Guidebook to IAS 23 Borrowing Costs

The International Accounting Standards Board (IASB) issued a revised version of IAS 23 Borrowing Costs (IAS 23) in March 2007. In the revised standard, the previous benchmark treatment of recognising borrowing costs as an expense has been eliminated. Instead, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset will form part of the cost of that asset. The revised IAS 23 is effective for annual periods beginning on or after 1 January 2009 with earlier application permitted.

The new standard will represent a change in accounting policy for entities that applied the benchmark treatment under the previous standard. These entities will now need to develop procedures to calculate the amount of borrowing costs to be capitalised. Although the concept of capitalising borrowing costs is simple and familiar to many, putting that concept into practice frequently leads to questions.

Issues that often take up management time, and may therefore need to be considered early, include :

• which of the entity’s loans are specific borrowings?
• how does an entity reflect the fluctuation of borrowings and interest rates during the period when calculating the borrowing costs to capitalise?
• how does an entity take into account the effect of exchange differences in determining the amount of borrowing costs to capitalise?

These and many other common questions are considered in : Grant Thornton – Capitalisation of Borrowing Costs, from theory to practice.

This guidebook is available to be downloaded in here.  Another valuable guidebook published by PWC also available in here. 

IASB issued IFRS 9 Financial Instruments

The International Accounting Standards Board (IASB) issued today a new International Financial Reporting Standard (IFRS) on the classification and measurement of financial assets. Publication of the IFRS represents the completion of the first part of a three-part project to replace IAS 39Financial Instruments: Recognition and Measurement with a new standard - IFRS 9Financial Instruments. Proposals addressing the second part, the impairment methodology for financial assets were published for public comment at the beginning of November, while proposals on the third part, on hedge accounting, continue to be developed.

he new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity – an objective endorsed by the Group of 20 leaders (G20) and other stakeholders internationally. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39. Thus IFRS 9 improves comparability and makes financial statements easier to understand for investors and other users.

The IASB has received broad support for its approach. This became evident during the unprecedented global scale of consultation and outreach activity it undertook in order to refine proposals contained within the exposure draft published in July 2009. Round table discussions were held in Asia, Europe and the United States. Interactive webcasts, each attracting thousands of registered participants, have been held, often on a weekly basis. In addition, more than a hundred meetings have been held with interested parties around the world during the past four months.

The views expressed to the IASB during its consultations resulted in the proposals being modified to address concerns raised and to improve the standard. For example, IFRS 9 requires the business model of an entity to be assessed first to avoid the need to consider the contractual cash flow characteristics of every individual asset. It requires reclassification of assets if the business model of an entity changes. The IASB changed the accounting that was proposed for structured credit-linked investments and for purchases of distressed debt. The IASB also addressed concerns expressed about the problems created by the mismatch in timings between the mandatory effective date of IFRS 9 and the likely effective date of a new standard on insurance contracts.

Furthermore, in response to suggestions made by some respondents, the IASB decided not to finalise requirements for financial liabilities in IFRS 9. The IASB has begun the process of giving further consideration to the classification and measurement of financial liabilities and it expects to issue final requirements during 2010.

A feedback statement providing comprehensive details of how the IASB has responded to comments received through the consultation process is available for download by clicking here.

The effective date for mandatory adoption of IFRS 9 Financial Instruments is 1 January 2013. Consistent with requests by the G20 leaders and others, early adoption is permitted for 2009 year-end financial statements.

Commenting on IFRS 9, Sir David Tweedie, Chairman of the IASB, said:

We have delivered on our commitment to the G20 and stakeholders internationally to provide an improved financial instrument standard for the classification and measurement of financial assets for use in 2009. Benefiting from unprecedented levels of consultation with stakeholders around the world, the IASB has made significant changes in its initial proposals to improve the standard, provide enhanced transparency and respond to stakeholder concerns.

IFRS 9 Financial Instruments is available for eIFRS subscribers from today.

Source : www.IASB.org

IASB and FASB reaffirm to improve IFRS and U.S.GAAP and to bring about their convergence

At their joint meeting last week, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) reaffirmed their commitment to improve International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (U.S. GAAP) and to bring about their convergence. The Boards also agreed to intensify their efforts to complete the major joint projects described in their 2006 Memorandum of Understanding (MoU), as updated in 2008.

Today, as a further affirmation of that commitment, the IASB and FASB issued a joint statement describing their plans and milestone targets for completing the major MoU projects in 2011. The statement, which is available by clicking here [PDF] also describes the values and principles underpinning the Boards’ collaboration and significant successes achieved thus far.

In affirming their commitment to developing a common set of high quality standards, the Boards took note of the support of the leaders of the Group of 20 nations, the Financial Crisis Advisory Group of the FASB and IASB, and the Monitoring Board of the International Accounting Standards Committee (IASC) Foundation for the joint convergence efforts underway.

Commenting on the update, Sir David Tweedie, chairman of the IASB, said:

The two boards are committed to improving financial reporting internationally by completing the convergence programme described in the Memorandum of Understanding. The statement published today describes a series of important and concrete steps that will help us to achieve our June 2011 targets.

Robert Herz, chairman of the FASB, said:

Our successful joint meeting with the IASB in late October demonstrated that improvements in financial reporting and convergence are very much on track. Our joint efforts have and will continue to produce significant benefits to investors and the economy at large. We will continue our dual objectives of working toward global convergence while addressing reporting issues of critical importance to U.S. investors and financial markets.

In the interest of timely and continued progress, the two Boards also committed to monthly joint meetings and to provide transparency and accountability by providing quarterly updates on their progress on convergence projects.

The IASB and the FASB will hold their next joint meeting via videoconference later this month.

The Trustees of the IASC Foundation and the Trustees of the FAF also issued a statement of support today available by clicking here [PDF].

Source : IASB.org

ED on the amortised cost measurement and impairment of financial instruments

The International Accounting Standards Board (IASB) today (5 Nov 2009) published for public comment an exposure draft on the amortised cost measurement and impairment of financial instruments. The proposals form the second part of a three-part project to replace IAS 39 Financial Instruments: Recognition and Measurement with a new standard, to be known as IFRS 9 Financial Instruments. Proposals on the classification and measurement of financial instruments were published in July, with a final standard expected shortly, while proposals on hedge accounting continue to be developed.

Both International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) currently use an incurred loss model for the impairment of financial assets. An incurred loss model assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value.
The global financial crisis has led to criticism of the incurred loss model for presenting an initial, over-optimistic assessment of no credit losses, only to be followed by a large adjustment once a trigger event occurs.

Responding to requests by the G20 leaders and others, in June 2009 the IASB published a Request for Information on the practicalities of moving to an expected loss model. The responses have been taken into account by the IASB in developing the exposure draft.

