The April 2007 AASB meeting was a one-day affair that sought to address a number of outstanding issues.  The approval of an Amending Standard based on the proposals in ED 151 significantly advances the process of Australia’s convergence with IFRS and will be welcomed by many constituents.  However, the AASB continues to propose the elimination of the reporting entity concept.

In this Accounting alert we focus on the following developments:

• ED 151 proposals confirmed – an amending Standard is approved
• the death knell sounds for the reporting entity concept – the AASB’s Preface to accompanying the IASB’s SME Standard nears completion
• other developments – fair value accounting by superannuation entities and the AASB’s consideration of the IASB’s Fair Value Measurements Discussion Paper.

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ED 151 proposals confirmed

Overview

The AASB made an Amending Standard based on the proposals in ED 151 Australian Additions to, and Deletions from, IFRSs.  The Standard also incorporates a number of editorial corrections and amendments made by the IASB to IFRSs.  In all, 34 Standards will be affected by the Amending Standard – leaving only a few untouched by its requirements.

The Amending Standard applies to annual reporting periods beginning on or after 1 July 2007, but may be early adopted.  We expect that early adoption will be attractive for the majority of entities, particularly those seeking to eliminate disclosures from their financial reports or adopt the new options implemented.

Significant changes implemented by the Amending Standard include:

• permitting the ‘indirect method’ of presenting cash flows statements
• revisions to the definition of ‘separate financial statements’ and the requirement to prepare consolidated financial statements
• introduction of an option to account for jointly controlled entities using proportionate consolidation
• new options in accounting for government grants
• elimination of a large number of disclosures across many Standards.

Adopting the new requirements

The AASB has confirmed that adoption of new options introduced by the Amending Standard will be subject to the requirements of AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.  Accordingly, the Amending Standard does not have any additional transitional provisions.

Because these are voluntary changes in accounting policies, there is not a ‘free choice’ in changing accounting policies - entities will only be able to change their accounting policies where the change results in more relevant and reliable information.  Whilst this may be easy to illustrate in many cases, entities should ensure that changes are appropriately considered and documented in accordance with the requirements of AASB 108.

Where entities change their policies under AASB 108 after their date of transition to A-IFRS, they cannot avail themselves of the various elections and exemptions under AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards.

Is this it for IFRS convergence?

A number of the concerns we raised in our submission on ED 151 have not been specifically addressed by the AASB, or were deferred for consideration at a later (and indeterminate) time.  These include:

• the treatment of exploration and evaluation under AASB 6 Exploration for and Evaluation of Mineral Resources
• questioning the need for an Australian materiality Standard
• the efficacy of Australian Interpretations, particularly those on non-Australian specific topics
• related party disclosures, particularly by disclosing entities
• some terminology differences and the introductory paragraphs of IFRS Standards.

• Amending Standard 2007-4 Amendments to Australian Accounting Standards arising from ED 151 and Other Amendments (from the AASB website, PDF 292kb)
• Accounting alert 2007/06 – the AASB’s consideration of comment letters received on ED 151
• Accounting alert 2007/05 – our submission on ED 151
• Accounting alert 2006/14 – a summary of the proposals in ED 151

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The death knell sounds for the reporting entity concept

Overview

The AASB considered the Preface to an Invitation to Comment on “A Proposed Revised Differential Reporting Regime for Australia and the IASB Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities”.  The Board confirmed its view that the proposed focus should be on the applicability of accounting standards to general purpose financial reports, and not the reporting entity concept.

Accordingly, the AASB has reaffirmed its decision to end of the ‘reporting entity’ concept in the Australian context as part of the issue of an Australian SME Standard.

The ‘size tests’

The AASB debated the size tests that should be applied by entities in determining whether they should apply A-IFRS or an Australian SME Standard.  Again, the size tests only determine which suite of Standards should be applied and no recognition, measurement or disclosure exemptions will be proposed.

In relation to for-profit entities, all entities that are ‘publicly accountable’ as defined by the IASB would be required to apply A-IFRS, along will all other entities that exceed either of the relevant revenue and asset thresholds.  Other entities would be able to apply the Australian SME Standard.

The concept of ‘public accountability’ is difficult to apply to not-for-profit entities and accordingly the AASB propose these entities will only apply a size test in determining whether to apply A-IFRS or an Australian SME Standard.  The size tests to be applied are based on the current Treasury proposals on determining the distinction between small and large proprietary companies under the Corporations Act 2001 and are much lower than the thresholds proposed for for-profit entities.  This is due to the perception that not-for-profit entities are by their nature all ‘publicly accountable’, so the ability of some not-for-profit entities to utilise the Australian SME Standard is effectively proposed on a cost/benefit basis.

The table below provides a summary of the thresholds tentatively agreed by the AASB at the meeting:

Next steps

The AASB will consider a revised Australian preface to the IASB’s ED of IFRS for SMEs for consideration at its May 2007 meeting with a view to exposing the document in Australia as soon as possible after that meeting. It is expected that the document will be open for comment until 1 September 2007.

• Accounting alert 2007/06 – agreement to introduce a ‘size test’ for certain entities and consideration of how wholly-owned subsidiaries should be treated
• Accounting alert 2007/04 – initial decisions regarding the implementation of the IASB SME proposals in the Australian context
• 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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Other developments

Accounting by superannuation entities

The AASB discussed an issues paper in relation to the justifications for a full fair value accounting model that incorporates realisation costs being applied to superannuation entities.

The AASB tentatively agreed it should propose that a replacement Standard for AASB 25 Financial Reporting by Superannuation Plans should require superannuation entities to treat anticipated disposal costs as a reduction in the carrying amount of assets.

Further consideration of this matter is expected at a future meeting.

• Accounting alert 2007/06 – discussions on consolidation by superannuation funds
• Accounting alert 2007/04 – discussions from the previous AASB meeting on accounting by superannuation funds
• Accounting alert 2006/12 – earlier AASB discussions on how superannuation funds should account for assets and liabilities

Fair value measurement

The AASB discussed a draft submission on the IASB’s Fair Value Measurements Discussion Paper in light of comments received from constituents.

The AASB decided not to support, at this stage, extending application of an ‘exit price’ concept of fair value to all items measured at fair value under IFRSs.

• IAS Plus Project Page on the IASB fair value measurement project
• IASB Project Page on fair value measurement project

More information on above topics can be obtained from the AASB Action Alert for the meeting, available from the AASB website.

The next meeting of the AASB is scheduled for 23-25 May 2007.

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