IFRS, IAS, ISA Update

IASB Sets Out Practical Effects of Bringing Leases onto the Balance Sheet

The International Accounting Standards Board (IASB) is in the process of finalising a new International Financial Reporting Standard (IFRS) that will require companies to bring leases onto the balance sheet. It has recently published a document outlining the likely practical effects of the new Leases Standard, as well as details on the similarities and differences between the IASB’s requirements and those of the US Financial Accounting Standards Board (FASB). Deliberations by the IASB on the new accounting model for leases will be completed this month and the final Standard is scheduled to be issued later this year. Responding to calls from stakeholders for further information on the possible effects of the new Standard, the IASB staff have developed a document comparing the new and current accounting requirements.

The IASB and the FASB have been working jointly on the Leases project and have reached the same decisions in many areas, including requiring leases to be shown on the balance sheet, how to define a lease and how lease liabilities should be measured. However, there are some differences between the two Boards’ models and the document provides an overview of the likely practical effects of these differences.

Hans Hoogervorst, Chairman of the IASB, commented: “Our stakeholders have asked for more details on how the new Leases Standard will change things in practice. The most important difference is that the new Standard will provide a richer set of information for investors than is available today, which, in turn, will aid their decision making.

The main change that will be brought about by the new Leases Standard is an increase in assets and liabilities on the balance sheet for those companies that currently have a large amount of leases off balance sheet, thus improving the transparency of a company’s leverage and asset base.”

In addition to changes to the balance sheet, the new Leases Standard is likely to result in some important differences on the income statement. Among them is the reporting of higher operating profit compared to the current requirements – and in comparison to the FASB’s model. There will be no changes to total cash flows but, in the cash flow statement, the amount of operating cash will increase while the amount of financing cash will decrease.

The IASB’s analysis concludes that the costs to companies of applying the new Standard will be broadly similar for both the IASB’s and the FASB’s model.

The document also looks at other potential implications of the leases accounting model, such as the possible impact on the cost of borrowing. It clarifies that the new Standard will provide more transparent information about a company’s financial commitments, but does not change those commitments. Therefore, should the Standard affect the cost of borrowing for a company, this will be because the improved reporting provides lenders with new information that is relevant and important to their decision making.

Summary of the Model for Insurance Contracts without Participation Features

An overview of the IASB’s tentative decisions on the general model that would apply to insurance contracts without participation features, and the IASB’s reasons for reaching those decisions, is now available. Access the document Insurance Contracts without Participation Features.

In addition, the following information has been updated on the Insurance Contracts project page:

  • Project Update – Updated overview of the Insurance Contracts project summarising the progress on the project, including tentative decisions to date. View the Insurance Contracts: Project Overview.

  • Due process overview – describes the key due process steps undertaken to date by the IASB in developing its proposals for a global Standard on insurance contracts. View the Due Process Overview.

  • Due process steps – shows how the IASB has complied to date, since publication of the 2013 Exposure Draft Insurance Contracts, with the due process steps required to finalise the Standard on insurance contracts in accordance with the Due Process Handbook. View the Due Process steps.

IASB Publishes Proposals to Clarify the Way in Which Liabilities Are Classified

The International Accounting Standards Board (IASB) recently published for public comment the Exposure Draft Classification of Liabilities (Proposed amendments to IAS 1), which clarifies how entities classify debt, particularly when it is coming up for renewal.

The proposed amendments are designed to improve presentation in financial statements by clarifying the criteria for the classification of a liability as either current or non-current. The proposed amendments do this by:

  • clarifying that the classification of a liability as either current or non-current is based on the entity’s rights at the end of the reporting period; and

  • making clear the link between the settlement of the liability and the outflow of resources from the entity.

The proposals are open for public comment for 120 days. Comments on the proposed amendments should be sent to the IASB by 10 June 2015. The Exposure Draft can be accessed from the Open for comment section of the IFRS website.

IAASB’s Revised Standard Isa 720 Enhances Auditor Focus on Annual Reports In Light Of Increased Investor Focus on Qualitative Disclosures

The International Auditing and Assurance Standards Board® (IAASB®) recently released International Standard on Auditing™ (ISATM) 720 (Revised), The Auditor’s Responsibilities Relating to Other Information. The revisions aim to clarify and increase the auditor’s involvement with “other information”-defined in the standard as financial and non-financial information, other than the audited financial statements, that is included in entities’ annual reports.

“The annual report is a critical document for investors. It is in the public interest that an auditor undertakes an ‘intelligent read’ of an annual report, in the context of the knowledge obtained in the audit, and perform certain procedures to ensure the annual report is not materially inconsistent with the audited financial statements,” explained Prof. Arnold Schilder, IAASB Chairman.

The standard also includes new requirements related to auditor reporting on other information that complement the changes arising from the IAASB’s new and revised Auditor Reporting standards, issued earlier this year. Concurrent with those standards, ISA 720 (Revised) will be effective for audits of financial statements for periods ending on or after December 15, 2016.

“Which documents have been read and considered by the auditor and the results of the auditor’s work on those documents will now be transparent to auditor report users,” explained Kathleen Healy, IAASB Technical Director. “Specifically articulating the auditor’s responsibilities for other information, including the fact that the auditor’s opinion does not cover this information, will also give users the appropriate context in which to consider an entity’s annual report.” The standard also seeks to address the practical challenges that may arise when some or all of the other information is not available as of the date of the auditor’s report, and prescribes additional communications in auditor’s reports for listed entities in these circumstances.

The staff-prepared Basis for Conclusions, which explains the IAASB’s rationale for its decisions, and an At a Glance document, which explains the main changes from the extant ISA, are also now available.

IPSASB Publishes Recommended Practice Guideline on Reporting Service Performance Information

The International Public Sector Accounting Standards Board® (IPSASB®) has published Recommended Practice Guideline 3 (RPG 3), Reporting Service Performance Information. RPG 3 provides good practice guidelines on reporting service performance information. Development of this RPG reflects the IPSASB’s commitment to addressing public sector-specific reporting issues, including those that relate to information additional to the financial statements.

“Service provision is the primary function of the vast majority of public sector entities,” said IPSASB Chair Andreas Bergmann. “Service performance information is essential for users to evaluate the services provided and public sector entities’ efficient and effective use of resources to deliver those services. RPG 3 provides guidance to support the quality of service performance information already reported by entities and offers a useful framework for entities that have not yet started to report service performance information.”

RPG 3 provides principles applicable to the presentation of service performance information and definitions that establish a standardised service performance information terminology. It addresses the reporting entity and reporting period for service performance information. RPG 3 also provides guidance on the choice of performance indicators that show an entity’s achievements with respect to its service performance objectives, disclosures about the basis of the reported information, and service performance-related narrative discussion and analysis.

RPG 3 states that service performance information may be presented, either in the same report as the financial statements or in a separate report, and identifies factors to consider when making that decision.

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