Why Bearer Plants was taken out from the scope of IAS 41 ?

Prior to the 2014 amendments, IAS 41 required all biological assets related to agricultural activity to be measured at fair value less costs to sell (read also : Biological Assets and Bearer Plants, what is the difference between them ?).

Later, in June 2014 the IASB board issued Agriculture : Bearer Plants (Amendments to IAS 16 and IAS 41) which amended the scope of IAS 16 to include bearer plants. While IAS 41 Agriculture applies to the produce growing on the bearer plants. The amendments define a bearer plant and require bearer plants to be accounted for as property, plant and equipment in accordance with IAS 16.

As discussed in the amendments to the Basis for Conclusions on IAS 16 Property, Plant and Equipment, stakeholders told the Board that they think the fair value measurement is not appropriate for mature bearer biological assets such as oil palms and rubber trees because they are no longer undergoing significant biological transformation as defined in IAS 41 for the biological assets in relation to the agricultural activity. The use of mature bearer biological assets such as those is seen by many as similar to that of manufacturing. Consequently, they said that a cost model should be permitted for those bearer biological assets (bearer plants such as oil palms and rubber trees), because it is permitted for property, plant and equipment. Further, they also said that they had concerns about the cost, complexity and practical difficulties of fair value measurements of bearer biological assets in the absence of markets for those assets, and about the volatility from recognising  changes in the fair value less costs to sell in profit or loss. Furthermore, they asserted that investors, analysts and other users of financial statements adjust the reported profit or loss to eliminate the effects of changes in the fair values of these bearer biological assets.

Most respondents who cited agriculture in their responses to the Board’s 2011 Agenda Consultation raised concerns in relation to fair value measurement of plantations, for example oil palm and rubber trees plantation, and favoured a limited-scope project for these bearer biological assets to address the concerns as mentioned above. Only a small number of respondents favoured a broader consideration of IAS 41 or a Post-implementation Review, or said that there is no need to amend IAS 41.

Before the limited-scope project for bearer biological assets was added to its work programme, the Board was monitoring the work undertaken by the Asian-Oceanian Standard-Setters Group (AOSSG), primarily by the Malaysian Accounting Standards Board (MASB), on a proposal to remove some bearer biological assets from the scope of IAS 41 and account for them in accordance with IAS 16. Those proposals were discussed several times by national standard-setters, the Board’s Emerging Economies Group (EEG) and the IFRS Advisory Council. Feedback from these meetings indicated strong support for the AOSSG/MASB proposals and for the Board to start a limited-scope project for bearer biological assets.

In September 2012, the Board decided to add to its agenda a limited-scope project for bearer biological assets, with the aim of considering whether the account for some or all of them as property, plant and equipment, thereby permitting use of  a cost model.  Later, the Board decided that it had received sufficient information to develop an ED from work performed by the MASB, meetings of national standard-setters, feedback from preparers on the 2011 Agenda Consultation and user outreach performed by staff. Furthermore, the project was expected to result in limited changes that were sought by both users and preparers of financial statements. Consequently, the Board decided that the project could proceed without a Discussion Paper and developed and ED that was issued in June 2013, and finally, in June 2014 the accounting standard of Agriculture : Bearer Plants (Amendments to IAS 16 and IAS 41) was published by the IASB. Entities are required to apply the amendments for annual periods beginning on or after 1 January 2016. Earlier application is permitted (HRD).

IASB proposes the ED of Measurement Uncertainty Analysis Disclosure for Fair Value Measurements

The International Accounting Standards Board (IASB) today (29 June 2010) published for public comment further enhancements to a disclosure proposal on Level 3 fair value measurements that formed part of the IASB’s exposure draft Fair Value Measurement published in May 2009.

In that exposure draft, the IASB proposed a three-level fair value hierarchy that categorises observable and non-observable market data used as inputs for fair value measurements. According to that hierarchy, Level 3 inputs are ‘unobservable inputs’ used for the fair value measurement of assets or liabilities for which market data are not available.

In response to comments received, the IASB proposes to enhance its original proposal by requiring the measurement uncertainty analysis disclosure to reflect the interdependencies between unobservable inputs used to measure fair value in Level 3. Users of financial statements commented that this information would allow them to assess the effect that the use of different unobservable inputs would have had on the fair value measurement.