Under the proposals expected losses are recognised throughout the life of the loan (or other financial asset measured at amortised cost), and not just after a loss event has been identified. This would avoid the front-loading of interest revenue that occurs today before a loss event is identified, and would better reflect the lending decision. Therefore, under the proposals, a provision against credit losses would be built up over the life of the financial asset. Extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary.

The IASB is aware of the significant practical challenges of moving to an expected loss model. For this reason an Expert Advisory Panel (EAP) comprising experts in credit risk management is being established to advise the board. An eight-month comment period has been provided to allow adequate time for entities to consider the impact of such a change within their organisation.

The IASB will continue the unprecedented level of outreach activity currently being undertaken in reforming the accounting for financial instruments. The IASB will also co operate closely with the US Financial Accounting Standards Board (FASB) with a view to agreeing a common approach to the impairment of financial assets.

Introducing the exposure draft, Sir David Tweedie, Chairman of the IASB, said:

Consistent with requests from the G20 and others, the IASB has moved swiftly to reform the accounting for financial instruments. These proposals on the impairment of financial assets measured at amortised cost form the second part of this project.

Although moving to a single impairment model significantly reduces complexity, the challenges of applying an expected loss approach should not be underestimated. For this reason the IASB will tread carefully and seek input from a broad range of interests before deciding how to proceed.

An IASB ‘Snapshot’, a high level summary of the proposals, is available to download free of charge from the IASB website - click here.

The proposals in the exposure draft Financial Instruments: Amortised Cost and Impairment are open for comment until 30 June 2010. After considering comments received on the exposure draft, the IASB plans to issue an IFRS in 2010 that would become mandatory about three years later with early application permitted. The exposure draft is available on the ‘Open for Comment’ section on the IASB website. Subscribers may also view the document in eIFRS.

Source : IASB.org

The revised version of IAS 24 Related Party Disclosures

The International Accounting Standards Board (IASB) issued today (4 November 2009) a revised version of IAS 24 Related Party Disclosures that simplifies the disclosure requirements for government-related entities and clarifies the definition of a related party. The revised standard is effective for annual periods beginning on or after 1 January 2011, with earlier application permitted.

IAS 24 requires entities to disclose in their financial statements information about transactions with related parties. In broad terms, two parties are related to each other if one party controls, or significantly influences, the other party.

The IASB has revised IAS 24 in response to concerns that the previous disclosure requirements and the definition of a ‘related party’ were too complex and difficult to apply in practice, especially in environments where government control is pervasive. The revised standard addresses these concern by :

(1) Providing a partial exemption for government-related entities. Until now, if a government controlled, or significantly influenced, an entity, the entity was required to disclose information about all transactions with other entities controlled, or significantly influenced by the same government. The revised standard still requires disclosures that are important to users of financial statements but eliminates requirements to disclose information that is costly to gather and of less value to users. It achieves this balance by requiring disclosure about these transactions only if they are individually or collectively significant.

(2)  Providing a revised definition of a related party. The IASB has simplified the definition and removed inconsistencies.

The softcopy of IAS 24 Related Party Disclosures is available to download for eIFRS subscribes from today.

Click here for IASB Press Release.

How IAS 16 regulates the Depreciation of PPE ?

IAS 16 Property, Plant and Equipment Par. 43 states that each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately, and such depreciation charge shall be charged to the income statement unless it is included in the cost of producing another asset.

Depreciation shall be applied to the depreciable amount of an asset on a systematic basis over its expected useful life.

Expected useful life is the period used, not the asset’s economic life, which could be appreciably longer (IAS 16 Par. 57 states that the useful life of an asset is defined in terms of the asset’s expected utility to the entity. The asset management policy of the entity may involve the disposal of assets after a specified time or after consumption of a specified proportion of the future economic benefits embodied in the asset. Therefore, the useful life of an asset may be shorter that its economic life. The estimation of the useful life of the asset is a matter of judgement based on the experience of the entity with similar assets).

The depreciable amount takes account of the expected residual value of the assets. Both the useful life and the residual value shall be reviewed annually and the estimates revised as necessary in accordance with IAS 8.

Depreciation still needs to be charged even if the fair value of an asset exceeds its residual value. The rationale for this is the definition of residual value, detailed above.

Residual value is the estimated amount, less estimated disposal costs, that could be currently realized from the asset’s disposal if the asset were already of an age and condition expected at the end of its useful life. This definition precludes the effect of inflation and, in all likelihood, will be less than fair value.

Depreciation commences when an assets is in the location and condition that enables it to be used in the manner intended by management. Depreciation shall cease at the earlier of its derecognition (sale or scrapping) or its reclassification as “held for sale”. Temporary idle activity does not preclude depreciating the asset, as future economic benefits are consumed not only through usage but also through wear and tear and obsolescence.

Useful life, therefore needs to be carefully determined based on use, maintenance programs, expected capacity, expected output, expected wear and tear, technical or commercial innovations, and legal limits.

(Source : IFRS Practical Implementation Guide and Workbook 2^nd Edition)

Revenue Recognition, the latest update from IASB

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

• Financial crisis
  
  • - Derecognition
    
  • - Financial instruments: replacement of IAS 39
    
  • - Classification of rights issues
    
• Conceptual framework
  
• Financial instruments with characteristics of equity
  
• Financial statement presentation
  
• Insurance contracts
  
• Leases
  
• Liabilities: Amendments to IAS 37
  
• Post-employment benefits
  
• Related party disclosures
  
• Revenue recognition
  

REVENUE RECOGNITION

Here is the summary from the IASB meeting regarding on Revenue Recognition.

The Board discussed:

• the definition of control for determining when goods and services are transferred to a customer; and
  
• options to acquire additional goods and services.
  

Control

In the Discussion Paper Preliminary Views on Revenue Recognition in Contracts with Customers the Board proposed that an entity should recognise revenue when it satisfies its performance obligations to a customer by transferring goods and services to the customer. An entity has transferred a good or a service when the customer obtains control of it.

At this meeting, the Board:

• Considered the following working definition of control: 'control of a good or a service is an entity's present ability to direct the use of and receive the benefit from that good or service'.
  
• Decided tentatively that an entity should assess the transfer of control from the perspective of the customer.
  
• Considered the following indicators that the customer has obtained control of the promised asset and examples applying those indicators:
  
  • The customer has an unconditional obligation to pay for the asset (and the payment is non-refundable).
    
  • The customer has legal title to the asset.
    
  • The customer can sell the asset to (or exchange the asset with) another party.
    
  • The customer has physical possession of the asset.
    
  • The customer has the practical ability to take possession of the asset.
    
  • The customer specifies the design or function of the asset.
    
  • The customer has continuing managerial involvement with the asset.
    
