Japan deciding on IFRS

Feb 15, 2011

On February 7 and 8, 2011 members of the Accounting Standards Board of Japan and the Financial Accounting Standards Board (FASB) met to update each other on the progress they are making on convergence of their respective Accounting Standards with International Financial Reporting Standards (IFRS). This meeting is one of the many that FASB has undertaken with different International Accounting Standards Board to discuss the convergence of  U.S. GAAP with International Financial Reporting Standards.

 In terms of making a decision about convergence, for Japan it will be around 2012. For US, the Securities and Exchange Commission is expected to decide whether the FASB and IASB (International Accounting Standards Board) have made sufficient progress on convergence, and whether IFRS can eventually be incorporated into the U.S. financial reporting system.

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Joint rule proposed for bank losses

Feb 2, 2011

Another step towards the convergence of accounting standards was taken recently when a joint proposal was made by International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) in relation to recognizing the losses on loans by banks.

The current practice in many countries requires that the banks wait to write down the value of financial asset until they have hard evidence of the loss. But the proposed rule will require that the banks predict the losses ahead of time, so they have more time to find the extra funds to cover the losses.

This rule will help address one of the main issues in the recent financial crisis ; by the time the financial institutions recognized the loan losses it was too late in the game. The taxpayers funded bailout money was the savior for many of these financial institutions.

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PCOAB and POB join hands

Jan 13, 2011

With the recent Dodd Frank law amending the accounting rules to permit exchange of information with overseas regulators, the Public Company Accounting Oversight Board (PCOAB) and its British counterpart Professional Oversight Board (POB) have signed an agreement to cooperate in the oversight of auditors and public accounting firms in either jurisdiction.The six largest global accountancy firms – BDO, Deloitte, Ernst & Young, Grant Thornton, KPMG and PwC have also welcomed this co-operative agreement.

The agreement provides a basis for the resumption of PCAOB inspections of registered accounting firms that are located in the U.K. and that audit, or participate in audits, of companies whose securities trade in U.S. markets. The PCAOB previously conducted inspections in the United Kingdom with the POB from 2005 to 2008, but has been blocked from doing so since that time.

The agreement could open the door for the PCAOB to look into Ernst & Young UK’s role in the accounting fraud involving the removal of billions of dollars of fixed income securities from the Lehman Brothers balance sheet to deceive investors about the bank’s liquidity; the Repo 105 scandal.

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Sri Lanka getting ready to adopt IFRS

Jan 10, 2011

The Institute of Chartered Accountants of Sri Lanka (ICASL) plans to adopt new accounting guidelines for Sri Lankan companies in line with International Financial Accounting Standards starting 2012.

The Central Bank of Sri Lanka, in its Road Map Monetary and Financial Sector Policies for 2011 and beyond report released in January 2011 has included the initial steps to facilitate the adoption of  international standards. The reports states that changes would take place to Sri Lanka Accounting Standards (SLAS) 44 and 45 on financial instruments corresponding with International Accounting Standards of 32 and 39. Already work is under way to implement these changes starting from January 2012.

IFRS can soon add another country to its list of adopters.

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Move to IFRS leads to losses for Power companies in India

Jan 3, 2011

The adoption of IFRS beginning April of 2011 will have a big impact on both the Income Statement and the Balance Sheet of power companies in India. Under the present Indian GAAP, rate regulated assets/ liabilities are allowed to be recognized, so companies have recognized as an asset or liability- tariffs, fuel adjustments and advances against depreciation.

With the adoption of IFRS, such assets or liabilities will have to be removed from the financial statements. In terms of numbers the initial impact on account of these regulatory assets under IFRS can be as high as Rs.745 crore in case of Tata Power and Rs.1,034 crore for Reliance Infra.

This issue is not centered only on India. This IFRS rule affects power companies worldwide. Just as an example the regulatory assets and liabilities for the electricity companies in the US is estimated to be $675 billion and $450 billion, respectively, in 2007.

For the convergence and standardization of the accounting standards, such anomalies will have to be taken into stride.