The exposure draft Measurement Uncertainty Analysis Disclosure for Fair Value Measurements is open for comment until 7 September 2010.

T he FASB is publishing the proposals in the exposure draft Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Both boards will consider the comments received on the exposure drafts jointly as they continue their discussions about fair value measurement.

The IASB exposure draft can be accessed on http://go.iasb.org/open+to+comment from today. The FASB exposure draft can be accessed on www.fasb.org.

The IASB will publish in due course on its website a comprehensive summary on the progress of its fair value measurement project, of which these proposals form part.

Source : www.iasb.org

User questionnaire for Fair Value Option exposure draft

On 24 May 2010 the International Accounting Standards Board (IASB) produced a questionnaire for financial statement users on its May 2010 exposure draft Fair Value Option for Financial Liabilities.

The IASB asks analysts to complete the questionnaire to provide input on the proposals in the exposure draft on the fair value option. This questionnaire, targeted at analysts, forms part of a comprehensive programme of outreach activities to all IFRS constituents.

Responses to the questionnaire must be received by 16 July 2010. Click here for more information.

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).

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

IASB publishes guidance on fair value measurement

WebCPA.com in its publication dated November 4, 2008 alerted that The International Accounting Standards Board has issued educational guidance from an expert advisory panel on the controversial issue of fair value measurement when markets become inactive.

In conjunction with the 84-page report, the IASB also published an eight-page staff summary, outlining the highlights of the major issues in the report and the contex.

The report and summary take into account recent documents issued by the U.S. Financial Accounting Standards Board and the Securities and Exchange Commission's Office of the Chief Accountant.

The Press Release of IASB dated October 31, 2008 said that the International Accounting Standards Board (IASB) today published education guidance on the application of fair value measurement when market become inactive.

Further, it said that the education guidance takes the form of a summary document prepared by IASB staff and the final report of the expert advisory panel established to consider the issue.

The summary document sets out the context of the expert advisory panel report and highlights important issues associated with measuring the fair value of financial instruments when markets become inactive.

"The expert advisory panel has provided useful input to a number of projects and we are moving quickly to incorporate their valuable contributions into our standards. Round-table discussions in Asia, Europe and the United States, to be held jointly with the FASB, will provide additional opportunities to gather views on where further enhancements may be required. Added to this, the joint IASB - FASB high level advisory group now being set up will provide advice to both boards on the reporting lessons from the credit crisis," said Sir David Tweedie, chairman of the IASB, commenting the publication of the guidance report.

Go here for the full press release issued by IASB on October 31, 2008 and for downloading the final report of the expert advisory panel and the IASB staff summary.

The Revaluation Model of PPE Measurement (after Recognition)

IAS 16 provides for two acceptable alternative approaches to accounting for long-lived tangible assets. The first of these is the historical cost method, under which acquisition or construction cost is used for initial recognition, subject to depreciation over the expected economic life and to possible write-down in the event of a permanent impairment in value. In many jurisdictions this is the only method allowed by statue, but a number of jurisdictions, particularly those with significant rates of inflation, do permit either full or selective revaluation and IAS 16 acknowledges this by also mandating what it calls the “revaluation model.”

The logic of recognizing revaluations relates to both the statement of financial position and the measure of periodic performance provided by the statement of comprehensive income. Due to the effects of inflation (which even if quite moderate when measured on an annual basis can compound dramatically during the lengthy period over which property, plant, and equipment remain in use) the statement of financial position can become a virtually meaningless agglomeration of dissimilar costs.

Furthermore, if the depreciation charge against profit is determined by reference to historical costs of assets required in much earlier periods, profits will be overstated, and will not reflect the cost of maintaining the entity’s asset base. Under these circumstances, a nominally profitable entity might find that is has self-liquidated and is unable to continue in existence, at least not with the same level of productive capacity, without new debt or equity infusions.

IAS 29, Financial Reporting in Hyperinflationary Economies, addresses adjustments to depreciation under conditions of hyperinflation. Use of the revaluation method is typically encountered in economies that from time to time suffer less significant inflation than that which necessitates application of the procedures specified by IAS 29.

As the basis for the revaluation method, the standard stipulates that it is fair value (defined as the amount for which the asset could be exchanged between knowledgeable, willing parties in an arm’s-length transaction) that is to be used in any such revaluations.

