IFRS News in Brief - October 2011

PUBLICATIONS AND ANNOUNCEMENTS

Release of IFRIC Interpretation 20 Stripping Costs in the Production Phase of a Surface Mine 

On 19 October 2011, the IASB clarified when and how to account for costs associated with waste removal in surface mining, mainly when production stripping should lead to the recognition of an asset and how that asset should be measured, initially and subsequently. The Interpretation is effective for annual periods beginning on or after 1 January 2013 (earlier application permitted).

For more information: http://www.ifrs.org/News/Press+Releases/surface+mine+interpretation+Oct+2011.htm  


Proposal to amend the accounting for government loans by first-time adopters open for comment until 5 January 2012

On 20 October 2011, the IASB published an exposure draft to provide in IFRS 1 the same relief to first-time adopters as is granted to existing preparers of IFRS financial statements in IAS 20, mainly how to account for a government loan with a below-market rate of interest. 

For more information: http://www.ifrs.org/News/Press+Releases/IFRS1+amendment+Oct+2011.htm

INTERNATIONAL ACCOUNTING STANDARDS BOARD 
LATEST DECISIONS SUMMARY

 The following is a summarised update of the main issues discussed and provisional decisions taken by the IASB at its recent meeting on 19 – 20 October 2011, sometimes jointly with the FASB.

For more information: http://media.iasb.org/IASBupdateOctober2011.html 


Revenue recognition (re-exposure due Q4/2011)

An entity that prepares interim financial statements under IAS 34 would be required to disclose, in addition to information that has changed significantly from prior financial statements, specific quantitative information on revenue.


Leases (re-exposure due H1/2012)

• Under the ‘receivable and residual’ approach, a lessor should

  • Initially measure the lease receivable at the present value of the lease payments discounted at the rate charged in the lease and subsequently amortise it using the effective interest method
    

  • Initially measure the residual asset as an allocation of the carrying amount of the underlying asset which comprises two components (to be presented together as a net residual asset): the gross residual asset (present value of the estimated residual value at the end of the lease term discounted at the rate charged in the lease) and the deferred profit (difference between the gross residual asset and the allocation of the carrying amount of the underlying asset)
    

  • Subsequently accrete the residual asset to the estimated residual value at the end of the lease term, using the rate charged in the lease.

• Whether a lessor's residual asset is subsequently adjusted for variable lease payments that are not recognised in the lease receivable at lease commencement would depend on whether the rate the lessor charges the lessee reflects an expectation of variable lease payments: if it does not, the residual asset should not be adjusted; if it does, a portion of the residual asset should be recognised as an expense when the variable lease payments are recognised in profit or loss.  

• Lease receivables, even if held for the purpose of sale, should not be measured at fair value. When transferred or sold, they follow IFRS 9 and IFRS 7 derecognition requirements, but the carrying amount of a lease receivable should be allocated on the basis of its fair value excluding any option elements and variable lease payments that are not transferred.

• In the statement of comprehensive income, a lessor should present accretion of the residual asset as interest income and amortisation of initial direct costs as an offset to interest income. Lease income and lease expense would be presented either in separate line items (gross) or in a single line item (net), whichever best reflects the lessor's business model. In any case, income and expenses arising from leases should be identified separately (in the statement of comprehensive income or in the notes).

• For leases of investment property, the lessor should continue to recognise the underlying asset and recognise lease income over the lease term, the receivable and residual approach not being applicable.

