The publication of 2011 IFRS (Blue Book) Consolidated without early application

Dropped into my email inbox on last Saturday, November 20, 2010, below was the announcement of the publication of 2011 IFRS Blue Book.

The IFRS Foundation is pleased to announce that the 2011 IFRS (Blue Book) Consolidated without early application will be published in December 2010.

International Financial Reporting Standards (IFRSs). Official pronouncements applicable on 1 January 2011. Does not include IFRSs with an effective date after 1 January 2011.

This single volume presents the International Financial Reporting Standards (IFRSs), including International Accounting Standards (IASs), IFRIC and SIC Interpretations, and the accompanying documents - illustrative examples, implementation guidance, bases for conclusions and dissenting opinions - as issued by the IASB and with an effective date no later than 1 January 2011.

This edition does not consolidate those IFRSs or changes to IFRSs with an effective date after 1 January 2011. Readers seeking the consolidated text of IFRSs issued at 1 January 2011 (including IFRSs with an effective date after 1 January 2011) should refer to the two-part 2011 IFRS Red Book, which is being published in parallel with this edition, expected March 2011.

Copies are priced at £60 each, plus shipping. Discounts are available for:

• academics/students
• middle income and low income countries
• multiple orders.

The 2011 IFRSs (Blue Book) Consolidated without early application Bound Volume (978-1-907026-85-0) (Product code7) is priced at £60 per copy, plus shipping. Further information can be found on IFRS Foundation web shop. Please register your interest in this product if you wish to be notified of its publication.

In the Absence of an IFRS, where to turn to ?

The IASB publishes its standards in a series of pronouncements called International Financial Reporting Standards (IFRSs). The term ‘International Financial Reporting Standards’ includes IFRSs, IASs and Interpretation developed by the IFRIC or its predecessor, the former SIC.

The Interpretation of IFRSs are prepared by the IFRIC to give authoritative guidance on issues that are likely to receive divergent or unacceptable treatment, in the absence of such guidance.

As stated in paragraph 9 of IAS 8, Accounting Policies, Changes in Accounting Estimates, and Errors that IFRS are accompanied by guidance to assist entities in applying their requirements. All such guidance states whether it is an integral part of IFRS. Guidance that is an integral part of the IFRSs is mandatory. Guidance that is not an integral part of the IFRSs does not contain requirements for financial statements.

Further, paragraph 10 states that in the absence of an IFRS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is :

(1)  relevant to the economic decision-making needs for users; and

(2)  reliable, in that the financial statements :

1. represent faithfully the financial position, financial performance and cash flows of the entity;
2. reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
3. are neutral, ie. free from bias;
4. are prudent; and
5. are complete in all material respects

Following, paragraph 11 states that in making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order :

1. the requirements in IFRSs dealing with similar and related issues; and
2. the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.

Paragraph 12 states that in making the judgement described in paragraph 10, management may also consider the most recent pronouncements of other standard-setting bodies that use a similar concept framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11 (HRD).

Revenue Recognition from Rendering of Services

In general, IAS 18, Revenue states that revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably.

How this standard regulates the revenue recognition particularly from rendering of services ?

Paragraph 20 of IAS 18 states that when the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognized by reference to the stage of completion of the transaction at the end of the reporting period.

The outcome of a transaction can be estimated reliably when all the following conditions are satisfied :

1. the amount of revenue can be measured reliably;
2. it is probable that the economic benefits associated with the transaction will flow to the entity;
3. the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
4. the costs incurred for the transaction and the costs to complete the transaction can be measured reliably

The recognition of revenue by reference to the stage of completion of a transaction is often referred to as the percentage of completion method. Under this method, revenue is recognized in the accounting periods in which the services are rendered. The recognition of revenue on this basis provides useful information on the extent of service activity and performance during a period.

While, paragraph 22 states that revenue is recognized only when it is probable that the economic benefits associated with the transaction will flow to the entity. However, when an uncertainty arises about the collectibility of an amount already included in revenue, the uncollectible amount, or the amount in respect of which recovery has ceased to be probable, is recognized as an expense, rather than as an adjustment of the amount of revenue originally recognized.

Regarding the requirement of the existence of reliable estimation as stated in para. 20, further, para. 23 states that an entity is generally able to make reliable estimates after it has agreed to the following with the other parties to the transaction :

1. each party’s enforceable rights regarding the service to be provided and received by the parties;
2. the consideration to be exchanged; and
3. the manner and terms of settlement

The stage of completion of a transaction may be determined by a variety of methods. An entity uses the method that measures reliably the services performed. Depending on the nature of the transaction, the methods may include :

1. surveys of work performed;
2. services performed to date as a percentage of total services to be performed; or
3. the proportion that costs incurred to date bear to the estimated total costs of the transaction.

For practical purposes, when services are performed by an indeterminate number of acts over a specified period of time, revenue is recognized on a straight-line basis over the specified period unless there is evidence that some other method better represents the stage of completion. When a specific act is much more significant than any other acts, the recognition of revenue is postponed until the significant act is executed (Hrd).

The IFRS Framework

As described in the Introduction section of IFRS 2010 (Part A), the IASB has a Framework for the Preparation and Presentation of Financial Statements.

The FIRS Framework deals with the :

• objective of financial reporting
• qualitative characteristics of useful financial information
• reporting entity
• definition, recognition and measurement of the elements from which financial statements are constructed
• concepts of capital and capital maintenance

The intention of the Framework is to assist the IASB :

1. in the development of future IFRSs and in its review of existing IFRSs; and
2. in promoting the harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs.

