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A (1): The mission of IASB is "to develop, in the public interest, a single set of high quality, understandable and international financial reporting standards for general purpose financial statement". Critically analyse the challenges faced by the IASB in fulfilling its mission.
The international accounting standards are developed and issued by the International Accounting Standards Board (IASB). The IASB came into existence by replacing the International Accounting Standards Committee (IASC) in the year of 2001 (IAS Plus, web). The IASC was founded by an Accountants' International Study Group in the year of 1973 (Wood & Sangster, 2008). The IASB is an independent accounting setting body. After formally converting into the international accounting standards setting body, the IASB decided to develop, in the public interest, a single set of high quality international accounting standards(about Us). Since its inception, the IASB has been successful in introducing and implementing many fundamental accounting standards globally. Many developed and under-developed countries have extended their support for the mission of the IASB. However, there are still certain areas where the IASB faces a real threat of challenges.
Critical analysis of the IASB
Has the dream of global international accounting standards received a reality in the corporate world? Many authors have no positive answer for this question. Additionally, many believe that a single international accounting body may create problems for many stakeholders (Lont, 2010).To substantiate their point, they say that the international accounting standards of the IASB are voluntary in nature: The IASB has no legal authority to impose and implement these accounting standards on any entity. Since the IASB has no legal authority to enforce its own devised international accounting standards, it would not be easy for the IASB to ensure the global uniform application of the standards. Furthermore, soon after the creation of the IASC, Financial Accounting Standards Board (FASB) in the United States of America came into existence, creating a counter balancing force to the mission of the IASC. In the same year of 1973, the FASB drafted its own accounting standards and implemented on the corporations working inside America. Till this point of time, the U.S. corporations follow the Generally Accepted Accounting Practices (GAAP), in other countries; the International Financial Reporting Standards (IFRS) are used.
Also, the IASB faces some political challenges as well. The powerful waves of global financial crisis drowned the boats of many large multi-nationals between the periods of 2007 to 2009. Many critics point out the fair value model used in the International Accounting Standards IAS 39 was mainly responsible in bringing the nightmare of global financial crisis. In October 2008, the IASB came under a severe attack from the European political leaders over the role of IAS 39 in the global financial crisis (Veron, 2010). Given to the severity of economic and financial situation, the IASB brought some reclassification amendment to the IAS 39 standard on the financial instruments (Veron, 2010).
Additionally, the FASB behaves like a competitor rather than a professional associate of the IASB. Recently, it has been announced by the IASB and the FASB that by the end of 2015, the IFRS would be enforced in America. This is an attempt to ensure the global uniform application of the IFRS; and this would bring a forward step movement of the IASB in attaining its global mission. However, this global mission received a serious blow when the FASB separately and independently developed and published its own visions on how to introduce reforms in the accounting of financial instruments (Veron, 2010).
Furthermore, the IASC Foundation has received many questions on its professional integrity towards achieving its mission. The European banking industry shares its many reservations over the many of the announcements of the IASC. This situation has created an environment of hostility between the two. This hostility becomes more severe when the chairman, Gerrit Zalm, of IASC Foundation's trustees has been a full banker since late 2008 (Veron, 2010). In the professional corporate world, this entire situation is defined as an appearance of a conflict of interest. The Presence of Gerrit Zalm at the highest level creates many questions in the minds than the answers over the professional behaviour of the IASB towards attaining its global mission.
However, there are many authors who do not mistrust on the efforts of the IASB. They put their confidence over the sincere and dedicated efforts of the IASB. Undoubtedly, the IASB has been to some extent successful in achieving some parts of its mission. Unfortunately, these parts do not term the mission of the IASB as complete. The presence of political challenges, and convergence with the U.S. GAAP, resolving its funding issue, bringing a uniform and agreed global consensus on the application of the IFRS are those fundamental challenges that are still there to be handled by the IASB.
