CHAPTER THREE

Governance and accountability of the IFRS Foundation

3.1 HISTORY, STRUCTURE AND FINANCE

The IFRS and IAS are developed and published by the International Accounting Standards Board, an international non-governmental organisation operationally based in London but legally registered as a not-for-profit entity in Delaware, USA.

The IASB was preceded by the International Accounting Standards Committee, also London based. On 29 June 1973, the IASC was founded by nine professional accountancy bodies from the United States, the United ­Kingdom/Ireland, Canada, Australia, Japan, Germany, France, Mexico and the ­Netherlands. Actually, the roots go back to 1966. At that time, there was a proposal by professional accountancy bodies in Canada, the United Kingdom and the United States to create an Accountants International Study Group to develop comparative studies of accounting and auditing practices in the three nations. So, clearly, the effort began as an IFRS Anglo-Saxon initiative. Of course, much has happened since then.

The main objectives of the former IASC were to formulate and publish, in the public interest, accounting standards to be observed in the presentation of financial statements, and to promote the worldwide acceptance and observance of such standards. Furthermore, the general purpose of that organisation was to work for the improvement and harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements.

The IASC enters the electronic age

The IASC entered the electronic age when a website was started in 1997. Even before discussions concerning the opening of board meetings to the public, the IASC had launched its own website and also initiated the distribution of board agenda papers by electronic mail. Commercial Director Kurt Ramin encouraged Paul Pacter to develop the website. In an agenda paper to the Executive Committee, April 1997, Ramin wrote: ‘This (Web-Page) will open opportunities for us to receive orders for publications via e-mail, distribute news-bytes and board papers, as well as to provide a forum for technical committee meetings'. Ramin attached a note from Pacter:

IASC will launch its Internet web site any day now. It will contain about 130 pages of information written by Paul Pacter and converted to Internet format by a consultant. Paul will maintain it. The permanent address will be: http://www.iasc.org.uk. . .

IASC now has its own Internet domain name (iasc.org.uk) and shortly will change its main email address to [email protected]. Emails sent to the old address will automatically forward to the new one. Individual email addresses for IASC staff (for example, [email protected]) are installed, but their use must await hardware and wiring, probably when we move to our new facility.

Source: The International Accounting Standards Committee: A Political History, by Robert J. Kirsch, published in February 2007 by WoltersKluwer, pp. 262–263. Reproduced by permission of Robert J. Kirsch.

Note: Kurt Ramin is co-author of this book. At the time of writing Paul Pacter is on the International Accounting Standards Board.

Interestingly, the original IASC website subsequently gave birth to the IAS Plus website. Note that IAS Plus is purported to be the leading website for global accounting news and provides a wealth of information. (www.iasplus.com – see Figure 3.1). Particularly, see the related site map, which is extensive and is summarised next:

• IFRS News
  • Chronology of Past News
• Standards
  • IFRSs
  • IASs
• Interpretations
  • IFRIC Final Interpretations
  • SIC Final Interpretations
  • IFRIC Agenda Projects
  • SIC Drafts Not Finalised
• IASB Agenda
  • Agenda Consultation
  • Active Agenda Projects
  • Research Projects
  • Technical Corrections
  • Completed Projects (IASB)
• IASB Structure
  • Overview
  • Key Groups
• Newsletters
• Financial Statements
• Links

The site provides a useful synopsis of IASB history and structure (see www.iasplus.com/en/resources/resource382) and is a rich source of useful reference material.

FIGURE 3.1 The IAS Plus website.

The IASB's objective

The objective of the IASB is to develop a single set of high-quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. The former IASC worked from 1973 to 2000 to accomplish those objectives. It promulgated a substantial body of standards (IAS 1 to IAS 41), interpretations, a conceptual framework and other forms of guidance.

In comparison, the IASB is organised under an independent foundation and is now named the International Financial Reporting Standards ­Foundation. Incorporated in the state of Delaware, USA, on 6 February 2001, the IFRS Foundation is a not-for-profit charitable organisation, with its primary operations located in London. It pursues its objective by way of:

• an independent standard-setting board, overseen by a geographically and professionally diverse body of trustees which is publicly accountable to a monitoring board of public capital market authorities;
• support by an external IFRS Advisory Council and an IFRS Interpretations Committee to offer guidance where divergence in practice occurs;
• a thorough, open, participatory and transparent due process;
• engagement with investors, regulators, business leaders and the global accountancy profession at every stage of the process;
• collaborative efforts with the worldwide standard-setting community.

