IASB - Some Green Lights - Mainly Amber!
Some of the more topical issues on the agenda of the International Accounting Standards Board (IASB) were the subject of further developments in the past month. Amended standards have been published in relation to both presentation of financial statements and employee benefits. Progress is not so advanced with some of the key projects being jointly carried out by the IASB and the U.S Financial Accounting Standards Boards (FASB). Earlier in the year the Boards revised their overall timescale for some major projects from completion by end-June to project completion by end 2011 but recent indications would suggest that this may prove to be optimistic with a 2012 completion date perhaps being more likely.
Presentation of Financial Statements
With an implementation date of periods beginning on or after 1 January 2012, the amended standard has been "spun out" of the wider project on performance reporting. This wider project looked at more fundamental changes to the manner in which a company presented its performance reports and at a fundamental level was proposing the mandatory implementation of a "one statement" approach to presenting profit or loss and other comprehensive income. The amended IAS1 has responded to negative reaction by constituents to these proposals and has retained the option of presenting this information in either one statement or two statements, which is the current position. The amended standard does require elements of other comprehensive income to be classified between those which may be reclassified to profit and loss (e.g. cash flow hedging, foreign currency translation) and those which may not. Differences remain between U.S. GAAP and IFRS concerning (1) what items are included in comprehensive income, and (2) reclassification requirements.
This has always been a complex area which has been the subject of much debate for many years, particularly in relation to pensions, and this debate may be expected to continue. The IASB has published an amended IAS 19 which has an implementation date of accounting periods beginning on or after 1 January 2013. Probably the most significant amendment being the elimination of the option for entities to adopt a partial recognition or 'corridor' approach for actuarial gains and losses. This will mean full recognition of the defined benefit pension plan net liability/asset with the actuarial gains and losses being accounted for in other comprehensive income. The move from partial recognition to full recognition could give rise to a significant adjustment to the net asset position of some companies, with consequent implications for such matters as compliance with debt covenants and the dividend policy being pursued.
A second amendment which may impact on the profit or loss reported is the inclusion of a net interest charge (credit) based on the defined benefit liability (asset), rather than the elements being calculated separately for inclusion in profit or loss i.e., expected return on investments, and discount/interest charges on pension scheme obligations. In many cases this may impact negatively on the net profit or loss of an entity.
The amended standard also requires improved qualitative disclosures about pension schemes including explaining the characteristics and related risks of defined benefit plans together with how they may affect future cash flows of the entity.
The amendments also address the distinction between 'termination benefits' payable in exchange for termination of employment and those payable in exchange for service, which in general terms is dependent on the length of the period for which the benefits are available. The factors underlying payments of this nature will determine when the charges are recognised in the financial statements.
The Convergence Projects
The IASB and the FASB have had a major focus in their joint convergence and improvement programme on revenue recognition, lease accounting and financial instruments. It is clear that much debate and controversy has ensued about all three and there is a considerable way to go before consensus is reached amongst constituents and final standards reach publication stage. The project on insurance accounting is also still very much a work in progress.
Earlier this year the IASB received significant comment from constituents on the implementation dates and transition programme for major new and revised standards being published. There were widely varying comments and the matter continues to be under review. More recently the IASB indicated that it intends to discuss and fully consider at its next meeting in July moving back the implementation date of IFRS 9 from January 2013 to January 2015. This is to give more latitude for all phases of the project to be implemented at the same date and also to better align with the potential effective date of the proposed new standard on insurance contacts. It also recognises that there is some way to go before completion of the phases on impairment and hedging, including the need to find a resolution to convergence issues with the FASB.
There is also much unrest on the other two projects - revenue recognition and lease accounting - with significant re-deliberation being carried out by the IASB in the light of constituent comments. A new exposure draft of the standard on revenue has been issued and a similar scenario for lease accounting is not unexpected.
The exposure draft issued jointly by the IASB and the FASB is in the light of (a) the large number of changes to the initial exposure draft arising from the various redeliberations originating from constituent comment; and (b) that revenue is the top line in the income statement and everything else evolves from there.
In addition to seeking comments from constituents on the understandability, clarity, operationality, interaction of paragraphs and the overall wording, the Boards have a focus on four specific areas being:
a) Determining when a performance obligation is satisfied over time
b) Presenting the effects of credit risk adjacent to revenue
c) Constraining the cumulative amount of revenue recognised to amounts that are reasonably assured, rather than amounts that can be reasonably estimated taking probabilities into the equation
d) Applying the 'onerous test' to a performance obligation satisfied over a long period
For some entities the effect of the new proposals may be minor, but for many the impact may be very significant given the fundamental importance of revenue accounting. A different profile of revenue recognition may result for some entities, with changes in timing of recognition and other factors. Where there are performance obligations in, for example, a 'loss leader' scenario, 'day 1' losses may arise and there may be complex calculations involved. Entities that prepare well will commit the necessary time and resources to staying abreast of developments.
There is no doubt but that the IASB and the FASB are working hard to achieve their goal of improved, converged standards. It is clear that there remains much to be done to achieve this objective, but the ultimate potential prize of improved and converged standards on a global basis is one that is worthy of pursuit.
First published in Finance Dublin Online.