IFRS, IAS, ISA Update
IASB and FASB issue converged Standard on revenue recognition
In May the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) jointly issued a converged Standard on the recognition of revenue from contracts with customers. The Standard will improve the financial reporting of revenue and improve comparability of the top line in financial statements globally.
Although revenue is a vital metric for users of financial statements, the previous requirements of IFRS and US GAAP resulted in different accounting for transactions that were economically similar. Furthermore, while revenue recognition requirements of IFRS lacked sufficient detail, the accounting requirements of US GAAP were considered to be overly prescriptive and conflicting in certain areas.
The boards have thus developed new and converged requirements for revenue recognition in both IFRS and US GAAP. The core principle of the new Standard is for companies to recognise revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new Standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements.
IASB publishes Exposure Draft Investment Entities – Applying the Consolidation Exception (Proposed amendments to IFRS 10 and IAS 28)
The IASB recently published for public comment the Exposure Draft Investment Entities-Applying the Consolidation Exception (Proposed amendments to IFRS 10 and IAS 28).
The proposed amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures are designed to clarify three issues about the application of the requirement for investment entities to measure subsidiaries at fair value instead of consolidating them. The proposed amendments:
confirm that the exemption from presenting consolidated financial statements continues to apply to subsidiaries of an investment entity that are themselves parent entities;
clarify when an investment entity parent should consolidate a subsidiary that provides investment-related services instead of measuring that subsidiary at fair value; and
simplify the application of the equity method for an entity that is not itself an investment entity but that has an interest in an associate that is an investment entity.
The issues originated from submissions to the IFRS Interpretations Committee, which recommended that the IASB should amend the Standards to clarify the requirements in order to reduce the risk of diversity developing in practice.
IASB issues amendments to IAS 16 and IAS 41 for bearer plants. In late June, the IASB published amendments that change the financial reporting for bearer plants, such as grape vines, rubber trees and oil palms. Entities are required to apply the amendments for annual periods beginning on or after 1 January 2016. Earlier application is permitted.
IAS 41 Agriculture currently requires all biological assets related to agricultural activity to be measured at fair value less costs to sell. This is based on the principle that the biological transformation that these assets undergo during their lifespan is best reflected by fair value measurement. However, there is a subset of biological assets, known as bearer plants, which are used solely to grow produce over several periods. At the end of their productive lives they are usually scrapped. Once a bearer plant is mature, apart from bearing produce, its biological transformation is no longer significant in generating future economic benefits. The only significant future economic benefits it generates come from the agricultural produce that it creates.
The IASB decided that bearer plants should be accounted for in the same way as property, plant and equipment in IAS 16 Property, Plant and Equipment, because their operation is similar to that of manufacturing. Consequently, the amendments include them within the scope of IAS 16, instead of IAS 41. The produce growing on bearer plants will remain within the scope of IAS 41.
IASB publishes amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets
In May the IASB published amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets. IAS 16 and IAS 38 both establish the principle for the basis of depreciation and amortisation as being the expected pattern of consumption of the future economic benefits of an asset.
The IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset.
The IASB also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption, however, can be rebutted in certain limited circumstances.
Effective Date Of IFRS 9 Likely To Be Delayed Until 2018
The IASB has tentatively decided to require entities to apply IFRS 9 Financial Instruments for annual periods beginning on or after 1 January 2018. This isn’t the first time that the effective date of this much-debated new standard has been delayed. It had originally been expected to come into effect in 2013, but this was pushed back to 2015 when it became apparent that the project to replace IAS 39 was going to take a lot longer than originally anticipated. But as the IASB and their US counterparts struggled to find a converged solution, it soon became apparent that even 2015 was too ambitious a target.
The end, however, is finally in sight. The new general hedging model was published late in 2013 and the chapters on classification and measurement and on impairment are expected very soon. The IASB has therefore tentatively decided that IFRS 9 will be effective in 2018; a whole decade since the onset of the financial crisis that resulted in the clamour for IAS 39 to be replaced.
IASB publishes amendments to IFRS 11 Joint Arrangements
Also in May the IASB published amendments to IFRS 11 Joint Arrangements. IFRS 11 addresses the accounting for interests in joint ventures and joint operations. The amendments published today add new guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business. The amendments specify the appropriate accounting treatment for such acquisitions.
Proposed Changes to the International Standards on Auditing (ISAs)-Addressing Disclosures in the Audit of Financial Statements The International Auditing and Assurance Standards Board (IAASB) recently released for public comment proposed changes to the International Standards on Auditing (ISAs) to clarify expectations of auditors when auditing financial statement disclosures.
The proposals include new guidance on considerations relevant to disclosures-from when the auditor plans the audit and assesses the risks of material misstatement, to when the auditor evaluates misstatements and forms an opinion on the financial statements.
“Addressing financial reporting disclosures has always been an integral part of an audit of financial statements in accordance with the ISAs. Over the past decade, however, financial reporting disclosure requirements and practices have evolved, and disclosures now provide more decision-useful information that is often more narrative and subjective in nature,” notes IAASB Chairman Prof. Arnold Schilder. “This gives rise to challenges from an auditing point of view, and the proposals enhance certain areas in the ISAs to support the proper application of the standards’ requirements.”