  • The customer can secure or settle debt with the asset.
    

The staff will continue to refine the definition of control and the indicators for discussion at future meetings. For example, one of the concerns expressed by the Board was how the control definition would be applied to an asset under construction.

Options to acquire additional goods and services

The Board considered how an entity would determine whether options to acquire additional goods and services are part of a present contract with a customer, and, if so, how the entity would account for them.

The Board decided tentatively as follows:

• An entity should account for an option to acquire additional goods and services granted in a contract with a customer as a performance obligation in that contract if that option provides a material right to the customer that the customer would not receive without entering into that contract. An example would be a material discount on additional goods and services that the customer would not otherwise receive. An entity should account for that performance obligation by allocating to it a portion of the transaction price relative to the standalone selling price of the option.
  
• In some cases, an entity may estimate the standalone selling price of the option by reference to:
  
  • the discount the customer would obtain when exercising the option, adjusted for:
    
  • the discount that the customer could receive without exercising the option; and
    
  • the likelihood that the option would be exercised.
    

The staff proposed that an entity should apply this approach when the standalone selling price of the option is not directly observable. However, the Board directed the staff to consider this further, noting that there may be circumstances in which the time value component of an option should not be ignored.

• If a customer has an option to acquire additional goods and services, and those goods and services are:
  
  • similar in nature to the other goods and services in the contract; and
    
  • provided in accordance with terms and conditions (including pricing) in the contract the allocation of the transaction price should reflect the optional goods and services (and corresponding customer consideration), on an expected (ie probability-weighted) basis.
    

the allocation of the transaction price should reflect the optional goods and services (and corresponding customer consideration), on an expected (ie probability-weighted) basis.

Go to the project page on the IASB website

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)

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
http://www.pcaobus.org/Inspections/Other/2009/09-24_AS5_4010_Report.pdf

Posted from PCAOB Website

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)

When to Recognize Revenue ?

“Revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably” (IAS 18 Revenue).

Revenue can take various forms, such as sales of goods, provision of services, royalty fees, franchise fees, management fees, dividends, interest, subscriptions, and so on.

The principle issue in the recognition of revenue is its timing – at what point is it probable that future economic benefit will flow to the entity and can the benefit be measured reliably.

Some of the recent highly publicized financial scandals that caused turmoil in the financial world globally were allegedly the result of financial manipulations resulting from recognizing revenue based on inappropriate accounting policies. Such financial shenanigans resulting from the use of aggressive revenue recognition policies have drawn the attention of the accounting world to the importance of accounting for revenue.

It is absolutely critical that the point of recognition of revenue is properly determined. For instance, in case of sale of goods, is revenue to be recognized on receipt of the customer order, on completion of production, on the date of shipment, or on delivery of goods to the customer ? The decision as to when and how revenue should be recognized has a significant impact on the determination of “net income” for the year (i.e., the “bottom line”), and thus it is a very critical element in the entire process of the preparation of the financial statements.

Revenue from the sale of goods should be recognized when all of the following criteria are satisfied :

(a) the significant risks and rewards of ownership of the goods have been transferred to the buyer

(b) the seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold

(c) the amount of the revenue can be reliably measured

(d) it is probable that economic benefits associated with the transaction will flow to the seller

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

The transfer of “significant” risks and rewards is essential. For example, if goods are sold but the receivable will be collected only if the buyer is able to sell, then “significant” risks of ownership are retained by the original seller and no sale is recognized.

The point of time at which significant risks and rewards of ownership transfer to the buyer requires careful consideration involving examining the circumstances surrounding the transaction. Generally, the transfer of significant risks and rewards of ownership takes place when title passes to the buyer or the buyer received possession of the goods. However, in some circumstances, the transfer of risks and rewards of ownership does not coincide with transfer of legal title or the passing of possession, as when a building that is still under construction is sold.

Revenue from the rendering of services can be recognized by reference to stage of completion if the final outcome can be reliably estimated. This would be the case if :

(a) the amount of revenue can be measured reliably

(b) it is probable that economic benefits associated with the transaction will flow to the seller

(c) the stage of completion can be measured reliably

(d) the cost incurred and the cost to complete can be measured reliably.

Revenue arising from the use by others of an entity’s asset that yield interest, dividends, or royalties are recognized in this way :

(a) Interest is recognized using the “effective interest method”

(b) Royalties are recognized on an accrual basis in accordance with the royalty agreement

(c) Dividends are recognized when the shareholder has a right to receive payment.

Source of this article : IFRS Practical Implementation Guide and Workbook (Second Edition) - Abbas Ali Mirza, Magnus Orrell and Graham J. Holt

For further reference, read also a related article from CFO.com regarding on Revenue Recognition in here >>

IASB Publishes IFRS for Small and Medium-sized Entities

On Thursday, 9 July 2009, IASB has published the IFRS for SMEs. Following is the Press Release which was posted from the IASB website :

The International Accounting Standards Board (IASB) issued today an International Financial Reporting Standard (IFRS) designed for use by small and medium-sized entities (SMEs), which are estimated to represent more than 95 per cent of all companies*. The standard is a result of a five-year development process with extensive consultation of SMEs worldwide.

The IFRS for SMEs is a self-contained standard of about 230 pages tailored for the needs and capabilities of smaller businesses. Many of the principles in full IFRSs for recognising and measuring assets, liabilities, income and expenses have been simplified, topics not relevant to SMEs have been omitted, and the number of required disclosures has been significantly reduced. To further reduce the reporting burden for SMEs revisions to the IFRS will be limited to once every three years.

Benefits

The IFRS for SMEs responds to strong international demand from both developed and emerging economies for a rigorous and common set of accounting standards for smaller and medium-sized businesses that is much simpler than full IFRSs. In particular, the IFRS for SMEs will:

(a) provide improved comparability for users of accounts

(b) enhance the overall confidence in the accounts of SMEs, and

(c) reduce the significant costs involved of maintaining standards on a national basis.

The IFRS for SMEs will also provide a platform for growing businesses that are preparing to enter public capital markets, where application of full IFRSs is required.

The IFRS for SMEs is separate from full IFRSs and is therefore available for any jurisdiction to adopt whether or not it has adopted the full IFRSs. It is also for each jurisdiction to determine which entities should use the standard. It is effective immediately on issue.

Rigorous development

In developing the IFRS for SMEs the IASB consulted extensively worldwide. A 40-member Working Group of SME experts advised the IASB on the structure and content of the IFRS at various stages in its development. The exposure draft of the IFRS, published in 2007, was translated into five languages to assist SMEs in responding to the proposals. More than 50 round-table meetings and seminars were held to receive direct feedback, and the draft IFRS was field-tested by over 100 small companies in 20 countries. As a result, further simplifications have been achieved in the final document.

