1 WHY
INTERNATIONAL
FINANCIAL REPORTING
STANDARDS MATTER
With globalisation has come the increasing integration of world markets for goods,
services and capital – with the result that companies that traditionally were reliant on
their domestic capital markets for financing now have substantially increased access to
debt and equity capital, both inside and outside their national borders.
Yet – perhaps not entirely surprisingly – the world of financial reporting was slow to respond
reflecting, no doubt, a widespread nationalism in respect of countries’ own standards.
Undoubtedly, one of the main advantages of a single set of global accounting standards is
that it would enable the international capital markets to assess and compare inter-company
performance in a much more meaningful, effective and efficient way. This should increase
companies’ access to global capital and ultimately reduce the cost thereof. Thus the request
for global standards came both from regulatory bodies and from preparers of financial
statements. As early as 1989 the International Organisation of Securities Commissions
(IOSCO), the world’s primary forum for co-operation among securities regulators,
prepared a paper noting that cross border security offerings would be facilitated by the
development of internationally accepted standards. For preparers, greater comparability
in financial reporting with their global peers had obvious attractions.
Notwithstanding these anticipated benefits, it has only been since 2000 that there has
been a serious effort made toward such global standards. This came about largely as a
result of the European Commission’s announcement in June 2000 that it would present
proposals to introduce the requirement that all listed European Union (EU) companies
report in accordance with International Accounting Standards by 2005. This
requirement not only changed the face of European financial reporting, but global
reporting as well after many other countries followed Europe’s lead. Indeed, the IFRS
Foundation reports that 144 jurisdictions require IFRS standards for all or most
domestic publicly accountable entities (listed companies and financial institutions) in
their capital markets.1
Thus global financial reporting has ceased to be characterised by numerous disparate
national systems to the point at which there are today essentially only two – IFRS and
US GAAP.
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2
THE IFRS FOUNDATION AND THE IASB
2.1
The standard-setting structure
The diagram below illustrates the structure within which standards are set by the
International Accounting Standards Board (IASB).
Appoints /
Monitors
Trustees
Monitoring
IFRS Foundation
Board
Reports to
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Technical advice
IFRS
IASB
Interpretations
Interprets
Committee
Creates
IFRS
High quality, enforceable
and global
The various elements of the structure are discussed further below.
Unless indicated otherwise, references to IFRS include the following:
• International Financial Reporting Standards – standards developed by the IASB;
• International Accounting Standards (IAS) – standards developed by the International
Accounting Standards Committee (IASC), the predecessor to the IASB;
• Interpretations developed by the IFRS Interpretations Committee (Interpretations
Committee) or its predecessor, the Standing Interpretations Committee (SIC); and
• International Financial Reporting Standards for Small and Medium-sized Entities
(IFRS for SMEs) – a stand-alone standard for general purpose financial statements
of small and medium-sized entities (as defined).
2.2
The IFRS Foundation
The governance of the IFRS Foundation primarily rests with the Trustees of the IFRS
Foundation (Trustees) who, in turn, act under the terms of the IFRS Foundation Constitution
(the Constitution).2 Section 17 of the Constitution requires a review, every five years, of the
structure and effectiveness of the IFRS Foundation. The last review was completed in 2016
and, as a result, the Constitution was revised effective from 1 December 2016.
It is a requirement of the Constitution that, in order to ensure a broad international basis,
there must be:3
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GAAP
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• six Trustees appointed from the Asia/Oceania region;
• six Trustees appointed from Europe;
• six Trustees appointed from the Americas;
• one Trustee appointed from Africa; and
• three Trustees appointed from any area, subject to maintaining overall
geographical balance.
