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NOVEMBER 2006

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30 November 2006: IASB discussion paper on fair value measurements
The IASB has published for public comment a Discussion Paper on Fair Value Measurements. The Discussion Paper sets out the IASB's preliminary views on how to measure fair values when fair value measurement is already prescribed under existing IFRSs. It does not propose any extensions of the use of fair values. The Discussion Paper is built around FASB's recently issued SFAS 157 Fair Value Measurements. SFAS 157 establishes a single definition of fair value together with a framework for measuring fair value for financial reports prepared in accordance with US GAAP. The IASB's Discussion Paper:
  • indicates the IASB's preliminary views on the provisions of FAS 157;
  • identifies differences between FAS 157 and fair value measurement guidance in existing IFRSs; and
  • invites comments on the provisions of FAS 157 and on the IASB's preliminary views about those provisions.

Some points about FAS 157:
  • Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.
  • Fair value should be based on the assumptions market participants would use when pricing the asset or liability.
  • FAS 157 establishes a fair value hierarchy that prioritises the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity's own data.
  • Fair value measurements would be separately disclosed by level within the fair value hierarchy.
  • FAS 157 is effective for financial statements issued for fiscal years beginning after 15 November 2007, and interim periods within those fiscal years. Early adoption is permitted.
  • FAS 157 may be downloaded from FASB's Website without charge.
Click for IASB Press Release (PDF 53k). The Discussion Paper will be available without charge on the IASB's website starting 11 December 2006. Comment deadline is 2 April 2007. The IASB plans to publish an Exposure Draft in 2008.

30 November 2006: IASB issues convergence standard on segment reporting
The IASB has issued International Financial Reporting Standard 8 Operating Segments as part of joint project with the US Financial Accounting Standards Board to reduce differences between IFRSs and US GAAP. IFRS 8 replaces IAS 14 Segment Reporting and aligns the IASB's standards with the requirements of SFAS 131. IFRS 8 requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments.

IFRS 8 Operating Segments:
  • applies only to listed entities.
  • requires identification of operating segments based on internal reports that are regularly reviewed by the entity's chief operating decision maker in order to allocate resources to the segment and assess its performance.
  • includes a component of an entity that sells primarily or exclusively to other operating segments of the entity in the definition of an operating segment if the entity is managed that way.
  • requires the amount of each operating segment item reported to be the measure reported to the chief operating decision maker for the purposes of allocating resources to the segment and assessing its performance.
  • requires reconciliations of total reportable segment revenues, total profit or loss, total assets, total liabilities and other amounts disclosed for reportable segments to corresponding amounts in the entity's financial statements.
  • requires an explanation of how segment profit or loss and segment assets and liabilities are measured for each reportable segment.
  • requires an entity to report information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, and about major customers, regardless of whether that information is used by management in making operating decisions.
  • requires an entity to give descriptive information about the way in which operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the entity's financial statements, and changes in the measurement of segment amounts from period to period.
  • applies to the annual financial statements for periods beginning on or after 1 January 2009. Earlier application is permitted.
Click for Press Release (PDF 68k).

30 November 2006: Japan and EC discuss accounting progress
Officials from the Japanese Financial Services Agency and the European Commission met in Tokyo on 27 November 2006 to discuss the progress made by Japan towards converging with International Financial Reporting Standards. Participants also discussed consistency in the interpretation and application of both standards. Japan is seeking recognition of Japanese GAAP as equivalent to IFRSs for the purpose of filings by Japanese companies listed in the European Union. The EC explained its intention to defer the equivalence assessment until 2009, and highlighted the importance of continued effort towards accelerating the convergence and ensuring the consistent application of the accounting standards. The JFSA detailed the time-framed convergence programme of the Accounting Standards Board of Japan. The two groups plan to meet twice yearly, with the next meeting planned for the first half of 2007. Click for Press Release (PDF 22k).

30 November 2006: Deloitte partner assumes the Presidency of IFAC
Fermin del Valle, a Partner in Deloitte Argentina since 1980, has become the President of the International Federation of Accountants for a two-year term ending in November 2008. Mr del Valle was IFAC Deputy President from November 2004 to November 2006 and served as a member of the IFAC Board beginning in October 1997. He has been an Associate Professor at the School of Economic Sciences at the University of Buenos Aires and a Professor of Accounting and Auditing at the University of San Andres. Mr. del Valle is also a member of the IFAC Regulatory Liaison Group and most recently served as chairman of IFAC's Planning and Finance Committee, where he led the organisation in the development of its operational and strategic plan for 2006-2008. He is also a former member of IFAC's Compliance Committee, Audit Committee, and Structure and Organisation Task Force.

30 November 2006: EFRAG does not support IFRIC D20
The European Financial Reporting Advisory Group (EFRAG) has written to the International Financial Reporting Interpretations Committee expressing reservations about the proposals in IFRIC Draft Interpretation D20 Customer Loyalty Programmes. Here is an excerpt from EFRAG's Letter to IFRIC (PDF 35k):

We do not support the consensus proposed by the Draft Interpretation. In particular, we do not support the adoption of a deferred revenue approach. Instead, we favour adoption in D20 of the so-called cost/provision approach and believe that this approach will, in most instances, result in the most appropriate accounting treatment. We believe that the lack of a clear set of guidelines on segmentation of revenue transactions will lead to inconsistent accounting practices and, generally we doubt whether a consistent and comparable approach will be achieved if the measurement model being proposed is adopted. For those reasons, and until further research is undertaken, we believe that the cost/provision approach will provide the most suitable level of comparability of information in the financial statements.

29 November 2006: IPSASB proposal on disclosure of assistance
The International Public Sector Accounting Standards Board IPSASB) has published Exposure Draft 32 on Financial Reporting Under the Cash Basis of Accounting – Disclosure Requirements for Recipients of External Assistance (PDF 309k). ED 32 proposes that the financial statements of governments that receive external assistance disclose the total amount of external assistance received, used, and available during the reporting period. ED 32 also encourages a range of additional disclosures that will further enhance the usefulness of the financial statements in the assessment of the financial position of recipients and of their use of external assistance. ED 32 was developed following consideration of responses that the IPSASB received to a previous exposure draft, ED 24, a document with the same title which was issued in February 2005. ED 32 proposes amendments to address constituents' concerns regarding the previous exposure draft. Comments due by 31 March 2007. Click for Press Release (PDF 83k).

28 November 2006: European discussion paper on performance reporting
The European Financial Reporting Advisory Group (EFRAG) and the Instituto de Contabilidad y Auditoría de Cuentas (or ICAC) have published a Discussion Paper on performance reporting entitled What (if anything) is wrong with the good old income statement? It is the second paper issued under the auspices of the Pro-active Accounting Activities in Europe (PAAinE). The paper identifies and analyses the arguments of those who believe that fundamental changes are needed to the existing performance reporting model, and also explains the reasoning of those who believe such changes are not needed. The paper does not reach any conclusions on the issues, but it sets the scene for a subsequent paper that will explore the underlying issues involved in greater detail. The comment period ends on 31 March 2007. Click to Download the Discussion Paper (PDF 896k).

24 November 2006: EC Commissioner comments on accounting issues
In a presentation titled Rewarding Excellence in Legibility of Accounts: Meeting the IFRS Challenge (PDF 72k), Charlie McCreevy, the European Commissioner for Internal Market and Services, commented on a number of IFRS-related issues:

  • Readbility. "IFRS aim to give increased transparency in accounts. But this must not be at the expense of legibility. Preparers have been grappling with the novelties of IFRS. Companies and investors will take some time to absorb and digest them. That is why I have repeatedly said we need a period of relative stability to let the new standards bed down."
  • Information overload. "The world's biggest accounting firms have recently joined forces to call for a radical overhaul of how companies report. They have called, in particular, for two changes. The first is that there should be a move to real-time, internet-based accounting, instead of quarterly statements. The second is that more non-financial information should be provided to give a fuller picture of companies' performance. The accounting firms are right to provoke a debate. But I wonder whether a flood of information is really the answer. Of course, we must make use of new technological tools. Yet often the real problem in the digital age is how best to sift the mass of information that is available. How to find the needle in the haystack. Too much information may mean many investors will have to rely more heavily on professional analysts. In fact, I have to tell you that I am very glad we didn't go for quarterly reporting in Europe."
  • IFRS for SMEs. "The Commission is working to identify areas of EU accounting and company law which can be simplified for SMEs. Important work on SME accounting is also going on at the International Accounting Standards Board (IASB). I have already made clear to that board that if this work is to be useful, it must be kept simple. This is the clear test that I will apply in determining whether it is worthwhile making use of the results of the IASB's work at EU level."

23 November 2006: Standard setting activity in Asia-Pacific region
We have updated the following pages on this website to reflect recent standard setting activity in the Asia-Pacific region:

22 November 2006: Treasury Secretary comments on accounting and auditing
United States Secretary of the Treasury Henry M Paulson spoke recently to the Economic Club of New York on the Competitiveness of Capital Markets. He gave particular emphasis to accounting and auditing matters. Click to Download Mr Paulson's Remarks (PDF 68k). Here is an excerpt from the comments on accounting:

The corporate scandals were, for the most part, accounting scandals, so it is not surprising that so much of the recent reform has focused on the accounting industry. Our accounting system is the lifeblood of our capital markets. And it has historically represented a very high standard. But it was abused in the corporate scandals by manipulation and smoothing of earnings.

Capital markets rely on trust, which is based on financial information presumed to be accurate and to reflect economic reality. The ultimate responsibility for accurate and transparent financial statements must rest with management. The role of the external auditor is to examine a company's financial statements in order to express an opinion that conveys reasonable, but not absolute, assurance as to the truth and fairness of the statements. Auditors do this by evaluating management's adherence to Generally Accepted Accounting Principles....

A common theme in my remarks today is the desirability, where practical, of moving toward a principles-based system. Nowhere is this issue more relevant than in the accounting system. Added complexity and more rules are not the answer for a system that needs to provide accurate and timely information to investors in a world where best of class companies are continually readjusting their business models to remain competitive.

