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REGISTER YOUR SELF NOW.REGISTER YOUR SELF NOW. COMPLETION OF SYLLABUS COMPLETION OF SYLLABUS

WITH ACCENTUATE ON BASIC WITH ACCENTUATE ON BASIC CONCEPTS.CONCEPTS.

The Reporting LandscapeThe Reporting Landscape

Global Markets – the Services Revolution Accountability Cross border Capital flows Bases for business decisions Corporate Reporting failures Corporate Governance Regulatory Framework Changes in Technology and Products

AccountabilityAccountability

A business enterprise receives capital from outside investors, lenders, and other creditors.

It is accountable to them – it has an obligation to keep them informed about performance, conditions, and prospects.

Also accountable to others who provide resources or environment in which to operate: Employees, government, community at large.

Bases for business decisions

Capital Market transactions Mergers & Acquisitions Employee Stock Options Borrowing and Lending

Company failure – director failure !!

October 16, 2001

Issue: Off-Balance Sheet Accounting and Financial Reporting Fraud

Impact: $3 billion in undisclosed losses

June 20, 2002

Issue: Financial Reporting Fraud

Impact: $9 billion in unreported expenses

March 28, 2002

Issue: Financial Reporting Fraud and embezzlement

Impact: $2.5 billion of hidden debt

January 31, 2002

Issue: Financial Reporting Fraud through improper revenue recognition

Impact: $12.4 billion in overstated earnings

FAIRNESS

ACCOUNTABILITY

TRANSPARENCY

Corporate Governance Pillars

TRANSPARENCY

Corporate Governance

Primary characteristicsPrimary characteristics

DISCIPLINE

DISCIPLINE

INDEPENDENCE

RESPONSBILITY

SOCIAL

RESP.N

Regulatory Framework

Sarbanes Oxley Reporting in the financial services sector Quotas, obligations, etc. Taxation Eligibility for business transactions

Changes in Technology and Products

Intangible Assets – Licenses, Rights, etcIntangible Assets – Licenses, Rights, etc Tangible Assets – component accountingTangible Assets – component accounting Barter transactionsBarter transactions Options and SwapsOptions and Swaps FuturesFutures

– Complex arrangements – BOOT, BOT, Complex arrangements – BOOT, BOT, BOMT, Service concession agreements, BOMT, Service concession agreements, etcetc

Accountability

This is what corporate accounting is all about.

Accounting standards help ensure the financial information is:

Relevant Transparent

Reliable Comparable

Understandable

13

Evolution of Accounting Standards


Historically accounting standards have evolved country by country. Standards set by government, or accounting profession, or Standards set by government, or accounting profession, or

independent board.independent board.

In the USA:In the USA: Independent board Independent board – – Financial Accounting Financial Accounting Standards Board (FASB) since 1973. Before that Standards Board (FASB) since 1973. Before that – – accounting professionaccounting profession..

In Hong Kong:In Hong Kong: Accounting profession Accounting profession –– Hong Kong Society of Hong Kong Society of Accountants.Accountants.

In China: In China: Government Government – Ministry of Finance.– Ministry of Finance.


National standards made sense when companies raised money in, and investors looked for investment opportunities in, only their home country.

But that is no longer the case.

Global Accounting Standards Are Needed

Big change in 4th quarter of 20th century: Globalisation of capital markets.

Now, investors seek investment opportunities all over the world.

Companies seek capital at the lowest price anywhere.

Cross-border mergers. Accounting differences can

completely obscure comparisons.

17

Cross border Capital flows

Global Accounting Standards Are NeededGlobal Accounting Standards Are Needed

Number of Foreign Companies Listed on major stock exchanges (October 2006)

London SE, 327

Euronext , 256

Others, 814

Deutsche Börse, 104

Singapore Exchange, 232

Luxembourg SE, 223

NYSE, 453

Nasdaq, 329

World: 51 stock exchanges, 2700 foreign (cross border listings) out of World: 51 stock exchanges, 2700 foreign (cross border listings) out of 40,000 companies40,000 companies



Globalisation of Capital Markets

Billion $ % of GDP

Billion $ % of GDP

U.S. 4,167 38 1,922 17

Euro Area 3,569 44 3,609 44

U.K. 2,387 133 2,247 125

Switzerland 343 111 510 165

Canada 223 26 297 34

Australia 212 42 124 24

Sweden 190 63 223 74

Capital inflows Capital Outflows

Source: IMF Workpaper


On many stock exchanges foreign listings are a large % of total - USA October 2006: NASDAQ: 10% (329 cos., 36 countries). NYSE: 20% (453 companies, 47 countries).

