Accounting alert 2007/16 – September 2007 AASB meeting highlights

The September 2007 AASB meeting again covered a wide ambit of topics. A revised Standard on presentation of financial statements will be approved out-of-session and the IASB’s annual improvements ED could result in more than 40 amendments to various Standards. The AASB decided to propose the adoption of the New Zealand definition of ‘public benefit entity’ in replacement of ‘not-for-profit entity’, an important development in the context of the current debate around differential reporting.

In this Accounting alert we focus on the following developments:

revised AASB 101 Presentation of Financial Statements – a case of ‘back to the future’ for the names of financial statements
IASB annual improvements project – ED with more than 40 amendments expected shortly
Interpretations – draft Interpretation on Petroleum Resource Rent Tax (PRRT), advisory panel developments and more
not-for-profit entities – the AASB intends to adopt the New Zealand FRSB definition of ‘public benefit entity’
other developments – differential reporting and SMEs, insurance, superannuation entities and GAAP/GFS harmonisation.

Revised AASB 101 Presentation of Financial Statements

IASB issues revised IAS 1

The IASB issued a revised IAS 1 Presentation of Financial Statements on 6 September 2007.

The main changes from the previous version of IAS 1 include requirements to:

present all non-owner changes in equity ('comprehensive income') either in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the statement of changes in equity
present of an additional statement of financial position (balance sheet) as at the beginning of the earliest comparative period when the entity applies an accounting policy retrospectively or makes a retrospective restatement (this would generally mean that three balance sheets are presented in these circumstances)
disclose income tax relating to each component of other comprehensive income
disclose reclassification adjustments relating to components of other comprehensive income.

In what many Australian constituents may consider a ‘back to the future’ change, IAS 1 amends the titles of financial statements as follows:

'balance sheet' will become 'statement of financial position'
'income statement' will become part of the 'statement of comprehensive income', unless a separate income statement is presented
'cash flow statement' will become 'statement of cash flows'.

All existing Standards and Interpretations are being amended to reflect the new terminology. The revised IAS 1 resulted in consequential amendments to 5 IFRSs, 23 IASs, and 10 Interpretations. The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009, with early adoption permitted.

AASB consideration of the Standard in the Australian context

The Board considered a draft revised AASB 101 Presentation of Financial Statements and a draft AASB 2007-X Amendments to Australian Accounting Standards arising from AASB 101. The Standards will be voted on out of session.

Consistent with the AASB’s objective of making A-IFRS as close as possible to IFRS in relation to for-profit entities, the AASB decided to adopt IASB terminology and definitions in the revised AASB 101 for items such as 'general purpose financial statements'. This policy will be flowed through to various other standards in due course.

More information

IAS Plus summary of the revised IAS 1
IAS Plus project page on the financial statements presentation project
IASB press release “IASB issues revised standard on the presentation of financial statements” (PDF 17 kb)

IASB annual improvements project

The AASB discussed the forthcoming IASB exposure draft of annual improvements to IFRS. The IASB ED will be the first in a series of annual EDs that deal with minor, non-urgent amendments to IFRS. The ED is expected to be issued in October, with a view to the issue of an omnibus Standard in April 2008.

Although the focus of the annual improvements ED is on clarification and minor technical corrections, some of the proposals may have significant impacts on some entities. Of particular importance is the proposed amendment to IAS 39 Financial Instruments: Recognition and Measurement to remove from the definition of a derivative the exclusion relating to contracts linked to non-financial variables that are specific to a party to the contract.

The proposed inclusion of contracts linked to non-financial variables that are specific to a party to the contract in the definition of a derivative instrument, may bring many more contracts within the scope of IAS 39 (unless they can be considered to be closely related). Examples may include contracts linked to EBITDA and management fee arrangements linked to the fair value of the underlying property or other assets being managed.

It is expected that the IASB ED will run to in excess of 100 pages and will propose more than 40 different amendments to IFRS. The table below highlights some of the proposals expected to be included in the annual improvements ED:

