Scope and Content of International Accounting and Auditing Standards

Подпись: 10International accounting and auditing standards have been developed respectively by the International Accounting Standards Board (IASB) and its predecessor the International Accounting Standards Committee (IASC),7 and by the International Federation of Accountants (IFAC).8 IFRSs encompass both the previously adopted—and, in some cases, amended—International Accounting Standards (IASs), as well as newly devel­oped, IASB-issued IFRSs.

The original IASs were issued from 1973 to 2000 by the IASC, which was replaced by the IASB in 2001. The IASB has since amended or eliminated some IASs, has proposed to amend others, has proposed to replace some IASs with new IFRSs, and has adopted or proposed new IFRSs on topics for which there were no previous standards. Thus, stan­dards are continuously changing and being upgraded to reflect the current conditions and needs of financial markets. Narrowly interpreted, IFRSs refer to the new numbered series of pronouncements that the IASB has issued, distinct from the IAS series issued by its predecessor IASC. More broadly, IFRSs refer to the entire body of IASB pronouncements, including standards and their interpretations, as well as to the IASs and their interpre­tation approved by the predecessor IASC. The standards issued by the IASC, many of which were revised by the IASB in 2004, will continue to be designated as IASs.

Currently, 36 effective IAS-IFRS standards, with 11 interpretations, are accompanied by documents providing the framework for the preparation and presentation of financial statements, as well as guidance on interpretation of standards. The framework defines the objectives of financial statements, identifies the qualitative characteristics that make information in the statements useful, and defines the basic elements of financial state­ments and the concepts in recognizing and measuring them (e. g., asset, liability, income). The framework addresses the general-purpose financial statements designed to meet the needs of shareholders, creditors, employees, government agencies, and the public at large for information about a public entity’s financial position, performance, and cash flows.

Hence, it does not cover special-purpose reporting to tax and regulatory authorities. A complete set of financial statements includes a balance sheet, income statement, cash flow statement, statement of changes in equity, and notes composing the summary of accounting policies and other explanatory notes.9

Подпись: 10Some of the IASs and IFRSs are particularly important in financial sector assess­ments. A number of the standards are more relevant for the financial institutions. For instance, IAS 32 and IAS 39 provide requirements on the recognition, measurement, and disclosure of financial instruments, and IAS 30 applies to the disclosures by banks and other similar institutions of their income statement, balance sheet, and contingen­cies and commitments, including other off-balance sheet items. IAS 1 is also particularly pertinent because it deals with the content of financial statements generally. Boxes 10.3, 10.4, 10.5, and 10.6, provide further details of the scope of IAS 39, IAS 32, IAS 30, and IAS 1, respectively. IAS 39, which seeks the measurement of specified assets at fair value, may have significant effect on the volatility of earnings, levels of provisioning, and various observed prudential ratios, and it has raised concerns among regulators. IAS 32 on financial instruments calls for a range of financial risk disclosures, thus seeking to improve transparency of financial risks, which may pose a challenge for some classes of financial institutions (particularly insurance companies) with traditionally weak risk dis­closures. Those considerations highlight the significant challenges in aligning prudential standards with evolving accounting standards and the complexities involved in achiev­ing convergence of national and international standards. Evolving issues in international convergence in major markets are summarized in box 10.7.

There are 33 ISAs, accompanied by a “Code of Ethics for Professional Accountants” and other related engagement standards.10 The auditing standards provide requirements on a range of issues, including quality control (ISA 220), documentation (ISA 230), responsibility to consider fraud and error (ISA 240), risk assessments of internal control (ISA 400), analytical procedures (ISA 520), and the auditor’s report on financial state­ments (ISA 700).

The IASB and the IFAC’s IAASB constantly revise and update the standards to reflect current trends and issues in financial reporting and auditing, which reflect global­ization, capital flows, regionalization, technology changes, and so forth. Recent events in industrialized countries relating to corporate business failures and misstatements of finan­cial information have also raised the attention to the role and oversight of the auditing profession, the governance of standard-setting bodies, and the scope of corporate gover­nance as it relates to reporting and disclosure. The IASB has been issuing new standards (IFRSs), and revising current IASs, while IFAC and its numerous committees and have been actively revising ISAs. For example, it recently released proposed revisions to ISA 230 on audit documentation. The IFAC’s Public Sector Committee (PSC) focuses on the accounting, auditing, and financial reporting needs of national, regional, and local governments, as well as on related agencies, and it proposes benchmark guidelines. It has also undertaken a multiyear initiative that is focusing on developing International Public Sector Accounting Standards (IPSAS) for government budget reporting that is based on IASs. It has also published a guidance paper on anti-money-laundering.