22 November 2006: Updated summary of issues not added to IFRIC agenda
We have updated our Summary of Issues Not Added to IFRIC's Agenda to include IFRIC's final decisions in November 2006 not to add the following topics to its agenda:
  • IAS 1 - Whether the liability component of a convertible instrument should be classified as current or non-current
  • IAS 11 - Allocation of profit in a single contract
  • IAS 16 - Revaluation of investment properties under construction
  • IAS 32 - Changes in the contractual terms of an existing equity instrument resulting in it being reclassified
  • to financial liability
  • IAS 32 - Classification of a financial instrument as liability or equity
  • IAS 32 - Foreign currency instruments exchangeable into equity instruments of the parent entity of the issuer
  • IAS 32 - Puts and forwards held by minority interests
  • IAS 38 - Classification and accounting for SIM cards
  • IAS 38 - Adoption of IAS 38 (revised 2004)
  • IAS 39 - Valuation of electricity
  • IAS 39 - Testing of hedge effectiveness on a cumulative basis
  • IFRS 2 - Fair value measurement of post-vesting transfer restrictions
  • IFRS 2 - Incremental fair value to employees as a result of unexpected capital restructurings
  • IFRS 2 - Employee benefit trusts in the separate financial statements of the sponsor
  • IFRS 3 - Are puts or forwards received by minority interests in a business combination contingent consideration?
  • IFRS 7 - Presentation of 'net finance costs' on the face of the income statement
  • SIC-12 - Relinquishment of Control

21 November 2006: Guidance on implementing IFRS-based standards in China
The Ministry of Finance of China has issued limited implementation guidance on 32 of the 38 Accounting Standards for Business Enterprises (ASBEs) that it adopted in February 2006, effective for 2007 financial reports of Chinese listed companies. The table below has the complete list of the new ASBEs. The guidance covers ASBEs 1-14, 16-24, 27, 28, 30, 31, 33, 34, 35, 37, and 38. The MOF guidance is currently available only in Chinese Click to Download in ZIP Format (4,009k ZIP). Alternatively, all of the ASBEs and guidance can be downloaded in Chinese from the official website of China Accounting Standards Committee www.casc.gov.cn/kjfg/200607/t20060703_337130.htm.

China's Accounting Standards for Business Enterprises
 Basic Standard
1Inventories
2Long-term equity investments
3Investment properties
4Fixed assets
5Biological assets
6Intangible assets
7Exchange of non-monetary assets
8Impairment of assets
9Employee compensation
10Enterprise annuity fund
11Share-based payment
12Debt restructurings
13Contingencies
14Revenue
15Construction contracts
16Government grants
17Borrowing costs
18Income taxes
19Foreign currency translation
20Business combinations
21Leases
22Recognition and measurement of financial instruments
23Transfer of financial assets
24Hedging
25Direct insurance contracts
26Re-insurance contracts
27Extraction of petroleum and natural gas
28Changes in accounting policies and estimates and correction of errors
29Events occurring after the balance sheet date
30Presentation of financial statements
31Cash flow statements
32Interim financial reporting
33Consolidated financial statements
34Earnings per share
35Segment reporting
36Related party disclosure
37Presentation of financial instruments
38First time adoption of Accounting Standards for Business Enterprises

21 November 2006: Our views on Conceptual Framework discussion paper
We have submitted to the IASB Our Comments on the Discussion Paper (DP): Conceptual Framework–Objective and Qualitative Characteristics (PDF 81k). Although we agree with many of the provisions in the proposed framework, we have concerns about some of them, including the following:

  • Insufficient emphasis is given to stewardship as an objective of financial reporting. Our letter states:
    "Management, in addition to having the responsibility for allocation of the assets entrusted to it for the benefit of shareholders, also has an obligation to provide its shareholders with an account of what it has done with those assets. This account has to be a faithful and complete historic description of the entity's assets and liabilities at the beginning and end of the accounting period, coupled with management's explanation of how those balances changed during the period. Recognizing this broader meaning of 'stewardship' as one of the primary objectives of financial reporting both supports all of the qualitative characteristics of financial reporting information proposed in the DP, and helps to align management's behaviour with the objectives of all of the entity's stakeholders. Such a stewardship objective will emphasize the role of financial reporting as a dialogue between management and the owners of the business."
  • While present and potential investors and creditors view cash flow information as essential for their decision-making, they also value other information not specifically tied to cash flows. For example, many non-cash transactions such as asset write-downs and share-based payments lend insight into management's stewardship and the impact of current economic factors on the entity's assets and liabilities. Other information such as sensitivity or trend analyses might prove equally useful;
  • Different information needs of different categories of users of financial reports should be set out in a hierarchy;
  • The DP focuses on financial reporting, rather than financial statements, but does not define financial reporting;
  • Reliability should be regarded as an essential attribute of financial information and as an additional and separate characteristic that should not be subsumed in the attributes of faithful representation and verifiability
  • 'Substance over form' should be identified as a component of representational faithfulness,
Click for:

21 November 2006: Proposed revisions to 'cost approach' valuation guidance
The International Valuation Standards Committee has published Proposed Revisions to International Valuation Guidance Note 8 – The Cost Approach for Financial Reporting {PDF 193k). The proposed revisions are the result of requests for clarification and suggestions of minor improvements to the 2005 version of GN8. Comment deadline is 31 December 2006. The IVSC has also released an update of its work programme:

IVSC Work Programme
Eighth edition International Valuation Standards To be published Q2 2007
Revised IVS 2 - Valuation Bases other than Market Value Early publication on website Q1 2007
Revised IVA 2 - Valuation for Lending Purposes Early publication on website Q1 2007
New IVA 3 - Valuation for Financial Reporting of Public Sector Assets Early publication on website Q2 2007
New GN - Valuation of Historic Property Early publication on website Q1 2007
Proposed Revisions to GN 8 - The Cost Approach for Financial Reporting Consultation draft issued Nov 06
Proposed Revisions to GN 9 - Discounted Cash Flow Analysis Consultation draft to be issued Q1 2007
The Valuation of Intangible Assets for IFRS Reporting Purposes Exposure draft to be issued Q2 2007

20 November 2006: SEC 2006 annual report references to IFRSs
The Performance and Accountability Report (PDF 2,294k) of the US Securities and Exchange Commission for the year ended 30 September 2006 makes a number of references to IFRSs including the following progress report under the heading 'Improving Disclosure for Investors':

Global accounting standards. Last year, the SEC staff published a 'roadmap' of the milestones necessary to permit foreign private issuers to file financial statements prepared under International Financial Reporting Standards (IFRS), without reconciling them to U.S. generally accepted accounting principles. The roadmap involves, among other things, a detailed analysis of the faithfulness and consistency of the application, interpretation, and enforcement of IFRS in financial statements across companies and jurisdictions, and continued progress in the convergence work now being conducted by the International Accounting Standards Board and the Financial Accounting Standards Board. The SEC staff has been working with other regulators, including through IOSCO and the Committee of European Securities Regulators (CESR), to help reach some of these milestones. For example, the SEC staff and CESR finalized a work plan in 2006 to share information about IFRS implementation.

20 November 2006: New EU procedure for endorsing IFRSs
A new step has been added to the procedure for endorsing IFRSs (including Interpretations) for use in Europe. The European Commission will be required to submit its endorsement proposals to a Committee of the European Parliament, known as the Regulatory Procedure with Scrutiny Committee. That Committee will give its opinion on endorsement to the Commission within a time frame determined on a case by case basis. If the Committee agrees with the Commission's recommendation, the recommendation goes to the European Parliament and Council for approval, as at present. If, however, the Committee does not agree with the Commission's recommendation, the matter will go directly to the Council. If the Council supports the Commission's recommendation, the matter will go to Parliament for action. If the Council does not support the Commission's recommendation, the Commission will be asked to reconsider the matter and submit a new recommendation. Click for:

20 November 2006: IAASB issues three exposure drafts
The International Auditing and Assurance Standards Board (IAASB), an independent standard-setting board under the auspices of the International Federation of Accountants (IFAC), has issued three exposure drafts of proposed International Standards on Auditing (ISAs) that follow its new clarity drafting conventions. Key elements of those drafting conventions include basing the standards on objectives, as opposed to procedural considerations; using the word 'shall' to identify requirements that the professional accountant is expected to follow in the vast majority of engagements; eliminating the present tense to describe actions by the professional accountant; and structural improvements to enhance the overall readability and understandability of the standards. The three new EDs are:

  • ISA 320 (Revised and Redrafted), Materiality in Planning and Performing an Audit;
  • ISA 450 (Redrafted), Evaluation of Misstatements Identified during the Audit; and
  • ISA 260 (Revised and Redrafted), Communication with Those Charged with Governance.
Comment deadline is 15 February 2007. The exposure drafts may be viewed by going to www.ifac.org/EDs. The EDs remain posted until the final ISAs have been issued.

19 November 2006: Board agenda project pages updated
We have updated the following agenda project pages to reflect the discussions and decisions at the International Accounting Standards Board's November 2006 meeting:

18 November 2006: Notes from the November 2006 IASB meeting
The International Accounting Standards Board held its November 2006 Board meeting at its offices, 30 Cannon Street, London, on Thursday 16 November 2006 and Friday 17 November 2006. Click here to go to the Preliminary and Unofficial Notes of the November 2006 IASB Meeting taken by Deloitte observers.

18 November 2006: EITF Snapshot for November 2006
We have posted the latest edition of EITF Snapshot (PDF 96k) summarising the 16 November 2006 meeting of FASB's Emerging Issues Task Force. EITF Snapshot, published by Deloitte & Touche LLP (USA), enables readers to identify relevant topics and to understand quickly the meeting's outcome. A related newsletter – EITF Roundup – is published immediately after the FASB's consideration of the tentative conclusions and consensuses reached, provides more in-depth information on each of the issues. Past issues of both of these publications can be downloaded Here.

17 November 2006: Final notes from the World Congress of Accountants
The World Congress of Accountants in Istanbul, Turkey, held its last session on 16 November 2006. Over 5,000 delegates from 120 countries attended the four-day meeting. Presented below are notes from a number of the sessions on the fourth and final day of the Congress.

Notes from the XVII World Congress of Accountants
Istanbul, Turkey, 16 November 2006

Workshop: Emergence of the accounting profession in the CIS countries

Ndung'u Gathinji (CEO, ECSAFA, Kenya) chaired a session dedicated to examining how accountants in the Commonwealth of Independent States are coping with the transition from a managed demand economy to a market economy.

Frederic Gielen (UK Financial Reporting Council, on loan from the World Bank) noted that a comprehensive reform of the financial system in the CIS was needed when the region embraced the market economy in the early 1990s. He said that the World Bank recognised the link between sound financial reporting and poverty reduction and was an advocate for improved standards and compliance. Fundamental to this was the Bank's Report on Systems and Codes (ROSC) programme. Under the ROSC approach, the accounting profession is a key pillar in a stable financial architecture. ROSC assessments had been completed in five of the CIS countries and noted that progress was very encouraging although there were areas for improvement-not least in the compensation of accounting academics.