Paul Pacter, Director of Standards for SMEs for the IASB, has agreed to lead a group to support international adoption of the standard. Further details of this group will be announced shortly.

Global education initiative

To support the implementation of the IFRS for SMEs the IASC Foundation is developing comprehensive training material. The Foundation is also working with international development agencies to provide instructors for regional workshops to ‘train the trainers’ in the use of the training material, particularly within developing and emerging economies. The training material will be published in a number of languages. The English language material will be downloadable free of charge from the IASB’s website in late 2009.

The complete IFRS for SMEs (together with the basis for conclusions, illustrative financial statements, and a presentation and disclosure checklist) can be downloaded free of charge from http://go.iasb.org/IFRSforSMEs from today.

Introducing the IFRS for SMEs, Sir David Tweedie, IASB Chairman, said:

The publication of IFRS for SMEs is a major breakthrough for companies throughout the world. For the first time, SMEs will have a common high quality and internationally respected set of accounting requirements. We believe the benefits will be felt in both developed and emerging economies.
I thank Paul Pacter for his tireless efforts in leading the project, as well as the hundreds of people and SMEs worldwide who have assisted in the development of the IFRS.

Commenting on the announcement, Paul Pacter, Director of Standards for SMEs, said:

The IFRS for SMEs will provide businesses with a passport to raise capital on a national or an international basis.

Journal of Accountancy on July 9, 2009 has commented the release of this IFRS for SMEs standard through its article titled “New Option for Private Companies in Streamlined IFRS.”

U.S. private companies have a new choice for accounting and financial reporting—a slimmed-down version of IFRS tailored more to their needs. IFRS for SMEs (small- and medium-size entities) is a simplification of full IFRS. The International Accounting Standards Board (IASB), which released the standard Thursday after five years of work on the project, defines SMEs as businesses that publish general-purpose financial statements for external users and do not have public accountability. Many U.S. private companies would fit that definition.

Read further in here >>. And another related article from CFO.com in here >>

Fair Value at Initial Recognition (ED Fair Value Measurement)

Paragraph 34 – 37 of  Exposure Draft (ED) Fair Value Measurement (ED/2009/5) regulates the Fair Value at Initial Recognition of asset or liability.

When an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the transaction price is the price paid to acquire the asset or received to assume the liability (often referred to as an entry price). In contrast, the fair value of the asset or liability represents the price that would be received to sell the asset or paid to transfer the liability (an exit price). Entities do not necessarily sell assets at the prices paid to acquire them. Similarly, entities do not necessarily transfer liabilities at the prices received to assume them. In some cases, eg. in a business combination, there is not a transaction price for each individual asset or liability. Likewise, sometimes there is not an exchange transaction for the asset or liability, eg when biological assets regenerate (Par. 34).

Although conceptually entry prices and exit prices are different, in many cases an entry price of an asset or liability will equal the exit price (eg. when on the transaction date the transaction to buy an asset would take place in the market in which the asset would be sold). In such cases, the fair value of an asset or liability at initial recognition equals the entry (transaction) price (Par. 35).

Par. 36 states that in determining whether fair value at initial recognition equals the transaction price, an entity shall consider factors specific to the transaction and the asset or liability. For example, the transaction price is the best evidence of the fair value of an asset or liability at initial recognition unless :

(a)  the transaction is between related parties.

(b)  the transaction takes place under duress or the seller is forced to accept the price in the transaction. For example, that might be the case if the seller is experiencing financial difficulty.

(c)  the unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value. For example, that might be the case if the asset or liability measured at fair value is only one of the elements in the transaction, the transaction includes unstated rights and privileges that are separately measured or the transaction price includes transaction costs.

(d)  the market in which the transaction takes place is different from the market in which the entity would sell the asset or transfer the liability, ie. the most advantageous market. For example, those markets might be different if the entity is a securities dealer that transacts in different markets with retail customers (retail market) and with other securities dealers (inter-dealer market).

If an IFRS requires or permits an entity to measure an asset or liability initially at fair value and the transaction price differs from fair value, the entity recognises the resulting gain or loss in profit or loss unless the IFRS requires otherwise (Par. 37).

ED of Draft Guidance of fair value measurement

From the Press Release of IASB :

The International Accounting Standards Board (IASB) today, 28 May 2009 published for public comment an exposure draft of draft guidance on fair value measurement.

If adopted, the proposals would replace fair value measurement guidance contained in individual International Financial Reporting Standards (IFRSs) with a single, unified definition of fair value, as well as further authoritative guidance on the application of fair value measurement in inactive markets. The proposals deal with how fair value should be measured when it is already required by existing standards. They do not extend its use in any way.

To ensure consistency between IFRSs and US Generally Accepted Accounting Principles (GAAP), the proposals incorporate recent guidance on fair value measurement published by the US Financial Accounting Standards Board (FASB) and are consistent with a report of the IASB’s Expert Advisory Panel published in October 2008 on fair value measurement in illiquid markets.

This project forms part of a long-term programme by the IASB and the FASB to achieve convergence of IFRSs and US GAAP, as described in the board’s Memorandum of Understanding  published in September 2008. It is also consistent with requests from G20 leaders to align fair value measurement in IFRSs and US GAAP.

The IASB’s starting point in developing the exposure draft was the equivalent US standard, SFAS 157 Fair Value Measurements as amended. The proposed definition of fair value is identical to the definition in SFAS 157 and the supporting guidance is also largely consistent with US GAAP.

Introducing the exposure draft, Sir David Tweedie, Chairman of the IASB, said :

This exposure draft is an important milestone in our response to the global financial crisis. It proposes clear and consistent guidance for the measurement of fair value and also addresses valuation issues arising in markets that have become inactive.

The proposed guidance ensures consistency with US GAAP on issues related to fair value measurement and would achieve overall convergence with US GAAP.

The proposals are set out in the exposure draft Fair Value Measurement which is open for comment until 28 September 2009. The exposure draft is available on the ‘Open for Comment’ section on www.iasb.org. The IASB will hold a webcast to introduce the proposals in the exposure draft and will announce details on its website in due course.

To download the exposure draft and submit a comment letter, just go in here >>

Get Ready for IFRS

This article was quoted from the International Financial Reporting Standards (IFRS), an AICPA Backgrounder, released by AICPA through its IFRS resources Web site : www.IFRS.com

The growing acceptance of IFRS as a basis for U.S. financial reporting represents a fundamental change for the U.S. accounting profession. Today, approximately 113 countries require or allow the use of IFRS for the preparation of financial statements by publicly held companies. In the United States, the Securities and Exchange Commission (SEC) has been taking steps to set a date to allow U.S. public companies to use IFRS, and perhaps make its adoption mandatory. In fact, on November 14, 2008, the SEC released for public comment a proposed roadmap with a timeline and key milestones for adopting IFRS beginning in 2014.

