IFRS News in Brief - August/September 2011

PUBLICATIONS AND ANNOUNCEMENTS

Proposal to exempt investment entities from consolidation open for comment until 5 January 2012

On 25 August 2011, the IASB published an exposure draft proposing criteria that would have to be met by an entity in order to qualify as an investment entity. Such entities would then be exempt from the consolidation requirements of IFRS 10 and instead would be required to account for all their investments at fair value through profit or loss, with appropriate disclosures.

For more information:http://www.ifrs.org/News/Press+Releases/ED+investment+entities+aug+2011.htm


Five draft Q&As on the IFRS for SMEs open for comment until 30 November 2011

On 28 September 2011, the SME Implementation Group published for public comment five question and answer documents (Q&As) addressing interpretation of ‘undue cost or effort’ and ‘impracticable’ exemptions contained in several sections of the IFRS, whether the IFRS can be used for periods ending before 9 July 2009 (date of issue) and compliance with the IFRS for SMEs in the following situations: locally imposed format for financial statements, departure from a principle in the IFRS for SMEs and fallback to full IFRSs required by jurisdiction.

For more information: http://www.ifrs.org/News/Announcements+and+Speeches/draftQAs0911.htm

IFRS INTERPRETATIONS COMMITTEE
LATEST DECISIONS SUMMARY

The following is a summarised update of the main issues discussed and tentative decisions made by the Committee at its meeting on 8 - 9 September 2011.

For more information: http://media.ifrs.org/IFRICUpdateSept11.html


Levies charged for participation in a market on a specified date (IAS 37)

In view of further staff analysis, the Committee noted the following:

• Any guidance developed on this matter should only address levies charged by public authorities, thus excluding payments related to private contractual arrangements.
• Economic compulsion to participate in the market in the next period does not create a constructive obligation and does not cause the recognition of a liability under IAS 37.
• Concerning the debit side of the liability, the obligation to pay a levy may be associated with an expense or with an asset, depending on the characteristics of each levy.
  
  

Circumstances in which presumption of manner of recovery of investment property can be rebutted (paragraph 51C added to IAS 12 in December 2010)

The Committee tentatively clarified that the presumption can be rebutted in cases other than the case described in the amended Standard (not 'if and only if' case) and that there is no possibility of bifurcating asset recovery between use and sale.


Recognition of deferred tax for single assets in a corporate entity (‘corporate wrapper’)

In circumstances where an entity holds a subsidiary which has a single asset within it, the Committee clarified that the entity cannot avoid recognising deferred tax for temporary differences relating to the underlying asset, even if it does not expect to dispose of the asset separately from the subsidiary.

INTERNATIONAL ACCOUNTING STANDARDS BOARD 
LATEST DECISIONS SUMMARY

The following is a summarised update of the main issues discussed and tentative decisions made by the IASB at its recent meeting on 19 – 22 September 2011, sometimes jointly with the FASB.

For more information: http://media.iasb.org/IASBupdateSeptember2011.html 


Leases (re-exposure planned Q1/2012)

• No scope exclusion would be provided in the leases standard for inventory (eg non-depreciating spare parts, operating materials and supplies associated with the leasing of another underlying asset).
• Lessor’s right to receive lease payments would be subsequently measured using the effective interest method and assessed for impairment in accordance with IAS 39/IFRS 9; the fair value option would be prohibited. Changes to the receivable due to reassessment of variable lease payments that depend on an index or a rate should be recognised immediately in profit or loss.
  
• Revaluation of the lessor’s residual asset would be prohibited and its impairment should be assessed under IAS 36.
  
• Lessor’s accounting for residual value guarantees would not differentiate between those that are provided by a lessee, a related party and a third party. Although such guarantees would not be recognised until the end of the lease (when they are due from the guarantor), they should be considered in assessing impairment of the lessor’s residual asset
  
• The lessor’s residual asset and lease receivable should be presented separately either in the statement of financial position or in the notes. In the lessor’s statement of cash flows, all cash receipts from lease payments would be classified as operating activities.