A (2): The qualitative characteristics of relevance, reliability and comparability identified in the IASB's Framework for the preparation and presentation of financial statements (Framework) are some of the attributes that make financial information useful to the various users of financial statements
Accounting Framework explains the qualitative characteristics of the financial statements. Pounder and Bruce (2009) define the accounting framework as a conceptual framework of fundamental concepts and theories on which accounting standards is based. Additionally, the main function of the accounting framework is to assist developing future accounting standards besides suggesting the review of existing standards. Furthermore, the accounting framework helps financial accountants to draft and prepare the financial statements in accordance with the international accounting standards. Also, the accounting framework helps users of financial information to understand and interpret the financial statements and information with the help of international accounting standards. In order to assist both the makers and users of financial statements, the accounting framework has defined the qualitative characteristics. Relevance, reliability, comparability and understandability are the fundamental characteristics; without understanding their definition and use, it would not be easy either for the makers or users of financial statements to fully understand and interpret the financial statements and financial information.
Only relevant financial information helps to make appropriate economic and financial decisions. Predictability and confirmatory value are highly essential elements in a piece of relevant information. The users of financial statements forecast the future financial performance and financial position. And, this forecast considerably depends on the past financial information and financial statements. Although, the future results would not be exactly the same as the past, yet the past information would be helpful to understand the deviations and differences occur in financial data. Obviously, only relevant financial information enables the decision makers: Any irrelevant piece of financial information would not help the users of financial information to make an appropriate economic and financial decision.
Bias and error free information can be defined as reliable information. Additionally, that reliable information must be presented faithfully. And, any information that is unreliable only brings bad decisions. And, the bad decisions bring economic and financial loss, shattered confidence, a decline in market share and so no. The impacts of bad decisions could be more devastating than anyone could imagine about it!
Reliable information brings many advantages. First, reliable information ensures to shareholders and other users of financial information that a company is fully complying with the given local and international regulatory and accounting standards. And, on the basis of reliable information, the users of financial information determine and take their economic decisions. Second, better economic decisions can be taken by the users of financial statements on the basis of reliable information.
Financial information must be comparable with the financial information of other companies in the same industry. It is the use of comparability that enables users of financial information to properly evaluate and compare an entity's performance with other entities. Financial information of an entity can be compared in many ways: First, actual financial information and financial statements can be compared with the financial information of the previous year. This comparability enables the users of financial information whether an entity has financially improved in comparison with the previous year financial information. Second, the actual financial information can be compared with the forecasts. This sort of comparability helps to understand the efficiency of management in forecasting the future financial growth and prosperity. Third, the actual financial information can be compared with the financial information of competing companies in industry. This comparability highlights the entity's existing financial position and performance in the industry in which it is working.
Aggregately, comparability evaluates an entity in a way to highlight its existing financial position and performance in comparison with its previous year, forecasts and competitors in the industry.
The users of financial statements considerably depend on these qualitative characteristics. It is the sound understanding of relevance, reliability and comparability that equips the users to properly evaluate financial statements and information. Relevant information helps users to predict the future financial performance and position. And this predication is carried out with the use of past financial statements and information. Additionally, reliable information enables users to make better economic decisions. Reliable information is one that is free from bias and error. The users of financial information considerably depend on the reliability of financial information. Since most of their economic decisions are based on the reliability of information, the users of financial statements give huge significance to this qualitative characteristic. Any wrong or biased financial information would directly impact on their economic decisions. To avoid any such possibility, the users ensure that the financial information must be reliable. Furthermore, comparability critically evaluates the financial position of an entity. By comparing with the previous year, with the forecasts, and with the industry financial information, comparability enables users of financial information to correctly understand the current financial position and financial performance an entity.
B (1) Comment on the different approaches which could have been taken by the International Accounting Standards Board (IASB) in developing the 'IFRS for Small and Medium-sized Entities' (IFRS for SMEs),explaining the approach finally taken by the IASB.