One issue of particular relevance, especially to developing and emerging market economies, is the role of small and medium enterprises (SMEs) and the need to have

Box 10.3 IAS 39: Financial Instruments, Recognition, and Measurement

 

IAS 39 (revised March 2004) covers a broad range of financial instruments, including the following:

• Cash

• Demand and time deposits

• Commercial paper

• Accounts, notes, and loans receivable and payable

• Debt and equity securities

• Asset-backed securities (collateralized mort­gages, repurchase agreements, and securitized receivables)

• Derivatives (swaps, forwards, futures, options, rights, and warrants) and embedded derivatives

• Leases

• Rights and obligations with insurance risk under insurance contracts

• Employers rights and obligations under pension contracts

IAS 39 requires that financial assets be classified in one of the following categories to determine how a particular asset is recognized and measured in finan­cial statements:

• Financial assets at fair value through profit or loss

• Available-for-sale financial assets

• Loan and receivables

• Held-to-maturity investments

The general principle is that available-for-sale financial assets are to be valued at fair value, whereas held-to-maturity may be valued at amortized cost.

IAS 39 recognizes two classes of financial liabilities:

• Financial liabilities at fair value through profit and loss

• Other liabilities measured at amortized cost using the effective interest method

IAS 39 has been a source of debate within financial markets, especially among commercial banks. IAS 39 requires entities to value derivatives, shares, and bonds at fair market value, not at historical costs, but does not recognize macro-hedging and internal-risk

 

transfers. However, banks are heavy users of macro­hedging and inter-group transfers of risks. Not recog­nizing macro-hedging (see below) would mean that marked-to-market changes in the value of derivative position would be booked to earnings and would raise volatility. If recognized, derivative position would be booked to equity and not earnings. Consequently, a number of European banks, especially in France, have opposed IAS 39 because they believe that it could damage their risk management practice (especially in a fixed interest rate environment) and could lead to earnings fluctuations and, thus, lower share prices. The European Central Bank, prudential supervisors, and securities regulators are also opposed to the fair value option on the grounds that it may, in their view, be used inappropriately (see Europe case below).

IAS 39 permits hedge accounting only under cer­tain circumstances, provided that the hedge account­ing meets the following criteria (see IAS 39.88):

• The hedge accounting is formally designated and documented, including the entity’s risk management objective and strategy for under­taking the hedge, the identification of the hedg­ing instrument, the hedged item, the nature of the risk being hedged, and the process of how the entity will assess the hedging instrument’s effectiveness.

• The hedge accounting is expected to be highly effective in achieving offsetting changes in fair value or cash flows that are attributed to the hedged risk as designated and documented, and this effectiveness can be reliably measured.

In October 2004, the European Union’s Accounting Regulatory Committee opposed the adoption of the extant IAS 39 as issued by the IASB. Instead, it adopted a “carved out” version of IAS 39, which (a) removed the fair value option as it applies to liabilities and (b) allowed the use of fair value hedge accounting for the interest rate hedges for core depos­its on a portfolio basis. European banks will be able to choose between the original or altered set of rules for hedge accounting.

 

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simplified financial reporting requirements for those enterprises. The financial reporting needs of SMEs in both developing and industrial countries are gaining greater attention by regulators. In that regard, the IASB and the IFAC have committed themselves to identifying and addressing the needs of SMEs. The IASB undertook a research project in 2001 in response to the growing call in the field to support a separate set of accounting

 

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Box 10.4 IAS 32: Financial Instruments, Disclosure, and Presentation

 

IAS 32 is closely related to IAS 39 and attempts to enhance financial statement users’ understanding of the significance of financial instruments to an entity’s position, performance, and cash flows.

The fundamental principle of IAS 32 holds that a financial instrument should be classified from the perspective of issuer as (a) a set of financial assets, (b) a financial liability, or (c) an equity instrument according to the substance of the contract, not the legal form. The enterprise must make the decision at the time that the instrument is initially recognized.

Some financial instruments—compound instru­ments—have both a liability and an equity compo­nent from the issuer’s perspective. In that case, IAS 32 requires that the component parts be accounted for and presented separately according to their substance and on the basis of the definitions of liability and equity. The split is made at issuance and is not revised for subsequent changes in market interest rates, share

 

prices, or other events that change the likelihood that the conversion option will be exercised.

