The Outlook and Issues of the First-time Adoption of IFRS

Following are excerptions taken from WILEY – IFRS 2008 Interpretation and Presentation of IFRS.

While IFRS had been gaining adherents on a slow but steady pace for many years, 2005 was a true watershed in that over 7,000 publicly traded companies in nations of the European Union were required to begin reporting group (consolidated) financial statements using IFRS, vastly increasing the total number of companies world-wide employing international standards.

Other nations have recently either embraced IFRS, announced plans to do so, or are endeavoring to “converge” their national GAAP with IFRS.

The US standard-setting body, FASB, agreed on a program to converge with IFRS in 2002, and in the past several years a number of US GAAP standards have been modified to conform to their IFRS equivalents (and several international standards have been modified to converge to US GAAP equivalents, where that was deemed appropriate).

Most recently, the US securities regulatory authority, the SEC, has agreed to accept filings by foreign private issuers (i.e., foreign registrants in the US) with financial statements prepared in conformity with IFRS, making wider acceptance of IFRS in the US a near certainty – perhaps signaling the ultimate superseding of US GAAP by IFRS.

With this developments and prospective events in mind, IASB issued a comprehensive standard on “first-time adoption,” IFRS 1, in mid-2003.

When a reporting entity prepares its financial statements in accordance with international accounting standards for the first time, a number of implementation questions need to be addressed and resolved.

IASB’s predecessor standard setter, IASC, had provided only limited guidance on this matter, which was set forth in SIC 8. This was superseded by the more comprehensive standard, IFRS 1, First-time Adoption of IFRS. IFRS 1 differed in several important respects from SIC 8.

The word wide trend toward universal adoption of IFRS has continued, extending beyond the EU action of 2005. Several nations have since announced plans to drop existing national GAAP in favor of IFRS.

Canada will converge to or adopt IFRS by 2011 (Canadian GAAP is currently very similar to US GAAP), China is converging to IFRS beginning in 2007, and even Japan appears to be accelerating its IFRS converging efforts. Indonesia standard-setting body, IAI, is in the plan to convergence the Indonesian GAAP (PSAK) with IFRS by 2012. Many more countries in Eastern Europe, South Asia, and the Far East are planning to be included in the growing list of new converts to IFRS. It is within this context that IASB decided to promulgate a standard on this subject as its maiden pronouncement, notwithstanding the existing guidance on this topic (SIC 8).

IASB endeavored to provide a “stable platform” of standards, with few revisions and no new standards having near-term effective dates, in order to facilitate the transition process by EU-based public companies.

IASB has announced that any new standards to be issued in the near-term will likely have implementation dates of 2009 or later, and indeed subsequent pronouncements (e.g., revised IAS 1, IFRS 8) have 2009 mandatory effective dates, although earlier application is permitted. This was intended to provide a respite from the challenges of dealing with constantly evolving standards.

A proposed standard would remove the discussion of specific exemptions and exceptions, currently part of the body of IFRS 1, to appendices to the standard. Furthermore, exemptions would be categorized as either permanent (e.g., waiving the need to account for the liability component of compound financial instruments when the component is no longer outstanding) or temporary (e.g., certain requirements relative to applying fair value measurements to financial instruments).

If this is done, the temporary exemptions will be removed as they become no longer relevant (that is, as the passage of time makes these moot).

Current issues regarding on implementation of IFRS for U.S. GAAP

CFO.com in its August 27, 2008 article titled “The End of GAAP Could Begin Next Year” wrote that the Securities and Exchange Commission has raised the possibility that some U.S. publicly traded companies will be able to use international financial reporting standards next year.

Further, it reported that on Wednesday, the SEC commissioners proposed a timetable for transitioning all public companies from U.S. generally accepted accounting standards to IFRS within eight years, with the allowance for some companies to begin using the global rules earlier. If this so-called roadmap is approved, the SEC estimates that 110 companies would be eligible to use IFRS at the end of fiscal years ending after December 15, 2009, depending on their size and industry.

The roadmap further calls for the SEC to make a decision in 2011 regarding whether to require all of its registrants to use IFRS. The commissioners would base their decision on the progress made on, among other things, funding the International Accounting Standards Committee Foundation (which governs the International Accounting Standards Board), IFRS data tagging, and accounting education.

Here is the SEC Proposed Timeline for Moving Companies to IFRS :

1. End of 2009 – limited group of large companies given the option to use IFRS. SEC estimates 110 U.S. companies will be able to take advantage of the offer

2. 2011 – SEC evaluates the progress of achieving proposed milestones, and makes a decision about whether to mandate adoption of IFRS. If IFRS is mandated, the commission will develop a staged roll out, starting with the largest public companies first.

3. 2014 – Year the first wave of companies will be mandated to report financial results using international accounting standards, if IFRS requirements are adopted in 2011.

4. 2016 – Year that all public companies, big and small, will be mandated to report financial results using international accounting standards, if IFRS requirements are adopted in 2011.

Sources of this article : WILEY – IFRS 2008 the interpretation and application of IFRS and CFO.com (The End of GAAP Could Begin Next Year)

The push to move U.S. companies to international accounting standards is a myth-laden ?

