GAAP ALERT No.6/2008
17 April 2008
By Colin Parker B.Bus FCA MAICD
Principal, GAAP Consulting, colin@gaap.com.au
Member of the Australian Accounting Standards Board
INTRODUCTION
Understanding the requirements of AASB 7 ‘Financial Instruments: Disclosure’ Effect of expanded disclosures and processes required to produce the required information (including the appropriate level of internal control) Impact of disclosing internal company information externally (risk disclosure ‘through the eyes of management’) Revision, update and documentation of risk management policies relating to significant financial instruments, and Recent amendments to AASB 139 ‘Financial Instruments: Recognition and Measurement’ (e.g., fair value determinations, restrictions on fair value though profit or loss, financial guarantees) that also affect AASB 7.
It is likely that some reporting entities, particularly at the smaller end of the reporting entity range, may have no formal internal accounting policies on how they manage the risks arising from the use of financial instruments. Where there are such policies, they be somewhat dated, and may not have been approved by the Board. There may also be a lack of effective engagement with those charged with governance on objectives, risks, processes and assurance on financial instruments.
Auditors will also need to plan for the impact of AASB 7 on each of their clients. AASB 7 will affect audit area such as: planning, understanding the entity and environment, assessing risk, audit documentation, and communication with governance. There is also the specific auditing standard ASA 545 ‘Auditing Fair Value Measurements and Disclosures’, and AGS 1030 ‘Auditing Derivative Financial Instruments’ to consider.
Some requirements of AASB 7 are familiar, as they stem from AASB 132 ‘Financial Instruments: Disclosure and Presentation’ while others, such as the requirement to provide quantitative and qualitative market risk disclosures are new, and may represent a significant challenge for many entities. The release of AAS 7 sees AASB 132 ‘Financial Instruments: Presentation and Disclosure’ being truncated to presentation issues, and the withdrawal of AASB 130 ‘Disclosures in the Financial Statements of Banks and Similar Financial Institutions’.
The CFO may wish to consider the following action items to deal with AASB 7 ‘Financial Instruments: Disclosure’:
Organise training and implementation sessions on AASB 7 When evaluating the extent of disclosure, bear in mind the underlying objective of AASB 7 is to provide disclosures that enhance users’ understanding of the exposure to financial risks and how those risks are being managed Determine whether any of the five-scope exclusions apply Set preliminary materiality levels Review the coverage of accounting policies for financial instruments in the context of the objective of AASB 7 and its specific disclosure requirements Review existing management reporting systems, policies, procedures and risk frameworks, and the nature and extent of qualitative data reported to key management personnel and consider whether such internal reporting would stand up to external scrutiny through AASB 7 disclosures Consider how internal reporting benchmarks against other similar entities Determine whether existing systems provide the required information and level of assurance Decide how much detail to provide to meet the requirements of AASB 7 including how much emphasis to place on different aspects of the requirements, and how aggregate information shows the overall picture without combining information with different characteristics Determine a balance between overburdening the financial report with excessive detail, and obscuring important information as a result of too much aggregation Review contracts to identify collateral Identify sources of fair value Identify sources of market conditions (e.g., interest rates, exchange rates, commodity, equity or other price risks) Update the chart of accounts for new and revised disclosure requirements Obtain information for both consolidated financial statements and now parent financial statements (note, the superseded standards provide certain disclosure exemptions for parent entities) Determine appropriate grouping of financial instruments Identify appropriate method for determining the change in fair value of loans or receivables and a financial liability designated as fair value through profit or loss Prepare comparative disclosures For listed entities, consider the interrelationship with ASX Corporate Governance Principles and Recommendation (in particular, Principle 7: Recognise and Manage Risk) Consider what related information to disclose in the Directors’ Report, press releases, and analysts’ briefings Seek the input of the auditor on the proposed presentation and disclosure changes Develop a communication plan for key external stakeholders, and Brief the Audit Committee on the findings and recommendations.
AASB 7 ‘Financial Instruments: Disclosure’ represents a substantial change from the current regime of AASB 130 ‘Disclosures in the Financial Statements of Banks and Similar Financial Institutions’ and AASB 132 ‘Financial Instruments: Presentation and Disclosures’. AASB 7 has a number of practical implementation challenges, in particular, the determination of the specific qualitative disclosures about the risk exposures arising from financial instruments. Greater insights into internal risk management are the intended result. As each entity’s use and management of financial instruments differs, there are no boilerplate disclosures. The extent of disclosure requires detailed consideration today.
