IASB proposes improvements to defined benefit pensions accounting

Below is the IFRS Alert dropped into my e-mail inbox on April 29, 2010 :

The International Accounting Standards Board (IASB) today published for public comment an exposure draft of proposed amendments to IAS 19 Employee Benefits.

The proposals would amend the accounting for defined benefit plans through which some employers provide long-term employee benefits, such as pensions and post-employment medical care. In defined benefit plans, employers bear the risk of increases in costs and of possible poor investment performance.

The draft interpretation is open for comment until 6 September 2010.

More information:

• Read the press release.
• Read the Snapshot, a short introduction to the document.
• Visit the project page.

Access the document online:

• To access the document visit the "Get involved / Comment on a proposal" section on www.iasb.org
• If you are an eIFRS/Comprehensive subscriber, you can also view the document in the 'Latest Additions' section of eIFRS (you will be required to provide your login details).

Printed copies of the document:

• Printed copies of the document will be available shorlty from the IASC Foundation's online shop.
• Comprehensive subscribers will receive a print copy shortly.

Extraordinary Items, why it was prohibited ?

IAS 1 Presentation of Financial Statements in paragraph 87 states that an entity shall not present any items of income or expense as extraordinary items, in the statement of comprehensive income or the separate income statement (if presented), or in the notes.

Further, in the Basis for Conclusions (BC) on IAS 1 Presentation of Financial Statements, BC 60 states that IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (issued in 1993) required extraordinary items to be disclosed in the income statement separately from the profit or loss from ordinary activities. That standard defined ‘extraordinary items’ as ‘income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and therefore are not expected to recur frequently or regularly’.

In 2002, the IASB decided to eliminate the concept of extraordinary items from IAS 8 and to prohibit the presentation of items of income and expense as ‘extraordinary items’ in the income statement and the notes. Therefore, in accordance with IAS 1, no items of income and expense are to be presented as arising from outside the entity’s ordinary activities.

Some respondents to the exposure draft of 2002 argued that extraordinary items should be presented in a separate component of the income statement because they are clearly distinct from all of the other items of income and expense, and because such presentation highlights to users of financial statements the items of income and expense to which the least attention should be given when predicting an entity’s future performance.

The Board (IASB) decided that items treated as extraordinary result from the normal business risks faced by an entity and do not warrant presentation in a separate component of the income statement. The nature or function of a transaction or other event, rather than its frequency, should determine its presentation within the income statement. Items currently classified as ‘extraordinary’ are only a subset of the items of income and expense that may warrant disclosure to assist users in predicting an entity’s future performance.

Eliminating the category of extraordinary items eliminates the need for arbitrary segregation of the effects of related external events-some recurring and others not-on the profit or loss of an entity for a period. For example, arbitrary allocations would have been necessary to estimate the financial effect of an earthquake on an entity’s profit or loss it it occurs during a major cyclical downturn in economic activity. In addition, paragraph 97 of IAS 1 requires disclosure of the nature and amount of material items of income and expense.

Read also for further references  :

1. Extraordinary Items : Time to Eliminate the Classification (the CPA Journal)
2. Extraordinary Items Share Exclusive Company (Journal of Accountancy)
3. Accounting and Auditing Issues surrounding the September 11 Disasters (the CPA Journal)
4. Firms can't account for attacks as extraordinary items (CNN Money)

Source : IAS 1 Presentation of Financial Statements (IFRS Bound Volume 2009)

Cost of Investment – amendments to IFRS 1 and IAS 27

The amendments to IFRS 1. “First-time adoption of IFRS”, and IAS 27, “Consolidated and separate financial statements”, bring three major changes :

• The cost of a subsidiary, jointly controlled entity or associate in a parent’s separate financial statements, on transition to IFRS, is determined under IAS 27 or as a deemed cost. Deemed cost is either fair value or the carrying amount under the previous accounting practice.
• Dividends from a subsidiary, jointly controlled entity or associate are recognized as income. There is no longer a distinction between pre-acquisition and post-acquisition dividends.
• The cost of the investment of a new parent in a group (in a reorganization meeting certain criteria) is measured at the carrying amount of its share of equity as shown in the separate financial statements of the previous parent.

