GAAP ALERT No.1/2008
31 January
By Colin Parker B.Bus FCA MAICD
Principal, GAAP Consulting, colin@gaap.com.au
Member of the Australian Accounting Standards Board
INTRODUCTION
Welcome to the New Look GAAP Alert
ED 161 ‘Share-based Payment’ Released by AASB
AASB February Agenda
Revised Business Combinations and Consolidation Standards by IASB
‘Share-based Payment’ Amendment by IASB
D23 ‘Distributions of Non-cash Assets to Owners’ Proposals by IFRIC
D24 ‘Customer Contributions’ Proposals by IFRIC
IASB January Meeting Highlights
IFRIC January Meeting Highlights
FASB Accounting Standards Codification™
Final International Clarity EDs Issued by IAASB
Outstanding Exposure Drafts
Manage Your Financial Reporting and Auditing Risks
Welcome to the New Look GAAP Alert
We have a new user-friendly design for your fortnightly GAAP Alert; and a new logo! GAAP Alert still provides an independent and authoritative fortnightly description of the major Australian and international financial reporting, auditing, regulatory, and corporate governance developments. We have merged our email address books; you may, therefore, receive this newsletter for the first time.
There are also other changes in train for the GAAP suite of products, including a new look website to be launched later this month, and also the holding of our first seminar ‘GAAP and GAAS – Updates, Insights and Tools For 30 June 2008’. This all-day seminar will be held on 5 May in Melbourne with Colin Parker, Principal, GAAP Consulting, and a member of the AASB; Greg Pound, independent consultant, member of the Auditing and Assurance Standards Board; Jim Dixon, Associate, GAAP Consulting; and David Sauer, David Sauer, Chartered Accountant. More information on these developments will be included in our next GAAP Alert.
ED 161 ‘Share-based Payment’ Released by AASB
The AASB released ED 161 proposed amendments to AASB 2 ‘Share-based Payment’, and AASB Interpretation 11 ‘AASB 2 Group and Treasury Share Transactions’ with comments sought by 29 February (based on the IASB ED released in December). The proposals respond to requests for guidance on how a group entity that receives goods or services from its suppliers (including employees) should account for the following arrangements: the entity’s suppliers will receive cash payments that are linked to the price of the equity instruments of the entity; and the entity’s suppliers will receive cash payments that are linked to the price of the equity instruments of the entity’s parent. Under either arrangement, the entity’s parent has an obligation to make the required cash payments to the entity’s suppliers. The entity itself does not have any obligation to make such payments.
The proposed amendment to AASB 2 clarifies that it applies to arrangements such as those described above, even if the entity that receives goods or services from its suppliers has no obligation to make the required share-based cash payments. The proposed amendment to Interpretation 11 specifies that the entity should measure the goods or services in accordance with the requirements for cash-settled share-based payment transactions.
AASB February Agenda
The agenda for the 7 February meeting of the AASB includes:
Superannuation Plans and ADFs: Consider issues paper on measurement of defined benefit obligations
Cost of Investment: Consider draft submission to the IASB
Not-for-Profit Entities and IFRSs: Consider criteria for determining differences from IFRSs
Interpretations: Consider IFRIC draft Interpretations
Social Benefits: Consider draft Preface to IPSAB ED
IASB Concepts Project: Discussion of progress
Business Combinations: Consider revised IFRS 3 and IAS 27 for adoption
Non-exchange: Income Consider options for progressing project
Puttable Financial Instruments: Consider IASB’s proposed amendments to IAS 1 and IAS 32
Revised Business Combinations and Consolidation Standards by IASB
The IASB issued a revised version of IFRS 3 ‘Business Combinations’ and an amended version of IAS 27 ‘Consolidated and Separate Financial Statements’. The project was undertaken jointly with the US FASB, with the objective being to develop a single high quality accounting standard that would ensure that the accounting for business combinations is the same, regardless of whether an entity is applying IFRSs or US (GAAP). The new requirements take effect on 1 July 2009; entities are permitted to adopt the revised standards.
In publishing its equivalents to IFRS 3 and IAS 27, the FASB has made fundamental changes to its accounting for business combinations, most of which bring US accounting into line with the existing IFRS 3 and IAS 27. Other improvements will change both IFRSs and US GAAP. The revised IFRS 3 reinforces the existing IFRS 3 model, but addresses uncertainties that have emerged in its application.