Figure 3.2 shows a schematic overview of the structure of the organisation.

FIGURE 3.2 A schematic overview of the structure of the IASB.

Source: www.ifrs.org/The+organisation/How+we+are+structured.htm

Governance and accountability arrangements of the organisation

The IFRSF and its independent standard-setting body, the IASB, provide public accountability through the transparency of their work, consultation with the full range of interested parties in the standard-setting process and their formal accountability links to the public. The leaders of the major economies, through the G20, have confirmed the importance of an independent standard setter accountable to the public interest.

Public accountability, ensured by the organisation's constitution and governance arrangements, is vital to the organisation's success. It is the trustees' duty to ensure that appropriate governance arrangements are in place and observed by all parts of the organisation. To read more about the trustees' responsibilities, see www.ifrs.org/The+organisation/trustees/Trustee+responsibilities/Trustee+responsibilities.htm.

The trustees' effectiveness in exercising their functions is assessed annually by the trustees' Due Process Oversight Committee (DPOC). For more details see www.ifrs.org/DPOC/DPOC.htm.

The cornerstones of the organisation's public accountability are as follows.

The monitoring board

The trustees have established a formal public accountability link to a monitoring board of public capital market authorities.

The constitution review

The constitution of the IFRSF requires the trustees to undertake a formal, ­public, five-yearly review of the constitution.

Due process

Formal due process for the IASB, the IFRS Interpretations Committee and XBRL ensures extensive outreach, which includes mandatory public consultation. Comment letters received in response to formal proposals are made public on the website.

Public meetings

All meetings (other than those on administrative matters) of the bodies of the IFRS Foundation, including the IASB, the Interpretations Committee and its formal advisory bodies, are held in public and are webcast. Meeting notes are available to the public as observer notes.

Finance

The IFRSF issues annual financials, including a management report, expected financing, report of the independent auditors (BDO LLP, London) and detailed notes to the financial statements. The latest related opinion reads: ‘In our opinion the financial statements:

• Give a true and fair view of the state of the Foundation's affairs as at 31 December 2011 and of its comprehensive income for the year then ended; and
• Have been properly prepared with International Financial Reporting ­Standards.'

Both the IFRS Foundation and the US Financial Accounting Foundation (FAF) are well financed. As is typical with service organisations, most expenses are people related. Annual reports for both organisations are published after year end (with an associated lag of 4–5 months).

The IFRSF receives widespread contributions and funds from major countries around the globe and also from the sale of publications. However, currently, more than half of the funding is provided by large accounting firms and financial institutions. The FAF, mainly, is now financed through the US SEC and by the sale of publications.

It is interesting to note that salary and benefits scales for both organisations are similar to what large accounting firms pay in the UK and the US. For instance, board members are highly paid, as illustrated in an excerpt from the 2010 annual report:

In 2010, the total cost for 14.8 full-time equivalents (2009: 14.0 full-time equivalents) IASB members amounted to £6,759,000 (2009: £6,269,000). In July 2010, effective for October 2010, the trustees approved the following remuneration budgets:

£553,350 (includes per diem allowance) per year for the IASB Chair (2009: £493,990, excludes per diem allowance) and £457,950 (includes per diem allowance) per year for full-time members (2009: £401,370, excludes per diem allowance).

The reason for the relatively high remuneration payments are competition for people with the large accounting firms and similar salaries paid by the FASB.

Source: Financial Report, www.ifrs.org

Note: The IFRSF 2011 Annual Report became available shortly before we went to print.

The following summary shows how the IFRS is funded in terms of principles and practices.

Principles

Broad-based:

Funded by a wide range of market participants from across the world's capital markets.

Compelling:

Funding burden to be appropriately shared across beneficiaries within jurisdiction, with official support from relevant regulatory authorities.

Open-ended:

Not contingent on any particular action that would impair the independence of the organisation.

Country-specific:

Shared by the major economies of the world on a proportionate basis, using Gross Domestic Product as the key determining factor of measurement.

