IASB proposes first-time adoption amendments
In January 2007, the IASB published an Exposure Draft (ED) proposing exemptions from the requirements of IFRSs when they adopted for the first time. The ED would amend IFRS 1 First-time Adoption of International Financial Reporting Standards. The proposals respond to concerns about difficulties encountered by parent companies in measuring the cost of an investment in a subsidiary on adopting IFRSs.
IASB discussion paper on fair value measurements
In November 2006, the IASB published for public comment a Discussion Paper (DP) on Fair Value Measurements. The DP sets out the IASB’s preliminary views how to measure fair values when fair value measurement is already prescribed under existing IFRSs. It does not propose any extensions of the use of fair values. The DP is built around the US Financial Accounting Standards Board’s recently issued FAS 157 Fair Value Measurements. FAS 157 establishes a single definition of fair value together with a framework for measuring fair value for financial reports prepared in accordance with US GAAP. The IASB’s DP:
- indicates the IASB’s preliminary views on the provisions of FAS 157;
- identifies differences between FAS 157 and fair value measurement guidance in existing IFRSs; and
- invites comments on the provisions of FAS 157 and on the IASB’s preliminary views about those provisions.
Some points about FAS 157:
- Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.
- Fair value should be based on the assumptions market participants would use when pricing the asset or liability.
- FAS 157 establishes a fair value hierarchy that prioritises the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity’s own data.
- Fair value measurements would be separately disclosed by level within the fair value hierarchy.
- FAS 157 is effective for financial statements issued for fiscal years beginning after 15 November 2007, and interim periods within those fiscal years. Early adoption is permitted.
- FAS 157 may be downloaded from FASB’s Website without charge.
The IASB DP is available without charge on the IASB’s website. Comment deadline, originally 2 April 2007, has been extended to 4 May 2007. The IASB plans to publish an Exposure Draft in 2008.
New IASB-FASB joint working group on leases
The IASB and the FASB have announced the membership of a new international working group that will help the boards in their joint project on lease accounting. The joint project involves comprehensive reconsideration of all aspects of lease accounting and is expected to lead to fundamental changes in how lessees and lessors account for leases. The boards expect to publish a joint discussion paper in 2008 expressing their preliminary views.
IASB issues convergence standard on segment reporting
The IASB has issued International Financial Reporting Standard 8 Operating Segments as part of its joint project with the FASB to reduce differences between IFRSs and US GAAP. IFRS 8 replaces IAS 14 Segment Reporting and aligns the IASB’s standards with the requirements of SFAS 131.
IFRS 8 requires an entity to report financial and descriptive information about its reportable segments. See below for an overview of IFRS 8.
Overview of IFRS 8 operating segments
IFRS 8 requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. IFRS 8:
- applies only to listed entities.
- requires identification of operating segments based on internal reports that are regularly reviewed by the entity’s chief operating decision maker in order to allocate resources to the segment and assess its performance.
- includes a component of an entity that sells primarily or exclusively to other operating segments of the entity in the definition of an operating segment if the entity is managed that way.
- requires the amount of each operating segment item reported in IFRS financial statements to be the measure reported to the chief operating decision maker for the purposes of allocating resources to the segment and assessing its performance.
- requires reconciliations of total reportable segment revenues, total profit or loss, total assets, total liabilities and other amounts disclosed for reportable segments to corresponding amounts in the entity’s financial statements.
- requires an explanation of how segment profit or loss and segment assets and liabilities are measured for each reportable segment.
- requires an entity to report information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, and about major customers, regardless of whether that information is used by management in making operating decisions.
- requires an entity to give descriptive information about the way in which operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the entity’s financial statements, and changes in the measurement of segment amounts from period to period.
- by means of consequential amendments to IAS 34 Interim Financial Reporting significantly expands the requirements for segment information at interim reporting dates.
- applies to the annual financial statements for periods beginning on or after 1 January 2009. Earlier application is permitted.
ED of an IFRS for SMEs
The IASB has published an Exposure Draft of an International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). The ED was approved by a vote of thirteen Board members in favour and one opposed. An overview of the ED is presented below and on the following page. Comment deadline is 1 October 2007.
Overview of exposure draft of IFRS for SMEs
Definition of an SME
The IFRS for SMEs is intended for an entity with no public accountability. An entity has public accountability (and therefore should use full IFRSs) if:
- it has issued debt or equity securities in a public market; or
- it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund, or investment bank.
The Board intends the IFRS for SMEs to be a stand-alone document for a typical SME with about 50 employees. That is, it will cover the kinds of transactions and other events and conditions that companies of that size will likely encounter. The ‘50 employees’ was a guide to the Board in deciding the content of the IFRS for SMEs. It is not intended as a quantified size test for defining an SME, though jurisdictions adopting the IFRS for SMEs may add one. There is no mandatory fallback to full IFRSs.
