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Challenges Of Ifrs Notes

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CHALLENGES OF IFRS Lectures


'in a balance sheet deflation, with zero official interest rates, fiscal policy is all we have.' (Wolf)


Nov 12th 2009 IASB issued new rules for financial assets that will be optional and then mandatory from 2013 o Loans or securities similar to loans will be held at the price banks paid for them, provided the bit of the firm that owns them is not engaged in trading.
 Everything else held at fair value o Also, instead of booking losses as things go sour, they will be spread over the life of the loan.


'Now it's all about adoption of IFRS' Doherty (2008)


'bank regulators and politicians are afraid that fair value markdowns can force banks to sell assets to satisfy minimum regulatory requirements.' (Garcia-Feijoo 2009) o Forced asset sales can further depress prices o 'Regulators have the flexibility to include or exclude fair value gains and losses to determine capital adequacy without compromising financial reporting transparency.' (Garcia-Feijoo 2009)


Woods (2004) o 'the use of fair value accounting is gaining ground, and is strongly supported by the major standard setters, particularly the IASB.' o 'The IASB's conceptual framework states that financial statements fulfil two purposes - the assessment of stewardship and the provision of information for economic decision making.' o Against fair value - 'difficult for stakeholders to get a real sense of whether management have been good stewards of resources or not.' o But 'supporters of fair value argue that the purchase of assets that fall in value is indicative of poor stewardship which should be recognised in the performance statement.' o 'questions about the reliability and comparability of fair values for certain assets' - especially in illiquid markets - may need to use models with assumptions o 'counter argument is that even if there is a degree of potential unreliability to the values, they are still very useful to decision making because they represent the economic reality.' o 'a fair value based balance sheet is a more faithful representation of the net worth of its components and, hence, of a company's financial position.'
 But - only true if all assets measured by fair value - 'apples and oranges cannot sensibly be added together.'


Sanderson & Tait 2009 o Fair value could 'lead to greater volatility in their accounts, undermining broader financial stability.'


IAS 41 - Agriculture o Introduced fair value accounting for biological assets o Market value is preferred but if reliable market based prices are not available, fair value is the present value of expected net cash flows from the asset discounted at a current market rate. o IAS 41 does not prescribe a valuation method; each preparer must determine the valuation approach which is most representative for its forest assets.

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership.


A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership.


'The current operating lease accounting model allows off balance sheet treatment of significant amounts of assets and liabilities of lessees, which has led to problems in estimating their value.' (Cohn 2010)


David Tweedie (IASB chairman) frequently jokes that it has always been his ambition to fly on a plane that was on an airline's balance sheet


'This proposal would require that all lease obligations would be recorded on the balance sheet at the present value of the expected lease payment, along with an asset representing the right to use the leased asset.' o 'For some who had been doing capital lease accounting, all we're doing is changing the amounts potentially, but for most lessees you're putting potentially significant amounts on the balance sheet for the first time.'


'The accounting depends on whether the lease qualifies as an operating or finance lease which is often a very blurry line.' (McConnell 2010)


'Because of these favourable financial statement impacts, leases have sometimes been tailored to achieve operating lease accounting.' (McConnell 2010)


'right of use model' - acquired a right to use the underlying asset and is paying for that right with rental payments (both asset and rental payments recorded in the balance sheet; profit and loss will include amortisation of the right of use asset and interest on the lease obligation) o 'Under our proposal, the lessee will recognise the obligation to pay rentals for the longest possible lease term that is more likely than not to occur'(McConnell 2010) o There will be an increase in assets (lower asset turnover ratios and perhaps lower return to capital)
 Both current and non current liabilities will rise
 Decrease in working capital and increase in debt-to-equity ratio


Estimated in 2006 that the total off-balance sheet lease liability for S&P 500 companies was $396 billion


'Financial reporting information, above all else, is primarily meant to faithfully represent the economic performance over multiple periods and should never be seen as a tool of short term regulatory interventions.' (Papa 2010) 'Towards a positive theory of the determination of accounting standards' Watts &
Zimmerman 1978


'Management, we believe, plays a central role in the determination of
[accounting] standards'


Factors influencing management attitudes towards financial accounting standards o Assume that individuals are utility maximising therefore 'management lobbies on accounting standards based on its own self interest.' o They also assume managers and shareholders interests are the same o 'recent research casts serious doubt on the ability of management to manipulate directly share prices via changes in accounting procedures.' o 'management's total compensation from the firm consists of wages and incentive compensation' - 'to the extent that management can increase either the level of incentive compensation or the firm's share price via its choice of accounting standards, they are made better off.'

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