What was the reason for the amendment ?

The main reason for the amendment is to facilitate the transition to IFRS without significantly reducing the relevance of the financial statements. IAS 27 requires an entity to account for its investments at cost or in accordance with IAS 39 in its separate financial statements. For those accounted for at cost, a parent entity could previously recognize income from the investment only to the extent that distributions were received from post-acquisition earnings. Distributions in excess of post-acquisition earnings were recognized as a reduction to the cost of the investment.

Prior to the amendment, IFRS 1 required retrospective application of this method of calculating cost, which was often cumbersome to reconstruct for investments that had been held for several years. With the amendments, a first-time adopter can use a deemed cost, which may be the previous GAAP carrying amount.

If dividends are recognized as income and not as a reduction to the cost of the investment, is there risk of impairment ?

Yes, IAS 36 has been amended to identify circumstances when a dividend payment requires impairment testing. These circumstances include :

• Dividends exceeding the total comprehensive income (under IAS 1 – revised) of the subsidiary, jointly controlled entity or associate in the period the dividend is declared; or
• The carrying amount of the investment in the separate financial statements exceeding the carrying amount in the consolidated financial statements of the investee’s net assets, including goodwill.

How will the alleviate ‘dividend trap’ issues ?

Prior to the amendment, dividends from pre-acquisition earnings were recognized as a reduction of the cost of an investment. Because they were not recognized as profits by the parent, they were not available for further distribution. Under the new standard, dividends are credited to income and available for distribution, subject to there being no impairment and subject to local legal requirements.

Source : A Practical guide to new IFRSs for 2010 - PWC publication

Assessing Indonesia’s Readiness in Adopting IFRS by 2012

Indonesia is in the process of IFRS Convergence with gradual approach. By 2012 Indonesian Accounting Standard Board determines to eliminate material differences among Indonesian Accounting Standard and IFRS as per 1 January 2009 by. During 2009-2010, The Board has issued many new standards and interpretations to be effective in 2011 and 2012 and also has revoked many standards that are not in compliance with IFRS. Indonesia as one of G20 country members is required to achieve a global accounting standard; therefore the support from Indonesia’s regulators is imperative in achieving that goal.

Indonesian Institute of Accountants invites Indonesian regulators and authorities to explain their preparation in embracing IFRS Convergence.  The IASB Director for International  Activities, Wayne Upton, would also share information on IFRS Convergence progress around the world, in particular how regulatory bodies in other country have been preparing for IFRS Convergence.

This special event is very important for all key decision makers in the regulatory bodies, accountants, business practitioners and academics in Indonesia. The panel discussion among regulators in Indonesia would become the main agenda of the first day seminar.  On the second day, the seminar would discuss what are the challenges faced by Indonesian business entities in applying IFRS to date and beyond. In detail the agenda of two-day seminar will be held on 11 and 12 May 2010. Further detail in here

AICPA IFRS for SMEs-US GAAP Comparison Tool

The American Institute of CPAs (AICPA) staff have developed an IFRS for SMEs–US GAAP Comparison Tool, which is being added to collaboratively by those who use the tool. AICPA technical staff monitor and review the additions. Here is an excerpt of the AICPA's description:

The purpose of this Wiki is to provide a detailed and comprehensive comparison of the International Accounting Standards Board's International Financial Reporting Standard for Small-and Medium-Sized Entities ('IFRS for SMEs') with corresponding requirements of United States generally accepted accounting principles ('US GAAP'). But this is more than just a comparison resource, it is a Wiki. That means it is a collaborative, ongoing work in progress for anyone to contribute and use.