• On transition, a lessee or lessor could choose to apply the future leases standard fully retrospectively as per IAS 8, otherwise the following reliefs would be available:

  • No evaluation of initial direct costs for contracts that began before the effective date
    

  • Use of hindsight in comparative periods (including to determine whether a contract is or contains a lease)
    

  • For finance leases existing at the beginning of the earliest comparative period presented, no adjustments to the carrying amount of the lease assets and lease liabilities
    

  • For an operating lease existing at the beginning of the earliest comparative period presented by a lessee: lease liability recognised at the present value of the remaining lease payments (discounted at the lessee's incremental borrowing rate as of the effective date for each portfolio of leases with reasonably similar characteristics), right-of-use asset recognised on the basis of proportion of the liability to make lease payments at lease commencement, relative to the remaining lease payments, and any resulting difference to retained earnings
    

  • For an operating lease existing at the beginning of the earliest comparative period presented by a lessor: lease receivable recognised at the present value of the remaining lease payments (discounted at the rate charged at commencement of the lease) and adjusted for impairment, residual asset recognised consistently with the receivable and residual approach (using information available at the beginning of the earliest comparative period presented), and the underlying asset derecognised. 

Impairment of financial assets (re-exposure/review draft due Q1/2012)

The Board is pursuing the 'three-bucket' expected loss approach, a model in which the overall objective is to reflect the deterioration in the credit quality of financial assets. On origination, loans would be placed into the first bucket. The measurement attribute of the credit allowance in this first category, the principle and indicators/triggers for when recognition of lifetime expected losses becomes appropriate (ie transfer to buckets 2 and 3), appropriate robust disclosures and application of the model for various types of financial assets (eg debt securities) are still to be discussed and agreed.

Annual improvements 2010-2012 (exposure draft due Q4/2011)

• IFRS 13 Fair Value Measurement - The Basis for Conclusions would clarify that an entity is still allowed under IFRS 9 to measure short-term receivables and payables with no stated interest rate at invoice amounts if the effect of discounting is immaterial.
• IFRS 3 Business Combinations – Existing inconsistencies related to the guidance for contingent consideration should be removed by clarifying which IFRS is applicable for the classification of the contingent consideration as debt or equity, which IFRS is applicable for the measurement of subsequent changes in the fair value of contingent consideration, and whether the disclosure requirements of IFRS 7 apply in addition. Also, for consistency purposes with IFRS 3, IAS 39/IFRS 9 would be amended to ensure that any contingent consideration within their scope would not qualify for amortised cost measurement.

Insurance contracts (re-exposure/review draft due H1/2012)

• Fixed-fee contracts that provide service as their primary purpose should be accounted for using the general revenue recognition requirements rather than as insurance contracts (via a scope exclusion from the future standard) when they meet all the following three criteria: their price is not based on the risk associated with an individual customer, they compensate customers by providing a service (not cash), and the type of risk transferred relates mostly to the utilisation or frequency of services.
• The four components of insurance liabilities (ie expected future cash flows, risk adjustment, residual margin and effect of discounting) should be disaggregated either in the statement of financial position or in the notes.
• In the statement of financial position

  • Portfolios that are in an asset position and those that are in a liability position should not be aggregated

  • Insurance liabilities/assets should be presented separately for contracts measured using the building block approach and those measured using the premium allocation approach

  • For contracts measured under the premium allocation approach (eligibility criteria still to be agreed), liabilities for unexpired coverage and for incurred claims should be presented separately and all insurance contract rights and obligations should be presented on a gross basis

  • For contracts measured under the building block approach, any unconditional right to premiums or other consideration should be presented (and accounted for) as a receivable separately from the insurance contract asset/liability, whereas the remaining insurance rights and obligations should be presented on a net basis.

UPCOMING COMMENT DEADLINES

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RSM International Comment Letters

On 21 October 2011, RSM International submitted the following letters of comment to the IASB on its Exposure Drafts:

• ED/2011/2 Improvements to IFRSs: http://www.ifrs.org/NR/rdonlyres/7CA7F109-6416-4CBB-8FBD-3D01A09B9F2F/0/CL37.pdf
  
  
• ED 2011/3 Mandatory Effective Date of IFRS 9: http://www.ifrs.org/NR/rdonlyres/1EA72D64-AF37-4C7D-9350-AD62B33FE8D6/21327/20111021101050_RSMCommentonMandatoryEffectiveDateofIFRS9.pdf