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At a productive February 2007 meeting, the AASB agreed to issue an Australian equivalent to IFRS 8 Operating Segments, made two new Interpretations, issued a number of amending standards and a new exposure draft on amendments to AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards.
In this Accounting alert we focus on the following developments:
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Differential reporting and SMEs
Future reporting framework for Australian corporate entities
The AASB considered staff papers on differential reporting and tentatively decided that Australia should adopt a ‘two tiered’ approach in relation to Australian corporate entities, as follows:
Australian equivalents to IFRSs (A-IFRS) will be adopted by corporates that are publicly accountable
an Australian version of the SME Standard will be adopted by corporates that are not publicly accountable but which prepare general purpose financial reports.
| The AASB decided that under a revised financial reporting regime all financial reports that are prepared and lodged with ASIC under the Corporations Act 2001 would be regarded as general purpose financial reports, because they are available on a public register for access by users. Once the new reporting regime (based on IFRS and ‘IFRS for SMEs’) is put in place, this decision will effectively remove the ‘reporting entity’ concept for corporate entities that report under the Corporations Act 2001. |
Determining which entities are ‘publicly accountable’
The AASB decided to adopt a definition of ‘publicly accountable’ that is equivalent to the IASB’s definition. The IASB draft ‘IFRS for SMEs’ defines ‘publicly accountable’ as follows:
An entity has public accountability if:
- it files, or it is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; or
- it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance entity, securities broker/dealer, pension fund, mutual fund or investment banking entity.
The only entities that would be required to adopt A-IFRS would be entities that meet the above definition. This would encompass listed entities, those with traded debt securities and those that have a broad fiduciary duty such as banks and insurance companies. All other entities would apply an Australian SME Standard, but could elect to adopt ‘full’ A-IFRS if they choose.
Remaining steps
The AASB is still to address the following significant issues in finalising this proposal:
- how subsidiaries of publicly accountable entities should be treated, i.e. should they adopt A-IFRS instead of the SME Standard, or should it be a free choice; whether disclosure requirements should be modified, and so on
- how not-for-profit entities in the private sector should be dealt with in any future ‘IFRS for SMEs’
Furthermore, The AASB’s decisions are subject to the final form and outcome of the IASB’s SME Standard. Therefore, the AASB acknowledged:
- relief from the disclosure requirements may be necessary if the SME Standard is too onerous for entities at the lower end of the second tier
- if the IASB reduces the level of disclosure or the rigour of the recognition and measurement requirements of the ‘IFRS for SMEs’ in its finalisation, certain entities may be ‘deemed’ to be publicly accountable, so requiring the application of A-IFRS rather than the SME Standard.
It is expected that once these matters have been resolved (or perhaps before), the AASB will publish a ‘wrap around’ to the IASB’s exposure draft outlining their final proposals.
What these decisions mean in practice
The AASB’s tentative decisions as outlined above would mean:
- all entities lodging financial reports with ASIC would be required to prepare ‘general purpose financial statements’, meaning the amount of disclosure required may potentially substantially increase for those entities that are currently considered ‘non-reporting entities’
- the vast majority of corporate entities in Australia would adopt the Australian SME standard, offering some relief from the full rigours of A-IFRS, particularly in difficult areas such as financial instruments (including hedging), share-based payment and fair value measurements (for more information about the proposed modifications, see Accounting alert 2007/03)
Do we really need an Australian SME Standard? Some accounting commentators argue that we may not need an Australian version of the 'IFRS for SMEs', on the basis that we have already adopted 'full' IFRS across the board. Besides obvious situations such as the need for Australian subsidiaries of foreign entities to align their accounting with their parent (should they adopt the 'IFRS for SMEs'), it is clear that IFRS and 'IFRS for SMEs' are closely linked and it would be difficult to adopt one without the other. Furthermore, IFRS is unashamedly targeted at the major global corporates listed on the world's stock exchanges. The accounting requirements under IFRS reflect this emphasis and so are necessarily complex, thorough and robust. These requirements may not suit the users of the financial statements of SMEs and similar entities, and the draft 'IFRS for SMEs' is the IASB's attempt to find a balance between complexity and usefulness to users in this group. Once accounting by SMEs is segregated from IFRS by the IASB, it might be expected that IFRS will become more complex and difficult to apply by those entities that are not 'publicly accountable'. Much of IFRS is being revisited in the IASB's current work program, and the IASB's decisions may be influenced by knowing that SMEs may be granted an exemption or simpler option in key areas. Although with the benefit of hindsight it may have been better to only require listed entities to adopt A-IFRS in 2005, with others transitioning to an 'IFRS for SMEs' at a later date, the go-forward position in Australia may be best served by adopting an Australian 'IFRS for SMEs' Standard. |
More information
For more information about on differential reporting and SMEs, see the following:
- Accounting alert 2007/03 – overview of the IASB’s exposure draft of ‘IFRS for SMEs’ and our initial analysis of the proposals from the Australian perspective
- Accounting alert 2006/09 – our analysis from mid-2006 on likely developments in differential reporting in Australia
- IAS Plus page on the IASB SME Project – a history of the IASB’s decisions and deliberations in this long running project
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Segment reporting
As foreshadowed in Accounting alert 2006/15, the AASB affirmed its decisions around AASB 8 Operating Segments, including limiting its scope to be equivalent to IFRS 8 Operating Segments. This will mean that the requirement to disclose segment information will effectively be limited to for-profit entities whose debt or equity instruments are traded in a public market or where the entity is in the process of filing documents to do so.
