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IAS plus

December 2005


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IASB news

IAS 39 and IFRS 4 amended for guarantee contracts

The IASB has amended the scope of IAS 39 Financial instruments : recognition and measurement to include financial guarantee contracts issued. However, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either IAS 39 or IFRS 4 Insurance Contracts to such financial guarantee contracts. Some details :

  • A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due.
  • Under IAS 39, financial guarantee contracts are initially recognised at fair value and are subsequently measured at the greater of (a) the amount determined in accordance with IAS 37 and (b) the amount initially recognised less, where appropriate, cumulative amortisation recognised in accordance with IAS 18.
  • The issuer may make the IAS 39 or IFRS 4 election contract by contract, but the election for each contract is irrevocable.

The amendments to IAS 39 and IFRS 4 are effective for annual periods beginning on or after 1 January 2006, with earlier application encouraged.

IASB issues IFRS 7 on financial instruments disclosures

The IASB has issued IFRS 7 Financial Instruments : Disclosures. The standard :

  • Adds certain new disclosures about financial instruments to those currently required by IAS 32;
  • Replaces the disclosures now required by IAS 30; and
  • Puts all of those financial instruments disclosures together in a new combined standard, IFRS 7. The remaining parts of IAS 32, which will be renamed Financial Instruments : Presentation, deal only with presentation matters, including classifying instruments as debt or equity, compound financial instruments, offsetting, and treasury shares.

Under IFRS 7, an entity must group its financial instruments into classes of similar instruments and, when disclosures are required, make the disclosures by class. IFRS 7 requires disclosure of information about :

  • The significance of financial instruments.
  • The nature and extent of risks arising from financial instruments.

An appendix of mandatory application guidance is part of the standard. There is also an appendix of non-mandatory implementation guidance that describes how an entity might provide the disclosures required by IFRS 7.

IFRS 7 applies to all entities effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Early appliers are given some relief with respect to comparative prior period disclosures. When effective, IFRS 7 replaces both IAS 30 and the disclosure requirements of IAS 32.

Deloitte has published two new IFRS 7-related publications :

  • Special edition of our IAS Plus Newsletter providing an overview of IFRS 7 Financial Instruments : Disclosures.
  • Disclosure checklist for IFRS 7 that supplements our general IFRS presentation and disclosure checklist for 2005.
Round-tables held on business combinations phase 2

The IASB held a public round-table meeting on 9 November 2005 on the Board’s Business Combinations Phase II Proposals. The IASB and the US FASB issued identical exposure drafts, and the FASB held a similar round-table meeting with respondents to its exposure drafts on 27 October 2005. Ken Wild, Deloitte’s Global IFRS Leader, represented Deloitte at the round-tables.

IASB amends IAS 1 to add capital disclosures

As part of its project to develop IFRS 7 Financial Instruments : Disclosures (see story on page 3), the IASB decided also to amend IAS 1 Presentation of Financial Statements to add requirements for disclosures of :

  • The entity’s objectives, policies and processes for managing capital.
  • Quantitative data about what the entity regards as capital.
  • Whether the entity has complied with any capital requirements.
  • If it has not complied, the consequences of such non-compliance.

These disclosure requirements apply to all entities, effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Illustrative examples have added to IAS 1 as guidance.

IASB approves minor amendment to IAS 21

At its November 2005 meeting, the IASB approved certain amendments to IAS 21 that had been proposed in Draft Technical Correction (DTC) 1 Proposed Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates–Net Investment in a Foreign Operation. However (as noted in the next story) the Board has decided not to pursue further Technical Corrections but, instead, to adopt editorial corrections as fast-track amendments.

The amendment to IAS 21 provides that if an exchange difference arises on a monetary item that forms part of a reporting entity’s net investment in a foreign operation, that exchange difference should be reclassified to the separate component of equity in the financial statements in which the foreign operation is consolidated, proportionately consolidated, or accounted for using the equity method. This requirement applies regardless of the currency in which the monetary item is denominated and of which group entity transacts with the foreign operation.

IASB abandons technical corrections plan

In July 2005, the IASB invited comment on a proposed policy on technical corrections. Technical corrections are defined as “minor changes to the wording of a standard or interpretation made after initial publication when it is clear that the words in a standard do not properly convey the IASB’s intention, even when considered with the basis for conclusions and any related guidance.” The Board intended its technical corrections policy to be a ‘fast track’ process to deal with those changes.

