IFRS News in Brief - May 2011

PUBLICATIONS AND ANNOUNCEMENTS

Release of the final standards on consolidation, joint arrangements and disclosures 

On 12 May 2011, the IASB published a package of five new and revised standards, all effective for annual periods beginning on or after 1 January 2013 (earlier application permitted), thus broadly aligning the IFRS accounting treatment for off balance sheet activities with US GAAP: IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures. 

For more information, see Appendix to this newsletter. 


Publication of the final standard on fair value measurement 

On 12 May 2011, the IASB issued IFRS 13 Fair Value Measurement (and the FASB an update to Topic 820), effective for annual periods beginning on or after 1 January 2013 (earlier application permitted). Without extending the use of fair value accounting (it applies when other IFRSs require or permit it), IFRS 13 provides a precise definition of fair value, a single source of fair value measurement and disclosure requirements for use across IFRSs.

For more information: http://www.ifrs.org/News/Press+Releases/IFRS+13+FVM+May+2011.htm


IFRS INTERPRETATIONS COMMITTEE
LATEST DECISIONS SUMMARY

The following is a summarised update of the main issues discussed by the Committee at its meeting in London on 5 and 6 May 2011.

For more information: http://media.ifrs.org/IFRICUpdateMay11.html


Accounting for stripping costs in the production phase of a surface mine

• The revised recognition principle previously discussed is confirmed (IFRS News in Brief March 2011).
• Measurement of the stripping cost asset should be based on production metrics, with no mandatory approach for allocating costs between current and future benefits.
• IAS 36 should be applied in testing the stripping cost asset for impairment.
• On transition, existing stripping cost assets not directly associated with a specific component of ore should be recognised in retained earnings at the beginning of the earliest period presented.
  
  

Employee benefits – Defined contribution plans with vesting conditions

The Committee clarified that vesting conditions have no impact on the accounting for defined contribution plans under IAS 19, if the employer is not required to make additional contributions to cover shortfalls because of these vesting conditions. Thus, contributions to defined contribution plans are recognised as an expense/liability when they fall due and refunds are recognised as an asset/income when the entity becomes entitled to them (eg by the employee failing to meet the vesting condition).


Issues recommended for inclusion in the IASB’s Annual improvements to IFRSs project

• Operating Segments – A reconciliation of the total of the reportable segments’ assets to the entity’s assets should be disclosed only if a measure of total assets for each reportable segment is regularly provided to the chief operating decision maker (IFRS 8. 28(c)).
• Statement of Cash Flows - Payments of interest that are capitalised must be classified consistently with the underlying asset (IAS 7.16) (eg investing for PPE, operating for inventories).
  
• Revaluation model of fixed assets – Restatement of the accumulated depreciation is not always proportionate to the change in the gross carrying amount of the asset (IAS 16.35(a) and IAS 38.80(a)).
  

Current requirement to restate proportionately the accumulated depreciation and the gross carrying amount does not accommodate the effects of past revisions to residual value, useful life or depreciation method. 

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, including joint meetings with the FASB:

• 11-12 May 2011 (http://media.iasb.org/IASBUpdate11and12May2011.html), and
• 17-19 May 2011 (http://media.iasb.org/IASBupdateMay2011.html).

Leases

• Confirmation of the single approach to lessee accounting (reversal of prior tentative decision, IFRS News in Brief April 2011): initial recognition of a right-of-use asset and a liability to make lease payments at the present value of the lease payments; the right-of-use asset would be subsequently amortised/depreciated using a systematic method and the liability would be amortised using the effective interest method. 
• Accounting for changes after the date of inception of the lease:
  • A modified contract where the contractual terms are substantively changed (eg different determination of whether the contract is, or contains, a lease) should be accounted for as a new contract.
  • A change in circumstances other than a modification to the contractual terms that would affect:
    • the assessment of whether a contract is/contains a lease should result in a reassessment as to whether the contract is/contains, a lease
    • whether a lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset should not result in a reassessment or a change in the accounting approach.
• In reassessing whether a lessee has a significant economic incentive to exercise an option, lessee and  lessor should consider together contract-based, asset-based and entity-based factors.
• The thresholds for evaluating a lessee's economic incentive to exercise options to extend or terminate a lease and to purchase the underlying asset should be the same for both initial and subsequent evaluations; changes in market rates should not be considered after lease commencement.
• Lessee’s liability to make lease payments and its right-of-use asset should be adjusted for changes in lease payments due to a reassessment in the lease term.
• The discount rate used to measure the present value of lease payments should not be reassessed if there is no change in the lease payments. It is, however, reassessed in case of changes in the lease payments not reflected in its initial measurement and due to:
  • either a change in the assessment of whether the lessee has a significant economic incentive to exercise an option to extend a lease or to purchase the underlying asset, or
  • the exercise of an option that the lessee did not have a significant economic incentive to exercise. 
• If reassessed, the discount rate would be revised using the spot rate at the reassessment date and applied to the remaining lease payments.