Foreign is 33% of market value. US SEC total:

1981: 173 foreign companies listed in US. 1991: 439 foreign companies listed in US. 2002:1,400 foreign out of 16000 total 2004: 1,236 foreign companies from 53

countries 2005: 1240 foreign companies from 55

countries


Foreign companies that sell securities publicly in the Foreign companies that sell securities publicly in the US must either:US must either: Prepare their financial statements using US Prepare their financial statements using US

Generally Accepted Accounting Principles (GAAP), Generally Accepted Accounting Principles (GAAP),

oror Use their national GAAP and include a Use their national GAAP and include a

reconciliation of earnings and net assets to reconciliation of earnings and net assets to comparable US GAAP figures.comparable US GAAP figures.

The 1,240 foreign companies registered with the SEC The 1,240 foreign companies registered with the SEC use about 55 GAAPs!use about 55 GAAPs!


Even with the reconciliation, perhaps 95% of the Even with the reconciliation, perhaps 95% of the financial figures in a foreign company’s annual financial figures in a foreign company’s annual report are based on their national GAAP report are based on their national GAAP –– not not comparable to US GAAP.comparable to US GAAP.

• Pity the poor investor who has to compare Pity the poor investor who has to compare foreign GAAP companies with US foreign GAAP companies with US investment alternatives. investment alternatives.

• Pity the SEC staff reviewer, too.Pity the SEC staff reviewer, too.


Same problem all over the world. And these exchanges do not even require a

reconciliation to national GAAP.

London Stock Exchange (Jan 2006): 17% of companies are non-UK.

550 foreign companies, 65 countries. 66% of market value is non-UK.

Euronext: 25% foreign (345 / 1,392) Switzerland: 32% (132 / 419) Germany: 21% (182 / 866)

26

Examples of Reconciling items USGAAP vs. Other GAAPs

Examples of Reconciling Items

ItemItem US GAAPUS GAAP Many foreign GAAPsMany foreign GAAPs

Revaluation of land, buildings, and intangible assets

Prohibited Permitted, even occasionally required. Sometimes all assets are revalued. In other cases only selected assets are revalued (company can select).

Business combinations

Measure the acquired company’s assets at their fair values at the time the merger takes place.

Sometimes – Carry forward the acquiree’s old historical costs. Do not remeasure assets to fair value.



GoodwillGoodwill Do not amortise this asset.

Generally require amortisation, usually with 20 year maximum life.

Investments in equity securities

Measure at fair value (quoted market price).

Generally, measure at historical cost if not purchased for short-term trading.

Stock option plans

Permits recognition of the fair value of stock options given to employees as expense. If not recognised, must disclose fair value in the notes. Soon will propose expensing the fair value.

Expense is in some cases not recognised or disclosed.


Research and development costs

All research and development costs are charged to expense when incurred

While research is generally charged to expense, product development costs often are recognised as amortisable assets rather than expenses.

“Off-balance-sheet” debt

Fairly strict rules* on “derecognition” of financial assets through securitisations repurchase agreements, and on consolidation of special purpose entities.

*Not quite strict enough for Enron.

Limited, if any, rules in this area. Much more off-balance-sheet debt.



Derivatives On the balance sheet and remeasured to fair market value at each reporting date.

Frequently off the balance sheet. Only recognised at settlement date.

Deferred income taxes

Recognised based on balance sheet differences with tax bases of assets and liabilities.

Sometimes not recognised. If recognised, usually income statement approach. Also deferred tax assets frequently not recognised. Often not adjusted for changes in tax rates.



Revenue recognition: When is a “sale” made? What if seller has significant

ongoing obligations or performance guarantees or servicing commitments?

What if buyer’s payment is deferred?

Detailed rules, industry by industry, particularly for SEC listed companies.

Limited rules. Usually much more flexibility.


32

Topics covered by IASs

Shortcomings of Old IASC

Weak relationships with national standard setters.

Lack of convergence of IAS and major national GAAPs.