CFO.com in its September 11, 2008 Today in Finance article titled "Regulator Rips into Global Accounting Plan" said that 'Recent effort to move the United States toward adoption of international accounting standards is a politically motivated effort that will hurt the standing of the United States in the World's capital markets, a prominent accounting regulator said today'

Further, it wrote the statement of a member and former acting chair of the Public Company Accounting Oversight Board, Charles Niemeier who said that 'A precipitous move away from U.S Generally Accepted Accounting Principles will undermine the U.S. regulatory system, and thereby "put in jeopardy the thing that gives the U.S. a competitive advantage'

Niemeier also said it is a myth that IFRS is based more on principles than the rules-heavy U.S GAAP.

"IFRS in not more principles-based, it's just younger," said Niemeier, repeating a charge that he has made in the past.

GAAP, he said, also started with principles. However, he said, that changed after U.S. v.Simon, a 1969 court decision that found that presenting financial information in conformity with generally accepted accounting principles may not be a sufficient defense against charges of violating the antifraud provision of U.S. securities laws.

That case, he said, was a "shock to the system," and spurred a large number of the rules that exist in GAAP today, which were demanded by companies and auditor seeking a level of predictability and consistency.

Read the rest of this article in here :  Regulator Rips into Global Accounting Plan (CFO.com), and also another related article in her : Regulator pans U.S. move toward IFRS accounting

IAS 2 Inventories, How and When to Determine the Ownership of Goods

Inventory can only be an asset of the reporting entity if it is an economic resource of the entity at the date of the statement of financial position.

In general, an enterprise should record purchases and sales of inventory when legal title passes. Although strict adherence to this rule may not appear to be important in daily transactions, a proper inventory cut off at the end of an accounting period is crucial for the correct determination of periodic results of operations. Thus, for accounting purposes, to obtain an accurate measurement of inventory quantity and corresponding monetary representation of inventory and cost of goods sold in the financial statements, it is necessary to determine when title has passed.

The most common error made in this regard is to assume that title is synonymous with possession of goods on hand. This may be incorrect in two ways: (1) the goods on hand may not be owned, and (2) goods that are not on hand may be owned.

There are four matters that may cause confusion about proper ownership: (1) goods in transit, (2) consignment sales, (3) product financing arrangements, and (4) sales made with the buyer having generous or unusual right of return.

Good in transit. At year end, any goods in transit from seller to buyer may properly be includable in one, and only one, of those parties’ inventories, based on the terms and conditions of the sale.

Under traditional legal and accounting interpretation, goods are included in the inventory of the firm financially responsible for transportation costs. This responsibility may be indicated by shipping terms such as FOB, which is used in overland shipping contracts, and by FAS, CIF, C&F and ex-ship, which are used in maritime contracts.

The term FOB stands for “free on board”. If goods are shipped FOB destination, transportation costs are paid by the seller and title does not pass until the carrier delivers the goods to the buyer; thus these goods are part of the seller’s inventory while in transit.

If goods are shipped FOB shipping point, transportation costs are paid by the buyer and title passes when the carrier takes possession; thus these goods are part of the buyer’s inventory while in transit.

The terms FOB destination and FOB shipping point often indicate a specific location at which title to the goods is transferred, such as FOB Milan. This means that the seller retains title and risk of loss until the goods are delivered to a common carrier in Milan who will act as an agent for the buyer.

A seller who ships FAS (free alongside) must bear all expense and risk involved in delivering the goods to the dock next to (alongside) the vessel on which they are to be shipped. The buyers bears the cost of loading and of shipment; thus title passes when the carrier takes possession of the goods.

In a CIF (cost, insurance and freight) contract the buyer agrees to pay in a lump sum the cost of the goods, insurance costs, and freight charges.

In a C&F contract, the buyer promises to pay a lump sum that includes the cost of the goods and all freight charges.

In either case, the seller must deliver the goods to the carrier and pay the costs of loading; thus both title and risk of loss pass to the buyer upon delivery of the goods to the carrier.

A seller who delivers goods ex-ship bears all expense and risk until the goods are unloaded, at which time both title and risk of loss pass to the buyer.

Consignment sales. There are specifically defined situations where the party holding the goods is doing so as an agent for the true owner.

In consignments, the consignor (seller) ships goods to the consignee (buyer), which acts as the agent of the consignor in trying to sell the goods.

In some consignments, the consignee receives a commission; in other arrangements, the consignee “purchases” the goods simultaneously with the sale of goods to the final customer.

Goods out on consignment are properly included in the inventory of the consignor and excluded from the inventory of the consignee.

Disclosure may be required of the consignee, however, since common financial analytical inferences, such as days’ sales in inventory or inventory turnover, may appear distorted unless the financial statement users are informed. However, IFRS does not explicitly address this (to be continued).

Source of this article : WILEY - IFRS 2008 Interpretation and Application of IFRS

Revised IAS 2 Inventories, the history and the main changes

The History

IAS 2 Inventories was issued by the International Accounting Standards Committee (IASC) in December 1993. It replaced IAS 2 Valuation and Presentation of Inventories in the Context of the Historical Cost System (originally issued in October 1975).

The Standing Interpretations Committee developed SIC-1 Consistency-Different Cost Formulas for Inventories, which was issued in December 1997.

Limited amendments to IAS 2 were made in 1999 and 2000.

