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June 28, 2018

During the IFRS Foundation Conference in Frankfurt, the IASB Chair provided a brief update on the spread of IFRS Standards worldwide and discussed the ongoing work of the Board. He highlighted that, out of the 166 jurisdictions surveyed in the last few years, 144 have fully adopted IFRS standards. IFRS standards are now required for use by 95% of the surveyed African jurisdictions, 98% of European jurisdictions, and by 100% of Middle East jurisdictions. Almost all of the Americas and many Asian countries are now fully on board. The first movers to IFRS adoption included the European Union, Australia, New Zealand, Hong Kong, and South Africa.

However, there are still a couple of gaps on the IFRS map of the world. “The biggest gap is the country of US GAAP,” said the IASB Chair. Additionally, China is using national standards that are very close to full IFRS standards and is committed to achieving full convergence over time. China has adopted without modification all of the new major standards—IFRS 9, 15, and 16—and is in the process of adopting IFRS 17. More than 300 Mainland Chinese companies already produce IFRS-compliant financial statements for dual listings in Hong Kong. Their financial reports demonstrate that Chinese GAAP and IFRS Standards are nearly identical. Of those companies, over 200 companies show no difference in the outcomes of their Chinese GAAP-based and IFRS-based financial reports. Of the remaining companies, the differences in outcomes are minimal. Thus, achieving China’s stated aim of full convergence with IFRS Standards only requires a very small step. Also, India has recently adopted accounting standards that are based on IFRS Standards. The new Indian standards contain several modifications of IFRS requirements. India knows that these modifications mean that it cannot derive all the benefits of IFRS and, therefore, wants to remove them over time. A few might disappear through changes in IFRS standards, but most will require action by India. This will not be easy, because modifications can be as hard to change as accounting standards themselves. However, as the Japanese experience suggests, the cost of maintaining modified standards is probably higher than removing them.

Japanese companies can choose from four different sets of accounting standards: Japanese GAAP, US GAAP, full IFRS Standards, and Japanese Modified International Standards (JMIS). JMIS is a modified version of IFRS Standards with two carve-ins related to goodwill and recycling of equity investments. Interestingly, no Japanese company is forced to use a particular standard. It really is a case “of let the market decide.” Nearly 200 mostly big, multinational Japanese companies have chosen to adopt full IFRS standards while some very big Japanese companies are seriously looking at adoption of IFRS standards and before long 50% of the Tokyo market cap could be IFRS-denominated. The number of Japanese companies using US GAAP has been steadily shrinking and is expected to be less than 10 soon. Most interestingly, not a single Japanese company uses the Japanese modified IFRS. Even those companies who argued strongly for modified IFRS Standards have chosen not to use them. According to a report by JFSA, the top three benefits of IFRS Standards for Japanese companies are: the efficiency of being able to use the same standards in all subsidiaries worldwide, enhanced comparability, and better communications with international investors. The Japanese IFRS-adopters know that even limited modifications to IFRS Standards will undo much of these advantages. Overall, “IFRS adoption around the world may not be perfect, but the progress achieved in the past 15 years is nothing short of astounding.“

He also discussed the Fitness Check that EC is conducting on public reporting by companies. This Fitness Check covers a wide array of reporting issues and contains the question whether EU should have the ability to modify IFRS standards. Clearly, this is a sovereign decision for EU to make. This is the third time in five years that the EU has asked itself this question, which means that we cannot take European adherence to unmodified IFRS Standards for granted. Fortunately, the outcome of the two previous consultations was that Europe should forego making modifications to IFRS standards. Of course, it is hoped that for the third time also, Europe will again conclude that it is not in its enlightened self-interest to go in this direction. The questionnaire of the Fitness Check is open until July 21, 2018. He also mentioned a consultation that IASB issued on financial instruments with characteristics of equity. This research project is looking at ways to help companies issuing financial instruments to determine whether those instruments are liabilities or equity by providing a clear rationale for this distinction, while also providing investors with better information about them. This is an early-stage proposal and the consultation is open until January 07, 2019.

Next, he discussed the projects that the Board is focusing on. He explained that the Board is focused on the Primary Financial Statements Project, with the objective of providing better formatting and structure in IFRS Financial Statements, especially in the income statement. Additionally, IASB issued IFRS 17 one year ago and it comes into effect in 2021. “The standard has already been endorsed in Australia, Canada, Hong Kong, Malaysia, New Zealand Singapore, South Africa, and Switzerland and it is very close to endorsement in China and South Korea (and who knows when North Korea may follow!). IFRS 17 will bring huge benefits in terms of standardization and quality of information,” said the IASB Chair. IASB recognizes the significant implementation challenges faced by insurance companies transitioning to the new Standard. Therefore, IASB is devoting considerable resources to support implementation. These include webinars, educational materials, helping to prepare the market by running investor education sessions, and through the work of the IFRS 17 Transition Resource Group (TRG). The TRG is a public forum for discussions among preparers, auditors, and regulators. The experience with the previous Revenue Recognition TRG has made clear that sometimes it can be necessary for the IASB to consider amendments to address questions and indeed we have considered some for IFRS 17 last week. Of course we hope to keep the number of amendments as limited as possible so that we do not disrupt implementation, but we stand ready to act if necessary. 

Keywords: International, Accounting, Banking, Insurance, Securities, IFRS 17, IFRS Adoption, IASB

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