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Experts split on need for extractive IFRS

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13th Aug 2010
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The ICAEW’s Financial Reporting Faculty stand against proposals for an international accounting standard for extractive industries has angered transparency campaigners.

The faculty went public last week with its response to an IASB discussion paper proposing enhancements to the existing IFRS 6 Exploration for and Evaluation of Mineral Resources.

The IASB project is intended to address a lack of consistency for reporting the risks and costs associated with acquiring property and exploiting its mineral resources.

But Dr Nigel Sleigh-Johnson, head of the Financial Reporting faculty, warned that industry-specific standards such IFRS 6 made comparisons between companies across industry sectors more difficult.

“If we are to achieve a global reporting language the standards need to be consistent not only across country borders but also across industry sectors,” he argued.

The institute experts urged the IASB to look again at the scope exemptions for extractive industries within existing standards to see if they couldn’t be accommodated within international GAAP.

But tax justice campaigner Richard Murphy, who submitted evidence to the IASB project as part of the Publish What You Pay initiative, accused the Financial Reporting faculty of blocking moves to improve international transparency through country-by-country financial reporting.

But when stronger seqmental reporting requirements were suggested for IFRS 8 a few years ago, professional bodies including the ICAEW objected to the idea, Murphy said. “We’re quite happy for a standard-by-standard approach, but come on guys, you can’t have it both ways.”

Murphy argues that extractive industries do have unique features that merit special accounting treatments. “They are remarkably immobile, and stuck into the ground in a particular country.”

Many of the businesses that would be covered by the new standard operate in developing countries and are often associated with corruption. “It’s an area with enormous reputational risks,” Murphy explained. “Immateriality is wholly inappropriate when applied to this industry. Risks are tied to locations and ability to recover from risks. In [BP CEO] Tony Hayward’s words immaterial events like the Deepwater Horizon disaster are literally a drop in the ocean, but when it happens, it’s catastrophic. This is an industry with enormous long-term consequences.”

The World Bank has also supported the move to country-by-country reporting, Murphy claimed, “Because we don’t know about the flows of finance through this industry. We don’t know where oil is being sourced from, and how it moves within companies.”

Demanding more transparency from multinational organisations raises political hackles within a profession that shies away from any hint of social campaigning. But Murphy argues that standards-setters and those who oppose reforming proposals are turning their backs on the wider relevance of financial reporting.

“What is extraordinary about this whole process, whether extractive or country by country reporting as a whole, are the straightforward objections by the profession that information will be used by anybody other than those who buy and sell shares,” he said.

“When it started in the 1970s, the Accounting Standards Committee identified 15 different user groups for corporate reports, and eight stakeholder groups, including civil society and government. Who owns this company and how much tax does it pay were reaonable questions to ask of accounts. Here in 2010, we’re still asking those questions on behalf of government and civil society. How far has accountancy retrenched in its broad view of society? The IASB has narrowed the reporting horizon down to the narrow view of someone who is buying or selling shares. Stewardship has been almost entirely lost within international standards.”

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By shoshana
20th Aug 2010 10:50

Purpose of IFRS

I am not sure that one of the purposes of IFRS is to provide the sort of information which has been mentioned in the article (I am not saying I necessarily disagree with the proposed disclosures mentioned).

Isn't it up to lawmakers (such as the EU, US Government) to dictate disclosures which I see as going beyond the scope of accounting principles and rules? We already have Company Law and UK Listing Rules which add a layer of disclosure on top of that required by the accounting standard setters.

To address a further point in the article, if extractive companies had to follow general IFRS then they would have to write off all their exploration and exploration costs as they incur them. This would represent a major change in a well-established accounting practice.

I have to say that I am disappointed with the DP on Extractive Industries. It appears to fail to address some of the problems with the current incumbent, IFRS 6, in that companies are allowed to choose which costs they treat as exploration assets within a very widely drawn definition. This leads to inconsistency between preparers which actually impact upon earnings and balance sheet comparisons. For example some companies write off geological and geophysical study costs while others capitalise them.

I think that these issues of consistency need to be addressed ahead of any additional disclosures.

Malcolm Greenbaum

Director, Greenbaum Training and Consultancy Limited

IFRS, UK GAAP, US GAAP, UK Tax and VAT

 

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