Part-time Board, full-time work load. Needed broader sponsorship than accounting

profession. Needed recognition by regulators. Needed resources.Structure review 1999-2000. Results . . .

Topics Covered by Existing IASs

1 Presentation of financial statements

2 Inventories

7 Cash flow statement

8 Accounting Policies, Changes in Accounting Estimates and Errors

10 Events after balance sheet date

11 Construction contracts

12 Income taxes

14 Segment reporting

16 Property, plant, and equipment

17 Leases

18 Revenue Recognition


19 Employee Benefits

20 Government Grants

21 Foreign Currency translation

23 Borrowing Cost

24 Related Party disclosures

26 Accounting and Reporting by Retirement Benefit Plans

27 Consolidation and Separate Financial Statements

28 Investments in associates

29 Hyperinflation

30 Bank disclosures

31 Joint Ventures


32 Financial Instruments: Disclosures and Presentation (disclosure provisions superseded by IFRS 7)

33 Earnings per share

34 Interim Reporting

35 Discontinued Operations (superseded by IFRS 5)

36 Impairment of assets

37 Provisions, Contingent Liabilities and Contingent Assets

38 Intangible assets

39 Financial instruments

40 Investment Property

41 Agriculture


IFRS 1 First time adoption of IFRS IFRS 2 Share based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets held for Sale and

Discontinued Operations IFRS 6 Exploration for and Evaluation of

Mineral Resources IFRS 7 Financial Instruments: Disclosures

(issued 18 August 2005)

IFRS 8 Operating Segments

Issued [30 November]

Effective 1 January 2009 Earlier adoption permitted

Replaces IAS 14

IFRS 8

No significant changes from ED Adopts FAS 131 approach to determining

segments—’management approach’ Focus on the information presented to the

‘chief operating decision maker’ Vertically-integrated operations can have

segments Measurement

Based on measures reported to chief operating decision maker

No requirement for IFRS-based measurement

IFRS 8

Disclosure Enhanced from those in IAS 14 Reconciliation to IFRS-based reporting

required IAS 34 disclosures amended

IFRIC developments

Group and Treasury Share Transactions – IFRIC 11

Service Concession Arrangements – IFRIC 12

IFRIC 11 – Group share plans

Issues: Share-based payments involving own shares Share-based payments involving shares of the parent Intra-group transfers

Share-based payments involving own shares Will always be equity-settled if equity-settled under

IFRS 2

IFRIC 11 (ii)

Share-based payments involving parent shares Parent offers its shares to employees of the

subsidiary Always equity-settled

Subsidiary offers its employees shares of the parent Cash-settled in the individual accounts of the subsidiary

Intra-group transfers—non-market vesting conditions

IFRIC 12

IFRIC 12 Service Concession Arrangements Approved, to be issued [30 November] Effective date 1 January 2008

Public-to-private arrangements only Grantor controls or regulates what services are

provided; to whom; and the price Grantor controls any significant residual interest in the

infrastructure Whole life assets are within the scope if the Grantor

controls services, intended customers and price Operator’s pre-existing PP&E Grantor accounting is not addressed

IFRIC 12 (ii)

Some significant issuesSome significant issues Arrangement considerationArrangement consideration Financial asset vs. intangible assetFinancial asset vs. intangible asset Repairs, restoration and maintenanceRepairs, restoration and maintenance Borrowing costsBorrowing costs Applicability of other IFRSApplicability of other IFRS

Amends IFRIC 4Amends IFRIC 4 Scope exclusion for concession arrangements Scope exclusion for concession arrangements

subject to IFRIC 12subject to IFRIC 12

The IFRIC’s agenda—status

Draft—comment period closed D19 - The Asset Ceiling: Availability of Economic Benefits and Minimum Funding Requirements D20 - Customer Loyalty Programmes

In development IAS 18 - Real estate sales IAS 18 - Initial fees received by a fund manager IAS 18 - Identifying agency arrangements IAS 38 - Advertising and promotional costs IAS 41 - Recognition and measurement of biological assets

The IFRIC’s agenda (ii)

Early stages IFRS 2 - Accounting for employee benefit trusts IAS 11 - Allocation of profit in unsegmented contracts IAS 17 - Sales and leasebacks with repurchase agreements IAS 21 - Hedging a net investment IAS 39 - various hedge accounting issues

Recent and Emerging Trends in International Accounting Standards

Greater use of fair values in measuring transactions: Impairment recognition. Prohibit poolings. Non-monetary exchanges.

