Accounting alert 2008/03 – March 2008 AASB meeting highlights
The AASB's March 2008 meeting saw the approval of Australian equivalents to the IASB's business combinations standards and puttable instruments amendments, discussion on the vexed issue of emission rights and consideration of a revised differential reporting regime for Australia effectively put on hold.
In this Accounting alert we focus on the following developments:
- New standards - revised business combinations standards and puttable financial instruments amendments
- Emission rights - will we see the AASB go it alone?
- Other developments - differential reporting shake-up on hold, superannuation fund accounting, customer contributions, and more.
|We've updated our What's new analysis for the new Standards below - click here to access the guide. Disclosure of the impact of these new pronouncements should also be included in financial reports. For more information, see our analysis in our commonly asked questions around pronouncements on issue but not applied in the financial report.|
Business combinations (phase II)
The AASB made AASB 3 Business Combinations (2008), AASB 127 Consolidated and Separate Financial Statements (2008) and AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127.
After deferring the issue of the Standards to consider the impact on the not-for-profit and public sectors, the AASB decided at this meeting to issue the standards in respect of for-profit entities only. The AASB has only committed to consider the suitability of AASB 3 for combinations of not-for-profit entities prior to its mandatory application date.
The revised AASB 3 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. The revised AASB 127 will apply to annual periods beginning on or after 1 July 2009. Early adoption is permitted only by for-profit entities for annual reporting periods beginning on or after 30 June 2007 but before 1 July 2009.
The effect of the new application dates and transitional requirements is that the revised Standards will, with certain exceptions, only be applied to business combinations and changes in ownership interests that occur in annual reporting periods that begin on or after 1 July 2009. The table below shows the first period in which the standards will be mandatorily applied for various year ends:
|Year end||First mandatory application date in financial year ending|
|January||31 January 2011|
|February||28 February 2011|
|March||31 March 2011|
|April||30 April 2011|
|May||31 May 2011|
|June||30 June 2010|
|July||31 July 2010|
|August||31 August 2010|
|September||30 September 2010|
|October||31 October 2010|
|November||30 November 2010|
|December||31 December 2010|
|Note: Different dates will apply where an entity changes its year end during the transitional period.|
More information on the transitional requirements can be found in Accounting alert 2008/01.
|Although the revised Standards may not apply for some time, the revised IFRS 3 effectively provides additional guidance on accounting under existing IFRS 3. The level of guidance and specific requirements might be seen by some as a set of 'rules' on how to apply the basic principles already established. However, the additional guidance may potentially make it more difficult to adopt other approaches under the current IFRS 3 in matters now 'clarified' in the revised Standard - such as in relation to the settlement of pre-existing contracts and certain replacement share-based payment awards. More information on these changes can be found in Accounting alert 2008/01.|
The revised standards form a significant part of the so-called 'IFRS Mark II' transition expected to occur commencing from 2009-2010. More information on the 'next wave' of IFRS transition IAS Plus project page
Puttable instruments amendments
The AASB made Amending Standard AASB 2008-2 Amendments to Australian Accounting Standards - Puttable Instruments and Obligations arising on Liquidation. This Amending Standard amends AASB 132 Financial Instruments: Presentation and AASB 101 Presentation of Financial Statements to introduce equivalent requirements to the IASB's Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation. A copy of the Amending Standard is available on the AASB website (PDF 136kb).
The Amending Standard is applicable to annual reporting periods beginning on or after 1 January 2009, with early adoption permitted for annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009.
Prior to the issue and adoption of these amendments, instruments are classified as financial liabilities if an issuer can be required to pay cash or another financial asset in return for redeeming or repurchasing a financial instrument. This principle applies even if the amount payable is equal to the holder's interest in the net assets of the issuer, or if the amount is only ever payable at liquidation and liquidation is certain because, for example, there is a fixed liquidation date.
