuations, impairment testing, etc.<br/>The transition to IFRS can bring significant improvement to the quality of financial performance and improve comparability<br/>worldwide. However, there are issues still remaining which can lead to inconsistency and lack of comparability with those<br/>financial statements.</p> fd页:
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