Highlights of AASB April Meeting
Highlights of 17 April meeting included:
Key Management Personnel Disclosures: Decided to issue an exposure draft proposing that disclosing entities that are companies be exempt from complying with key management personnel disclosures in AASB 124 ‘Related Party Disclosures’ (paragraphs Aus25.2 to Aus25.7.2). Those companies are required to disclose remuneration information about individual KMP in the remuneration report under section 300A of the Corporations Act 2001 and Regulation 2M.3.03. The existing ASIC relief from making duplicate disclosures expires before the end of June. The ED is expected by the end of April, with 19 May 2008 the closing date for comments. It is anticipated that the revised AASB 124 will be in place by 30 June
Superannuation Plans and ADFs: Agreed the accrued benefits of members of a superannuation plan or an approved deposit fund (ADF) should be recognised as liabilities in the financial statements of the plan or ADF; and the amendments to AASB 101 ‘Presentation of Financial Statements’ and AASB 132 ‘Financial Instruments: Presentation’ arising from AASB 2008-2 ‘Amendments to Australian Accounting Standards – Puttable Financial Instruments and Obligations Arising on Liquidation’ should not apply to superannuation plans or ADFs as it would produce different presentations for similar entities
Distributions of Non-cash Assets to Owners: Considered a draft submission on IFRIC Draft Interpretation D23 ‘Distributions of Non-cash Assets to Owners’, which addresses the accounting by an entity that declares a distribution and has an obligation to distribute assets to its owners
Customer Contributions: Considered a draft submission on IFRIC Draft Interpretation D24 ‘Customer Contributions’. D24 aims to standardise practice for initial recognition of, and subsequent accounting for, the receipt of items of property, plant and equipment or cash (customer contributions) that the entity is required to use to construct or acquire an item of property, plant and equipment that must be used to provide access to a supply of goods or services
Planning: Discussed its key strategies and Business Plan 2008-09 that will be published on the website following consideration by the FRC, and
Next Meeting on 21-22 May 2008: Agenda items of the next meeting include: meeting with the Consultative Group (21 May); amendments to AASB 1049 arising from AASB 101; definition of not-for-profit entity; GAAP/GFS (entities within the GGS); IFRIC Interpretations; KMP disclosures; non-exchange income; and superannuation plans and ADFs.
AASB Releases IASB Discussion Paper of Employee Benefits
The AASB released the IASB Discussion Paper ‘Preliminary Views on ‘Amendments to IAS 19 Employee Benefits’ for comment in the Australian context. The Discussion Paper describes the IASB’s preliminary views on how the accounting for some post-employment benefits, including pensions, could be improved. AASB seeks comments by 29 August.
Shortcomings on the existing IAS 19 ‘Employee Benefits’ (AASB 119 ‘Employee Benefits’) include:
Deferral of the recognition of gains and losses leads to misleading amounts in the statement of financial position Multiple options for deferring recognition which reduces inter entity comparability Lack of clarity in the definitions of benefit promises that leads to inconsistencies, and lack of comparability for those benefit promises that include a promised return on contributions linked to an asset or an index, and 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 is to remove the options for deferred recognition of gains and losses in defined benefit plans, i.e., remove the ‘corridor approach’, 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.
AASB Releases IPSASB Papers on Social Benefits
The AASB has released Request for Comment ITC 15 on the International Public Sector Accounting Standards Board (IPSASB) ED 34 ‘Social Benefits: Disclosure of Cash Transfers to Individuals or Households’, and the IPSASB Consultation Paper ‘Social Benefits: Issues in Recognition and Measurement’. The AASB seeks comment by 16 June 2008.
ED 34 proposes particular disclosure requirements for public sector entities (generally governments) for their cash transfer social benefits e.g., social security pensions, child benefits and unemployment benefits.
The IPSASB Consultation Paper distinguishes three types of social benefits i.e., collective goods and services, individual goods and services, and cash transfers to individuals or households. The paper seeks comment on:
For each of these types of social benefits whether a present obligation to provide them arises at any time and, if so, when For cash transfers to an individual or household, whether and, if so, when, a present obligation arises if contributions of resources to the government are required for the individual or household to become entitled to benefits For cash transfer programs that require individuals or households to revalidate their entitlement to benefits from time to time, whether revalidation is a criterion for the recognition of any such liabilities or a factor to take into account in the measurement of the liabilities, and Whether a social benefit program should be treated as an in-substance ‘executory contract’?
AUASB April Agenda
The agenda for 14 April meeting of the Auditing and Assurance Standards Board (AUASB) included:
Review Engagements ASAE 3100 ‘Compliance Engagements’ ASA redrafting, including ASA 240 ‘The Auditor’s Responsibility to Consider Fraud in the Audit of a Financial Report’ Addendum to Guidance Statement – ‘Authorised Deposit-taking Institutions’ ISQC 1 ‘Quality Control for Firms that Perform Audits and Reviews of Historical Information and Other Assurance and Related Services Engagements’ Guidance Statement ‘Audit Implications of AASB 1049’, and Project plans to revise or withdraw guidance statements.
