QUESTION 3 a. As level 300 students who have just been trained on the standard s

Question

QUESTION 3 a. As level 300 students who have just been trained on the standard setting process by IASB, you are asked to make a short presentation to a panel in the accounting department about the standard setting process adopted by the International Accounting Standards Board. Explain the standard setting process as adopted by the IASB to the panel. (4 marks) containing the qualitative characteristics of financial statements. Explain three each of fundamental and enhancing characteristics of financial statements Required: b. The IASB's Conceptual Framework for Financial Reporting has one of its chapters Required: in the context of financial reporting. (3 marks) c. Explain borrowing costs in accordance with IAS 23 and state the three conditions (3 marks) (Total 10 marks) necessary for the commencement of capitalization of borrowing costs.

Explanation / Answer

Part - A )

The Standard Setting Process
International Financial Reporting Standards (IFRSs) are developed through an international
consultation process, the "due process", which involves interested individuals and
organisations from around the world.
The due process comprises six stages, with the Trustees of the IFRS Foundation having the
opportunity to ensure compliance at various points throughout:
1. Setting the agenda
2. Planning the project
3. Developing and publishing the discussion paper
4. Developing and publishing the exposure draft
5. Developing and publishing the standard
6. After the standard is issued

1. Setting the agenda
The IASB, by developing high quality financial reporting standards, seeks to address a
demand for better quality information that is of value to those users of financial reports.
When deciding whether a proposed agenda item will address users’ needs the IASB
considers:

To help the IASB in considering its future agenda, its’ staff is asked to identify, review and
raise issues that might warrant the IASB’s attention. New issues may also arise from a
change in the IASB’s Conceptual Framework for Financial Reporting.
In addition, the IASB raises and discusses potential agenda items in the light of comments
from other standard-setters and other interested parties, the IFRS Advisory Council and the
IFRS Interpretations Committee, and staff research and other recommendations.
In making decisions regarding its agenda priorities, the IASB also considers factors related
to its convergence initiatives with accounting standard-setters. The IASB’s approval to add
agenda items, as well as its decisions on their priority, is by a simple majority vote at an
IASB meeting.

2. Planning the project
When adding an item to its active agenda, the IASB decides whether to conduct the project
alone or jointly with another standard-setter. Similar due process is followed under both
approaches.
When considering whether to add an item to its active agenda, the IASB may determine that
it meets the criteria to be included in the annual improvements process. The IASB assesses
the issue against criteria such as

All criteria must be met to qualify for inclusion in annual improvements.
Once this assessment is made, the amendments included in the annual improvements
process will follow the same due process as other IASB projects. The primary objective of
the annual improvements process is to enhance the quality of IFRSs by amending existing
IFRSs to clarify guidance and wording, or correcting for relatively minor unintended
consequences, conflicts or oversights.

After considering the nature of the issues and the level of interest among constituents, the
IASB may establish a working group at this stage and a project team for the project will be
selected. The project manager draws up a project plan under the supervision of the
directors of the technical staff and the project team may also include members of staff from
other accounting standard-setters, as deemed appropriate by the IASB.

3. Developing and publishing the discussion paper
A discussion paper is not a mandatory step in the IASB’s due process. Normally the IASB
publishes a discussion paper as its first publication on any major new topic as a vehicle to
explain the issue and solicit early comment from constituents. If the IASB decides to omit
this step, it will state its reasons.
Typically, a discussion paper includes a comprehensive overview of the issue, possible
approaches in addressing the issue, the preliminary views of its authors or the IASB, and an
invitation to comment. This approach may differ if another accounting standard-setter
develops the research paper.
Discussion papers may result either from a research project being conducted by another
accounting standard-setter or as the first stage of an active agenda project carried out by the
IASB. If research has been performed by another accounting standard-setter, issues related
to the discussion paper are discussed in IASB meetings, and publication of such a paper
requires a simple majority vote by the IASB. If the discussion paper includes the preliminary
views of other authors, the IASB reviews the draft discussion paper to ensure that its
analysis is an appropriate basis on which to invite public comments.
For discussion papers on agenda items that are under the IASB’s direction, or include the
IASB’s preliminary views, the IASB develops the paper or its views on the basis of analysis
drawn from staff research and recommendations, as well as suggestions made by the IFRS
Advisory Council, working groups and accounting standard-setters and presentations from
invited parties. All discussions of technical issues related to the draft paper take place in
public sessions.
When the draft is completed and the IASB has approved it for publication the discussion
paper is published to invite public comment. The IASB normally allows a period of 120 days
for comment on a discussion paper, but may allow a longer period on major projects (which
are those projects involving pervasive or difficult conceptual or practical issues).
After the comment period has ended the project team analyses and summarises the
comment letters for the IASB’s consideration. Comment letters are posted on the IASB’s
website. In addition, a summary of the comments is posted on their website as a part of
IASB meeting observer notes.
If the IASB decides to explore the issues further, it may seek additional comment and
suggestions by conducting field visits, or by arranging public hearings and round-table
meetings.