In December 2003, the IASB issued a revised IAS 2, which also replaced SIC-1.

The Main Changes of Revised IAS 2

The main changes from the previous version of IAS 2 are described below.

Objective and scope

The objective and scope paragraphs of IAS 2 were amended by removing the words ‘held under the historical cost system’, to clarify that the Standard applies to all inventories that are not specifically excluded from its scope.

Scope clarification

The Standard clarifies that some types of inventories are outside its scope while certain other types of inventories are exempted only from the measurement requirements in the Standard.

Paragraph 3 establishes a clear distinction between those inventories that are entirely outside the scope of the Standard (described in paragraph 2) and those inventories that are outside the scope of the measurement requirements but within the scope of the other requirements in the Standard.

Scope exemptions

The Standard does not apply to the measurement of inventories of producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value in accordance with well-established industry practices.

The previous version of IAS 2 was amended to replace the words ‘mineral ores’ with ‘minerals and mineral products’ to clarify that the scope exemption is not limited to the early stage of extraction of mineral ores.

The Standard does not apply also to the measurement of inventories of commodity broker-traders to the extent that they are measured at fair value less costs to sell.

Cost of Inventories

IAS 2 does not permit exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency to be included in the costs of purchase of inventories.

This change from the previous version of IAS 2 resulted from the elimination of the allowed alternative treatment of capitalizing certain exchange differences in IAS 21 The Effects of Changes in Foreign Exchange Rates.

That alternative had already been largely restricted in its application by SIC-11 Foreign Exchange - Capitalization of Losses from Severe Currency Devaluation. SIC-11 has been superseded as a result of the revision of IAS 21 in 2003.

Paragraph 18 was inserted to clarify that when inventories are purchased with deferred settlement terms, the difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense over the period of financing.

Cost formulas

The Standard incorporates the requirements of SIC-1 Consistency-Different Cost Formulas for Inventories that an entity use the same cost formula for all inventories having a similar nature and use to the entity. SIC-1 is superseded.

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

Recognition as an expense

The Standard eliminates the reference to the matching principle.

The Standard also described the circumstances that would trigger a reversal of a write-down of inventories recognized in a prior period.

Disclosure

The Standard requires disclosure of the carrying amount of inventories carried at fair value less costs to sell.

The Standard also requires disclosure of the amount of any write-down of inventories recognized as an expense in the period and eliminates the requirement to disclose the amount of inventories carried at net realizable value.

Business Combinations of Entities under Common Control, how IFRS guide it?

IFRS 3 Business Combinations (as revised by January 2008) required a business combination transaction be accounted for by applying the acquisition method, unless it is a combination involving entities or business under common control.

IFRS 3 Business Combinations applies to a transaction or other event that meets the definition of business combination.

An entity shall determine whether a transaction or other event is a business combination by applying the definition in this IFRS, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition.

This IFRS defines a business combination as a transaction or other event in which an acquirer obtains control of one or more business. Transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business combination as that term is used in this IFRS.

As mentioned above, this IFRS only applies to a transaction or other event that meets the definition of a business combination, and does not apply to: (a) the formation of a joint venture, (b) the acquisition of an asset or a group of assets that does not constitute a business, and (c) a combination of entities or business under common control

Business combinations of entities under common control

Paragraph B1-B4 of IFRS 3 provide guidance apply to business combinations of entities under common control.

Paragraph B1 stated that this IFRS does not apply to a business combination of entities or business under common control. A business combination involving entities or business under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory.

Following, paragraph B2 expressed that a group of individuals shall be regarded as controlling an entity when, as a result of contractual arrangements, they collectively have the power to govern its financial and operating policies so as to obtain benefits from its activities.

Therefore, a business combination is outside the scope of this IFRS when the same group of individuals has, as a result of contractual arrangements, ultimate collective power to govern the financial and operating policies of each of the combining entities so as to obtain benefits from their activities, and that ultimate collective power is not transitory.

Further, paragraph B3 stated that an entity may be controlled by an individual or by a group of individuals acting together under a contractual arrangement, and that individual or group of individuals may not be subject to the financial reporting requirements of IFRSs.

Therefore, it is not necessary for combining entities to be included as part of the same consolidated financial statements for a business combination to be regarded as one involving entities under common control.

Latest, paragraph B4 stated that the extent of non-controlling interests in each of the combining entities before and after the business combination is not relevant to determining whether the combination involves entities under common control.

Similarly, the fact that one of the combining entities is a subsidiary that has been excluded from the consolidated financial statements is not relevant to determining whether a combination involves entities under common control.

WILEY – IFRS 2008 Interpretation and Application of IFRS described that IFRS 3 explicitly does not apply to entities under common control (e.g., brother-sister corporations).

A question arises, however, when a parent (Company P) transfers ownership in one of its subsidiaries (Company B) to another of its subsidiaries (Company A) in exchange for additional shares of Company A.

In such an instance, A’s carrying value for the investment in B should be P’s basis, not B’s book value. Furthermore, if A subsequently retires the interests of minority owners of B, the transaction should be accounted for as a purchase, whether it is effected through a stock issuance by A or by a cash payment to the selling shareholders.