The current requirements often lead to counter-intuitive results. For example, the total amount payable may equal the market value of the whole entity, which may well be in excess of the accounting net assets of the entity. In another scenario, where liquidation is certain or is at the option of the holder, instruments that represent the last residual interest in the entity may be recognised as financial liabilities even when the instruments have characteristics similar to equity. The objective of the IASB's amendments is to provide a 'short-term, limited scope amendment' designed to avoid these outcomes, permitting certain instruments to be classified as equity, subject to certain criteria being met.
The amendments are most likely to impact some unit trusts and other limited-life entities, cooperative companies, and certain partnerships. However, careful analysis will be required as there are a number of criteria which must be met in order to classify these instruments as equity.
In some cases, the requirements included in the Amending Standard will result in many instruments being classified as a financial liability even though they are issued by the types of entities that were the target of the amendments. For instance, a mandatory obligation to distribute profits can undermine the classification of an instrument as equity.
It is also important to note that the amendments are mandatory once they are required to be applied, i.e. an instrument must be classified as equity if it meets the relevant criteria. This will, as part of the transition to the new requirements, necessitate a potentially complex and time-consuming reassessment of the classification of financial instruments by entities that might be affected.
Furthermore, the IASB and FASB are also current progressing a project on the distinction between liabilities and equity, with a view to simplifying the current requirements. This project resulted in the IASB releasing a Discussion Paper Financial Instruments with Characteristics of Equity, which was issued in late February.
Whilst the Discussion Paper does not have any firm recommendations, its contents would suggest that a much narrower view is developing as to the nature of instruments that may be classified as equity. Accordingly, whilst this amendment to classification of certain instruments may be welcomed by some, its requirements may be relatively short lived.
For more information, see the following:
- AASB 2008-2 Amendments to Australian Accounting Standards - Puttable Financial Instruments and Obligations arising on Liquidation (issued by the AASB shortly after the meeting, PDF 136kb)
- IAS Plus Newsletter 'Puttable financial instruments and obligations arising on liquidation' (PDF 101kb)
- IAS Plus project page
- IASB project page
A complex issue with a short timeframe
The AASB received a closed session presentation from a Commonwealth Treasury staff representative on features of a proposed Australian emissions trading scheme and noted that Government policy on many issues is yet to be announced. However, it is expected that a form of emissions trading scheme will be introduced in the Australian context on or around 2010.
The accounting issues around emission trading schemes are complex and possible approaches are restrained by restrictions in existing Standards, e.g. the restrictions around the revaluation of intangible assets under AASB 138 Intangible Assets.
A 2010 timeframe is a very short period for the development of a comprehensive accounting pronouncement on emission rights. IFRIC had previously released IFRIC 3 Emission Rights but this was subsequently withdrawn by the IASB, leaving a hole in the IASB's work program for some time.
Developments at the IASB level
The IASB decided to add emission rights to its agenda at its December 2007 meeting. At that meeting, the IASB staff paper presented to the Board (PDF 93kb) for the agenda decision included the following table outlining the main approaches that are being accepted in practice to account for emissions trading schemes, revealing some of the complexity of the issues involved and diversity:
|Area||Approach 1||Approach 2||Approach 3|
|Initial recognition - allocated allowances||Recognise and measure at market value at date of issue; corresponding entry to government grant.||Recognise and measure at cost, which for granted allowances is nil.|
|Initial recognition - purchased allowances||Recognise and measure at cost.|
|Subsequent treatment of allowances||Allowances are subsequently measured at cost or market value, subject to review for impairment.||Allowances are subsequently measured at cost, subject to review for impairment.|
|Subsequent treatment of government grant||Government grant amortised on a systematic and rational basis over compliance period.||Not applicable.|
|Recognition of liability||Recognise liability when incurred (i.e. as emissions are produced).||Recognise liability when incurred (i.e. as emissions are produced). However, the way in which the liability is measured (see below) means that often no liability is shown in the statement of financial position until emissions produced exceed allowances allocated to entity.|
|Measurement of liability||Liability is measured based on the market value of allowances at each period end that would be required to cover actual emissions, regardless of whether the allowances are on hand or would be purchased from the market.||
Liability is measured based on:
the carrying amount of allowances on hand at each period end to be used to cover actual emissions (i.e. market value at date of recognition if cost model is used; market value at date of revaluation if revaluation model is used) on either a FIFO or weighted average basis;
the market value of allowances at each period end that would be required to cover any excess emissions (i.e. actual emissions in excess of allowances on hand).
