When IFRS standards goes beyond traditional accounting | Wolters Kluwer
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  • When IFRS standards goes beyond traditional accounting

    By Jeroen Van Doorsselaere, VP - Global Risk and Finance, Financial Services, Wolters Kluwer

    Published December 24, 2018

    In its last board meeting The International Accounting Standards Board (IASB) discussed matters which are reinforcing its mission statement. As a reminder its mission is to “to develop IFRS Standards that bring transparency, accountability and efficiency to financial markets around the world. Our work serves the public interest by fostering trust, growth and long-term financial stability in the global economy.”

    Traditionally though, its work concerned settling accounting issues only once these had been passed. Following the raft of new IFRS standards, however, it became apparent that reporting aspects are becoming a larger focus – and rightfully so. The focus on one hand has been to foster more effective communication, but on the other hand there continues to be a focus on more truthful information.

    One of the elements that was discussed centered around plans to generate a better definition of primary financial statements. In the last few months the IASB has indicated that subtotals and other KPIs need to refer back to underlying defined IFRS terms. In addition, the IASB has been proposing to introduce a subtotal “operating profit and loss” formerly also known as “business profit from consolidated entities”.

    A second subtotal indicated was “operating profit or loss and share of profit or loss of integral associates and joint ventures’” originally known as “profit before income/expenses from investments, finance income/expenses and income tax.” Thirdly, the subtotal previously described as “profit before finance income/expenses and income tax” should be described as “profit or loss before financing and income tax.”

    It’s also important to note that the board tentatively decided that the label “earnings before interest and taxes” (EBIT) would not be a faithful representation of the subtotal referred to in profit before finance income/expenses and income tax. What’s more any management performance measure labelled as “earnings before interest and taxes” should faithfully represent what is included in that management performance measure.

    As part of the disclosure initiative, the board has decided that it is difficult to work on the materiality aspect as a whole and that what is material in the context of one standard cannot be generalized. This becomes important as the materiality threshold in different standards, such as IFRS 9, are not applicable outside that standard. What is considered material in its right does not necessarily mean it needs to be disclosed as part of the disclosure initiative. As a result, the board will need clarify that not all accounting policies relating to material transactions, other events or conditions are themselves material. The board will work at some examples in the coming months to clarify this.

    Interestingly, the IASB also has published the definition of what is material: “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The examples as mentioned above use these definitions as an addition towards on which levels does this definition needs to apply.

    Of course these are merely the recent additions on a detailed level, of the latest era of standard setting. In her latest speech Anna Tarca, board member of the IASB, examined the history of standard setting at the IASB and why they focused on the “adoption of the Better Communication theme, working on maintenance, application and interpretation.”

    In the first phase the board examined more on how to get better high quality information to the capital markets and, of course, by that executing on the mission statement as indicated by the G20 to develop a common global set of accounting standards.

    In the second phase the board focused on developing standards to offset and collaborate with the FASB to ensure better standards which answers after the impact of the global financial crisis. After that the IASB (with or without the FASB) focused on major standards such as IFRS 9 financial instruments, IFRS 15 Revenue recognition, IFRS 16 leases and the latest IFRS 17 Insurance contracts. As the major standards are now released and have been implemented or will be implemented in the coming years (in the case of the insurance standards), the IASB is now turning its attention to finding ways to transplant relevant information. However, this does not end the mandate of the IASB and there are still challenges ahead even beyond this.

    Ms. Tarca therefore concluded: “Therefore the IASB has expanded its work with stakeholders over the years and will continue to engage with them as it pursues its mission of developing high quality standards that promote transparency, accountability and efficiency in the world’s capital markets. The need for a harmonized accounting language through international accounting standards was identified many years ago when the IASC formed. The demand for global standards, because of their potential benefits in countries around the world, is as strong as ever. I invite you to stay part of this exciting story through your support of the mission of the IFRS Foundation.”

    As we approach 2019, it seems, there is still plenty to be done…

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