This Chapter includes topics currently under debate and all recent changes and standards issued by the IASB. The following have been incorporated in the chapter:

  1. Practice Statement Management Commentary
  2. IFRS 1 First Time Adoption of International Financial Reporting Standards
  3. Convergence with US GAAP
  4. IAS 21 – Does it need amending
  5. The IASB‘s Principles of Disclosure Initiative
  6. Future trends in sustainability reporting


What is management commentary?

Management commentary is a narrative report that provides a context within which to interpret the financial position, financial performance and cash flows of an entity. It also provides management with an opportunity to explain its objectives and its strategies for achieving those objectives. Users routinely use the type of information provided in management commentary to help them evaluate an entity‘s prospects and its general risks, as well as the success of management‘s strategies for achieving its stated objectives. For many entities, management commentary is already an important element of their communication with the capital markets, supplementing as well as complementing the financial statements.


The objective of the Practice Statement is to assist management in presenting useful management commentary that relates to financial statements that have been prepared in accordance with International Financial Reporting Standards (IFRSs).


The Practice Statement applies only to management commentary and not to other information presented in either the financial statements or the broader financial reports.

Framework for the presentation of management commentary


  • Management commentary should provide users of financial statements with integrated information that provides a context for the related financial statements. Such information explains management‘s view not only about what has happened, including both positive and negative circumstances, but also why it has happened and what the implications are for the entity‘s future.
  • Management commentary complements and supplements the financial statements by communicating integrated information about the entity‘s resources and the claims against the entity and its resources, and the transactions and other events that change them.
  • Management commentary should also explain the main trends and factors that are likely to affect the entity‘s future performance, position and progress. Consequently, management commentary looks not only at the present, but also at the past and the future.


In aligning with those principles, management commentary should include:

  • Forward-looking information; and
  • Information that possesses the qualitative characteristics described in the Conceptual Framework for Financial Reporting.

Management commentary should provide information to help users of the financial reports to assess the performance of the entity and the actions of its management relative to stated strategies and plans for progress. That type of commentary will help users of the financial reports to understand, for example:

  • The entity‘s risk exposures, its strategies for managing risks and the effectiveness of those strategies;
  • How resources that are not presented in the financial statements could affect the entity‘s operations; and
  • How non-financial factors have influenced the information presented in the financial statements.


Management commentary should be clear and straightforward. The form and content of management commentary will vary between entities, reflecting the nature of their business, the strategies adopted by management and the regulatory environment in which they operate.

Elements of management commentary

Although the particular focus of management commentary will depend on the facts and circumstances of the entity, management commentary should include information that is essential to an understanding of:

  • The nature of the business;
  • Management‘s objectives and its strategies for meeting those objectives;
  • The entity‘s most significant resources, risks and relationships;
  • The results of operations and prospects; and
  • The critical performance measures and indicators that management uses to evaluate the entity‘s performance against stated objectives.

Application date

An entity may apply this Practice Statement to management commentary presented prospectively from 8 December 2010.


A first-time adopter of IFRSs is an entity that presents IFRS financial statements for the first time, and fully complies with the requirements of IFRSs.

The special requirements for a first-time adopter are set out in IFRS 1.

  • A first-time adopter must adjust its statement of financial position produced under ‘local GAAP’ to a statement of financial position produced using IFRSs.
  • This adjustment should be made by ‘retrospective application’ of the IFRSs.
  • In order to make adjustments to move from a statement of financial position prepared under local GAAP to a statement of financial position prepared with IFRSs, a number of prior year adjustments must be made for all the accounting policy changes. These adjustments are made in the financial statements by adjusting the opening reserves in the first-time adopter’s opening IFRS statement of financial position. These adjustments are usually made to the accumulated profits reserve (retained profits reserve).

Opening statement of financial position of a first-time adopter

The retrospective application of IFRSs means that adjustments are made to the first-time adopter’s opening statement of financial position. This is the entity’s statement of financial position at the date of transition to IFRSs.