The international standard-setting process began several decades ago as an effort by industrialized nations to create standards that could be used by developing and smaller nations unable to establish their own accounting standards. But as the business world became more global, regulators, investors, large companies and auditing firms began to realize the importance of having common standards in all areas of the financial reporting chain.

The globalization of business and finance has led more than 12,000 companies in more than 100 countries to adopt IFRS. In 2005, the European Union (EU) began requiring companies incorporated in its member states whose securities are listed on an EU-regulated stock exchange to prepare their consolidated financial statements in accordance with IFRS. Australia, New Zealand and Israel have essentially adopted IFRS as their national standards. Canada, which previously planned convergence with US. GAAP, now plans to require IFRS for publicly accountable entities in 2011. The Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) plan convergence by 2011. On November 11, 2008, Mexico announced it would adopt IFRS for all listed entities starting in 2012.

In another part, AICPA reported that even great strides have been made by the FASB and the IASB to converge the content of IFRS and U.S. GAAP, yet several significant differences between the U.S. GAAP and IFRS still remain. For example :

1. IFRS does not permit LIFO as an inventory costing method
2. IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely.
3. IFRS has a different probability threshold and measurement objective for contingencies.
4. IFRS does not permit curing debit covenant violations after year-end
5. IFRS guidance regarding revenue recognition is less extensive than U.S. GAAP and contains relatively little industry-specific instruction.

Further, it said that perhaps the greatest difference between IFRS and U.S. GAAP is that IFRS provides much less overall detail.

Go here >> to download the complete publication.

Determining Fair Values in Business Combination (based on IFRS 3)

The assets acquired and liabilities assumed in the business combination should be recorded at fair values. If the acquirer obtained a 100% interest in the acquired entity, this process is straightforward. If the cost exceeds the fair value of the net identifiable assets acquired, the excess is deemed to be goodwill, which should be capitalized as an intangible asset and tested periodically for impairment.

Determining Fair Values

Accounting for acquisitions requires a determination of the fair value for each of the acquired company’s identifiable tangible and intangible assets and for each of its liabilities at the date of combination (except for assets which are to be resold and which are to be accounted for at fair value less costs to sell under IFRS 5).

IFRS 3 provides illustrative examples of how to treat certain assets, particularly intangibles, but provides no general guidance on determining fair value. The Phase II revisions to IFRS 3, promised by iASB, are expected to provide more detailed guidance on this topic. A separate project on fair value measurements is likely to result in the issuance of a new IFRS on this topic, very likely to be heavily based on the recent US GAAP standard, FAS 157.

The list below in drawn from Appendix B of IFRS 3 :

1. Financial instruments traded in an active market – Current market values.

2. Financial instruments not traded in an active market – Estimated fair values, determined on a basis consistent with relevant price-earnings ratios, dividend yields, and expected growth rates of comparable securities of entities having similar characteristics.

3. Receivables – Present values of amounts to be received determined by using current interest rates, less allowances for uncollectible accounts.

4. Inventories

a) Finished goods and merchandise inventories – Estimated selling prices less the sum of the costs of disposal and a reasonable profit

b) Work in process inventories – Estimated selling prices of finished goods less the sum of the costs of completion, costs of disposal, and a reasonable profit

c) Raw material inventories – Current replacement costs.

5. Plant and equipment – At market value as determined by appraisal; in the absence of market values, use depreciated replacement cost. Land and building are to be valued at market value.

6. Identifiable intangible assets (such as patents and licenses) – Fair values determined primarily with reference to active market as per IAS 38; in the absence of market data, use the best available information, with discounted cash flows being useful only when information about cash flows which are directly attributable to the asset, and which are largely independent of cash flows from other assets, can be developed.

7. Net employee benefit assets or obligations for defined benefit plans – The actuarial present value of promised benefits, net of the fair value of related assets (Note that an asset can be recognized only to the extent that it would be available to the enterprise as refunds or reductions in future contributions).

8. Tax assets and liabilities – The amount of tax benefit arising from tax losses or the taxes payable in respect to net profit or loss. The amount to be recorded is net of the tax effect of restating other identifiable assets and liabilities at fair values.

9. Liabilities (such as notes and accounts payable, long-term debt, warranties, claims payable) – Present value of amounts to be paid determined at appropriate current interest rates, discounting is not required for short-term liabilities where the effect is immaterial.

10. Onerous contract obligations and other identifiable liabilities – At the present value of the amounts to be disbursed.

11. Contingent liabilities – The amount that a third party would charge to assume those liabilities. The amount must reflect expectations about cash flows rather than the single most likely outcome (Note that the subsequent measurement should fall under IAS 37 and In many cases would call for de-recognition. IFRS 3 provides an exception for such contingent liabilities, in that subsequent measurement is to be at the higher of the amount recognized under IFRS 3 or the amount mandated by IAS 37).

Source : Wiley IFRS 2008 : Interpretation and Application of International Accounting and  Financial Reporting Standards 2008

How IFRS 1 rules the accounting for Business Combinations ?

IFRS 1 First-time Adoption of International Financial Reporting Standards applies to an entity that presents its first IFRS financial statements. It specifies the requirement that an entity must follow when it first adopts IFRS as the basis for preparing its general-purpose financial statements. IFRS 1 refers to these entities as first-time adopter.

How IFRS 1 rules the financial statement presentation of business combination for an entity as the first-time adopter ?

A first-time adopter need not apply IFRS 3 Business Combinations retrospectively. Should it restate any business combination to comply with IFRS 3, then all later business combinations must also be restated.

A first-time adopter may elect not to apply IFRS 3 Business Combinations retrospectively to past business combinations (business combinations that occurred before the date of transition to IFRSs). However, if a first-time adopter restates any business combination to comply with IFRS 3, it shall restate all later business combinations and shall also apply IAS 27 (as amended in 2008) from that same date. For example, if a first-time adopter elects to restate a business combination that occurred on 30 June 20X6, it shall restate all business combinations that occurred between 30 June 20X6 and the date of transition to IFRSs, and it shall also apply IAS 27 (amended 2008) from 30 June 20X6 (IFRS 1 Appendix B par. B1).

Where a first-time adopter has accounted for a business combination as an acquisition and recognized an item as an intangible asset under IAS 38 Intangible Assets that item should be reclassified as goodwill.

The carrying amount of goodwill in the opening IFRS balance sheet should be its carrying value under previous GAAP adjusted for any intangible asset that does not meet the IAS definition and additional evidence that is now available with respect to any contingent purchase consideration. In addition, irrespective of whether there is any indication of impairment, IAS 36 Impairment of Assets should be applied to test the carrying value of goodwill at the date of transition.

