The Financial Reporting Standards -  Beginning of an Era of Responsible Reporting

 

 

It is paramount on the part of business establishments, listed or unlisted, to provide financial information of theirs to various stakeholders with fairness, relevance and faithful representation (reference: Conceptual Framework Summary).

 

The need for introducing Financial Reporting Standards are multi- faceted, like as mentioned above, to reiterate the importance of fair reporting of financial information, include only those information which are relevant for various stakeholders and should convey the financial performance for a period faithfully and with no malicious intent.

 

Some of the reputed multinational organisation had misrepresented their financial performance deliberately and they include,

 

Enron – 2001

Worldcom – 2002

Freddie Mac – 2003

Lehmann Brothers – 2008

Satyam Computers – 2009

 

All companies mentioned above had one way or the other had manipulated their financial statement and thereby reporting to the external stakeholders.

 

Enron:

A top-notch energy company had inflated their revenue and has been reporting with fictitious numbers since 1997 at the behest of its CEO, Jeff Skilling and his predecessor CEO, Ken Lay. This helped Enron to achieve higher stock prices in DJ. An inside whistleblower had brought it out that led for regulatory audit. Company went belly-up in 2001. This episode paved way for SOX Act to come into play (Sarbanes – Oxley Act).

 

Lehmann Bothers:

The then largest investment bank, Lehmann Brothers, story is different from Enron. The lending asset book of this Investment Bank, in 2007, was severely impacted dueto sub-prime crisis yet this bank continued to report healthy book of accounts. However, because of the external market churn their stock prices plummeted. Both Emanuel and Mayer Lehmann were the brain behind this act of beating the system. The bank stealthily introduced REPO 105 technique to remove all short-term liabilities from their financial statement. However, they had to file for bankruptcy in 2008. This had stimulated a global economic repercussion in 2008.

 

 

The above two examples were just tip of the iceberg. Financial indiscipline, misrepresentation and fraudulent manipulation were widespread across the world, irrespective of the industry in first decade of this millennium. There was an urgent need for an overarching financial regulatory body, and International Financial Reporting Standards Foundation was born, shortly, IFRS Foundation, in 2001. The mission was to develop high quality standards in reporting with focus on transparency, accountability and efficiency. The objective was to foster trust, growth and financial stability of the companies in the long run. 

 

IFRS Foundation has created an exclusive standards setting board called International Accounting Standards Board, otherwise known as IASB.

 

 

Apart from reporting standards, IFRS Foundation created in 2021, International Sustainability Standards Board (known as ISSB)which operates alongside IASB and develops standards for disclosure standards for sustainability of different types capitals used by the organisation.

 

 

Standards Setting Process is pretty robust and intense. There are four stages involved before a standard is rolled out. The process begins with agenda consultation, followed by deep dive research on the requirement, then properly worded standard setting takes place, and followed by maintenance of the standards released for adoption.

 

1. Every once in five years, IASB undertakes a comprehensive review of the standard setting requirements and starts a wide scope project work. They also add any additional work is required for the existing project ( as recommended by the IFRS interpretation committee). This activity is agenda consutation, meaning a deep dive discussion takes place any need for standards in the first place, if yes, then a project plan is set up.

 

2. Research on the standard requirement kicks in here. Exploring the issues, identifying a tangible solution and decide if there is a need for a guideline standards to obviate the problem is discussed. At this stage, public is invited to participate and give their opinion. If the accounting problem is large and impactful enough to issue a standard then the standard setting process is initiated. This research activity does not stop once the standard is released, it continues to review the performance of new or existing standards once in five years. There will be atleast two or three post-implementation reviews in the pipeline .

 

3. An exposure draft of proposed standards is publised for public review and suggestion. IASB reviews those feedbacks and proposed draft standards is amended if the suggestions are in sync with the intention and purpose of the said standard. On fullest satisfaction of all parties concerned a new standard or amendment to the existing one is issued for adoption.

 

4. The buck doesn’t stop here. IASB continues to monitor and trace how the standard is implemented by the companies. They also frequently re-visit the applicability of the standards in the real world business scenario. Any issues or application problems are identified and referred to IFRS Implementation  Commmittee who will create a Amendment narrow scope which will follow the entire IASB process of review and amendment as detailed above.

 

       (Refernce: https://www.ifrs.org)

 

 So far, IASB has issued 17 financial reporting standards and they are listed below in the table.

 

Most of the relevant standards are part of the F1 – Financial Reporting and F2 – Advance Financial Reporting syllabuses of management accounting course online  and are dealt in- depth with enough working solutions in both subjects offered by AKONTZ.