The Future Changes in Financial Reporting Michael Kavanagh

2. The Future Changes in Financial Reporting Michael Kavanagh Head of Financial Reporting Supervision IAASA

3. Presentation Overview • Current accounting regimes operating in Ireland • Main players involved in determining the future of financial reporting in Ireland • The impact IFRS has had on the financial reporting regime in Ireland • What future for Irish GAAP? • The role of the Financial Reporting Supervision unit of IAASA • Current hot topics for future changes to financial reporting

4. Re-cap on current accounting regimes operating in Ireland • Irish GAAP • International Financial Reporting Standards • Alternative Bodies of Accounting Standards

5. European Communities (International Financial Reporting Standards and Miscellaneous Amendments) Regulations, 2005 • Mandatory IFRS financial statements for • All consolidated group accounts for entities with securities listed on an EU regulated market for years beginning 1/1/05 • Group accounts of debt listed entities deferred until years beginning 1/1/07

6. European Communities (International Financial Reporting Standards and Miscellaneous Amendments) Regulations, 2005 • Choice for all other companies to prepare individual or group accounts as • ‘Companies Act’ accounts or • IFRS accounts • One way choice, unless relevant change of circumstances

7. European Communities (International Financial Reporting Standards and Miscellaneous Amendments) Regulations, 2005 • Companies Act accounts are accounts prepared in accordance with the accounting rules of company law and Irish GAAP i.e. as issued by the UK Accounting Standards Board (ASB) • IFRS accounts are accounts prepared in accordance with IFRS* as issued by the IASB and include some mandatory disclosures from the Companies Acts *As endorsed by the EU

8. Investment Funds, Companies and Miscellaneous Provisions Act, 2005. • Investment companies, as defined by Part XIII of the Companies Act, 1990 allowed to use Alternative Bodies of Accounting Standards (ABAS) • ABAS = US, Japanese and Canadian GAAP

9. Main players involved in determining the future of financial reporting in Ireland

10. Main players involved in financial reporting in Ireland IAASA ASB IASB EU Financial reporting SEC DETE CESR

11. International Accounting Standards Board (IASB) • The accounting standards produced by the IASB (previously the IASC) are: • International Financial Reporting Standards (IFRS) (7) • International Accounting Standards (30) • Interpretations of these - IFRIC (10) and SIC (11)

12. Accounting Standards Board • The accounting standards produced by the UK ASB (previously the ASC) include : • Financial Reporting Standards (FRS) (29) • SSAP (of ASC) (7 active) • Interpretations of these - UITF Abstracts (23)

13. Financial Reporting Review Unit of IAASA • Principal functions include – - Monitoring whether the accounts of certain classes of companies and other undertakings comply with the Companies Acts; • Co-operating in the development of accounting standards and practice notes; • Assisting the Board of IAASA to discharge its functions as advisor to the Minister on accounting and related matters; • Liaising with other countries’ financial reporting monitoring bodies and developing contacts with those bodies.

14. Department of Enterprise Trade and Employment (DETE) and the European Union (EU) Various laws relating to accounting standards including prescribing which accounting standards should be used by the different categories of companies, the format of those accounts, and other accounting related EU regulations that are transposed into Irish law by the DETE.

15. The regulators – CESR and SEC • Primarily regulators of capital markets and therefore impact on financial reporting.

16. Experiences of first time implementation of IFRS • 8,000 listed groups required to report under IFRS in Europe including c50 in Ireland. Many others have done so voluntarily • The most common adjustments seen in Ireland • Financial instruments generally • Share-based payments • Pension obligations • Foreign currency • Business combinations • Leasing • Deferred tax • Dividend distributions • Others

17. What future for Irish/UK GAAP?

18. The Accounting Standards Board (ASB) • ASB is an operating body of the UK Financial Reporting Council (FRC). • In Ireland, ASB standards are “promulgated” by the ICAI. • Section 41 of the 2003 Companies Act – “accounting standards ……. issued by any body or bodies prescribed by regulation”. Not yet commenced. • Accounting standards responsibilities impacted by move to International Financial Reporting Standards (IFRS). • ASB has consulted on its future role in 2004,2005 and 2006.