However, after considering the comments received, at its November 2005 meeting the Board decided not to pursue its proposed technical correction policy. It concluded that the experience of Proposed Technical Correction 1 had demonstrated that it was not a good way to amend an existing Standard. The Board noted that it already has an Exposure Draft policy in place that allows fast-track proposals for comment for a period of not less than 30 days in limited circumstances. That policy will be used for future technical corrections.

Discussion paper on ‘management commentary’

In October 2005, the IASB published a discussion paper on Management Commentary that assesses the role the IASB could play in improving the quality of the management commentary that accompanies financial statements. (Management commentary is sometimes called ‘management discussion and analysis’ or ‘operating and financial review’.) The discussion paper was prepared for the IASB by staff of its partner standardsetters from Canada, Germany, New Zealand, and the United Kingdom.

The paper reviews existing national requirements or principles on management commentary and offers recommendations on how the IASB might promote the wider adoption of best practice in the interests of investors and others who use financial reports. While the IASB has discussed the paper, it has not yet developed tentative views on the authors’ recommendations.

The IASB has invited comments on the discussion paper by 28 April 2006. The discussion paper can be downloaded from the IASB’s website.

18 October 2005 : IASB holds round-table discussions on SMEs

On 13-14 October 2005, the Board conducted public round-table meetings with respondents to its April 2005 questionnaire on possible recognition and measurement simplifications for small and medium-sized entities (SMEs) to probe the views expressed in the responses. Forty-three organisations participated in the round-tables. While a broad range of possible recognition and measurement simplifications was discussed, the areas identified below tended to receive the most attention :

  • IAS 12 : Deferred income taxes
  • IAS 16 : Some aspects of property, plant, and equipment including the revaluation model, components, and residual value
  • IAS 17 : Lease classification and measurement
  • IAS 19 : Employee benefits – defined benefit programmes including statutory long-service obligations
  • IAS 27 : Consolidation
  • IAS 32 : Debt vs equity classification
  • IAS 36 and IFRS 3 : Goodwill impairment and intangibles recognition
  • IAS 36 : Indicators of impairment of property, plant and equipment; value in use calculation; and cash generating units
  • IAS 39 : Fair value measurement in general, hedging, and derecognition
  • IAS 41 : Fair value model for biological assets and agricultural produce
  • IFRS 2 : Measurement of share-based payment
  • What an SME should do if the IASB SME standards do not address a particular accounting question
Deloitte Hong Kong manager to join IASB staff

Wai Ling (Candy) Fong, a manager in the Technical Department of Deloitte Touche Tohmatsu in Hong Kong, will be joining the staff of the International Accounting Standards Board in London for a two-year secondment starting in January. Candy will be assigned to researching and drafting interpretations for the International Financial Reporting Interpretations Committee, an arm of the IASB. Candy is a member of both the HKICPA and the ACCA.

Discussion paper on initial measurement

The IASB has published for public comment a Discussion Paper Measurement Bases for Financial Reporting - Measurement on Initial Recognition. The Discussion Paper, prepared by staff of the Canadian Accounting Standards Board (AcSB), analyses possible bases for measuring assets and liabilities on initial recognition. These include :

  • historical cost,
  • current cost,
  • fair value,
  • net realisable value,
  • value in use, and
  • deprival value.

The Paper evaluates the possible bases against criteria derived from the IASB Framework, as well as developments in finance theory, present value and statistical probability principles, and measurement practices. Neither the IASB nor the AcSB has yet debated the Discussion Paper. The IASB invites comments by 19 May 2006. Comments received will be analysed by staff of the AcSB. Their analysis and copies of responses will be provided to the IASB.

World standard setters met 26-27 September 2005

The IASB hosted a meeting of representatives of approximately 40 national accounting standards-setting bodies on 26-27 September 2005. The agenda included :

  • The role of IFRIC and review of IFRIC’s operations.
  • Conceptual Framework.
  • Accounting Standards for Small and Medium-sized Entities.
  • Memorandum of Understanding - National standard setters and the IASB.
  • Non-financial Liabilities.
  • General round-table discussion of challenges and opportunities facing jurisdictions as they adopt/converge with IFRSs.

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