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March

IFRIC D15 Reassessment of Embedded Derivatives

31 Mar 2005

The International Financial Reporting Interpretations Committee (IFRIC) has released for public comment Draft Interpretation D15 'Reassessment of Embedded Derivatives'.

IAS 39 Financial Instruments: Recognition and Measurement requires an entity, when it first becomes a party to a contract, to assess whether any embedded derivatives contained in the contract are required to be separated from the host contract and accounted for separately as derivatives under the standard. (An example of an embedded derivative is the conversion option that is part of an investment in convertible debt.)

The two questions addressed in D15, and the proposed responses, are:

  • Question: Does IAS 39 require assessment of whether an embedded derivative must be separated from the host contract only when the entity first becomes a party to the derivative contract or throughout the life of the contract?
    D15 Proposal:
    Make the assessment only when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract, in which case it is required.
  • Question: Should a first-time adopter of IFRSs make its assessment on the basis of the conditions that existed when the entity first became a party to the derivatives contract, or those prevailing when the entity adopts IFRSs for the first time?
    D15 Proposal: Make the assessment based on the conditions that existed when the entity first became a party to the contract.

To allow entities affected by the final interpretation enough time to change current practices, the proposed effective date for the interpretation is annual periods beginning on or after a date to be set at three months after the interpretation is finalised. Earlier application would be encouraged. Comment deadline on D15 is 31 May 2005.

Click for Press Release (PDF 66k). The draft interpretation may be downloaded from IASB's Website (subscribers only until tomorrow).

 

New IFRIC member appointed

31 Mar 2005

The IASC Foundation Trustees have appointed Shunichi Toyoda of NEC Corporation, Japan, to the International Financial Reporting Interpretations Committee (IFRIC).

He will complete the remainder of the term of Junichi Akiyama, Tama University, Japan, who recently retired from the IFRIC. Mr Toyoda's term expires on 30 June 2006.

Click for:

 

Financial reporting by insurance companies

31 Mar 2005

Because of concerns that some insurance companies may have entered into reinsurance transactions for the purpose of manipulating capital and income, the New York State Insurance Department is requiring the chief executive officers of insurance companies it regulates to attest, under penalty of perjury, that with respect to cessions under any reinsurance contract: there are no separate written or oral agreements that would, under any circumstances, reduce, limit, mitigate, or otherwise affect any actual or potential loss to the parties under the reinsurance contract; and for each such reinsurance contract, the reporting entity has an underwriting file documenting the economic intent of the transaction and the risk transfer analysis evidencing the proper accounting treatment, which is available for review. Click for (PDF 13k) and (PDF 29k). .

Because of concerns that some insurance companies may have entered into reinsurance transactions for the purpose of manipulating capital and income, the New York State Insurance Department is requiring the chief executive officers of insurance companies it regulates to attest, under penalty of perjury, that with respect to cessions under any reinsurance contract:

  • there are no separate written or oral agreements that would, under any circumstances, reduce, limit, mitigate, or otherwise affect any actual or potential loss to the parties under the reinsurance contract; and
  • for each such reinsurance contract, the reporting entity has an underwriting file documenting the economic intent of the transaction and the risk transfer analysis evidencing the proper accounting treatment, which is available for review.
Click for (PDF 13k) and (PDF 29k).

EITF mining decision affects US IFRS filers

31 Mar 2005

On 30 March 2005, FASB's Emerging Issues Task Force reached a consensus on the treatment of stripping costs incurred in open pit mines once production commences.

Those costs are to be considered a variable production cost. Deferral of such costs on the balance sheet via a 'life of mine stripping ratio' is no longer permitted under US GAAP. Foreign companies that file with the SEC and use IFRS or other national GAAP, and that decide to retain the practice of deferring post-production stripping costs, will have to include an adjustment in their US GAAP reconciliation going forward. Pre-production stripping was not addressed by the EITF, so the general practice of capitalising such costs as part of mine development costs is not affected. For more information see EITF Issue No. 04-6 Accounting for Stripping Costs in the Mining Industry on FASB's Website.

SEC Staff Accounting Bulletin on Stock Options

30 Mar 2005

The staff of the US Securities and Exchange Commission has issued Staff Accounting Bulletin 107 dealing with valuations and other accounting issues for share-based payment arrangements by public companies under FASB Statement 123R Share-Based Payment.

For public companies, valuations under Statement 123R are similar to those under IFRS 2 Share-based Payment. SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of Statement 123R in an interim period, capitalisation of compensation cost related to share-based payment arrangements, accounting for the income tax effects of share-based payment arrangements on adoption of Statement 123R, the modification of employee share options prior to adoption of Statement 123R, and disclosures in Management's Discussion and Analysis (MD&A;) subsequent to adoption of Statement 123R. One of the interpretations in SAB 107 is whether there are differences between Statement 123R and IFRS 2 that would result in a reconciling item:

Question: Does the staff believe there are differences in the measurement provisions for share-based payment arrangements with employees under International Accounting Standards Board International Financial Reporting Standard 2, Share-based Payment ('IFRS 2') and Statement 123R that would result in a reconciling item under Item 17 or 18 of Form 20-F? Interpretive Response: The staff believes that application of the guidance provided by IFRS 2 regarding the measurement of employee share options would generally result in a fair value measurement that is consistent with the fair value objective stated in Statement 123R. Accordingly, the staff believes that application of Statement 123R's measurement guidance would not generally result in a reconciling item required to be reported under Item 17 or 18 of Form 20-F for a foreign private issuer that has complied with the provisions of IFRS 2 for share-based payment transactions with employees. However, the staff reminds foreign private issuers that there are certain differences between the guidance in IFRS 2 and Statement 123R that may result in reconciling items. [Footnotes omitted]

Click to download:

March 2005 edition of EITF Roundup

29 Mar 2005

We have posted the (PDF 148k), which provides an overview of the issues discussed, consensuses reached, and administrative matters discussed at the 17 March 2005 meeting of FASB's Emerging Issues Task Force.

