1. The Impact of IFRS in Transparency
Manuel Arranz
October 15, 2007

2. A few words about Transparency in financial reporting
Contents
A few words about Transparency in financial reporting
Prehistory of financial reporting: the situation before IFRS
Why IFRS?: The European case
How does IFRS help to improve Transparency?

3. A few words about Transparency in financial reporting

4. Also transparent means easily seen through, recognized, or detected.
A general definition
Transparency or transparence is the quality or state of being transparent, transmitting rays of light through its substance so that bodies situated beyond or behind can be distinctly seen.
Also transparent means easily seen through, recognized, or detected.

5. A definition closer to financial reporting
In financial reporting, transparency commonly refers to the disclosure of financial information in a manner that an user of such financial information can see what it is behind the figures presented by management.
Transparency is commonly associated to terms like: useful, timely, reliable, comparable and consistent.

6. One main reason: the users’ process of making economic decisions.
Why Transparency?
Diverse potential users of financial information: shareholders, suppliers, financial entities, Internal Revenue Services, financial analysts, etc.
One main reason: the users’ process of making economic decisions.
Lack of Transparency implies potential errors in such process.
Transparency is one of the key pillars in Stock Exchange Markets.

7. Prehistory of Financial Reporting: the situation before IFRS

8. Let’s return to the 90’s for a while
Main markets:
One clear leader: USA
A couple of significant markets: London, Frankfurt, Tokyo,..
Many small markets in Europe, Asia, Latin America,…
Financial reporting:
US GAAP in USA
Local GAAP in the rest of countries
IAS (former IFRS) applied only in limited situations

9. US GAAP IAS Local GAAP Private standards setters: FASB, EITF, AICPA
GAAP in the 90’s
US GAAP
Private standards setters: FASB, EITF, AICPA
Complex rules, but still understood
IAS
Private standards setter: IASC
General principles, optional methods
Local GAAP
Mix of principle-based and rule-based
Huge diversity

10. Peak and then drop in Stock Markets Financial scandals in US
What happened around 2000?
Technological boom: high tech companies, internet, telecom, .com, software companies, biotech, etc.
Peak and then drop in Stock Markets
Financial scandals in US
Demand for new rules and disclosures
Investors
Politicians
Regulators
Financial analysts

11. Major development of US GAAP
What happened around 2000?
Major development of US GAAP
Revenue Recognition (SAB 101)
Derivatives (SFAS 133)
Business combinations, goodwill and intangible assets (SFAS 141 and 142)
FIN 46(R)
Improvement of disclosures
Creation of IASB and IFRS and revision of IAS
Globalization of markets – need for a unique reporting language

12. Why IFRS?: the European case

13. USA: Europe Complaints about complexity OF US GAAP
Who needed IFRS?
USA:
Complaints about complexity OF US GAAP
Sarbanes-Oxley Act appointed SEC for GAAP: US GAAP was renewed, but
FASB had to converge with IASB
A process of simplification was required
Europe
Political and economical convergence: EUROPE needed an unique language

14. Why IFRS? When was adopted? First steps Political reasons
Not US GAAP
Not a Local GAAP within EU
…only one suitable option.
Economic reasons
When was adopted?
Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of International Accounting Standards

15. How did EU adopt it? –Preamble of the EU Law
The Lisbon European Council of 23 and 24 March 2000 emphasized the need to accelerate completion of the internal market for financial services, set the deadline of 2005 to implement the Commission's Financial Services Action Plan and urged that steps be taken to enhance the comparability of financial statements prepared by publicly traded companies.
(2) In order to contribute to a better functioning of the internal market, publicly traded companies must be required to apply a single set of high quality international accounting standards for the preparation of their consolidated financial statements. Furthermore, it is important that the financial reporting standards applied by Community companies participating in financial markets are accepted internationally and are truly global standards. This implies an increasing convergence of accounting standards currently used internationally with the ultimate objective of achieving a single set of global accounting standards.

