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Accounting alert 2008/09 - June 2008 AASB meeting highlights

The AASB's June 2008 meeting saw an agreement to approve out-of-session amendments to introduce the IASB's recent amendments arising from its annual improvements and cost of investment in a subsidiary projects, approval of a new ED and ITC on the conceptual framework and progress in various other projects.

In this Accounting alert we focus on the following developments:

  • New Amending Standards - out-of-session approval expected on annual improvements and cost of investment in a subsidiary, AASB's frustration with the Standard setting process
  • Other developments - conceptual framework, superannuation plans and more.

New Amending Standards

Annual improvements project (2007)

To implement the IASB's amendments arising out its annual improvements project, the AASB agreed to vote out-of-session on making the following Amending Standards:

  • AASB 2008-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Process, applicable to annual reporting periods beginning on or after 1 January 2009 ( draft Standard considered at the meeting, from the AASB's website, PDF 524kb)
  • AASB 2008-6 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Process, applicable to annual reporting periods beginning on or after 1 July 2009 ( draft Standard considered at the meeting, from the AASB's website, PDF 274kb).

The need for two Amending Standards reflects the IASB's staggered implementation dates of the equivalent global amendments, deferring the changes around loss of control of a subsidiary where that subsidiary is classified as held for sale in AASB 5 Non-current Assets and Discontinued Operations and AASB 1 First-time Adoption  of International Financial Reporting Standards.

Many of the amendments are matters of detail and may not have a significant impact in practice, even in respect of those changes identified by the IASB as resulting in accounting changes.

There are, however, a number of amendments that are likely to have a significant impact on financial statements in relevant circumstances. These amendments generally clarify the required accounting treatment where previously practice had varied.

Some of the major new or revised requirements include:

  • Classification as held for sale of the assets and liabilities of a subsidiary where the parent is committed to a plan to sell its controlling interest but intends to retain a non controlling interest (IFRS 5/AASB 5)
  • The reclassification to inventories of property, plant and equipment previously held for rental when the assets cease to be rented and are held for sale, and the recognition of the proceeds of disposal of such assets as revenue (IAS 16/AASB 116)
  • The recognition of a government grant arising from government loans at below-market interest (IAS 20/AASB 120)
  • Recognition of advertising and promotional expenditure as an asset is not permitted beyond the point at which the entity has the right to access the goods purchased or, in the case of services, the point at which the services are received (IAS 38/AASB 138)
  • The classification of property under construction for investment purposes as investment property under IAS 40/AASB 140, resulting in it being measured at fair value if that is the entity's general accounting policy for investment property and the fair value of the property under construction can be measured reliably (IAS 40/AASB 140).

For more information about the annual improvements amendments, including a full summary of all the amendments, see our IAS Plus Newsletter (PDF 136kb).

Cost of an investment in a subsidiary

The Board agreed to vote of-of session on making AASB 2008-7 Amendments to Australian Accounting Standards - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate. The draft Amending Standard considered by the AASB at the meeting (subject to amendment) can be downloaded from the AASB website (PDF 305kb).

The Standard will apply for annual reporting periods beginning on or after 1 January 2009 with early adoption permitted.

When made, this Standard will:

  • Remove the definition of the 'cost method' from AASB 127 Consolidated and Separate Financial Statements and amend AASB 118 Revenue to require dividends to be presented as income in the separate financial statements of the investor
  • Implement consequential amendments to AASB 136 Impairment of Assets, introducing a new indicator of impairment for investments in subsidiaries, jointly controlled entities and associates where a dividend has been recognised
  • Amend AASB 127 to require the separate financial statements of a new parent formed as the result of a specific type of reorganisation to measure the cost of its investment in the previous parent at the carrying amount of its share of the equity items of the previous parent at the date of the reorganisation
  • Amend AASB 1 to allow first-time adopters to use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements.

In our global and Australian submissions on the IASB/AASB exposure drafts, we did not support the proposals around the measurement of cost in the separate financial statements of a new parent. In our view, the amendments are not so much the granting of an 'exemption', but rather they limit accounting policy choices in relation to the specific category of transactions with which it deals. We would have preferred that the proposed amendments be debated more fully in the context of the IASB's project on accounting for common control transactions.

Furthermore, the amendments are not restricted to the formation of a new ultimate parent entity, but also extend to the formation of a new parent within a group. In our view, the accounting requirements for such transaction may also be considered non-authoritative guidance on other classes of common control transactions.