You can access the AICPA IFRS for SMEs – US GAAP Comparison Tool at http://wiki.ifrs.com/

Where to obtain IFRS for SMEs materials

• The standard online
  (English, Spanish, Italian and Romanian)
• The standard in hard copy
• Presentations at 'Train the Trainers' Workshops
• Training materials in PDF format
• Past issues of the IFRS for SMEs Update

Source : IFRS for SMEs Update – Issue 2010-2, 14 April 2010

Recent adoptions of the IFRS for SMEs

We try to keep track of jurisdictions that have adopted, or are planning to adopt, the IFRS for SMEs. Our list currently includes 60 jurisdictions. In a future Update we will include a summary. Meanwhile, in the past few weeks we have become aware of the following adoptions:

Argentina. On 19 March 2010, the Federación Argentina de Consejos Profesionales de Ciencias Económicas (the national professional accounting body in Argentina) issued an exposure draft proposing to adopt the IFRS for SMEs as an option for all entities not required to use full IFRSs. The SME exposure draft proposes that those private entities should also be permitted to use accounting standards that the Federation has issued or may issue in the future. Full IFRSs will be required in Argentina for all companies that publicly offer equity or debt securities starting in 2012, with an option to use IFRSs in 2011 or, in some cases, 2010.

Brazil. In December 2009, the Brazilian Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis, or CPC) adopted a Portuguese version of the IFRS for SMEs as an option for SMEs in Brazil. By Resolution 1255 of 2009, the CPC's SME standard was endorsed by the Brazilian Federal Accounting Council (Conselho Federal de Contabilidade, or CFC), the national professional body. The standard is a temporary and unofficial translation of the IFRS for SMEs that is available on the CPC website pending completion of the official translation by the IFRS Foundation. It is anticipated that auditors will be able to report that financial statements that comply with the CPC's SME standard are in conformity with the IFRS for SMEs because there are no substantive differences between the unofficial Portuguese translation and the IFRS for SMEs. The estimated number of SMEs in Brazil (January 2009) was 5.9 million, representing 99 per cent of Brazilian enterprises. While many of them are expected to continue to follow a very simple accounting system permitted under the Brazilian SMEs law, many others are expected to switch to the Brazilian IFRS for SMEs equivalent. For example, the Brazilian National Development Bank (Banco Nacional de Desenvolvimento Econômico e Social, or BNDES) is expected to encourage or even require all of its borrowers (approximately 250,000 SMEs) to use the new standard.

Costa Rica. The Costa Rican Institute of Certified Public Accountants Colegio de Contadores Publicos de Costa Rica is, by law, the accounting standard setter in Costa Rica. Currently, all companies follow IFRSs with the exception of some regulated entities (banks and finance entities, stockbrokers, and pension funds), which follow accounting policies adopted by the regulators. The Institute has adopted the IFRS for SMEs, to be effective for financial years beginning 1 January 2010. However, the Institute is still deliberating which entities will qualify as SMEs, and are therefore eligible to use the IFRS for SMEs.

Dominican Republic. In the Dominican Republic, the Instituto de Contadores Publicos Autorizados de la Republica Dominicana (Institute of CPAs of the Dominican Republic, or ICPARD) has had the legal power to establish accounting standards in accordance with article 31 of Law 479-08 since July 2009. In February 2010 the ICPARD adopted two resolutions:

• Listed companies. Resolution 001 requires the use of full IFRSs for companies whose shares are quoted on the Stock Exchange of the Dominican Republic starting in 2014 (some individual IFRSs will be mandatory starting in 2010).
• Other companies. Resolution 002 requires the use of the IFRS for SMEs for all companies whose shares are not quoted on the stock exchange (other than government-regulated companies). The resolution provides for a two-step implementation of the IFRS for SMEs, requiring some sections as mandatory starting in 2010, while the remaining sections become mandatory in 2014. In addition, the resolution allows unlisted companies that currently prepare financial statements in accordance with US GAAP to continue to do so up to 2014, when they will need to switch to the IFRS for SMEs. If the IFRSs for SMEs does not address an accounting question, Resolution 002 requires companies to follow full IFRSs and then US GAAP.

