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News

PCAOB staff Q&As on internal controls

12 Oct 2004

The US Public Company Accounting Oversight Board has published a second set of staff questions and answers related to PCAOB Auditing Standard No.

2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. AS 2 applies to audits of foreign, as well as domestic, SEC registrants. The new Q&As; (nos. 27-29) address the scope and extent of testing, evaluating deficiencies, and service organisations. Click to download:

Role of the audit committee examined

12 Oct 2004

In her recent comments on The Role of the Audit Committee: The US Experience, US SEC Commissioner Cynthia A.

Glassman spoke about application of the Sarbanes-Oxley Act to foreign registrants:

It is clear that the problems that led to the enactment of Sarbanes-Oxley are not exclusive to the United States. Corporate governance issues are just as important internationally, as evidenced by some of the recent Italian and other European scandals. We in the United States are also not the only ones crafting solutions to these problems. It is therefore incumbent upon all of us to work diligently to ensure that our solutions are appropriate and have the intended effect. The Commission therefore has and will continue to seek a balance between its responsibility to protect U.S. investors and the need to provide reasonable accommodations to foreign issuers.

Deloitte comment letters on proposed IAS 39 amendments

11 Oct 2004

We have posted three letters of comment submitted by Deloitte in response to the IASB's exposure drafts of proposed amendments to IAS 39: .

New Australian Accounting Alert posted

11 Oct 2004

We have posted (PDF 50k), which discusses a new amendment to AASB 1046 "Director and Executive Disclosures by Disclosing Entities".

You will find all past Australian Accounting Alerts Here.

Second day of the October 2004 IFRIC meeting

10 Oct 2004

The International Financial Reporting Interpretations Committee (IFRIC) met in London for two days: 7 and 8 October 2004. Presented below are the preliminary and unofficial notes taken by the Deloitte observers at the second day of the meeting.Notes from the IFRIC Meeting8 October 2004 IFRIC D8 Members' Shares in Co-operative Entities The IFRIC considered an overview paper outlining the responses to the exposure of this draft.

It was noted that 74% of respondents agreed either fully or in part with the proposals.

The IFRIC considered in brief issues raised by respondents, including:

  • Expanding the title of the interpretation to reflect its increased scope;
  • The need for additional guidance clarifying the difference for accounting purposes between a prohibition on the creation of a liability, and the prohibition on the settlement of a liability;
  • Agreeing in principle that the ability to change the Charter of an organisation does not affect the classification as liability or equity until such time as that change in Charter has occurred;
  • The use and application of the portfolio approach;
  • The need for transitional provisions, noting that in Europe these would be unnecessary as entities would be caught by the transitional provisions relating to adoption of IAS 32; and
  • Whether profit or loss could ever arise on reclassification between liability and equity.

The objective of the session was to highlight issues and ensure IFRIC members believed all major issues arising in comment letters would be addressed by exploration of those issues. The IFRIC agreed to discuss these issues in more detail at its November meeting. In addition the IFRIC will consider a draft interpretation at its November meeting.

Service Concessions

The IFRIC was presented three draft interpretations in relation to service concessions to consider:

  • D10A Service Concession Arrangements - Determining the Accounting Model
  • D10B The Financial Asset Model
  • D10C The Intangible Asset Model

Determining the accounting model

The IFRIC considered issues arising from the draft interpretation on selection of the accounting model. They noted that where there is a requirement for the grantor to pay, at the end of the concession, the fair value of the asset at that time, the arrangement would not be within the scope of the interpretations because the control tests are not met.

One IFRIC member raised a concern as to whether an operator can allocate different margins to different parts of a contract where the segmentation criteria in IAS 11 are not met. It was generally agreed that where output measures are used to measure completion then such accounting is possible, but this issue would be better considered as part of the combining and segmenting project, and should not hold up the release of the draft interpretations.

Some IFRIC members expressed concern about the use of the financial asset model when payments by the grantor depend on usage, but most IFRIC members believed this was acceptable. The IFRIC discussed widening the scope of the financial asset model to capture all arrangements where an entity has a right to receive cash (whether from the grantor, or from users with a grantor minimum guarantee), leaving arrangements where an entity only has the right to try and earn cash in the intangible asset model. The IFRIC agreed that the model as currently drafted should be released for exposure without this widening of the application of the financial asset model. The IFRIC also requested that wording be included to the effect that the existence of rate regulation (ie an ability to increase prices to offset lower than expected demand) does not by itself mean the financial asset model is appropriate, as such rate regulation is only effective in creating a financial asset where the possibility of non-recovery is remote.

The IFRIC briefly discussed transitional arrangements, and given the planned effective date of 1 January 2006, what, if anything could be done about accounting for these arrangements in 2005. It was agreed that they should not propose to suspend the hierarchy in respect of these arrangements for 2005, and therefore entities would have to determine accounting policies believed to be consistent with the hierarchy which, it was acknowledged, could include continuing to apply a fixed asset model.

