Analysis of IFRS 6

Introduction:

In this research report focus has been made on the drafting of the IFRS-6 which is mainly related to ‘Exploration for and Evaluation of Mineral Sources’. The said IFRS is issued by IASB with main objective to make changes in the method of impairment related to exploration of assets being generated though mining activities with the introduction of various impairment methods. In December 2004, IFRS-6 has been issued by board and the same has been applied in preparation of financial statements which are effectively implemented on or after 2006. This entire report shall have the discussion about the background history of the IFRS-6 emergence, the different comment letters being issued by various accounting bodies and entities, and any exposure draft for any amendments in the said IFRS. The report also makes focus on the governing theories on the comment letters which impact the public interest.

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Answer-2 Draft Exposure IFRS 6

a) Exposure draft, Invitation for comment letters and emergence of Accounting Standard:

The earlier applied US GAAP was not being so effective to make rationalize the standard reporting of mining industry products, and there were problem also found in measurement and recognition of cost of such products. Under such provisions; for making measurement and recognition of cost of products either successful method or full cost method were being used for exploration and evaluation of mineral products. Usually the gas and oil producing organisations used successful efforts methods for making appropriate measurement of mining products. However, due to non-technicality and non-standardize process of making evaluation of cost of the products, the said methods could not make the satisfactions in the mind of experts in accounting professions, and there was requirement found by IFRS Board, to make changes in this standard of financial reporting. The companies could not able to make recognize the cost which is to be expensed and what part of cost should be shown differently in books of accounts.

In case of the full cost method, it has been mentioned that all the cost being incurred in cost of appraisal and cost of exploration of products, cost of development of product, processing cost, construction cost, etc. should be capitalized under particular cost centre. As per the issues prevailing in accounting practice for this field, have issued new accounting standard IFRS-6, which has some provisions being developed by making research in this field, and suggested some costing methods. For making recognition of cost of the products being developed by mining activities, cash generating unit method suggested where the area identified having jurisdiction of mining activities are being covered under one unit, and all the cost being incurred under such process are indentified and accumulated, and booked as assets of particular cash generating unit head. After that; based on the completion of activities under such unit, impairment of assets made for transfer of amount of asset to income statement.

Recently there is exposure draft being issued for making amendment in IFRS-6, which is related to measurement and recognition of assets arising from mining activities. The said changes took place in paragraph 26A and paragraph 10, the changes took place in paragraph 10 to make the replacement of word ‘framework’ by ‘conceptual framework for financial reporting’, this could be considered as mistake in drafting of standard required to change such mistake, so that wrong interpretation from the users of standard can be avoided and a new paragraph 26A, also added to make such amendment effectively retrospectively from the beginning of the standard issued in 2004.

There are various letter issued by various accounting bodies and entities engaged in the business of mining activities after  issuance of draft exposure on such standard. A few of them has been discussed here under:

Committee of Deutsches Rechnungslegungs Standards and German Accounting Standards has issued comment letter, mentioned that the provisions contained allowing exemptions from applicability of this standard is appraisable. The exemption provided from making disclosure of comparative information, for measurement  and recognition of mining products as per IFRS-6, due to difficulties found in compiling of information which required for preparation of comparative statement. These changes shall provide benefits to many entities. Another comment letter was issued by E&Y, which requires clarification of certain accounting principles in relation to impairment of assets being generated through mining activities. The said issue was also being considered at the time of issue of such standard. Comment letter issued by OIC Italian Standard Setter, has asked for detailed clarification with regards to definition of word mineral in relation to mining activities. This accounting body has given positive response on such standard with this doubt. Council on Corporate Disclosure and Governance also issued Comment on draft exposure of IASB to making disclosure for agreement with IFRS-6. Alkane Exploration Ltd is engaged in the business of mining activities and issued comment letter to get clarification with regards for listing rules of junior explorer and requested to draft the provisions more clearly.

b) Agreement or disagreement on the issue of IFRS-6 in the context of above comment letters being discussed:

The first comment letter is being discussed by making appraisal of board, which provides exemption from disclosure of comparative financial information in the statement of account, for the initial periods after the issuance of such standard. The entities which will going for adopt IFRS-6 in presentation and preparation of financial statements having benefits in relation to get such exemption. Such exemption provided looking to the technicality of process of mining and difficulties found in recognition and measurement of amount of the product generated though mining activities. The proposed changes accepted by E&Y in above mentioned comment letter, shall make smoothen accounting policy of impairment of assets, as per the opinion given by E&Y. OIC have mentioned for acceptance of this IFRS, how requested for certain clarification for some public issues in the provisions of the standard. Council on Corporate Disclosure and Governance has shown its interest in the issued IFRS, and mentioned that in Singapore there is no so many companies engaging in mining activities, so not making any comments. Alkane Ltd was not satisfied with drafted provisions in relation to impairment of asset and requested to re-draft it with more clarification.

c) Governing theories in relation to public and economic interest in the context of comment letters issued above:

The various comment letters issued by various bodies are having interest to make clarification of the provisions which shall affect them in preparation of statement of account which they going to issue based on the operating activities of the organisation. There are many areas and provisions of law which are affecting the operation of entities and other accounting bodies, which require them to make focus on the economic and public interest as well along with the business operation. So, any changes took place in the governing standard, shall have direct effect on the users of the financial statement also, and as a result comment letters invited from various authority and entities to verify the draft report of the standard and give suggestion for any changes looking to the practical aspects of application of standard.

