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News

Deadline on IFRIC D12-13-14 extended to 31 May

01 Apr 2005

The IFRIC has agreed to extend the deadline for comments on its three Draft Interpretations D12, D13, and D14 Service Concession Agreements to 31 May 2005. Those proposals were issued on 3 March 2005 with an original comment deadline of 3 May 2005. .

The IFRIC has agreed to extend the deadline for comments on its three Draft Interpretations D12, D13, and D14 Service Concession Agreements to 31 May 2005. Those proposals were issued on 3 March 2005 with an original comment deadline of 3 May 2005.

PCAOB proposal on elimination of a material weakness

01 Apr 2005

The US Public Company Accounting Oversight Board has proposed for public comment a standard that would apply when auditors report on the elimination of a material weakness in a company's internal control over financial reporting.

The proposed standard would establish a voluntary, stand-alone engagement that would be performed at the election of the company. Comments are due 16 May 2005. If the PCAOB does adopt a final standard, it will be submitted to the Securities and Exchange Commission for approval. The proposed rule may be Downloaded from the PCAOB's Website (Docket No. 018).

Report from the IFRIC meeting 31 March 2005

01 Apr 2005

The International Financial Reporting Interpretations Committee (IFRIC) is meeting at the IASB's offices in London on Thursday 31 March and Friday 1 April 2005. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the first day of the meeting.Notes from the IFRIC Meeting31 March 2005 Administrative Matters Gilbert Gelard, IASB member chaired the meeting.

The Chairman welcomed Shunichi Toyoda (Japan), who has replaced Junichi Akiyama on the IFRIC. Mr Toyoda is employed by the NEC Corporation. He is currently on secondment to the Accounting Standards Board of Japan, where he is a technical manager.

The IFRIC expressed its thanks and good wishes for the future to outgoing member Junichi Akiyama.

Mr Gelard also noted that this meeting would be the last for Robert Comerford (IOSCO-SEC) and for Kevin Stevenson (IASB). Mr Comerford will be leaving the SEC at the end of May. Mr Stevenson is returning to his native Australia at the end of April.

An IFRIC member expressed concern that the short comment letter period on the concessions exposure drafts (Draft Interpretations D12, D13 and D14) would lead to a 'lack of depth' in the comments. One of the international accounting firms had identified at least twelve points of principle in the exposure drafts and is concerned that there were several 'embedded interpretations' – especially of IAS 11 Construction Contracts – that might catch people unawares. The staff noted the concern and stated that the staff would investigate whether an extension of the comment period was possible given the desired completion date for the final interpretations.

IFRIC 3 Emission Rights

Intangible assets

The IFRIC considered a staff proposal to amend IAS 38 Intangible Assets to facilitate 'currency-like' intangible assets (eg emission allowances that can be used to settle emission obligations) to be measured at fair value through profit or loss. That amendment would be a further accounting policy choice in IAS 38.

The IFRIC had received strong representations from the European Financial Reporting Advisory Group (EFRAG) about IFRIC 3, especially with respect to a perceived accounting mismatch caused by the interaction of IAS 20 Government Grants, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and IAS 38.

The staff proposal would create a special category of intangible asset, which could be used if:

a. the intangible asset's value derives from the fact that it can be used to settle obligations; and b. the intangible asset has a fair value that can be determined by reference to an active market.

The IFRIC discussed the issue at length and explored the staff recommendations as well as other possible alternatives. There was enough support among IFRIC to direct the staff to develop its general proposal further. There was mixed support for a proposal that the accounting model should mandate a 'fair value through profit and loss' approach. One vote taken had enough support for a consensus view however, after further discussion, there was enough opposition to the mandatory requirement to block a consensus. Notwithstanding this vote, the IFRIC agreed that the staff should redraft the proposals assuming a mandatory requirement for fair value through profit or loss.

The staff was asked to refine the accounting model such that the class of intangible asset such that criterion (a) above would be something like 'the intangible asset ultimately derives its value from the fact that it can only be used to settle obligations'.

Hedge accounting

The IFRIC had also received a suggestion from the EFRAG that entities should be allowed to apply, by analogy, the hedge accounting provisions in IAS 39 Financial Instruments: Recognition and Measurement for a cash flow hedge of a foreign currency exposure.

IFRIC members stated that they wished to develop their views on the accounting for intangible assets before giving detailed consideration to this proposal. To that end, they directed the staff to ask EFRAG to prepare a more detailed proposal on hedge accounting and to submit this in good time before the next IFRIC meeting (2-3 June 2005).

