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An International Financial Reporting Standard for Extractives

  • Briefing

  • 1 January 2010

What are the International Financial Reporting Standards?
International Financial Reporting Standards (IFRSs) are the accounting and disclosure rules for corporate financial reporting, as established by the International Accounting Standards Board (IASB). The IASB is a privately funded organization based in London, whose purpose is to develop clear, globally applicable rules for how companies report on their financial status to their investors and other stakeholders.

Which countries are impacted by IFRSs?
The key feature of IFRSs is their broad geographical coverage, as more than 110 countries currently require or allow reporting using IFRSs. Rules created by the IASB are applied automatically at a number of stock exchanges, including the Australian and European Union exchanges. And the number of exchanges covered will grow substantially in coming years, as other countries on their way to ‘convergence’ with IFRS standards gradually adopt these rules. China is already “substantially converged,” while other countries requiring IFRS use in the near future include the US, Brazil, Canada, India, Korea, Mexico, Argentina, Japan, Indonesia and Russia.

How are IFRS rules relevant to extractive industries?
Since the IFRSs put out by the IASB are applied to companies around the world, creating a new IFRS will create large-scale systematic change; an IFRS requiring extractive companies to report how much they pay governments on a disaggregated (country-by-country) basis, for instance, would have global reach. And country-by-country reporting could affect even companies operating only in countries where IASB guidelines are not adopted, since their investors might come to expect these minimum standards for transparency to be met.   

Who decides on these standards?
The International Accounting Standards Board is comprised of 15 independent, global experts from around the world, who do not represent the interest of any specific country or organization. After an extensive process of public consultation, it is these members vote on what standards should be required.

How does the IASB make decisions on International Financial Reporting Standard?
The IASB has a procedure of ‘due process’ that is used to inform the decision of whether or not to adopt a new or revised IFRS.

This process begins with IASB staff research, which yields potential topics for the IASB Board to add to its official agenda. Once the Board has agreed to add an item to this agenda, it will decide if the IASB will work in conjunction with another standard-setting organization to draft the new related rule. In this project-planning phase, a team of IASB staff is put together to draft a project plan. This project team publishes a discussion paper for feedback from IASB constituents, who are invited to comment in public meetings or through written feedback. Following this initial round of input, the IASB publishes an exposure draft of the proposed standard, which is then made public for comment. After comments are considered, IASB staff may create a second exposure draft for comment or else go on to the stage of developing new IFRS language. Once written, the new IFRS is voted on by the IASB in a public meeting, and then published. Post publication, IASB staff work to educate the affected industry on the new requirements imposed by the IFRS, and address any complications related to its implementation.

From start to finish this process can take years, and there are no clear guidelines in the IASB’s Due Process Handbook on a standard timetable or set of deadlines the IASB must follow as it undertakes this process. Even when a new IFRS is finally standardized and adopted by the IASB, its implementation by IASB-member stock exchanges is not required until 6-18 months after it has been published.

What is the status of the IFRS on Extractive Industries?
The establishment of an IFRS for extractive activities has been debated within the IASB since the organization’s foundation in 2001. However an official research project plan was not agreed upon by the Board until 2004. Research continued until April of 2010, when the IASB finally published a discussion paper on the extractive industries. The comment period for this paper expired on July 30, 2010.
The IASB is now in the process of deciding whether to formally add extractives to its agenda. According to its work plan for IFRSs, this decision might not be made public until the second half of 2011. At this point, if the Board decides to go ahead with an extractive industry IFRS, an exposure draft will be released, initiating a 120-day period of public comment.

What is the Publish What You Pay (PWYP) coalition asking for from the International Accounting Standards Board?
Publish What You Pay, an international coalition of civil society groups advocating for transparency in the extractive industries, is advocating for the IASB to require country-by-country transparency for companies working in the extractive industries. Specifically, PWYP is advocating for IFRSs that will require multi-national companies to report the following key financial information for each country in which they operate, as part of their normal financial reports:

  • Payments (benefit streams) to governments
  • Reserves
  • Production volumes
  • Production revenues
  • Costs
  • Key subsidiaries properties
In response to the IASB’s discussion paper on an IFRS for extractives, PWYP additionally clarified its recommendations on disclosure requirements, which can be summarized as follows:
  • Companies should be required to report for each and every country in which they operate.
  • Information on specific payments to individual governments is essential.
  • A minimum set of information is needed to ensure the coherence and credibility of what is reported by a company for operations per country, which means that all six of the key financial information areas must be covered.
  • There should be no reporting exemptions, which are unnecessary and undermine comparability.
  • There are many legitimate users of company financial reports other than investors and their needs must be considered by the IASB in the design of standards.
How do these asks align with existing practices?
In July, 2010 the United States Congress passed sweeping financial reforms, which included a landmark provision requiring oil, gas and mining companies registered with the U.S. Securities and Exchange Commission (SEC) to publish how much they pay to foreign countries and the U.S. government, on a disaggregated and annual basis. The new requirements will apply to hundreds of companies, including 90% of the world’s largest internationally operating oil and gas companies, as well as eight of the world’s ten largest mining companies. Earlier in 2010 the Hong Kong stock exchange (HKEX) enacted a similar (though less robust) rule that requires any company with more than 25 percent of its assets in natural resources to disclose the payments it makes to governments at the time of its application to list with HKEX.

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