Pronouncement	High level overview of proposed amendments
IFRS 1 First-time Adoption of International Financial Reporting Standards	Restructure of IFRS 1 to make its intent and operation clearer. New appendices would be introduced collating exceptions and exemptions (business combinations, permanent exemptions and short-term exemptions).
IFRS 5 Non-current Assets Held for Sale	Clarification that assets and liabilities of a subsidiary should be classified as held for sale if the parent has a sale plan involving loss of control of the subsidiary.
IAS 1 Presentation of Financial Statements	Amend the examples in paragraphs 59 and 62 to remove the potential implication that financial assets and financial liabilities that are classified as held for trading in accordance with IAS 39 are required to be presented as current. Clarify that the potential settlement of a liability by the issue of equity is not relevant to its classification as current.
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors	Clarify the status of implementation guidance. The IASB has been advised that paragraph 7 could be misinterpreted as requiring the mandatory application of Implementation Guidance.
IAS 16 Property, Plant and Equipment and IAS 7 Cash Flow Statements	Amendments for entities whose ordinary activities include renting and subsequently selling the same assets should recognise revenue from both renting and selling the assets on a gross basis, i.e. revenue and not a gain/loss on disposal.
IAS 18 Revenue	Require the definition of transaction costs in IAS 39 to be applied to the accounting for financial asset origination fees.
IAS 17 Leases	Require contingent rent relating to an operating lease to be recognised as incurred. Amendment to address a perceived inconsistency between the specific classification guidance for leases of land and buildings and the general lease classification guidance.
IAS 34 Interim Financial Reporting	Amend paragraph 11 to require the presentation of basic and diluted earnings per share only when the entity is within the scope of IAS 33 Earnings Per Share.
IAS 38 Intangible Assets	IAS 38 requires expenditure on advertising or promotional activities, training activities and start-up activities, and on relocating or reorganising part or all of an entity, to be recognised as an expense as incurred. Divergent interpretations have developed about when such expenses are incurred. This proposed amendment clarifies the meaning of ‘as incurred’ in this context. It also makes clear that an entity may recognise a prepayment as an asset only until that entity has access to the goods or has received the services. Removal of the last sentence of paragraph 98 because of concerns that the words ‘rarely, if ever’ in the paragraph (relating to the use of other than straight-line method of amortisation) are interpreted as 'never'.
IAS 39 Financial Instruments: Recognition and Measurement	Removing from the definition of a derivative the exclusion relating to contracts linked to non-financial variables that are specific to a party to the contract. Other amendments relate to the reclassification of derivatives into or out of the classification of at fair value through profit or loss, designating and documenting hedges at the segment level, applicable effective interest rate on cessation of fair value hedge accounting and treating loan prepayment penalties as closely related embedded derivatives.
IAS 40 Investment Property	Include property under construction or development for future use as an investment property within the scope of IAS 40.
IAS 41 Agriculture	Replace the terms ‘point-of-sale costs’ and ‘estimated point-of-sale costs’ in IAS 41 with ‘costs to sell’. Permit either a pre-tax or a post-tax discount rate to be used according to the valuation methodology used to determine fair value. Remove the perceived prohibition on an entity taking into account the cash flows resulting from ‘additional biological transformation’ when estimating the fair value of a biological asset.

Near final drafts of the amendments can be found on the IASB web site at http://www.iasb.org/Current+Projects/IASB+Projects/Annual+Improvements/Near+final+drafts+of+amendments.htm.

For more information, see the IAS Plus project summary at http://www.iasplus.com/agenda/annualimprovements2006.htm.

Interpretations

Draft Interpretation on Petroleum Resource Rent Tax (PRRT)

The AASB approved the release, for public comment, of draft AASB Interpretation 10XX Australian Petroleum Resource Rent Tax subject to minor editorial changes. The version of the draft Interpretation considered by the Board can be downloaded from AASB website (PDF 499 kb).

The draft Interpretation states that Australian PRRT falls within AASB 112 Income Taxes. The AASB is proposing that the Interpretation apply for annual reporting periods ending on or after 30 June 2008.

The draft Interpretation is expected to be available on the AASB website sometime this week, with comments requested by 12 October 2008. It is expected that the Board will consider submissions on the draft Interpretation at its 14-15 November 2007 meeting.

Concern remains that an Australian Interpretation on PRRT may establish principles that result in many other taxes, royalties and production sharing arrangements being considered an income tax under AASB 112. Any government impost that is levied on a measure of ‘profit’ may potentially be caught. This may have a widespread impact both within and outside the extractive industries. Entities should carefully assess the wording in the draft Interpretation in order to identify other potential imposts that may be considered an income tax.

Advisory Panels

The AASB discussed the following:

the recommendations of the Interpretations Agenda Committee concerning the questions to be considered by the Interpretation Advisory Panel on the treatment of service concession arrangements by public sector grantors (paper considered by the AASB, PDF 487 kb)
the composition of the Interpretations Advisory Panel on superannuation contributions tax (paper considered by the AASB, PDF 491 kb)

Revised AASB 1048

The AASB made a revised version of AASB 1048 Interpretation and Application of Standards to incorporate references to:

Interpretation 13 Customer Loyalty Programmes
Interpretation 14 AASB 119 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities (revised)
Interpretation 12 Service Concession Arrangements (revised)
Interpretation 113 Jointly Controlled Entities – Non-Monetary Contributions by Venturers (revised).

The revised Standard, which will apply to annual reporting periods ending on or after 30 September 2007, is expected to be published on the AASB website shortly.

