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IFRS BY ICAI Issues in relation to IFRS

IFRS BY ICAI Issues in relation to IFRS

IFRS BY ICAI Issues in relation to IFRS: International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. They are the rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable and relevant as per the users internal or external. |San Francisco IFRS, with the exception of IAS 29 Financial Reporting in Hyper inflationary Economies and IFRIC 7 Applying the Restatement Approach under IAS 29, are authorised in terms of the historical cost paradigm. IAS 29 and IFRIC 7 are authorised in terms of the units of constant purchasing power paradigm.

Generals Issues Related to IFRS

 As well as project-specific research the IASB is also interested in issues of a more general nature that affect its work. The topics suggested here are indicative and by no means exhaustive.

IFRS BY ICAI Issues in relation to IFRS

Electronic filing and structured data

The IASB’s jurisdictional profiles document the extent to which jurisdictions require the use of IFRS by its entities. But what happens to these financial reports? When are they distributed to investors; are they filed with some central agency and made publicly accessible; are electronic versions accessible; are they filed using a structured data format such as XBRL? The IASB has a project to document filing and access requirements in the jurisdictions that allow or require use of IFRS. The IASB is interested in documenting these requirements because it considers that the timing and means of access to general purpose financial reports is important.

There is some evidence that prior to the introduction of the EDGAR system in the US, the market reacted to post-filing announcements of earnings published in the Wall Street Journal, presumably because search costs made the Wall Street Journal a more efficient source. It also seems that this reliance on the Wall Street Journal has diminished with EDGAR. (See, for example, Earl K. Stice The market reaction to 10-K and 10-Q flings and to subsequent Wall Street Journal earnings announcements, The Accounting Review, 66 (January 1991), 42–55 and Theodore E. Christensen, William G. Heninger, Earl K. Stice Factors associated with price reactions and analysts’ forecast revisions around SEC filings, Research in Accounting Regulation, Volume 25 Issue 2, November 2013.)

Has the use of XBRL affected when and how markets react to financial statement filings?

Many investors use information provided by data aggregates as a primary data source.  Data aggregates adjust the data filed by entities.  With the increasing availability of XBRL filings, it is easier to compare reported data with aggregated data.  Are there material differences between these information sets?  How does the market react to these differences?

IFRS BY ICAI Issues in relation to IFRS

Reporting frequency

The European Union has taken steps to discourage, or prevent, entities from reporting on a quarterly basis, because it believes that interim reporting can encourage a focus on short-term behaviour, particularly by the entities.

In an article on 20 October 2014, the Financial Times claimed that ‘Reporting quarterly figures is bad for businesses, investors and markets.’  They state that while ‘in theory quarterly numbers force companies to be disciplined … this must be weighed against the chance that executives are rushing or delaying deals to smooth quarterly figures, when short-term variation is normal.  The risk is that, in an effort to hit quarterly forecasts, executives make the wrong long-term decisions.’

As a counter example, the New Zealand Government reports publicly using, essentially, IFRS each month, including updated fair values for the forests it owns.  The requirement was introduced because monthly reporting was seen to reduce the ability and therefore incentive to smooth earnings.  In the US, Progressive Insurance (ticker symbol PGR) issues unedited financial statements every month.

Does frequent reporting encourage or discourage short-term behaviour by investors and prepares?

IFRS BY ICAI Issues in relation to IFRS

Translation and the effect of cultural differences

Language and cultural issues are a challenge to the IASB as it strives to set Standards that can be applied internationally.  We are aware that some of the subtlety of the English language does not translate well.  For example, the words ‘could’ and ‘would’ are translated into the same word in some languages.

We are interested in research that helps us to understand how local factors affect the consistent application of IFRS.  This type of research extends into how judgement-based Standards, and words, are applied in different languages and cultures—material, significant, substantial etc.

IFRS BY ICAI Issues in relation to IFRS

First-time adoption of IFRS

The IASB is interested in why jurisdictions, or entities within jurisdictions that allow instead of require the use of IFRS, elect to adopt IFRS.  Is it to enhance access to capital (does it affect the cost of capital?); broaden the investor base (does the mix of investors, particularly from outside the jurisdiction, increase?); reduce costs (does it allow entities to use IFRS globally instead of having to run multiple GAAP systems, or reduce the reliance on multiple external GAAP experts?); to align their accounting with peers who have already adopted IFRS?; or to improve the comparability of information used to assess management?  Are there characteristics of an economy or an entity that influence the decision to adopt (or to not adopt)?

IFRS BY ICAI Issues in relation to IFRS

IFRS Issues for Economic Activities

“Net income” is a very important index of economic activities. There are concerns that IFRS changes properties of net income. Net income will continue to be a useful index of business results, so shouldn’t results of company conduct be properly reflected? Introducing “fair value measurement” causes greater fluctuations in business results, and especially during economic recessions it causes much worse results. We must avoid having estimates of fair value measurement creating greater fluctuations in business results and economic cycles.

We must carefully study the scope to which fair value measurement should apply. Aiming at continuous value creation and stable business results also leads to encouragement of stable investment. There are also opinions that there are effects of changes in business practices of agriculture (agriculture accounting) and the marine shipping industry (lease accounting), and effects on communication between companies and investors due to greater disclosure volume. Etc

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