Archives For IFRS

Paul Cooper (cropped)

By Paul Cooper, Corporate Reporting Manager, ACCA

At its recent quarterly meeting, ACCA’s Global Forum for Corporate Reporting discussed the likely impact of IFRIC 21 on levies, issued by the IASB in May 2013. This was an opportunity for an open discussion on a current reporting issue, and the Forum raised a number of practical concerns about the implementation of the new requirements from 1 January 2014.

In accordance with the IASB’s interpretation of IAS 37 covering provisions and contingencies, a levy will be recognised as a liability once a ‘triggering event’ occurs. An example of a ‘triggering event’ is where a levy due on 31 March 2014, but based on revenue for the year ending 31 December 2013, would be recognised in full on 31 March 2014. This is the point at which a levy legally becomes payable to government, and can be on a date which is in a different accounting period to that on which the levy is based.

It is not now possible (except in non-statutory management accounts) to anticipate the triggering event by making an accrual, or even (as ACCA has previously suggested to the IASB) by making a disclosure in interim financial statements. This treatment will feel at odds with supporters of the principles behind the matching concept.

The legislation imposing a levy does not, of course, have to follow the matching concept, or indeed any other accounting ‘logic’. This is evident in the case of banking levies in some jurisdictions. There may be a requirement to make interim estimated payments on account of a levy yet to be incurred in law, and consequently yet to be recognised under IFRIC 21. Furthermore, a levy can be imposed for a whole year on a bank, whether or not it has traded throughout the whole of that year. For a bank which ceases trading early in the year in question, the levy will inevitably appear disproportionate, but under IFRIC 21, it will not be recognised up to the date the trade ceases, if it is legally due after that date.

In addition, IFRIC 21 deals with the recognition of a liability, but leaves the entity to decide, in accordance with other Accounting Standards, the treatment of the corresponding debit entry. Intuitively, many entities will consider the debit to be entirely a charge against income, but this may not fully reflect economic reality. For example, an annual property tax, payable on a specified date, could be at least partly a recoverable asset, if the owner has the intention of selling the property. However, if this recovery is subject to negotiation with a purchaser, the asset is contingent on uncertain future events, raising questions about the timing of its recognition. Furthermore, it can be argued that IFRIC 21 does not prescribe the timing of the recognition of the debit for the levy, in contrast to the timing of the liability. These questions leave scope for diversity to arise in practice.

Another question is whether certain amounts payable to government are actually levies. Fines, and income taxes within the scope of IAS 12, are not within the definition of a levy, but other payments are included where no goods or services are received in exchange. It might not be straightforward to identify such liabilities: for example, part of a property tax may cover local services which directly benefit the entity.

Levies payable to governments feature in the trading of many entities, and in an increasingly-regulated world, their number and types are only likely to increase. Overall, the above concerns raise a question of whether IFRIC 21 is sufficiently broadly-written to cover, at least, most types of levy.

What do you think? Do you share the Forum’s concerns? Are you having concerns of your own about your own sector or industry? If you don’t have any concerns, why? The Forum wants to hear from you!

(l-r): Sarah Hathaway, head of ACCA UK; Sir David Wallace, master at Churchill College, Cambridge; Timothy Luke, Prime Minister's senior adviser for business; David Cameron, UK Prime Minister; Professor Sir Martin Sweeting, executive chairman of Surrey Satellite Technology; Martin Donaldson, chief executive of the British Council

(l-r): Sarah Hathaway, head of ACCA UK; Sir David Wallace, master at Churchill College, Cambridge; Timothy Luke, Prime Minister’s senior adviser for business; David Cameron, UK Prime Minister; Professor Sir Martin Sweeting, executive chairman of Surrey Satellite Technology; Martin Donaldson, chief executive of the British Council

by Sarah Hathaway, head of ACCA UK  

There was a great deal of fanfare about David Cameron being the first British Prime Minister to visit Kazakhstan at the end of June and judging by the £700m worth of deals with British businesses that came from that visit alone, it was worth all the fuss.

BG Group, Rolls Royce, other business representatives and those from UK universities all flew out to the Central Asian market to meet with business leaders, policy makers and other stakeholders to discuss ways the UK and Kazakhstan can work together.

It is no surprise that where UK businesses look to develop links in emerging economies, finance professionals are there in readiness to support not only cross-border deals, but also the businesses within emerging markets, which is why ACCA UK was invited by UK Trade & Investment to join the PM and Trade & Investment Minister Lord Green on the visit to Kazakhstan.

ACCA was the only accountancy body on the visit, and I was honoured to be the organisation’s representative on the visit. We not only have an established presence in the Central Asian country, as well as 1,604 ACCA students there, we are also a genuinely global body. Of course I would say that and our PR team would be proud of me for plugging those key points, but these are genuinely valuable assets that are key to emerging markets such as Kazakhstan.