Liability is measured based on:
the carrying amount of allowances on hand at each period end to be used to cover actual emissions (nil or cost) on a FIFO or weighted average basis;
the market value of allowances at each period end that would be required to cover any excess emissions (i.e. actual emissions in excess of allowances on hand.
Will the AASB go it alone?
The AASB indicated at the March meeting that it would prefer to await the outcome of the IASB's project on emission rights rather than develop an Australian pronouncement. The AASB is to offer resources to the IASB to help it accomplish its work.
Without a comprehensive framework on this issue, it is likely that divergent practice may develop in Australia. In addition, in an issue that is highly politically charged, a lack of guidance may cause some entities to adopt accounting methodologies that portray the effects of any emissions trading scheme in a favourable or unfavourable light.
However, there are numerous problems if the AASB takes this project on in its own right to achieve consistency in the Australian context, including the following:
- In developing any domestic solution, AASB would be restrained to the requirements of IFRS as it currently stands, potentially making a conceptually superior or most appropriate accounting approach unacceptable due to convergence concerns
- Any solution developed may not be globally accepted, risking the perception of Australia's full convergence with IFRS
- The IASB's solution may be different to any developed by the AASB, resulting in numerous changes in accounting policies for affected entities in a relatively short timeframe.
It is clear that the climate change challenge spreads deep into the accounting arena as well, and we might expect that this is likely to be one of many hot topics in accounting for the next few years at least.
For more information, see the following:
At its December 2007 meeting (see Accounting alert 2007/20), the AASB tentatively agreed that there should be two tiers of reporting for for-profit entities reporting under the Corporations Act. This decision requires full IFRSs for publicly accountable entities and a choice between IFRS for SMEs and the recognition and measurement requirements of IFRSs (with limited specified disclosures) for other entities.
At this meeting, the AASB considered papers on how the second tier of entities should report, and in particular, what limited specified disclosures should be required by entities in that tier. Discussion included whether the disclosure requirements of the IFRS for SMEs would be sufficient for all non-publicly accountable entities, or whether particular disclosures from full IFRS should be mandated. After debate, the AASB decided to defer further consideration of the issues until the final outcome of the IASB's IFRS for SMEs project is known.
The AASB also considered, and decided to pursue at a later time, a draft 'Application Standard' that depicts the change of application focus from 'reporting entity' to 'general purpose financial statements' and showing how a single Application Standard may be used to require publicly accountable and non-publicly accountable entities to apply their respective requirements under a two-tier system.
The AASB also held a dinner with constituents from small and medium-sized entities, their accounting firms and the accounting bodies to discuss issues related to differential reporting.
The AASB's effective deferral of this project will be considered unfortunate by some as it will continue the uncertainty around differential reporting in Australia. However, it is a realistic approach by the AASB given the circumstances, including the largely negative feedback being received by the IASB on the IFRS for SMEs and the likelihood of further refinements will be proposed by the IASB.
Also, the AASB's consideration of an 'Application Standard' throws open the possibility that Australian application paragraphs could be removed from all IFRS-equivalent standards. This could represent a small step towards the adoption of 'pure IFRS' in Australia, governed by a single 'Application Standard'.