Fair values on balance sheet for both financial and non financial assets: Financial Instruments. Agriculture. Investment property. Commodity inventories.


More unrealised components of income: Performance reporting becomes key.

No income smoothing, cost deferrals, general provisions: Remove corridor approach to pensions. Balance sheet approach to deferred tax. No accruals for future losses. Rigorous hedge accounting rules.


Eliminate off-balance sheet items: Derivatives. Special purpose entities. Stock compensation.

More disclosure, especially judgements, plans, assumptions: Judgement in applying accounting policies. Risk management policies. Sensitivity analyses.

Eliminate accounting choices. Convergence with US GAAP.

“Endorsement” of IFRS in Past Few Years

International Organization of Securities Commissions: 100 securities regulators (including the US SEC).

Basel Committee: Global bank regulators (including the US Federal Reserve)

The World Bank and IMF. The G7 Finance Ministers. And many others.

These are non-binding endorsements.

52

Use of IFRS around the world

Use of IFRS Use of IFRS Around the WorldAround the World





Use of IFRS Around the World

Europe – domestic listed companies: IFRS required in consolidated financial

statements of all European listed companies starting 2005.

About 9,000 companies in 28 countries (15 current EU + 10 joining May 2004

+ 3 EEA).

Member states may require or permit IFRS for unlisted companies, for individual-company statements and/or for foreign companies listed on EU exchanges.


Countries that adopt IFRS almost word for

word as national GAAP (time lag)

Countries that have stopped developing national GAAP and just use IFRS

Australia New Zealand South Africa Singapore Hong Kong Philippines

Bahrain Croatia Costa Rica Cyprus Dominican Republic Ecuador Guatemala Haiti Honduras

Jamaica Kenya Malta Mauritius Nepal Oman Panama Tanzania Tajikstan Trinidad United Arab Emirates


IFRS already required or permitted for some domestic companies: Antilles, Bangladesh, Bolivia, China (B-shares),

Egypt, Hong Kong (if incorporated outside HK), Hungary, Kuwait, Russia, South Africa, Switzerland, Turkey.

IFRS is the “fallback” if national GAAP does not address a question: Mexico, Venezuela.

IFRS permitted for foreign registrants: Most European countries, USA, and many others.

Asia-Pacific Summary

Adoption of IFRS in place of national GAAP: Bangladesh.

National GAAP mostly word for word IFRS: Australia (new policy), Hong Kong, New Zealand (new policy),

Philippines, Singapore. Also several recent standards in India.

IFRS “looked to” in setting national GAAP: Most other A-P countries. To varying degrees.

Some domestic listed companies use IFRS: China, Laos, Myanmar.

Foreign listed companies may use IFRS: Australia, Hong Kong, New Zealand, Pakistan, Singapore,

Thailand. Several in Japan also.


Other developed countries:

Canada: Domestic companies not allowed to use IFRS. In Jan 2006 the Accounting Standards Board of Canada adopted a plan which includes a decision to move financial reporting for Canadian publicly accountable enterprises to IFRSs. Canadian companies registered with US SEC may use US GAAP.

South Africa: All listed companies must follow IFRS starting 2005.

Switzerland: Most listed companies already use IFRS.

Russia: IFRS required for listed holding companies and all banks starting 2004. Phased in for other large companies to 2007.


Market Capitalisation (end 2005 - US $ Trillions)

Others, 8IFRS, 11

US GAAP, 17

Largest companies - Fortune 500 List

US GAAP, 176

IFRS, 200

Japanese GAAP, 81

In terms of largest companies included in Fortune 500 list, 176 prepare their accounts under US GAAP , 200 under IFRS and 81 under Japanese GAAP

IFRS accepted in about

75 jurisdictions

Out of worldwide market capitalisation of over 36 trillion dollars at end 2005: 11 trillion$ corresponds to markets where IFRS are required or permitted and 17trillion $ where US GAAP is the rule

64

Benefits & Criticism of Global Accounting Standards

Benefits of Global Accounting Standards

Positive Findings on IFRS *:

• Overall increase in comparability and transparency

• Enables level playing fields and strengthens market discipline

• Provision of early warning signals on exposure or risks relevant for risk assessment

• Use of a principles-based framework, which provides for adequate degree of flexibility in implementation

* Source: Report titled ‘Assessment of Accounting Standards from a Financial Stability Perspective’ published by European Central Bank – December, 2006

Benefits of Global Accounting Standards

Easier access to foreign capital markets.