IFRS 1 defines the date of transition to IFRSs as ‘the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements.’

IFRS 1 also states that an entity must use the same accounting policies in its opening IFRS statement of financial position and throughout all the financial periods presented in its first IFRS financial statements. These should be the IFRSs that apply as at the reporting date for the first IFRS financial statements (and any previous versions of IFRSs that may have applied at earlier dates should not be used).

Example 1

A company was a first-time adopter of IFRS and prepared its first IFRS financial statements for the year to 31 December 2003. In its financial statements, it prepared comparative financial information for the previous financial year.

The previous financial year is the year to 31 December 2004.

The date of transition to IFRS is the beginning of this period, which is 1 January 2004.

The opening IFRS statement of financial position of this first-time adopter is therefore 1st January 2004. The adjustments made by retrospective application of IFRSs must therefore be made to a statement of financial position as at this date.

Opening IFRS statement of financial position: exemptions from IFRSs

The general rule in IFRS 1 is that in the opening IFRS statement of financial position, a first-time adopter must:

  • recognise all assets and liabilities whose recognition is required by IFRSs  Not recognise assets or liabilities if IFRSs do not permit such recognition
  • Re-classify items recognised under the previous GAAP as one type of asset, liability or component of equity if IFRSs require that they should be classified differently  Apply IFRSs in measuring all assets and liabilities.

Main exemptions from applying IFRS in the opening IFRS statement of financial position

  • Property, plant and equipment, investment properties and intangible assets
    • Fair value/previous GAAP revaluation may be used as a substitute for cost at date of transition to IFRSs.
  • Business combinations

For business combinations prior to the date of transition to IFRSs:

  • The same classification (acquisition or uniting of interests) is retained as under previous GAAP.
  • For items requiring a cost measure for IFRSs, the carrying value at the date of the business combination is treated as deemed cost and IFRS rules are applied from thereon.
  • Items requiring a fair value measure for IFRSs are revalued at the date of transition to IFRS.

The carrying value of goodwill at the date of transition to IFRSs is the amount as reported under previous GAAP.

  • Employee benefits
    • Unrecognised actuarial gains and losses can be deemed zero at the date of transition to IFRSs. IAS 19 is applied from then on.
  • Cumulative translation differences on foreign operations
    • Translation differences (which must be disclosed in a separate translation reserve under IFRS) may be deemed zero at the date of transition to IFRS. IAS 21 is applied from then on.
  • Adoption of IFRS by subsidiaries, associates and joint ventures

If a subsidiary, associate or joint venture adopts IFRS later than its parent, it measures its assets and liabilities:

  • Either: At the amount that would be included in the parent‘s financial statements, based on the parent‘s date of transition
  • Or: At the amount based on the subsidiary (associate or joint venture)‘s date of transition.

Presentation and disclosure by a first-time adopter

IFRS 1 requires that a first-time adopter must include at least one year of comparative information in its first IFRS financial statements. (This is why the date of transition to IFRS cannot be later than the beginning of the previous financial year).

IFRS 1 also requires a first-time adopter to disclose the following reconciliations:

  • A reconciliation of equity that was reported under the previous GAAP with the equity reported under IFRSs, for both of the following dates: (1) the date of transition to IFRS and (2) the end of the last financial period in which the entity presented its financial statements under the previous GAAP.
  • For example, suppose that a first-time adopter presents just one year of comparative information, and prepared its first IFRS financial statements for the year to 31 December 2005. The reconciliation of equity between ‘old GAAP’ and IFRSs should be made for both 1 January 2004 and 31 December 2004.
  • A reconciliation of the profit or loss reported under the previous GAAP and the profit or loss using IFRSs, for the entity’s most recent financial period before adopting IFRSs.
  • If the entity recognises impairment losses for the first time in its opening IFRS statement of financial position, it should provide the information that would have been required by IAS 36 Impairment of assets if the impairment losses had been recognised in the financial period beginning with the date of transition to IFRS.


