GAAP ALERT No.5/2008
31 March 2008
Revised AASB 3 ‘Business Combinations’ Released by AASB
The AASB has issued a revised version of AASB ‘Business Combinations’ which amends a number of accounting requirements for mergers and acquisitions resulting from the recently revised IFRS 3 ‘Business Combinations’. The revisions to IFRS 3 result from a joint project between the International Accounting Standards Board (IASB) and the US FASB to converge IASB requirements and US GAAP, and thus improve comparability.
The revised standard provides a choice to measure a non-controlling interest at fair value, or at its proportionate share of the acquired entity’s net assets. Measuring the non-controlling interest at fair value will result in goodwill attributable to the non-controlling interest being reflected in the balance sheet.
Incidental costs related to the acquisition of a business will now be required to be expensed. If a liability is recognised in the balance sheet for a payment that is contingent on a future event, the obligation will be measured at fair value at acquisition date, and any subsequent changes to fair value may be reflected in the income statement, rather than against goodwill on the balance sheet.
The revised standard also addresses problems that existed under the old requirements. The requirements for acquisitions made over a period of time in a target entity are simplified in the revised standard, and guidance is included to assist entities in determining which transactions form part of a business acquisition.
As a consequence of issuing AASB 3, the AASB has also issued amended standard AASB 127 ‘Consolidated and Separate Financial Statements’, and amending standard AASB 2008-3 ‘Amendments to Australian Accounting Standards Arising from AASB 3 and AASB 127’.
The revisions are effective from 1 July 2009, with early adoption permitted for for-profit entities only. The AASB is conducting further research into the suitability of the revised AASB 3 requirements for mergers and acquisitions among not-for-profit entities.
Garnaut Releases Model for Emissions Trading Scheme
Professor Ross Garnaut released his discussion paper on an Australian emissions trading scheme (ETS available at www.garnautreview.org.au). The ETS has a number of significant financial reporting implications for entities that fall within the scope of the scheme. The AASB is currently considering the approach (see GAAP Alert No.4/2008, 15 March 2008).
The paper suggests fixed and clear limits on emissions through the establishment of defined emissions ‘trajectories’, which would transparently map the pathway to emissions reduction targets/commitments. Permits would be regularly released in line with the trajectory. The ETS discussion paper supports the auctioning of all permits, arguing that any increase in the price of goods or services, such as energy, will not be prevented through the free allocation of permits. The auctioning of permits will generate very large amounts of revenue for the Federal Government.
Design features of the ETS include:
- Creation of an ‘Independent Carbon Bank’ to monitor and enforce compliance with the scheme
- Auctioning of all permits
- Allowing the unlimited banking or hoarding of permits, and lending of permits by the Independent Carbon Bank
- No price controls for permits, such as price caps or floors
- Application of a penalty with a make-good provision, for non-compliance
- Making the coverage as broad as possible, with a recommendation to include agriculture and forestry as soon as practicable
- Usage of permit revenue to provide assistance to households, particularly low-income households, and adjustment assistance for communities and employees of impacted sectors, and
- Provision of transitional assistance to trade-exposed, emissions intensive firms.
The Federal Government has announced a detailed timeline for a national carbon trading scheme that is anticipated to be operational by 2010. Submissions are sought on the discussion paper by 18 April 2008.
Revisions to AASB 2 ‘Share-based Payment’
AASB issued AASB 2008-1 ‘Amendments to Australian Accounting Standard – Share-based Payment: Vesting Conditions and Cancellations’, effective from 1 January 2009 (early adoption is allowed). The amendments clarify that vesting conditions comprise service and performance conditions, and other features of share-based payment transaction are not vesting conditions. The amendments also specify that all cancellations, whether by the entity or other parties, should receive the same accounting.
Financial Instruments Discussion Paper Released by IASB and AASB
The IASB released a discussion paper ‘Reducing Complexity in Reporting Financial Instruments’ that analyses the main causes of complexity in reporting financial instruments, and proposes possible intermediate approaches to address some of them. The document is the first stage in a project which aims to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’.
The existing requirements for the reporting of financial instruments are widely regarded as difficult to understand, interpret and apply. Constituents urged the IASB to develop standards that are principle-based and less complex.
The approaches proposed in the Discussion Paper seek to improve and simplify measurement and hedge accounting by amending or replacing the existing requirements. The discussion paper sets out the arguments for and against a possible long-term approach that would use one measurement method for all types of financial instruments in the scope of a financial instruments standard. The IASB seeks views on both the possible long-term and intermediate approaches and is interested to hear about possible alternatives on how it should proceed in developing new standards for reporting financial instruments that are principle-based and less complex. Comments on the discussion paper are sought by 19 September 2008.
The AASB has released the Discussion Paper in the Australian context, seeking comments from Australian constituents by 22 August 2008.
