IASB marks year-end with a flurry of activity

The IASB has issued two sets of proposed amendments to existing standards and an exposure draft (ED) on consolidation as a further response to current economic conditions. Both sets of amendments have very short comment periods. A discussion paper (DP) on revenue recognition - a convergence project - was also issued by both the IASB and the FASB in December 2008. The proposals are summarized below.

Proposed amendments to IFRS 7 — investments in debt instruments

Attendees of the global financial crisis round table meetings held jointly by the IASB and the FASB in November and December 2008 suggested that disaggregated information about impairment losses on available-for-sale debt instruments would be useful. The IASB believes that extending the disclosures will allow users of financial statements to more easily compare investments in debt instruments.

The IASB published an ED on December 23, 2008 that will require additional disclosures in December 2008 financial statements for investments in debt instruments. Should the proposed amendments be finalized as drafted, entities will be required to disclose the following information in tabular format (without comparatives).

For all debt instruments (e.g. loans and receivables, available-for-sale debt investments and held-to-maturity financial assets), other than those classified as at fair value through profit or loss:

Comments are due by January 15, 2009 and all concerned parties are encouraged to respond.

Proposed amendments to IFRIC 9 and IAS 39 — embedded derivatives

The IASB published an ED on December 22, 2008 that will amend IFRIC 9 and IAS 39 in relation to embedded derivatives. The ED proposes a mandatory assessment of any embedded derivatives following reclassification of a financial asset out of the fair value through profit or loss category. The assessment will not have taken place at initial recognition, as the entire asset was accounted for at fair value. The Board has explained that the amendment is necessary to ensure that, following a reclassification from the fair value category, entities apply the requirements for separation of an embedded derivative that is not closely related to the host contract. The assessment should be made on the basis of the circumstances that existed when the entity first became a party to the contract. In addition, if the fair value of the embedded derivative that would have to be separated cannot be reliably measured, the Board IASB has proposed that the hybrid financial asset in its entirety should remain in the fair value through profit or loss category. The ED has a proposed effective date for annual periods ending on or after December 15, 2008, with full retrospective application.

If amendments are accepted as proposed, entities that used the October 2008 change to IAS 39 will need to apply this in their December 2008 financial statements. Comments are due by January 21, 2009 and all concerned parties are encouraged to respond.

ED 10, Consolidated financial statements

The IASB has published ED 10, Consolidated Financial Statements. The ED is expected to replace existing IAS 27 and SIC 12. It proposes a single control based model as the basis for consolidation and expands the disclosure requirements. The proposals are expected to result in little change in the scope of consolidation for operating companies but introduce a new term, structured entity, and may have more impact on consolidation decisions for these entities.

The proposals form part of the Board's comprehensive review of off-balance sheet activities and its response to the recommendations from the Financial Stability Forum, the international body tasked with coordinating the global regulatory response to the credit crisis. Further proposals, covering the derecognition of assets and liabilities, are due to be published in the first quarter of 2009.

Comments are due by March 20, 2009.

Discussion paper on revenue

The IASB has issued a DP that proposes a change to the revenue recognition guidance. The DP (also issued by the FASB) will lead to a new, converged and comprehensive IFRS that will replace the present standards IAS 18, Revenue, and IAS 11, Construction contracts. The objective of the joint project is to develop a single revenue model that can be applied consistently regardless of industry. Applying the underlying principle proposed by the IASB and the FASB, a company would recognize revenue when it satisfies a performance obligation by transferring goods and services to a customer as contractually agreed. That principle is similar to many existing requirements, and the boards expect many transactions to remain unaffected by the proposals. However, the expectation is that that clarifying that principle and applying it consistently to all contracts with customers will improve the comparability and clarity of revenue for users of financial statements.

Comments are due by June 19, 2009.

IFRIC guidance on distributions of non-cash assets to owners

Ago Vilu, partner in PricewaterhouseCoopers' (PwC) Accounting Consulting Services group in Central and Eastern Europe, explains the implications of IFRIC 17, Distributions of Non-cash Assets to Owners.

Transactions with shareholders have always been a grey area under IFRS and raise many application questions. The only guidance under IFRS was a paragraph in IAS 1, First-time Adoption of IFRS, which required transactions with owners acting in their capacity as such to be reflected within equity. Diversity in practice developed as a result. IFRIC responded to requests for guidance around demergers and other in specie distributions by issuing IFRIC 17, Distributions of Non-cash Assets to Owners, in November 2008.