International Harmonisation

Comparable, transparent, and reliable financial information is fundamental for the smooth functioning of capital markets. In the global arena, the need for comparable standards of financial reporting has become paramount because of the dramatic growth in the number, reach, and size of multinational corporations, foreign direct investments, cross-border purchases and sales of securities, as well as the number of foreign securities listings on the stock exchanges. However, because of the social, economic, legal, and cultural differences among countries, the accounting standards and practices in different countries vary widely. The credibility of financial reports becomes questionable if similar transactions are accounted for differently in different countries.

To improve the comparability of financial statements, harmonization of accounting standards is advocated. Harmonization strives to increase comparability between accounting principles by setting limits on the alternatives allowed for similar transactions. Harmonization differs from standardization in that the latter allows no room for alternatives even in cases where economic realities differ.

Advantages and disadvantages of harmonisation

There are some strong arguments in favour of the harmonisation of accounting standards in all countries of the world, and in particular for the convergence of US GAAP and IFRSs.

However, there are also some arguments against harmonisation -even though these are probably not as strong as the arguments in favour.

Advantages of harmonisation

  1. Investors and analysts of financial statements can make better comparisons between the financial position, financial performance and financial prospects of entities in different countries. This is very important, in view of the rapid growth in international investment by institutional investors.
  2. For international groups, harmonisation will simplify the preparation of group accounts. If all entities in the group share the same accounting framework, there should be no need to make adjustments for consolidation purposes.
  3. If all entities are using the same framework for financial reporting, management should find it easier to monitor performance within their group.
  4. Global harmonisation of accounting framework may encourage growth in cross-border trading, because entities will find it easier to assess the financial position of customers and suppliers in other countries.
  5. Access to international finance should be easier, because banks and investors in the international financial markets will find it easier to understand the financial information presented to them by entities wishing to raise finance.

Disadvantages of harmonisation

  1. National legal requirements may conflict with the requirements of IFRSs. Some countries may have strict legal rules about preparing financial statements, as the statements are prepared mainly for tax purposes. Consequently, laws may need re-writing to permit the accounting policies required by IFRSs.
  2. Some countries may believe that their framework is satisfactory or even superior to IFRSs. This has been a problem with the US, although currently is not as much of an issue as in the past.
  3. Cultural differences across the world may mean that one set of accounting standards will not be flexible enough to meet the needs of all users.

Convergence with US GAAP

The IASB and the US Financial Accounting Standards Board (FASB) have been working together since 2002 to achieve convergence of IFRSs and US generally accepted accounting principles (GAAP).

A common set of high quality global standards remains a priority of both the IASB and the FASB.

In September 2002 the IASB and the FASB agreed to work together, in consultation with other national and regional bodies, to remove the differences between international standards and US GAAP. This decision was embodied in a Memorandum of Understanding (MoU) between the boards known as the Norwalk Agreement.

The boards‘ commitment was further strengthened in 2006 when the IASB and FASB set specific milestones to be reached by 2008 (A roadmap for convergence 20062008).

Norwalk Agreement (MoU)

At their joint meeting in Norwalk, Connecticut, USA on September 18, 2002, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) each acknowledged their commitment to the development of high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting.

To achieve compatibility, the FASB and IASB (together, the ―Boards‖) agree, as a matter of high priority, to undertake a short-term project aimed at removing a variety of individual differences between U.S.

GAAP and International Financial Reporting Standards (IFRSs, which include International Accounting Standards, IASs);

In 2008 the two boards issued an update to the MoU, which identified a series of priorities and milestones to complete the remaining major joint projects by 2011, emphasising the goal of joint projects to produce common, principle-based standards instead of ‘rule based approach’ followed by FASB.

Common conceptual framework

In October 2004 the IASB and FASB agreed to develop a common conceptual framework which would be a significant step towards harmonisation of future standards. The project has been divided into two phases:

  • The initial focus is on particular aspects of the frameworks dealing with objectives, qualitative characteristics, elements, recognition, and measurement, giving priority to issues affecting projects for new/ revised Standards.
  • Later, they will consider the applicability of those concepts to other sectors, beginning with not for profit entities in the private sector.