Namibia. By Resolution of its Council, the Institute of Chartered Accountants of Namibia has adopted the IFRS for SMEs for use in Namibia for financial statements authorised for issue after 17 February 2010. Applicability is as follows:

1. The Council of the Institute has decided that the IFRS for SMEs may be applied by: a 'public company' or a 'private company', as defined in the Companies Act, 1973, if it does not have public accountability as defined in Section 1 of the IFRS for SMEs.
2. For entities other than companies where the founding document or other regulation requires compliance with a 'fair presentation framework' as contemplated by the International Federation of Accountants ('IFAC') the IFRS for SMEs may be applied, if the entity does not have public accountability as defined in Section 1 of the IFRS for SMEs, except in the circumstances described in 4 below.
3. For entities where legal provisions or other regulations require compliance with a specific financial reporting framework (other than the IFRS for SMEs), such an entity may not apply the IFRS for SMEs even if it does not have public accountability as defined in Section 1 of the Statement of IFRS for SMEs.
4. For entities whose financial reporting framework is not set out by legal provisions, the founding statement or other regulations, if such an entity does not have public accountability, as defined in Section 1 of the Statement of IFRS for SMEs, it should assess whether it is appropriate to apply the IFRS for SMEs.

Philippines. The IFRS for SMEs has been adopted in the Republic of the Philippines effective 1 January 2010. It is known as the Philippine Financial Reporting Standard for SMEs (PFRS for SMEs). In the Philippines, listed companies, large unlisted companies, financial institutions, and public utilities are all required to use full PFRSs, which are nearly identical to full IFRSs. The PFRS for SMEs must be used by any other entity that has total assets of between P3,000,000 and P350,000,000 (US$70,000 to $8,000,000) or total liabilities of between P3 million and P250 million (US$70,000 to $5,500,000). Entities below those thresholds (so-called 'micro entities') may use the PFRS for SMEs or 'another acceptable basis of accounting'.

Source : IFRS for SMEs Update – Issue 2010-2, 14 April 2010)

Deloitte’s IFRS for SMEs in Your Pocket

Deloitte's IFRS Global Office has published the Global Edition of IFRS for SMEs in Your Pocket. This 45-page guide to the IFRS for SMEs is similar to Deloitte's very popular IFRSs in Your Pocket guide to full IFRSs. IFRS for SMEs in Your Pocket takes each section of the IFRS for SMEs, summarises its requirements, and highlights differences with full IFRS requirements. There is also a chronology of the development of the IFRS for SMEs and a discussion of how the IFRS for SMEs differs from full IFRSs. Click to download : IFRS for SMEs in Your Pocket (PDF 406k).

Source : IAS Plus Home Page

IASB IFRS Update – 8 April 2010

The IASB has done a public meeting in London on 8 April 2010, discussed several issues of IFRS regulation on Annual Improvements, Derecognition, Fair Value Measurement and also an amendments to IAS 19 regarding Termination Benefits. Here is the summary of the meeting result :

This IASB Update is a staff summary of the tentative decisions reached by the Board at a public meeting. As a project progresses, the Board can, and sometimes does, modify its earlier tentative decisions. Tentative decisions do not change existing requirements until those decisions are incorporated in a new or amended standard.

The International Accounting Standards Board met in London on 8 April 2010 for an additional Board meeting. The US Financial Accounting Standards Board (FASB) participated via video conference. The boards discussed:

• Annual improvements
• Derecognition
• Fair value measurement
• Termination benefits - amendments to IAS 19

Annual improvements

The Board had previously tentatively decided to include in the Annual Improvements 2008-2010 cycle an amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards regarding the use of a previous GAAP carrying amount as deemed cost for property, plant and equipment and intangible assets used in operations subject to rate regulation. At this meeting the Board considered and tentatively agreed to clarifications to this proposed amendment.

The Board formally assessed the improvements proposed for inclusion in the forthcoming Improvements to IFRS against the current published criteria for Annual Improvements and concluded that the criteria were met.

Next step

The staff will circulate shortly a ballot draft of Improvements to IFRSs for publication in April 2010.

Derecognition

The staff held an education session for the FASB on the IASB's proposed derecognition model. The boards will hold further discussions on the proposed derecognition model at the next joint board meeting.

Fair value measurement

Considerations for re-exposure

The Board discussed whether there is a need to re-expose a draft of an IFRS on fair value measurement.

The Board tentatively agreed to publish a limited scope exposure draft of the measurement uncertainty analysis disclosure, including the effect of correlation. The comment period of the exposure draft will coincide with the FASB's comment period for proposed amendments to Accounting Standards Codification Topic 820 (Fair Value Measurements and Disclosures).

