Appendix C: Case Study Illustrating Possible Supplemental Treatments Under the IOSCO Recommendations

Appendix C: Case Study Illustrating Possible Supplemental Treatments Under the IOSCO Recommendations

Company X has presented its financial statements under International Accounting Standards (IAS) and is seeking listing on the national stock exchange of Country Y. The securities regulator of Country Y is a member of the IOSCO. It has recently decided to accept financial statements prepared under IAS. However, supplemental treatments as envisaged by the IOSCO recommendations would need to be made for the purposes of listings on its national stock exchange.

A local practitioner, who is also an IAS expert, was consulted by Company X. The consultant pointed out the following items that would need to be adjusted before the financial statements could be presented to the stock exchange in Country Y:

1. Amortization of intangible assets over twenty-five years by the company as permitted by IAS 38;

2. Revaluation of building with disclosures strictly according to IAS 16;

3. Immediate expensing of borrowing costs relating to certain qualifying assets as permitted by IAS 23; and

4. Use of the "true and fair" override with respect to translation of monetary liabilities. Accounts payable denominated in a foreign currency were not translated at year-end rates because that would have resulted in the company recognizing income of $2 million. Strictly applying IAS 21, this translation gain would need to be booked to income. However, since the company was certain that when it would ultimately repay these amounts such a difference in the amount payable would not result, and thus, recognizing this huge sum as income would not be proper. It therefore invoked the "true and fair" override provisions of IAS 1 and did not recognize this income.

The following possible supplemental adjustments are required before Company X is allowed to list its shares on the national stock exchange of Country Y:

1. The GAAP in Country Y allows intangible assets to be amortized over five years. Since the company has amortized the intangible assets over twenty-five years, a reconciliation is required as envisaged by the IOSCO recommendations;

2. Disclosures made in Company X's financial statements under IAS 16 with respect to carrying amounts of a building based on cost would need to be supplemented by addtitonal disclosures as envisioned in the IOSCO recommendations. For instance, additional disclosure with respect to significant balance sheet and income statement effect of revaluation would need to be provided;

3. Since the GAAP in Country Y only allows borrowing costs relating to qualifying assets to be capitalized, the financial statements prepared under IAS would need to be restated giving effect to this adjustment;

4. Because the GAAP in Country Y does not permit the "true and fair" override, the unrecognized income resulting from foreign currency translation gain would need to be booked in the income statement of Company X.