Impairment of financial assets (re-exposure probable Q1/2012)

Under the 'three-bucket' expected loss approach, classification of financial assets should follow their credit quality levels as of the reporting date. Transfer between the buckets would be based on a principle (no bright lines) that reflects deterioration of credit quality to a particular level and the entity begins to manage the financial assets more actively because of the heightened credit risk.


Financial instruments: hedge accounting (review draft planned Q4/2011)

• Hedging relationships that are frequently reset (ie discontinued and restarted) as part of a dynamic hedging process would require specific disclosures instead of disclosing the terms and conditions of the hedging instruments.
• The effective date would be aligned to the mandatory effective date of IFRS 9 and transition would be prospective, however with limited exceptions. Also, as practical expedients, entities may apply the new hedge accounting model immediately after ceasing to apply IAS 39 ('same logical second') and the hedge ratio used under IAS 39 would be the starting point for rebalancing a hedging relationship on transition (ie any gain / loss arising from the rebalancing on transition would be recognised in profit or loss).
• For hedges of credit risk using credit derivatives, subject to qualifying criteria, elective fair value through profit or loss accounting would be applied at initial recognition or subsequently, possibly only for a component of nominal amounts, could be discontinued and would require disclosures.
  

Asset and liability offsetting (amendments to IAS 32 and IFRS 7 planned Q4/2011) 

• Inconsistencies in the application of the offsetting requirements in IAS 32 should be addressed by clarifying that a right of set-off must be legally enforceable both in the normal course of business and in the event of default, bankruptcy and insolvency of one of the counterparties and that gross settlement systems with specified distinguishing factors would be considered equivalent to net settlement.
• Amendments should be applied retrospectively, for annual and interim reporting periods beginning on or after 1 January 2013.

Insurance contracts (re-exposure probable Q1/2012)

• Disclosures proposed in the exposure draft would be retained with some agreed changes, mainly relative to the aggregation / disaggregation principle; the methods, inputs and changes from previous periods; the nature and extent of risk arising from insurance contracts.
  
• Risk adjustment should measure the compensation required by the insurer to make it indifferent between fulfilling an insurance contract liability that would have a range of possible outcomes or fulfilling a fixed liability that has the same expected present value of cash flows as the insurance contract. Both favourable and unfavourable outcomes should be considered in a way that reflects the insurer’s degree of risk aversion (ie a risk-averse insurer would place more weight on unfavourable outcomes than on favourable ones). In estimating the risk adjustment, insurers would have the choice of relevant techniques and inputs.

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

The following clarifications would be included in the next Improvements to IFRSs exposure draft:

• IFRS 2 Share-based Payment - New definitions of 'performance condition' and 'service condition'.
  
• IFRS 8 Operating Segments - Reconciliation of the total of the reportable segments' assets to the entity's assets should be disclosed only if a measure of segment assets is regularly provided to the chief operating decision-maker.
  
• IAS 1 Presentation of Financial Statements - For an existing loan that is due within 12 months after the reporting date to be classified as non-current, it must be refinanced with the same lender and at the same or similar terms.
  
• IAS 7 Statement of Cash Flows - Interest paid that is capitalised (under IAS 23) should be classified in conformity with the classification of the underlying asset.
  
• IAS 12 Income Taxes - Each type of taxable profit (eg capital gain) should be assessed separately if specifically distinguished by tax law; an action that results in reversal of existing deductible temporary differences without creating or increasing taxable profit in the future is not a tax planning opportunity; realisation of a deferred tax asset is assessed against taxable profit before reversal of deductible temporary differences.
  
• IAS 16 Property, Plant and Equipment – Under the revaluation model, when both revalued gross and net carrying amounts reflect observable data, restatement of the accumulated depreciation is not proportionate to the change in the gross carrying amount of the asset.
  
• IAS 36 Impairment of Assets - When a material impairment loss / reversal is recognised, if fair value less costs to sell is determined based on a present value technique, the discount rate used in the calculation should be disclosed.

Amendment to IFRS 1 (exposure draft planned Q4/2011)

First-time adopters would be allowed (via an optional exemption) prospective application of paragraph 10A of IAS 20 (government loans at a below-market rate of interest, that was added by Improvements to IFRSs issued in May 2008).

UPCOMING COMMENT DEADLINES

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