IFRS News in Brief - February 2011

PUBLICATIONS AND ANNOUNCEMENTS

Draft Q&A 2011/01 Use of the IFRS for SMEs in Parent’s Separate Financial Statements open for comment until 4 April 2011

On 24 February 2011, the SME Implementation Group (SMEIG) published for public comment its first draft guidance on the IFRS for SMEs in form of a question and answer document (Q&A).

The SMEIG develops guidance on specific accounting questions that are being raised by those implementing the IFRS for SMEs and makes recommendations to the IASB regarding amendments to the IFRS for SMEs in view of updating the standard (approximately every three years).

The Q&A addresses whether a parent entity that itself does not have public accountability may present its separate financial statements in accordance with the IFRS for SMEs if it is part of a group that presents consolidated financial statements in accordance with full IFRSs.

For more information: http://go.ifrs.org/IFRS+for+SMEs+QandA

Public consultation on governance review open for comment until 8 April 2011

On 7 February 2011, the IFRS Foundation Monitoring Board released “Consultative Report on the Review of the IFRS Foundation’s Governance” for public comment.

The Monitoring Board review’s fundamental question is whether the current governance structure effectively promotes the standard-setter’s primary mission set forth in the Constitution of the IFRS Foundation (i.e. setting high quality, globally accepted standards), and whether the standard-setter is appropriately independent yet accountable, with primary focus on the composition, responsibilities and roles of the Monitoring Board, Trustees and IASB.

In order to enhance involvement of stakeholders in the review project, the Monitoring Board is organising public round-table meetings in Asia, Europe and the Americas during this consultation period.

For more information: http://www.iosco.org/monitoring_board/pdf/Press20110207-1.pdf

INTERNATIONAL ACCOUNTING STANDARDS BOARD
LATEST DECISIONS SUMMARY

The following is a summarised update of the main provisional decisions taken by the IASB at its recent meetings in London, including joint meetings with the FASB:

• 1-2 February 2011 (http://media.iasb.org/IASBUpdate1and2Feb2011.html)
  
• 15-18 February 2011 (http://media.iasb.org/IASBUpdateFebruary2011.html)
  
• 1-2 March 2011 (http://media.iasb.org/IASBupdate1and2march2011.html) 

Financial instruments: impairment

The final standard (expected in Q2/2011) will indicate that a financial asset (or part of it) should be written-off in the period in which it is considered uncollectible (i.e. the entity has no reasonable expectation of recovery of the financial asset). The agreed definition of “write-off” is a direct reduction of the amortised cost of a financial asset resulting from uncollectibility. As to disclosure requirements, an entity should disclose its write-off policy and a reconciliation of changes in non-performing financial assets that are 90 days past due but not included in the 'bad book'. However, the disclosure of stress testing information (proposed in the November 2009 ED) would not be required.


Insurance contracts

• Amongst the main agreed axioms and assumptions underlying the future accounting model for insurance contracts from the perspective of the insurer:
  
  • Accounting for the assets backing the contracts will not be dealt with by the standard (expected in Q2/2011) (e.g. financial assets backing the insurance contracts would be measured in accordance with IFRS 9)
  • Insurance contracts should be regarded as creating a bundle of rights and obligations that work together to generate a package of cash inflows and outflows
    
  • In general, insurance contracts will be measured at the portfolio level, based on current estimates of future cash flows expected to arise as the insurer fulfils the insurance contract, but without reflecting changes in the insurer's own credit standing
• Discount rate for non-participating contracts should exclude the effect of the insurer's non-performance risk and factors that are not relevant to the insurance liability (e.g. an investment risk taken by the insurer that cannot be passed to the policyholder). For all insurance contracts, the discount rate should not be locked in (i.e. update current rate each reporting period).
  
• Discounting would be required only if material, i.e. in the measurement of all non-life long-tail claims.
  
• All acquisition costs that relate to a portfolio of insurance contracts (e.g. commissions) should be included in the contract cash flows.
  
• All and only those costs to be incurred directly in fulfilling a portfolio of insurance contracts should be included in the cash flows used to determine the insurance liability (e.g. payments to policyholders, claims handling, etc.). Other costs should be recognised as expenses in the period in which they are incurred.
  
• Whereas no gain could be recognised at inception of an insurance contract, any loss on day one should be recognised immediately in profit or loss.
  
• All issued financial guarantee contracts will be accounted for under the current approach in IFRSs (i.e. in accordance with the financial instruments standards, unless designated by the issuer as insurance contracts), with no exception for intragroup guarantees.
  