Where previous GAAP required or permitted goodwill to be disclosed as a deduction from equity, it should not be recognized in the opening balance sheet, nor should the goodwill be transferred to the income statement on disposal of the subsidiary.

If under previous GAAP, the first-time adopter did not consolidate a subsidiary, but IFRS would require it to be consolidated the accounting treatment is as follows :

The carrying amounts of the subsidiary’s assets and liabilities should be adjusted to those required by IFRS. The deemed goodwill will equal the difference between the parent’s cost of investment in the subsidiary and its interest in those assets and liabilities.

An entity shall apply IFRS 1 if its first IFRS financial statements are for a period beginning on or after 1 January 2004.  Earlier application is encouraged  (IFRS 1 par. 47).

How to treat the costs incurred subsequent to purchase or self-construction of PPE

IAS 16 par. 7 states that the cost of an item of Property, Plant and Equipment (PPE) shall be recognized as an asset if, and only if :

1. it is probable that future economic benefits associated with the item will flow to the entity; and
2. the cost of the item can be measured reliably.

Further, par. 12 states that under the recognition principle in par. 7, an entity does not recognize in the carrying amount of an item of PPE the costs of the day-to-day servicing of the item. Rather, these costs are recognized in profit or loss as incurred. Costs of day-to-day servicing are primarily the costs of labor and consumables, and may include the cost of small parts. The purpose of these expenditures is often described as for the 'repairs and maintenance' of the item of PPE.

Costs that are incurred subsequent to the purchase or construction of the long-lived asset, such as those for repairs, maintenance, or betterments, may involve an adjustment to the carrying value, or may be expensed, depending on the precise facts and circumstances.

To qualify for capitalization, costs must be associated with incremental benefits. Costs can be added to the carrying value of the related asset only when it is probable that future economic benefits beyond those originally anticipated for the asset will be received by the entity. For example, modifications to the asset made to extend its useful life or to increase its capacity would be capitalized.

It can usually be assumed that ordinary maintenance and repair expenditures will occur on a ratable basis over the life of the asset and should be charged to expense as incurred. Thus, if the purpose of the expenditure is either to maintain the productive capacity anticipated when the asset was acquired or constructed, or to restore it to that level, the costs are not subject to capitalization.

A partial exception is encountered if an asset is acquired in a condition that necessitates that certain expenditures be incurred in order to put it into the appropriate state for its intended use. For example, a deteriorated building may be purchased with the intention that it be restored and then utilized as a factory or office facility. In such cases, costs that otherwise would be categorized as ordinary maintenance items might be subject to capitalization, subject to the constraint that the asset not be presented at a value that exceeds its recoverable amount. Once the restoration is completed, further expenditures of similar type would be viewed as being ordinary repairs or maintenance, and thus expensed as incurred.

However, costs associated with required inspections (e.g., of aircraft) could be capitalized and depreciated. These costs would be amortized over the expected period of benefit (i.e., the estimated time to the next inspection). As with the cost of physical assets, removal of any un-depreciated costs of previous inspections would be required. The capitalized inspection cost would have to be treated as a separate component of the asset. (Hrd)

Initial recognition of self-constructed assets

Essentially the same principles that have been established for recognition of the cost of purchased assets also apply to self-constructed assets. All costs that must be incurred to complete the construction of the asset can be added to the amount to be recognized initially, subject only to the constraint that if these costs exceed the recoverable amount, the excess must be expensed currently. This rule is necessary to avoid the "gold-plated hammer syndrome," whereby a misguided or unfortunate asset construction project incurs excessive costs that then find their way into the statement of financial position, consequently overstating the entity's current net worth and distorting future periods' earnings. Of course, internal (intra-company) profits cannot be allocated to construction costs. The standard specifies that "abnormal amounts" of wasted material, labor or other resources may not be added to the cost of the asset.

Self-constructed assets should include the cost of borrowed funds used during the period of construction (as set forth by IAS 23 regarding on capitalization of borrowing costs).

The other issue that arises most commonly in connection with self-constructed fixed assets relates to overhead allocations.

While capitalization of all direct costs (labor, materials, and variable overhead) is clearly required and proper, a controversy exists regarding the treatment of fixed overhead. Two alternative views of how to treat fixed overhead are to either :

1. Charge the asset with its fair, pro rata share of fixed overhead (i.e., use the same basis of allocation used for inventory); or

2. Charge the fixed asset account with only the identifiable incremental amount of fixed overhead.

While international standards do not address this concern, it may be instructive to consider the non-binding guidance to be found in US GAAP. AICPA Accounting Research Monograph 1 has suggested that :

----- in the absence of compelling evidence to the contrary, overhead costs considered to have "discernible future benefits" for the purposes of determining the cost of inventory should be presumed to have "discernible future benefits" for the purpose of determining the cost of a self-constructed depreciable asset.

The implication of this statement is that a logical similar to what was applied to determining which acquisition costs may be included in inventory might reasonably also be applied to the costing of PPE. Also, consistent with the standards applicable to inventories, if the costs of PPE items exceed realizable values, any excess costs should be written off to expense and not deferred to future periods.

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

The Scope of IAS 16 Property, Plant and Equipment

IAS 16 par. 2 to par. 5 described the scope of IAS 16 Property, Plant and Equipment (PPE)

This Standard shall be applied in accounting for property, plant and equipment except when another Standard requires or permits a different accounting treatment (par. 2).

Par. 3 states that this standard does not apply to :

(a)  property, plant and equipment classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;

(b)  biological assets related to agricultural activity (see IAS 41 Agriculture);

(c)  the recognition and measurement of exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources); or

(d)  mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

However, this Standard applies to PPE used to develop or maintain the assets described in (b)-(d).

Other Standards may require recognition of an item of PPE based on an approach different from that in this Standard. For example, IAS 17 Leases requires an entity to evaluate its recognition of an item of leased PPE on the basis of the transfer risks and rewards. However, in such cases other aspects of the accounting treatment for these assets, including depreciation, are prescribed by this Standard (par. 4).

Further, par. 5 states that an entity shall apply this Standard to property that is being constructed or developed for future use as investment property but does not yet satisfy the definition of "investment property" in IAS 40 Investment Property. Once the construction or development is complete, the property becomes investment property and the entity is required to apply IAS 40. IAS 40 also applies to investment property that is being redeveloped for continued future use as investment property. An entity using the cost model for investment property in accordance with IAS 40 shall use the cost model in this Standard.