Furthermore, when a purchase transaction is closely followed by a sale of the parent’s subsidiary to the newly acquired (target) entity, these two transactions should be viewed as a single transaction. Accordingly, the parent should recognize gain or loss on the sale of its subsidiary to the target company, to the extent of minority interest in the target entity.

As a result, there will be a new basis (step-up) not only for the target company’s assets and liabilities, but also for the subsidiary company’s net assets. Basis is stepped up to the extent of minority participation in the target entity to which the subsidiary company was transferred (Hrd) ***

IAS 23 versus SFAS 34 – several main differences

The Basis for Conclusions on IAS 23 Borrowing Costs which accompanies, but not as part of IAS 23, revealed out several major differences between IAS 23 and FASB Statement of Financial Accounting Standards (SFAS) No. 34 Capitalization of Interest Cost.

Definition of borrowing costs

IAS 23 uses the term ‘borrowing costs’ whereas SFAS 34 uses the term ‘interest costs’. ‘Borrowing costs’ reflects the broader definition in IAS 23, which encompasses interest and other costs, such as : (a) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs; and (b) amortization of ancillary costs incurred in connection with the arrangement of borrowings.

EITF issues No. 99-9 concludes that derivative gains and losses (arising from the effective portion of a derivative instrument that qualifies as a fair value hedge) are part of the capitalized interest cost. IAS 23 does not address such derivative gains and losses.

Definition of a qualifying asset

The main differences are as follows:

(a) IAS 23 defines a qualifying asset as one that takes a substantial period of time to get ready for its intended use or sale. The SFAS 34 definition does not include the term substantial.

(b) IAS 23 excludes from its scope qualifying assets that are measured at fair value. SFAS 34 does not address assets measured at fair value.

(c) SFAS 34 includes as qualifying assets investments in investees accounted for using the equity method, in some circumstances. Such investments are not qualifying assets according to IAS 23.

(d) SFAS 34 does not permit the capitalization of interest costs on assets acquired with gifts or grants that are restricted by the donor or grantor in some situations. IAS 23 does not address such assets.

Measurement

When an entity borrows funds specifically for the purpose of obtaining a qualifying asset:

(a) IAS 23 requires an entity to capitalize the actual borrowing costs incurred on that borrowing. SFAS 34 states that an entity may use the rate of that borrowing.

(b) IAS 23 requires an entity to deduct any income earned on the temporary investment of actual borrowings from the amount of borrowing costs to be capitalized. SFAS 34 does not generally permit this deduction, unless particular tax-exempt borrowings are involved.

SFAS 34 requires an entity to use judgement in determining the capitalization rate to apply to the expenditures on the asset-an entity selects the borrowings that it considers appropriate to meet the objective of capitalizing the interest costs incurred that otherwise could have been avoided.

When an entity borrows funds generally and uses them to obtain a qualifying assets, IAS 23 permits some flexibility in determining the capitalization rate, but requires an entity to use all outstanding borrowings other than those made specifically to obtain a qualifying asset.

Disclosure requirements

IAS 23 requires disclosure of the capitalization rate used to determine the amount of borrowing costs eligible for capitalization. SFAS 34 does not require this disclosure.

SFAS 34 requires disclosure of the total amount of interest cost incurred during the period, including the amount capitalized and the amount recognized as an expense. IAS 23 requires disclosure only of the amount of borrowing costs capitalized during the period. IAS 1 Presentation of Financial Statements requires the disclosure of finance costs for the period.

(Source of this article : IAS 23 BC - Basis for Conclusions on IAS 23 Borrowing Costs)

The Core Principles of IAS 23 Borrowing Costs

IAS 23 (revised March 2007) uses the following terms with the meanings specified :

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognize other borrowing costs as an expense in the period in which it incurs them (par. 8).

To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings (par. 12).

To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that an entity capitalizes during a period shall not exceed the amount of borrowing costs it incurred during that period (par. 14).

An entity shall begin capitalizing borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalization is the date when the entity first meets all of the following conditions :

1. It incurs expenditures for the assets;

2. It incurs borrowing costs; and

3. It undertakes activities that are necessary to prepare the asset for its intended use or sale.

The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the asset’s condition is taking place.

For example, borrowing costs incurred while land is under development are capitalized during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalization.

An entity shall suspend capitalization of borrowing costs during extended periods in which it suspends active development of a qualifying asset (par. 20).

An entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete (par. 22).

An asset is normally ready for its intended use or sale when the physical construction of the asset is complete even though routine administrative work might still continue. If minor modifications, such as the decoration of a property to the purchaser’s or user’s specification, are all that are outstanding, this indicates that substantially all the activities are complete.

When an entity completes the construction of a qualifying asset in parts and each part is capable of being used while construction continues on other parts, the entity shall cease capitalizing borrowing costs when it completes substantially all the activities necessary to prepare that part for its intended use or sale (par. 24).

An entity shall apply this standard for annual periods beginning on or after 1 January 2009.

This standard supersedes IAS 23 Borrowing Costs revised in 1993.

The Chronology of IAS 23 Borrowing Costs and why it was revised

IAS 23 Borrowing Costs was issued by the International Accounting Standards Committee in December 1993. It replaced IAS 23 Capitalisation of Borrowing Costs (issued March 1984).

In April 2001 the International Accounting Standards Board resolved that all Standards and Interpretation issued under previous Constitutions continued to be applicable unless and until they were amended or withdrawn.