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Convergence Project still on track

Dec 20, 2010

Recently the Financial Accounting Standards Board and the International Accounting Standards Board said they were on track to finish writing the new accounting standards for financial instruments, revenue recognition, leases, comprehensive income, and fair value measurement by June 2011 or earlier. The IASB is also on target to align its disclosure requirements for derecognized assets and other off-balance-sheet risks with U.S. rules and to finish its updates for consolidations and insurance contracts by the same date.

Due to the push to get these projects completed by mid 2011, some of the other joint projects the two boards are undertaking have been pushed back.  Those projects include an effort to reorganize the entire presentation of financial statements, a new standard for financial instruments that have characteristics of equity, and new rules for emission trading schemes and the consolidation of investment companies. The boards also are putting off further work on their conceptual framework.

Even though some projects are getting pushed back, there is definite headway being made on some of the key convergence standards.

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India on track for adoption of IFRS

Dec 16, 2010

Even thought the Indian version of the International Financial Reporting Standards (IFRS) has been altered here and there, the country is all set to implement the standards come April 2011.

In the first phase, companies on the Indian stock exchanges – Nifty 50 and BSE Sensex, firms whose securities are listed on stock exchanges outside the country, and all those having a net worth of R1,000 crore, would switch to the new accounting system.

Insurance and banking companies, however, would be required to migrate to the IFRS methodology from 2012, the circular said.

The Institute of Chartered Accountants of India (ICAI) has also set up a group, which includes members from the finance ministry, for identifying tax issues that may arise from the convergence issue. The group has prepared a draft report identifying certain options that could be adopted to achieve tax neutrality.

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IFRS adoption leads to increased net worth for Coal India

Nov 22, 2010

The move to adopt the International Financial Reporting Standards will boost Coal India Ltds’s net worth by $2.4 billion.

 The company adhering to the old accounting standards has on its books a $2.4 billion provision on account of the overburden removal reserve. This reserve was maintained as Indian mining accounting is based on mineable deposit and expected lifespan of a mine. In the initial period, the cost of mining was less, but it gradually increased as mining went deeper and thereby leading to a huge reserve balance.

 With the adoption of IFRS, the mining cost can now be calculated based on actuals and no provision for future mining is to be made. So the reserve can now be released leading to an increase in the net worth.

To put things in perspective, the present net worth of the company is $6 billion; the change to IFRS would bring the net worth up to $8.4 billion.

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Lease accounting convergence

Nov 11, 2010

Another step towards convergence of the accounting standards. On August 27, 2010, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) jointly published an Exposure Draft, outlining proposed major changes to Generally Accepted Accounting Principles (GAAP) for leases. The changes would modify GAAP accounting standards to require the capitalization of most leases now treated as operating leases.

The changes are intended to provide greater disclosure in GAAP financial statements, since operating leases are not generally reflected on the balance sheets of either landlords or tenants, and to harmonize GAAP treatment of leases with international accounting standards.

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UK getting set to adopt IFRS

Nov 8, 2010

The Accounting Standards Board (ASB) is ready to incur 78.9 million pounds in order to move to the International Financial Reporting Standards (IFRS). The new system would introduce across the business community, but the ABS insists the cost will be well worth it.

The rule book will be reduced from 2,000 pages to 400. The scope for auditing errors will also be reduced. The new standards would modernize and simplify the accounting system which would provide make it easier to read financial statements and benefit the investors and the market in general.

The system had been scrutinized and debated for 6 years and is expected to be fully in place by summer 2013. Transition costs for companies of medium to large size are expected to average 80 million pounds.

One question that arises associated with the changes that different economies are trying to implement to their accounting standards is whether it is the right time. With the global economy being fragile would it move the resources from strategizing about the future of the company to getting the books compliant with the new standards.

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The convergence project

Nov 8, 2010

October 2002 was a significant year in the history of accounting. The Norwalk Agreement , a memorandum of understanding was announced by Financial Accounting Standards Board and the International Accounting Standards Board (IASB). This was a significant step towards the formalization of  the commitment of the two organizations to converge the US and International accounting standards.

