GAAP ALERT No.15/2008
31 August 2008
Highlights of August 28th meeting of the AASB included:
Financial Instruments – Eligible Hedged Items: Made AASB 2008-8 ‘Amendments to Australian Accounting Standards – Eligible Hedged Items’ which amends the application guidance of AASB 139 ‘Financial Instruments: Recognition and Measurement’ to clarify how the existing principles underlying hedge accounting apply to the designation of: a one-sided risk in a hedged item; and inflation as a hedged risk or portion in particular circumstances. The amendments apply retrospectively to annual reporting periods beginning on or after 1 July 2009, with earlier application permitted
Concise Financial Reports: Made the revised AASB 1039 ‘Concise Financial Reports’ to reflect the requirements of AASB 101 ‘Presentation of Financial Statements’, and AASB 8 ‘Operating Segments’. The revised AASB 1039 applies to annual reporting periods beginning on or after 1 January 2009
Interpretations: Approved AASB Interpretation 15 ‘Agreements for the Construction of Real Estate’ and AASB Interpretation 16 ‘Hedges of a Net Investment in a Foreign Operation’, which reflect IFRIC Interpretations 15 and 16. AASB Interpretation 15 applies to annual reporting periods beginning on or after 1 January 2009. AASB Interpretation 16 applies to annual reporting periods beginning on or after 1 October 2008. Both Interpretations can be early adopted
Annual Improvements 2008: Approved ED 165 ‘Proposed Improvements to Australian Accounting Standards’ that reflects the IASB’s ED ‘Improvements to IFRSs’ that was issued as part of the IASB’s annual improvements project. Submissions are sought by 20 October
Earnings per Share: Approved ED 166 ‘Simplifying Earnings per Share: Proposed amendments to AASB 133’ which reflect the IASB’s ED ‘Simplifying Earnings per Share: Proposed amendments to IAS 33’. Submissions are sought by 31 October
Superannuation Plans and Approved Deposit Funds (ADFs): Completed its first review of the standard component of the proposed exposure draft ‘Superannuation Plans and Approved Deposit Funds’ that will replace AAS 25 Financial Reporting by Superannuation Plans. The AASB is yet to consider Application Guidance and Basis of Conclusions components. The standard component of the exposure draft is to be updated to reflect decisions make on seven issues papers discussed at the meeting, and for the review comments made by the AASB on the principles expressed in the exposure draft. The AASB is likely to take at least two more meetings to finalise the exposure draft.
24 September Meeting Agenda: It is anticipated that the AASB will address: Amendments to AASB 1049 to align with AASB 101 (ED 163); Conceptual Framework; GAAP/GFS Harmonisation (Entities within the GGS); Interpretations (including AASB 1048); and Superannuation Plans and ADFs.
Interpretation 15 ‘Agreements for the Construction of Real Estate’
AASB Interpretation 15 ‘Agreements for the Construction of Real Estate’ applies to agreements for the construction of residential real estate arising from marketing individual units ‘off the plan’ before construction is complete, and to any other agreement for the construction of real estate (whether residential or non-residential).
The Interpretation clarifies that an agreement for the construction of real estate meets the definition of a ‘construction contract’ (and, therefore, falls within the scope of AASB 111 ‘Construction Contracts’) when the buyer is able to specify the major structural elements of the design of real estate before construction begins and/or specify major structural changes once construction is in progress (whether or not it exercises that ability). For agreements that fall within the scope of AASB 118 ‘Revenue’, AASB Interpretation 15 clarifies how that Standard should be applied to the construction of real estate. It also clarifies how to account for separate components of agreements for the construction of real estate, such as building construction, sales of land, and the provision of property management services.
If an agreement for the construction of real estate is an agreement for the sale of goods, the entity recognises revenue by reference to the stage of completion using the percentage of completion method only if both of the following occur: the entity transfers to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses; and all the criteria of AASB 118 (paragraph 14) are met continuously as construction progresses.
SEC Road Map to IFRS Adoption by 2014
The Securities and Exchange Commission (SEC) voted to publish for public comment a proposed Roadmap that could lead to the use of International Financial Reporting Standards (IFRS) by U.S. issuers beginning in 2014; the road map will be released shortly. Currently, U.S. issuers use U.S. Generally Accepted Accounting Principles (U.S. GAAP). The SEC will make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the SEC.
“An international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions,” said SEC Chairman Christopher Cox. “The increasing worldwide acceptance of financial reporting using IFRS, and U.S. investors' increasing ownership of securities issued by foreign companies that report financial information using IFRS, have led the Commission to propose this cautious and careful plan. Clearly setting out the SEC’s direction well in advance, as well as the conditions that must be met, will help fulfill our mission of protecting investors and facilitating capital formation.”