Igor Kozyrev (Deputy Chief Accountant, Lukoil, Russia) spoke of the changing and developing nature of the accounting profession in Russia, in particular the demand placed on it by moving from a managed to a market economy. He noted that under the Soviet system, accountants were part of a compliance network and were often involved in forensic investigations. The transition to a market economy was difficult because there was a lack of experience-both technical and psychological-in the use of judgement (rather than following state-dictated regulations). He noted that accounting reform in Russia had improved the quality of financial information but had also improved the quality of company management and the use of resources.

Prof Adolf Enthoven (University of Texas, USA) gave an overview of the history of the accounting profession in Russia, noting that prior to 1917 its history followed that of the profession in Europe. The 1917 Revolution had meant that the purposes of accounting had changed-accountants now served the State's central planning purposes, and served them well. He noted several challenges facing the profession-not least the lack of an official status for IFRS-based financial reporting and a formalist approach by regulating authorities. However, he observed that this was changing and that by 2010 significant reforms are expected to be in place.

Rick Gurley (US AID, Ukraine) gave an account of US AID's involvement in the development of a recognised accounting curriculum and qualification in the CIS. Based on knowledge of IFRS and ISA, the IFAC Code of Ethics and similar globally recognised foundations and working with CGA Canada, the Certified International Professional Accountant qualification had been developed. The CIPA exam is administered and marked by an independent body under the auspices of IFAC, US AID and the Eurasia Council of Certified Auditors and Accountants (ECCAA), a regional body recognised by IFAC. The CIPA exam has been very successful in the region and there is hope that it can be rolled out in other regions.

Plenary Session 3

The topic of this session was value creation through professional accountants in business.

Graham Ward (out-going President of IFAC, UK) opened the session by noting that IFAC had devoted significant resources in the past two years to highlighting the role of the professional accountant in business, noting that (because of their training) professional accountants bring a critical set of skills to businesses and use those skills to add value.

Lady Barbara Judge (Deputy Chair, Financial Reporting Council, UK) is not an accountant-she is a lawyer by training and a former Commissioner of the US Securities and Exchange Commission. She spoke from personal experience as a company director of the value of having a professional accountant – one who is a member of a body regulated by the IFAC codes of conduct and ethics – on the board of a publicly-accountable company.

She noted that today's world is about numbers and real-time reporting. The professional accountant can 'feel and see' what is wrong and ask the right questions to identify problems quickly. Boards of directors need this expertise, especially in the chair of the audit committee who, she said, should always be a professional accountant. The board is also responsible for governance and ethics-something that professional accountants bring with them as members of IFAC member bodies. The board is also responsible for enterprise strategy and professional accountants can help their board colleagues to focus on strategy and strategic risk assessments.

She concluded her remarks by reminding the audience that the board was also responsible for internal controls and that professional accountants can help their colleagues to understand these. Their expertise was something that helped her, as the chairman of one company and a director of others 'to sleep at night in a Sarbanes-Oxley environment'.

David Hastings (Shell Canada Limited, Canada) focused on how professional accountants in business create value for the business in which they work: identifying where, how and why value is created.

The professional accountant is central to identifying value drivers in today's economy: innovation, customer satisfaction, the war for talent, the effects of technology and brand investment. They have an holistic view of the business, putting customers first while understanding all dimensions of the business and managing risk effectively. As such, they can assimilate both the financial and non-financial information that is needed across a business. Value is created through the professional accountant's ability to identify and manage risk; to think and act globally and to recognise the difficulties and opportunities in a global economy.

Mary Keegan (HM Treasury, UK) spoke of the role of the professional accountant in creating value for citizens. In central government, there can be no second best. It was incumbent on government to improve the delivery performance to its citizens and to improve the financial management of the delivery of public services. She noted that the UK government uses a Value for Money model-concentrating on Economy, Efficiency and Effectiveness-and looks as much at the future value drivers as it does on historical data.

Central to this strategy is having the right systems delivering the appropriate data quickly; using this information to drive performance; and implementing good governance and proper management structures throughout the government supply chain. Ms Keegan noted that the UK has put in place a requirement that all government departments have an audit committee of non-executive members and that all government boards must have a professional accountant (a member of an IFAC member body) as finance director.

She noted that governments should govern by numbers not by instinct and consequently, accountants are properly placed at the centre of policy formulation and service delivery. She concluded her remarks by saying that governments had a responsibility to deliver value to their citizens and that there is a vital role for the professional accountant. Consequently, professional accountants must be at the policy table.

17 November 2006: European discussion paper on the conceptual framework
The European Financial Reporting Advisory Group (EFRAG) and the French accounting standard setter (Conseil National de la Comptabilite, or CNC) have jointly published the first Discussion Paper under the auspices of the Pro-active Accounting Activities in Europe (PAAinE). The Discussion Paper is titled The Conceptual Framework: Starting from the Right Place? It elaborates on the following issues:

  • Purpose of the conceptual framework;
  • Users of financial reporting;
  • Entities within the scope of the Framework; and
  • The scope of financial reporting.
EFRAG and CNC invite comments, which are due by 18 March 2007. Click to Download the Discussion Paper PDF 873k).

16 November 2006: Notes from the XVII World Congress of Accountants
More than 5,000 delegates from 120 countries are attending the 17th World Congress of Accountants in Istanbul, Turkey, from 13 to 16 November 2006. There are nearly 50 plenary and technical sessions. Presented below are notes from a number of the sessions on the third day of the Congress.

Notes from the XVII World Congress of Accountants
Istanbul, Turkey, 15 November 2006

Plenary Session 2

The theme of the second plenary session was capital market stability worldwide and the accounting profession. Rene Ricol (past president of IFAC, France) introduced the session by reiterating a common theme here: that capital market stability is essential for development. To fulfil their role in the capital market supply chain, accountants must walk with integrity and join the battle against corruption and money laundering.

Taizo Nishimuro (President and CEO of the Tokyo Stock Exchange) gave an overview of the TSE's operations and how it is responding to advances both in regulation and technology. Among the steps that have been taken to ensure the integrity of financial reporting in Japanese securities markets is a requirement for a management report on internal controls and an independent audit report thereon.

Sir David Tweedie (Chairman, IASB) explained why global accounting standards, based on principles and promoting the appropriate use of professional judgement, are vital to secure an efficient global capital market. He suggesed three simple tests for a good quality accounting standard:

  • Can we explain the standard in one minute?
  • Does it make intuitive sense?
  • Is it written in plain English?

He stressed that the accounting profession had a 'once in a lifetime' opportunity to retrieve accounting standards from rule-based systems, but this will require:

  • restraint on the part of preparers and auditors from demanding interpretations and detailed implementation guidance
  • acceptance by regulators that the exercise of judgement in a principles-based environment will mean that two entities in similar circumstances might get different accounting answers.
He finished his address with an invitation to the accounting profession to rise to the challenge of implementing IFRSs.

Samuel DiPiazza (Global CEO, PricewaterhouseCoopers) emphasised that for the accounting profession to prosper it must remain relevant. We should ask each day whether we were creating trust and delivering value. He noted that stakeholders today demand financial information that reflects economic reality, and he commended the IASB for progress in that direction. He suggested three goals for a 'sustainable accounting profession':

  • Deliver quality audits: The audit opinion lends credibility financial information in the capital markets. It is the duty of the audit firms to attract and develop auditors who are skilled and critical thinkers.
  • Convergence of standards around the world: Financial information is no longer national. It is at least regional and often global. IFRS is the way to achieve reliable and consistent financial information. The standards should not be too complex and must be based on the appropriate use of professional judgement, and the legal and regulatory environment must respect those judgements.
  • Relevant reporting: The investor community is focused on economic reality and this required both financial and non-financial information; and information that is as much forward-looking as retrospective. To ensure relevance and usefulness, the profession must rethink the timeliness of information and the technology available for communication.
He concluded his remarks by saying that all parts of the financial reporting supply chain must be involved in this effort.

Finally, Professor Mustafa Aysan spoke as a late replacement for Ali Babacan, the Minister of State of Turkey, who could ot attend due to State business arising on short notice. Prof. Aysan reviewed the history of IFRSs in Turkey and spoke in favour of 'adoption' not 'adaptation' of the standards produced by the IASB.

IFRS for SMEs

The IASB's project to develop an IFRS for Small and Medium-sized Entities was the subject of a workshop attended by over 1,000 delegates. The workshop was chaired by Sylvie Voghel, who chairs IFAC's Small and Medium Practices (SMP) Committee.

Paul Pacter, the IASB's Director of Standards for SMEs (and webmaster of www.iasplus.com) led off with an overview of the history of the project and the status of the draft Exposure Draft (ED). He noted that a near-final draft of the ED, along with the Invitation to Comment, Illustrative Financial Statements, and a Disclosure Checklist, were posted on the IASB's website www.iasb.org last week. He said that the IASB is likely to publish the ED for comment in late December or early January. He identified:

  • material in IFRSs that is not included in the draft ED because it is not regarded as relevant for a typical SME
  • options in IFRSs that are not included in the draft ED (in general, where IFRSs allow accounting policy choices, the IFRS for SMEs will include only the simpler choice, with the alternative available to an SME via cross-reference to the IFRS)
  • recognition and measurement simplifications that the Board has made
  • proposed simplifications that were rejected
Click to downlooad Paul Pacter's Presentation (PDF 227k).

Comments on the draft ED were offered by:

  • Arnon Ratzkovsky, who chairs the Accounting Standards and Financial Reporting Committee of the Istaeli Institute of CPAs
  • Mohamed Ali Elaouany Cherif, a partner of Mazars Tunisia and a member of IFAC's SMP Committee
  • Pierre Barnes, President of the Interamerican Accounting Association (IAA)
Mr Barnes indicated that his organisation believes that, in addition to standards for listed companies and standards for SMEs, a third tier of accounting standards is needed – one designed for 'micro-sized entities' with fewer than 10 employees. He noted that IAA has embarked on a project to develop accounting standards for the micros.