Financial Instruments with Characteristics of Equity Discussion Paper Released by AASB
The AASB released an IASB Discussion Paper on ‘Financial Instruments with Characteristics of Equity’, incorporating the FASB Preliminary Views document on Financial Instruments with Characteristics of Equity. Comments are due to the AASB by 1 August 2008.
Compiled Interpretations 1 and 12 Released
The AASB issued Compiled Interpretations: Interpretation 1 ‘Changes in Existing Decommissioning, Restoration and Similar Liabilities’, and Interpretation 12 ‘Service Concession Arrangements’, both effective 1 Jan 2009 (early adoption is allowed).
IASB March Meeting Highlights
The highlights of the IASB 10-24 March meeting include.
Annual improvements: Deliberated on the following issues. All final amendments are likely to be released in May 2008.
- IFRS 7 ‘Financial Instruments: Disclosure’ – Presentation of finance costs: Reaffirmed proposed amendment
- IAS 23 ‘Borrowing Costs’ – Components of borrowing costs: Reaffirmed proposed amendment
- IAS 27 ‘Consolidated and Separate Financial Statements’ – Measurement of subsidiary held for sale in separate financial statements: Reaffirmed proposed amendment
- IAS 36 ‘Impairment of Assets’ – Disclosure of estimates used to determine recoverable amount: Reaffirmed proposed amendment
- IAS 1 ‘Presentation of Financial Statements’ – Current/non-current classification of derivatives: Decided to amend the proposals to clarify how the similar terms used in IAS 1 and IAS 39 relate to each other. Also decided to explain the difference between ‘held primarily for the purpose of trading’ under IAS 1 and ‘held for trading’ under IAS 39
- IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ – Status of implementation guidance. Decided to modify the proposed amendment to paragraph 9 to take into consideration the varying authority of the different types of guidance in standards
- IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’ – Government loans with a below-market rate of interest: Reaffirmed the proposed amendment, but decided to clarify that a government grant would be recognised as equal to the difference between the cash received and the recognised amount of the loan. It would be accounted for using IAS 20. The amendment is to be applied prospectively to loans received after the effective date of the amendment
- IAS 38 ‘Intangible Assets’ – Unit of production method of amortisation: Reaffirmed the proposal to remove the last sentence of paragraph 98 of IAS 38
- IAS 41 ‘Agriculture’ – Point-of-sale costs: Reaffirmed the proposal to replace the term ‘point-of-sale costs’ with ‘costs to sell’
- IAS 41 ‘Agriculture’ – Additional biological transformation: Reaffirmed the proposed to remove the prohibition on taking ‘additional biological transformation’ into consideration when calculating the fair value of biological assets using discounted cash flows. Decided to remove ‘harvest’ from the definition of ‘biological transformation’. The proposed amendment is to be applied prospectively.
IFRS for SMEs: An educational session where issued raised in letters of comments were noted. General issues not related to specific sections in the exposure draft included:
- A full stand-alone document should be produced
- All accounting policy options should be available to SMEs
- The proposed Standard should not anticipate changes to full IFRSs
- Further simplifications of disclosure are needed
- Revisit the term ‘SMEs’
- There should be further restrictions on fair value measurement, and
- There is a need for implementation guidance.
No decisions were made. A review of a revised draft standard is planned for September or October.
IAS 19 Employee Benefits: Revised the definition of contribution based promises to clarify that vesting and demographic risks do not preclude a benefit promise from being contribution-based in the proposed discussion paper on amendments to IAS 19.
IAS 39 Financial Instruments: Recognition and Measurement: Considered an analysis of the comment letters received on exposure draft ‘Exposures Qualifying for Hedge Accounting’ (September 2007). No decisions were made.
First-time adoption of IFRSs: Decided to add a project to its agenda to address challenges that jurisdictions and entities are likely to face in adopting IFRSs. Tentatively decided to consider amendments to IFRS to:
- Introduce a principle prohibiting retrospective estimates that could be affected by hindsight
- Introduce a principle that an entity need not reassess the accounting for a transaction at the date of transition to IFRSs on the basis of facts and circumstances at that date if the entity’s previous GAAP had introduced the same accounting as IFRSs based on an assessment of facts and circumstances at an earlier date, and
- Permit an entity using full cost accounting for oil and gas to measure exploration, evaluation, development and production assets on transition to IFRSs on the basis of an allocation of the amount recognised under the entity’s previous GAAP.
Financial statement presentation: Decided that the initial discussion document should not include a preliminary view on the presentation of income taxes; it should explore and illustrate both views, i.e., separate income tax section and income tax allocation.