This is an intriguing development, which may offer the AASB a new solution to its ongoing dilemmas in setting Accounting Standards in various sectors, and might just hasten a move to 'multiple GAAPs' in Australia. The AASB's vacillation on how not-for-profit entities should apply the revised business combination requirements discussed above is another symptom of these dilemmas. Read our earlier analysis on this topic in Accounting alert 2007/20 and Accounting Alert 2006/09.
For more information, see the following:
- Deloitte Australia Insights podcast 'Another shakeup in financial reporting - the AASB's differential reporting proposals'
- Accounting alert 2007/15 - our response to the AASB's differential reporting proposals
- Accounting alert 2007/03 - an overview of the IASB's exposure draft of 'IFRS for SMEs' and our initial analysis of the proposals from the Australian perspective.
Superannuation plans and ADFs
The AASB received a presentation on the measurement of accrued benefits for defined benefit superannuation members.
The AASB debated issues such as whether a liability exists in the financial statements of the fund where a deficit exists or where available assets are forecast to be insufficient to meet accrued benefits. The AASB decided that it needed to understand the respective legal obligations of superannuation plans and employer sponsors in relation to member's superannuation entitlements and, in particular, defined benefit obligations.
The AASB also debated whether superannuation plans should 'look through' investments held through investment vehicles such as master funds and wrap accounts when accounting for investments. There AASB is to further investigate the implications of the requirements of AASB 7 Financial Instruments: Disclosures on these of arrangements.
For more information, see the following:
- Accounting alert 2008/02 - AASB debate on defined benefit obligations
- Accounting alert 2007/20 - tentatively decision that a parent superannuation plan recognise all assets and liabilities held by a subsidiary at their fair values less or plus anticipated disposal costs in its consolidated financial statements
- Accounting alert 2007/14 - earlier discussions, including consideration of three different approaches to consolidation by superannuation plans
- Accounting alert 2007/12 - initial consideration of the consolidation issue
- Accounting alert 2007/10 - whether superannuation funds should be required to prepare consolidated financial statements, or whether investments should be measured on a fair value basis
- Accounting alert 2007/06 - issues paper in relation to the consolidation of subsidiaries by superannuation entities and alternative ways in which subsidiaries held by superannuation entities might be treated in the context of a full fair value accounting model
- Accounting alert 2007/04 - appropriate measurement basis for defined benefit obligations by superannuation funds
- Accounting alert 2006/12 - early debate around the accounting to be adopted by superannuation plans
|Topic||Overview||Comments and more information|
|Interpretations||The AASB considered preliminary staff analysis of IFRIC draft Interpretation D24 Customer Contributions and directed staff to prepare a submission commenting on a number of concerns.||
Staff issues paper. Timing of revenue recognition (IFRIC D24) (Agenda Paper 3.3 from the AASB website, PDF 54kb)
IFRIC D24 - Staff paper on other Substantive Issues (Agenda Paper 3.5 from the AASB website, PDF 21kb)
IAS Plus Newsletter 'IFRIC's D23 (Distributions of Non-cash Assets) and D24 (Assets Contributed by Customers)' (PDF 105kb)
|Not-for-profit roundtables||The AASB noted that roundtables seeking constituent input on ITC 14 Proposed Definition and Guidance for Not-for-Profit Entities will be held on 11 March (Melbourne), 13 March (Sydney) and 17 March (Canberra).||
Our overview analysis of the NFP revised definition can be found in Accounting alert 2007/16
|Communications||The AASB considered its communication activities, largely focussed around how to make Accounting Standards and their amendments more accessible and user-friendly for constituents.||-|
|SAC report||The AASB received a report from Judith Downes, an Australian member of the Standards Advisory Council (SAC) of the International Accounting Standards Advisory Committee Foundation (IASCF), on recent SAC activities.||IAS Plus background on the Standards Advisory Council|
More information on above topics can be obtained from the AASB Action Alert (PDF 59kb) for the meeting.
The next meeting of the AASB is scheduled for 17 April 2008.