IFRIC D9 Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions

The IFIRC discussed a preliminary analysis of comments received on exposure, in particular the measurement of the defined benefit obligation in respect of a D9-type plan. The discussion was wide-ranging, and no conclusions were reached. Several concerns were expressed, especially that, if the tentative staff conclusions were pursued, the IFRIC would be undertaking a far more fundamental amendment of IAS 19 Employee Benefits. Such a move would necessitate re-exposure.

The IFRIC will resume its redeliberations in June.

IFRIC D6 Multi-employer Plans

IFRIC redeliberated IFRIC D6 Multi-employer Plans with respect to State Plans. IFRIC D6 contained a proposed amendment to IAS 19 that stated that entities should account for state plans as defined contribution plans. The results from exposure were inconclusive, and some commentators disagreed with the automatic exemption from defined benefit accounting for any type of plan.

After a brief discussion, the IFRIC agreed with a staff recommendation that the IFRIC should not proceed with the proposed amendments to IAS 19 in relation to state plans.

IFRIC D5 Applying IAS 29 Financial Reporting in Hyperinflationary Economies for the First Time

Disposition of comments received on the 'near-final draft' of proposed IFRIC 6 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies.

The IFRIC did not provide Observer Notes for this session.

The IFRIC agreed a number of editorial amendments to the near-final draft of IFRIC 6 suggested by the staff. In addition, they agreed that the section on Transition (paragraph 7) was redundant and should be deleted.

The IFRIC agreed to redraft BC16, which contained a discussion of US generally accepted accounting principles and the reporting requirements of the US Securities and Exchange Commission, such that it is factual rather than discursive.

An IFRIC member raised a concern with the material in IE6, which addresses deferred tax accounting. The member was concerned that, while the example reflected appropriately the IFRIC's conclusions, the accounting result could be seen as being not meaningful. The concern was that the operation of the restatement approach magnifies the deferred tax effect by a greater amount than might be expected. The staff is to review the example. If it could be amended without major work and causing no changes in principle, the consensus would be issued under existing authorities granted by the IFRIC and IASB. However, if there were changes in principle as a result of the staff's review of the example, IFRIC 6 would have to be referred to the IFRIC (and the IASB) in June.

IAS 11 Combining and Segmenting Contracts

The IFRIC discussed a report to the IASB prepared by the staff, which summarised the IFRIC's work and conclusions on this topic. The staff's primary conclusions were (i) that there was no significant difference between IFRS and US GAAP with respect to combining and segmenting construction contracts and (ii) that the Board should assume responsibility for two revenue recognition issues identified during the course of IFRIC's discussions.

IFRIC members expressed concern that, while there might be no difference in net income between IFRS and US GAAP with respect to contract accounting, differences in the timing of revenue and expense recognition under the two regimes could lead to differences. These differences could lead to material differences in the measure of total revenue and total expense, even if net income was not affected.

The IFRIC also discussed two flowcharts comparing IFRS and US GAAP for the separation, allocation and recognition of multiple element arrangements. Some IFRIC members expressed some reservations about the staff analysis with respect to the accounting for multiple element arrangements under IFRS, but the discussion was not conclusive.

The IFRIC was asked to pass any comments to the staff off-line. In addition, they were asked to indicate which, if any, issues related to the topic they might want to pursue. Any such topics might be treated as supplemental topics for the service concessions team.

IFRIC D12, D13, D14 Service Concession Arrangements

The staff provided an oral report on the status of the comprehensive example designed to accompany D12, D13, and D14 on service concession arrangements. The example extends the example in the exposure draft to a 50-year arrangement and contains detailed computations, etc.

The staff had reviewed the example and had a number of comments and some major concerns, in particular with respect to potential conflicts with current requirements of IAS 38. The parties preparing the example (who are independent of the IASB) have yet to respond to the staff. However, from experience they have been very accommodating to staff concerns. The comprehensive example will be available on the IASB Website as soon as the staff is satisfied with its contents. The IFRIC will not review it.

This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.

March 2005 edition of Accounting Roundup

01 Apr 2005

We have posted the (PDF 176k), prepared by the National Office Accounting Standards and Communications Group of Deloitte & Touche LLP (USA).

This edition has information about FASB developments (several final and proposed FSPs and summaries of recent FASB meetings); AICPA developments (exploring changes to GAAP for private companies); SEC developments (including SAB 107, an SEC Staff Alert on annual report reminders, and FAQs on the SEC's voluntary XBRL filing program); and international developments (including the IASB Staff Paper on the fair value option, IFRIC's proposed guidance on service concession arrangements, and a summary of the March 2005 IASB meeting). You will find past issues Here.

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.

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