15 November 2006: SEC enables full-text search of filings
The United States Securities and Exchange Commission has announced that investors are now able to search the contents of the disclosure documents filed electronically with the SEC using a new full-text search tool on the Commission's Website. The newly searchable information includes registration statements, annual and quarterly reports, and other filings by companies and mutual funds filed during the past four years on the Commission's EDGAR database. Here is the Link to the Main Search Page. If you search for IFRS, for example, you will get over 8,000 hits. Click for Press Release (PDF 34k).

15 November 2006: Notes from the XVII World Congress of Accountants
The World Congress of Accountants is being held in Istanbul, Turkey, from 13 to 16 November 2006. There are 5,000 delegates from over 120 countries. There are nearly 50 plenary and technical sessions. Presented below are notes from a number of the sessions on the second day of the Congress.

Notes from the XVII World Congress of Accountants
Istanbul, Turkey, 14 November 2006

Plenary Session 1

The theme of the first plenary session of the Congress was generating economic growth and stability through the accounting profession in developing nations. The session was chaired by the incoming chair of IFAC, Fermín del Valle (Deloitte, Argentina). In his opening remarks, he spoke of the role of accountants in promoting development, noting that accountants influence development at all levels: as controllers, management accountants, executives, Board members, internal auditors, members of audit committees and external auditors.

Continuing the high-profile political speakers at the Conference, the Deputy Prime Minister of Turkey, Abdullatif Sener, stated that the accounting profession was an integral part of being able to access secure and reliable financial data. He referred to the various measures that Turkey had put in place as it seeks to join the EU, including the commitment to adopt IFRS and Basel II by 2008. He said that global harmonisation of accounting standards is very important for developing countries. Global standards will encourage international trade, enhance the ability to obtain capital, ensure rational allocation of resources, and compel management to act rationally. Thus, IFRSs will enable developing countries to obtain the benefits of globalisation. He noted that Turkey has committed to the IMF that it will adopt IFRSs.

Mr Rahman Kahn (Deputy Chair of the Upper House of Parliament, India) stated that the lack of accountability (both in the public and private sectors) was a fundamental obstacle to economic development in several regions of the world. He said that the accounting profession had a very important role to play in countering this lack of accountability. Indeed, the role of the profession went beyond providing financial information, and should include constructive influence of public policy, especially in the areas of corporate governance, accountability, combating corruption, etc.

Mr Wang Jun (Vice Minister, Ministry of Finance, China) called the profession an 'economic bridge' in the journey from poverty to growth. He used the example of the tremendous growth of the accounting profession in China as providing a benchmark for other countries to follow. He said that China has adopted three strategies with regard to accounting:

  • talent development;
  • adoption of international accounting and auditing standards. In this regard he noted that in February 2006 China published 39 new accounting standards based on IFRSs and 48 new auditing standards based on ISAs, all of which are effective in 2007; and
  • development of larger and more competitive CPA firms. He noted that currently China has 140,000 CPAs ande 5,700 CPA firms.

Mr Jabulani Moleketi (Deputy Minister of Finance, South Africa) reminded the Congress that development should not be economic growth for growth's sake, but rather an opportunity to offer a better life for a country's citizens. As others had done, he noted the role of accountants in fighting corruption and challenged the profession to fortitude: the resistance accountants encounter when faced with corrupt or doubtful practices should not deter us from doing our job. He concluded by saying that while a strong accounting profession was not the solution to the challenges of the developing world, a strong, vibrant and independent accounting profession was certainly part of it.

Each day at the Congress there are a number of concurrent workshops addressing a variety of issues. Deloitte participants were able to attend three of these workshops.

Workshop: Enhancing public confidence in financial reporting

Sir Bryan Nicholson, an IASC Foundation Trustee, led a panel discussion that examined the accounting profession's response to the financial reporting and auditing failures that had occurred since the last World Congress in November 2002. In his opening remarks, he noted in particular the introduction of the Sarbanes-Oxley Act in the US and the transition to IFRS in the European Union, Australia and elsewhere. Signs of regulatory fatigue were evident and had been acknowledged in the IASB's '2009 announcement'.

Robert Bunting, (Vice President, IFAC) reviewed the response of the global accounting profession. He noted that IFAC had reinforced the notion that the ethics and integrity of accountants were critical to building trust in the profession and he noted the several steps that IFAC and its member bodies had implemented to ensure that the trust was built on a solid foundation. In particular, he noted IFAC and its member bodies was committed to convergence of standards globally-not just financial reporting standards, but also standards on auditing, ethics, education and standards for accountants in business. He closed by stressing the four cornerstones of a financial reporting system:

  • a strong ethical foundation;
  • high quality international standards;
  • convergence of those standards worldwide;
  • enhancing and strengthening the role of professional accountants in business.

Patrick de Cambourg (Mazards, France) focused on IFRS. He noted that IFRS was well known in theory but less well known in practice and (as the implementation of IFRS in the EU has demonstrated) there is room for 'local interpretation.' He noted five concerns related to IFRSs, some of which covered familiar ground:

  • the governance of the IASB, especially how agenda decisions are made
  • does convergence with FASB mean adoption of US GAAP as IFRSs
  • clarification of the status of IFRSs in the United States – will the SEC become an interpreter of IFRSs
  • stability ('people need a rest')
  • whether the revisions to the IASB framework, a statement of total recognised income and expense, and increased use of fair values are leading accounting into a 'brave new world'. He noted that although it is vital that the IASB and the FASB should be free and independent to develop their standards, a certain degree of accountability is necessary, especially as new standards shift the accounting model radically.
Finally, he noted that accounting standards were part of a larger coordinated reform of the European capital market, noting other developments such as the Transparency and Prospectus Directives as well as the reform of the Auditing Directive, which will permit the adoption of ISAs.

Nick Fraser (Deloitte, France) addressed the role of the independent audit in the 'financial services supply chain.' He noted that public confidence in the accounting profession required all participants to perform: from management to auditor. The auditing profession has responded positively to the audit failures earlier this decade. The Forum of Firms brings together the major networks of auditing firms and is the means by which IFAC standards on auditing, ethics, internal quality control and education are implemented in the international auditing networks. He said that the Forum of Firms, whose members audit over 90% of listed companies around the world, has begun a study of consistent application of IFRSs from country to country. He noted that the profession needed to manage expectations with respect to the responsibilities and limitations of the audit better than it has done in the past. Auditors need to work with all financial reporting supply chain participants to ensure the credibility of the audit is maintained and enhanced.

Marc Pickeur (Banking, Finance and Insurance Commission, Belgium) stressed that market discipline can only be truly effective when market participants have access to high quality financial information. This required sound corporate governance and a commitment to enforce best practices within business entities and a strong external audit (which would include a report on internal controls to the audit committee). He said that regulators were reviewing and monitoring implementation of IFRS and ISA both in their own jurisdiction and globally.

Workshop: IFRS 2005: Can we see the benefits?

Gilbert Gelard (IASB Member) chaired a session that examined whether the benefits of adopting a common accounting language had begun to be seen.

Michael Birch (PricewaterhouseCoopers, Hungary) noted that the real benefits of IFRS would only be apparent when IFRS was embedded in the financial reporting systems of companies. The work to 2005 had been expensive and painful and the benefits would only be realised later. However, some benefits had already been seen: better, more transparent and more available information and an indication that the cost of capital for quality IFRS entities was improving. An underlying concern was that, because IFRS has a lower threshold for restatement of errors, the markets would react nervously to restatements under IFRS, eroding confidence rather than strengthening it.

Aziz Dieye (Cabinet Aziz Dieye, West Africa) spoke from a developing country perspective and stressed the need for the IASB to avoid any downgrading of their standards.

Bulent Ustunel (Chairman of the Turkish Accounting Standards Board) informed the session of the implementation of IFRS in Turkey. He noted that one consequence of implementing IAS 29 had been to demonstrate that the 'inflation adjustment' shares issued under Turkish tax accounting had, in fact, represented a distribution of capital and not a capitalisation of the inflation adjustment.

Lee White (Chief Accountant, Australian Securities and Investment Commission) spoke about the Australian experience of adopting Australian equivalents of IFRSs (A-IFRSs). In some areas, notably financial instruments and share-based payments, there was no equivalent Australian standard and the introduction of IFRS had real impacts on dividend policy, tax, loan covenant agreements and lending conditions. However, it seemed that already the benefits outweighed the costs: there is greater access to international capital markets and IAS 32/39 and IFRS 2 had improved financial reporting in the country. Implementation had been relatively smooth and there had been no stock exchange 'alarms'. He echoed Mike Birch in saying that implementation was not over. He also noted that the greatest challenge to ASIC as a regulator was to 'remain true to the principles-based approach' in their regulatory activity.

Workshop: Implementing international standards – the challenges and solutions

Peter Wong (Consultant, Deloitte, Hong Kong SAR) introduced this session by reviewing the findings of the Wong Report on the implementation of global standards (available on www.ifac.org). He noted that one of the principal challenges is that 'convergence' means different things, depending on who is speaking.

Gerard Tremoliere (Deloitte, France) reviewed the progress in the European Union towards adopting ISA, including the adoption of the 8th Directive on Company Accounts. He outlined the endorsement mechanism proposed to ensure that auditing standards in Europe will contribute to a high level of credibility and quality of company reports.

Sandy Chant (ALCOA, Australia and USA) reported on her experiences and the challenges of implementing IFRSs in the Australian subsidiary of a US listed, US GAAP parent. She gave a clear and concise report of the real-life challenge of implementing IFRSs; handling IFRS and A-IFRS differences (for Australian reporting purposes) and IFRS/US GAAP differences (for parent company reporting). As ALCOA is a SEC registrant, she had to engage IFRS transition accountants as her auditors were barred from providing advice under Sarbanes-Oxley. She noted that differences of opinion and interpretation of IFRS among the audit networks had cost the profession some credibility, but noted that everyone was learning 'on the job.' Her advice to those still facing transition: start early, invest the resources necessary and do not underestimate the time it will require. She also noted that in adopting IFRSs Australia had initially removed certain options from IFRSs and added new requirements. However, both her company and other Australian companies found that 'modifying IFRSs adds unnecessary complexity', and Australia has now decided to reinstate the options and remove the added requirements.

Manuel Sanchez-y-Madrid (Mexico) spoke of the challenges facing the adoption of global standards in Latin and South America. He noted that while there are active capital markets in the region, they listed companies are generally small and that IFRS presents a major challenge to both the preparers and professional accountants. In general, there is a lack of resources and capacity, both at the operational and financial level. He suggested that the most efficient way to implement global standards in the region would be through a joint effort involving all stakeholders: IFAC and the local accounting bodies, governments, donor agencies, universities, etc.