Practice

• Mandatory levies introduced for listed and non-listed companies in a growing number of countries.
• Organisation now funded by thousands of bodies either directly or indirectly.

Source: Adapted from www.ifrs.org, ‘Who we are and what we do'

The key financial figures for the IFRSF as compared with the Financial Accounting Foundation (FAF) in US$ are shown in Table 3.1.

Table 3.1 Financial figures for the IFRS Foundation and the FAF.

Source: www.accountingfoundation.org

Note: For currency conversion £1 = $1.60

Since the establishment of the monitoring board, it is noteworthy that there is now also a trend for the IFRSF to obtain more funding through public sources. Other financial considerations are fees and expenses, as detailed below.

Fees

• For an IASB member, the fee is £5,000 per day or part day.
• For technical staff, the fee is £1,500 per day or part day.
• These amounts are indivisible and non-negotiable, and are payable if one or more speeches or appearances are made in a day at an event.
• For ‘exclusive arrangements' in corporate events organised jointly with major firms or multinational corporations, the IFRS Foundation may seek a discretionary fee, typically £20,000, in addition to the amounts stated earlier.

Expenses

• Travel, accommodation and related expenses incurred by an IASB member or a member of the technical staff in relation to a speaking engagement are the responsibility of the conference organiser that invited the speaker.

Source: Financial Report, www.ifrs.org

Funding history

How the IFRS Foundation gained funding is a story in itself and one that is worth recounting, if only to show what was required to secure the continuance of this key component of international accounting, as well as of the resultant business reporting.

As commercial director of the IASB, Kurt Ramin was part of the strategy party in charge of preparing the first budget for the IFRSF and raising funding, which he had started in 2009. Here is the story:

I went to the FASB in Norwalk and copied all their salaries (from board members to key people). Since the FASB just finished a funding consulting exercise, I asked them whether I could contact the funding companies they had talked to. Only one was recommended by the FASB president at that time. The company was CCS in New York. They really did not want to do it for us. But I chased them all over the place and, finally, caught up in Dublin (with the help of Kathryn Cairns from the UK standards board, ASB). They agreed to it.

I also threatened the City of London that we would move the IASB to Amsterdam or Bonn (I had offers from them for ‘rent-free' accommodation as long as we were in their city). The next day, I had a £4 million commitment from the City of London if we would stay there.

It is noteworthy that Kurt Ramin worked closely with Paul Volcker, former chairman of the US Federal Reserve Bank. The following extract provides further insight as to the people and processes involved with establishing the IFRS Foundation.

At the 30 October 2000 trustees meeting, a discussion of the new IASC's legal incorporation and tax base took place. Chairman Volker [sic] suggested establishing a 501 (c) 3 charitable corporation (potentially in Delaware) since a large portion of IASC's funds were expected to come from US contributors. Such a corporation would enable US supporters to deduct their contributions for tax purposes, and it would enable the IASC to reduce its tax burden from investments and operational revenues. (The reader will recall the failed attempts by the old IASC to be awarded charitable status in the UK in years past.) Volker [sic] also said that the Corporation of London had sent him a proposal for development of a competitive package to keep IASC headquartered in the City.

The ‘trustees nominating committee' 52 held interviews for new board members in three locations, London, New York and Tokyo, in October and November 2000. Approximately 200 applications had been received; fifty applicants were interviewed. Sir David Tweedie was a participant observer at those interviews. The trustees announced the names of the new Board on 25 January 2001.

. . .

On 21 July, Volker [sic] faxed his response to Minter:

There is no doubt that the decision to appoint Sir David Tweedie as Chairman of the new IASC Board was taken promptly. . . .[T]wo circumstances greatly impressed the trustees, and me personally, in reaching that decision. The first was . . . the enormous advantage to making an early appointment in facilitating the organisational work ahead if we were even to come close to meeting the end of year timetable . . .

Secondly, the trustees became convinced that by experience, reputation and competence,

Sir David was exceptionally well suited to the position. . . .

. . . trustees are totally resolved to make an open and intensive search for other Board members…Part of the search will certainly involve contact with broadly representative and interested organisations, including your own. . . .

. . .