19. The changing accounting environment • Move towards global accounting standards • What is the future role for ASB in setting accounting standards?

20. Future role for ASB- UITFs • ASB acknowledges that national interpretations of accounting standards should be rare. • ASB has stated that the International Financial Reporting Interpretations Committee (IFRIC) is the appropriate body to interpret IFRS. • Role of Urgent Issues Task Force (UITF) to be reviewed.

21. Future role for ASB – FRSs/SSAPs • ASB sees its role as primarily trying to • influencing future direction of IASB standards = influencing EU policy on accounting standards, including the endorsement of IFRS • Future role in national standard setting might include issuing standards in relation to • Entity specific issues: for example, smaller entities • Sector specific issues: for example, use of Statements of Recommended Practice (SORPs) and • Improving communication between companies and investors: narrative reporting and the Operating and Financial Review (OFR).

22. ASB convergence policy with IFRS • ASB policy: no case for maintaining differences between the principles underlying Irish/UK GAAP and IFRS. • Consulted on convergence strategy in 2004: responses indicated support for phased approach. • Responses to consultation on role in 2005 highlighted change of view: • Phased approach complicated/difficult to implement • Complicated IFRS may not be suitable for many companies • Await the outcome of the IASB SME project. • ASB now proposing to move to ‘big bang’ convergence from 2009

23. ASB convergence – current proposals • ASB issued tentative proposals in May 2006 for public comment – • All publicly quoted and other publicly accountable companies would be required to apply full IFRS. • Use of the Financial Reporting Standard for Smaller Entities (FRSSE) extended to include medium-sized entities.

24. ASB convergence – current proposals • Subsidiaries of group companies that apply full IFRS would also be required to apply full IFRS for measurement and recognition, but with reduced disclosure requirements (yet to be determined). • No decision yet on companies that do not fall in 1, 2 or 3. Alternatives seem to be: • extend FRSSE application further, • apply IFRS to more companies, • maintain Irish/UK GAAP for them, or • some combination of (i), (ii) and (iii).

25. Issues: what is public accountability? • IASB definition: “An entity has public accountability if: (a) there is a high degree of outside interest in the entity from non- management investors or other stakeholders, and those stakeholders depend primarily on external financial reporting as their means of obtaining financial information about the entity; or (b) the entity has an essential public service responsibility because of the nature of its operations.” • How to put this definition into operation still to be determined.

26. Issues: FRSSE or IASB SME standard? • Is it appropriate to apply the FRSSE to medium-sized and possibly even larger companies? • Final decisions will be made when the outcome of the IASB SME project is clearer.

27. IAASA - Financial Reporting Supervision Unit’s role in the future of financial reporting in Ireland

28. Financial Reporting Review Unit of IAASA • Principal functions include – - Monitoring whether the accounts of certain classes of companies and other undertakings comply with the Companies Acts; • Co-operating in the development of accounting standards and practice notes; • Assisting the Board of IAASA to discharge its functions as advisor to the Minister on accounting and related matters; • Liaising with other countries’ financial reporting monitoring bodies and developing contacts with those bodies.

29. Monitoring whether the financial statements of certain companies comply with the Companies Acts • Section 26 of the 2003 Act • The IAS Regulation • The Transparency Directive

30. Section 26 of the 2003 Act • The financial reporting supervision constituency comprises: • all plcs (whether listed or not); • all subsidiary undertakings of plcs; • all private companies limited by shares that, in both in the relevant financial year and the immediately preceding financial year, satisfy the following criteria: • balance sheet total exceeds €25m; and • turnover exceeds €50m. • all private companies limited by shares which, when aggregated with their subsidiary undertakings, exceed the aforementioned thresholds; • all subsidiary undertakings of the preceding class of private companies; and • certain other undertakings, and where applicable their subsidiary undertakings, that satisfy the aforementioned criteria, including unlimited companies and partnerships whose members having unlimited liability are themselves limited companies.