Source : International Accounting Standard (IAS) 16 Property, Plant and Equipment

IFRS Bound Volume 2009 is available now

International Financial Reporting Standards (IFRS) 2009 (English) is the only official printed edition of the consolidated text of the IASB's authoritative pronouncements.
This edition presents in a single volume the latest version of International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs), IFRIC and SIC Interpretations and the supporting documents - illustrative examples, implementation guidance, bases for conclusions and dissenting opinions - as issued by the IASB at 1 January 2009.
The main changes in this 2009 edition of the Bound Volume are :

• one revised standard - IFRS 1
• amendments to IFRSs that were issued as separate documents
• amendments to IFRSs issued in the first annual improvements project
• amendments to other IFRSs resulting from those revised or amended standards
• three new Interpretations - IFRICs 15-17

The version of IFRS 1 that is being superseded by the new version has been ommited.
The volume also includes the IASC Foundation Constitution, the IASB Framework for the Preparation and Presentation of Financial Statements, the Preface to International Financial Reporting Standards, the Due Process Handbooks for the IASB and IFRIC, an updated Glossary of Terms, and a comprehensive Index.
The publication date : 10 March 2009, 2880 pages approx.

Several Guidelines for the First-time Adoption of IFRS

IFRS 1 regarding on First-time Adoption of International Financial Reporting Standards.

Per IFRS 1, an entity must apply the standard in its first IFRS financial statements and in each interim financial report it presents under IAS 34 for a part of the period covered by its first IFRS financial statements. For example, if 2006 is the first annual period for which IFRS financial statements are being prepared, the quarterly or semiannual statements for 2006, if presented, must also comply with IFRS.

IFRS 1 stipulates that in preparing an opening IFRS statement of financial position, the first-time adopter (an entity is referred to as a first-time adopter in the period in which it presents its first IFRS financial statements) is to use the same accounting policies as it has used throughout all periods presented in its first IFRS financial statements.

Furthermore, the standard requires that those accounting policies must comply with each IFRS effective at the “reporting date” for its first IFRS financial statements, except under certain defined circumstances wherein the entity claims targeted exemptions from retrospective application of IFRS, or is prohibited by IFRS from applying IFRS retrospectively.

In other words, a first-time adopter should consistently apply the same accounting policies throughout the periods presented in its first IFRS financial statements and these accounting policies should be based on “latest version of the IFRS” effective at the reporting date.

If a new IFRS has been issued on the reporting date, but application is not yet mandatory, although reporting entities have been encouraged to apply it before the effective date, the first-time adopter is permitted, but not required, to apply it as well.

In general, IFRS 1 requires an entity to comply with each IFRS effective at the end of its first IFRS reporting period. In particular, the IFRS requires an entity to do the following in the opening IFRS statement of financial position that it prepares as a starting point for its accounting under IFRSs :

a) Recognize all assets and liabilities whose recognition is required by IFRSs;

b) Not recognize items as assets or liabilities if IFRSs do not permit such recognition;

c) Reclassify items that it recognized under previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under IFRSs; and

d) Apply IFRSs in measuring all recognized assets and liabilities.

An entity is required to apply the IFRS if its first IFRS financial statements are for a period beginning on or after 1 January 2004. Earlier application is encouraged (IN6 IFRS 1)

To be continued (this is the first part of two articles)

Changes in Accounting Policies, What to Disclose in the Financial Statements ?

Par. 28 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors states that when initial application of an IFRS has an effect on the current period or any prior period, would have such an effect except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall dislose :

1. the title of the IFRS;
2. when applicable, that the change in accounting policy is made in accordance with its transitional provisions;
3. the nature of the change in accounting policy;
4. when applicable, a description of the transitional provisions;
5. when applicable, the transitional provisions that might have an effect on future periods;
6. for the current period and each prior period presented, to the extent practicable, the amount of the adjustment :
   • for each financial statement line item affected; and
   • if IAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share;
7. the amount of the adjustment relating to periods before those presented, to the extent practicable; and
8. if retrospective application required by par. 19(a) or (b) is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.

Financial statements of subsequent periods need not repeat these disclosures.

Further, par. 29 states that when a voluntary change in accounting policy has an effect on the current period or any prior period, would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall disclose :

1. the nature of the change in accounting policy;
2. the reasons why applying the new accounting policy provides reliable and more relevant information;
3. for the current period and each prior period presented, to the extent practicable, the amount of the adjustment :
   • for each financial statement line item affected; and
   • if IAS 33 applies to the entity, for basic and diluted earnings per share
4. the amount of the adjustment relating to periods before those presented, to the extent practicable; and
5. if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.

Financial statements of subsequent periods need not repeat these disclosures.

When an entity has not applied a new IFRS that has been issued but is not yet effective, as stated in par. 30, the entity shall disclose :

1. this fact; and
2. known or reasonably estimable information relevant to assessing the possible impact that application of the new IFRS will have on the entity's financial statements in the period of initial application.

Latest, par. 31 states that in complying with par. 30, an entity considers disclosing :

1. the title of the new IFRS;
2. the nature of the impending change or changes in accounting policy;
3. the date by which application of the IFRS is required;
4. the date as at which it plans to apply the IFRS initially; and
5. either :
   • a discussion of the impact that initial application of the IFRS is expected to have on the entity's financial statements; or
   • if that impact is not known or reasonably estimable, a statement to that effect.

(Source : IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors)

Applying Changes in Accounting Policies

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraph 14 states that :

An entity shall change an accounting policy only if the change :

1. is required by an IFRS; or
2. results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance or cash flows.

Par. 19 stated that subject to paragraph 23 :

1. an entity shall account for a change in accounting policy resulting from the initial application of an IFRS in accordance with the specific transitional provisions, if any, in that IFRS; and
2. when an entity changes an accounting policy upon initial application of an IFRS that does not include specific transitional provisions applying to that change, or changes in accounting policy voluntarily, it shall apply the change retrospectively.

For the purpose of this Standard, early application of an IFRS is not a voluntary change in accounting policy (par. 20).

In the absence of an IFRS that specifically applies to a transaction, other event or condition, management may, in accordance with par. 12, apply an accounting policy from the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards. If, following an amendment of such a pronouncement, the entity chooses to change an accounting policy, that change is accounted for and disclosed as a voluntary change in accounting policy (par. 21).

Retrospective Application

Subject to par. 23, when a change in accounting policy is applied retrospectively in accordance with par. 19(a) or (b), the entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied (par. 22).

Limitations on Retrospective Application

When retrospective application is required by par. 19(a) or (b), a change in accounting policy shall be applied retrospectively except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the change (par. 23).

When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative information for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period (par. 24).

When it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable (par. 25).

(Source : IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors)

Net Realizable Value of Inventory Measurement

IAS 2 Inventories, para. 9 states that :

Inventories shall be measured at the lower of cost and net realizable value.

Para. 7 of IAS 2 defines the Net Realizable Value as :

Net realizable value refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course of business. Fair value reflects the amount for which the same inventory could be exchanged between knowledgeable and willing buyers and sellers in the marketplace. The former is an entity-specific value; the later is not. Net realizable value for inventories may not equal fair value less costs to sell.