. . . the fourteen Board members were either representatives or observer members of the old Board. Thus, there was significant continuity of members from the old Board to the new. The ‘trustees finance committee' agreed upon a detailed strategy by October 2000. In a few months, they then generated commitments of over $75 million over five years; Volker [sic] had done a lot of the fundraising himself. Fundraising activities were going sufficiently well that, on the 11 December 2000, the trustees unanimously authorized Volker [sic] to enforce Part B of the Constitution when the Finance Committee was confident that the IASC could raise the required funds. In the IASC's 2001 Annual Report, Volker [sic] was able to report:

. . . [T]he trustees needed to ensure adequate financial commitments to cover the annual operating budget of about £11.5 million (US $16.5 million). The budget was largely determined by the need to pay salaries that would attract qualified Board and staff members and by the rather heavy travel costs of an organisation that must regularly consult constituents around the globe. . . . In order to obtain rapid assurance that the new organisation could proceed expeditiously and confidence about its financial stability, the IASC Foundation established

an ‘underwriter' class of supporter of major international financial and business firms. Underwriter companies provided five-year pledges ranging from $100,000 to $200,000 per year. . . .

. . . I am delighted to report that the funding program to date has been a solid success. In addition to the underwriting group, the ‘Big Five' accounting firms have committed nearly a third of the estimated budget. Over 30 central and development banks around the world have provided tangible, as well as moral, support. Official ­international financial institutions have joined the financing effort. A large number of the world's leading multinationals are on board. Finally, demonstrating the depth of support in many regions, leading business groups in Europe, Japan, and the United States have formally endorsed the effort and provided financial assistance. In total, 188 corporations, associations, and other institutions provided financial support, totalling £12.8 million (US $18.3 million) in 2001.

Source: The International Accounting Standards Committee: A Political History, by Robert J. Kirsch, published in February 2007 by WoltersKluwer, pp 359–360. Reproduced by permission of Robert J. Kirsch.

Note: Paul Volcker is incorrectly spelled in the source as Paul Volker. Also, note that FASB President should read FAF President, referring to the Financial Accounting Foundation.

3.2 THE MONITORING BOARD AND IFRS FOUNDATION TRUSTEES

Monitoring board

The monitoring board was formed in 2009 to enhance the public accountability of the IFRS Foundation. The board can refer accounting issues to, and will confer regarding these issues with, the trustees and the IASB chair. The monitoring board can request a meeting with the chairpersons of the trustees and the IASB.

The monitoring board's main responsibilities are to ensure that the trustees continue to discharge their duties as defined by the IFRSF Constitution, as well as approving the appointment or reappointment of trustees. It is envisaged that the monitoring board will meet the trustees at least once a year, or more often if appropriate.

The members of the monitoring board are the Emerging Markets and Technical Committees of IOSCO, the European Commission, the Financial Services Agency of Japan (JFSA) and SEC. The Basel Committee on Banking Supervision participates in the monitoring board as an observer.

The board's charter and other related information (working with the G20) is housed at the IOSCO website, indicating the importance of the relationship with public authorities (see www.iosco.org/monitoring_board/pdf/Monitoring_Board_Charter.pdf).

IFRS Foundation trustees

Trustees of the IFRSF promote the work of the IASB and rigorous application of IFRS, but are not involved in any technical matters relating to the ­standards. This responsibility rests solely with the IASB. Trustees are appointed for a renewable term of three years. Each trustee is expected to have an understanding of, and be sensitive to, international issues relevant to the success of an international organisation responsible for the development of high-quality global accounting standards for use in the world's capital markets and by other users.

There are currently 22 trustees. To ensure global representation, it is noteworthy that six of the trustees must be selected from the Asia/Oceania region, with six from Europe, a further six from North America, and four from all remaining regions. The IFRSF constitution requires an appropriate balance of professional backgrounds, including auditors, preparers, users, academics and other officials serving the public interest. Two will normally be senior partners of prominent international accounting firms. This geographical/functional balance is often difficult to achieve and in the past has led to significant delays in appointments. Trustees are appointed on a rotational basis and of course changes occur through retirement and replacement. Accordingly, for an up-to-date view of the current contingent, refer to www.ifrs.org/The+organisation/trustees/trustees.htm and www.ifrs.org/The+organisation/trustees/Trustee+distribution.htm.