GAAP Consulting member David Sauer noted that the SEC proposal includes staggered commencement dates with the largest US listed entities having the earliest adoption date.
IASB Progresses towards a Consolidations ED
The International Accounting Standards Board (IASB) is to hold a series of round-table meetings with interested parties on consolidations. The objective of the round tables is to facilitate progress on the project by obtaining public comment at an early stage. The views received in the round-table discussions are expected to help the IASB in shaping its forthcoming proposals for creating a single IFRS on consolidation to replace IAS 27 ‘Consolidated and Separate Financial Statements’ and SIC-12 ‘Consolidation – Special Purpose Entities’. The IASB envisages publishing an exposure draft for public comment in the fourth quarter 2008.
An initial staff draft of the exposure draft was presented to the IASB at its meeting in July, and was published on the Website as part of the observer notes for that meeting. As a basis for the round-table discussions an updated version of the staff working draft will be published shortly before the first round table meeting. The IASB welcomes observers to listen to the discussion at the round table on 17 September (which will also be broadcast on the Internet).
IFRIC September Meeting Agenda
The agenda for 4-5 September IFRIC meeting included:
D24 ‘Customer Contributions’ D23 ‘Distributions of Non-cash Assets to Owners’ Review of Tentative Agenda Decisions published in the July IFRIC Update: Time pattern of the user’s benefit; Accounting for trailing commissions; and Transaction costs to be deducted from equity Staff Recommendations for Tentative Agenda Decisions: Customer-related intangible assets; Restricted securities; Application to prepaid employer’s contribution reserve, and Regulatory assets and liabilities.
APESB August Meeting Highlights
Highlights of the 11 – 12 August meeting of Accounting Professional & Ethical Standards Board Limited (APESB) included:
Prospective Financial Information: Agreed to re-expose ED 02/08 APES 345 ‘Reporting on Prospective Financial Information’ for 30 days. The scope is now proposed to include documents required to be lodged with ASIC, as well as unregulated offer documents Due Diligence: Agreed in principle to develop a separate pronouncement on the accountant’s role in Due Diligence Committees Risk Management: Agreed to establish a taskforce to oversee the development of APES 350 ‘Risk Management’ Financial Advisory Services: Considered a Financial Advisory Services Discussion Paper and agreed to issue the paper for public comment for a period of 60 days Outsourcing: Considered an Outsourcing Discussion Paper Quality Control: Approved a project plan to update APES 320 ‘Quality Control for Firms’ to reflect the recent revisions to International Standard on Quality Control (ISQC) 1 ‘Quality Control for Firms that Perform Audits and Reviews of Financial Statements and Other Assurance and Related Services Engagements’ Conformity with Auditing and Assurance Standards: Considered ED 03/08 APES 210 ‘Conformity with Auditing and Assurance Standards’ (current APES 410), and agreed that the standard should continue to apply to all members. The proposed revised standard is expected to be issued in September 2008. An operative date is yet to be determined, and Insolvency Services: Discussed ED 0X/08 APES 330 ‘Insolvency Services’, and will reconsider it at the November 2008 meeting.
ASIC Guidance for Unlisted and Unrated Debentures Clarified
ASIC released the updated Regulatory Guide 69: Debentures–improving disclosure for retail investors which clarifies existing obligations to make them simpler for issuers to implement. It does not change ASIC’s policy on improved disclosure for retail investors. The original guide (31 October 2007), set out a series of benchmarks which debenture issuers should disclose against on an ‘if not, why not’ basis. The benchmarks are designed to ensure the risks associated with debentures are better disclosed to retail investors.
As a result of feedback, ASIC has refined some aspects of the practical implementation in the regulatory guide by clarifying:
Disclosure benchmarks for: equity capital, liquidity, loan portfolio, valuations, and lending principles Disclosure obligations for issuers who on-lend funds indirectly through a related party It does not apply to debentures that are to be quoted on a financial market, or to debentures that are convertible into listed securities at the discretion of the investors; and Auditors’ report on the benchmarks.
When auditing the annual financial report of the issuer, ASIC expects issuers to engage their auditors to provide a separate report in relation to the benchmarks. A pro forma ‘auditor’s benchmark report’ is available at ASIC’s website http://www.asic.gov.au/uud to meet this requirement.