Credibility of domestic capital markets to foreign capital providers.

Lower cost of capital to companies.

Comparability of financial data across borders.

Understandability.

Companies keep “one set of books”.

Global education and training.

Convergence criticism

Meaningless without convergence in local practices and laws as national standards are drawn up having regard to local laws, customs, usages and business environment.

Convergence of local practices is a distant dream

Implementation may result in an economic disadvantage to the user considering that national statutes either do not accept the basis on which the standard has been formulated or accept a different basis that secures an economic benefit for the user

Convergence

Training

Debt covenants

Stat. accounts

& taxes

M & AManagement

compensation

Forecasts –

Internal Reporting

I T Systems

Measure of performance

Business Issues

Convergence process

Improving quality

Eliminating numerous options

Convergence

National standards-identical

Shared objectives

Participation

In developing international standards

In content and quality – facilitate convergence

Active participation of US

Guided by some vision of the desired outcome

U.S. views

““As regulators around the world continue the process of developing a As regulators around the world continue the process of developing a set of international accounting standards, some would like the U.S. to set of international accounting standards, some would like the U.S. to embrace standards that would be of higher quality than those embrace standards that would be of higher quality than those currently used in many countries but less rigorous than U.S. GAAP. currently used in many countries but less rigorous than U.S. GAAP. That would be a mistake”.That would be a mistake”.

- Arthur Levitt- Arthur Levitt “…“…..the trend particularly in the U.S. to have a detailed accounting rule ..the trend particularly in the U.S. to have a detailed accounting rule

for everything, no matter how narrow or obscure the issue… for everything, no matter how narrow or obscure the issue… Accountants should encourage the new IASB to emphasize a Accountants should encourage the new IASB to emphasize a principles-based approach. Further, as part of the commitment to principles-based approach. Further, as part of the commitment to convergence, it is time for the FASB and SEC to change their convergence, it is time for the FASB and SEC to change their behaviour and become more like the rest of the world.”behaviour and become more like the rest of the world.”

- Dennis R. Beresford, former chairman FASB- Dennis R. Beresford, former chairman FASB

U.S. views

“I have always wondered if some of those advocating the use of international standards failed to recognize and give appropriate credit to the fact that we in the U.S. have the world’s largest, most liquid capital markets because we do in fact have the ‘best of breed’ financial reporting today. This in turn has provided companies with capital at the lowest possible cost that has been used to generate jobs and an improved global economy.

- Lynn Turner – final speech as Chief Accountant of SEC

Convergence

“The coherent consistent application of IFRS is an essential prerequisite to the elimination of the reconciliation requirement in the U.S. It will take us some time to assess how IFRS is being implemented and enforced, but I am optimistic that we will complete our assessment, well within the 2009 goal for reconciliation, and be able to determine that the reconciliation requirement is unnecessary. Our new Chief Accountant, Conrad Hewitt, is committed to working to achieve this objective as quickly as possible.” – Paul S. Atkins U.S. SEC Commissioner

Convergence concerns

Inadequate compliance with international standards

Global auditing standards International standard oversight function

74

Conclusion

Conclusion

The accounting confusion that results from dozens of national GAAPs in a global financial market is a disservice to investors, creditors, and others who use corporate financial statements.

No one country – not even the USA – has a monopoly on the best financial reporting standards and practices. The accounting scandals of the past few years have

driven that point home in the United States.

Conclusion

Accounting is not a science. Truth is not discovered by scientific experiments in a laboratory. Truth is what the standard setters say it is! Based on a Conceptual Framework. Focused on users’ needs. Without bias.

Users have pretty much the same needs all over the world.

Conclusion

Clear lesson from Enron, WorldCom, Parmalat, etc: Accounting Does Matter!

A single set of accounting standards leading to high quality, transparent, and comparable financial statements makes a lot of common sense.

An opportunity for the Pakistani profession to rise to global standards and be amongst the premier and much sort after professionals of the world.

78


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