The geographical distribution of current trustees is as follows:

North America

Europe

Asia/Oceania

South America

Africa

3.3 IASB MEMBERS, DUE PROCESS AND IFRS INTERPRETATIONS COMMITTEE

IASB

The International Accounting Standards Board is an independent group of 15 experts with an appropriate mix of recent and practical experience in setting accounting standards, in preparing, auditing, or using financial reports, and in accounting education. Broad geographical diversity is also required.

Members are appointed by the trustees through an open and rigorous process that includes advertising vacancies and consulting relevant organisations. In January 2009, the trustees voted to expand the IASB to ­16 ­members by 2012. Information about IASB members is available at www.ifrs.org/The+organisation/Members+of+the+IASB/Members+of+the+IASB.htm (see Figure 3.3).

FIGURE 3.3 IASB members.

The main qualifications for membership of the IASB are professional competence and practical experience. In order to ensure a broad international basis, there shall normally be:

• four members from the Asia/Oceania region;
• four members from Europe;
• four members from North America;
• one member from Africa;
• one member from South America;
• two members appointed from any area, subject to maintaining overall geographical balance.

Of the 16 board members (of whom one is appointed as chair and up to two as vice-chairs), up to three may be ‘part-time' members. They are elected for an initial term of five years, renewable for a further three years. The chair and vice-chairs may serve second terms of five years, subject to an overall maximum term of 10 years.

At the time of writing, IASB members are as follows:

Due process of standard setting

The IASB is the independent standard-setting body of the IFRSF. Its members are responsible for the development and publication of IFRS, including the IFRS for SMEs, and for approving interpretations of IFRS as developed by the IFRS Interpretations Committee (formerly the IFRIC). All meetings of the IASB are held in public and are also webcast. In fulfilling its standard-setting duties, the IASB follows a thorough, open and transparent due process, of which the publication of consultative documents, such as discussion papers and exposure drafts, for public comment is an important component. The IASB engages closely with stakeholders around the world, including investors, analysts, regulators, business leaders, accounting standard setters and the accountancy profession.

The mandate of the Interpretations Committee is to review, on a timely basis, widespread accounting issues that have arisen within the context of current IFRS and to provide authoritative guidance (IFRIC Updates) on those issues. Interpretation Committee meetings are open to the public and are webcast. In developing interpretations, the Interpretations Committee works closely with similar national committees and follows a transparent, thorough and open due process.

Basically, due process involves:

• a discussion paper that contains preliminary views of the IASB on a particular topic, such as a proposed standard, and any related issues. This is published and distributed to elicit comment for subsequent consideration;
• an exposure draft that is approved by nine or more of the IASB members and contains related conclusions. It also contains so-called alternative views – dissenting opinions – all of which are published for comment;
• the receipt, discussion and consideration of comments received in relation to discussion papers and exposure drafts;
• consideration and implementation of public hearings and field tests;
• approval and publication of a standard if it receives nine or more votes from IASB members. The standard includes associated explanations, appropriate responses to comments received on the related exposure draft, as well as dissenting opinions.

This process of standard setting is summarised in Figure 3.4.

FIGURE 3.4 How the IASB develops standards.

Source: www.ifrs.org

Note also that the IASB has due process handbooks for IASB Interpretations, IFRS Interpretations and XBRL Interpretations.

IFRS Interpretations Committee

The IFRS Interpretations Committee comprises 14 voting members, drawn from a variety of countries and professional backgrounds. They are appointed by the trustees of the IFRSF and are selected for their ability to maintain an awareness of current issues as they arise, as well as the technical ability to resolve them. Information about this committee, and its members, can be found at www.ifrs.org/The+organisation/Members+of+the+IFRIC/About+the+IFRIC.htm.