A copy of our global comment letter to the IASB on the original exposure draft can be downloaded from our IAS Plus website (PDF 160kb).

More information about the amendments can be found in our IAS Plus Newsletter (PDF 102kb).

The Board's frustration with the Standard setting process

The voluminous nature of the changes introduced by the IASB's amendments under its annual improvements and cost of investment in subsidiary projects highlight again the difficulties the AASB faces in implementing the IASB's Standards as legislative instruments in Australia. The Board was openly critical of the process during the meeting, as reflected in the Action Alert from the meeting, and it will investigate alternative means of achieving amendments.

The AASB's frustration arises out of the need to make Standards that are in accordance with the requirements of the Australian legislative environment, including the Constitution and related Acts Interpretation Act 1901, amongst others. This is because Accounting Standards effectively become part (as an instrument) of the Corporations Act 2001.

The sheer number of changes to any particular Standard can be overwhelming to the average user (see the example below). The option, in most cases, to early adopt many amendments further complicates the process in determining exactly what 'version' of the Standard must be applied by a particular entity at any given time.

We understand that the AASB is pursuing a new method of delivery of Accounting Standards materials through its website that may help to partially alleviate this issue. However, as we recognised in Accounting alert 2007/20, it may be time for a complete rethink of Accounting Standard setting in the Australian environment.

Example - history of AASB 139 Financial Instruments: Recognition and Measurement 

The following is a listing of the history of AASB 139, illustrating the vast array of Amending Standards and other pronouncements that have affected that Standard since it was originally made in July 2004:

  • Amended by AASB 2004-2 Amendments to Australian Accounting Standards, applicable to annual reporting periods, and interim periods in respect of AASB 134, beginning on or after 1 January 2005.
  • Amended by AASB 2005-1 Amendments to Australian Accounting Standards, applicable to annual reporting periods beginning on or after 1 January 2006.
  • Amended by AASB 2005-4 Amendments to Australian Accounting Standards, applicable to annual reporting periods beginning on or after 1 January 2006.
  • Amended by AASB 2005-5 Amendments to Australian Accounting Standards, applicable to annual reporting periods beginning on or after 1 January 2006.
  • Amended by AASB 2005-9 Amendments to Australian Accounting Standards, applicable to annual reporting periods beginning on or after 1 January 2006.
  • Amended by AASB 2005-10 Amendments to Australian Accounting Standards, applicable to annual reporting periods beginning on or after 1 January 2007.
  • Amended by AASB 2005-11 Amendments to Australian Accounting Standards, applicable to annual reporting periods ending on or after 31 December 2005.
  • Interpreted by Interpretation 9 Reassessment of Embedded Derivatives, applicable to annual reporting periods beginning on or after 1 June 2006.
  • Interpreted by Interpretation 10 Interim Financial Reporting and Impairment, applicable to annual reporting periods beginning on or after 1 November 2006.
  • Amended by AASB 2007-2 Amendments to Australian Accounting Standards arising from AASB Interpretation 12, applicable to annual reporting periods beginning on or after 1 January 2008 (in relation to the Service Concession Arrangement amendments) and applicable to annual reporting periods ending on or after 28 February 2007 (in relation to amendments to references to UIG Interpretations).
  • Amended by AASB 2007-4 Amendments to Australian Accounting Standards arising from ED 151 and Other Amendments, applicable to annual reporting periods beginning on or after 1 July 2007.
  • Amended by AASB 2007-8 Amendments to Australian Accounting Standards arising from AASB 101, applicable to annual reporting periods beginning on or after 1 January 2009 .
  • Amended by AASB 2008-2 Amendments to Australian Accounting Standards - Puttable Financial Instruments and Obligations arising on Liquidation, applicable to annual reporting periods beginning on or after 1 January 2009.
  • Amended by AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127, applicable to annual reporting periods beginning on or after 1 July 2009.

Other developments

Conceptual Framework

The AASB agreed to issue two requests for comment in relation to the IASB's Conceptual Framework project, both with a comment deadline to the AASB of 25 August 2008:

  • ED 164 An improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information ( IAS Plus Newsletter, PDF 143kb)
  • ITC 17 'Request for Comment on IASB Discussion Paper Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Reporting Entity' ( IAS Plus Newsletter, PDF 156kb).