ASIC Wholly-owned Entities Class Order
The Australian Securities and Investments Commission (ASIC) has announced a number of changes to Class Oder 98/1428 ‘Wholly-owned entities’, which provides certain wholly-owned subsidiaries with relief from the requirement to prepare financial reports. The changes enable more companies to rely on the relief and reduce the administrative work for group companies.
The main changes include:
Removing the requirement for a three year compliance history with the financial reporting requirements of the Corporations Act 2001 of the first order Replacing the requirement to lodge an annual notice concerning use of the class order with a requirement to lodge a notice when the relief is first applied or the group holding entity changes, and another notice when the company ceases to apply the relief Reducing the matters which must be addressed in the certificate required under the original class order Removing the requirement for a statutory declaration when first entering into a deed; and Removing the requirement to lodge solvency statements by directors under the order and simplifying the signing requirements for those statements.
ASIC is also adopting a no action position in relation to certain past failures to lodge the annual notice. To take advantage of the no action position, a company that has never lodged a Form 389 may do so by 30 June 2008.
ASIC Disclosing Entities Class Order
ASIC has also announced new relief under Class Order 08/15 ‘Disclosing entities – half year financial reporting relief’. CO 08/15 relieves a disclosing entity from the requirement to prepare and lodge a half-year financial report and directors’ report during the first financial year of the entity, where that first financial year lasts for eight months or less.
Disclosing entities are required to prepare and lodge financial reports for each half-year and full financial year. ASIC has previously given case-by-case relief from preparing and lodging half-year reports to entities with a financial year of eight months or less. Relief for first financial years of eight months or less is now available under CO 08/15. This will save entities that can rely on CO 08/15 the cost of making individual applications for relief.
ICAA Revises its QA Review Retention Policy
From 1 July 2008, quality review results letters, and any associated correspondence, will be kept on file by The Institute of Chartered Accountants in Australia. The change allows quality reviewers to see how practices have progressed over time, by comparing the review result with the previous result. It also allows the Financial Reporting Council (FRC), to oversee the Institute’s work. The information will be treated confidentially, and not be shared with any other third party. In 2007, the FRC published findings of a review of the Institute’s co-regulatory work. One the recommendations made was that the FRC have access to review files. The Institute accepted this recommendation, and has amended its retention policy accordingly.
Any practice that is selected for a review from 1 July 2008 will be informed in writing that the review results letter issued by the Institute, and any associated correspondence, will be kept on file until their next review has been completed (normally, three to five years). Other documentation relating to the review will normally only be kept for twelve months after the completion of the review (depending on the result of the review). This information may be inspected by the FRC, as part of its routine oversight of the Institute’s Quality Review Program.
IPSASB March Meeting Highlights
Highlights from 10-13 March of the International Public Sector Accounting Standards Board (IPSASB) included:
Strategy and Workplan 2008-2010: Discussed proposed project activities for the next 2 years including, specifically, plans for reaching convergence on IFRSs. The IPSASB aims to have standards complete as of 31 December 2009 that will be substantially converged with IFRSs approved as of 31 December 2008
Conceptual Framework: Reviewed a first draft of a consolidated Consultation Paper on ‘objectives of general purpose financial reporting’, ‘scope of general purpose financial reporting’, ‘qualitative characteristics of financial information included in general purpose financial reports’, and ‘the reporting entity’. A revised draft is scheduled for approval for public comment in June 2008
Social Benefits: Approved for public comment a Consultation Paper ‘Social Benefits: Key Issues in Recognition and Measurement’. The paper is one of three documents for comment released on the topic social benefits, the others are ED 34 ‘Social Benefits: Disclosure of Cash Transfers to Individuals or Households’, and a Project Brief on ‘Long-Term Fiscal Sustainability’. Comments are sought by 15 July
Service Concession Arrangements: Approved for public comment, a Consultation Paper ‘Accounting and Financial Reporting for Service Concession Arrangements’ with comments due by 1 August
Financial Instruments: Reconsidered the direction of its financial instruments project, concluding that it should develop IPSASs that are convergent with IAS 32 ‘Financial Instruments: Presentation’, IAS 39 ‘Financial Instruments: Recognition and Measurement’, and IFRS 7 ‘Financial Instruments: Disclosures’. Decided to develop an additional public sector specific standard on financial instruments
Updated IPSAS 4 ‘The Effects of Changes in Foreign Exchange Rates’: Approved a revised IPSAS 4
Updated IPSAS 5 ‘Borrowing Costs’: Considered a proposal to converge IPSAS 5 with IAS 23 ‘Borrowing Costs’. Decided to develop IPSAS 5 to allow the capitalisation of borrowing costs for cash generating assets and require the expensing of borrowing costs in all other circumstances, and
Narrative Reporting: Approved a new project on Narrative Reporting (Management Discussion and Analysis), but will await comments on the IPSASB's Conceptual Framework Consultation Paper before proceeding in the second quarter of 2009.