Kazakhstan is a young country, just 20 years old, but is rapidly developing and has strong industries – oil, mining, pharmaceuticals and financial services to name a few. The republic’s President, Nursultan Nazarbayev, has high ambitions for the economy, keen to give it a truly international presence. That’s where finance professionals have a key role to play.

It’s one thing to have strong mining and oil sectors, but taking them global requires finance talent to help that happen. The international focus of UK finance expertise is essential for Kazakhstan to not only cement ties with UK businesses but to reach out on a more global scale.

Having that complete finance knowledge in the board room will increase the levels of corporate governance and sends a clear signal to investors that Kazakhstan is not only open for business but that it has the finance experience supporting its industries. With growing adoption of IFRS there is arguably a greater need for rapidly developing markets to look to us for skills. It is no coincidence that the Managing Director of Samruk Kazyna, Kazakhstan’s sovereign wealth fund is Peter Howes, a UK finance professional.

From a UK point of view, British businesses are already benefiting from closer trade links with Kazakhstan, but there is scope to go further. There is a need there for experienced finance professionals to boost Kazakh and UK companies doing business with each other.

However, we shouldn’t look at this solely from a short-term view point. Yes, ACCA UK and its members can play a key role in helping Kazakh and UK companies doing business with the republic hone the finance function and handle the constantly changing regulations in the country – ACCA members’ management skills are critical to that end. Longer term, however, ACCA has a bigger role to play.

The ethos behind ACCA’s accountancy qualifications is that home grown talent can emerge and lead a market’s own finance profession. It will take time for Kazakhstan’s finance expertise to transform into chief finance officers with the complete, global management skills required to take businesses in the region onto a surer international footing, but over time they will emerge, which is why ACCA is there already.

Our global experience, internationally recognised accountancy qualification and established presence in Kazakhstan means we are well-placed to support the country as it develops the next generation of finance talent from within.

The fact we are there, along with Ernst & Young and other global accountants, also means that tomorrow’s CFO’s can learn and benefit from working with the current crop of the world’s finance leaders and nurture links with their UK counterparts. As well as being a trading partner for UK plc Kazakhstan can be a finance profession partner into the future as well.

There is another benefit to us being there. ACCA UK represents accountants in the UK, irrespective of size. Many of our members’ clients are small and medium sized enterprises who could hugely benefit from exports to emerging economies. What’s to stop a small business specialising in valves in Yorkshire exporting to Kazakhstan’s expanding oil industry? It can be daunting, but our members are there to help those business meander their way through the red tape of exporting, and with ACCA UK securing closer ties in Kazakhstan and the wider Central Asian region the scene is set for that to happen.

Kazakhstan has a lot going for it, as does the potential relationship it has with UK plc. Finance professionals are there to make it happen.


aksaroya —  29 May 2013 — Leave a comment

By Jane Fuller, former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank

The proposal that the same asset should be measured at amortised cost in the P&L but at fair value in the OCI is inconsistent at best, and raises fundamental issues about performance reporting.


When I see the words ‘limited amendments’ on a proposal from the International Accounting Standards Board (IASB), my gut reaction is relief that there will be no need to respond. Voluntary representatives of users of accounts, like myself at CFA Society of the UK, welcome invitations to drop things from the priority list.

But the dismissive description of ED/2012/4, which proposes a new category for financial assets, is misleading. This is not just because of the revived emphasis on convergence with US GAAP, but, crucially, because it raises fundamental issues about performance reporting and expands the use of the other comprehensive income (OCI) statement.

This timing is unfortunate since a debate on the purpose of OCI is part of the IASB’s revisiting of the conceptual framework. Many users hope this will provide a back-door route into tackling our biggest concern about International Financial Reporting Standards (IFRS): financial statement presentation.

The IASB’s ‘limited’ proposal is to create a new category of financial asset that is measured at amortised cost (complete with impairment testing) in the profit and loss account, but at fair value on the balance sheet. The difference between the two would run through the OCI, hence the FVOCI label. This waters down the plan for IFRS 9 on financial instruments, which was to replace the four asset categories of IAS 39 with just two – a welcome simplification. One of those scheduled for the dustbin was ‘available for sale’ which this proposal revives but with a new P&L treatment.

Questions raised by the draft include:

– if the difficulty lies in the definition of ‘hold to collect’ (for amortised cost accounting) because even a ‘simple’ debt instrument might be sold, then why was that not a key point in the consultation?

– If insurers complain of an ‘accounting mismatch’ because assets are put in a different section to linked liabilities, why is the OCI the best place to marry these things up?

– Why is the OCI being expanded when users of accounts suspect it gives preparers an opportunity to smooth ‘P&L’ earnings, and describe it as a ‘dumping ground’?

