Exceptions to the rule

The message from Anne McGeachin on international financial reporting standards (IFRS) was clear: "The IFRS must be applicable worldwide, and we therefore cannot go around exempting jurisdictions. The IFRS is principle-based. If we base the rules on judgement, we get a lot of rules. Specific rules for the Netherlands will set a precedent for all other jurisdictions."

This prompted nearly 90% of the Dutch Lower House to support a motion calling on the government to lobby internationally for a retention of the corridor approach within IAS19.

But an IPE analysis of the recent International Accounting Standards Board (IASB) workplan reveals that although IFRS literature does not contain a country-specific carve-out from the requirements of IFRS, between January 2006 and McGeachin's statement to IPE in May 2008, the London-based standard setter had embarked on no fewer than four projects to create a more favourable IFRS regime for Australia, New Zealand, the United Kingdom, Germany and China.

IPE can reveal that in the case of the Australian exemption, the IASB, caved in to pressure from the Canberra government to amend its consolidations standard, IAS27. Canberra demanded the change in order to meet the requirements of that country's retail banking sector.

Speaking during a 19 July 2007 IASB meeting, the standard setter's chairman Sir David Tweedie warned: "The government is prepared to carve it out in the law, but they have said, ‘would you clarify whether carry-over basis is appropriate?'" The accompanying observer notes explain: "The approach to providing relief would be to exempt the new parent from paragraph 37 of IAS27."

Sir David summed up the proposal as a limited-scope fix to grant group reorganisations an easement from measuring the new parent's investment in the previous parent at fair value. Although the observer notes do not refer to Australia, representatives of the Australian accounting and banking regulatory community packed the observer seats for this agenda item. They left on masse for the subsequent discussion on pensions accounting.

According to comments made by Sir David, the Australian Prudential Regulatory Authority: "… objected strongly to the retail banking side of it being at risk from other activities of the parent ... They demanded that it be isolated so that the risks did not flow across," he said. Sir David did not cite the Australian regulator's name in full during the meeting.

McGregor argued: "For good commercial reasons … organisations are undertaking a re-organisation of their corporate structures … [and] there is … in the minds of some an accounting impediment because some would see that particular paragraph in [IAS] 27 as applying to these sorts of re-arrangements." McGregor added that "these are not exchange transactions" and therefore fall "outside the scope of [IAS] 27".

IASB vice chairman Tom Jones warned the board: "I think practical considerations say ‘we should give them a break'."

The United Kingdom, in common with the Australians, has also sought a targeted amendment to IAS27. In a 27 April 2007 comment letter to the board, the Chartered Institute of Management Accountants noted: "Many subsidiary companies in the UK have not adopted IFRS as they are concerned that to do so introduces a ‘dividend trap'."

The letter continued: "IAS27 requires that if dividends have been paid by a subsidiary after acquisition, then it is necessary to determine whether those dividends have been paid from pre- or post-acquisition profits." CIMA's correspondence - labelled CL28 on the IASB IAS27 amendment project web page - came in response to an IASB bid to fix the so-called "dividend trap".

CIMA continued: "Dividends paid from pre-acquisition profits would need to be treated as a reduction in the cost of the investment rather than as distributable reserves of the parent. Where the subsidiary has been owned for many years it may be difficult and costly, if even possible, to research the necessary records."

Some IASB constituents have recently complained that the board's proposal to classify pension promises according to the accumulation phase, not the pay-out phase, creates new record-keeping difficulties.

"We are sure it is not the Board's wish to put some UK companies, and hence their shareholders, at an economic disadvantage if it can be avoided without reducing the quality of IFRS and we welcome the Board's intention to address this problem," CIMA concluded.

The UK carve-out returned to the board table on 21 June 2007. Although the then IASB technical director Liz Hickey did not once mention the United Kingdom by name, she did so by fact pattern. On 24 April 2007, the 100 Group of Companies wrote in CL05: "Where this is the case, the proposed exemption is likely to be unattractive to UK companies because the resulting write-down of the carrying value of the investment will reduce the distributable profits of the parent."

In what some might think is a strikingly similar argument, Hickey observed that: "They have been concerned that one of the solutions that we have proposed, that is perhaps the easiest solution to apply, will in the circumstances they are thinking about reduce the carrying amount of their investment in their subsidiary." She did not identify which constituent she meant by "they".

"While this problem could perhaps be overcome by determining the deemed cost based on the fair value of the subsidiary, there may be a reluctance among companies to incur the additional costs that would be associated with a fair valuation," concluded CIMA.

Summing up both this - as well as any potentially identical - fact pattern, project manager Amy Schmidt said: "In this particular instance, it is the subtraction of goodwill that's the issue … the comment letter opposition has some larger implications for the adoption of IFRS in the separate financial statements of parent companies, because what feedback has been is that ‘if you reduce what we show and have dividends distributable be reduced in any way, thank you but not thank you - that's more important to us than any cost benefit we may realise at this point'."

CIMA's solution, was to "allow the use of the carrying value of the investment in the subsidiary determined under previous GAAP as the deemed cost for IFRS purposes." Whichever jurisdiction she was referring to, Liz Hickey, summed up the demand from constituents in these terms: "The plea is a plea to continue doing what they have been doing," or, put simply, to use a local GAAP measure as a deemed cost for IFRS purposes.

IPE's review of the comment letters received by the IASB suggests that the plea did not emanate from Australia's Group of 100, the Norwegian Accounting Standards Board, the Bank of Russia, the Institute of Chartered Accountants in Australia, Germany's Institut der Wirtschaftsprüfer, nor the Dutch Accounting Standards Board, among others.

Hong Kong strongly supported the British submission, as did the Fédération des Experts Comptables Européens - IASB erroneously labelled its comment letter 47 as a Malaysian submission.

Canada, however, argued strongly against granting any concession: "We are concerned with using pre-acquisition accumulated profits under previous GAAP as a proxy for IFRS amounts. If it is not reasonably practical to determine IFRS amounts, we suggest that consideration be given to including all distributions in income, coupled with an impairment test of the investment post-distribution," they wrote.

To ease the transition of British - and potentially, Hong Kong - subsidiary companies to IFRS, the IASB issue a revised exposure draft (ED) in December 2007. The ED permitted the use of a previous GAAP carrying amount, while the Australians secured their amendment to IAS27. Neither amendment is expressed as a jurisdiction-specific change. Both UK and Australian comment letters recorded broad satisfaction with the revised ED.

It is not only nation states that have succeeded in persuading the IASB to back down. New Zealand dairy co-operative, Fonterra, succeeded in securing IASB's agreement to mould IFRS to suit itself. At its 20 September 2005 meeting, the board voted to give co-operatives in general, and, in effect, Fonterra in particular, a scope exemption from the requirements of IAS32, Financial Instruments: Disclosure and Presentation.

The Fonterra issue arose because, under IAS32, a member share in that co-operative, puttable at fair value, counted not as equity but as a liability. In practical terms, the original requirements of IAS 32 meant that the better a co-operative performed, the greater its liabilities.

Given the proliferation of co-operative structures in Europe, IASB found it impossible to limit the IAS32 relief project to New Zealand's dairy farmers, widening the eventual scope of the relief to capture German commercial partnership structures.

On 24 May 2006, IASB added a project to its agenda amending IAS24 Related Party Disclosures. The project will focus on two aspects of IAS24, one of which granted reliefs from the requirements of IAS24 for entities with significant state ownership when they have transactions with similar entities. China's state-controlled entities are expected to benefit substantially from the amendment project.

Food for thought no doubt for the Dutch MPs who supported this May's motion to lobby for a retention of the corridor approach.