Monday, September 28, 2009

Financial Statement Presentation, the Latest Update from IASB

The International Accounting Standards Board met in London on 14-18 September 2009, when it discussed :

(1) Financial Crisis, (a) De-recognition, (b) Financial instruments : replacement of IAS 39, and (c) Classification of right issues

(2) Conceptual Framework

(3) Financial Instruments with Characteristics of Equity

(4) Financial Statement Presentation

(5) Insurance Contracts

(6) Leases

(7) Liabilities : amendments to IAS 37

(8) Post-employment Benefits

(9) Related Party Disclosures

(10)Revenue Recognition

Financial Statement Presentation

Regarding on Financial Statement Presentation, here is the update summary from the meeting.

The discussion paper Preliminary Views on Financial Statement Presentation proposes that an entity should present information about the way it creates value (its business activities) separately from information about the way it funds those business activities (its financing activities). The discussion paper proposes that an entity should:

(a) further separate information about its business activities by presenting information about its operating activities separately from information about its investing activities.

(b) further separate information about its financing activities so that non-owner sources of finance (and related charges) should be presented separately from owner sources of finance (and related charges).

(c) present information about its discontinued operations separately from its continuing business and financing activities.

The Board tentatively decided:

(a) to retain the requirement to distinguish between business activities (value creating activities) and financing activities (funding of that value creation) in each of the financial statements.

(b) to define the financing section as financial liabilities used as part of an entity's capital raising activities that have an agreed-upon schedule of repayments with an interest component (and that interest component is either explicit or implicit). Items directly related to those financial liabilities, such as fees, would also be classified in the financing section. A derivative held as part of an entity's non-equity sources of funding, regardless of whether it is an asset or a liability at the reporting date, would also be presented in this section.

(c) to retain an approach to classification within the business section that is based on how a reporting entity organises its activities and how it uses its assets and liabilities. Consequently, additional groupings of information within the business section (ie categories) would reflect the facts and circumstances of that entity and would be left to the discretion of management. Application guidance would be developed to help management determine meaningful groupings of information within an entity's business section. The Board may revisit the decision not to require specific categories in the business section once it has reviewed the application guidance.

(d) to retain the requirement to present information about discontinued operations in a separate section in each of its primary financial statements (except the statement of changes in equity). However, the Board decided not to prescribe how information about discontinued operations should be disaggregated, nor whether that disaggregation should appear on the face of financial statements or be disclosed in the notes.

The Board also considered whether an entity should present information about net debt in its financial statements. The discussion paper did not address presentation of net debt information. Respondents to the discussion paper note that information that would be useful in assessing an entity's liquidity, solvency and financial flexibility is missing from the presentation model proposed in the discussion paper. Moreover, some respondents are concerned that the financial statements do not necessarily include all the information that users need to either reconcile net debt or to analyse the components of net debt.

The Board tentatively decided:

(a) to require information about net debt to be presented in the financial statements; and

(b) to define net debt to be the financial liabilities that an entity classifies in the financing section together with the resources available to service those financial liabilities.

The Board also considered different ways to present net debt information in the financial statements. The presentation of net debt information will be reconsidered at the October joint meeting with the FASB as part of the discussion on the Statement of Cash Flows.

Go to the project page on the IASB website

Source : IASB Update September 2009 (Emailed News Letter)

Friday, September 25, 2009

PCAOB Issues Report on First Year of Implementation of Auditing Standard No. 5

Washington, DC, September 24, 2009 – The Public Company Accounting Oversight Board today issued a report on the first year of implementation of Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (AS No. 5).

The report is based on PCAOB inspections that examined portions of approximately 250 audits of internal control over financial reporting (ICFR) by the eight largest domestic registered firms in 2007 and 2008. AS No. 5 became effective for audits for fiscal years ending on or after Nov. 15, 2007, and replaced the PCAOB’s previous ICFR standard, Auditing Standard No. 2.

The period covered by the report was, for auditors and preparers of financial statements, a period of transition to new internal control requirements. Auditors responded to the issuance of AS No. 5 and preparers of financial statements received guidance from the U.S. Securities and Exchange Commission (SEC) on management’s assessment of ICFR.