Dr Nordin Zain (Executive Director, Malaysian Accounting Standards Board) noted similar concerns in south-east Asia. He suggested that the challenge was strategic not technical. He said that the emerging economies in the region have little or no choice but to adopt global standards if they were to qualify for regional development funding, foreign direct investment programmes and membership of regional and global trade bodies.

14 November 2006: Notes from the XVII World Congress of Accountants
The World Congress of Accountants began yesterday in Istanbul, Turkey, and runs through 16 November 2006. There are 5,000 delegates from over 120 countries. There are nearly 50 plenary and technical sessions. IAS Plus will include selected notes from each day of the Congress – generally those sessions related to financial reporting in the context of International Financial Reporting Standards. If you happen to be attending the Congress, please stop by and say hello at the Deloitte booth in the exhibition area.

Notes from the XVII World Congress of Accountants
Istanbul, Turkey, 13 November 2006

Opening Ceremonies

The Seventeenth World Congress of Accountants was inaugurated this afternoon at a special plenary session at the Istanbul Convention and Exhibition Centre. Speeches of welcome were delivered by the Chairman of the Congress, Prof Dr Recep Pekdemir; the President of the Union of Chambers of Certified Public Accountants of Turkey (TURMOB), Mr Mehmet Timur; and the President of the Expert Accountants' Association of Turkey, Dr Masum Turker.

The outgoing President of the International Federation of Accountants, Graham Ward, reviewed his term of office and noted that the accountancy profession had used the opportunity of profound scrutiny following the financial scandals such as Enron and Parmalat to examine itself and undertake fundamental reforms that placed the worldwide profession on a solid foundation to be part of the solution to restoring public trust in financial markets. He stated that where there was a sound, vibrant, and independent accounting profession there was almost certainly an 'investment climate of trust'. He rounded out his address by reviewing the various measures that IFAC has put in place to ensure that the standards it promulgates (including International Standards on Auditing, standards for ethics in accounting firms, and education standards) were developed in as transparent an environment as possible.

The Congress has honoured by two senior members of the Turkish government: the Finance Minister and the Prime Minister, Recep Tayyip Erdogan. The Prime Minister noted that the upgrading of Turkey's financial systems and strengthening its financial infrastructure – including financial reporting – is a vital part of the country's ambition to join the European Union.

The working sessions of the Congress begin on 14 November, with a plenary session on the role of the accounting profession in generating economic growth in developing nations and three sets of topical workshops. IASB Chairman Sir David Tweedie will speak the 15 November plenary session on capital market stability worldwide and the accounting profession.

13 November 2006: IAS Plus Newsletters for October 2006
The October 2006 IAS Plus Quarterly Newsletter has been published. The newsletter reports on the 3rd quarter 2006 activities of the IASB, the IFRIC, and the IASC Foundation, and also on worldwide issues and events relating to international financial reporting. The Asia-Pacific edition has the same 28-page news content as the Global Edition plus 8 more pages of accounting standards updates for the Asia-Pacific region. You will find all Past IAS Plus Issues Here. Sign up for Free Subscription by Email.

11 November 2006: Historical data about the old IASC
We have added a page of Historical Information about the International Accounting Standards Committee. The IASC was the IASB's predecessor from 1973 to March 2001. The historical information about the IASC on that page is based on tables prepared for The International Accounting Standards Committee: A Political History, by Robert J Kirsch, forthcoming from CCH, part of Wolters Kluwer (UK) Ltd, publication expected 4th quarter 2006. We are grateful to the author and publisher for permission to post this information. The tables include:

  • IASC Voting Requirements
  • Dates and Locations of Meetings of the IASC Full Committee (1973-1977) and Board (1977-2000)
  • Duration of IASC Board Meetings Per Year
  • IASC Expenditure
  • IASC Revenue by Source as Per Cent of Total
  • Chairmen of the IASC
  • IASC Secretaries (to 1983) and Secretaries-General (from 1984)
  • Location and Size of IASC-IASB Offices
You will also find historical information about the IASC, including Exposure Drafts and final Standards and Interpretations issued year by year, on our Chronology Page.

11 November 2006: Commissioner McCreevy's comments on IFRSs
Charlie McCreevy, the European Commissioner for Internal Market and Services, spoke recently on Setting the Stage for Competitive EU Financial Services Markets before the Association of Corporate Treasurers in the UK. Among other things, Commissioner McCreevy addressed IFRSs, the US SEC reconciliation requirement, and continued use of 'third country' GAAP by non-EU companies trading on EU regulated securities markets. Click to download Commissioner McCreevy's Remarks (PDF 79k). An excerpt:

In the field of accounting, significant steps forward have been taken. In April 2005, the Securities and Exchange Committee (SEC) staff proposed a 'roadmap' towards eliminating the need for reconciliation to US GAAP for European firms by 2009. This roadmap, together with a joint work plan recently published by CESR and the SEC on the consistent application of accounting standards, go a long way towards the goal of removing the reconciliation to US GAAP requirement for EU issuers in the US.

On this side of the Atlantic, the European Parliament and the European Securities Committee (ESC) have recently approved the Commission's proposal that will enable US GAAP, Japanese GAAP, Canadian GAAP and other third country accounting standards that are converging towards IFRS to continue to be used for another 2 years in the EU. This brings the deadline to 2009, and thus aligns the EU and US timetables on this issue. This will also give recognition to other countries' efforts to converge towards IFRS, thereby promoting use of the international standards globally.

In the slightly longer term, both sides agree on the need for continued progress on the technical convergence of IFRS and US GAAP. If we can succeed in abolishing accounting reconciliation requirements, we will greatly reduce costs for transatlantic listed companies and create a more open transatlantic capital market. The success of the accounting standards convergence project will be an acid test for the EU-US relationship in financial services because it will test the fundamental proposition of whether we can converge our regulatory systems or not.

11 November 2006: ICAEW study on measurement in financial statements
The Institute of Chartered Accountants in England and Wales has published a study on Measurement in Financial Reporting (PDF 287k). The report examines various measurement bases used in financial reporting currently and concludes that there is not one basis that is the best for all items in all circumstances. The report states:

'Making the case for change' puts the onus on showing that there is a problem that needs to be solved. In the context of financial reporting measurement this may be the case where:
  • people are confronted with a measurement problem and do not know how to deal with it;
  • worthwhile information that could be provided is not being provided;
  • information that is being provided is not worthwhile or even has negative effects - for example, because it is misleading.
It should not be assumed that every case of inconsistency in measurement is a problem that needs to be remedied. This report puts forward the following working hypotheses: that it may be appropriate in making decisions on measurement requirements:
  • to adopt a mixed approach to measurement for different items in accounts; and
  • to distinguish between different types of entity in accordance with their industry, ownership and governance structure, and size.
'Evaluation of options' should include the option to do nothing. Once the costs of potential changes (including the costs of making the change) have been taken into account and their likely benefits considered, it may become clear that the most sensible policy is to leave things as they are.

10 November 2006: IASB posts latest draft of SME exposure draft
The International Accounting Standards Board has posted the latest staff draft of an exposure draft of an International Financial Reporting Standard for Small and Medium-sized Entities (SMEs). The draft is posted as two files:

  • The draft IFRS and a draft Invitation to Comment
  • Draft implementation guidance in the form of Illustrative Financial Statements and a Disclosure Checklist
The Board has not completed its consideration of the text, and further changes will be made to this draft before the Board publishes the exposure draft for public comment later this year. The draft is being made publicly available to keep interested parties up to date with progress on the project. The IASB does not request comments on this draft, and the staff will not be in a position to consider or respond to any comments. Here is the Link to the SME Page on IASB's Website where you can download the latest SME drafts.

10 November 2006: ASBJ and FASB hold convergence discussions
The Accounting Standards Board of Japan and the US Financial Accounting Standards Board held the second meeting on global convergence of standards. "Both Boards believe that these discussions are useful in promoting mutual understanding that will contribute to subsequent deliberations at their respective Boards and to their respective convergence projects with the IASB." A list of issues discussed is in the ASBJ Press Release (PDF 56k).

10 November 2006: IFAC proposes guidance for companies' codes of conduct
The International Federation of Accountants' (IFAC) Professional Accountants in Business (PAIB) Committee has published an exposure draft of guidance that would assist companies and their professional accountants in developing and implementing a code of conduct. The proposed new good practice guidance, Defining and Developing an Effective Code of Conduct (PDF 139k), highlights the varied roles of professional accountants in business in driving and supporting organizational ethics and conducting ethics programs. It also provides practical guidance on the design and development of such codes. Comment deadline is 16 February 2007. Click for IFAC Press Release (PDF 82k).

9 November 2006: Big-6 CEOs' vision for strengthening financial reporting
The CEOs of the six major global networks of accounting and auditing firms, including Deloitte, have jointly published a 'vision statement' titled Global Capital Markets and the Global Economy (PDF 1,961k) "as the beginning of what we hope will be a robust dialogue about how global financial reporting and public company auditing procedures must adapt to better serve capital markets around the world". The vision statement suggests development of "a new business reporting model to deliver relevant and reliable information in a timely way". Specific suggestions relating to financial reporting and auditing include the following:

Strengthening Financial Reporting and the Audit Function

Near-Term Measures: In the near term, the following 'convergence' processes must be completed to benefit the global financial markets and their stakeholders:

  • Complete the effort by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to harmonize differences between international and U.S. reporting standards, as currently envisioned. Complex rules must be resisted and withdrawn. Today's rules can produce financial statements that virtually no one understands. Standards need to be principles-based.
  • Launch and complete a similar process for the convergence of national audit standards, which should make use of the International Standards on Auditing (ISA) that already have been developed with the oversight of the Public Interest Oversight Board (PIOB) of the International Federation of Accountants (IFAC).
  • Similarly, minimize national differences in the oversight of auditors and enforcement of relevant audit standards, including rules relating to the way auditors conduct their activities. The recently established Independent Forum of International Audit Regulators (IFIAR) may be the appropriate body to pursue this objective. We are encouraged by recent statements from the U.S. audit regulator, the Public Company Accounting Oversight Board (PCAOB), that it intends to join and actively participate in IFIAR.

Consistency in business reporting standards, audit standards and enforcement of audit standards is necessary to support a global economy with the lowest cost of capital. Alignment of the accounting profession and the regulators around common objectives and application of principles-based standards will enable companies to produce consistent global information. A sensible global regulatory framework also will reduce barriers to growth and entry by other audit firms or networks in our profession, thus providing increased choice for auditing services.