 

Answer 3– Adoption of accounting standard in EU countries:

EU as whole is not a single country rather it is group of 28 European countries and every country have applicable local GAAP prevail in the country for their financial statement. EU countries have lesser trust of on standardisation of accounting and maintaining accounting in professional way. Before IFRS all the EU countries were using local GAAP prevail in the country for preparation of financial statement. In 2002 by notification no. 1606/2002 whole EU countries adopted IFRS for preparation and presentation of financial statement for consolidation purpose only. And compulsory adoption of IFRS for consolidation of financial statement was only for the EU companies traded in stock market, hence company other than listed in EU stock market were exempt from the compliance of IFRS. Compulsory adoption of IFRS was effectively implemented from the year 2005. EU countries adopted IFRS with some modification in original IFRS based on their convenience. European Union embraces the IFRS for all the EU countries for implementation of IFRS for consolidation purpose. In order to push up of European Union approximately 7000 EU companies adopted IFRS as standard for preparation and presentation of financial statement for consolidation purpose.  From year 2007 adoption of IFRS is gear up in EU as well as in the world. With effect from harmonisation process of IFRS in world approximately 100 countries accepted IFRS for preparation of financial statement. Before implementation of IFRS for financial statement all the companies analyse about the advantage from acceptance of IFRS for financial statement. With that some research question in the mind of executives of companies about IFRS implementation.

Research question on adoption of IFRS by EU counties and world –

·         Whether benefit from IFRS adoption is more than cost incurred for implementation of IFRS?

·         Whether IFRS is adequately cover all the area of reporting which is actually needed?

·          Whether all other country will adopt IFRS in near future? If not then how standardisation objective of IASB can be achieved?

·         Whether IFRS cover the legal requirement of the countries going to be adopted IFRS?

·         Whether IFRS helps to the market in crisis position?

After all the analyses and research European Union formed the group of EU countries for IFRS implementation with the name of European Financial Advisory Group (EFRAG), who provide guidance to the EU countries about technical sustainability of IFRS in EU countries. EFRAG issued the report called EC report which reveals that IFRS is beneficial for EU countries as well.

Advancement of IASB for harmonisation of IFRS and drawback to the EU for adoption of IFRS - With advancement in the business, increase in global trade and mobilisation of resources for the business in the world it is necessary to issued one standardised process for maintenance accounting in the world companies. Now a day’s maximum companies operate their business from more than two locations and all the location are from different areas of the world therefore organisations is in dilemma about the maintenance of the books of account. As all the countries have some different accounting principal for preparation of books of account and if organisation operate their business in the country then they have maintain account as per the principal of country as well. In order to mitigate the entire problem about the dual accounting record for the MNCs, IASB issued IFRS for preparation of accounting standard.  

Benefit of IFRS implementation – There is many benefit from IFRS implementation to the companies in account preparation if it is applied. From all the benefit we will discuss some of benefit which organisation can avail by preparing financial statement according to IFRS –

Benefits to the investors –

Higher level of analytical information- IFRS enforce to the organisation for more and more information in their financial statement which helps to the investor to analyse the information from all scenario and based on prior analysis investor can take decision about the investment.

Accurate Information   - Statement prepare by following IFRS is more accurate as compared to other statement hence it is investor can rely upon the statement of the company based on information disclosed in financial statement.

Reduce Uncertainty – Financial statement prepared according to the IFRS principal provides all the measurement about the future liability of the company in prior hence there is lower uncertainty about the objective of the organisation.

Reliable - Financial statement prepare according to the IFRS is more reliable based on information disclosed in the statement of accounts.

Benefit to the Entity

Cross border investment – Financial statement prepared based on IFRS is more reliable for the inventors and it attracts to the investor for invest in the company.  Trusted financial statement attracts global investors for cross border investment.

Lower cost of capital – Availability of sufficient funds in the business helps to the entity for reduce in cost of capital of the company.

Drawback for the EU countries in advancement of IFRS –

Partial implementation of IFRS – European Union implement IFRS for the EU countries with effect from 2005 but it is one of the big drawbacks in IFRS implementation in the countries, as in compulsory implementation of IFRS only listed company have to follow IFRS. And listed company also have to follow for the purpose of consolidation of financial statement only. Therefore there is dual standards will prevail in the countries. Objective of IFRS is also did achieve due to this. As IFRS issued by IASB for make comparable financial statement but due to dual standard, financial statement not comparable in the same country. 

Dual standard in the country – With effect from 2005, for consolidation IFRS adopted by listed company but company other than listed in stock exchange continue to follow local GAAP  for financial statement hence it also create dual system of accounting in the country. Which leads to non matching of financial statement.

Barriers in implementation of IFRS in EU countries 

Rules and regulation prevail in the countries – Even European Union initiate preparation of financial statement according to the IFRS but the local rules of the country enforce to the organisation for preparation of accounting record according to the GAAP. Hence companies are not able to prepare financial statement by two different standards, which increase the cost of accounting maintenance. 

Fear of Higher cost in implementation – EU countries have over reliance on the local GAAP hence they have a fear of increase in cost due to implementation of IFRS for accounting.

Lack of Awareness - EU companies is not aware about the benefit of IFRS implementation therefore they are lesser interested to implement IFRS in financial statement preparation.

Accounting harmonisation process by IASB across the globe –

IASB try to regulate accounting across the world according to IFRS. In order to implement IFRS in the world IFRS push to the other then member country for adoption of IFRS.  Those countries who cannot accept IFRS for financial statement preparation due to local principal IASB also offer to those countries to convergence of local GAAP with IFRS, so that standardisation of accounting across the world can be maintained. With that offer some countries like India, US and other countries converge their accounting standard with IFRS. IASB try to bring standardisation, transparency, comparability and accuracy in the accounting system by implementing IFRS.