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EC opinions on consolidated and separate statements

20 Feb 2007

At the 2 February 2007 meeting of the European Commission's Accounting Regulatory Committee, the Commission presented two final interpretive opinions dealing respectively with the meaning of 'annual accounts' and the possibility to issue annual accounts prepared in accordance with IFRS before consolidated ones.

Both relate to application of the requirements of IAS 27 Consolidated and Separate Financial Statements within the European Union:
  • If a parent company in the EU is not required by the Seventh Directive to prepare consolidated accounts, can it issue IFRS 'annual accounts' (its own separate financial statements) in conformity with IFRSs? In almost all circumstances, if a company is a parent, IAS 27 requires the preparation of consolidated financial statements. Under IAS 27, the parent's separate financial statements are an additional set of financial statements not required by IAS 27. The Commission has concluded, however, that the Seventh Directive takes precedence in Europe in determining when consolidated statements must be prepared. Therefore, if the Seventh Directive does not require consolidated financial statements, a parent company can prepare its separate financial statements using IFRSs. The Commission's view is that "the IAS 27 requirements to prepare consolidated accounts do not apply." Click for Commission's Opinion (PDF 25k).
  • Can a company that prepares both individual and consolidated accounts in accordance with IFRSs adopted for use in Europe issue the individual accounts before issuing the consolidated accounts? In rejecting an agenda topic in March 2006, the IFRIC concluded that separate financial statements issued before consolidated financial statements could not be considered to comply with IFRSs, because separate financial statements are required by IAS 27 paragraph 42 to identify the consolidated financial statements to which they relate. However, the European Commission has concluded that the interpretation under the EU IAS Regulation is different. If a company chooses or is required to prepare its annual accounts in accordance with IFRSs as adopted by the EU, it is permitted to prepare and file them independently from the preparation and filing of its consolidated accounts – and thus in advance – where the national law transposing the Directives requires or permits separate publication. Click for Commission's Opinion (PDF 25k).

Special EFRAG meeting on service concessions

19 Feb 2007

The European Financial Reporting Advisory Group will hold an extra meeting on IFRIC 12 Service Concession Arrangements on Friday 9 March 2007 in its offices 13/14 Avenue des Arts, Brussels.

This is in addition to the scheduled EFRAG meeting on 14-16 March 2007. Our news story of 13 February 2007 reported that EFRAG's tentative view is to recommend that the European Commission endorse IFRIC 12 for use in Europe. However, a significant minority of EFRAG members disagree. Here is a link to download EFRAG's Draft Comment Letter (DOC 132k). Comments are requested by 28 February 2007.

SEC Commissioner speaks about IFRSs

18 Feb 2007

Kathleen L. Casey, the newest member of the US Securities and Exchange Commission, spoke about International Financial Reporting Standards in her remarks at the Practicing Law Institute's SEC Speaks conference.

 Click for Commissioner Casey's Remarks (PDF 47k). An excerpt:

Likewise, as you have just heard from the prior panel, the Commission is committed to the roadmap announced in 2005 that sets out a timeline for the Commission's consideration of the various steps necessary to make a determination on the elimination of the reconciliation requirement for foreign private issuers that use International Financial Reporting Standards ('IFRS'). As we begin Year 2 of IFRS, we are working through application issues with foreign issuers and continue dialogue with international regulators to analyze the faithfulness and consistency of the application and interpretation of IFRS in financial statements.

We also continue to monitor the progress of the IASB and FASB in their convergence projects. I strongly support these efforts and am committed to identifying issues and obstacles early in order to move toward our goal in a timely manner.

IFRS implementation review panel formed in Netherlands

16 Feb 2007

The Netherlands Authority for Financial Markets (Autoriteit Financiele Markten or AFM) has formed a Financial Reporting Committee of 12 external IFRS experts to advise the Authority on the application of IFRSs and the supervision thereof.

Click for AFM's Press Release (PDF 15k). The AFM is responsible for supervising the financial reporting of Dutch listed companies. They have announced that their 2007 reviews of the 2006 financial reporting will focus on the application of IAS 12 Income Taxes and IAS 7 Cash Flow Statements. Click for Letter Sent to Listed Companies (PDF 283k) setting out the results of AFM's review of 2005 reports and example questions for 2006.


FASB adopts fair value option for financial instruments

16 Feb 2007

The US Financial Accounting Standards Board has issued a standard that provides companies with an option to report selected financial assets and liabilities at fair value.

Statement 159 The Fair Value Option for Financial Assets and Financial Liabilitiesalso establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for an entity's first financial year beginning after 15 November 2007, with earlier adoption permitted. Under FAS 159, the fair value option:
  • May be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method
  • Is irrevocable (unless a new election date occurs)
  • Is applied only to entire instruments and not to portions of instruments.
The FAS 159 fair value option is similar, but not identical, to the fair value option in IAS 39 Financial Instruments: Recognition and Measurement. The IAS 39 fair value option is subject to certain qualifying criteria not included in FAS 159, and it applies to a slightly different set of instruments. Click for FASB's News Release (PDF 58k). You can download FAS 159 from FASB's Website.