Memorandum of understanding

In February 2006, the two Boards signed a ‘Memorandum of Understanding’. This laid down a ‘roadmap of convergence’ between IFRSs and US GAAP in the period 2006-2008.

The aim was to remove by 2009 the requirement for foreign companies reporting under IFRSs listed on a US stock exchange to have to prepare a reconciliation to US GAAP.

Events moved faster than expected, and in November 2007 the US Securities and Exchange Commission

(SEC) decided to allow non-US filers to report under IFRSs for years ended after 15 November 2007 with no reconciliation to US GAAP.

Consultation is also underway on the possibility of the use of IFRSs by US filers. In November 2008, the SEC published a proposal, titled Roadmap for the Potential Use of Financial Statements Prepared in accordance with International Financial Reporting Standards by U.S. Issuers. The proposed roadmap sets out milestones that, if achieved, could lead to the adoption of IFRSs in the US in 2014.

It also proposes to permit the early adoption of IFRSs from 2010 for some US entities.

FASB/IASB projects

Some of the main results of the convergence project between FASB and the IASB have been:

  • The issue of IFRS 5 Non-current assets held for sale and discontinued operations
  • The issue of IFRS 8 Operating segments
  • Revision of IAS 23 Borrowing costs, to align with US GAAP
  • Revision of IAS 1 Presentation of financial statements and an agreement on common wording to be used in accounting standards
  • Revision of IFRS 3 Business combinations and IAS 27 Consolidated and separate financial statements
  • The issue of IFRS 9 Financial instruments, exposure drafts on impairment and hedging
  • There are also Discussion Papers, Exposure drafts or completed/revised IFRSs on the following topics:
    1. Conceptual Framework
    2. Financial statements presentation
  • Leases
  1. Revenue Recognition
  2. Fair value measurement
  3. Income taxes Pension accounting


The International Accounting Standards Board (IASB) recently initiated a research project, which examined a previous research. This research considered whether any work on IAS 21, The Effects of Changes in Foreign Exchange Rates, was appropriate. The following text looks at some of the issues raised by the project in the context of IAS 21.

The foreign exchange market is affected by many factors, and in countries with a floating exchange rate, their foreign exchange rates are inevitably exposed to volatility due to the effects of the different factors influencing the market. For example, the ongoing problem of Greece repaying its enormous debts has significantly affected the value of the euro.

As the barriers to international flows of capital are further relaxed, the volatility of the foreign exchange market is likely to continue. This volatility affects entities that engage in foreign currency transactions and there has been a resultant call in some quarters to amend IAS 21.

IFRS 7, Financial Instruments: Disclosure requires disclosure of market risk, which is the risk that the fair value or cashflows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects, in part, currency risk. In IFRS 7, the definition of foreign currency risk relates only to financial instruments. IFRS 7 and IAS 21 have a different conceptual basis. IFRS 7 is based upon the distinction between financial/non-financial elements, whereas IAS 21 utilises the monetary/non-monetary distinction.

The financial/non-financial distinction determines whether an item is subject to foreign currency risk under IFRS 7, whereas translation in IAS 21 uses monetary/non-monetary distinction, thereby possibly causing potential conceptual confusion. Foreign currency risk is little mentioned in IAS 21 and on applying the definition in IFRS 7 to IAS 21, non-financial instruments could be interpreted as carrying no foreign currency risk. Under IAS 21, certain monetary items include executory contracts, which do not meet the definition of a financial instrument. These items would be translated at the closing rate, but as such items are not financial instruments, they could be deemed not to carry foreign currency risk under IFRS 7.

Foreign currency translation should be conceptually consistent with the conceptual framework. IAS 21 was issued in 1983 with the objective of prescribing how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency.

There is little conceptual clarification of the translation requirements in IAS 21. The requirements of IAS 21 can be divided into two main areas: the reporting of foreign currency transactions in the functional currency; and the translation to the presentation currency. Exchange differences arising from monetary items are reported in profit or loss in the period, with one exception which is that exchange differences arising on monetary items that form part of the reporting entity‘s net investment in a foreign operation are recognised initially in other comprehensive income, and in profit or loss on disposal of the net investment.