AASB 8 will supersede AASB 114 Segment Reporting and, consistent with the IASB’s recent policy on new/revised standards, will apply to annual reporting beginning on or after 1 January 2009. An accompanying amending standard, AASB 2007-3 Amendments to Australian Accounting Standards arising from AASB 8 will also introduce consequential amendments into other Standards, with effect from the same date. Early adoption will be permitted (with disclosure).
| AASB 8 is expected to be formally made by the AASB out of session in the coming weeks. Once made as a Standard, AASB 8 will be available for early adoption by entities. Reporting entities that do not fall within the scope of AASB 8 may choose to early adopt the Standard, thereby overriding AASB 114 and so avoiding segment reporting in their financial statements. |
More information
For more information about AASB 8/IFRS 8, see the following:
- Accounting alert 2006/15 – analysis of the AASB’s decisions surrounding the scope of AASB 8
- IAS Plus Newsletter on IFRS 8 (PDF 113kb) – provides an overview of IFRS 8
- IAS Plus page on the operating segments project – a history of the IASB’s convergence project on segment reporting
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Interpretations
Group and treasury share transactions
The Board made Interpretation 11 AASB 2 – Group and Treasury Share Transactions, which is equivalent to IFRIC 11 IFRS 2 – Group and Treasury Share Transactions. The Board also approved an amending standard, AASB 2007-1 Amendments to Australian Accounting Standards arising from AASB Interpretation 11, to include the IASB’s transitional provisions in IFRS 2 into AASB 2.
The Interpretation applies to annual reporting periods beginning on or after 1 March 2007, with early adoption permitted.
More information
For more information about Interpretation 11/IFRIC 11, see the following:
IAS Plus IFRIC 11 page – summary of IFRIC 11, together with the history of the development of the Interpretation
Service concession arrangements
The Board made Interpretation 12 Service Concession Arrangements as an Australian equivalent to IFRIC 12 of the same name. IFRIC 12 will apply to annual reporting periods beginning on or after 1 January 2008, but early adoption will be permitted.
Consequential amendments were made to Interpretation 4 Determining Whether an Arrangement contains a Lease and Interpretation 129, which is now called Service Concession Arrangements: Disclosures. In addition, an amending Standard, AASB 2007-2 Amendments to Australian Accounting Standards arising from AASB Interpretation 12 was also made to introduce a new transitional provision into AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards.
| The requirements of Interpretation 12 represent a substantial change to the method of accounting traditionally adopted for service concession arrangements. In addition, past and future outsourcing and similar arrangements will need to be carefully considered in light of the interaction between Interpretation 12, Interpretation 4 and AASB 117 Leases. Affected entities may encounter numerous difficulties in determining whether particular arrangements are within the scope of Interpretation 12 or not and if so, applying its requirements. We recommend entities that may be impacted by Interpretation 12 begin planning its possible implementation as soon as possible. |
Interpretation 12 does not address accounting for the government (grantor) side of such arrangements. Although the AASB agreed to form an Advisory Panel to advise on accounting for service concession arrangements by these entities at its December 2006 meeting, the Panel has not met.
| Darryn Rundell, a Deloitte technical partner based in our Melbourne office, is working closely with a number of entities regarding the potential application and impact of Interpretation 12. Darryn can be contacted by e-mail at the following address: drundell@deloitte.com.au |
More information
For more information about Interpretation 12, see the following:
- Accounting alert 2006/15 – overview of the requirements of IFRIC 12
- IAS Plus Special Edition Newsletter on IFRIC 12 (PDF 128kb)
- IAS Plus IFRIC 12 page – summary of IFRIC 12, together with the history of the development of the Interpretation
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Other developments
Proposed amendments to AASB 1
The AASB agreed to issue ED 152 Proposed Amendments to AASB 1 First-time Adoption of Australian equivalents to IFRSs. ED 152 proposes that, on first-time adoption of A-IFRS, a parent can measure its interest in a subsidiary at the fair value or carrying amount of net assets at transition date and subsequently treat this as a cost of the investment.
More information
For more information about the proposed amendments to AASB 1, see the following:
- AASB Exposure Drafts page – ED 152 will be made available here soon (a draft is available here [PDF 77kb])
- IAS Plus project page
Accounting by superannuation entities
The AASB discussed the appropriate measurement basis for defined benefit obligations by superannuation funds, focussing on the difference between ‘fair value’ and the measurement basis under AASB 119 Employee Benefits.
The AASB agreed that the measurement of defined benefit obligations should be based on the current requirements of AASB 119 and agreed that an issues paper should be prepared to consider the implications of this decision.
More information
For more information about this topic, see the following:
- Accounting alert 2006/12 – earlier AASB discussions on how superannuation funds should account for assets and liabilities
- AASB Issues Paper: “Fair Value Measurement of Defined Benefit Obligations” (PDF 63kb)
Other
The following topics were also discussed:
- AASB work program for 2007
- review of public sector not-for-profit entity 'gaps in GAAP' issues
- GAAP/GFS harmonisation – this project now comprises two phases: Phase 1 being the General Government Sector (GGS), Public Non-Financial Corporation sector, Public Financial Corporation sector and ‘whole of government’ reporting, whilst Phase 2 will include entities within the GGSs of the States, Territories and Commonwealth
- inventories – difficulties being encountered by not-for-profit entities in measuring inventories at the lower of cost or current replacement cost
- IASB intangible assets project – status report
- fair value measurements – extension of AASB comment period to 2 April 2007
- revenue from non-exchange transactions – joint project with the NZ FRSB to replace AASB 1004 Contributions
- IPSASB report
- board membership – welcome to Sue Highland, retirement of Ken Leo, appointment of Bruce Porter as Deputy Chairman.
More information on these and all of the above topics can be obtained from the AASB Action Alert (PDF 52kb) for the meeting.
The next meeting of the AASB is scheduled for 14-15 March 2007.
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