The logical inconsistency in measuring an asset one way in the P&L and another in the balance sheet is criticised by IASB board members Steve Cooper and Jan Engstrom in their alternative view, which says: ‘Where amortised cost is judged to be the most appropriate basis for reporting, this should be applied consistently throughout the financial statements.’ In that case, changes in fair value would be disclosed in the notes.

An underlying cause of unease is the sensitivity of the debate about ‘fair value’ accounting. The FVOCI proposal ducks the issue. It tries to satisfy both those who think performance reporting should be balance sheet driven and those more interested in inflows and outflows in the P&L.

In non-financial sectors the balance-sheet may be a poor reflection of assets because internally generated goodwill is ignored, but for banks and insurers this matters deeply – the balance-sheet is where it’s at for valuation and risk assessment purposes.

This is just the beginning of the debate on what to do about the OCI, including whether to abolish it. Could it be replaced with a single income statement with different sections, or columns, that distinguish between different types of income/expense and balance-sheet gains/losses? On the timing issue, the long-established tools of accrual accounting and cashflow reporting also come into it.

The proposed ‘limited amendments’ looks like a fait accompli. But the IASB must not let this FVOCI patch predetermine the outcome of a wider debate on performance reporting.

This post first appeared in Accounting and Business magazine, May 2013

Don’t ignore the draft

aksaroya —  22 May 2013 — 1 Comment

By Barry Cooper, ACCA president

Engaging in the IIRC’s consultation is vital in developing the integrated reporting framework.

Barry Cooper-0513

It has always been a source of pride to me that ACCA has been at the forefront of developments within the accountancy profession – the move to ensuring that our syllabus was based on International Financial Reporting Standards (IFRS) being just one.

Now ACCA is once again demonstrating its pioneering credentials by not only being one of the first adopters of integrated reporting (IR) – having produced our most recent annual report to IR principles – but also by calling for the business community, companies and investors alike to ensure they help shape the future of IR.

We have urged these groups to respond to the International Integrated Reporting Council (IIRC) consultation draft on the integrated reporting framework to help develop a new corporate reporting model. This will enable organisations to communicate their activities more effectively and provide clear information to stakeholders.

In my meetings with members, employers and tuition providers, many have commented favourably on our first annual report produced along IR lines – which enabled our stakeholders to see the bigger picture brought together in what is hopefully an easily digested document. Our next report will be another step along the IR route.

But this initiative is not only an opportunity to demonstrate leadership and innovation in the accountancy profession. It is also critical that those you advise play their part in helping to shape the future of integrated reporting, by looking at issues and challenges which can be addressed now and which ensure that the IIRC gets the full picture.

You have a critical role to play, and I urge you and your companies to engage in the consultation process.

This post first appeared in Accounting and Business magazine, May 2013

China makes the case

aksaroya —  24 April 2013 — Leave a comment

China’s experience of IFRS convergence makes a convincing case for other economies, says ACCA president Barry Cooper

Barry Cooper-0513

Given China’s increasing influence in the world, not only as producer but as major consumer, there’s growing interest in how to do business there. I’ve worked in China on and off for over 25 years and have been fascinated to see how it has developed into an economic world power.

With that growth has come some challenges, not least in the US where the Securities and Exchange Commission recently raised questions about the ways in which Chinese companies report their performance. So I was particularly interested to see some research commissioned by ACCA, which has looked at the impact of China’s convergence with International Financial Reporting Standards (IFRS), and what it has meant for corporate reporting.

The ACCA report, produced independently by Dr Edward Lee and Professor Martin Walker of Manchester University, together with Dr Colin Zeng of the University of Bristol, shows that IFRS convergence has benefitted the Chinese economy, by making accounting earnings more informative and therefore more useful to domestic and international investors.

After examining all Chinese companies listed on the Shanghai and Shenzhen stock exchanges between 2003 and 2009 the study found that the value relevance of earnings (the degree to which changes in reported earnings affect share prices) had increased following IFRS convergence in 2007, almost certainly as a result of convergence itself. The research also revealed that IFRS convergence resulted in better quality corporate disclosures only where there were other strong incentives for companies to do so, such as a high level of dependence on the equity markets for funding.

The findings underline the importance of IFRS as the international standard for financial reporting, particularly where companies have legal, governance and commercial incentives to provide high-quality disclosures. Convergence has undoubtedly worked for China. Other emerging economies – along with some significant developed ones yet to converge with IFRS – must now take notice. To consolidate and build on the benefits of convergence, the legal and regulatory accounting framework will need to be enhanced on a continuous basis, which will provide challenges and opportunities for all finance professionals.

Professor Barry J Cooper is head of the School of Accounting, Economics and Finance at Deakin University, Australia

This post first appeared in Accounting and Business, International edition, April 2013