31. IAS Regulation • Requires EU Member States to take appropriate measures to ensure compliance with IFRS (applies to listed entities – consolidated a/c’s only); • Recital no.16 of the Regulation - “A proper and rigorous enforcement regime is key to underpinning investors' confidence in financial markets. Member States, by virtue of Article 10 of the Treaty, are required to take appropriate measures to ensure compliance with international accounting standards. The Commission intends to liaise with Member States, notably through the Committee of European Securities Regulators (CESR), to develop a common approach to enforcement.”

32. Transparency Directive • Article 24(4)(h) of the Transparency Directive (“TD”): - “..to examine that information referred to in this Directive is drawn up in accordance with the relevant reporting framework and take appropriate measures in case of discovered infringements.”

33. Liaising with other countries’ financial reporting monitoring bodies • IAASA an active participant in EECS (European Enforcement Co-ordination Sessions) – sub committee of CESR – monthly meetings • EECS – Forum for discussing and co-ordinating “enforcement” decisions in EU/EEA • A database of IFRS enforcement decisions in the EU/EEA has been established – not precedents but likely to be persuasive reference point • Has been Irish EECS case which was brought to EU Roundtable on Consistent Application of IFRS • CESR/EECS liasing with IASB and SEC on various matters of mutual interest • EECS - very important part of SEC and EU “road map”

34. Other financial reporting functions • Assisting the Board to discharge its functions as an advisor to the Minister on accounting related matters - Advice onvarious matters as have arisen - Member of CLRG and advice on part A6 of forthcoming Consolidation Bill dealing with accounting and auditing • Co-operating in the development of accounting standards and practice notes - Irish Observer at ASB Board – twice monthly meetings - Liaison with IASB

35. Current hot topics for future changes in financial reporting

36. What direction are accounting standards going in? • ASB convergence with IASB standards • IASB formal agreements with US FASB and Japan. • Convergence roadmap between IFRS and US GAAP – 2008. • The potential impact of China… and other emerging economies.

37. Current hot topics for future changes in financial reporting • Financial Statement presentation • Fair value measurement • Business combinations • Revenue recognition • Conceptual framework …..…………. and many more

38. Financial Statement presentation • Current proposals are for 3 primary “financial statements” -

39. Financial Statement presentation • Each set of accounts will consist of - 3 statements of financial position, - 2 statements of earnings and comprehensive income/recognised income and expense, - 2 statements of changes in equity, and - 2 statements of cash flows.

40. Fair value measurement • The objective of IASB/FASB joint project is to: • Define fair value, • Establish a framework for measuring fair value • Enhance disclosures about fair value, and • Codify existing fair value measurement guidance • Canadian DP – “Measurement on initial recognition” • FASB is nearing completion of its project on fair value measurements

41. Business combinations • Joint IASB/FASB ED issued 30 June 2005 proposing major changes to acquisition accounting. For example e.g. • If acquirer purchases less than 100 % recognise assets and liabilities at the full amount of their fair values and goodwill as the difference between the fair value of the acquiree, as a whole, and the fair value of assets acquired and liabilities assumed. • the acquirer to account for acquisition-related costs incurred in connection with the business combination separately from the business combination (generally as expenses).

42. Revenue recognition Objectives are to – • Eliminate weaknesses in existing concepts and standards. - Focus on changes in assets and liabilities - Insufficient guidance on multiple-element revenue arrangements - Deal more comprehensively with recognition criteria for various other types of transactions • Converge IFRSs and US requirements – approx 200 sources of standards and guidance on revenue recognition in US GAAP.

43. Conceptual framework • IASB and FASB joint agenda project to develop a common conceptual framework. • Multi-phase project over a number of years: converged framework – 2010? • More than an academic exercise. Will have major impact on way in which the IASB/FASB will develop and revise standards. • First discussion paper issued July 2006

44. Questions ?

45. Further Information • Further information on the Authority and its activities may be obtained from: IAASA 2nd Floor, Willow House Millennium Park Naas Co. Kildare Tel: +353 (0)45 983600 Fax: +353 (0)45 983601 Email: info@iaasa.ie Web: www.iaasa.ie www.iaasa.eu