Longer-Run Measures: Over the longer run, experts agree that the current systems of reporting and auditing company information will need to change — toward the public release of more non-financial information (some or much of which may be industry-specific) customized to the user, and accessed far more frequently than is currently done. It is time, therefore, for all global capital markets stakeholders involved to launch a process that will lead to the development of a new business reporting model, with a clear identification of the role of the independent audit and requirements dictated by that model.

Our firms pledge to work with issuers, investors, regulators and other market participants to develop this new model including ways of disseminating a broad array of company information to users in a manner more suited to the Internet age than the traditional quarterly and annual reports.

8 November 2006: Agenda for November 2006 IASB meeting
The International Accounting Standards Board will hold its November 2006 Board meeting at its offices, 30 Cannon Street, London, on Thursday 16 November 2006 and Friday 17 November 2006. Presented below is the preliminary agenda for the meeting. The IASB will also meet with the Standards Advisory Council on 9 and 10 November 2006. We previously posted the Agenda for the SAC Meeting.


16-17 November 2006, London

Thursday 16 November 2006

  • IFRIC X Service Concession Arrangements – Vote to approve an Interpretation
  • Annual improvements process - the following annual improvements projects will be recommended to and discussed by the Board:
    • Should IAS 1 Presentation of Financial Statements be amended to provide guidance on situations where the financial statements of an entity are based on, but not in full compliance with, IFRSs
    • How should the conflict between the requirements of IAS 1 Presentation of Financial Statements and IFRS 7 Financial Instruments: Disclosures regarding the presentation of finance costs be resolved?
    • Should the liability component of a convertible instrument with an obligation to deliver cash or other assets more than 12 months from the balance sheet date be classified as current or non-current?
  • Financial Instruments: Recognition and Measurement - Comprehensive Project
  • Conceptual Framework – Elements and Recognition
  • Fair Value Measurements – Discussion Paper
Friday 17 November 2006

8 November 2006: UNCTAD guidance on corporate governance disclosures
The United Nations Conference on Trade and Development (UNCTAD) has published Guidance on Good Practices in Corporate Governance Disclosure (PDF 262k). This 52-page publication is an updated version of UNCTAD's 2002 report Transparency and Disclosure Requirements for Corporate Governance. UNCTAD's goal in developing this disclosure guidance is "achieving better corporate transparency and accountability in order to facilitate investment flows and mobilise financial resources for economic development" in UN member states. It is aimed particularly at regulators and companies in developing countries and transition economies. The suggested disclosures are divided between financial and non-financial. For financial disclosures the guidance states: "The International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board provide a widely recognised benchmark in this respect." The guide recommends a range of non-financial disclosures in the following areas:

Non-financial corporate governance disclosures:
  • Company Objectives
  • Ownership and Shareholder Rights
  • Changes in Control and Transactions Involving Significant Assets
  • Governance Structures and Policies
  • Members of the Board and Key Executives
  • Material Issues Regarding Stakeholders, and Environmental and Social Stewardship
  • Material Foreseeable Risk Factors
  • Independence of External Auditors
  • Internal Audit Function
We are grateful to UNCTAD for permission to post this guide.

7 November 2006: Trustees make two Board member appointments
 
Dr. Zhang
 
Mr. Smith
  The Trustees of the IASC Foundation, under which the IASB operates, have appointed Dr Zhang Wei Guo, Chief Accountant and Director General of the Department of International Affairs of the China Securities Regulatory Commission, to membership on the IASB for a five-year renewable term beginning 1 July 2007. The Trustees also reappointed John Smith, currently a part-time IASB member, to a full-time Board position for a second five-year term also beginning 1 July 2007. The Trustees continue their search to fill one remaining position on the IASB that will become vacant on 1 July 2007. Click for Press Release (PDF 61k), which includes brief biographical notes about Dr Zhang and Mr Smith. The press release also discusses enhanced measures on Trustee oversight and long-term funding of the IASB.

7 November 2006: Our views on IFRIC D20 Customer Loyalty Programmes
Deloitte has submitted to the IASB comments on IFRIC's Draft Interpretation D20 Customer Loyalty Programmes (45k). Overall, we believe that the draft Interpretation addresses an issue for which we believe there is need for an interpretation. An excerpt from our comments:

We support the consensus in the Draft Interpretation, in so far that it applies to customer loyalty programmes that represent multiple sales, as we think the logic set out for identification and measurement of separately identifiable components in a transaction is irrefutable. We believe the IFRIC has interpreted the distinction between paragraph 13 and paragraph 19 in IAS 18 Revenue appropriately. Paragraph 13 of IAS 18 applies when a single contract requires two or more separate goods or services to be delivered at different times. In contrast, paragraph 19 of IAS 18 applies when an entity has to incur further costs related to items already delivered. An entity would not normally incur costs related to award credits at the time of the initial transaction because the entity has not provided the goods or the services to the customer at that time but rather when the customer redeems the award credits. Award credits that are provided as part of a transaction should therefore follow the accounting requirements in paragraph 13 and revenue accounted for when the entity deliver the goods or services, as a result of the award credits, to the customer.

However, we want to highlight that we have concerns regarding the scope of the Draft Interpretation. We believe that the IFRIC should clarify further the distinction between customer loyalty programmes and marketing expenses, as we believe guidance in the Draft Interpretation is not sufficient.

Click for:

6 November 2006: Model half-year report under Australian IFRSs
Deloitte Touche Tohmatsu (Australia) has published 2006 Consolidated Model Half-Year Report (PDF 630k) to illustrate an interim report for periods ending on or after 31 December 2006 in accordance with Australian equivalents to International Financial Reporting Standards (A-IFRSs). There is a permanent link to these and other A-IFRS model financial statements on our Australia Page.

5 November 2006: IFRIC 11 interprets IFRS 2
The International Financial Reporting Interpretations Committee (IFRIC) has published IFRIC Interpretation 11 IFRS 2: Group and Treasury Share Transactions. The Interpretation addresses how to apply IFRS 2 Share-based Payment to share-based payment arrangements involving an entity's own equity instruments or equity instruments of another entity in the same group (eg equity instruments of its parent). IFRIC 11 provides:

  • Share-based payment involving an entity's own equity instruments in which the entity chooses or is required to buy its own equity instruments (treasury shares) to settle the share-based payment obligation: These should always be accounted for as equity-settled share-based payment transactions under IFRS 2.
  • A parent grants rights to its equity instruments to employees of its subsidiary: Assuming the transaction is accounted for as equity-settled in the consolidated financial statements, the subsidiary must measure the services received using the requirements for equity-settled transactions in IFRS 2, and must recognise a corresponding increase in equity as a contribution from the parent.
  • A subsidiary grants rights to equity instruments of its parent to its employees: The subsidiary accounts for the transaction as a cash-settled share-based payment transaction.
IFRIC 11 is effective for annual periods beginning on or after 1 March 2007. Earlier application is permitted. Click for:

5 November 2006: Accounting Roundup – October 2006
We have posted the October 2006 Edition of Accounting Roundup (PDF 291k) published by Deloitte & Touche LLP (USA). Topics covered in this issue include:

FASB Developments
  • Two Exposure Drafts on Not-for-Profit Organizations
  • Four Proposed FSPs Issued
  • Tentative Guidance on Statement 133 Implementation Issues
EITF Developments
  • EITF Meeting of 7 September 2006
GASB Developments
  • GASB Invitation to Comment on Fund Balance Reporting and Government Fund Type Definitions
  • White Paper on the Difference in Governmental Accounting and Financial Reporting
AICPA Developments
  • Second Exposure Draft of Proposed Valuation Standard Act for CPAs
SEC Developments
  • Tender Offer Best-Price Rules Amended
  • Proposed Rule Affects Broker-Dealers Also Registered as Futures Commission Merchants
PCAOB Developments
  • Q&As Issued on Auditing the Fair Value of Share Options Granted to Employees
  • Highlights of the PCAOB's October 2006 Standing Advisory Group Meeting
You will find past issues of Accounting Roundup Here.

4 November 2006: Notes from the November 2006 IFRIC meeting
The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Wednesday to Friday 1-3 November 2006. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting.


1-3 November 2006

Wednesday 1 November 2006

Draft Handbook on IFRIC Due Process – Review of responses

The IFRIC discussed comments received on the consultation document issued by the IASCF on the Draft Handbook for the IFRIC. The discussion was based on the four questions raised in the consultation document.

Question 1 - Agenda Committee

Comments received from constituents generally supported the functions performed by the Agenda Committee. The main concern expressed by constituents was that there is not enough transparency and communication around the work performed by the Agenda Committee in its current form. Some respondents had proposed as a solution that Agenda Committee meetings should be held in public, or if meetings are continued to be kept that working papers and meeting notes should be made available to the public.

Based on the responses, two possible alternatives were presented to the IFRIC as possible solutions for the concerns.

  • Keep the current form of the Agenda Committee, but clarify that the IFRIC Agenda Committee is not a decision taking body, but merely a working group which provide input on how to form issues received and which help the staff to prepare working papers for the IFRIC.
  • To 'absorb' the Agenda Committee back in the IFRIC. All staff papers would then be brought directly to the IFRIC without any 'refining' process by the Agenda Committee.

In general IFRIC members were supportive of alternative one, which is to continue the Agenda Committee in its current form. The current form allows every member to attend the Agenda Committee meeting and all Agenda Committee working papers are currently available to all IFRIC members. IFRIC members expressed that if it would go forward with the current model it would be necessary to clarify that the Agenda Committee does not have a quorum and is therefore not in a position to decide on an issue (which is not the intention either).

The staff will amend the Due Process Draft Handbook based on comments from constituents and the IFRIC.

Question 2 - Agenda Criteria

Staff presented comments received on the agenda criteria which the IFRIC uses to decide whether an issue should be taken on its agenda for interpretations or not. Comments and concerns were spread evenly on the criteria, but staff had not identified any pattern of concerns raised towards specific criteria.

There was no specific discussion regarding responses to this question.

Question 3 - Consultation regarding issues not added to the IFRIC agenda

Respondents had expressed concerns about the wording used by IFRIC when rejecting an issue to be added to its agenda for interpretations. Concerns were particularly directed to the authority the rejection had in cases where the IFRIC rejected an issue by stating 'the standard is clear'. Respondents were concerned that such wording would give authority to the statement given by IFRIC without the necessary due process. IFRIC members expressed agreement that this particular wording was unfortunate for issues not taken on the agenda.