Scope

The scope of IFRIC 17 is narrow and carefully defined, as follows:

• Transactions with owners are defined as falling into two broad categories: exchange transactions and non-reciprocal transfers. The latter are commonly referred to as contributions and distributions. Exchange transactions between an entity and its owners have not been addressed; this would encompass measurement of many related party transactions, deemed to be a subject too broad for an interpretation. The interpretation also describes the diversity in practice as mainly around distributions of non-cash assets and distributions that give a choice of a non-cash asset or a cash alternative. The scope of IFRIC 17 is, therefore, limited to these types of distributions. A non-reciprocal transfer of a non-cash asset to owners will, therefore, be captured by the interpretation; whereas, a sale of the same asset to owners at a non-market price is not addressed.
• IFRIC 17 is limited to distributions where all owners are treated equally. This is because distributions in which owners of the same class of equity instrument are not all treated equally implied, in IFRIC's view, that some owners receiving the distribution indeed gave up something to the entity and/or other owners; therefore, such distributions in substance represent exchange transactions.
• IFRIC 17 only applies to distributions that result in a change in control over assets distributed. This requirement effectively scopes out any distribution by an entity ultimately controlled by a single party or parties. This is because, in IFRIC's view, distributions where the asset is ultimately controlled by the same party or parties both before and after the distribution are often made for the purpose of group restructuring rather than representing a genuine dividend payment. In addition, the IASB has added a common control transactions project to its agenda, so the IFRIC considered it appropriate not to cover common control distributions in the interpretation.
• The change-in-control requirement scopes out partial distributions of subsidiaries where control over the subsidiary is retained by the distributing entity. IFRIC 17 makes it clear that such distributions qualify as transactions with non-controlling shareholders and are accounted for under IAS 27. Implications of the change-in-control requirement are illustrated below.

Example 1

Entity A is owned by public shareholders. No single shareholder (or group of shareholders bound together by a contractual arrangement) controls Entity A. Entity A distributes 100% of its interest in its wholly owned subsidiary, Entity B, to its shareholders. The transaction is within the scope of IFRIC 17.

Example 2

Entity C is owned by public shareholders. No single shareholder (or group of shareholders bound together by a contractual arrangement) controls Entity C. Entity C distributes some of its interest in its wholly owned subsidiary, Entity D, to its shareholders but retains a controlling interest in Entity D. The transaction is outside the scope of IFRIC 17.

Example 3

Entity E is owned by public shareholders. A group of shareholders bound together by a contractual arrangement controls entity E, and there are also other non-controlling shareholders. Entity E distributes 100% of its interest in its wholly owned subsidiary, Entity F, to its shareholders. The entire transaction — that is, both the distribution to the controlling shareholders and to the other shareholders — is outside the scope of IFRIC 17.

Recognition and measurement

IFRIC 17 clarifies that a dividend payable should be recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity. This date will differ by jurisdiction. For example, if the jurisdiction requires shareholders' approval, the liability is not recognized until such approval is granted. Where shareholders' approval is not required, the dividend payable is normally recognized when declared.

The dividend payable is recorded at the fair value of the net assets to be distributed. Where a choice of settlement is given, management considers fair values of both alternatives and their respective probabilities. Where the net assets distributed constitute a business, the liability is measured at the fair value of the business rather than the sum of individual fair values of the net assets constituting the business (i.e. they include goodwill, identifiable intangible assets and contingent liabilities). The distribution liability is remeasured at fair value at each reporting date, with measurement adjustments taken to equity.

IFRIC recognized that fair value of some distributions (e.g. ownership interest in a non-traded entity) may not be readily available but did not provide any exemptions from the measurement principle. Management is expected to be able to measure the value of any distribution. In addition, dividend income is measured at fair value under IAS 18; thus, the interpretation does not impose a more onerous requirement on the entity making the distribution, as compared to the recipient of the distribution.

IFRIC 17 requires an entity making the distribution to recognize the difference between the carrying amount of the dividend payable and the carrying amount of the net assets distributed in profit or loss. This difference is presented as a separate line item. The difference will always be represented by a credit balance because any decline in value of the assets distributed would have been captured by the impairment provisions of relevant IFRS. IFRIC 17 effectively requires recognition of previously unrealized gains on non-cash assets distributed to owners.

IFRIC specifically invited comments from constituents on profit or loss versus equity recognition and carefully considered the two alternative approaches. It recognizes that, under IAS 1, distributions to owners are recognized in equity. At the same time, it concluded that the difference in question does not arise from a distribution as such but represents a change in value of the asset to be distributed. Under IFRS (e.g. IAS 16, IAS 38, IAS 39 and IFRS 5), such changes are reflected in profit or loss when the asset is derecognized. In addition, IFRIC noted that the profit or loss approach will have the same accounting effect as would have been achieved had an entity sold the asset and distributed cash to shareholders. It, therefore, agreed that profit or loss recognition will best reflect the economic substance of the transaction.

Consequential amendments to IFRS 5

Once an entity has committed to distribute assets to its owners, the carrying value of the assets will no longer be recovered through continuing use. IFRS 5 will, therefore, be amended to capture assets held for distribution. The amended IFRS 5 will require non-current assets held for distribution to be measured at the lower of their carrying amount and fair value less costs to distribute. IFRS 5 will apply at the commitment date - that is, when the assets are available for immediate distribution in their present condition and the distribution is highly probable.

Effective date and transitional provisions

IFRIC 17 and consequential amendments to IFRS 5 apply for annual periods starting on or after July 1, 2009 (i.e. 2010 for calendar year entities). Earlier application is permitted. IFRIC recognized potential difficulties around fair value measurement of the liability and, therefore, required prospective application of the interpretation.