ASIC has been monitoring debenture issuers to check that this benchmarking information is adequately disclosed to investors on an ‘if not, why not’ basis. ASIC intends to continue working with debenture issuers, trustees, auditors, and valuers to ensure retail investors are better informed when making choices about their investments and assessing the risk of capital return.
‘Capacity to Repay’ Certificates Warning by ASIC
Accountants who certify that borrowers applying for finance have the ‘capacity to repay’ a loan have been reminded by ASIC about their responsibilities to ensure there is a reasonable basis for providing the certification. The alert follows the release of an ASIC report ‘Protecting wealth in the family home’ which drew on a qualitative examination of a small number of refinancing transactions for borrowers in financial difficulty.
The report discussed the practice by some lenders of relying on an accountant’s certificate to verify a borrower’s capacity to make repayments before approving a loan. The report also examined a small number of cases where accountants had provided certificates without properly ascertaining or investigating the borrower’s financial position, or their true capacity to repay the loan.
“In each case examined, the accountant had insufficient information to make a reliable judgment about the borrower’s financial position. In fact, in two cases it appears that the accountant who provided these certificates had never met or spoken to the borrowers”, Ms Delia Rickard, ASIC’s Acting Executive Director of Consumer Protection said.
The report shows that mortgage brokers seeking to arrange refinancing transactions for borrowers in mortgage stress regularly approach accountants for a certificate of the borrowers ‘capacity to repay’. “Relying on an accountant’s certificate effectively shifts the risk of credit assessment from the lender to the accountant. Accountants need to be aware that certifying a capacity to repay without making proper inquiries may expose them to legal action, particularly where the borrower defaults within a short period after taking out the loan”, said Ms Rickard.
ASIC urged all accountants who provide ‘capacity to repay’ certificates to check they have appropriate systems in place to ensure there is a reasonable basis for providing the certification in every case; and that accountants to consider the implications of providing these certificates without reasonable basis. “It is essential that accountants make detailed and rigorous inquiries before certifying the borrower’s ‘capacity to repay’, in order to protect themselves and borrowers”, said Ms Rickard.
GAAP Consulting member David Sauer noted that “Although the format of required wording may slightly disguise the fact, any accountant providing one of these certificates is undertaking an assurance engagement. If they have not undertaken their work in accordance with Australian Auditing and Assurance Standards they place themselves in a very vulnerable position.”
Unit Pricing Guide Updated by APRA and ASIC
The Australian Prudential Regulation Authority (APRA) and ASIC released a newly updated 105-page Unit pricing - guide to good practice for the life insurance, superannuation and funds management industries. The joint APRA/ASIC guide has been amended so that scheme operators can elect not to make payments to exited members for unit pricing errors where the compensation due is less than $20.
APRA and ASIC reiterated that unit pricing issues can be complex and providers need to remain vigilant in applying robust risk management practices, as well as meeting their trustee and responsible entity obligations. These regulators will continue to review aspects of unit pricing practice and generally expect that product providers will follow the ‘good practices’ described in the guide. They understand that alternative practices are sometimes appropriate, but expect product providers to have a reasonable and well-documented justification for adopting them.
NIA Government Accounting Masterclass
The National Institute of Accountants is running its popular ‘Government Accounting Masterclass’ (8.30am-4.30pm) in Sydney on 28 October 2008, and National Press Club, Canberra, 20 October 2008. Key topics to be covered include:
Update from the AASB on accounting developments Update from the Audit Office Challenges in managing reporting issues and accountability Improving the efficiency and effectiveness of government activities Public Private Partnerships (PPP), and Asset Valuation and the Public Sector.
Colin Parker, Principal, GAAP Consulting, will speak on the topic of ‘Public Sector Accounting Standards Update’. Colin is also a member of the Australian Accounting Standards Board.
For further information please contact: National Institute of Accountants (NSW Division) 02 8262 6000, or email.
Outstanding Exposure Drafts
Accounting
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 20 September 2008 ‘Review of the Constitution: Public Accountability and the Composition of the IASB – Proposals for Change’ – IASB 29 September ‘An Improved Conceptual Framework for Financial Reporting: Chapter 1: The Objective of Financial Reporting and Chapter 2: Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information)’ – IASB and FASB 29 September ‘Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Reporting Entity’ – IASB and FASB 20 October ED 165 ‘Proposed Improvements to Australian Accounting Standards’ – AASB 31 October ED 166 ‘Simplifying Earnings per Share: Proposed amendments to AASB 133’ – IASB 7 November ‘Improvements to IFRS (Proposed amendments to International Financial Reporting Standards’ – IASB 5 December ‘Simplifying Earnings per Share (proposed amendments to IAS 33)’ – IASB
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