The FASB has has undertaken the following six key initiatives to further the goal of convergence of U.S. GAAP with International Financial Reporting Standards (IFRS):

  1. Joint projects being conducted with the IASB – Key projects under this are Revenue Recognition and Business Combinations
  2. The short-term convergence project. – These are projects where the convergence around high quality solutions to resolve differences between US GAAP and IFRS appear achievable in the short term .Solution could be selecting between existing existing U.S. GAAP and IFRS.
  3. Liaison IASB member on site at the FASB offices. – Having full time IASB member , James J. Leisenring, in residenece at the FASB office is a significant feature.
  4. FASB monitoring of IASB projects. IASB projects are monitored by the FASB based upon the FASB’s level of interest in the topic being addressed.
  5. The convergence research project. The FASB staff is currently working on a research project related to convergence. The project identifies and catalogs the substantive differences between U.S. GAAP and IFRS.
  6. Explicit consideration of convergence potential in all Board agenda decisions. Within the framework of the Board’s agenda criteria, all topics formally considered for addition to the FASB’s agenda need to be assessed for the possibilities for cooperation with the IASB (or another standard setter).

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FASB planning to expand fair -value accounting

Nov 3, 2010

In an effort to align US GAAP to IFRS, FASB is considering expanding the fair- value accounting to land and buildings held for investment. The biggest impact of the change will be on real estate companies and real estate investment trusts. At present such assets are recorded at historical cost, but with the new standard fair value or in other terms the market value of the asset will be the basis of recording the asset in the financial statements.

What would the impact on companies’ financial statement be. Well that depends on the age of the properties. If the property is old and has been depreciated significantly, then the value of those assets would be significantly higher; but on the other side assets that were bought at the peak of the market in 2006-2007-2008, possibly would have significant decline in the value of the property that will be recorded on the balance sheet.

FASB’s rule is expected to be similar to International Accounting Standard 40, which allows a fair-value option.

The proposal is expected to be sometime next year and there is no time set for implementation yet. But the good news is that we are moving towards the global standards.

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Another drop out for IFRS

Nov 2, 2010

A couple of weeks ago, the Indian government announced dropping the new rule from International Financial Reporting Standards  that allows property developers to book sales only when the project is complete. Another announcement came out this week of dropping the government’s plans to introduce a new accounting norm for agriculture as part of the move to converge its accounting standards with globally adopted International Financial Reporting Standards (IFRS).

India will keep their present rules to guide the agricultural industry in maintaining their financial statements. Apart from agriculture the Indian government will depart or “carve out” compared to IFRS in real estate, property, plant and purchase and mergers to name a few key areas. 

The guideline based standards of IFRS have been met with general acceptance over the world, except some specific areas that the countries consider sensitive like banking where countries want to keep their own standards which usually are rule based.

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Korea requests delay in consolidation

Nov 1, 2010

Korea, the host of the 2010 G20 Summit, requested the G20 to delay the consolidation process of the global accounting standards. Korea has defined its role at the G20 mainly as an arbiter and a consensus builder among the world’s largest economies.

The G20 initiative for new, consolidated rule, Korea believes will be an issue for the Korean firms. Considering that many large firms have already spent a lot of money in setting up accounting and IT systems based on the IFRS method over the past few years.

Accounting firms say that the move towards convergence could cost Korean firms tens of billions of won, after they have just spent a huge amount of money in shifting from the GAAP-based standard to the IFRS-oriented one. The government is forcing them to use the IFRS for every listed company from next year.

Only time will tell whether Korea will be able to get a consensus among the G20 members to move the consolidation process to a later date and save the Korean firms from spending even more on meeting the new requirement.

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Technical difficulties with new Revenue Recognition rules

Oct 23, 2010

The recent draft rules proposed by the Financial Accounting Standard Board concerning the revenue recognition rules would not just change the way accounting folks would recognize and record the revenue, but it would also require the companies to change or revamp their accounting systems.

One such situation will be in implementing the draft rule of assigning fair value to bundled products. Under the draft rule companies will have to use the relative selling price method, which allocates revenue for bundled products on a percentage to assign fair value rather than the popular residual allocation method, which assigns a straight dollar amount of revenue to each element of a bundled product.

Generally Enterprise Resource Planning (ERP) systems built for software revenue recognition are configured to handle the percentage method, while most ERP systems are programmed to handle the residual allocation method. So most non software companies will have to revamp their ERP system to comply with the rule if and when it becomes a rule. Will it be a small tweak in the system or a work around situation or will it be an opportunity for small or even large vendors to come up with stand alone products catering to this niche market, only time will tell.

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