So, net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

The utility of an item of inventory is limited to the amount to be realized from its ultimate sale; where the item's recorded cost exceeds this amount, IFRS requires that a loss be recognized for the difference. The logic for this requirement is twofold; first, assets (in particular, current assets such as inventory) should not be reported at amounts that exceed net realizable value; and second, any decline in value in a period should be reported in that period's results of operations in order to achieve proper matching with current period's revenues. Were the inventory to be carried forward at an amount in excess of net realizable value, the loss would be recognized on the ultimate sale in a subsequent period. This would mean that a loss incurred in one period, when the value decline occurred, would have been deferred to a different period, which would clearly be inconsistent with several key accounting concepts, including conservatism.

Revised IAS 2 states that estimates of net realizable value should be applied on an item-by-item basis in most instances, although it makes an exception for those situations where there are groups of related products or similar items that can be properly valued in the aggregate.

Recoveries of previously recognized losses

IAS 2 stipulates that a new assessment of net realizable value should be made in each subsequent period; when the reason for a previous write-down no longer exists (i.e., when net realizable value has improved), it should be reversed. Since the write-down was taken into income, the reversal should also be reflected in profit  or loss. As under prior rules, the amount to be restored to the carrying value will be limited to the amount of the previous impairment recognized.

(Sources : Wiley IFRS 2008 : Interpretation and Application of International Financial Reporting Standards - Barry J. Epstein, Eva K. Jermakowicz and IAS 2 Inventories)

Comparative Information of financial statements based on IAS 1

Except when IFRSs permit or require otherwise, an entity shall disclose comparative information in respect of the previous period for all amounts reported in the current period's financial statements. An entity shall include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period's financial statements (IAS 1 par. 38).

Par. 39 stated that an entity disclosing comparative information shall present, as a minimum, two statements of financial position, two of each of the other statements, and related notes. When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements or when it reclassifies items in its financial statements, it shall present, as a minimum, three statements of financial position, two of each of the other statements, and related notes. An entity presents statements of financial position as at :

1. the end of the current period,
2. the end of the previous period (which is the same as the beginning of the current period), and
3. the beginning of the earliest comparative period

In some cases, narrative information provided in the financial statements for the previous period(s) continues to be relevant in the current period. For example, an entity discloses in the current period details of a legal dispute whose outcome was uncertain at the end of the immediately preceding reporting period and that is yet to be resolved. Users benefit from information that the uncertainty existed at the end of the immediately preceding reporting period, and about the steps that have been taken during the period to resolve the uncertainty (IAS 1 par. 40).

Further, par. 41 stated that when the entity changes the presentation or classification of items in its financial statements, the entity shall reclassify comparative amounts unless reclassification is impracticable. When the entity reclassifies comparative amounts, the entity shall disclose :

1. the nature of the reclassification;
2. the amount of each item or class of items that is reclassified; and
3. the reason for the reclassification.

When it is impracticable to reclassify comparative amounts, an entity shall disclose :

1. the reason for not reclassifying the amounts, and
2. the nature of the adjustments that would have been made if the amounts had been reclassified.

Enhancing the inter-period comparability of information assists users in making economic decisions, especially by allowing the assessment of trends in financial information for predictive purposes. In some circumstances, it is impracticable to reclassify comparative information for a particular prior period to achieve comparability with the current period. For example, an entity may not have collected data in the prior period(s) in a way that allows reclassification, and it may be impracticable to recreate the information (par. 43).

Later, par. 44 stated that IAS 8 sets out the adjustments to comparative information required when an entity changes an accounting policy or corrects an error (Hrd) ***

(Source : IAS 1 - Presentation of Financial Statements)

Methods of INVENTORY COSTING Under IAS 2 re.Inventories

IAS 2 regarding Inventories states that inventories shall be measured at the lower of cost and net realizable value.

The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Then, how to assign the cost of inventories ?

Par. 23 to par. 27 of IAS 2 lines out the guidance of valuing the cost of inventories.

The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs (par. 23).

The theoretical basis for valuing inventories and cost of goods sold requires assigning the production and/or acquisition costs to the specific goods to which they relate. For example, the cost of ending inventory for an entity it its first year, during which it produced ten items (e.g., exclusive single family homes), might be the actual production cost of the first, sixth, and eighth unit produced if those are the actual units still  on hand at the date of the statement of financial position. The costs of the other  homes would be included in that year's income statement (the presentation of comprehensive income in two statements) as cost of goods sold. This method of inventory valuation is usually referred to as specific identification.

Specific identification is generally not a practical technique, as the product will generally lose its separate identity as it passes through the production and sales process. Exceptions to this would generally be limited to those situations where there are small inventory quantities, typically having high unit value and a low turnover rate. Under IAS 2, specific identification must be employed to cost inventories that are not ordinarily interchangeable, and goods and services produced and segregated for specific projects. For inventories meeting either of these criteria, the specific identification method is mandatory and alternative methods cannot be used.

The cost of inventories, other than those dealt with in par. 23, shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified (par. 25).

The FIFO formula assumes that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the entity (par. 27).

The FIFO method of inventory valuation assumes that the first goods purchased will be the first goods to be used or sold, regardless of the actual physical flow. This method is thought to parallel most closely the physical flow of the units for most industries having moderate to rapid turnover of goods. The strength of this cost flow assumption lies in the inventory amount reported in the statement of financial position. Because the earliest goods purchased are the first ones removed from the inventory account, the remaining balance is composed of items acquired closer to period end, at more recent costs. This yields results similar to those obtained under current cost accounting in the statement of financial position, and helps in achieving the goal of reporting assets at amounts approximating current values.

The other acceptable method of inventory valuation under revised IAS 2 involves averaging and is commonly referred to as the weighted-average cost method. The cost of goods available for sale (beginning inventory and net purchases) is divided by the units available for sale to obtain a weighted-average unit cost. Ending inventory and cost of goods sold are then priced at this average cost.

The Standard (IAS 2) does not permit the use of the last-in, first-out (LIFO) formula to measure the cost of inventories (par. IN13).

The IASB, as part of its Improvements Project, determined that the goals of achieving convergence among accounting standards and of promoting uniformity across entities reporting under IFRS would be served by eliminating the formerly "allowed alternative" of costing inventories by means of the last-in, first-out (LIFO) method. This has left the first-in, first-out (FIFO) and the weighted-average methods as the only two acceptable costing techniques under IFRS.

(Sources : Wiley IFRS 2008 : Interpretation and Application of International Financial Reporting Standards - Barry J. Epstein, Eva K. Jermakowicz and IAS 2 Inventories)