However, this does not resolve the rule-based vs. principle-based debate since all rule-based standards issued by the FASB are still being used. As in all things where there are two diametrically opposite views, it would appear that the ideal solution would be an equal balance between the two – the mid-path so to speak.
The IASB seems to have found that balance. After IFRS 3, the following standards were issued by the IASB:
IFRS 4 Insurance Contracts
IFRS 5 Non-current assets held for sale
IFRS 6 Exploration and Evaluation of Mineral Resources
IFRS 7 Financial Instruments – Disclosures
IFRS 8 Operating Segments
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
IFRS 13 Fair Value Measurement
IFRS 14 Rate Regulated Entities
IFRS 15 Revenue from Contracts with Customers
It would appear that the IASB too is moving towards industry specific standards in cases where it is felt that the existing accounting standards are not elaborate enough to meet the requirements of the Framework to International Accounting Standards. IFRS 4 Insurance Contracts and IFRS 6 Exploration and Evaluation of Mineral Resources are industry specific. IFRS 14 focuses only on regulatory deferral accounts.
The saying “the only constant is change” is probably as old as change itself. Technology has filtered into everyone's lives and changed the way they live. A decade ago, buying a bestselling book involved going to your nearest bookstore. Often times, the book was not available and the storekeeper was told to inform you when it arrived. These days, you can order a bestseller online even before it is released to the public. You get it at your doorstep immediately after it is released. You can pay cash after ensuring it has been delivered intact (the only thing you probably can't do is to read it and return it!). From vegetables, electronic gadgets to matrimonial alliances, everything is done at the click of a button. With the rapid changes in technology, it was only a matter of time before bricks-and-mortar companies started to provide an online offering, thereby ensuring parity with the competition.
Accounting standards needed to keep pace with these developments. Both the FASB and the IASB have been quick to issue clarifications whenever any issues are raised on their existing accounting standards. In many ways, it is considered that the five-step approach envisaged by IFRS 15 is not only bringing the revenue recognition standard on par with Chapter 606 of US GAAP but also takes into account the changing revenue recognition landscape in different industries. Many of the 64 illustrative examples in IFRS 15 show the principles of revenue recognition in different industries.
Apart from the new generation industries, such as e-commerce, the traditional manufacturing industries also seem to be changing. Entities are hiving off divisions which they cannot manage profitably – bringing into play IFRS 3 Business Combinations – or are outsourcing segments of their manufacturing process that are provided more cheaply by third parties. This would bring into play questions of revenue recognition and in some instances, determining who owns and controls the property, plant and equipment to recognise it under IAS 16.
Entities that engage with the government in public private partnerships invariably enter into service concession arrangements with the government. The erstwhile International Accounting Standards provided limited guidance on how to recognise revenue in such arrangements or whether the right to charge an amount for utilising that public service gave rise to any intangible assets. IFRIC 12 Service Concession Arrangements fixes this conundrum.
All IFRS Standards go through a very detailed process before being published. Despite this, a Standard may not be able to provide solutions to specific situations experienced in particular industries. A recent discussion in the IASB focused on whether telecommunication towers owned by tower companies should be reflected as investment property under IAS 40 or property, plant and equipment under IAS 16. The IASB brought out International Financial Reporting Standards Interpretations (IFRIC) and Standard Interpretations Committee (SIC) to resolve such specific issues. In a limited way, IFRIC and SIC are looking at industry-specific issues.
The focus of IFRS on industry-specific standards appears to be further confirmed if one looks at the major projects of the IASB for the future. Re-deliberation is planned on IFRS 4 in Q1 of 2015, and the all-new IAS 17 Leases is expected to be issued at the latest by the end of 2015. That apart, a further public consultation on rate regulation is expected to be commenced in Q1 2015.
The twin factors of IFRS evolving, and dynamic changes in the way business is conducted and industries are aligned, will ensure that there will more industry-specific standards that will come out in the future from the IASB.
Some experts aver that IFRS is all about fair value and disclosures. They opine that the extensive disclosures mandated by every IFRS Standard provide ready-made information to competitor to know everything that a competitor needs to know about an entity – the fair value of its assets and liabilities, as well as a detailed breakdown of the amounts paid in a business combination. This is a spin-off effect that IFRS has had on industry – the availability of too much information about an entity. While using these vast amounts of disclosure data can do no harm, misuse of this data can create issues between entities and their competitors. However, it should be stated here that all the accounting accidents that happened over the last decade and more – be it an Enron, WorldCom, Parmalat, Lehmann Brothers or Satyam – suffered from a common shortcoming: the lack of detailed disclosures in the areas of accounting where they deviated from the norms. Accounting regulators feel – and rightly so – that it is better to disclose more rather than less, or only what is deemed essential. In the IFRS era, entities operating in different industries should learn the art of disclosing both good and not-so-good information.
We can reasonably conclude from the above discussion that, irrespective of the basis on which accounting standards have been developed, they will have an impact on specific industries. During the course of writing this book, I found to my pleasant surprise that the industry most impacted by IFRS was the airline industry. They have different types of leases, componentisation of PPE, borrowing costs, impairment, intangible assets such as airport landing rights, revenue recognition dilemmas (customer loyalty programmes) and financial instruments. It would probably not be an exaggeration to state that apart from the industry specific Standards such as IFRS 4 Insurance Contracts and IFRS 6 Exploration for and Evaluation of Mineral Resources most of the other Standards would apply in some way or the other to the airline industry. This conclusion sets the tone for the remaining chapters of the book.
Chapter 2
Summary of Disclosures Under IFRS Standards
To many, IFRS is all about disclosures. The insertion of the words “financial reporting” in place of “accounting” in the erstwhile International Accounting Standards was intended to send out a message that accounting is passé, financial reporting is in. Financial reporting in essence means disclosures. The disclosure requirements in IFRS are, to say the least, intense. Apart from the disclosure requirements mentioned in most Standards, IFRS has Standards exclusively for disclosures: IAS 24 Related Party Transactions, IFRS 7 Financial Instruments: Disclosures, IFRS 8 Operating Segments and IFRS 11 Disclosure of Interests in Other Entities are examples. However, it has to be mentioned that the disclosure requirements in other Standards are equally intense: IAS 36 requires