Revised IPSAS 4 on ‘Foreign Exchange Rates’
The International Public Sector Accounting Standards Board (IPSASB) has released a technical update to International Public Sector Accounting Standard (IPSAS) 4 ‘The Effects of Changes in Foreign Exchange Rates’. The update to IPSAS 4, which was issued as part of the IPSASB's global convergence program, reflects the latest amendments to the corresponding IFRS issued by the IASB. Converging IPSASs with IFRSs, where appropriate for the public sector, is one of the key strategic objectives of IPSASB standards development program. The revised IPSAS clarifies the requirements for public sector entities to convert foreign currency transactions and balances into their reporting currency.
Service Concession Paper Released by IPSASB
The use of public-private partnership arrangements, which include service concession arrangements, by the public sector, as vehicles to build and improve infrastructure and other public facilities and provide the services associated with these structures, has continued to grow worldwide over recent years. The lack of international guidance for grantors of service concession arrangements, combined with the growing public sector interest in these arrangements, means that there is need for action on this issue critical.
The International Public Sector Accounting Standards Board (IPSASB) has released a consultation paper entitled ‘Accounting and Financial Reporting for Service Concession Arrangements’ that identifies issues and provides proposals to be considered in the development of IPSASB requirements for accounting and financial reporting of service concession arrangements.
The consultation paper provides an overview of the various types of arrangements that are considered public-private partnerships, of which service concession arrangements are a subset. Also included is an analysis of existing authoritative guidance to assess whether it is sufficient to address the accounting and reporting implications for these arrangements. The paper concludes that additional guidance is needed for service concession arrangements in the public sector. Comments on the consultation paper are requested by 1 August 2008.
Service concession arrangements are distinct from other public-private partnership arrangements in that the risks and benefits associated with constructing, owning and operating the underlying property, along with the control over the property, are shared to a greater degree by the public sector entity and private sector entity involved in the arrangement. The sharing of these aspects of the property, as well as the general complexity of these transactions, has often made the financial reporting of the property for the parties unclear.
This lack of specific guidance for service concession arrangements has caused divergence in how the property is reported, even occasionally resulting in the property not being reported as an asset by either the public sector or private sector entity. This has also provided public sector entities the opportunity to use these arrangements as a means to fulfill their infrastructure needs without recognising the property and related financing in their financial statements, while potentially still meeting fiscal targets.
In November 2006, the IFRIC issued IFRIC 12 ‘Service Concession Arrangements’ which is applicable only to the operators of these arrangements and not to the public sector grantor. This left many public sector grantors without international guidance on reporting on service concession arrangements. This consultation paper is the IPSASB’s first step in considering options for developing guidance for them.
ISAs on Written Representations and Subsequent Events
The International Auditing and Assurance Standards Board (IAASB) has released International Standard on Auditing (ISA) 580 (Revised and Redrafted) ‘Written Representations’, and ISA 560 (Redrafted) ‘Subsequent Events’. These form part of the complete set of clarified ISAs. They are effective for audits of financial statements for periods beginning on or after 15 December 2009.
IAS 580 ‘Written Representations’ contains new requirements designed to improve the auditors’ practice in relation to the written statements that management provides to auditors to confirm certain matters or to support other audit evidence (referred to as ‘written representations’). The standard requires the auditor to request management to provide written representations on two fundamental matters, that it has:
Fulfilled its responsibility for the preparation and presentation of the financial statements, and Provided the auditor with all relevant information and that all transactions have been recorded and are reflected in the financial statements.
The auditor may deem it appropriate to request other written representations during the course of the audit. Other ISAs also include requirements for the auditor to request certain written representations in respect of specific matters. In addition, ISA 580 includes requirements for appropriate action by the auditor when written representations are not provided by management or are considered to be unreliable.
The ISA makes clear that, although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any matters. Furthermore, the fact that management has provided written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of management's responsibilities, or about specific assertions.
IAS 560 ‘Subsequent Events’ deals with the auditor's responsibilities relating to subsequent events in an audit of financial statements, and provides more clarity as to the requirements, but does not incorporate any substantive changes.
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Outstanding Exposure Drafts
Accounting
25 April D23 ‘Distributions of Non-cash Assets to Owners’ – IFRIC 25 April D24 ‘Customer Contributions’ – IFRIC 16 June Request for Comment ITC 15 on IPSASB ED 34 ‘Social Benefits: Disclosure of Cash Transfers to Individuals or Households’ – AASB 16 June IPSASB Consultation Paper ‘Social Benefits: Issues in Recognition and Measurement’ – AASB 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
Other
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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