 
Revenue recognition

• 'Contract asset' and 'contract liability' could be labeled differently, provided sufficient information is disclosed to distinguish between unconditional rights to consideration (billed/unbilled receivable) and conditional rights to consideration (contract asset).
• Based on a clear principle and examples (not prescription) of appropriate categories, revenue should be disaggregated in the statement of comprehensive income or in the notes to the financial statements. Impairment loss allowance (for customers' credit risk presented adjacent to revenue) would not have to be disaggregated.
• Specified and additional line items should be included in the reconciliation of contract assets and contract liabilities if, and only if, those reconciling items would be useful for explaining a material change in contract asset/liability balance.
• Transaction price allocated to remaining performance obligations should be disclosed only for contracts that have both an original expected duration of more than one year and terms and conditions that result in the entity having to apply each step of the revenue model. An entity should explain when it expects those amounts to be recognised as revenue, either on a quantitative basis (in time bands) or by using a mixture of quantitative and qualitative information.
• Assets arising from the costs incurred to acquire or fulfil a contract with a customer
  • For each reporting period, a reconciliation of the carrying amount of the asset should be disclosed by major classification (eg acquisition costs, precontract costs, setup costs), at the beginning and end of the period, separately showing additions, amortisation (with description of the method used to determine it), impairments and impairment reversals (with indication of the circumstances that led to them).
  • Impairment loss should be recognised to the extent that the carrying amount of the asset exceeds the amount of consideration to which the entity expects to be entitled (using the principles for determining the transaction price), less the remaining costs that relate directly to providing the goods/services to which the asset relates. Reversals of previous impairments are required when the impairment condition ceases to exist.
  • The asset should be amortised  on a systematic basis consistent with the pattern of transfer of the related goods/services. The asset might relate to goods or services to be provided under future contracts with the same customer (eg renewal options).
  • Acquisition costs for contracts with a duration of one year or less could be recognised as an expense when incurred (practical expedient).
• The onerous contract test would be restricted to long-term service contracts. Costs to be considered when applying the onerous test are the lower of the costs that relate directly to satisfying the performance obligation and any amounts that the entity would have to pay to cancel the contract.

Financial instruments: hedge accounting

The following points replace confusing umbrella terms used in the exposure-draft: ‘other than accidental offsetting', ‘unbiased hedge', ‘minimising hedge ineffectiveness', and ‘the entity has no expectation that changes in the value of the hedging instrument will systematically either exceed or be less than the changes in value of the hedged item such that they would produce a biased result'.  

• A hedging relationship qualifies for hedge accounting if it satisfies the following two criteria: 
  • there is an economic relationship between the hedged item and the hedging instrument giving rise to offset, and
  • the effect of credit risk does not reduce or modify the extent of offsetting gains or losses on the hedging instrument and the hedged item. 
• Designation of the hedging relationship shall be based on the quantity of hedged item actually hedged and the quantity of hedging instrument actually used to hedge that quantity of hedged item.
• An entity cannot designate a hedging relationship such that it reflects a deliberate mismatch between the weightings of hedged item and hedging instrument that would create hedge ineffectiveness

Insurance contracts

• Application of the principle that an insurance contract is measured using the expected present value of the fulfilment cash flows to unit-linked and participating contracts:
  • Cash flows expected to result from the policyholder participation should be included in the insurance liability on the same basis as the measurement of the underlying items in which the policyholder participates. 
  • Measurement of the participating contract should reflect the asymmetric risk-sharing between the insurer and the policyholder resulting from the minimum guarantee.
  • Changes in the insurance contract liability should be presented in the statement of comprehensive income consistently with the presentation of changes in the linked items.
• Measurement of an insurance contract should contain an explicit adjustment for risk that would be determined independently from the premium and re-measured in each reporting period.

UPCOMING COMMENT DEADLINES

 

 Click here to download a PDF and the Appendix of IFRS News in Brief for May 2011