The IAASB’s work has been informed by the feedback to its January 2011 Discussion Paper, The Evolving Nature of Financial Reporting: Disclosure and Its Audit Implications. The board has also benefited from liaison and outreach with stakeholders, including accounting standard setters, which are also actively exploring initiatives relating to disclosures. The IAASB acknowledges that many of the issues around disclosures cannot be solved by the IAASB alone, and that collaboration and cooperation between many interested stakeholders is necessary to further enhance the public’s confidence in financial statement disclosures.
“Public confidence in financial reporting can be damaged when there are poor quality disclosures, including excessive or immaterial disclosures that may obscure understanding of important matters. This can result, for example, when disclosures are prepared and audited relatively late in the financial reporting process,” notes IAASB Technical Director James Gunn. “One of the key areas addressed in the board’s proposals, therefore, is additional guidance to help establish an appropriate focus by the auditor on disclosures and encourage earlier auditor attention on them during the audit process, including disclosures where the information is not derived from the accounting system.”
IAASB re-proposes standard addressing information in annual reports; further clarifies auditor effort and reporting responsibilites
The IAASB recently released for re-exposure an enhanced International Standard on Auditing (ISA) 720 (Revised), The Auditor’s Responsibilities Relating to Other Information. The proposed standard clarifies and strengthens the scope and focus of auditor efforts on information included in entities’ annual reports, other than the audited financial statements, and introduces new auditor reporting responsibilities.
“There have been significant developments in recent years in corporate reporting, in particular in relation to the information included in entities’ annual reports. The importance ascribed by users to this other information, and the weight they place on it, have notably increased since ISA 720 was originally issued,” commented Prof. Arnold Schilder, IAASB Chairman. “Auditors have certain responsibilities relating to this other information as part of an audit of an entity’s financial statements, and the IAASB is intending to appropriately strengthen them—and users need to know what those responsibilities are.”
Under the proposed ISA, the auditor would now be required to perform limited procedures to evaluate the consistency of the other information with the audited financial statements. In addition, while reading the other information, the auditor would be responsible to consider whether there is a material inconsistency between the other information and the auditor’s knowledge obtained during the course of the audit, and to remain alert for other indications that the other information appears to be materially misstated. The terms ‘other information’ and ‘annual report’ are defined and explained in the standard in order to make the scope of the standard as clear as possible, while also enabling its appropriate application in light of differing corporate reporting regimes and practices in a wide variety of jurisdictions and circumstances.
“Feedback on the IAASB’s first proposals in 2012 indicated broad support for the IAASB’s intention of strengthening the auditor’s responsibilities relating to other information, including new reporting responsibilities. However, commentators across different stakeholder groups believed that the proposals needed to be clearer in a number of areas to prevent potentially divergent practices, both among auditors and between jurisdictions—an outcome that would run contrary to the benefits sought by the IAASB,” noted James Gunn, IAASB Technical Director.
Update on the Disclosure Initiative
The IASB’s Disclosure Initiative is a portfolio of projects designed to improve the quality of information provided in financial reports.
Principles of Disclosure
The Principles of Disclosure (POD) project is a key project of the Disclosure Initiative. The aim is to develop a disclosure Standard(s) to replace three of our current Standards: IAS 1, IAS 7 Statement of Cash Flows and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
The IASB have been hearing some concerns that developing disclosure principles and replacing IAS 1, IAS 7 and IAS 8 will not bring improvements quickly enough. Many people are asking for more immediate improvements to disclosure requirements.
Targeted improvements to disclosure requirements
Amendments to IAS 1
In March the IASB published an Exposure Draft of proposed amendments to IAS 1 Presentation of Financial Statements. The proposed amendments are intended to clarify, instead of significantly change, existing IAS 1 requirements. Although the proposed amendments are relatively modest, it is expected they will help to address some perceived barriers to exercising judgement in areas such as the application of materiality and determining the order of the notes to the financial statements.
Reconciliation of liabilities arising from financing activities
The IASB is considering proposals to amend IAS 7 to require the disclosure of changes in liabilities classified in financing activities.
As part of the work on materiality, the IASB is developing proposals designed to help entities determine which of their accounting policies are ‘significant’. The goal is to ensure that users of financial statements understand which accounting policies are important to a particular entity, instead of being confronted with descriptions of all of the policies being applied by an entity.
A meaningful review of the disclosure requirements in individual Standards involves assessing the related recognition and measurement requirements. The IASB staff have started systematically analysing and categorising the disclosure requirements in all Standards to identify ways to simplify the disclosure requirements without reducing the usefulness of the information available to users of the financial statements.
The aim of the materiality thread of the Disclosure Initiative is to identify steps, if any, that the IASB can take to help preparers, auditors and regulators apply the concept of materiality to assessing what should, and what should not, be disclosed in financial statements.
The IASB is currently reviewing how materiality is defined, interpreted and applied in different jurisdictions and for different purposes related to financial reporting-securities law, auditing standards and local GAAP. National and regional standard-setters are also providing the IASB with information from their jurisdictions.