Other Interpretation related developments

The Board considered the following:

IFRIC Draft Interpretation D21 Real Estate Sales (IAS Plus project summary)
a revised Interpretations Model and decided that in future it that would not seek constituent comment on an advisory panel’s recommendations and that it would disband the Interpretations Agenda Committee.

Not-for-profit entity definition

After considering the definitions of ‘not-for-profit entity’ and ‘public benefit entity’ that apply in various jurisdictions, the AASB decided to proceed with an ED that proposes using the FRSB definition of a ‘public benefit entity’ and the guidance in NZ IAS 1 Presentation of Financial Statements. A copy of NZ IAS 1 can be downloaded here (from the New Zealand Institute of Chartered Accountants website, PDF 551 kb).

The New Zealand definition is as follows:

“Public benefit entities are reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders”

The current Australian definition of a ‘not-for-profit entity’ is as follows:

“A not-for-profit entity is an entity whose principal objective is not the generation of profit. A not-for-profit entity can be a single entity or a group of entities comprising the parent and each of the entities that it controls.”

The key difference between the definitions is that the New Zealand definition focuses on the objective of community and social benefits, whereas the Australian definition focuses on whether the principle objective is the generation of profit.

The guidance that accompanies NZ IAS 1 is quite thorough, and includes consideration of the founding documents of the entity, the nature of the benefits provided, the quantum of any expected surplus, the nature of the equity interest and the nature of funding. This enhanced guidance will be seen by many as a welcome addition to Australian accounting literature in what can be a difficult area to apply in practice.

The ED is expected to be issued in the last quarter of 2007.

The definition of a ‘not-for-profit entity’ is important because of the existing differential accounting and reporting requirements that exist under A-IFRS, e.g. not-for-profit entities have different requirements around revenue recognition, impairment, revaluation of property, plant and equipment and so on. The importance of the definition will be increased in the future because of the AASB’s proposals around a modified differential reporting regime for Australia having different requirements for for-profit and not-for-profit entities.

Other developments

The AASB also discussed the following topics:

Topic	Overview	Comments and more information
Differential reporting and SMEs	The AASB discussed issues raised by constituents at the ITC 12 Roundtables held in Melbourne and Sydney during August 2007. A summary of the Roundtable discussions is now available on the AASB website (PDF 90 kb)	Deloitte Australian Insights podcast - Another shakeup in financial reporting Accounting alert 2007/10 May 2007 AASB meeting highlights Accounting alert 2007/03 IASB offers relief for SMEs Invitation to Comment ITC 12 'A Proposed Revised Differential Reporting Regime for Australia and the IASB Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities' (from the AASB web site, PDF 1,714 kb)
Insurance	The AASB discussed its submission to the IASB on its Discussion Paper Preliminary Views on Insurance Contracts, noting its support for the IASB’s proposed ‘current exit value’ model for insurance contracts (although some of the more detailed proposals are not necessarily seen as consistent with that model)	IAS Plus Newsletter Phase II of IFRS for Insurance Contracts: IASB Discussion Paper (PDF 1,282 kb) IAS Plus project page
Superannuation entities	The Board noted the potential impact on the current comprehensive review of AAS 25 of the August 2007 report of the Parliamentary Joint Committee on the Corporations and Financial Services on the structure and operation of the Australian superannuation industry. The Board also decided a number of matters around the forthcoming proposals for a replacement standard for AAS 25.	Paper considered by the AASB at the meeting Definitions in relation to review of AAS 25 Financial Reporting by Superannuation Plans (PDF 575 kb) A copy of the Joint Committee report can be obtained from the Australian Parliament House website.
GAAP/GFS harmonisation	The AASB considered submissions received on ED 155 Financial Reporting by Whole of Governments and decided to adopt the majority of the proposals in the ED. The Board decided to adopt a single Standard that integrates GAAP/GFS harmonisation requirements for both GGS and whole of governments, combining the requirements of AASB 1049 Financial Reporting of General Government Sectors by Government and the modified proposals from ED 155. The Board expects to finalise the GAAP/GFS harmonisation Standard at its October 2007 meeting.	Copies of the papers considered at the meeting (from the AASB web site): draft Standard (expected to be effective to years ending on or after 30 June 2009) (PDF 870 kb) comment letters received on ED 155 (PDF 1,810 kb) collation of responses to ED 155 (PDF 565 kb) staff memorandum (PDF 488 kb)

More information on above topics can be obtained from the AASB Action Alert (PDF 71kb) for the meeting.

The next meeting of the AASB is scheduled for 3-4 October 2007. This meeting is a joint meeting with the New Zealand FRSB and will be held in Sydney. The AASB will also meet separately to discuss a number of Australian-specific agenda items.