IAS 23 was amended by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (issued December 2003).

In March 2007 the IASB issued a revised IAS 23.

The following Interpretations refer to IAS 23 :

· IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities (issued May 2004 and subsequently amended)

· IFRIC 12 Service Concession Arrangements (issued November 2006 and subsequently amended)

The revisions to IAS 23 result from the International Accounting Standards Board’s Short-term Convergence project.

The project is being conducted jointly with the United States standard-setter, the Financial Accounting Standards Board (FASB).

The objective of the project is to reduce differences between IFRSs and US generally accepted accounting principles (GAAP) that are capable of resolution in a relatively short time and can be addressed outside major projects.

The revisions to IAS 23 are principally concerned with the elimination of one of the two treatments that exist for borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset.

The application of only one method will enhance comparability.

For the reasons set out below, the Board decided to eliminate the option of immediate recognition of such borrowing costs as an expense. It believes this will result in an improvement in financial reporting as well as achieving convergence in principle with US GAAP.

The Board considered whether to seek convergence on the detailed requirements for the capitalization of borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset.

However, the Board noted statements by the US Securities and Exchange Commission (SEC) and the European Commission that the IASB and FASB should focus their short-term convergence effort on eliminating major differences of principle between IFRSs and US GAAP.

For their purposes, convergence on the detailed aspects of accounting treatments is not necessary.

The Board further noted that both IAS 23 and SFAS 34 Capitalization of Interest Cost were developed some years ago. Consequently, neither set of specific provisions may be regarded as being of a clearly higher quality than the other.

Therefore, the Board concluded that if should not spend time and resources considering aspects of IAS 23 beyond the choice between capitalization and immediate recognition as an expense.

(This article was excerpted from IAS 23 Borrowing Costs)

IAS 1 Presentation of Financial Statements, the Preliminary

IAS 1 Presentation of Financial Statements was issued by the International Accounting Standards Committee in September 1997. It replaced IAS 1 Disclosure of Accounting Policies (originally approved in 1974), IAS 5 Information to be Disclosed in Financial Statements (originally approved in 1977) and IAS 13 Presentation of Current Assets and Current Liabilities (originally approved in 1979).

In December 2003, the International Accounting Standard Board (IASB) issued a revised IAS 1, and in August 2005 issued an Amendment to IAS 1 Capital Disclosures.

Latest, in September 2007 the IASB issued a revised IAS 1.

Main features of IAS 1

IAS 1 affects the presentation of owner changes in equity and of comprehensive income. It does not change the recognition, measurement or disclosure of specific transactions and other events required by other IFRSs.

IAS 1 requires an entity to present, in a statement of changes in equity, all owner changes in equity. All non-owner changes in equity (i.e. comprehensive income) are required to be presented in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income are not permitted to be presented in the statement of changes in equity.

IAS 1 requires an entity to present a statement of financial position as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting policy retrospectively or makes a retrospective restatement, as defined in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, or when the entity reclassifies items in the financial statements.

Changes from previous requirements

The main changes from the previous version of IAS 1 are described below

A complete set of financial statements

The previous version of IAS 1 used the titles ‘balance sheet’ and ‘cash flow statement’ to describe two of the statements within a complete set of financial statements. IAS 1 uses ‘statement of financial position’ and ‘statement of cash flows’ for those statements.

IAS 1 requires an entity to disclose comparative information in respective of the previous period, i.e. to disclose as a minimum two of each of the statements and related notes. It introduces a requirement to include in a complete set of financial statements a statement of financial position as at the beginning of the earliest comparative period whenever the entity retrospectively applies an accounting policy or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. The purpose is to provide information that is useful in analyzing an entity’s financial statements.

Reporting owner changes in equity and comprehensive income

The previous version of IAS 1 required the presentation of an income statement that included items of income and expense recognized in profit or loss. It required items of income and expense not recognized in profit or loss to be presented in the statement of changes in equity, together with owner changes in equity. It also labeled the statement of changes in equity comprising profit or loss, other items of income and expense and the effects of changes in accounting policies and correction of errors as ‘statement of recognized income and expense’.

IAS 1 now requires:

1. All changes in equity arising from transactions with owners in their capacity as owners (i.e. owner changes in equity) to be presented separately from non-owner changes in equity. An entity is not permitted to present components of comprehensive income (i.e. non-owner changes in equity) in the statement of changes in equity. The purpose is to provide better information by aggregating items with shared characteristics and separating items with different characteristics.

2. Income and expense to be presented in one statement (a statement of comprehensive income) or in two statements (a separate income statement and a statement of comprehensive income), separately from owner changes in equity.

3. Component of other comprehensive income to be displayed in the statement of comprehensive income.

4. Total comprehensive income to be presented in the financial statements.

Other comprehensive income – reclassification adjustments and related tax effects

IAS 1 requires an entity to disclose income tax relating to each component of other comprehensive income. The previous version of IAS 1 did not include such a requirement. The purpose is to provide users with tax information relating to these components because the components often have tax rates different from those applied to profit or loss.

IAS 1 also requires an entity to disclose reclassification adjustments relating to components of other comprehensive income. Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognized in other comprehensive income in previous periods.