IAS Plus Newsletters for February 2007

16 Feb 2007

The February 2007 IAS Plus Quarterly Newsletter has been published.

The newsletter reports on the 4th quarter 2006 and early 2007 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 22-page news content as the Global Edition plus 7 more pages of accounting standards updates for the Asia-Pacific region.

IASB invites comments on SME exposure draft

15 Feb 2007

The IASB has published an Exposure Draft of an 'International Financial Reporting Standard for Small and Medium-sized Entities' (IFRS for SMEs).

The ED is a simplified, self-contained set of accounting principles for SMEs. Compared to full IFRSs, the volume has been reduced by 85%.

The IFRS for SMEs is based on full IFRSs, which are developed for public capital markets. Modifications are based on user needs and cost-benefit considerations.

The IFRS for SMEs would enable investors, lenders, and others to compare SMEs' financial performance, financial condition, and cash flows while, at the same time, reducing the burden of preparing SME financial statements. Thirteen Board members voted in favour of the ED, and one opposed. An overview is presented below.

Comment deadline is 1 October 2007. Click for Press Release (PDF 98k) and here for Project Background Info. The ED is now available to subscribers on the IASB's website. It will be publicly available 26 February 2007.



Definition of an SME

The IFRS for SMEs is intended for an entity with no public accountability. An entity has public accountability (and therefore should use full IFRSs) if:

  • it has issued debt or equity securities in a public market; or
  • it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund, or investment bank.

Stand-alone document

The Board intends the IFRS for SMEs to be a stand-alone document for a typical SME with about 50 employees. The IASB has not specified a quantified size test, though jurisdictions adopting the IFRS for SMEs may add one. There is no mandatory fallback to full IFRSs.

Small listed companies

They are not eligible to use the IFRS for SMEs. Listed companies, large or small, have elected to seek capital from outside investors who are not involved in managing the business and who do not have the power to demand information that they might want. Full IFRSs have been designed to serve public capital markets.

Based on concepts and principles in full IFRSs

The draft IFRS for SMEs was developed by extracting the fundamental concepts from the IASB Framework for the Preparation and Presentation of Financial Statements and the principles and related mandatory guidance from IFRSs with appropriate modifications in the light of users' needs and cost-benefit considerations.

Modifications of IFRSs

The modifications are of three broad types based on needs of users of SMEs' financial statements and cost-benefit considerations:

1. Topics omitted. IFRS topics not relevant to a typical SME are omitted, with cross-references to the IFRS if needed. These are:

  • General price-level adjusted reporting in a hyperinflationary environment.
  • Equity-settled share-based payment (the computational details are in IFRS 2 Share-based Payment).
  • Determining fair value of agricultural assets (look to IAS 41 Agriculture, but the ED also proposes to reduce the use of fair value through profit or loss for agricultural SMEs).
  • Extractive industries (look to IFRS 6 Exploration for and Evaluation of Mineral Resources).
  • Interim reporting (look to IAS 34 Interim Financial Reporting).
  • Lessor accounting finance leases (finance lessors are likely to be financial institutions who would be ineligible to use the IFRS for SMEs anyway).
  • Recoverable amount of goodwill (SMEs would test goodwill for impairment much less frequently than under IAS 38 Intangible Assets, but if an SME is required to perform such a test it would look to the calculation guidance in IAS 38).
  • Earnings per share and segment reporting, which are not required for SMEs, and Insurance contracts (insurers would not be eligible to use the IFRS for SMEs).

2. Only the simpler option included. Where full IFRSs provide an accounting policy choice, only the simpler option is in the IFRS for SMEs. An SME is permitted to use the other option by cross-reference to the relevant IFRS. These are:

  • Cost-depreciation model for investment property (fair value through profit or loss is permitted by reference to IAS 40 Investment Property).
  • Cost-amortisation-impairment model for property, plant and equipment and intangibles (the revaluation model is allowed by references to IAS 16 Property, Plant and Equipment and IAS 38).
  • Expense borrowing costs (capitalisation allowed by reference to IAS 23 Borrowing Costs).
  • Indirect method for reporting operating cash flows (the direct method is allowed by reference to IAS 7 Cash Flow Statement).
  • One method for all grants (or an SME can use any of the alternatives in IAS 20 Government Grants and Disclosure of Government Assistance).

In adopting the IFRS for SMEs, an individual jurisdiction could decide not to allow the option that is cross-referenced to the full IFRS.