Some respondents had proposed that the IFRIC introduced a category of 'clarifications' that would undergo a strengthened due process compared to issues that are rejected due to lack of practical relevance, because it is not widespread or because standards are clear about the issue. The staff had introduced a flow-chart decision tree that the IFRIC used in their deliberations.

The IFRIC will propose to the Trustees that they should continue to publish short explanations for why items are not taken on its agenda for interpretations as they stated that respondents seem to find this more helpful than the alternative. There was no appetite for including a formal flow-chart in the due process handbook, but the staff would look into whether it could extract some wording which could be included to further explain the due process.

Question 4 - Relationship with national standard-setters and interpretative groups

The majority of respondents commented that the IFRIC should continue to liaise with national standard-setters and interpretative groups, but that it should not be monitoring these groups and be required to respond to national interpretations that are not referred to the IFRIC.

The IFRIC did not discuss the issue.

It was agreed that the Draft Handbook would be amended based on major concerns raised by constituents and comments made by the IFRIC during this session. A draft paper will be circulated to IFRIC members offline for input.

It is expected that a proposal will be presented to the Trustees at their meeting in January 2007.

Thursday 2 November 2006

IAS 18 Revenue: Real Estate Sales

The IFRIC discussed the draft text of a Draft Interpretation and related Basis for Conclusions.

Applicable standards - Definition of a construction contract

The IFRIC tentatively concluded in September that agreements for the sale of real estate would meet the definition of a construction contract under IAS 11 Construction Contracts only if they require the seller to provide construction services to the buyer's specifications. The staff had concerns about the use of the word 'specifications' which in their opinion might be read in the narrow sense of technical design specification rather than in the wider sense of directions or instructions. Therefore, in the draft text the word 'directions' was used.

The IFRIC agreed in principle to this proposed wording but observed that the more important question was whether the buyer has purchased goods or construction services and that this question should be answered for the underlying real estate in its current state and condition. Only in case of the latter would IAS 11 apply. The IFRIC asked the staff to highlight this in the revised draft.

Applying IAS 18

The IFRIC confirmed the approach outlined in the draft text regarding the applicable revenue recognition criteria and the treatment of remaining obligations. However, the IFRIC asked the staff to concentrate on the basic principles in the respective paragraphs and to move any application guidance currently included in these paragraphs of the draft text to an appendix.

The IFRIC reaffirmed that revenue from the sale of real estate should be recognised in accordance with recognition criteria in paragraph 14 of IAS 18.

When the seller has to perform further work (such as to remedy minor defects or to complete internal decoration) the corresponding expenses should be recognised in accordance with paragraph 19 of IAS 18 and a liability should be recognised in accordance with IAS 37. If the seller has to deliver further goods or services that are separately identifiable from the real estate (such as communal amenities) paragraph 13 of IAS 18 should be applied.

Amendments to appendix to IAS 18

The staff proposed to withdraw Example 9 (Real Estate Sales) from the appendix to IAS 18 and to locate all guidance in the draft Interpretation. The IFRIC decided to consider this suggestion after the draft text has been finalised.

The IFRIC directed the staff to prepare a revised draft text of the Draft Interpretation reflecting these decisions for discussion at its January 2007 meeting.

IAS 18 Revenue – Revenue Recognition in Respect of Initial Fees Received by a Fund Manager

In September 2006 the IFRIC discussed how revenue should be recognised by a fund manager when a fund manager receives a one-off non-refundable upfront fee followed by regular payments for ongoing services received. At this meeting the IFRIC discussed a staff paper based on the decisions made in September.

Treatment of upfront investment advice

The IFRIC had a thorough debate on the identification of services provided at the initial investment in a fund.

The IFRIC confirmed that revenue is to be recognised to the extent that the upfront fee received or receivable relates to identifiable services that have been provided and can be measured reliably. The remainder of the upfront fee should be treated as deferred revenue.

The customer perspective

In September 2006 the IFRIC tentatively concluded that the recognition of revenue should be based on the customer's perspective of when the benefit of the services are received not the supplier's perspective of when the services are delivered. The staff concluded that the use of the customer perspective is not required by IAS 18 Revenue and that an Interpretation based on a customer perspective model would likely result in significant changes to the recognition of revenue in a wide range of situations which are not necessarily required by IAS 18. The IFRIC agreed with the staff and concluded that revenue should be recognised at the point at which the selling entity provides the services.

How should revenue in respect of upfront fees be recognised?

The staff proposed a hierarchy that could be used to determine the extent to which revenue in respect of upfront fees should be deferred:

  • To the extent that an entity performs upfront services which can be separately measured at fair value, revenue should first be measured at fair value in respect of those items.
  • To the extent that an entity is able to measure progress in providing its services, revenue should next be measured with reference to the stage of completion of the services.
  • To the extent that an entity can estimate its progress in providing its services based upon the costs of providing those services, the entity should next apportion revenue based upon the cost of delivering services.
  • To the extent that an entity cannot reliably measure its progress in delivering its services, revenue should be recognised on a straight line basis over the period of the services' delivery.

The IFRIC did not explicitly discuss the hierarchy but observed that revenue has to be recognised on a systematic basis reflecting how the service is provided to the customer. The IFRIC assumed that in most cases this would be over the expected investment period for a portfolio of investors. However, the IFRIC stated that other systematic approaches might also be appropriate.

Scope

The IFRIC agreed that the Draft Interpretation should apply to all situations where a selling entity receives a one-off non-refundable upfront fee followed by ongoing services and that it should not apply to situations where an entity receives an upfront payment for the supply of goods followed by an ongoing fee for the supply of services (for example the sale of electrical goods followed by the sale of a warranty service).

Consideration of the legal arrangements for fund managers

The staff noted that sometimes a fund manager receives its upfront fee from an investor and its ongoing fee from a fund. It stated that concluding that the two transactions should be considered together is a fundamental step in the argument that a fund manager should defer the recognition of revenue in respect of upfront fees and that the rationale for this conclusion should be explained in the basis for conclusions. The IFRIC agreed that the fact that the owners of a unit have sufficient control over a unit to be able to end the fund manager's fees in respect of that unit (by withdrawing from the fund) may be able to provide a rationale for considering the two transactions together.

The IFRIC directed the staff to prepare a draft text of a Draft Interpretation reflecting these decisions for discussion at the January 2007 meeting.

Review of tentative agenda decisions published in July and September IFRIC Update

Topics confirmed not to be added to the agenda

The IFRIC reviewed its tentative agenda decisions on the following topics in light of comments received from constituents. After discussing those comments, the IFRIC confirmed its previous decisions not to add the following items to the agenda. An Agenda Decision notice will be published in the IFRIC Update for this meeting.

  • IFRS 2 Share-based Payment – Employee benefit trusts in the separate financial statements of the sponsor
  • IFRS 2 Share-based Payment – Fair value measurement of post-vesting transfer restrictions
  • IFRS 2 Share-based Payment – Incremental fair value to employees as a result of unexpected capital restructurings
  • IFRS 7 Financial instruments: Disclosures – Presentation of 'net finance costs' on the face of the income statement
  • IAS 11 Construction Contracts – Allocation of profit in a single contract
  • IAS 16 Property, Plant and Equipment – Revaluation of investment properties under construction
  • IAS 32 Financial Instruments: Presentation – Foreign currency instruments exchangeable into equity instruments of the parent entity of the issuer
  • IAS 32 Financial Instruments: Presentation – Changes in the contractual terms of an existing equity instrument resulting in it being reclassified to financial liability
  • IAS 32 Financial Instruments: Presentation – Puts and forwards held by minority interests and IFRS 3 Business Combinations – Are puts or forwards received by minority interests in a business combination contingent consideration?
  • IAS 38 Intangible Assets – Classification and accounting for SIM cards
  • IAS 38 Intangible Assets – Adoption of IAS 38 (revised 2004)
  • IAS 39 Financial Instruments: Recognition and Measurement – Testing of hedge effectiveness on a cumulative basis
  • IAS 39 Financial Instruments: Recognition and Measurement – Valuation of electricity derivatives
  • SIC 12 Consolidation of Special Purpose Entities – Relinquishment of control

IAS 32 Financial Instruments: Presentation – Classification of a financial instrument as liability or equity

The IFRIC reviewed its tentative decision to not interpret an issue relating to whether 'economic compulsion' should affect classification of a financial instrument as a financial liability or equity.

The IFRIC initially provided split views on how to move forward on this issue. Several respondents had expressed concerns about the tentative decision made by the Board. Some members expressed a preference for an interpretation while other members expressed a preference for an amendment of the standard.

The result of the discussion was that the IFRIC decided it would not be able to reach agreement on this issue. The issue will therefore not be taken on by the IFRIC; however the IFRIC decided it would refer the issue back to the Board to let it decide whether this could be solved in the IASB's liabilities and equity project.

IAS 39 Financial Instruments: Recognition and Measurement – Definitions of a derivative: indexation on own EBITDA or own revenue

The IFRIC reviewed comments on the agenda decision to not to interpret the issue on whether contracts indexed on own EBITDA or own revenue would meet the definition of a derivative under IAS 39.

Several respondents had raised the concern that the IFRIC had not provided guidance on what the distinction is between a non-financial and a financial variable. IFRIC members supported the concerns raised. As FASB is doing preliminary deliberations on this issue the IFRIC decided that staff should look into and discuss with FASB staff whether this issue can be solved by the IFRIC.

The IFRIC decided not to confirm the agenda at this point, but decided to come back at a later stage when the staff has had a chance to discuss the time schedule for the FASB project.

IAS 41 Agriculture – Recognition and measurement of biological produce in accordance with IAS 41

The IFRIC continued its discussion on an issue relating to accounting for biological assets and agricultural produce.

The IFRIC referred these issues to the IASB in May 2004, however the Board's agenda did not permit the referral to be discussed. In the meantime the IASB agreed to undertake a project on fair value measurement (FVM) which is likely to affect how the IFRIC should deal with the issues raised.

The IFRIC's issues relate to paragraph 21 and 22 in IAS 41. Two questions have been addressed by the IFRIC as a result of the submissions it received:

  • How should an entity account for an obligation to replant a biological asset after harvest?
  • What does the exclusion from taking into account increases in value from 'additional biological transformation' mean in the context of IAS41.21? In particular, what is the implication of this exclusion where a valuation is based on forecast future cash flows (which can only be achieved after future biological growth)?