Presentation of Dividends

The previous version of IAS 1 permitted disclosure of the amount of dividends recognized as distributions to equity holders (now referred to as ‘owners’) and the related amount per share in the income statement, in the statement of changes in equity or in the notes. IAS 1 requires dividends recognized as distributions to owners and related amounts per share to be presented in the statement of changes in equity or in the notes. The presentation of such disclosures in the statement of comprehensive income is not permitted.

The purpose is to ensure that owner changes in equity (in this case, distribution to owners in the form of dividends) are presented separately from non-owner changes in equity (presented in the statement of comprehensive income).

When it is impracticable to apply a new accounting policy, how to deal with it ?

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors replaces IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies and should be applied for annual periods beginning on or after 1 January 2005.

The standard retains the ‘impracticability’ criterion for exemption from changing comparative information when changes in accounting policies are applied retrospectively and prior period errors are corrected. The standard now includes a definition of ‘impracticable’ and guidance on its interpretation.

Based on this standard, applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so.

Paragraph 27 IAS 8 stated that when it is impracticable for an entity to apply a new accounting policy retrospectively, because it cannot determine the cumulative effect of applying the policy to all prior periods, the entity, in accordance with paragraph 25, applies the new policy prospectively from the start of the earliest period practicable.

It therefore disregards the portion of the cumulative adjustment to assets, liabilities and equity arising before the date.

Changing an accounting policy is permitted even if it is impracticable to apply the policy prospectively for any prior period.

Paragraphs 50-53 provide guidance on when it is impracticable to apply a new accounting policy to one or more prior periods.

Paragraphs 50 stated that in some circumstances, it is impracticable to adjust comparative information for one or more prior periods to achieve comparability with the current period. For example, data may not have been collected in the prior period(s) in a way that allows either retrospective application of a new accounting policy (including, for the purpose of paragraphs 51-53, its prospective application to prior periods) or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information.

It is frequently necessary to make estimates in applying an accounting policy to elements of financial statements recognized or disclosed in respect of transactions, other events or conditions. Estimation is inherently subjective, and estimates may be developed after the reporting period.

Developing estimates is potentially more difficult when retrospectively applying an accounting policy or making a retrospective restatement to correct a prior period error, because of the longer period of time that might have passed since the affected transaction, other event or condition occurred. However, the objective of estimates related to prior periods remains the same as for estimates made in the current period, namely, for the estimate to reflect the circumstances that existed when the transaction, other event or condition occurred.

Therefore, retrospectively applying a new accounting policy or correcting a prior period error requires distinguishing information that (a) provides evidence of circumstances that existed on the date(s) as at which the transaction, other event or condition occurred, and (b) would have been available when the financial statements for that prior period were authorized for issue from other information.

For some types of estimates (example, an estimate of fair value not based on an observable price or observable inputs), it is impracticable to distinguish these types of information. When retrospective application or retrospective restatement would require making a significant estimate for which it is impossible to distinguish these two types of information, it is impracticable to apply the new accounting policy or correct the prior period error retrospectively.

Hindsight should not be used when applying a new accounting policy to, or correcting amounts for, a prior period, either in making assumptions about what management’s intentions would have been in a prior period or estimating the amounts recognized, measured or disclosed in a prior period.

For example, when an entity corrects a prior period error in measuring financial assets previously classified as held-to-maturity investments in accordance with IAS 39 Financial Instruments : Recognition and Measurement, it does not change their basis of measurement for that period if management decided later not to hold them to maturity.

In addition, when an entity corrects a prior period error in calculating its liability for employees’ accumulated sick leave in accordance with IAS 19 Employee Benefits, it disregard information about an unusually severe influenza season during the next period that became available after the financial statements for the prior period were authorized for issue.

The fact that significant estimates are frequently required when amending comparative information presented for prior periods does not prevent reliable adjustment or correction of the comparative information (Hrd) ***

How IFRS deals with Changes in Accounting Policies ?

In the preparation of financial statements there is an underlying presumption that an accounting principle, once adopted, should not be changed, but rather is to be uniformly applied in accounting for events and transactions of a similar type. This consistent application of accounting principles enhances the utility of the financial statements. The presumption that an entity should not change an accounting principle may be overcome only if the reporting entity justifies the use of an alternative acceptable accounting principle on the basis that it is preferable under the circumstances.

When IFRS are revised or new standards are developed, they often are promulgated a year or more prior to the date set for mandatory application. Disclosure of future changes in accounting policies must be made when the reporting entity has yet to implement a new standard that has been issued but that has not yet come into effect.

In addition, disclosure is now required of the planned date of adoption, along with an estimate of the effect of the change on the entity’s financial position, except if making such an estimate requires undue cost or effort.

Changes in Accounting Policy

A change in an accounting policy means that a reporting entity has exchanged one accounting principles for another.

According to IAS 8, the term accounting policy includes the accounting principles, bases, conventions, rules and practices used. For example, a change in inventory costing from weighted-average to first-in, first-out would be a change in accounting policy, as would a change in accounting for borrowing costs from capitalization to immediate expensing.

Changes in accounting policy are permitted if :

1. The change is required by a standard or an interpretation, or

2. The change in accounting principle will result in a more relevant and reliable presentation of events or transactions in the financial statements of the enterprise.