Extractive activities research project: Two education sessions on the extractive activities research project. Staff from the SEC provided an overview of the SEC Concept Release on Possible Revisions to the Disclosure Requirements Relating to Oil and Gas Reserves. Representatives of the Society of Petroleum Engineers Oil and Gas Reserves Committee and the Committee for Mineral Reserves International Reporting Standards presented the findings of a review to compare their respective oil & gas and minerals reserve and resource definitions and classification systems. No decisions were made.
Employee Benefits Discussion Paper Released by IASB
The IASB has released a discussion paper ‘Preliminary Views on Amendments to IAS 19 Employee Benefits’ on how the accounting for some post-employment benefits, including pensions, could be improved.
The accounting model set out in IAS 19 is considered inadequate. Constituents have stated that: the deferral of the recognition of gains and losses leads to misleading figures in the statement of financial position; the multiple options for deferring recognition lead to poor comparability across companies; the lack of clarity in the definitions of benefit promises lead to inconsistencies and poor comparability for those benefit promises that include a promised return on contributions linked to an asset or an index; and the required measurement method is inadequate for those benefit promises that include a promised return on contributions linked to an asset or an index.
The IASB’s preliminary views on how to address those main issues are to: remove the options for deferred recognition of gains and losses in defined benefit plans; and introduce a new classification of benefit promises into contribution-based promises and defined benefit promises, with a new measurement attribute for contribution-based promises.
Comments on the discussion paper are sought by 26 September 2008. The IASB plans to redeliberate the issues and publish an exposure draft of proposed amendments to IAS 19, with a view to issuing a revised standard by 2011.
The AASB will shortly release the Discussion Paper in the Australian context, seeking comments from Australian constituents.
IFRIC March Meeting Highlights
Highlights from 6 March meeting of International Financial Reporting Interpretations Committee included.
IFRIC D21 ‘Real Estate Sales’: Considered a flowchart on accounting for real estate sale agreements in accordance with IAS 11 Construction Contracts and IAS 18 Revenue, with the starting point being to consider the nature of the sale. Revised Flowchart is to be considered at the next meeting
IFRIC D22 ‘Hedges of a Net Investment in a Foreign Operation’: The following conclusions were reached.
- In the financial statements that include a foreign operation, an entity cannot hedge the same risk more than once. The amount of net investment eligible to be hedged at each parent level depends on whether any lower level parent companies have already hedged the risk of the net assets of their foreign operations (i.e., the amount of the net investment to be hedged for the same risk cannot be duplicated in the consolidated financial statements)
- The fact that the net investment is held through an intermediate company does not affect the economic risk. A parent entity can hedge the risk of a net investment it holds indirectly. The hedging instrument may be held by any entity within a group (other than the foreign operation being hedged) and neither where the hedging instrument is held, nor the method of consolidation that a group uses affects the assessment of the effectiveness of the hedge when an entity hedges a net investment in a foreign operation. IAS 39 ‘Financial Instruments:
- Recognition and Measurement’ requires the entity to identify the amounts included in the group’s foreign currency translation reserve in respect of that foreign operation as a result of applying hedge accounting. When a foreign operation that was hedged is disposed, the amount recycled to profit or loss from the group’s translation reserve in respect of the hedging instrument will always be the amount that IAS 39 requires to be identified
- When a foreign operation is disposed, IAS 21 ‘Effects of Changes in Foreign Exchange Rates’ requires any amount included in the group’s translation in respect of that foreign operation to be included in profit or loss.
- The determination of this amount may depend on whether the translation reserve in the ultimate parent’s group financial statements is based on intermediate consolidations when the step-by-step method of consolidation is applied. The IFRIC noted that although the amount determined by the direct method is the conceptually correct amount of translation reserve for an individual foreign operation, IAS 21 does not require an entity to use this method or to make adjustments to produce the same result.
IFRIC Agenda Decisions: IAS 7 ‘Statement of Cash Flows’ – Classification of expenditures: Concluded that the issue would referred to the IASB with a recommendation that IAS 7 be amended to make it explicit that only an expenditure that results in a recognised asset can be classified as a cash flow from investing activity.
Tentative Agenda Decisions: Decided not to add two issues to its agenda: IAS 19 ‘Employee Benefits’ – Settlements; and IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ – Deposits on returnable containers.
IFRIC Work in Progress: It is expected that the IFRIC will complete its deliberations on D21 and D22 at its May meeting. An analysis of the comments received on D23 ‘Non-cash Asset Distributions to Owners’, and D24 ‘Customer Contributions’ will be discussed at the July meeting.
Disclosures for Social Benefits ED Issued by IFAC
To improve the consistency and transparency of reporting on social benefits by public sector entities, the International Public Sector Accounting Standards Board (IPSASB) released ED 34 ‘Social Benefits: Disclosure of Cash Transfers to Individuals or Households’. It proposes disclosure requirements for amounts to be paid to beneficiaries as part of social programs, as well as information about those programs. ED 34 also includes requirements for determining the amounts to be disclosed. Comments on ED 34 are requested by 15 July 2008.