The IFRIC previously decided that it would not issue guidance on how to account for an obligation to replant a biological asset after harvest.

At the November 2006 meeting the IFRIC focused the discussion on the content in paragraph 21 of IAS 41. IFRIC members supported removing the prohibition against taking into account future growth on biological assets.

IFRIC members considered that market participants would take into account future growth when valuing these items and also commented that there are risk factors in future growth that should be considered when measuring those assets.

The IFRIC then discussed whether agricultural assets should be measured according to its 'highest and best use in the most advantageous market', a principle that will feature in the forthcoming IASB Discussion Paper on Fair Value Measurement. IFRIC members were split; some members did not think the IFRIC should move forward with a measurement concept that has not yet been explored fully and adopted by the IASB, while others would include the concept as it is likely to survive in the FVM project.

Paragraph 21 of IAS 41 refers to increases in value from 'transformation'. IFRIC members seemed to agree that the staff needed to clarify the underlying meaning of this concept.

The IFRIC decided that it should continue the work on this issue as there appears to be widespread diversity in practice. The staff was directed to address the problems specifically with paragraph 21 in IAS 41, and consider if and how IAS 41 can be amended to address the concerns raised by constituents.

IAS 21 The Effects of Changes in Foreign Exchange Rates – Hedging a net investment

The IFRIC considered an issue requesting guidance for how to account for a hedge in a 'net investment hedge in a foreign operation' in a group's consolidated financial statements. The staff presented two questions that they believed the IFRIC would need to consider when dealing with net investment hedging:

  • What is the hedged risk: Is it the exposure between two entities with different functional currencies in a group or is it the exposure between the presentation currency of the group and the functional currency of the entity being hedged. The First would indicate that the group is hedging economic risk between two difference functional currencies, while the latter would be based on hedging an accounting exposure when consolidating in the hedged entity (into the presentation currency of the group).
  • Where in the group can the hedging instrument be held: That is whether the hedging instrument must be held by the immediate parent or the ultimate parent of the hedged entity, or whether other entities in the consolidated groups should be allowed to hold the hedging instrument.

What is the hedged risk?

IFRIC members did not agree on whether the reading of paragraph 18 in IAS 21 indicates that consolidation occurs in one single process or whether it is done step-by-step. To solve this issue would be fundamental as a one-step consolidation (where entities are consolidated directly into the group) would indicate that exposure only arises when the entity's functional currency is translated into the group's presentation currency. The only exposure to hedge would then be the exposure between the presentation currency of the group and the functional currency of the hedged entity. Other IFRIC members thought that entities use net investment hedging to hedge dividends from foreign entities and that there is a real economic risk between entities with different functional currencies which is not considered if hedging a presentation currency was permitted.

Where in the group can the hedging instrument be held?

The staff had identified two different possible alternatives that the IFRIC discussed (note that the alternatives is based on that only economic exposure can be hedged):

  • The hedging instrument can be held by any parent, from the immediate to the ultimate, which is exposed to economic risk with holding the foreign investment.
  • The second option would be to allow any entity in the group to hold the hedging instrument as long as it is passed, through intra-group transactions, to the specified parent. Provided the hedging instrument is hedging the same functional currencies as those of the net investment and the specified parent, the gains and losses on the instrument would offset the economic exposure in the consolidated statements.

IFRIC members discussed whether it would wish to diverge from US GAAP by allowing the first alternative. US GAAP only allows the group to hedge the risk between the immediate parent and the net investment while it allows the group to put the hedging instrument anywhere in the group. The second alternative would be closer to US GAAP, but would still diverge as it would allow the entity to hedge the exposure between the net investment and any parent between the immediate parent and the ultimate parent of the group.

The IFRIC agreed to add this issue to its agenda. The staff was directed to clarify the scope, identify what the net investment could be, identify the risk being hedged and determine which instruments could be used.

IAS 38 Intangible Assets – Treatment of catalogues and other advertising costs

IFRIC continued its deliberations on the project for developing an interpretation on how to account for catalogues, advertising and promotional costs.

The project has identified two issues:

  • Which accounting model to apply for advertising and promotional cost. Some believe such costs should be accounted for under IAS 38, while others believe that IAS 2 would apply.
  • How to apply the chosen accounting model for these costs.

IFRIC members were divided on whether such costs should be accounted for as inventory or according to IAS 38. Some thought that catalogues in particular are tangible assets, and that these should be accounted for as inventory rather than as intangible assets. However, the majority of IFRIC members seemed to support the intangible asset model.

Further, the IFRIC discussed how to apply IAS 38. The discussion was focused on the apparent inconsistency between paragraph 68 and paragraph 70 in IAS 38. IAS 38.68 requires that expenditure on intangible items be expensed when incurred, while IAS 38.70 permits recognising a prepayment when the payment has been made in advance of the delivery of goods or the rendering of services. The majority of IFRIC members seemed to agree that costs should not be expensed at the time they are incurred if they are not consumed at the same time.

The IFRIC decided that the staff should seek to clarify the inconsistency between IAS 38 paragraphs 68 and 70 and propose an amendment in relation to those costs that should not be expensed when incurred if not consumed when costs are incurred. As this inconsistency also arises in SIC 32 paragraph 9, the staff was directed to clarify that paragraph also.

Friday 3 November 2006

Status Report: IAS 19 Employee Benefits – Outstanding IFRIC Issues

The staff presented a status report that grouped the outstanding IAS 19 issues into four categories:

  • Group 1 - Active issues under development
    • Impact of minimum funding requirements on the asset ceiling [D19]
  • Group 2 - Issues pending deliberations
    • Issues related to the non-consolidation model and definition of plan assets
    • Distinction between curtailments and negative past service costs
  • Group 3 - Issues to be completed when staff resources allow
    • Pension promises based on performance hurdles
    • Changes to a plan caused by government
    • Treatment of employee contributions
    • Treatment of death-in-service and other risk benefits
  • Group 4 - Issues to be incorporated as part of the IASB project on employee benefits
    • D9 - plans with a promised return on contributions
    • Distinction between defined benefit and defined contribution plans

The staff noted that the comment period for IFRIC D19 IAS 19 – The Asset Ceiling: Availability of Economic Benefits and Minimum Funding Requirements ended on 31 October 2006 and that it expects to bring a preliminary comment analysis to the January 2007 IFRIC meeting.

The staff noted that most of the issues in Group 3 have arisen in discussions with constituents or in comment letters on other proposals. The IFRIC concluded that a more detailed summary of the issues in Group 3 should be presented to the IFRIC before any agenda decisions are made.

The IFRIC agreed to remove D9 from its agenda, provided it had the option to restart the project should developments in the IASB's project on post-retirement benefits make it necessary or appropriate. With respect to the distinction between defined benefit and defined contribution plans, the IFRIC decided to split the project into two parts. The part dealing with the distinction of defined benefit plans and defined contribution plans should stay in group 4 and be addressed by the IASB. The other part, addressing how to determine the allocation of future salary increases in the measurement of the present value of the defined benefit obligation, should be developed further by the staff and submitted to the Agenda Committee and the IFRIC as a potential agenda item.

The IFRIC agreed to include a comment on these decisions in the next IFRIC Update.

Status Report: De-mergers and Other In-specie Distributions

The IFRIC discussed a request that it provide guidance on how to account for de-mergers and other in-specie distributions in the financial statements of the entity making such distributions to its shareholders. The IFRIC seemed to agree with the staff that the issues were significant and related to its on-going work on amendments to IAS 27 Consolidated and Separate Financial Statements (and Business Combinations Phase II) and that the IASB should be consulted before further work was undertaken by the IFRIC.

The IFRIC agreed that it was not appropriate for it to undertake a project to interpret IAS 27 while that Standard was under revision and that it should await the outcome of that IASB project before making an Agenda Decision on this issue. It is likely that a report will be included in IFRIC Update acknowledging two acceptable methods of accounting for these transactions, namely:

  • distributions recorded at the carrying amounts (in the financial statements of the parent) of the assets or businesses distributed;
  • distributions recorded at the fair values of the assets or businesses distributed, with any difference between the fair values and the carrying amounts of the assets or businesses recognised in the parent's profit or loss.

Status Report: IAS 39 Financial Instruments: Recognition and Measurement – Derecognition Application Issues

The staff reminded the IFRIC that two application issues related to derecognition of financial instruments had been referred to the IASB at the request of IFRIC.

The IASB had discussed both issues at their September 2006 meeting and the IASB had given their views on those issues. In particular, the Board had noted that derivative instruments are not 'similar' to non-derivative financial assets for the purposes of IAS 39 paragraph 16 and that transferred derivatives that could be assets or liabilities (such as interest rate swaps) would have to meet both the financial asset and financial liability derecognition criteria. In addition, the IASB indicated that a transaction in which an entity transfers all the contractual rights to receive the cash flows without transferring legal ownership of the financial asset, would not necessarily be assessed as a potential pass through. Conversely, the pass through tests in IAS 39 paragraph 19 would be applied when the entity does not transfer all the legal rights to the cash flows of a financial asset, such as in a disproportionate transfer.

The IFRIC agreed that it should not take these issues to the Agenda. However, the level of discussion, including referral to the IASB, suggested that there was a lack of clarity in the guidance available, and that the Agenda Decision should seek to clarify the current requirements as well as giving constituents a definite indication about the way in which the IASB would seek those requirements to be applied.

The IFRIC will consider the Agenda Decision wording at a subsequent meeting.

IAS 39 Financial Instruments: Recognition and Measurement – Accounting for Short Sales of Financial Assets

The IFRIC agreed not to address an issue that asked whether the 'regular way purchase and sale' exemption in IAS 39 could be applied to short sales of financial assets. IFRIC members noted that the 'regular way' exemption in IAS 39 had not been extended to short sales because the IASC Board and the IASB had considered that the risks associated with short sales to be quite different to those involving 'long' positions.

A Tentative Agenda Decision notice will appear in the forthcoming IFRIC Update.

IAS 39 Financial Instruments: Recognition and Measurement – Financial instruments puttable at an amount other than fair value

The IFRIC agreed not to address issues related to how a financial instrument should be accounted for in the financial statements of the holder when the financial instrument is classified as a financial liability in the financial statements of the issuer.

A Tentative Agenda Decision notice will appear in the forthcoming IFRIC Update.

IAS 19 Employee Benefits – 'Special wage tax'

The IFRIC discussed a proposal that the IFRIC consider the accounting treatment for taxes on pension costs.