Furthermore, the standard requires that, once an entity undertakes revaluations, they must continue to be made with sufficient regularity that the carrying amounts in any subsequent statement of financial position are not materially at variance with then-current fair values.

In other words, if the reporting entity adopts the revaluation model, it cannot report statements of financial position that contain obsolete fair values, since that would not only obviate the purpose of the allowed treatment, but would actually make it impossible for the user to meaningfully interpret the financial statements.

IAS 16 suggests that fair value is usually determined by appraisers, using market-based evidence. Market values can also be used for machinery and equipment, but since such items often do not have readily determinable market values, particularly if intended for specialized applications, they may instead be valued at depreciated replacement cost.

IAS 16 also requires that if any assets are revalued, all other assets in those groupings or categories must also be revalued. This is necessary to prevent the presentation of a statement of financial position that contains an unintelligible and possibly misleading mix of historical costs and current values, and to preclude selective revaluation designed to maximize reported net assets.

Although IAS 16 requires revaluation of all assets in a given class, the standard recognizes that it may be more practical to accomplish this on a rolling, or cycle, basis. This could be done by revaluing one-third of the assets in a given asset category, such as machinery, in each year, so that as of any statement of financial position date one-third of the group is valued at current fair value, another one-third is valued at amounts that are one year obsolete, and another one-third are valued at amounts that are two years obsolete.

Unless values are changing rapidly, it is likely that the statement of financial position would not be materially distorted, and therefore, this approach would in all likelihood be a reasonable means to facilitate the revaluation process.

Source of this article : Wiley IFRS 2008 – Interpretation and Application of IFRS

Several Accounting Changes Done by IASB in response to the Global Financial Crisis

CFO.com in its article today, October 15, 2008 titled "Fair Value Tweaking on a Global Scale" said that "In response to the global credit crisis, the International Accounting Standards Board has made its third announcement in as many days about slight changes to fair value accounting rules. The proposal issued today is a tweak to IASB's financial instrument disclosure rule, which is out for public comment until December 15.

The proposal streamlines disclosure requirements related to changes in valuation techniques for financial instruments. Rather than specifying what circumstances trigger new disclosures, the proposal simply requires that any change in valuation techniques be disclosed - plus the disclosure must include the reason for making the switch. The draft rule, which is a proposed amendment to IAS 39, applies to each class of financial instruments a company holds."

Further, the article said that "Earlier in the day, accounting regulators from the European Union voted in favor of an IASB fair value rule revision issued on Monday. The revision allows companies to reclassify financial assets to avoid marking the assets to market in some limited cases. The proposal must still be approved by the EU Parliament before taking effect.

The reclassification rule, which is part of a revised IAS 39, was finalized on October 13, and mirrors an existing U.S. standard - FAS 115."

Explore more in here : Fair Value Tweaking on a Global Scale

On October 13, 2008, IASB issued amendments to IAS 39 Financial Instruments : Recognition and Measurement and IFRS 7 Financial Instruments : Disclosures that would permit the reclassification of some financial instruments.

The amendments to IAS 39 introduce the possibility of reclassification for companies applying IFRSs, which were already permitted under U.S. GAAP in rare circumstances.

Here is the link to the story : IAS amendments permit reclassification of financial instruments

Next, on October 14, 2008, IASB provided an update on its work to consider the application of fair value when markets become inactive.

In May 2008 and at the request of the Financial Stability Forum (FSF) the IASB established and Expert Advisory Panel to consider the application of fair value when markets become inactive. The Panel has since met on seven occasions, the latest of which was on Friday, 10 October.

Several issues were discussed and agreed by the Panel during the meeting.

Click here to explore : IASB provides update on applying fair value in inactive markets

Latest, on October 15, 2008, as part of the IASB's response to the credit crisis, IASB published for public comment proposals to improve the information available to investors and others about fair value measurement of financial instruments and liquidity risk.

The proposals also reflect discussions by the IASB's Expert Advisory Panel on measuring and disclosing fair values of financial instruments when markets are no longer active.

For more information, click the following link : IASB proposes improvements to financial instruments disclosures

Using Depreciated Replacement Cost as a valuation approach of PPE Measurement

IAS 16 Property, Plant and Equipment provides for two acceptable alternative approaches to accounting for long-lived tangible assets.

