1. EFRAG & UK ASB Discusssion Paper: Considering the Effects of Accounting Standards 31 January 2011

2. Why we have issued this Discussion Paper For decades there have been debates about how standard setters should deal with the ‘costs’ and ‘benefits’ of accounting standards. Governments and other public bodies (including the European Commission) have increasingly called on the IASB to demonstrate the effects or consequences of their standards (as they are being developed and once implemented). The IFRS Foundation responded to these concerns by including effects analysis within the IASB due process but to date that policy has not been fully implemented. The adoption of IFRS in many jurisdictions has highlighted the need for there to be more careful consideration of the effects of those standards. For these reasons EFRAG and the UK ASB decided to issue this discussion paper. The intention is to stimulate debate about these issues and assist the IASB in developing a practical and workable response to these issues. The comment period closes on 31 August. Please send comments to commentletters@efrag.org commentletters@efrag.org Background to the Project

3. What we have said The conclusion we have drawn from our research is that standard setting, like many other areas of public policy, needs to draw on evidence throughout the process. The paper presents four key principles: Principle 1 – Explain intended outcomes. Standard setters should explain the intended outcomes of a proposed accounting standard or amendment in terms of their objective of serving the public interest. This should be done at the agenda setting stage. Principle 2 – Encourage input on anticipated effects. Constituents should be actively encouraged to provide input on the anticipated effects. Principle 3 – Gather evidence. The evidence gathered should demonstrate that the proposals faithfully represent the underlying economic reality and produce information that is useful. Principle 4 – Consider the effects throughout the due process. The consideration of effects should be embedded in the due process and not considered as a single event. In summary, we argue that it is important to think about the effects of accounting standards as an integral part of the standard setting process and not as a compliance activity to produce an ‘effects study’ at the end of the process. Key Messages in the Discussion Paper

4. Objective of Considering the Effects of Accounting Standards It is argued in the discussion paper that effects analysis is likely to strengthen the standard setting process, enhance its transparency and increase the accountability and credibility of the standard setter. Ultimately it should contribute to improving financial reporting. The paper sets out the pros and cons of that assertion. EFRAG and the UK ASB are keen to hear from constituents what they think about the issues discussed in the paper. What do we hope to achieve?

5. Definitions What are effects? Effects are defined as consequences that flow, or are likely to flow, from an accounting standard, referenced against the objective of serving the public interest by contributing positively to delivering improved financial reporting. Effects include both micro- and macro-economic impacts. What is effects analysis? Effects analysis is a systematic process for considering the effects of accounting standards as they are developed and implemented. It is not merely about a document or a single point-in-time event but an integral part of the standard setting process. The standard setter should carry one the analysis on a proportionate to the anticipated scale of the effects. ‘Effects’ and ‘Effects Analysis’ Explained

6. IASB Due Process 6 1. Agenda Decision 2. Project Planning 3. Development and publication of DP 6. Procedures after an IFRS is issued 5. Development and publication of IFRS 4. Development and publication of ED Discussion Paper Exposure Draft Feedback Statement IFRS Impact Assessment Post- implementation Reviews Consultation with constituents and national standard-setters Field Testing Non-mandatory Mandatory New Elements introduced by the Trustees in 2007 Consider effects at each of the six stages

7. How it might work Effects analysis can be applied to proposed accounting standards or amendments to: Validate the intended outcomes; Identify and assess the effects; and Identify options. In order to develop the proposals set out in the paper, it is suggested that the IASB should ‘field test’ them in the development of IFRSs via a ‘live’ project. National standard setters and other similar institutions should assist the IASB in gathering evidence of the effects of accounting standards and should play a more active part in the due process. Performing Effects Analysis