Publisher's poetry corner

IFRS News' publisher, Mary Dolson, has spent the holiday period improving on the Christmas classic, The Twelve Days of Christmas. May readers forgive some flexibility over the rhythm.

On the twelfth day of Christmas my true love sent to me:

• 12 users modelling
• 11 preparers crunching
• 10 Board members leaping
• 9 accountants dancing
• 8 staff a-drafting
• (IFRS) 7 new amendments
• 6 EDs for comment
• 5 golden rules
• 4 written puts
• 3 interpretations
• 2 impaired assets and
• 1 global standard setter.

US path to IFRS — looking ahead

Dave Kaplan, PwC's Leader of US International Accounting and SEC Services, looks at the SEC's proposed roadmap, the likely short-term implications and how US companies could prepare for IFRS.

With the November 2008 release of a proposed roadmap for allowing US domestic public companies to use IFRS, the U.S. Securities & Exchange Commission (SEC) effectively ensured that the US path to IFRS will remain in the headlines throughout 2009. Comments on the proposed roadmap are due in mid-February, and the number of commentators is expected to exceed almost any other proposal released by the SEC. The comment letters will likely fuel the debate over whether and how the final roadmap should be implemented, leading right up to the issuance of the final roadmap, which is unlikely to occur until late 2009.

The SEC did not set a definitive date for moving the United States to IFRS in the proposed roadmap. Rather, it established a number of milestones for moving to IFRS, and committed to revisiting in 2011 the question of mandatory IFRS adoption for the United States. It will assess in 2011 whether sufficient progress has been made toward those milestones.

Some of the more significant milestones include:

• Achieving sufficient improvements to IFRS
• Enhancing the independence, accountability and funding of the IASB and its Trustee Organization
• Achieving sufficient progress on the taxonomy for XBRL compatibility
• Realizing sufficient improvement in IFRS education and training in the United States

The SEC also plans to study the consistency with which IFRS is applied globally, believing that consistent application of IFRS, as issued by the IASB, is critical prior to moving the US to IFRS.

The proposed roadmap suggests that a reasonable timeline for moving the largest US public companies to IFRS is 2014, with mid-size and smaller public companies moving in 2015 and 2016, respectively. First-time adopters would be required to file three years of IFRS financial statements (two comparative years), consistent with current SEC requirements.

Included in the proposed roadmap is a proposed rule that would allow companies meeting certain eligibility criteria to adopt IFRS as early as 2009. To qualify, companies would have to be in industries where, globally, IFRS is used more than any other accounting framework. These companies would also have to fall within the largest 20 companies in their industry, as measured by market capitalization, in order to qualify for early adoption. Finally, any eligible company wishing to adopt early would need to obtain a letter of no objection from the SEC.

Additionally, the SEC is asking respondents for views on two transition alternatives by filers that elect early IFRS adoption. First, filers would provide a one-time reconciliation of US GAAP to IFRS in accordance with normal IFRS 1 transition requirements. Under an alternative, filers would have to provide an annual unaudited supplemental reconciliation from IFRS to US GAAP covering the three-year filing period.

Implications of the proposed roadmap

In the absence of a firm decision to move forward with IFRS until at least 2011, the restrictive eligibility requirements and the potentially onerous reconciliation requirements for companies who decide to convert to IFRS early are likely to dissuade virtually all US companies from early adopting. Some US companies may even put the topic of IFRS on the back burner for now. However, strategic, forward-thinking companies are expected to continue planning for IFRS adoption.

Although the path ahead for IFRS in the United States is not yet clearly defined, the end-game is virtually certain; all signs point to the eventual use of IFRS by US companies. To develop a thoughtful and strategic approach, companies should begin to learn more about IFRS and how it may impact them. Specifically, companies would benefit from performing a preliminary study now to identify business-, accounting-, investor-, systems-, controls- and workforce-related issues that could arise during an IFRS conversion. Companies should also identify key IFRS conversion considerations and incorporate them into business planning to ensure they are considered as a business changes occur over the next few years.

Management must prioritize the investment of resources and capital, especially, in these difficult financial times. While a comprehensive IFRS transition program may be farther off, there are certain areas of focus that can provide benefit now. Companies should consider the most significant IFRS conversion activities, as identified in a preliminary study, and make an investment only to the extent that company or industry-specific circumstances warrant it.

Multinational companies should also consider the impact of IFRS on foreign subsidiaries and understand where the company already uses IFRS or could use IFRS in the near future, and ensure the US parent maintains control of IFRS decisions across the business.

The road ahead

Given the scrutiny around accounting and its role in the global credit crisis, it is not surprising that the SEC has chosen a cautious, measured approach to laying out the path forward for a US move to IFRS. However, the credit crisis also clearly demonstrates the interconnected nature of the global financial markets and further demonstrates the need for a single set of high-quality accounting standards.

A confluence of factors will influence the direction the SEC takes related to IFRS over the next 12 months - the development of new accounting standards by both the IASB and the FASB, the political implications of a new US presidential administration, the comments received from constituents on the proposed roadmap, and even the level of vigour with which the European Union (EU) continues to support the IASB, to name a few. Companies will need to stay tuned and monitor the timing and tenor of the developments in order to plan appropriately.