Disclosure rules apply to all financial instruments, including risk management and hedges. For each class of financial asset, liability, and equity instru­ment, the following must be disclosed:

• Information about the extent and nature of the entity’s use of financial instruments, including significant terms and conditions that may affect the amount, timing, and certainty of future cash flows

• The accounting policies and methods adopted, including the criteria for recognition and the basis of measurement applied

• The business purposes served by the instru­ments, the risks associated with them, and the management policies for controlling those risks

• Interest rate and credit risk exposures

 

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Box 10.5 IAS 30: Disclosures in the Financial Statements of Banks
and Similar Financial Institutions

 

The goal of IAS 30 is to provide users with informa­tion required to evaluate the financial position and performance of banks and to enable them to better understand the special characteristics of banking operations. The standards require a bank to present a balance sheet that groups assets and liabilities by nature and lists them in an order that reflects their relative liquidity, as well as prescribes specific assets and liabilities to be disclosed.

On the income statement, the following specific items should be reported:

• Interest income and expenses

• Dividend income

• Fee and commission income

• Net gains and losses from securities dealings

• Net gains and losses from investment securities

• Net gains and losses from foreign currency dealings

• Other operating income and expenses ( includ­ing general administrative expenses)

• Loan losses

 

The following disclosures are included:

• Specific contingencies and commitments (including items not on the balance sheet)

• Specific disclosures for the maturity of assets and liabilities on the basis of the remaining period from the balance-sheet date to the con­tractual maturity date

• Concentration of assets, liabilities, and items not on the balance sheet (by geographical area, customer or industry groups, or other aspects of risk)

• Losses on loans and advances

• Fair value of each class of financial assets and financial liabilities

• Amounts set aside for general banking risks

• Secured liabilities as well as nature and amount of assets pledged as securities

 

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Box 10.6 IAS 1: Presentation of Financial Statements

 

IAS 1 reflects the broad guidelines set forth in the Framework for the Preparation and Presentation of Financial Statements and is designed to prescribe the basis for presentation of general purpose financial statements and to ensure compatibility both with the entity’s financial statements of previous periods and with the financial statements of other entities. It sets out the overall framework and responsibilities for the presentation of financial statements, guidelines for their structure, and minimum requirements for the content of the financial statements. Its main objec­tive is to provide information about an entity’s assets; liabilities; equity; income and expenses, including gains and losses; other changes in equity; and cash flows. It should also provide data about key compo­nents under each of those items.

 

The standard requires that statements “present fairly” the financial position, performance, and cash flows of an equity. It requires the faithful presenta­tion of effects of transactions and other events, as well as conditions of assets, liabilities, income, and expenses.

An entity must normally present a classified bal­ance sheet, separating current and noncurrent assets and liabilities. A list of minimum items on the bal­ance sheet is provided.

Other issues that the standard covers include going concern, accrual, consistency, materiality, off­setting, reporting period, income statement, state­ment of changes in equity, notes, and disclosures about dividends.

 

Подпись: 10standards for SMEs. One issue that it encountered in the process, however, was how to accurately “define” SMEs. In June 2004, it published a discussion paper on the proposal to develop separate standards and to set up an advisory panel to monitor the discussion. Going forward, IASB is expected to publish a draft of the SME versions of all existing standards.

Another important issue that arises in many countries with significant presence of Institutions Offering Islamic Financial Services (IIFS) is that the accounting standards designed for conventional types of business are not applicable to these institutions. A number of IASs and IFRSs are not suitable for Islamic financial institutions, and moreover financial statements of IIFS contain items for which there are no applicable IAS/IFRS. To address this problem, Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established in 1990, as a self regulatory body of IIFS (including also some government and regulatory bodies in the governance structure) to set accounting standards that complement IAS/IFRS and at the same time recognize the specific contractual features of Islamic finance. AAOIFI has issued a number of impor­tant accounting and auditing standards for Islamic finance instruments and institutions, as well as some governance and ethics standards relating to Sharia compliance; several countries and IIFS have begun to adopt or draw these standards. For a compilation of these standards see AAOIFI (2004). With growing financial innovations in the Islamic finance industry, and the increased focus on appropriate risk measurement and disclosure in Islamic finance, the financial reporting and governance standards are continuing to evolve, and gaining increasing acceptance among countries and IIFS.

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