IAS 8 does not regard the following as changes in accounting policies :

1. The adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions; and

2. The adoption of a new accounting policy to account for events or transactions that did not occur previously or that were immaterial in prior periods.

The provisions of IAS 8 are not applicable to the initial adoption of a policy to carry assets at revalued amounts, although such adoption is indeed a change in accounting policy. Rather, this is to be dealt with as a revaluation in accordance with IAS 16 or IAS 38, as appropriate under the circumstances.

Changes in accounting policy pursuant to the adoption of a standard

When a change in an accounting policy is made consequent to the enactment of a new standard, it is to be accounted for in accordance with the transitional provisions set forth in that standard.

Generally, the transitional provisions will require the restatement of comparative period information. Nonetheless, comparative information presented for a particular prior period need not be restated if doing so is impracticable.

When the comparative information for a particular prior period is not restated, the new accounting policy is to be applied to the balances of assets and liabilities as at the beginning of the period following that one, with a corresponding adjustment made to the opening balance of retained earnings for the first period restated.

The cumulative effect as of the beginning of the earliest comparative period presented (for which restatement is applied), if any, is to be reported as an adjustment to beginning retained earnings of that period.

For example, assume that a change is adopted in 2008 and comparative 2007 financial statements are to be presented with the 2008 financial statements. The change in accounting policy also affects previously reported 2005-2006 financial position and results of operations, but these are not to be presented in the current financial report.

Therefore, the cumulative effect (i.e., the cumulative amount of expense or income which would have been recognized in years prior to 2007) as of the beginning of 2007 must be reported as an adjustment to beginning retained earnings in 2007.

In certain circumstances, a new standard may be promulgated with a delayed effective date. This is done, for example, when the new requirements are complex and IASB wishes to give adequate time for preparers and auditors to master the new materials.

If, as of a financial reporting date, the reporting entity has not elected early adoption of the standard, it must disclose (1) the nature of the future change or changes in accounting policy; (2) the date by which adoption of the standard is required; (3) the date as at which it plans to adopt the standard; and (4) either (a) an estimate of the effect that change(s) will have on its financial position, or (b) if such an estimate cannot be made without undue cost or effort, a statement to that effect.

A change in an accounting policy other than one made pursuant to the promulgation of a new standard or interpretation must, under revised IAS 8, be accounted for retrospectively.

With retrospective application, the results of operations for all prior periods presented must be restated, as if the newly adopted policy has always been used. If periods before the earliest period being presented were also affected, then the opening balance of retained earnings for the earliest period being presented must be restated to reflect the net impact on all earlier periods.

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

Changes in Estimated Useful Life of Property, Plant and Equipment, how to handle it ?

In accordance with one of the more important of the basic accounting conventions, the matching principle, the cost of property, plant and equipment are allocated through depreciation to the periods that will have benefited from the use of the assets.

Whatever method of depreciation is chosen, it must result in the systematic and rational allocation of the depreciable amount of the asset (initial cost less residual value) over the asset’s expected useful life.

The determination of the useful life must take a number of factors into consideration. These factors include technological change, normal deterioration, actual physical use, and legal or other limitations on the ability to use the property.

(Wiley – IFRS 2008 Bound Volume, Interpretation and Application)

International Accounting Standard (IAS) 16 Property, Plant and Equipment defined useful life as the period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by an entity.

Par. 50 of IAS 16 stated that the depreciable amount of an asset shall be allocated on a systematic basis over its useful life.

Par. 51 stated that the residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Wiley – IFRS 2008 Interpretation and Application explained further, that if it is determined, when reviewing the depreciation method, that the estimated life is greater or less than previously believed, the change is handled as a change in accounting estimate, not as a correction of an accounting error.

Accordingly, no restatement is to be made to previously reported depreciation; rather, the change is accounted for strictly on a prospective basis, being reflected in the period of change and subsequent periods.

Example of changes in estimated useful life of asset and implementation of Par. 51 of IAS 16 as follows :

To illustrate this concept, consider an asset costing € 100,000 and originally estimated to have a productive life of 10 years. The straight-line method is used, and there was no residual value anticipated. After 2 years, management revises its estimate of useful life to a total of 6 years. Since the net carrying value of the asset is € 80,000 after 2 years (= € 100,00 x 8/10), and the remaining expected life is 4 years (2 of the 6 revised total years having already elapsed), depreciation in years 3 through 6 will be € 20,000 (= € 80,000/4) each.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the Preliminary

International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8 revised in December 2003) replaces IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (revised in 1993) and should be applied for annual periods beginning on or after 1 January 2005.

This standard also replaces SIC-2 Consistency-Capitalization of Borrowing Costs and SIC-18 Consistency-Alternative Methods.

The main changes of IAS 8 (December 2003 revised) from the previous version are described below :

Selection of accounting policies. The requirements for the selection and application of accounting policies in IAS 1 Presentation of Financial Statements (as issued in 1997) have been transferred to the Standard.

Materiality. The Standard defines material omissions or misstatements. It stipulates that :

1. The accounting policies in IFRSs need not be applied when the effect of applying them is immaterial. This complements the statement in IAS 1 that disclosures required by IFRSs need not be made if the information is immaterial;

2. Financial statements do not comply with IFRSs if they contain material errors;

3. Material prior period errors are to be corrected retrospectively in the first set of financial statements authorized for issue after their discovery.

Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.

Voluntary changes in accounting policies and corrections of prior period errors. The standard requires retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors. It removes the allowed alternative in the previous version of IAS 8 i.e. (a) to include in profit or loss for the current period the adjustment resulting from changing an accounting policy or the amount of a correction of a prior period error; and (b) to present unchanged comparative information from financial statements of prior periods.

As a result of the removal of the allowed alternative, comparative information for prior periods is presented as if new accounting policies had always been applied and prior period errors had never occurred.

Impracticability. The standard retains the “impracticability” criterion for exemption from changing comparative information when changes in accounting policies are applied retrospectively and prior period errors are corrected. The standard now includes a definition of “impracticable” and guidance on its interpretation.

Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so.

The Standard also states that when it is impracticable to determine the cumulative effect, at the beginning of the current period, of : (a) applying a new accounting policy to all prior periods, or (b) an error on all prior periods, the entity changes the comparative information as if the new accounting policy had been applied, or the error had been corrected, prospectively from the earliest date practicable.

Prospective application of a change in accounting policy and of recognizing the effect of a change in an accounting estimate, respectively, are : (a) applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed; and (b) recognizing the effect of the change in the accounting estimate in the current and future periods affected by the change.

Fundamental errors. The Standard eliminates the concept of a fundamental error and thus the distinction between fundamental errors and other material errors. The Standard defines prior period errors.

Disclosures. The Standard now requires, rather than encourages, disclosure of an impending change in accounting policy when an entity has yet to implement a new IFRS that has been issued but not yet come into effect. In addition, it requires disclosure of 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.

The Standard requires more detailed disclosure of the amounts of adjustments resulting from changing accounting policies or correcting prior period errors. It requires those disclosures to be made 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.

Source of this article : IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

IAS 18 Revenue, the Preliminary

International Accounting Standard (IAS) 18 Revenue was issued by the International Accounting Standards Committee in December 1993. It replaced IAS 18 Revenue Recognition (issued in December 1982).

Limited amendments to IAS 18 were made as a consequence of IAS 39 (in 1998), IAS 10 (in 1999) and IAS 41 (in January 2001).

In April 2001 the International Accounting Standards Board resolved that all Standards and Interpretations issued under previous Constitutions continued to be applicable unless and until they were amended or withdrawn.

Since then IAS 18 has been amended by the following IFRSs :

· IAS 39 Financial Instruments: Recognition and Measurement (as revised in December 2003)

· IFRS 4 Insurance Contracts (issued March 2004)

IAS 1 Presentation of Financial Statements (as revised in September 2007) amended the terminology used throughout IFRSs, including IAS 18.

The following Interpretations refer to IAS 18 :

· SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers (issued December 1998 and subsequently amended)

· SIC-27 Evaluating the Substance of Transactions involving the Legal Form of a Lease (issued December 2001 and subsequently amended)

· SIC-31 Revenue – Barter Transactions involving Advertising Services (issued December 2001 and subsequently amended)

· IFRIC 12 Service Concession Arrangements (issued November 2006 and subsequently amended)

· IFRIC 13 Customer Loyalty Programmes (issued June 2007)

This standard shall be applied in accounting for revenue arising from the following transactions and events : (a) the sale of goods, (b) the rendering of services, and (c) the use by others of entity assets yielding interest, royalties and dividends.

This standard does not deal with revenue arising from :

1. Lease agreements (see IAS 17 Leases);

2. Dividends arising from investments which are accounted for under the equity method (see IAS 28 Investments in Associates);

3. Insurance contracts within the scope of IFRS 4 Insurance Contracts;

4. Changes in the fair value of financial assets and financial liabilities or their disposal (see IAS 39 Financial Instruments: Recognition and Measurement);

5. Changes in the value of other current assets;

6. Initial recognition and from changes in the fair value of biological assets related to agricultural activity (see IAS 41 Agriculture);

7. Initial recognition of agricultural produce (see IAS 41); and

8. The extraction of mineral ores.

Income is defined in the Framework for the Preparation and Presentation of Financial Statements as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Income encompasses both revenue and gains.

Revenue is income that arises in the course of ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends and royalties.

Revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably.

In the normal sale of goods, revenue is presumed to have been realized when the significant risks and rewards have been transferred to the buyer, accompanied by the forfeiture of effective control by the seller, and the amount to be received can be reliably measured.

For most routine transactions, this occurs when the goods have been delivered to the customers.

Revenue recognition for service transactions, as set forth in revised IAS 18, requires that the percentage-of-completion method be used unless certain defined conditions are not met. Originally, reporting entities had a choice of methods – percentage-of-completion or completed contract.

For interest, royalties and dividends, recognition is warranted when it is probable that economic benefits will flow to the entity.

Specifically, interest is recognized on a time proportion basis, taking into account the effective yield on the asset. Royalties are recognized on an accrual basis, in accordance with the terms of the underlying agreement. Dividend income is recognized when the shareholder’s right to receive payment has been established.

Revenue shall be measured at the fair value of the consideration received or receivable.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

(Source of this article : IAS 18 Revenue and Wiley – IFRS 2008 Interpretation and Application)