The members of IFRS Interpretations Committee and their affiliations are as follows:

Note also that the following organisations have Observer status:

• International Organisation of Securities Commissions (IOSCO)
• European Commission

In March 2006, the trustees of the IFRS Foundation published a new Due Process Handbook for the IASB. The Handbook describes the IASB's consultative procedures. Formal due process for projects normally, but not necessarily, involves the following steps (the steps that are required by the IASC Foundation Constitution are indicated by an asterisk):

• Ask the staff to identify and review the issues associated with the topic and to consider the application of the Framework to the issues.
• Study national accounting requirements and practice and exchange views about the issues with national standard setters.
• Consult the Standards Advisory Council about the advisability of adding the topic to the IASB's agenda.*
• Form an advisory group (generally called a ‘working group') to advise the IASB and its staff on the project.
• Publish for public comment a discussion document.
• Publish for public comment an exposure draft approved by vote of at least nine IASB members, including any dissenting opinions held by IASB members (in exposure drafts, dissenting opinions are referred to as ‘alternative views').*
• Publish within an exposure draft a basis for conclusions.
• Consider all comments received within the comment period on discussion documents and exposure drafts.*
• Consider the desirability of holding a public hearing and the desirability of conducting field tests and, if considered desirable, holding such hearings and conducting such tests.
• Approve a standard by votes of at least nine IASB members and include in the published standard any dissenting opinions.*
• Publish within a standard a basis for conclusions, explaining, among other things, the steps in the IASB's due process and how the IASB dealt with public comments on the exposure draft.

The IASB is required to explain its reasons if it decides not to follow any of the non-mandatory due process steps. Such non-mandatory steps are:

• publishing a discussion document before an exposure draft;
• forming working groups;
• publishing a basis for conclusions;
• holding public hearings;
• conducting field tests.

3.4 IFRS ADVISORY COUNCIL

The IFRS Advisory Council provides a forum for participation by organisations and individuals with an interest in international financial reporting, having diverse geographical and functional backgrounds, with the objective of:

• advising the IASB on agenda decisions and priorities in the IASB's work;
• informing the IASB of the views of the organisations and individuals on the Council on major standard-setting projects;
• giving other advice to the IASB or the trustees.

Under the IFRSF Constitution, the Advisory Council has 30 or more members. The number is currently around 40. Members are appointed by the trustees for a renewable term of three years.

About the IASB's advisory bodies

The development and successful adoption of a single set of high-quality global financial reporting standards for use around the world requires regular input from a wide range of interested parties, widespread support for that objective, and confidence in the quality and relevance of information provided by IFRS. The formal advisory bodies of the IASB provide important channels for the IASB to receive that input and to consult interested parties. Meetings with formal advisory bodies are held in public and are webcast. Forthcoming meetings with advisory bodies are announced on the meetings diary on the IASB website, where recordings and observer notes are also made available.

The IASB has regular public meetings with the IFRS Advisory Council and with the Capital Markets Advisory Committee (CMAC) and the Global Preparers Forum (GPF), among others. The CMAC and the GPF are independent bodies established specifically to cooperate with the IASB and provide international channels for regular, public exchanges with the user and preparer communities. The SME Implementation Group makes recommendations to the IASB on the need to amend the IFRS for SMEs.

Moreover, the IASB establishes formal working groups for many of its major projects to provide additional practical input and expertise. Current working groups are as follows:

• Employee Benefits Working Group;
• Insurance Working Group;
• Joint International Group on Financial Statement Presentation;
• Financial Institution Advisory Group on Financial Statement Presentation;
• Financial Instruments Working Group;
• Lease accounting working group;

Source: www.ifrs.org/How+we+develop+standards/Working+groups.htm.

Supporting the objectives of the IFRS Foundation

All other activities undertaken by the IFRSF in support of the objectives of the organisation are managed by staff members of the Foundation. Those activities include:

• the creation of an XBRL taxonomy for IFRS and the IFRS for SMEs to facilitate the electronic use, exchange and comparability of financial data prepared in accordance with IFRS. This is done by the IFRS XBRL team;
• the production of high-quality, understandable and up-to-date material, including freely downloadable training material for the IFRS for SMEs, and the organisation of conferences and workshops about IFRS. These activities are grouped within the IFRS Foundation Education Initiative;
• the protection of the IFRS brand and the support of global convergence through addressing translation and copyright issues and contributing to the financing of the organisation through the provision of publication services. These activities are grouped under content management;
• operations, including the day-to-day management of and support for the organisation. Also included are communications, improving and expanding external relationships, and promoting a better understanding of the work of the organisation.

The next step in our journey is to introduce the framework, preface, standards and interpretations of IFRS.