Financial reporting news: calls for better governance at IASB

As reported in this month's roundup, there have been wide-ranging calls for the International Accounting Standards Board to improve its governance and accountability. By Nick Topazio, financial reporting specialist, CIMA.

International

Standards body to get governance overhaul

The International Accounting Standards Committee Foundation (IASCF), the oversight body of the International Accounting Standards Board (IASB), has proposed to enhance the organisation’s governance arrangements and its public accountability.

The proposals include:

• establishing a formal reporting link to official organisations
• developing a multilayered, multifaceted approach to accountability beyond the formal link to official organisations
• creating a mechanism for public input to the trustees outside regularly scheduled meetings with stakeholder groups
• continuing efforts towards a sustained, broad-based funding regime.

See the IASB website for more.

Meanwhile four major organisations have proposed the creation of a new monitoring body in the governance structure of the IASCF itself. According to proposals from The European Commission, the Financial Services Agency of Japan, the International Organisation of Securities Commissions (IOSCO), and the US Securities and Exchange Commission, the body would meet regularly with the foundation to:

• review and comment on the IASB's work programme
• participate in and have final approval in the selection of IASCF trustees
• review the trustees' oversight activities.

Read the joint statement.

EU reluctantly endorses operating segments standard

Despite expressing a number of concerns, reservations and regrets, the European Parliament has voted in favour of endorsing the controversial IFRS 8 Operating Segments for use in Europe.

SEC votes to remove the reconciliation requirement

The Securities and Exchange Commission in the US will remove the reconciliation requirement. This is the obligation for non US companies reporting under International Financial Reporting Standards (IFRS) to reconcile their financial statements to US generally accepted accounting principles (GAAP). Read the press release.

New XBRL groups to meet in January

The IASCF has inaugurated the XBRL (eXtensible Business Reporting Language) Advisory Council and XBRL Quality Review Team. The council will give strategic advice on the development and adoption of the XBRL taxonomy for IFRS. It will meet for the first time in December 2007.

The review team will review and quality-assure XBRL taxonomies developed by the IASCF. It will meet in January 2008. View the membership list.

Joint arrangements standard changes open for comment

In September 2007, the IASB issued an exposure draft to replace IAS 31 interests in joint ventures and SIC-13. 

The consultation is open for comment until 11 January 2008. You can comment through the CIMA consultation database (using the search term 'joint arrangements'), the financial reporting community of practice (new members can gain access by emailing tis@cimaglobal.com), or directly to the IASB.

The exposure draft proposes to:

• shift the focus in accounting for joint arrangements away from the legal form of the arrangements and onto the contractual rights and obligations agreed by the parties
• remove the choice for accounting for jointly controlled entities by equity method or proportionate consolidation. This would be done by requiring parties to recognise both the individual assets to which they have rights and the liabilities for which they are responsible, even if the joint arrangement operates in a separate legal entity. If the parties only have a right to a share of the outcome of the activities, their net interest in the arrangement would be recognised using the equity method.

The types of joint arrangement recognised by the exposure draft and the proposed accounting are:

• Joint operation
  This involves the use of the assets and other resources of the parties, often to manufacture and sell a joint product. Each party generally owns its own assets that it uses to create joint products. Each party would recognise controlled assets and incurred liabilities, expenses incurred and share of revenues and expenses from the sale of goods or services by the joint arrangement.
• Joint asset
  Each party takes a share of the output from the asset and bears an agreed share of the costs incurred to operate the asset. Each party has rights and often has joint ownership of the assets to generate the output. The proposed accounting is to recognise share of joint assets, liabilities incurred, revenue from the sale of share of output and expenses incurred.
• Joint venture
  In this arrangement, an entity is jointly controlled by the venturers with each entitled to a share of the outcome of the activities of the joint venture. Parties do not have rights to individual assets or obligations for expenses of the venture. Venturers would recognise the interest in the joint venture using the equity method.

Who will be affected by the proposals?
For the majority of entities, the new standard is unlikely to reshape their balance sheet. This is because accounting for individual assets and liabilities gives the same outcome as proportionate consolidation in most circumstances.

If an entity has rights to individual assets and responsibility for liabilities (and related revenue and expenses) of a joint arrangement, the new standard will have little effect on its financial statements if that joint arrangement is not a legal entity, or if it is a legal entity that was previously accounted for using proportionate consolidation. Similarly, if an entity has rights only to a share of the outcome of the activities of a joint arrangement, there will be little change if that joint arrangement is a legal entity and was previously accounted for using the equity method.

Where entities have been using proportionate consolidation and are recognising assets and liabilities in their financial statements even though they have no rights to the assets or responsibility for the liabilities; or where those entities that have rights to assets and responsibility for liabilities but are not recognising those rights and responsibilities because they are using the equity method of accounting, then the change may be more significant.

UK

Watchdog targets banking and credit market

The Financial Reporting Review Panel’s review of activity in 2008/09 will focus on:

• banking
• retail
• travel and leisure
• commercial property
• house builders.

Banking, commercial property and house builders have replaced utility, telecommunications and media as target areas. Travel and leisure and retail have been retained.

The panel will pay particular attention to disclosures relating to financing arrangements and risks and uncertainties in the light of credit market conditions at the time of approval of financial statements.

Accounts will continue to be selected from the full range of companies within the panel’s remit, including the largest companies. But there will be a shift in emphasis away from the FTSE 350 to the lower end of the listed market, AIM and large private companies. Accounts will continue to be selected for review on the basis of company specific factors and complaints. Read the full press release.

Private equity review urges more disclosure

The UK private equity industry is to require its members to disclose more investment details. A review commissioned by the industry recommends that firms should disclose details of employees, debt, risk and management approach. The report does not recommend that firms disclose the pay of their executives, or the fees they collect.

Access the full report and an audiocast of the press conference.

December 2007

Back to Insight front page