However, it would be useful to re-examine whether it is more appropriate to recognise a gain or loss on a monetary item in other comprehensive income instead of profit or loss in the period and to define the objective of translation. Due to the apparent lack of principles in IAS 21, difficulty could arise in determining the nature of the information to be provided on translation.

There is an argument that the current accounting standards might not reflect the true economic substance of long-term monetary assets and liabilities denominated in foreign currency because foreign exchange rates at the end of the reporting period are used to translate amounts that are to be repaid in the future. IAS 21 states that foreign currency monetary amounts should be reported using the closing rate with gains or losses recognised in profit or loss in the period in which they arise, even when the rate is abnormally high or low.

There are cases where an exchange rate change is likely to be reversed, and thus it may not be appropriate to recognise foreign exchange gains or losses of all monetary items as realised gains or losses. Thus there is an argument that consideration should be given as to whether foreign exchange gains or losses should be recognised in profit or loss or in other comprehensive income (OCI) based on the distinction between current items and non-current items.

Any potential fluctuation in profit or loss account would be reduced by recognising in OCI those foreign exchange gains or losses of non-current items with a high possibility of reversal. Furthermore, the question would arise as to whether these items recognised in OCI could be reclassified.

However, the IASB is currently determining via its conceptual framework project the purpose and nature of OCI, as there is no obvious principle that drives gains and losses out of profit or loss and into OCI, and there is no shared view among the IASB‘s constituents about what should be in profit or loss and what should be in OCI.

IAS 21 does provide some guidance on non-monetary items by stating that when a gain or loss on a nonmonetary item is recognised in OCI, any exchange component of that gain or loss shall be recognised in OCI.

Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss.

Long-term liabilities

In the case of long-term liabilities, although any translation gains must be recognised in profit or loss, and treated as part of reported profit, in some jurisdictions, these gains are treated as unrealised for the purpose of computing distributable profit.

The reasoning is that there is a greater likelihood in the case of long-term liabilities that the favourable fluctuation in the exchange rate will reverse before repayment of the liability falls due.

As stated already, IAS 21 requires all foreign currency monetary amounts to be reported using the closing rate; non-monetary items carried at historical cost are reported using the exchange rate at the date of the transaction and non-monetary items carried at fair value are reported at the rate that existed when the fair values were determined. As monetary items are translated at the closing rate, although the items are not stated at fair value, the use of the closing rate does provide some fair value information. However, this principle is not applied to non-monetary items as, unless an item is measured at fair value, the recognition of a change in the exchange rate appears not to provide useful information.

A foreign operation is defined in IAS 21 as a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity. Thus the definition of a foreign operation is quite restrictive. It is possible to conduct operations in other ways; for example, using a foreign broker. Therefore, the definition of a foreign operation needs to be based upon the substance of the relationship and not the legal form.

Although the exchange rate at the transaction date is required to be used for foreign currency transactions at initial recognition, an average exchange rate may also be used. The date of a transaction is the date on which the transaction first qualifies for recognition in accordance with International Financial Reporting Standards. For practical reasons, a rate that approximates to the actual rate at the date of the transaction is often used. For example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.

Average exchange rate

A question arises as to which exchange rate to use and therefore it would be useful to have more specific guidance on the use of the average exchange rate. IAS 21 allows a certain amount of flexibility in calculating the average rate. The determination of the average rate depends upon factors such as the frequency and value of transactions, the period over which the rate will apply and the nature of the entity‘s systems. There are a large number of methods that can be used to calculate the average rate, but no guidance is given in IAS 21 as to how such a rate is determined.

The IASB has completed its initial assessments on this project and decided that narrow scope amendments were unnecessary. In May 2015, it had no plans to undertake any additional work and is to remove this project from the research programme, subject to feedback in the next agenda consultation.

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