The small to medium sized entities (SMEs) are constantly increasing globally. With this growth, they significantly contribute in the global economy with its contribution in production of different kinds of goods and services. They are not only expanding in the developed economies but also increasing in the developing economies. Undoubtedly, to do business, the use of different accounting concepts and accounting practices cannot be underestimated. The fact is that an SME works and produces in the same manner the way the large corporations do. Due to this factor and certain other factors require the International Accounting Standards Board (IASB) to develop and issue the International Financial Reporting Standards (IFRS) for the SMEs. Consequently, in July 2009, the IASB issued the IFRS for Small and Medium-sized Entities (IFRS for SMEs) (Holt, 2010).
This is a separate and distinct IFRS for SMEs in comparison with the IFRS (Holton, 2010). The IFRS for SMEs is a modified version of the full IFRS currently used for the quoted large companies. The basic accounting concepts and practices are provided for the entities in the IFRS for SMEs.
Numerous changes are incorporated into the IFRS for SMEs. First, the IFRS for SMEs simplifies method used for measurement and recognition (Corporate Reporting, ACCA text book, 2008/09); for example, the IFRS for SMEs incorporates only two types of financial assets and all development expenditure must be recognised as an expense. Also, the IFRS for SMEs removes accounting treatment choices, allowing an entity to use the simpler option from the full IFRS. For instance, an entity should use the cost model in order to incorporate the investment properties, property, plant and equipment into the financial statements.
Different approaches towards SMEs
Two separate approaches were given consideration by the IASB- the GAAP approach and the Exemptions approach. The GAAP approach for SMEs required the development of accounting standards on the national level. More clearly, each state could have been given an opportunity to develop, determine, issue and implement its own accounting standards governing and guiding SMEs to follow a certain type of accounting concepts and accounting practices. However, the main limitation would be that the practices developed may have been incomparable with the accounting standards of other states. Additionally, under this GAAP approach, the practices developed for SMEs may have been inconsistent as well with other practices. Furthermore, if a SME wanted to apply for listing in a capital market, the process of transition would have not been easy rather difficult.
The exemptions approach could have been adopted. Under this approach, an appendix could have been given to smaller entities. The smaller entities could have been allowed to avail the exemptions from the mainstream accounting standard. However; there would appear certain other problems as well. For instance, still globally there is no single agreed definition defining an SME entity. In certain countries of Europe, companies below a certain level of revenue, number of employees, total assets are the benchmarks that are used to categorise the SME entity. But, there are certain other people who find it difficult to agree with this sort of categorization. They contend that there are certain other benchmarks that can be used to define a category for an SME entity. As a result, there would have been many individuals and smaller companies who would have more disagreed rather than agreed when a certain exemptions would have been applied.
The IFRS for SMEs facilitates all the relevant needs of the users. The IASB did use some period to consider the applicability of the GAAP approach and the exemptions approach before adopting this approach. The GAAP approach was narrow and limited to the national boundaries; adopting the GAAP approach could have only increased the difference between a local investor and an international investor. Besides, this could have promoted less harmonization of accounting standards. In the same manner, the exemption approach could have observed more divergence and difference on many definitions and accounting practices and accounting treatments. Instead of bringing a consensus, more disagreement could have been observed if the exemptions were to be used. To avoid all these possible problems, the IASB issued a separate and distinct IFRS for SMEs. Under these IFRS, an SME entity is allowed to avail simpler options from the full mainstream standard. Furthermore, measurement and recognition methods are simplified by defining only two categories of financial assets and putting all development expenditure into the category of expenses. Additionally, where the IFRS for SMEs does not specify its treatment for a transaction, condition, or event, an SME is allowed to look into the requirements and guidance elsewhere in the standard provided by the IASB.
B (2) Discuss the main differences and modifications to IFRS which the IASB made to reduce the burden of reporting for SME's, giving specific examples where possible and include in your discussion how the Board has dealt with the problem of defining an SME.
