Global Business

Regulators: Account for Accounting Carve-outs

Global regulators want companies to spell out how local accounting standards deviate from IFRS.
Stephen TaubFebruary 7, 2008

The International Organization of Securities Commissions (IOSCO) has fired off a detailed statement urging publicly traded companies to provide investors with clear and accurate information on the accounting standards they use to prepare financial statements.

Michel Prada, chairman of the IOSCO Technical Committee, said that the group is concerned that, with the convergence of global accounting standards, investors may assume that all company financial statements are generally comparable, even when they are prepared in accordance with very different generally accepted accounting principles (GAAPs). “This commonly occurs where national standards assert that they are based on but do not fully implement International Financial Reporting Standards (IFRS),” he added.

Local or industry-specific modifications to IRFS rules, known as “carve outs,” have caused friction between the International Accounting Standards Board and the European Union. In fact, the IASB is trying to eliminate carve-outs from IFRS so that the goal of having the IFRS and U.S. GAAP converge into a “single, quality set” of global accounting standards is reached, IASB chairman David Tweedie, told CFO.com in an earlier interview.

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One controversial modification relates to hedge accounting (IAS 39). “We are actually working to get rid of that carve-out,” asserted Tweedie, noting that the differences over IAS 39 amount to a mere seven paragraphs of the 2,000 pages of rules. The hedge-accounting carve-out in Europe is largely a matter of semantics, as some banks believe they can hedge under the IFRS and others do not.

For its part, IOSCO is taking a different tack, trying to convince companies to disclose more about the accounting modifications in regulatory filings. The overriding goal is to mitigate the risk of shareholders making investment decisions without a full understanding of the bases of financial statements, Prada emphasized.

To that end, IOSCO is recommending that all publicly traded companies include information which clearly explains the basis on which their accounts have been prepared.

The organization’s membership regulates more than 90 percent of the world’s securities markets. It recommends that companies preparing annual and interim financial statements on the basis of national standards that are modified or adapted from IFRS should include at least the following statements:

• A clear and unambiguous statement of the reporting framework on which the accounting policies are based.
• A clear statement of the company’s accounting policies on all material accounting areas.
• An explanation of where the accounting standards that underpin the policies can be found.
• A statement that explains that the financial statements are in compliance with IFRS as issued by the International Accounting Standards Board, if this is the case.
• A statement that explains in what regard the standards and the reporting framework used differs from IFRS as issued by the IASB, if this is the case.

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