The PCAOB’s 2008 inspections of ICFR audits were focused on whether auditors were effectively transitioning to AS No. 5, and were designed to assess the quality of the firms’ AS No. 5 implementation in the following areas: risk assessment; fraud risk; using the work of others; entity-level controls; the nature, timing, and extent of controls testing; and evaluating and communicating deficiencies.

“This report finds that, in the engagements our inspection teams looked at, auditors generally focused on the areas that presented more significant audit risk,” said Daniel L. Goelzer, Acting PCAOB Chairman. “While we are encouraged by the first-year implementation of AS No. 5, there is still room for improvement, and we will continue to review and assess the effectiveness of firms’ integrated audit procedures in 2009.”

George Diacont, Director of the PCAOB Division of Registration and Inspections, added, "This report discusses six areas in which auditors may be able to make further improvements in their integrated audits, and I encourage auditors to use this report to do so.”

The report focuses on audits performed by the eight domestic firms that the Board has inspected annually in each year since 2004. Four of these firms audit public companies that represent approximately 98 percent of total U.S. market capitalization.

In this report, the Board is not changing or proposing to change any existing standard, nor is the Board providing any new interpretation of any existing standards.

The report is available on the PCAOB Web site at

Posted from PCAOB Website

Thursday, September 24, 2009

Revenue recognition from the sale of goods

Revenue from the sale of goods should be recognized if all of the five conditions mentioned below are met.

(1) The reporting entity has transferred significant risks and rewards of ownership of the goods to the buyer;

(2) The entity does not retain either continuing managerial involvement (akin to that usually associated with ownership) or effective control over the goods sold;

(3) The quantum of revenue to be recognized can be measured reliably;

(4) The probability that economic benefits related to the transaction will flow to the entity exists; and

(5) The costs incurred or to be incurred in respect of the transaction can be measured reliably.

The determination of the point in time when a reporting entity is considered to have transferred the significant risks and rewards of ownership in goods to the buyer is critical to the recognition of revenue from the sale of goods.

If upon examination of the circumstances of the transfer of risks and rewards of ownership by the entity it is determined that the entity could still be considered as having retained significant risks and rewards of ownership, the transaction could not be regarded as a sale.

Some examples of situations illustrated by the standard in which an entity may be considered to have retained significant risks and reward of ownership, and thus revenue is not recognized, are set out below.

(1) A contract for the sale of an oil refinery stipulates that installation of the refinery is an integral and a significant part of the contract. Therefore, until the refinery is completely installed by the reporting entity that sold it, the sale would not be regarded as complete.

(2) Goods are sold on approval, whereby the buyer has negotiated a limited right of return. Since there is a possibility that the buyer may return the goods, revenue is not recognized until the shipment has been formally accepted by the buyer, or the goods have been delivered as per the terms of the contract, and the time stipulated in the contract for rejection has expired.

(3) In the case of “layaway sales,” under terms of which the goods are delivered only when the buyer makes the final payment in a series of installments, revenue is not recognized until the last and final payment is received by the entity. However, based upon experience, if it can reasonably be presumed that most such sales are consummated, revenue may be recognized when a significant deposit in received from the buyer and goods are on hand, identified and ready for delivery to the buyer.

If the reporting entity retains only an insignificant risk of ownership, the transaction is considered a sale and revenue is recognized.

Another important condition for recognition of revenue from the sale of goods is the existence of the probability that the economic benefits will flow to the entity. For example, for several years an entity has been exporting goods to a foreign country. In the current year, due to sudden restrictions by the foreign government on remittances of currency outside the country, collections from these sales were not made by the entity. As long as it is uncertain if these restrictions will be removed, revenue should not be recognized from these exports, since it may not be probable that economic benefits in the form of collections will flow to the entity. Once the restrictions are withdrawn and uncertainty is removed, revenue may be recognized.

Yet, another important condition for recognition of revenue from the sale of goods relates to the reliability of measuring costs associated with the sale of goods. Thus, if expenses such as those relating to warranties or other post-shipment costs cannot be measured reliably, then revenue from the sale of such goods should also not he recognized. This rule is based on the principle of matching of revenues and expenses.

(Sources : Wiley IFRS 2008 : Interpretation and Application of International Financial Reporting Standards - Barry J. Epstein, Eva K. Jermakowicz)