The IASB and FASB discussions on financial instruments accounting are nearly complete. Jessica Taurae looks at the latest progress.
The IASB and FASB announced in January 2012 that they would work together and redeliberate selected aspects of their classification and measurement models to reduce key differences. Since then, they have been focusing on the following areas:
The boards’ discussions on the above are nearly complete and have substantially converged in a number of key areas, including the approach to classify and measure debt investments.
Debt investments (such as loans and debt securities) under IFRS and US GAAP will be classified based on an individual instrument’s characteristics of contractual cash flows and the business model for the portfolio. The boards agreed last month on how these instruments are measured, with the IASB and FASB agreeing on a third measurement category: debt investments are measured at fair value, with changes in fair value recognized through other comprehensive income. The categories for debt investments are, therefore, broadly as follows:
One of the financial services industry’s key concerns is where traditional liquidity portfolios will be classified. Many are likely to fall in FVOCI; some might continue to fall into the amortized cost category. However, it is unclear to what degree that will be the case until we see the exposure draft.
The FASB agreed to adopt the IASB requirement for reclassifications between categories when there is a significant change in business strategy, which is expected to be very infrequent.
In previous meetings, the FASB also agreed to incorporate several aspects of IFRS 9 into its proposed model, including:
Has convergence been achieved?
Most of the points for joint discussion have now been concluded. The boards have agreed on a substantially converged approach for debt investments, although they do not plan on addressing all differences in their respective approaches (for example, classification and measurement of equity investments).
The final guidance will likely affect entities across all industries that hold financial instruments.
What’s the effective date?
The FASB must still complete its redeliberations before deciding on an effective date. The IASB had previously decided to extend the effective date for IFRS 9 to annual periods beginning on or after January 1, 2015. Time will tell if the IASB will delay the effective date further.
The boards are still expected to discuss some remaining issues over the next quarter, including transition and disclosures. The IASB is expected to issue an exposure draft on these proposals in Q4. The FASB will separately address a number of other matters in the coming months before issuing an exposure draft later this year. It is unclear at this time whether the new impairment approach will be included in that document or issued as a separate exposure draft (for example, classification and measurement of equity investments).
There are currently a number of Improvements projects at various stages of development:
The table below identifies the more significant changes to the standards arising from the 2009 to 2011 annual improvements project and the implications for management. The article on the following page outlines the proposals in the 2010-12 cycle.
|Amendment to IFRS 1, First-time Adoption of IFRS||The amendment clarifies that an entity may apply IFRS 1 more than once under certain circumstances.||
|Amendment to IFRS 1, First-time Adoption of IFRS||The amendment clarifies that an entity can choose to adopt IAS 23, Borrowing Costs, either from its date of transition or from an earlier date.||From whichever date the entity chooses to adopt IAS 23:
|Amendment to IAS 1, Presentation of Financial Statements||The amendment clarifies the disclosure requirements for comparative information when an entity provides a third balance sheet either as required by IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, or voluntarily.||
|Amendment to IFRS 1 as a result of the above amendment to IAS 1||The consequential amendment clarifies that a first-time adopter should provide the supporting notes for all statements presented.||
|IAS 16, Property, Plant and Equipment||The amendment clarifies that spare parts and servicing equipment are classified as property, plant and equipment rather than inventory when they meet the definition of property, plant and equipment.||
|Amendment to IAS 32, Financial Instruments: Presentation||The amendment clarifies the treatment of income taxes relating to distributions and transaction costs.||
|Amendment to IAS 34, Interim Financial Reporting||The amendment clarifies the disclosure requirements for segment assets and liabilities in interim financial statements.||
The exposure draft for the 2010-12 cycle of the annual improvements project, once finalized, is expected to apply for annual periods beginning on or after January 1, 2014, except for the amendment to IFRS 3, which applies to business combinations on or after January 1, 2015.
The board is asking for comments on the transition provisions and the effective date of each proposed amendment, for the first time. The deadline for comments is September 5, 2012.
IAS 1, Presentation of Financial Statements
A liability is classified as non-current if the entity expects, and has the discretion, to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan facility with the same lender on the same or similar terms.
IAS 7, Statement of Cash Flows
The classification of capitalized interest follows the classification of the asset to which the interest payments were capitalized.
IAS 12, Income Taxes
The amendment clarifies how an entity recognizes deferred tax assets for unrealized losses: if tax law restricts the use of tax losses to income of a certain type, the entity assesses whether it expects sufficient taxable income of that type to recognize a deferred tax asset; taxable profit against which an entity assesses a deferred tax asset for recognition is the amount before reversal of any deductible temporary differences; a tax-planning opportunity is an action that creates or increases taxable profit.
IAS 16, Property, Plant and Equipment, and IAS 38, Intangible Assets
The amendment clarifies how the accumulated depreciation should be calculated at the date of valuation when the revaluation model is applied.
IFRS 2, Share-based Payment
The definition of vesting conditions is either a performance condition or a service condition.