IFAC’s Recognition and Measurement of Social Benefits Key Issues Paper Released
The IPSASB has released a consultation paper, entitled ‘Social Benefits: Issues in Recognition and Measurement’. It sets out the IPSASB’s strategy for developing approaches to address the issues involved in accounting for social benefits, including recognition and measurement. These issues include when liabilities for cash transfers and goods and services arise and, if so, whether these liabilities arise at an earlier point for contributory programs than for programs financed primarily through general taxation. Comments the consultation paper are requested by 15 July 2008.
Long-term Fiscal Sustainability Project Launched by IPSASB
The IPSASB has launched a project on the long-term fiscal sustainability of these social benefit programs, such as social security, the provision of healthcare and unemployment benefits. In developing its project on social benefits, the IPSASB concluded that financial statements alone may not provide users with sufficient information to assess the long-term viability of social benefit programs. It is undertaking this new project to develop a framework for reporting on the long-term fiscal sustainability of governmental programs and finances.
Service Concession Arrangements Paper Released by IPSASB
The IPSASB has released a consultation paper ‘Accounting and Financial Reporting for Service Concession Arrangements’ that explores accounting and financial reporting issues related to service concession arrangements from the perspective of the grantor (typically a public sector entity). It provides proposals to be considered by the IPSASB in the development of any authoritative international public sector requirements for accounting and financial reporting of service concession arrangements. The IPSAB seeks comments by 1 August 2008.
NSW Incorporated Associations Act Revisions Proposed
The NSW Office of Fair Trading has released for public comment a draft of the revisions it is proposing to the NSW Incorporated Associations Act (1984). The new Bill ‘Associations Incorporation Bill 2008’ is the result of a comprehensive review to update the provisions of this legislation.
Some of the more significant proposals include:
- The Bill imposes statutory duties of care, diligence, honesty and disclosure of interest on members of the management committee
- The Bill provides for a two-tiered reporting system distinguishing between small and large associations on the basis of a financial threshold which has been set at an annual turnover of $200,000. Associations who are above the prescribed financial threshold must have their annual financial statement audited to Australian Auditing Standards. These associations need to provide the Registry with the financial statements and the auditor’s report which was presented at the AGM, a document which sets out any resolutions made at the AGM about that statement and a summary of the association’s affairs in an approved form
- Associations that are below the financial threshold do not need to have their accounts audited. They only need to provide the Registry with the financial statement which was presented at the AGM, a document which sets out any resolutions made at the AGM about that statement and a summary of the association’s affairs in an approved form
- The penalties for non compliance with the financial reporting requirements have been increased from $220 to $550, and
- The Bill provides for a financial year for all incorporated associations, ending on 30 June unless associations choose to specify in their constitution that their financial year ends on 31 December.
There will be a transitional period for associations who currently operate on some other financial year so that they can adjust to the new period.
Outstanding Exposure Drafts
Accounting
7 April D23 ‘Distributions of Non-cash Assets to Owners’ – AASB
25 April D23 ‘Distributions of Non-cash Assets to Owners’ – IFRIC
25 April D24 ‘Customer Contributions’ – IFRIC
15 July ED 34 ‘Social Benefits: Disclosure of Cash Transfers to Individuals or Households’ – IPSASB
15 July Consultation Paper ‘Social Benefits: Issues in Recognition and Measurement’ – IPSASB
1 August Discussion Paper ‘Financial Instruments with Characteristics of Equity’ – AASB
1 August Consultation paper ‘Accounting and Financial Reporting for Service Concession Arrangements’ – AASB
22 August Discussion Paper ‘Reducing Complexity in Reporting Financial Instruments’ – AASB
5 September Discussion Paper ‘Financial Instruments with Characteristics of Equity’ – IASB
19 September Discussion Paper ‘Reducing Complexity in Reporting Financial Instruments’ – IASB
19 September Discussion paper ‘Preliminary Views on Amendments to IAS 19 Employee Benefits’ – IASB
Auditing
4 April ED 07/07 APES 225 ‘Business Valuation’ – APESB
15 April ED 1/08 Proposed ASAE 3500 ‘Performance Engagements’ – AUASB
30 April Proposed ISA 402 ‘Audit Considerations Relating to an Entity Using a Third Party Service Organization’ – IAASB
Other
8 April Withdrawal of APS 8 ‘Statement of Management Consulting Services Standards’ – APESB
11 April ‘Associations Incorporation Bill 2008’ – NSW Office of Fair Trading
18 April Discussion Paper ‘Emissions Trading Scheme’ – Garnaut
22 April ED of APES 315 ‘Compilation of Financial Information’ – APESB
30 April Survey on Performance Measurement in the Public Sector – IFAC
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