Paragraph 29 of IAS 16 stated that an entity shall choose either the cost model in par. 30 or the revaluation model in par. 31 as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.

Using the Cost model, after recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses (par. 30).

Using the Revaluation model, after recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period (par. 31).

Further, par. 32 of IAS 16 stated that “The fair value of land and buildings is usually determined from market-based evidence by appraisal that is normally undertaken by professionally qualified valuers. The fair value of items of plant and equipment is usually their market value determined by appraisal.”

Furthermore, par. 33 stated that “If there is no-market-based evidence of fair value because of the specialized nature of the item of property, plant and equipment and the item is rarely sold, except as part of a continuing business, an entity may need to estimate fair value using an income or a depreciated replacement cost approach.”

Wiley – IFRS 2008, Interpretation and Application of IFRS explained that replacement cost deals with the service potential of the asset, which is after all what truly represents value for its owner.

An obvious example can be found in the realm of computers. While the cost to reproduce a particular mainframe machine exactly might be the same or somewhat lower today versus its original purchase price, the computing capacity of the machine might easily be replaced by one or a small group of microcomputers that could be obtained for a fraction of the cost of the larger machine.

Even replacement cost, if reported on a gross basis, would be an exaggeration of the value implicit in the reporting entity’s asset holdings, since the asset in question has already had some fraction of its service life expire. The concept of sound value addresses this concern.

Sound value is the equivalent of the cost of replacement of the service potential of the asset, adjusted to reflect the relative loss in its utility due to the passage of time or the fraction of total productive capacity that has already been utilized.

Example of depreciated replacement cost (sound value) as a valuation approach :

An asset acquired January 1, 2005 at a cost of € 40,000 was expected to have a useful economic life of 10 years. On January 1, 2008, it is appraised as having a gross replacement cost of € 50,000. The sound value, or depreciated replacement cost, would be 7/10 x € 50,000 or € 35,000. This compares with a book, or carrying value of € 28,000 at the same date. Mechanically, to accomplish a revaluation at January 1, 2008, the asset should be written up by € 10,000 (i.e from € 40,000 to € 50,000 gross cost) and the accumulated depreciation should be proportionally written up by € 3,000 (from € 12,000 to € 15,000). Under IAS 16, the net amount of the revaluation adjustment, € 7,000 would be recognized in other comprehensive income and accumulated in revaluation surplus, an additional equity account.

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

The Fair Value Guidance (FSP FAS 157-3)

CFO.com in its October 10, 2008 article titled "Fair Value Guidance to Go Live" reported that 'The Financial Accounting Standards Board will likely issue final guidance on fair value accounting by Monday. The board is working today and perhaps over the weekend to tweak some of the language to clarify how assets in illiquid markets are valued.

FASB decided to rework two sections of the draft document that was put out for public comment one week ago - but stuck to its guns regarding mandating companies to use significant judgement when valuing financial assets in inactive markets.'

Further, CFO.com wrote that 'The guidance clarifies items contained in FAS 157, the accounting rule that governs how to measure assets and liabilities using the fair value method. FAS 157 provides a measurement hierarchy that outlines ways to value securities depending on how liquid they are. Regularly traded securities are valued on their selling price, whereas securities that are thinly traded or in illiquid markets have a different set of inputs. In practice, however, many experts suspect that banks and financial institutions gave undue weight to the last observable selling price of their securities before the markets froze completely.'

Read further in here : Fair Value Guidance to Go Live

FASB in the FASB Staff Position publication No. FAS 157-3 Determining the Fair Value of a Financial Asset When the Market for That Asset is not Active, in the Objective section stated that 'This FASB Staff Position (FSP) clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.

In the Background section, the FSP FAS 157-3 explained that 'The FASB staff obtained extensive input from various constituents, including financial statement users, preparers, and auditors, on determining fair value in accordance with Statement 157. Many of those constituents indicated that the fair value measurement framework in Statement 157 and related disclosures have improved the quality and transparency of financial information.

However, certain constituents expressed concerns that Statement 157 does not provide sufficient guidance on how to determine the fair value of  financial assets when the market for that asset is not active.'

Read the complete guidance in here : FSP FAS 157-3