The appointment of Trustees to fill vacancies caused by routine retirement or other
reasons is the responsibility of the remaining Trustees but subject to the approval of the
Monitoring Board as discussed at 2.3 below. The appointment of the Trustees is
normally for a term of three years, renewable once.4
The Constitution requires that the Trustees comprise individuals that, as a group,
provide a balance of professional backgrounds, and have an interest in promoting and
maintaining transparency in corporate reporting globally. This includes individuals with
global experience at a senior level in securities market regulators, firms representing
investors, international audit networks, preparers, users, academics and officials serving
the public interest. To achieve
such a balance, Trustees are selected after consultation
with the accounting and audit profession, the securities market and other public interest
bodies, regulators, investors, preparers, users and academics. The Trustees are required
to establish procedures for inviting suggestions for appointments from these relevant
organisations and for allowing individuals to put forward their own names, including
advertising vacant positions.5
The Constitution provides that ‘all Trustees shall be required to show a firm commitment
to the IFRS Foundation and the IASB as a high quality global standard-setter, to be
financially knowledgeable, and to have an ability to meet the time commitment. Each
Trustee shall have an understanding of, and be sensitive to, the challenges associated with
the adoption and application of high quality global accounting standards developed for
use in the world’s capital markets and by other users’.6
The Trustees are responsible also for appointing the members of the IASB, Interpretations
Committee, IFRS Advisory Council (the Advisory Council)7 and the Accounting Standards
Advisory Forum (ASAF).8 In addition, their duties include the following:9
• appointing the Executive Director, in consultation with the IASB Chair, and
establishing his or her contract of service and performance criteria;
• reviewing annually the strategy of the IFRS Foundation and the IASB and its
effectiveness, including consideration, but not determination, of the IASB’s agenda;
• assuming responsibility for establishing and maintaining appropriate financing
arrangements;
• approving annually the budget of the IFRS Foundation and determining the basis
for funding;
• reviewing broad strategic issues affecting financial reporting standards, promoting
the IFRS Foundation and its work and promoting the objective of rigorous
application of IFRS, provided that the Trustees are excluded from involvement in
technical matters relating to financial reporting standards;
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• establishing or amending operating procedures for the Trustees;
• establishing and amending operating procedures, consultative arrangements and
due process for the IASB, the Interpretations Committee and the Advisory Council
and reviewing their compliance;
• approving amendments to the Constitution after following a due process, including
consultation with the Advisory Council and publication of an exposure draft for
public comment and subject to the voting requirements given in the Constitution;
• exercising all powers of the IFRS Foundation except for those expressly reserved
to the IASB, the Interpretations Committee and the Advisory Council;
• fostering and reviewing the development of educational programmes and materials
that are consistent with the IFRS Foundation’s objectives; and
• publishing an annual report on the IFRS Foundation’s activities, including audited
financial statements and priorities for the coming year.
The IFRS Foundation’s funding is derived primarily from voluntary contributions from
jurisdictions that have put in place national financing regimes. While funding
mechanisms differ, most jurisdictions have established either a levy on companies or a
system of publicly supported financing. The IFRS Foundation is continuing its work
towards a global funding system characterised by a long-term commitment by
jurisdictions, public sponsorship (either direct or implicit governmental or regulatory
support), flexibility, proportionally allocated contributions and public accountability in
the budget process.10 In 2017, the major funders of the IFRS Foundation were the
international accounting firms, the European Commission, Japan and China.11
2.3
The Monitoring Board
The Monitoring Board was created to address a perceived lack of accountability and
responsiveness by the IASB and the IFRS Foundation to the concerns of its constituents.
The Monitoring Board provides a formal link between the Trustees and public
authorities. This relationship seeks to replicate, on an international basis, the link
between accounting standard-setters and those public authorities that have generally
overseen accounting standard-setters.12
The Charter of the Monitoring Board notes that the Monitoring Board’s mission is:13
• to cooperate to promote the continued development of IFRS as a high quality set
of global accounting standards;
• to monitor and reinforce the public interest oversight function of the IFRS
Foundation, while preserving the independence of the IASB. In that regard;
• to participate in the selection and approval of the Trustee appointments;
• to advise the Trustees with respect to the fulfilment of their responsibilities,
in particular with respect to regulatory, legal and policy developments that
are pertinent to the IFRS Foundation’s oversight of the IASB and appropriate
sources of IFRS Foundation funding; and
• to discuss issues and share views relating to IFRS, as well as regulatory and market
developments affecting the development and functioning of these standards.
