General purpose financial statements by dfhrf555fcg

VIEWS: 33 PAGES: 5

									30 Cannon Street, London EC4M 6XH, England                         International
Phone: +44 (20) 7246 6410, Fax: +44 (20) 7246 6411               Accounting Standards
Email: iasb@iasb.org Website: http://www.iasb.org                      Board


This document is provided as a convenience to observers at IASB meetings, to assist
them in following the Board’s discussion. It does not represent an official position of
the IASB. Board positions are set out in Standards.
Note: These notes are based on the staff paper prepared for the IASB. Paragraph
numbers correspond to paragraph numbers used in the IASB paper. However,
because these notes are less detailed, some paragraph numbers are not used.


                       INFORMATION FOR OBSERVERS

Board Meeting:      May 2005, London
Project:            Accounting Standards for Small and Medium-sized Entities
_____________________________________________________________________


1.     The Board has agreed to discuss disclosure and presentation issues throughout
       2005, while the recognition and measurement questionnaire is being processed
       and the recognition and measurement round-tables are being organised and
       held. The Board also agreed that any tentative disclosure and presentation
       decisions made during this period would be reviewed after recognition and
       measurement decisions, because recognition and measurement decisions may
       trigger disclosure changes. This Agenda Paper raises several introductory
       presentation questions.
Presentation of general purpose financial statements for SMEs
2.     The goal of this project is to develop accounting standards suitable for entities
       that (a) do not have public accountability and (b) publish general purpose
       financial statements for external users. The recognition and measurement
       questionnaire issued for comment in April 2005 calls entities that meet this
       definition SMEs, and that term is used in this Agenda Paper as well. The term
       SMEs is sometimes used with different meanings around the world – often
       embedded in laws or regulations. In some countries, the term SME is used to
       mean or to include very small companies without regard to whether they
       publish general purpose financial statements for external users. A small entity
       that produces financial statements only for the use of owner-managers, or for
       tax reporting or other non-securities regulatory filing purposes, is not an SME
       as that term was used in the questionnaire or is used in this Agenda Paper.
3.     The above definition of SMEs (or whatever name the Board ultimately uses)
       has three key concepts that require definition:


106a966f-2f9d-4386-b94d-069d3db5ef04.doc                                                   1
      a.        Public accountability.
      b.        External users.
      c.        General purpose financial statements
Public accountability
4.    The Board has previously defined public accountability (in its Preliminary
      Views and in the questionnaire) as follows:
      An entity has public accountability if:
           it has filed, or it is in the process of filing, its financial statements with a
            securities commission or other regulatory organisation for the purpose of
            issuing any class of instruments in a public market;
           it holds assets in a fiduciary capacity for a broad group of outsiders, such
            as a bank, insurance company, securities broker/dealer, pension fund,
            mutual fund or investment banking entity;
           it is a public utility or similar entity that provides an essential public
            service; or
           it is economically significant in its home country on the basis of criteria
            such as total assets, total income, number of employees, degree of market
            dominance, and nature and extent of external borrowings.
5.    Entities that do not meet any of the four foregoing criteria normally would not
      be regarded as having public accountability.
External users
6.    The IASB Framework defines the objective of financial statements as follows:
      12.       The objective of financial statements is to provide information about
                the financial position, performance and changes in financial position of
                an entity that is useful to a wide range of users in making economic
                decisions.
7.    The Framework (paragraph 9) specifies that “the users of financial statements
      include present and potential investors, employees, lenders, suppliers and
      other trade creditors, customers, governments and their agencies and the
      public”. The Framework notes that “some of these users may require, and
      have the power to obtain, information in addition to that contained in the
      financial statements. Many users, however, have to rely on the financial
      statements as their major source of financial information and such financial
      statements should, therefore, be prepared and presented with their needs in
      view”.
8.    In an SME context, examples of such external users include owners who are
      not involved in managing the business, existing and potential creditors
      (lenders and suppliers), and credit rating agencies.
General purpose financial statements
9.    General purpose financial statements are defined in the Preface to
      International Financial Reporting Standards as follows:
      Preface to IFRSs
      10.       IFRSs apply to all general purpose financial statements. Such financial
                statements are directed towards the common information needs of a


106a966f-2f9d-4386-b94d-069d3db5ef04.doc                                                       2
              wide range of users, for example, shareholders, creditors, employees
              and the public at large. The objective of financial statements is to
              provide information about the financial position, performance and cash
              flows of an entity that is useful to those users in making economic
              decisions.
       11.    A complete set of financial statements includes a balance sheet, an
              income statement, a statement showing either all changes in equity or
              changes in equity other than those arising from capital transactions
              with owners and distributions to owners, a cash flow statement, and
              accounting policies and explanatory notes.
Question for the Board:
Setting aside for now whether the term “SME” is the best name for the group of
entities for which this project is developing standards, does the Board concur that
the foregoing definitions of public accountability, external users, and general
purpose financial statements are appropriate as a “working principle” for defining
the entities included in the scope of the project?