The Board also tentatively agreed to publish on the IASB website a Request for Views to solicit feedback on the FASB's proposed amendments to Topic 820. The IASB and FASB will consider jointly the feedback received on the IASB's limited scope exposure draft, the IASB's Request for Views and the proposed amendments to Topic 820.

Termination benefits - amendments to IAS 19

The Board tentatively decided that there is no need to re-expose the forthcoming amendments to IAS 19 Employee Benefits, relating to termination benefits.

The Board expects to publish the final amendments in the second quarter of 2010.

IAS 37 - Liabilities project - Staff paper posted

Just got today April 08, 2010 an email from IFRS alert regarding IAS 37 – Liabilities project.

The IASB staff have prepared a staff paper discussing one aspect of the working draft IFRS to replace IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

The paper explains how the recognition criteria would apply to liabilities arising from lawsuits. Its purpose is to help people understand the recognition criteria before they comment on the revised measurement proposals in the Exposure Draft Measurement of Liabilities in IAS 37.

Further information is available on the Liabilities page of the IASB website.

IASB issues a discussion paper of Extractive Activities

This is an email alerted from IASB IFRS alert on Tuesday, April 6, 2010 :

The IASB published today the results of an international research project on a possible future International Financial Reporting Standard (IFRS) for extractive activities in the form of a discussion paper - Extractive Activities. The discussion paper is open for comment until 30 July 2010.

More information:

• Read the press release
• Visit the project page. A Snapshot summary document will be available on the project page shortly.

Access the document online:

• To access the document visit the "Get involved / Comment on a proposal" section on www.iasb.org
• If you are an eIFRS/Comprehensive subscriber, you can also view the document in the 'Latest Additions' section of eIFRS (you will be required to provide your login details).

Printed copies of the document:

• Printed copies of the document can be purchased from the IASC Foundation's online shop for £12 each plus shipping. Discounts are available.
• Comprehensive subscribers will receive a print copy shortly.

The Components of Cash and Cash Equivalents (IAS 7)

The statement of cash flows, under the various national and international standards, may or may not include transactions in cash equivalents as well as cash. Under US standards, for example, preparers may choose to define cash as “cash and cash equivalents,” as long as the same definition is used in the balance sheet as in the statement of cash flows (i.e., the statement of cash flows must tie to a single caption on the balance sheet). IAS 7, on the other hand, rather clearly required that the changes in both cash and cash equivalents be explained by the statement of cash flows.

Cash and cash equivalents include unrestricted cash (meaning cash actually on hand, or bank balances whose immediate use is determined by the management), other demand deposits, and short-term investments whose maturities at the date of acquisition by the enterprise were 3 (three) months or less.

Equity investments do not qualify as cash equivalents unless they fit the definition above of short-term maturities of three months or less, which would rarely, if ever, be true. Preference shares carrying mandatory redemption features, if acquired within three months of their predetermined redemption date, would meet the criteria above since they are, in substance, cash equivalents. These are very infrequently encountered circumstances, however.

Bank borrowings are normally considered as financing activities. However, in some countries, bank overdrafts play an integral part in the enterprise’s cash management, and as such, overdrafts are to be included as a component of cash equivalents if the following conditions are met :

1. The bank overdraft is repayable on demand, and
2. The bank balance often fluctuates from positive to negative (overdraft)

Statutory (or reserve) deposits by banks (i.e., those held with the central bank for regulatory compliance purposes) are often included in the same balance sheet caption as cash. The financial statement treatment of these deposits is subject to some controversy in certain countries, which becomes fairly evident from scrutiny of published financial statements of banks, as these deposits are variously considered to be either a cash equivalent or an operating asset.

If the latter, changes in amount would be presented in the operating activities section of the statement of cash flows, and the item could not then be combined with cash in the balance sheet. In the appendix to IAS 7, which illustrates the application of the standard to statement of cash flows of financial institutions, does not include statutory deposits with the central bank as a cash equivalent. Given the fact that deposits with central banks are more or less permanent (and in fact would be more likely to increase over time than to be diminished, given a going concern assumption about the reporting financial institution) the presumption must be that these are not cash equivalents in normal practice.

(Source : WILEY – 2010 Interpretation and Application of International Financial Reporting Standards, Barry J. Epstein and Eva K. Jermakowicz)