Leases

• Lease term is defined as the non cancellable period for which the lessee has contracted with the lessor to lease the underlying asset, together with any options to extend or terminate the lease when there is a significant economic incentive for an entity to exercise an option to extend the lease, or for an entity not to exercise an option to terminate the lease. The term should be reassessed only in case of a significant change in relevant factors such that the lessee would then either have, or no longer have, a significant economic incentive to exercise any options to extend or terminate the lease.
• Recognised lease payments should include:
  • Variable payments that depend on an index or rate, for which the variability lacks commercial substance and that meet a high recognition threshold (e.g. reasonably certain)
    
  • Amounts expected to be payable under residual value guarantees, except for guarantees provided by an unrelated third party
    
  • Term option penalty, if a lessee would be required to pay one if it did not renew the lease and the renewal period has not been included in the lease term.

Revenue recognition

• A warranty should be accounted for as a separate performance obligation (i.e. allocate revenue to the warranty service) if and only if a customer has the option to purchase a warranty separately from the entity, otherwise as a warranty obligation under IAS 37 (i.e.  as a cost accrual).
• Incremental costs of obtaining a contract that the entity expects to recover should be recognised as an asset, presented separately in the statement of financial position and amortised on a systematic basis consistent with the entity's performance under the related contract.
• A bundle of promised goods/services should be accounted for as one performance obligation if the entity provides a service of integrating those goods/services into a single item. A promised good/service should be accounted for as a separate performance obligation if the entity regularly sells it separately or the customer can use the good/service either on its own or together with resources that are readily available.
• In order to recognise revenue for services, an entity must:
  
  • first determine that a performance obligation is satisfied continuously, i.e. either the entity's performance creates or enhances an asset controlled by the customer or the entity's performance does not create an asset with an alternative use to the entity and:
    
    • the customer receives a benefit as the entity performs each task, or
      
    • another entity would not need to reperform the task(s) performed if that other entity were to fulfil the remaining obligation to the customer, or
      
    • the entity has a right to payment for performance to date even if the customer could cancel the contract for convenience
  • then select a method for measuring progress toward complete satisfaction of that performance obligation (the output and input methods described in the ED).
• Two or more contracts that are entered into at (or near) the same time with the same customer (or related entities) should be combined and accounted for as a single contract, if:
  
  • the contracts are negotiated as a package with a single commercial objective, or
  • the amount of consideration in one contract depends on the other contract, or
    
  • the goods and services in the contracts are interrelated for design, technology or function
• A contract modification resulting in the addition of a separate performance obligation at a proportional price should be accounted for as a separate contract. For other contract modifications, performance obligation should be re-evaluated and transaction price reallocated to each separate performance obligation. 
• If it can be reasonably estimated, expected breakage (i.e. customer's non-refundable prepayment for future goods/services) should be recognised as revenue in proportion to the pattern of rights exercised by the customer, otherwise it should be recognised when the likelihood of the customer exercising its remaining rights becomes remote.
• The test to determine whether a contract is onerous should apply to all contracts, including 'loss-leader' contracts (i.e. those that are intentionally priced at a loss in the expectation of profits to be generated on subsequent contracts with the customer).

Consolidation and joint arrangements

The effective date of the forthcoming IFRSs (expected end Q1/2011) will be 1 January 2013, with early application permitted only if all five IFRSs are applied at the same time. On transition to IFRS 10 and IFRS 11, limited retrospective application will be required.
 

The five forthcoming IFRSs on consolidations and joint arrangements: IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests with Other Entities, Revised IAS 28 Investments in Associates and Joint Ventures and Revised IAS 27 Separate Financial Statements.

 

Post-employment benefits

• A plan with a benefit formula should be classified as a defined benefit plan if the benefit formula gives rise to a legal or constructive obligation that may require the employer to pay additional contributions as a result of current or past service.
• Accounting for risk-sharing features in determining the defined benefit obligation
  • Employee contributions should be deducted
  • Conditional indexation should always be reflected (whether automatic or subject to a decision)
  • Effect of any limits on the legal and constructive obligation to pay additional contributions should be included.
• Remeasurements should be presented in other comprehensive income (previous considerations of allowing presentation in profit or loss are thus abandoned).
• Administration costs related to the management of plan assets should be deducted from the return on plan assets.
• Effective date of the amendments to IAS 19 (expected end of Q1/2011) should not be earlier than 1 January 2013 and they should be applied retrospectively with limited exceptions. First-time adopters with a date of transition to IFRSs before the effective date of the amendments to IAS 19 would be granted a temporary exemption by IFRS 1. 
  

UPCOMING COMMENT DEADLINES

 

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