ITC 17 deals with the nature of the 'reporting entity', i.e. what is the boundary of the entity that is reporting. Accordingly, this is not the introduction of the 'reporting entity concept' into IASB literature. As part of the AASB's differential reporting/SME project, the AASB has effectively agreed to eliminate the 'reporting entity concept' from Australian Accounting Standards. For more information, see our summary of the current status of the AASB's differential reporting project.

The IASB's Discussion Paper discusses many key issues on the nature of the reporting entity, including:

  • Whether the reporting entity needs to be defined by reference to a legal entity, or whether the definition can be wider
  • How to circumscribe the area of business activity of interest to equity investors, lenders and other capital providers in the context of a group of entities, i.e. the nature of control
  • Approaches to the composition of the group reporting entity - the controlling entity, common control and risks and rewards models
  • Whether consolidated financial statements should be presented from the perspective of the group reporting entity or from the perspective of the parent company's shareholders (as occurs under the parent company approach)
  • Further issues relating to control, such as latent control and the treatment of options over voting rights.

The outcomes of this phase of the conceptual framework project can be expected to have significant impact on the IASB's project on consolidation.

The IASB's Discussion Paper can be downloaded from the IASB's website.

The IASB's Conceptual Framework project is a joint project with the US FASB to develop a common conceptual framework. The project is divided into many phases, with each phase being pursued separately such that the final revised Framework will be progressively issued and implemented.

More information on the IASB's Conceptual Framework project can be found on our IAS Plus project page and the IASB's project page.

Other
Topic Overview Comments and more information
Superannuation plans and approved deposit funds (ADFs)

The AASB tentatively agreed on a number of principles to be applied to the development of disclosures for superannuation plans and ADFs, largely based on existing IFRS requirements, and also agreed on a broad definition of 'accrued benefits'.

A first draft ED is expected to be considered at the August 2008 meeting.

Accounting alert 2008/03 (includes links to previous discussions on various issues)
Social benefits The AASB discussed its submission on IPSASB ED 34 Social Benefits: Disclosure of Cash Transfers to Individuals or Households, with the AASB preferring an accruals basis of accounting for amounts due and payable rather than the proposals in ED 34. Agenda Paper 4.6 'Submissions on ITC 15 - Social Benefits' (PDF 3.63MB)
Service concession arrangements - grantor accounting The AASB considered the IPSASB Consultation Paper Accounting and Financial Reporting for Service Concession Arrangements, noting that the proposals in the Consultation Paper could lead to asymmetrical accounting between grantors and operators. ITC 16 Request for Comment on IPSASB Consultation Paper Accounting and Financial Reporting for Service Concession Arrangements (PDF 769kb)
Differential reporting/SMEs Consideration of staff paper setting out the AASB's decisions to date

Our summary of the current status of the AASB's differential reporting project. 

Agenda Paper 16.2 Differential Reporting Project: Board Decisions and Tentative Basis for Conclusions (PDF 287kb) 

Interpretations Update on the status of interpretation issues in progress. It was also noted that the IASB have recently approved two Interpretations on real estate and hedging of net investments. Agenda Paper 14.2 Interpretation Issues in Progress (18 June 2008) (PDF 224kb)
Income taxes Education session on the IASB/FASB short-term convergence project on income taxes.

The changes to accounting for income taxes are likely to have a significant impact in the Australian context. In particular, the IASB's tentative decisions around uncertain tax positions, the elimination of the investment recognition exception for domestic subsidiaries and the determination of a tax base of an asset by reference to immediate sale at reporting date are likely to be significant changes in the Australian context.

IAS Plus project page 

IASB project page 

Criteria for modifying IFRS requirements in respect of not-for-profit entities Discussion of the criteria that might be used as the basis for modifying the requirements of IFRS in respect of not-for-profit entities, in preparation for the July 2008 meeting with the NZ FRSB. Agenda Paper 12.2 Issues paper: Criteria for assessing when to depart from IFRSs in respect of not-for-profit entities (PDF 437kb)
Other topics GAAP/GFS harmonisation (not discussed), IPSASB report, possible IFRS 5 amendments, board structure and relationships, board membership. Refer to the AASB Action Alert (PDF 68kb) for more information on these matters, mostly administrative in nature

 

More information on above topics can be obtained from the AASB Action Alert (PDF 68kb) for the meeting.

The next meeting of the AASB is scheduled for 30-31 July 2008, a joint meeting with the New Zealand FRSB in Auckland.

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