You will find past issues Here.

CFA Institute supports FASB and SEC on stock options

29 Mar 2005

In a letter to the chairs of the US SEC and FASB, the president of the CFA Institute urged those organisations "to proceed with the planned implementation of the new stock option expensing rules as embodied in FAS 123(R)....

Any argument that stopping or delaying the expensing requirement is somehow good for investors is pure nonsense. It simply extends the practice of improperly understating compensation expense." With regard to measurement issues, the letter cites the successful implementation of IFRS 2:

The question of how to value stock options is not a valid reason to avoid taking an expense. The issue of stock option expensing has been studied and debated for decades. Refinement of valuation models has occurred over a similar time span by industry experts, Nobel Prize winners and accounting leaders. It is a simple fact that such calculations will never be an exact science. Neither is the estimate of depreciation. Yet, standard methodologies are working well under IASB rules, are being used voluntarily by over 900 U.S. firms already and represent a dramatic improvement over no expensing.

Click to Download the Letter (PDF 34k).

Survey on extended use of IFRSs in the EU

29 Mar 2005

The European Commission has updated its survey of the 25 EU member states and the 3 EEA member countries concerning their plans for the following four options on use of IFRSs that are permitted under the EU Accounting Regulation: Require or permit IFRSs for unlisted companies Require or permit IFRSs in parent company (unconsolidated) financial statements Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007 Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007. Here is an overview of the latest findings: .

The European Commission has updated its survey of the 25 EU member states and the 3 EEA member countries concerning their plans for the following four options on use of IFRSs that are permitted under the EU Accounting Regulation:

  • Require or permit IFRSs for unlisted companies
  • Require or permit IFRSs in parent company (unconsolidated) financial statements
  • Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007
  • Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007.
Here is an overview of the latest findings:

EC Survey on Extended Use of IFRSs

Use of IFRSs in the separate company financial statements of listed companies:

  • 13 countries will permit: DK*, FI, DE**, IE, LU, NL, PT***, UK, NO, IS, LI, HU**, PL*required after 2009; **statutory accounts that conform to national GAAP are also required; ***except banks
  • 9 countries will require: GR, IT*, CZ, CY, EE, LT, MT, SQ, SI*except insurance
  • 5 countries will prohibit: AT, FR, ES, SE, LV
  • 1 country undecided: BE
Use of IFRSs in the consolidated statements of unlisted companies:
  • 24 countries will permit: AT, BE, DK, FI, FR, DE, GR, IT*, IE, LU, NL, PT, ES, SE, UK, NO, IS, LI, CZ, CY, EE, HU, PL, SI *except small
  • 6 countries will require: LV*, LT*, MT, PL*, SQ, SI**for banks only
  • 2 countries will prohibit: LV*, LT**for other than banks
Defer IFRSs to 2007 for companies with only listed debt securities:
  • 13 countries will defer: AT, BE, DK*, FI, FR, DE, LU, ES*, SE, NO, IS, HU, PL*no deferral for banks
  • 15 countries will not defer: all others
Defer IFRSs to 2007 for companies listed overseas using a non-EU GAAP:
  • 6 countries will defer: AT, BE, DE, LU, NO, IS
  • 22 countries will not defer: all others
In some cases, the positions noted above are leanings that are not yet finalised. For details, click to download (PDF 40k)

Eleventh UK webcast update on transition to IFRSs

28 Mar 2005

The Deloitte London IFRS Centre of Excellence is running a monthly series of hour-long Internet-based IFRS technical updates, focusing on the most important international accounting standards and how they will affect UK companies.

The eleventh webcast was run on Thursday 24 March 2005 and focused on issues affecting whether to adopt IFRSs for entity financial statements (as permitted by UK law) and the impact of the UK Accounting Standards Board's convergence programme for subsidiaries and other companies that continue with UK GAAP. To access the recording Click Here. The recording of each session will be available on this website for a period of at least 3 to 4 weeks from the date of the presentation. Links to past sessions may be found on our United Kingdom Page. The recording is no longer available online.

IAASB issues four exposure drafts

24 Mar 2005

The International Auditing and Assurance Standards Board (IAASB) has invited comments on exposure drafts of four proposed International Auditing Standards (ISAs).

The EDs propose new guidance designed to enhance the quality of group financial statement audits, independent auditors' reports, and communications between auditors and those charged with governance. Titles of the documents, which may be downloaded from IAASB's Website, are:
  • Proposed ISA 600 (Revised), The Audit of Group Financial Statements.
  • Proposed ISA 260 (Revised), The Auditor's Communication with Those Charged with Governance.
  • Proposed ISA 705, Modifications to the Opinion in the Independent Auditor's Report.
  • Proposed ISA 706, Emphasis of Matter Paragraphs and Other Matters Paragraphs in the Independent Auditor's Report (derived from ISA 701, Modifications to the Independent Auditor's Report).
Comments on all of the proposals are due by 31 July 2005.

Correction list for hyphenation

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