4. Developing and publishing the exposure draft
Publication of an exposure draft is a mandatory step in due process. An exposure draft is
the IASB’s main vehicle for consulting the public. Unlike a discussion paper, an exposure
draft sets out a specific proposal in the form of a proposed IFRS (or amendment to an IFRS).
The development of an exposure draft begins with the IASB considering issues on the basis
of staff research and recommendations, as well as comments received on any discussion
paper, and suggestions made by the IFRS Advisory Council, working groups and accounting
standard-setters and arising from public education sessions.
After resolving issues at its meetings, the IASB instructs the staff to draft the exposure draft.
When the draft has been completed, and the IASB has balloted on it, with a minimum of nine
votes necessary to publish an exposure draft, the IASB publishes it for public comment.
An exposure draft contains an invitation to comment on a draft IFRS, or draft amendment to
an IFRS, that proposes requirements on recognition, measurement and disclosures. The
draft may also include mandatory application guidance and implementation guidance, and
will be accompanied by a basis for conclusions on the proposals and the alternative views of
dissenting IASB members (if any).
The IASB normally allows a period of 120 days for comment on an exposure draft. If the
matter is exceptionally urgent, the document is short, and the IASB believes that there is
likely to be a broad consensus on the topic, the IASB may consider a comment period of no
less than 30 days, but it will set such a short period only after formally requesting and
obtaining prior approval from 75 per cent of the Trustees. The project team collects,
summarises and analyses the comments received for the IASB’s deliberation.
After the comment period ends, the IASB reviews the comment letters received and the
results of other consultations. As a means of exploring the issues further, and soliciting
further comments and suggestions, the IASB may conduct field visits, or arrange public
hearings and round-table meetings. The IASB is required to consult the IFRS Advisory
Council and maintains contact with various groups of constituents.

5. Developing and publishing the standard
The development of an IFRS is carried out during IASB meetings, when the IASB considers
the comments received on the exposure draft. Changes from the exposure draft are posted
on the website.
After resolving issues arising from the exposure draft, the IASB considers whether it should
expose its revised proposals for public comment, for example by publishing a second
exposure draft. If the IASB decides that re-exposure is necessary, the due process to be
followed is the same as for the first exposure draft
As it moves towards completing a new IFRS or major amendment to an IFRS, the IASB
prepares a project summary and feedback statement. These give direct feedback to those
who submitted comments on the exposure draft, identify the most significant matters raised
in the comment process and explain how the IASB responded to those matters.
At the same time, the IASB prepares an analysis of the likely effects of the forthcoming IFRS or major amendment. The analysis will therefore attempt to assess the likely effects of the new IFRS on:

When the IASB is satisfied that it has reached a conclusion on the issues arising from the exposure draft, it instructs the staff to draft the IFRS. A pre-ballot draft is usually subject to external review, normally by the IFRS Interpretations Committee. Shortly before the IASB ballots the standard, a near-final draft is posted on its limited access website for paying subscribers. Finally, after the due process is completed, all outstanding issues are resolved, and the IASB members have balloted in favour of publication, the IFRS is issued, followed by publication of any project summary and feedback statement and any effect analysis.

6. After the standard is issued
After an IFRS is issued, IASB members and staff hold regular meetings with interested parties, including other standard-setting bodies, to help understand unanticipated issues related to the practical implementation and potential impact of its provisions. The IFRS Foundation also fosters educational activities to ensure consistency in the application of IFRSs.
The IASB carries out a post-implementation review of each new IFRS or major amendment. This is normally carried out two years after the new requirements have become mandatory and been implemented. Such reviews are normally limited to important issues identified as contentious during the development of the pronouncement and consideration of any unexpected costs or implementation problems encountered. A review may also be prompted by:

The review may lead to items being added to the IASB’s agenda. The IASB may also continue informal consultations throughout the implementation of the IFRS or amendment.

Part - B )

The following are all characteristics of financial statements:

Part - C )

BORROWING COSTS - IAS 23

Objective of IAS 23

The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs. Borrowing costs include interest on bank overdrafts and borrowings, finance charges on finance leases and exchange differences on foreign currency borrowings where they are regarded as an adjustment to interest costs.

Key definitions

Borrowing cost may include: [IAS 23.6]

This standard does not deal with the actual or imputed cost of equity, including any preferred capital not classified as a liability pursuant to IAS 32. [IAS 23.3]

A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. [IAS 23.5] That could be property, plant, and equipment and investment property during the construction period, intangible assets during the development period, or "made-to-order" inventories. [IAS 23.6]

Scope of IAS 23

Two types of assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:

Accounting treatment

Recognition

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset and, therefore, should be capitalised. Other borrowing costs are recognised as an expense. [IAS 23.8]

Measurement

Where funds are borrowed specifically, costs eligible for capitalisation are the actual costs incurred less any income earned on the temporary investment of such borrowings. [IAS 23.12] Where funds are part of a general pool, the eligible amount is determined by applying a capitalisation rate to the expenditure on that asset. The capitalisation rate will be the weighted average of the borrowing costs applicable to the general pool. [IAS 23.14]

Capitalisation should commence when expenditures are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress (may include some activities prior to commencement of physical production). [IAS 23.17-18] Capitalisation should be suspended during periods in which active development is interrupted. [IAS 23.20] Capitalisation should cease when substantially all of the activities necessary to prepare the asset for its intended use or sale are complete. [IAS 23.22] If only minor modifications are outstanding, this indicates that substantially all of the activities are complete. [IAS 23.23]

Where construction is completed in stages, which can be used while construction of the other parts continues, capitalisation of attributable borrowing costs should cease when substantially all of the activities necessary to prepare that part for its intended use or sale are complete. [IAS 23.24]

Disclosure [IAS 23.26]

When capitalization to start:

When following conditions are satisfied then capitalization is commenced.

1. Expenditure for the acquisition, construction or production of a qualifying asset is being incurred;

2. Borrowing costs are being incurred; and

3. Activities that are necessary to prepare the asset for its intended use or sale are in progress.

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