10.    The objective of IAS 1 Presentation of Financial Statements is to prescribe the
       basis for the presentation of general purpose financial statements, to ensure
       comparability both with the entity’s financial statements of previous periods
       and with the financial statements of other entities. IAS 1 specifies the purpose
       of financial statements and the components of a complete set of financial
       statements as follows:
       Purpose of Financial Statements
       7.     Financial statements are a structured representation of the financial
              position and financial performance of an entity. The objective of
              general purpose financial statements is to provide information about
              the financial position, financial performance and cash flows of an
              entity that is useful to a wide range of users in making economic
              decisions. Financial statements also show the results of management’s
              stewardship of the resources entrusted to it. To meet this objective,
              financial statements provide information about an entity’s:
              (a)     assets;
              (b)     liabilities;
              (c)     equity;
              (d)     income and expenses, including gains and losses;
              (e)     other changes in equity; and
              (f)     cash flows.
              This information, along with other information in the notes, assists
              users of financial statements in predicting the entity’s future cash flows
              and, in particular, their timing and certainty.
       Components of Financial Statements
       8.     A complete set of financial statements comprises:
              (a)     a balance sheet;
              (b)     an income statement;


106a966f-2f9d-4386-b94d-069d3db5ef04.doc                                                   3
              (c)     a statement of changes in equity showing either:
                      (i)     all changes in equity, or
                      (ii)    changes in equity other than those arising from
                              transactions with equity holders acting in their capacity
                              as equity holders;
              (d)     a cash flow statement; and
              (e)     notes, comprising a summary of significant accounting policies
                      and other explanatory notes.
11.    In some countries, national GAAP for SMEs (or other class of non-public
       entity as defined in those countries) omits the cash flow statement or omits the
       statement of changes in equity. Examples of these countries include Germany,
       Hungary, New Zealand, Norway, Thailand, and United Kingdom.
Question for the Board:
Staff plans to develop a presentation and disclosure questionnaire, similar to the
recognition and measurement questionnaire. Is omission of the cash flow
statement or omission of the statement of changes in equity a matter that staff
should raise in the questionnaire as a potential presentation and disclosure
difference for SMEs?


12.    IAS 1 (paragraph 96) requires that the statement of changes in equity must
       show:
       a.     profit or loss for the period;
       b.     each item of income and expense for the period that is recognised
              directly in equity, and the total of those items;
       c.     total income and expense for the period (calculated as the sum of (a)
              and (b)), showing separately the total amounts attributable to equity
              holders of the parent and to minority interest; and
       d.     for each component of equity, the effects of changes in accounting
              policies and corrections of errors recognised in accordance with IAS 8.
13.    The following amounts may also be presented on the face of the statement of
       changes in equity, or they may be presented in the notes (paragraph 97):
       a.     capital transactions with owners;
       b.     the balance of accumulated profits at the beginning and at the end of
              the period, and the movements for the period; and
       c.     a reconciliation between the carrying amount of each class of equity
              capital, share premium and each reserve at the beginning and at the end
              of the period, disclosing each movement.
14.    In its Performance Reporting project, the Board is currently working on issues
       that are likely to lead to significant changes in and/or replacement of statement
       of changes in equity. Completion of the Performance Reporting project is
       likely to be several years after the SME exposure draft is issued.




106a966f-2f9d-4386-b94d-069d3db5ef04.doc                                                   4
Question for the Board:
Staff plans to develop a presentation and disclosure questionnaire, similar to the
recognition and measurement questionnaire. Should the staff raise, in the
questionnaire, the possibility of standardising the format of the statement of
changes in equity for SMEs (a single format for all SMEs). Or should all of the
options under IAS 1 be retained pending completion of the Performance Reporting
project?


Consolidated Financial Statements
15.    In some countries, national GAAP for SMEs does not require an SME with
       subsidiaries to prepare consolidated financial statements. Examples of these
       countries include China, Germany, Norway, South Africa, Netherlands, and
       United Kingdom.
16.    Because preparing consolidated financial statements changes the reporting
       entity from the legal entity to a group of entities (a parent and its subsidiaries),
       some would view consolidation as a presentation matter – defining the
       reporting entity for which the financial statements are being presented. Others,
       however, would argue that consolidation is more in the nature of a recognition
       or measurement principle because it affects how the elements of financial
       statements (assets, liabilities, income, and expenses) are recognised and
       measured in the parent’s financial statements.
17.    Both of these views might be inferred from IAS 27 Consolidated and Separate
       Financial Statements. IAS 27 defines consolidated financial statements as
       follows (paragraph 4):
       Consolidated financial statements are the financial statements of a group
       presented as those of a single economic entity.
       This definition suggests that the issue is one of presentation.
18.    On the other hand, the parent recognition and measurement view might be
       inferred from the IAS 27 requirement to present consolidated financial
       statements:
       9. A parent, other than a parent described in paragraph 10, shall present
          consolidated financial statements in which it consolidates its investments
          in subsidiaries in accordance with this Standard.
In the questionnaire on recognition and measurement currently outstanding,
“consolidation of subsidiaries under IAS 27” was identified in the list of areas for
possible simplification of recognition and measurement principles for SMEs.
Questions for the Board:
Staff plans to develop a presentation and disclosure questionnaire, similar to the
recognition and measurement questionnaire. Should the staff raise the matter of
exemption for SMEs from a requirement to prepare consolidated financial
statements in that questionnaire? Or should the possibility of an SME exemption
be addressed as a potential recognition and measurement difference?




106a966f-2f9d-4386-b94d-069d3db5ef04.doc                                                      5

								
To top