3. Recognition and measurement simplifications. Here are some examples:

  • Financial instruments:
    • Two categories of financial assets rather than four. This means no need to deal with all of the intent-driven held to maturity rules or related 'tainting', no need for an available for sale option, and many other simplifications.
    • A clear and simple principle for derecognition - if the transferor has any significant continuing involvement, do not derecognise. The complex 'pass-through testing' and 'control retention testing' of IAS 39 Financial Instruments: Recognition and Measurement are avoided.
    • Much simplified hedge accounting.
  • Goodwill impairment - an indicator approach rather than mandatory annual impairment calculations.
  • Expense all research and development cost (IAS 38 would require capitalisation after commercial viability has been assessed).
  • The cost method for associates and joint ventures (rather than the equity method or proportionate consolidation).
  • Less fair value for agriculture - only if 'readily determinable without undue cost or effort'.
  • Defined benefit plans - a principle approach rather than the detailed calculation and deferral rules of IAS 19 Employee Benefits. Complex 'corridor approach' omitted.
  • Share-based payment - intrinsic value method.
  • Finance leases - simplified measurement of lessee's rights and obligations.
  • First-time adoption - less prior period data would have to be restated than under IFRS 1 First-time Adoption of IFRSs.

Frequency of updating the IFRS for SMEs

  • Approximately once every two years via an 'omnibus' exposure draft.

Organisation of the ED

The ED is issued in three documents:

  • The draft IFRS for SMEs (254 pages),
  • Implementation guidance (80 pages, consisting of illustrative financial statements and a disclosure checklist), and
  • Basis for conclusions (48 pages).
The IFRS for SMEs is organised topically, rather than in IAS/IFRS statement number sequence. It has 38 sections and a glossary.

Next steps

  • Comment deadline on the ED is 1 October 2007.
  • During the exposure period the Board will conduct round-table meetings with SMEs and small firms of auditors to discuss the proposals. The Board will field test the proposals in the ED.
  • Final standard is expected in mid-2008.
  • It would be effective according to decisions in each jurisdiction that adopts the IFRS for SMEs.

New UK publication on interim financial reporting

15 Feb 2007

Deloitte (United Kingdom) has published Clear All Year–Considering New Rules and Practice in Interim Reporting. This 92-page publication considers, among other things, the EU Transparency Obligations Directive and its impact on United Kingdom reporting by fully listed companies.

The publication consists of seven parts:
  1. An overview of the new rules in UK periodic reporting arising from Disclosure and Transparency Rules (DTR).
  2. A survey on corporate periodic reporting.
  3. A model half-yearly financial report in accordance with IAS 34 Interim Financial Reporting and the DTR.
  4. A half-yearly financial report disclosure checklist.
  5. A model Interim Management Statement (IMS).
  6. An IMS disclosure checklist.
  7. A guide to IAS 34.
It is aimed at:
  • Finance Directors and Financial Controllers of public and AIM companies; and
  • non-executive directors, including Audit Committee members, of listed and AIM companies, who may be interested in financial reporting issues.
Click to Download Clear All Year (PDF 760k).

Agenda for leases working group meeting

14 Feb 2007

The IASB and FASB Working Group on Lease Accounting will meet on 15 February 2007 (tomorrow) at the Crowne Plaza London - St James, 45-51 Buckingham Gate, London.

The meeting is open to public observation. The agenda is below. Click here to Download the Agenda Papers (AP) from the IASB's website.

Agenda: IASB and FASB Working Group on Lease Accounting

15 February 2007, 10:00am to 17:30pm

  • The need for change – IASB Member Warren McGregor
  • Project overview and objectives of the meeting – AP 1
  • Identification of the assets and liabilities arising in a simple lease contract and analysis of different possible accounting models – AP 5 and AP 6
  • Characteristics and terms of common lease contracts – AP 7
  • Initial recognition of assets and liabilities arising in a lease contract – AP 8
  • Identification of the assets and liabilities arising in a lease with a lessee option to renew and analysis of different possible accounting models – AP 9 and AP 10
  • Options to terminate a lease – AP 11

Additional agenda papers are:

  • AP 2 History of Lease Accounting
  • AP 3 Academic research on Lease Accounting
  • AP 4 Asset and Liability definitions

US SEC plans roundtable discussion of the 'roadmap'

14 Feb 2007

On 6 March 2007, senior SEC staff members from the Office of the Chief Accountant, the Division of Corporation Finance, and the Office of International Affairs will hold a roundtable discussion on the 'roadmap' regarding IFRSs.

The roadmap is a plan for eliminating the need for non-US SEC registrants that file IFRS financial statements to reconcile to US GAAP. That plan was first articulated by then SEC Chief Accountant Donald Nicolaisen in April 2005. The 6 March 2007 roundtable will be moderated by Conrad Hewitt, the SEC's Chief Accountant, and John W. White, Director of Corporation Finance. It will be held at the SEC's offices in Washington, DC, and will be open to the public.

The roundtable will consist of three panels organised to address each of the following issues with respect to the roadmap:

  • the effect on the capital raising process in the US capital markets;
  • the effect on issuers in the US capital markets; and
  • the effect on investors in the US capital markets.

Click to download:

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