‘Share-based Payment’ Amendment by IASB
The IASB issued an amendment to IFRS 2 ‘Share-based Payment’. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. These amendments are based on the exposure draft of proposed amendments to ‘IFRS 2 – Vesting Conditions and Cancellations’ (February 2006). The IASB has also added to the guidance on implementing IFRS 2 addressing the determination of whether a condition is a vesting condition and on the accounting treatment for conditions that are not vesting conditions. The amendment will apply for annual periods beginning on or after 1 January 2009, with earlier application permitted.
D23 ‘Distributions of Non-cash Assets to Owners’ Proposals by IFRIC
IFRIC released for public comment a draft Interpretation D23 ‘Distributions of Non-cash Assets to Owners’. The IFRIC was asked to address how an entity should measure distributions of assets other than cash when it pays dividends to its owners acting in their capacity as owners. IFRS do not address the measurement of distributions to owners. The proposed Interpretation addresses: how should an entity measure an obligation to distribute non-cash assets to its owners (a dividend payable); and when an entity settles the dividend payable, how should it account for any difference between the carrying amount of the assets distributed and the carrying amount of the dividend payable?
IFRIC D23 would apply to all types of distributions of non-cash assets, except for a distribution of an asset to another entity within the same consolidated group. IFRIC D23 proposes that all types of distributions of non-cash assets would be measured at the fair value of the assets distributed. The guidance should be applied only to future distributions because it recognises the difficulty entities would face in recognising past distributions at their fair values. The proposal is open comment until 25 April 2008.
D24 ‘Customer Contributions’ Proposals by IFRIC
IFRIC released for comment a draft Interpretation IFRIC D24 ‘Customer Contributions’ that will standardise practice, and clarify the accounting for the receipt of customer contributions. Customer contributions are transactions in which an entity (the access provider) receives an asset it uses to provide access to an ongoing supply of goods or services to a customer or customers. In some cases, the access provider receives cash which it must use to acquire or construct the asset that will provide access. IFRIC D24 clarifies:
Whether a customer contribution should be recognised as an asset and, if so, whether it should be initially recognised at cost or fair value
Whether an agreement to provide ongoing services using a contributed asset contains a lease
How to account for the credit that arises from the recognition of a customer contribution at fair value, and
How to account for a cash contribution.
All access providers will be required to recognise contributed assets and revenue from providing access to a supply of goods or services over the period access is provided. Those access providers that have previously not recognised contributed assets will now recognise increased property, plant and equipment and revenue. Those access providers that have previously recognised revenue immediately on the receipt of a contributed asset may now be required to recognise it over a longer period. The guidance will be applied prospectively. The proposal is open for public comment until 25 April 2008.
IASB January Meeting Highlights
The highlights of 22-24 January meeting of the IASB included:
Puttable financial instruments and obligations arising on liquidation: Clarified one particular feature that a puttable instrument must have to be classified as an equity instrument, i.e., the total expected cash flows attributable to each puttable instrument over the life of the instrument (rather than the class of puttable instruments over the life of the class) must be based substantially on the profit or loss, the change in the recognised net assets, or the change in the fair value of the recognised and unrecognised net assets of the entity over the life of the instrument (excluding any effects of the instrument itself). The amending standard is expected to be issued shortly.
Liabilities and equity: Decided that the IASB discussion paper on liabilities and equity should contain an IASB Invitation to Comment and the FASB Preliminary Views document ‘Financial Instruments with Characteristics of Equity’. The discussion paper is expected to be published in the first quarter of 2008.
Financial instruments: The Financial Instruments Working Group reviewed extracts of the draft discussion paper ‘Reducing Complexity in Reporting Financial Instruments’ for clarity and completeness. The IASB discussed questions to be included in the discussion paper.
Earnings per share: Staff directed to begin drafting the exposure draft on the proposed amendments to IAS 33.
Annual improvements process: Identified a need to clarify the disclosure requirements for non-current assets (or disposal groups) classified as held for sale or discontinued operations under IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’. Decided to add a paragraph in the scope section to clarify that IFRS 5 specifies disclosures for non-current assets (or disposal groups) classified as held for sale or discontinued operations; the disclosures in other IFRSs do not apply to such assets (or disposal groups) unless those IFRSs specifically require such disclosures; and additional disclosures about such assets (or disposal groups) may be necessary to comply with the general requirements of IAS 1 ‘Presentation of Financial Statements’.
Revenue recognition: Considered the second of the two revenue recognition models (the customer consideration model) whereby an entity accounts for the contract asset or liability that arises from the rights and obligations (performance obligations) in an enforceable contract with a customer. At contract inception, the rights in the contract are measured at the amount of customer consideration in the contract. That amount is then allocated to the individual performance obligations identified within the contract in proportion to the stand-alone selling price of each good or service underlying the performance obligation. At contract inception, the sum of the amounts allocated to the individual performance obligations equals the customer consideration so that neither a contract asset, nor a contract liability is recognised. Subsequently, the performance obligations are measured at the amount of the customer consideration allocated to them at contract inception. They are not remeasured, except when the contract is judged to be onerous. As each performance obligation identified in the contract is satisfied, the resulting decrease in the contract liability or increase in the contract asset results in the recognition of revenue.