In addition, the Framework may assist :

1. preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of a standard or an interpretation
2. auditors in forming an opinion on whether financial statements conform with IFRSs
3. users of financial statements in interpreting the information contained in financial statements prepared in conformity with IFRSs
4. those who are interested in the work of the IASB, providing them with information about its approach to the formulation of accounting standards

The Framework is not an IFRS. However, when developing an accounting policy in the absence of a standard or an Interpretation that specifically applies to an item, an entity’s management is required to refer to, and consider the applicability of, the concepts in the Framework.

In a limited number of cases there may be a conflict between the Framework and a requirement within a standard or an Interpretation. In those cases where there is a conflict, the requirements of the standard or Interpretation prevail over those of the Framework.

Current Development of the IFRS Framework

In October 2004, the FASB and IASB added to their agendas a joint project to develop an improved, common conceptual framework that builds on their existing frameworks (that is, the IASB’s Framework for the Preparation and Presentation of Financial Statements and the FASB’s Statements of Financial Accounting Concepts).

As noted in the FASB website (read further : Conceptual Framework—Joint Project of the IASB and FASB), the objective of the conceptual framework project, a joint project of the FASB and IASB, is to develop an improved common conceptual framework that provides a sound foundation for developing future accounting standards. Such a framework is essential to fulfilling the Boards’ goal of developing standards that are principles-based, internally consistent, and internationally converged and that lead to financial reporting that provides the information capital providers need to make decisions in their capacity as capital providers. The new framework, which will deal with a wide range of issues, will build on the existing IASB and FASB frameworks and consider developments subsequent to the issuance of those frameworks.

The project is being undertaken in eight phases :

1. Phase A – Objectives and Qualitative Characteristics
2. Phase B – Elements and Recognition
3. Phase C – Measurement
4. Phase D – Reporting Entity
5. Phase E – Presentation and Dislosure, including Financial Reporting Boundaries
6. Phase F – Framework Purpose and Status in GAAP Hierarchy
7. Phase G – Applicability to the Not-for-Profit Sector
8. Phase H – Entire Framework

On 28 September 2010, the IASB and the FASB announced the completion of the first phase of this joint project to develop an improved conceptual framework for IFRSs and GAAP. Click here for more information.

Another references :

1. ICAEW - The Conceptual Framework for Financial Reporting
2. IFRS - Conceptual Framework

Revenue recognition while an entity is acting as a Principal or as an Agent

Based on IAS 18, Revenue, in general term, revenue is recognized only when it is probable that the economic benefits associated with the transaction will flow to the entity and these benefits can be measured reliably.

Para. 8 of IAS 18 states that revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue. Similarly, in an AGENCY relationship, the gross inflows of economic benefits include amounts collected on behalf of the PRINCIPAL and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission.

Further, para. 21 of the Illustrative Examples of IAS 18 IE (Part B of IFRS 2010) provides guidance in determining whether an entity is acting as a PRINCIPAL or as an AGENT (as amended in IFRS 2009).

Such guidance states that determining whether an entity is acting as a principal or as an agent requires judgment and consideration of all relevant facts and circumstances.

An entity is acting as a PRINCIPAL when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. Features that indicate that an entity is acting as a principal include :

1. the entity has the primary responsibility for providing the goods or services to the customer or for fulfilling the order, for example by being responsible for the acceptability of the products or services ordered or purchased by the customer;
2. the entity has inventory risk before or after the customer order, during shipping or on return;
3. the entity has latitude in establishing prices, either directly or indirectly, for example by providing additional goods or services; and
4. the entity bears the customer’s credit risk for the amount receivable from the customer.

An entity is acting as an AGENT when it does not have exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. One feature indicating that an entity is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer.

Read also : FASB EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent

The Requirements to classify an asset as HELD FOR SALE

IFRS 5, Non-current Assets Held for Sale and Discontinued Operations issued by the IASB in March 2004 replacing IAS 35, deals with the measurement and presentation in the statement of financial position of non-current assets (and disposal groups) held for sale. It also covers the presentation of discontinued operations in the statement of comprehensive income.

As stated in ‘Objective’, in particular, the IFRS requires :

1. assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets to cease; and
2. assets that meet the criteria to be classified as held for sale to be presented separately in the statement of financial position and the results of discontinued operations to be presented separately in the statement of comprehensive income.

The overall principle of IFRS 5 as stated in paragraph 5 of IFRS 5 is that an entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

The Standard specifies certain requirements and conditions that must be met for a non-current asset (or disposal group) to be classified as held for sale.

The two general requirements are as stated in paragraph 7 of IFRS 5 :

1. the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups); and
2. its sale must be highly probable

Appendix A of IFRS 5 defines “highly probable’ as significantly more likely than probable, where ‘probable’ means more likely than not.

Based on paragraph 8 of IFRS 5, several specific conditions must be satisfied for the sale of a non-current asset (or disposal group) to qualify as highly probable :

1. the appropriate level of management must be committed to a plan to sell the asset (or disposal group);
2. an active programme to locate a buyer and complete the plan must have been initiated;
3. the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value;
4. except as permitted by paragraph 9, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Paragraph 9 of IFRS 5 explains that events or circumstances may extend the period to complete the sale beyond one year. An extension of the period required to complete a sale does not preclude an asset (or disposal group) from being classified as held for sale if the delay is caused by events or circumstances beyond the entity’s control and there is sufficient evidence that the entity remains committed to its plan to sell the asset (or disposal group).

If an entity has classified an asset (or disposal group) as held for sale, but the criteria in paragraphs 7-9 are no longer met, the entity shall cease to classify the asset (or disposal group) as held for sale (paragraph 26 of IFRS 5) (Hrd).