IFRS 3, Business Combinations
Contingent consideration that meets the definition of a financial instrument is classified either as equity or a financial liability in accordance with IAS 32. The reference to other IFRS is removed. Contingent consideration classified as a financial liability is subsequently measured at fair value, with changes in fair value being presented in profit or loss or in other comprehensive income, depending on the requirements of IFRS 9.
IFRS 13, Fair Value Measurement
The amendment to the Basis for Conclusions clarifies that the board did not intend the changes made to IFRS 9 and IAS 39 by IFRS 13 to remove the ability of entities to measure short-term receivables and payables without discounting when the effect of discounting is not material.
IAS 24, Related party Disclosures
The definition of related party is extended to include entities that provide management services to the reporting entity. Disclosure is required of amounts charged as an expense for management services provided by such entities.
IAS 36, Impairment of Assets
The disclosures required when there has been a material impairment loss or reversal in the period are the same whether the recoverable amount has been estimated using value-in-use (VIU) or fair value less costs of disposal.
IFRS 8, Operating Segments
Entities are required to disclose the factors used to identify the reportable segments when operating segments have been aggregated. The reconciliation of a segment’s assets to the entity’s assets is only required when details of segment assets are reported to the chief operating decision-maker.
The IFRS Interpretations Committee has published an exposure draft on the accounting for levies charged by public authorities on entities that operate in a specific market.
The proposed interpretation is expected to apply retrospectively but this date is not yet defined; early application is likely to be permitted.
The proposed interpretation addresses levies that are recognized in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets; it does not apply to income taxes within the scope of IAS 12, Income Taxes. The interpretation focuses on:
Entities that are subject to levies for operating in a specific market, such as a specific country, a specific region or a specific market in a specific country might be affected. These levies are common in many industries — for example, banking.
Management should evaluate the accounting for any levies that might be in the scope of the proposals. Management should also consider commenting on the exposure draft. The deadline for comments is September 5.
Put options written on non-controlling interests (NCI puts) are contracts that oblige a parent to purchase shares of its subsidiary that are held by a non-controlling-interest shareholder for cash or another financial asset. IAS 32, para 23 addresses initial measurement; it requires management to recognize a financial liability for the present value of the redemption amount in the parent’s consolidated financial statements.
There is currently diversity in how entities subsequently present the changes in the measurement of NCI puts. The draft interpretation requires the changes to the financial liability to be accounted for in the income statement.
The key clarifications in the draft are:
All entities with NCI puts that are accounting for subsequent measurement of the financial liability in equity will be affected by the proposed changes. The deadline for comments is October 1, 2012.
Two new members have been appointed to the IASB for three-year terms from next month. Martin Edelmann was a member of the German Accounting Standards Board from 2006 until 2011. He was Head of Group Reporting at Deutsche Bank from 1997 to 2011. Before this, Mr. Edelmann worked at KPMG and was a member of the Accounting Working Group of the German Banking Association for 14 years, including as Chairman.
Chungwoo Suh was an adviser to the Korea Accounting Standards Board (KASB) and is a Professor of Accounting at Kookmin University in Seoul. He served as Chairman of the KASB between 2008 and 2011, during which time, he led Korea’s preparations to adopt IFRS from 2011.
Two new members have been appointed to the IFRS IC. Sandra Peters is Head of Financial Reporting Policy with the CFA Institute in the United States. Before this, she was a vice-president at insurance provider, MetLife. She is also a former KPMG partner.
John O’Grady joins the IFRS IC from Ernst & Young (E&Y), where he has been the Asia-Pacific IFRS Leader since July 2010. From 2005-2010, he led the Oceania Area IFRS Group. John is also a member of EY’s global IFRS Policy Committee.
They will serve three-year terms, renewable once. They replace Ruth Picker and Sara York Kenny, whose terms expired this month. Kazuo Yuasa and Laurence Rivat will complete their first terms at the end of June 2012 and have been reappointed for a further three-year term.
In this latest instalment of our IFRS quiz, impairment specialist, Akhil Kapadiya, tests your knowledge of IAS 36. You might also want to read our topic summary on impairment of assets to improve your chances of a good score.
Q1: What is a cash generating unit (CGU)?
Q2: Which of the following is correct in relation to the cash flow forecasts for calculating the value in use of a CGU under the VIU method?
Q3: IAS 36 lists eight indicators of impairment, four external and four internal. Which of the following statements is true?
Q4: Which of the following statements is true when considering the discount rate for computing the present value of cash flows under fair value less costs to sell (FVLCTS) and VIU?
Q5: How is goodwill allocated to CGUs or groups of CGUs for purposes of impairment testing?
Q6: How is an impairment loss attributable to a CGU allocated to its components?
Q7: Which of the following statements is true in relation to testing a brand for impairment?
Q8: Which of the following statements is false?
Q9: Which of the following statements is true in relation to determining the carrying amount of a CGU?
Q10: Which of the following statements are true in relation to determining the FVLCTS of a CGU?