IAS 24 Related Party Disclosures: Continued its discussion of responses to the ED IAS 24 ‘Related Party Disclosures – State-controlled Entities and the Definition of a Related Party’.
The decisions made by the IASB will in due course affect the work program of the AASB.
IFRIC January Meeting Highlights
The highlights of 10-11 January meeting of IFRIC included.
IFRIC D21 ‘Real Estate Sales’: IFRIC considered comments received and noted that most respondents supported the IFRIC’s conclusion that it should develop an interpretation on this issue. No decisions were made.
IFRIC D22 ‘Hedges of a Net Investment in a Foreign Operation’: IFRIC considered comments received and noted most respondents supported the IFRIC’s conclusion that it should develop an interpretation on this issue and agreed with the IFRIC’s proposals. The draft interpretation will be clarified to clearly state the financial statements to which its guidance relates (either consolidated or separate). IFRIC confirmed its previous decision that any parent entity may hedge its net investment. It also confirmed that, in financial statements that include a foreign operation, an entity cannot hedge the same risk more than once.
IFRIC confirmed its previous decisions about what can be hedged, the importance of clearly documenting the group’s hedging strategy, the hedged item and the hedging instrument in order to qualify for hedge accounting; and that determining which financial statements are being prepared is critical to the documentation; and that for the purpose of assessing hedge effectiveness, any entity in the group may hold the hedging instrument.
IAS 19 ‘Employee Benefits’ – Settlements: IFRIC discussed whether to add to its agenda a question about whether some payments of benefits under a defined benefit plan are settlements as defined in IAS 19. Agreed to consult interested parties to understand the effect of any proposed changes arising from a clarification of the definition of a settlement.
IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ – Deposits on returnable containers: FRIC is to clarify the wording of its previous tentative agenda decision for not proposing to add the item to its agenda.
IFRIC Agenda Decisions: Decided not to add the following issues to its agenda: IAS 19 ‘Employee Benefits’ – death in service benefits, definition of plan assets, and pension promises based on performance hurdles; and IAS 23 ‘Borrowing Costs’ (2007) foreign exchange and capitalisable borrowing costs.
In relation to IAS 39 ‘Financial Instruments: Recognition and Measurement’ – Scope of IAS 39 paragraph 2(g): IFRIC received a request for guidance on the appropriate interpretation of that paragraph which exempts from the scope of IAS 39 ‘contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date.’ IFRIC is to request the IASB to clarify the standard, addressing: whether the scope exception in paragraph 2(g) applies to all contracts (including options) between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date; and whether the scope exception provided in paragraph 2(g) could be applied to similar transactions, such as those to acquire an interest in an associate.
Tentative Agenda Decisions: IFRIC reviewed a issue regarding IAS 7 ‘Statement of Cash Flows – Classification of Expenditures’, and decided that it should not be added to its agenda; and concluded that the issue should be resolved by the IASB with a recommendation that IAS 7 should be amended to make explicit that only an expenditure that results in a recognised asset can be classified as a cash flow from investing activity.
The decisions made by the IASB will in due course affect the work program of the AASB.
FASB Accounting Standards Codification™
The FASB has launched the one-year verification phase of the FASB Accounting Standards CodificationTM (Codification). During the verification period, constituents are encouraged to use the online Codification Research System free of charge to research accounting issues, and provide feedback on whether the Codification content accurately reflects existing U.S. GAAP for nongovernmental entities. The Codification content is not yet approved as authoritative and, therefore, users must verify research results using their existing resources for the currently effective literature.
The Codification includes all accounting standards issued by a standard-setter within levels A through D of the current U.S. GAAP hierarchy, including FASB, AICPA, EITF, and related literature. The Codification does not change GAAP; instead it reorganises the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics, and displays all topics using a consistent structure. The SEC guidance will follow a similar topical structure in separate SEC sections.
The Codification Research System also includes general information about how to use the online research system and special features such as Cross Reference Reports (to locate where standards reside), Join Sections (to join similar Sections from multiple Topics and Subtopics into a single document), and Go To (to jump directly to a specific Topic, Subtopic, Section, or paragraph). The Accounting Standards Codification excludes governmental accounting standards.