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The responsibilities of the Monitoring Board are to:14
• participate in the process for appointing Trustees and approve the appointment
of Trustees;
• review and provide advice to the Trustees on the fulfilment of their responsibilities –
there is an obligation on the Trustees to report annually to the Monitoring Board; and
• meet with the Trustees or a sub-group thereof at least annually; the Monitoring
Board has the authority to request meetings with the Trustees or separately with
the chair of the Trustees and with the chair of the IASB to discuss any area of the
work of the Trustees or the IASB.
At the time of writing, the Monitoring Board comprises representatives of:15
• the IOSCO Board;
• the Securities and Exchange Commission (SEC), United States of America;
• the European Commission;
• the Financial Services Agency, Japan;
• the IOSCO Growth and Emerging Markets Committee;
• the Comissão de Valores Mobiliários, Brazil;
• the Financial Services Commission, Republic of Korea;
• the Ministry of Finance, People’s Republic of China; and
• the Basel Committee on Banking Supervision (observer).
The current chairman is the representative of the IOSCO Board.
Membership of the Monitoring Board is assessed based on the following criteria:16
• the member must be a capital market authority responsible for setting the form and
content of financial reporting in its jurisdiction;
• the jurisdiction has made a clear commitment to moving towards application of
IFRS and promoting global acceptance of a single set of high-quality international
accounting standards as the final goal;
• the IFRSs to be applied should be essentially aligned with IFRSs developed by the IASB;
• the jurisdiction can be regarded as a major market for capital-raising based on the size
of market capitalization, the number of listed companies and capital market activity;
• the jurisdiction makes financial
contributions to setting IFRS;
• the jurisdiction has a robust enforcement mechanism to ensure proper
implementation of relevant accounting standards; and
• the relevant national or regional standard-setting body is committed to
contributing actively to the development of IFRS.
Historically the motivation for the use of IFRS was to facilitate cross-border capital
raising and, therefore, the membership of the Monitoring Board was focused on capital
markets authorities that were committed to the development of high-quality global
accounting standards. While this continues to be a criterion for membership, beginning
with the 2016 review of its members, the Monitoring Board will evaluate the integration
of IFRS for domestic issuers in that member’s jurisdiction.17
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2.4
The International Accounting Standards Board (IASB)
The members of the IASB are appointed by the Trustees.18 Currently, the IASB comprises
14 members as required by the Constitution. The main qualifications for membership of
the IASB are professional competence and recent relevant professional experience.19
The Trustees are required to select IASB members so that the IASB, as a group, will
comprise the best available combination of technical expertise and diversity of
international business and market experience, including auditors, preparers, users,
academics and market and/or financial regulators. No individual should be both a
Trustee and a member of the IASB at the same time.20 Furthermore, the IASB, in
consultation with the Trustees, is expected to establish and maintain liaison with
national standard-setters and other official bodies concerned with standard-setting to
assist in the development of IFRS and to promote the convergence of national
accounting standards and IFRS.21
The IASB will normally be required to comprise:22
• four members from Asia/Oceania;
• four members from Europe;
• four members from the Americas;
• one member from Africa; and
• one member appointed from any area, subject to maintaining overall geographical
balance.
The responsibilities of the IASB are listed in Section 36 of the Constitution. Its primary
role is to have complete responsibility for all IASB technical matters including preparing
and issuing IFRSs (other than interpretations) and exposure drafts, each of which is
required to include any dissenting opinions; and final approval of and issuing
interpretations developed by the Interpretations Committee.23
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