16. How did EU adopt it? –Preamble of the EU Law
(4) This Regulation aims at contributing to the efficient and cost-effective functioning of the capital market. The protection of investors and the maintenance of confidence in the financial markets is also an important aspect of the completion of the internal market in this area. This Regulation reinforces the freedom of movement of capital in the internal market and helps to enable Community companies to compete on an equal footing for financial resources available in the Community capital markets, as well as in world capital markets.
(5) It is important for the competitiveness of Community capital markets to achieve convergence of the standards used in Europe for preparing financial statements, with international accounting standards that can be used globally, for cross-border transactions or listing anywhere in the world.

17. However, what IFRS are accepted by EU?
Article 3
Adoption and use of international accounting standards
1. In accordance with the procedure laid down in Article 6(2), the Commission shall decide on the applicability within the Community of international accounting standards.
2. The international accounting standards can only be adopted if:
- they are not contrary to the principle set out in Article 2(3) of Directive 78/660/EEC and in Article 16(3) of Directive 83/349/EEC and are conducive to the European public good and,
- they meet the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.
PROCESS OF ENDORSEMENT BY EU

18. How does IFRS help to improve Transparency?

19. Directive 2004/109/EC: Transparency for EU
Efficient, transparent and integrated securities markets contribute to a genuine single market in the Community
Foster growth and job creation by better allocation of capital and by reducing costs.
The disclosure of accurate, comprehensive and timely information about security issuers builds sustained investor confidence and allows an informed assessment of their business performance and assets.
This enhances both investor protection and market efficiency.

20. Periodic information Annual financial report 4 months after year end.
Transparency for EU
Periodic information
Annual financial report 4 months after year end.
It will comprise:
Audited financial statements
Management report
Management representations
Half-yearly financial report and interim management statements
Notice of acquisition or disposal of major holdings
Major related parties’ transactions

21. IASB is not a political organization
Transparency in IFRS
IASB is not a political organization
IFRS are especially designed for public companies
Objective and qualitative characteristics consistent with European Union’s goals
Principles-based set of pronouncements
Easy to implement in the short term

22. Classifications in balance sheet and statement of income
Some examples
Classifications in balance sheet and statement of income
Accounting policies and management estimates
Revenue recognition
Financial instruments, derivatives and hedging
Consolidation procedures
Impairment policies

23. Disclosures: Segment reporting Employees’ benefits Income Tax
Some examples
Disclosures:
Segment reporting
Employees’ benefits
Income Tax
Long-term debt and other commitments
Off-balance-sheet arrangements
Contingencies
Purchase Price Allocation
Related parties

24. Main challenges: convergence with US GAAP
Memorandum of Understanding (Feb. 2006): roadmap for
Short convergence projects:
Government grants (IASB)
Joint ventures (IASB)
Impairment (joint)
Income Tax (joint)
Investment properties (FASB)
Research and development (FASB)
Subsequent events (FASB)
Other projects

25. Main challenges: different interpretations
IAS 8, par. 10:
“In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management shall use its judgment in developing and applying an accounting policy that results in information that is:
relevant to the economic decision-making needs of users; and
reliable, in that the financial statements:
represent faithfully the financial position, financial performance and cash flows of the entity;
reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
are neutral, i.e., free from bias;
are prudent; and
are complete in all material respects.”

26. Main challenges: different interpretations
IAS 8, par. 11
In making the judgment described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order:
(a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.

27. Main challenges: different interpretations
IAS 8, par. 12
In making the judgment described in paragraph 10, management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11.

28. IFRS guarantees Transparency because of: :
CONCLUSIONS
IFRS guarantees Transparency because of: :
Its objectives
Its quality characteristics
It is a principle-based framework
The process of setting standards is public and based on consensus
It has been positively tested in Europe
We need to continue working on:
Convergence
Consistency in the applications