Financial Crisis Response of IASB, Improved Accounting Standards
The International Accounting Standards Board (IASB) has completed the improvements to the accounting standards for off balance sheet activities and joint arrangements.
The improvements came as the IASB issued the IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities.
This is in addition to IASB’s and the Financial Accounting Standards Board’s (FASB) new guidance on fair value measurement and disclosure requirements for International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP).
With the completion of the accounting standards, the IASB has “broadly” aligned the accounting treatment for off balance sheet activities in IFRS and US GAAP.
The IASB considered the completion to be “an important element” of its response to the financial crisis.
The IFRS 10 Consolidated Financial Statements identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company, thus building on existing principles.
Added to the standards is a guidance to determine the control needed in cases that make its assessment hard.
Additionally, the IFRS 11 Joint Arrangements focuses on the rights and obligations of the arrangement, rather than its legal form (as is currently the case), thus a “more realistic reflection of joint arrangements.”
The IASB said in a statement that the standard requires “a single method to account for interests in jointly controlled entities” so it addresses “inconsistencies in the reporting of joint arrangements.”
Moreover, IFRS 12 Disclosure of Interests in Other Entities is a new and comprehensive accounting standards whose focus is on disclosure requirements for all forms of interests in other entities, which include joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.
Finally, the IFRS 13 Fair Value Measurement and an update to Topic 820 in FASB’s Accounting Standards Codification (formerly referred to as SFAS 157), completes the financial regulators’ work in converging the IFRS and US GAAP.
These improvements were molded based on the input from a Fair Value Expert Advisory Panel and the FASB’s Valuation Resource Group during a public consultation.
According to the financial regultors, the IFRS 13 Fair Value Measurement improves consistency and reduces complexity for IFRS through its “precise” definition of fair value and a single source of fair value measurement and disclosure requirements.
For US GAAP, on the other hand, the improvement replaces most of the guidance in Topic 820, although many of the changes are “clarifications of existing guidance or wording changes to align with IFRS 13.”
The improvement further includes consideration by FASB over the “different characteristics of public and non-public entities and the needs of users of their financial statements,” with few exemptions for non-public entities from certain new disclosure requirements.
David Tweedie, Chairman of the IASB, said in a statement that the improved accounting standards “tighten up the reporting requirements for the consolidation of subsidiaries and special purpose vehicles, and require the substance of joint arrangements to be revealed.”
According to Tweedie, investors can now better understand the “risks associated with the creation or management of special purpose vehicles.”
The accounting standards improvements include a check on off balance sheet activities and provide investors with a clearer perspective on the nature and extent of a company’s involvement with other entities.