The IFRS and the IFRS for the SMEs do not share many accounting policies and standards. As a result, many differences have arrived to authenticate this fact. For instance, the standard for SMEs does not explain treatment for the following topics:
Interim financial reporting
Earnings per share
Assets held for sale
Insurance (because entities issuing insurance contracts are not eligible to avail the standard.
In addition, the revaluation model for intangible assets, property, plant and equipment, and proportionate consolidation for investments in collectively held entities are totally disallowed under the standard of the IFRS for SMEs. Furthermore, the IFRS for SMEs eliminates the 'held-to-maturity, 'available-for-sale' classifications of IAS 39, Financial Instruments: recognition and measurement. An effective interest method is used to measure amortised cost of the all financial instruments except that investments in non-puttable and non-convertible preference and ordinary shares that are valued and measured at profit and loss account. Furthermore, all instruments used for amortised costs must be tested for impairment. Simultaneously, the IFRS for SMEs simplifies the requirements for de-recognition and hedge accounting. However, SMEs are allowed to whether to apply IAS 39 in full.
The IASB has made various modifications in the IFRS for SMEs. Several modifications are carried out to facilitate SMEs to comply with the standard and at the same time not putting more pressure on their cost side. To achieve this end, the IASB has made various modifications in the disclosure requirements, measurement and recognition. First, intangibles like, goodwill, are amortised over their entire useful lives, in case, the useful life cannot be reliably estimated, then a period of 10 years is suggested to be used to account for the useful life period to that asset. Second, for investments in joint ventures and associates, the use of cost model is allowed. Third, if measurement of defined benefit pension plan obligations (under the estimated unit credit method) involves un-due cost, a simplified calculation is not disallowed.
The above are some of the basic differences and modifications between the mainstream IFRS and the IFRS for SMEs. The IASB further explains the reasons for supporting and providing different and distinct IFRS for SMEs. First, the IASB clarifies that the prime users of the mainstream IFRS are the capital markets. Consequently, the quoted companies are required to bear the cost of compliance and publishing the relevant financial statements and information to be used by the prime users. On the other hand, the prime users of the financial information of SMEs can be the tax authorities, current and potential lenders and manager/owners themselves as well. Since the prime users are mostly its owners, it would bring more cost of compliance for SMEs than to the benefits of compliance and reporting their financial statements and information if an SME entity is directed to use the mainstream IFRS. Also, as the SMEs have less complex transactions and smaller range of decisions, consequently, they do not require as sophisticated analysis of financial statements as the large companies are required. As a result, the disclosure requirements for SMEs are considerably decreased in comparison with the disclosure requirements of large companies.
A problem with defining an SME
Many reasons can explain the absence of universally-agreed definition of an SME. First, no single definition can encompass all the dimensions of a small or medium-sized entity since there are various small and large firms, sectors at different levels of development (Holt & Goh, 2006). Second, most provided definitions of an SME are mostly either based on size or number of employees and so on. However, none of these standards apply well across national borders.
The IASB has provided a definition to an SME. It is mentioned in its Draft of International Financial Reporting Standard for Small and Medium-sized entities (IFRS for SMEs): SMEs are entities that:
Do not have public accountability; and
Publish general purpose financial statements for external users.
This is not a specific definition for an SME. However, by providing this sort of definition, the IASB has clearly demarcated a line defining a difference between an SME and other large companies. These large companies are publically accountable to a securities commission, regulatory bodies and to their shareholders as well.
For the IASB, the task of defining an SME was not an easy. Huge divergent definitions were already used by different small and medium-sized companies. These companies were not limited to one particular country, but permeated across the globe. More importantly, all were using different benchmarks for the purpose of facilitating their own business needs and business interests. To bring a consensus on an agreed definition for an SME was not a simple task. Had the IASB defined an SME on the basis of a size, there would be many critics who would not agree on it. As a result, in order to serve the interests of majority, the IASB defined an SME as an entity having no public accountability but publish general purpose financial statements.