After addressing the issues raised during the constituent feedback process, the FASB is expected to formally approve the Codification as the single source of authoritative U.S. GAAP, other than guidance issued by the SEC. To improve usability, the Codification will include authoritative content issued by the SEC, as well as selected SEC staff interpretations. Upon approval by the FASB, all accounting standards (other than the SEC guidance) used to populate the Codification will be superseded. At that time, with the exception of any SEC or grandfathered guidance, all other accounting literature not included in the Codification will become non-authoritative.
Users who register at http://asc.fasb.org are able to review the Codification free of charge and provide specific content-related feedback at the individual paragraph level as well as general system-related feedback. During the verification period, Codification content will be updated for changes resulting from constituent feedback and new standards.
Final International Clarity EDs Issued by IAASB
The International Auditing and Assurance Standards Board (IAASB) has released the last two exposure drafts written in accordance with the new clarity drafting conventions, proposed ISA 210 (redrafted) ‘Agreeing the Terms of Audit Engagements’, and proposed ISA 710 (redrafted), ‘Comparative Information – Corresponding Figures and Comparative Financial Statements. Comments on the exposure drafts are requested by 15 March 2008. The exposure drafts may be viewed by going to http://www.ifac.org/EDs. Comments may be submitted by email to EDComments@ifac.org.
The release of these exposure drafts marks the completion of the first phase of the IAASB's 18-month program to redraft existing standards and to develop new and revised standards following the new drafting conventions. The redrafted ISAs provide more clarity on the requirements, which should contribute to improving the consistency of their application by auditors around the world.
When completed, 21 extant ISAs will have been fully revised, or updated and redrafted, in the last five years. The remaining 11 will have been redrafted in accordance with the new conventions. In addition, ‘International Standard on Quality Control 1’ will have been redrafted and a new ISA on communicating deficiencies in internal control completed. The final standards will become effective for audits of financial statements for periods beginning on or after 15 December 2009.
Outstanding Exposure Drafts
Accounting
13 February ED 160 ‘Proposed Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and IAS 27 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate’ – AASB
26 February Proposed Amendments ‘IFRS 1 First-time Adoption of International Financial Reporting Standards’ and IAS 27 ‘Consolidated and Separate Financial Statements’ – IASB
28 February ED 161 ‘Proposed amendments to AASB 2 ‘Share-based Payment’, and AASB Interpretation 11 AASB 2 Group and Treasury Share Transactions – AASB
17 March Proposed amendments to ‘IFRS 2 Share-based Payment’, and ‘IFRIC 11 IFRS 2 Group and Treasury Share Transactions’ – IASB
31 March Invitation to Comment ITC 14 ‘Proposed Definition and Guidance for Not-for-Profit Entities’
25 April D23 ‘Distributions of Non-cash Assets to Owners’ – IFRIC
25 April D24 ‘Customer Contributions’ – IFRIC
Auditing
15 February Proposed ISA 505 (Revised and Redrafted) ‘External Confirmations’ – IAASB
15 February Proposed ISA 620 (Revised and Redrafted) ‘Using the Work of an Auditor’s Expert’ – IAASB
15 February ED 5/07 ASAE 3100 ‘Compliance Engagements’ – AUASB
15 February ED 06/07 ‘Proposed Amendments to Auditor Independence Requirements in APES 110 Code of Ethics for Professional Accountants’ – APESB
15 March Proposed ISA 210 (redrafted) ‘Agreeing the Terms of Audit Engagements’ – IAASB
15 March Proposed ISA 710 (redrafted) ‘Comparative Information – Corresponding Figures and Comparative Financial Statements’ – IAASB
31 March Proposed ISA 501 (Redrafted) ‘Audit Evidence Regarding Specific Financial Statement Account Balances and Disclosures’ – IAASB
31 March ISA 520 (Redrafted) ‘Analytical Procedures’ – IAASB
4 April ED 07/07 APES 225 ‘Business Valuation’ – APESB
30 April Proposed ISA 402 ‘Audit Considerations Relating to an Entity Using a Third Party Service Organization’ – IAASB
30 April Proposed ISA 265 ‘Communicating Deficiencies in Internal Control’ – IAASB
31 May Proposed International Standard on Assurance Engagements (ISAE) 3402, ‘Assurance Reports on Controls at a Third Party Service Organization’ – IAASB
Manage Your Financial Reporting and Auditing Risks
Briefings on contemporary financial reporting and auditing issues can be arranged with Colin Parker, a member of the AASB, and Jim Dixon. Professional advice on interpretation of accounting and auditing standards is available from the GAAP Consulting team; contact colin@gaap.com.au.
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