Small listed companies
They are not eligible to use the IFRS for SMEs. Listed companies, large or small, have elected to seek capital from outside investors who are not involved in managing the business and who do not have the power to demand information that they might want. Full IFRSs have been designed to serve public capital markets.
Based on concepts and principles in full IFRSs
The draft IFRS for SMEs was developed by extracting the fundamental concepts from the IASB Framework for the Preparation and Presentation of Financial Statements and the principles and related mandatory guidance from IFRSs with appropriate modifications in the light of users’ needs and cost-benefit considerations.
Modifications of IFRSs
The modifications are of three broad types:
- Topics omitted. IFRS topics not relevant to a typical SME are omitted, with cross-references to the IFRS if needed. These are:
- General price-level adjusted reporting in a hyperinflationary environment.
- Equity-settled share-based payment (the computational details are in IFRS 2 Share-based Payment).
- Determining fair value of agricultural assets (look to IAS 41 Agriculture, but the Board also proposes to reduce the use of fair value through profit or loss for agricultural SMEs).
- Extractive industries (look to IFRS 6 Exploration for and Evaluation of Mineral Resources).
- Interim reporting (look to IAS 34 Interim Financial Reporting).
- Lessor accounting finance leases (finance lessors are likely to be financial institutions who would be ineligible to use the IFRS for SMEs anyway).
- Recoverable amount of goodwill (SMEs would test goodwill for impairment much less frequently than under IAS 38 Intangible Assets, but if an SME is required to perform such a test it would look to the calculation guidance in IAS 38).
- Earnings per share and segment reporting, which are not required for SMEs, and Insurance contracts (insurers would not be eligible to use the IFRS for SMEs).
- Only the simpler option included. Where full IFRSs provide an accounting policy choice, only the simpler option is in the IFRS for SMEs. An SME is permitted to use the other option by cross-reference to the relevant IFRS. These are:
• Cost-depreciation model for investment property (fair value through profit or loss is permitted by reference to IAS 40 Investment Property).
• Cost-amortisation-impairment model for property, plant and equipment and intangibles (the revaluation model is allowed by references to IAS 16 Property, Plant and Equipment and IAS 38).
• Expense borrowing costs (capitalisation allowed by reference to IAS 23 Borrowing Costs).
• Indirect method for reporting operating cash flows (the direct method is allowed by reference to IAS 7 Cash Flow Statement).
• One method for all grants (or an SME can use any of the alternatives in IAS 20 Government Grants and Disclosure of Government Assistance).
In adopting the IFRS for SMEs, an individual jurisdiction could decide not to allow the option that is cross-referenced to the full IFRS.
- Recognition and measurement simplifications. Here are some examples:
- Financial instruments:
― Two categories of financial assets rather than four. This means no need to deal with all of the “intent-driven” held to maturity rules or related “tainting”, no need for an available for sale option, and many other simplifications.
― A clear and simple principle for derecognition – if the transferor has any significant continuing involvement, do not derecognise. The complex “pass-through testing” and “control retention testing” of IAS 39 are avoided.
― Much simplified hedge accounting.
- Goodwill impairment – an indicator approach rather than mandatory annual impairment calculations.
- Expense all research and development cost (IAS 38 would require capitalisation after commercial viability has been assessed).
- The cost method for associates and joint ventures (rather than the equity method or proportionate consolidation).
- Less fair value for agriculture – only if “readily determinable without undue cost or effort”.
- Defined benefit plans – a principle approach rather than the detailed calculation and deferral rules of IAS 19 Employee Benefits. Complex ‘corridor approach’ omitted.
- Share-based payment – intrinsic value method.
- Finance leases – simplified measurement of lessee’s rights and obligations.
- First-time adoption – less prior period data would have to be restated than under IFRS 1 First-time Adoption of IFRSs.
- Financial instruments:
Frequency of updating the IFRS for SMEs
Approximately once every two years via an ‘omnibus’ exposure draft.
Organisation of the ED
The ED is issued in three documents – the draft IFRS for SMEs (254 pages), implementation guidance (80 pages, consisting of illustrative financial statements and a disclosure checklist), and a basis for conclusions (48 pages). The IFRS for SMEs is organised topically, rather than in IAS/IFRS statement number sequence. It has 38 sections and a glossary.
- Comment deadline on the Exposure Draft is 1 October 2007.
- During the exposure period the Board will conduct round-table meetings with SMEs and small firms of auditors to discuss the proposals. The Board will field test the proposals in the ED.
- Final Standard is expected in mid-2008.
- It would be effective based on decisions in each jurisdiction that adopts the IFRS for SMEs.