The IFRIC also discussed whether a fair value at date of adoption transition model could be offered, and agreed that under the intangible asset model it could not because there is no active market (and therefore such a transitional alternative would be inconsistent with IFRS 1. It was generally agreed that the transitional arrangements as drafted (that where restatement is not practical the entity should reclassify the asset and test for impairment as of the beginning of the earliest period presented if possible) should be exposed for public comment.

Staff agreed to develop some additional worked examples of how each of the models work across a long-lived concession for consideration at the next meeting, and that these would be considered for incorporation into educational material rather than as part of the draft interpretations.

The Financial Asset Model

The draft interpretation considered by IFRIC was broadly consistent with the one considered at the September meeting. The IFRIC considered a number of issues, particularly around the measurement of a financial asset, including the effect of anticipated penalty clauses, and re-measurement when such assumptions change. It was agreed that this was outside of the scope of this interpretation.

It was noted that in the context of the financial asset model it would be unlikely that there would be material qualifying assets for the purposes of capitalising borrowing costs. It was agreed that the draft interpretation should explain this in more detail by outlining the interaction of IAS 11, IAS 18 and IAS 23 in this situation.

The Intangible Asset Model

The IFRIC revisited the issue discussed in previous meetings on the exchange transaction that occurs when the intangible asset model is used, resulting in revenue being recognised on the construction services (exchange of construction services for an intangible asset), followed by recognition of additional revenue resulting from the cash inflows from operations (perceived as a 'double counting' because ultimately only the one set of cash flows is received). A number of IFRIC members expressed their discomfort with this outcome, however only two IFRIC members indicated their intention to dissent on the basis of this issue. Other IFRIC members were uncomfortable, but unable to develop technical bases for dissenting as they believe this outcome is forced by the current literature.

There was considerable discussion around whether an entity should recognise the intangible as it completes construction services, recognise the intangible and a corresponding liability for performance on Day 1, or recognise a receivable as it completes construction services (being the right to receive an intangible). It was agreed that the interpretation should not be explicit on this issue, but should clarify that the intention is that the pattern of revenue recognition should be similar to that which would occur under ordinary IAS 11 construction contract accounting.

One IFRIC member indicated his intention to draft a dissent from the exchange model, on the basis that as you cannot segment the contract, only the total cash flows should be recognised as revenue (being the fair value of amounts received or receivable from the combined construction and operation activities) and agreed that he would not dissent from issuing the draft interpretation for comment if his dissent were adequately reflected in the basis for conclusions.

The IFRIC agreed that when the intangible asset model is being applied that the effect of any caps, floors etc should be recognised using an IAS 37 type model and that fair valuing such features should not be permitted.

Considerable confusion was noted around how repairs and maintenance obligations should be accounted for, and it was agreed that further application guidance was necessary. Such guidance would clarify that under the financial asset model, it would simply be a revenue deferral issue (that is the repairs and maintenance might be completed either before or after revenue in respect of these services was received, and the revenue should be accounted for according to whether the related service had yet been performed). Under the intangible asset model repairs and maintenance should be accounted for in accordance with IAS 37.

The IFRIC will consider draft interpretations at the meeting to be held in November with the intention of voting to issue them for public comment at that time. It is expected that there will be a 3 month comment period.

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

First day of the October 2004 IFRIC meeting

09 Oct 2004

The International Financial Reporting Interpretations Committee (IFRIC) is meeting in London for two days: 7 and 8 October 2004. Presented below are the preliminary and unofficial notes taken by the Deloitte observers at the first day of the meeting.Notes from the IFRIC Meeting7 October 2004 IFRIC D1 - Emission Rights The IFRIC discussed the effective date of 1 March 2005 and underscored that its intention was for this Interpretation not to be effective for European first-time adopters although early adoption is encouraged. The point was made that the Basis for Conclusions does not adequately support the decision taken for non-amortisation of the allowances under D1. In addition, concern was raised that the Basis for Conclusions appears to give the impression that application of IAS 38 would result in an accounting treatment that is not representationally faithful.

Staff agreed to revisit the drafting.

Other editorial type issues were discussed.

No objections were noted to the finalisation of this Interpretation, subject to editorial amendments.

IFRIC D7 - Scope of SIC 12 Consolidation - Special Purpose Entities

At this meeting, the staff presented to the IFRIC, an analysis of the 26 comment letters received.

Removal of scope exclusion for equity compensation plans

All respondents agreed with the proposal to remove from SIC-12 the scope exclusion for equity compensation plans.

Post-Employment and Other Long-Term Benefit Plans

Most respondents agreed with the proposed amendment. However, some respondents expressed concerns about how the proposed amendment would affect defined contribution plans. The IFRIC discussed this issue at length and agreed with the Staff proposal that the only change that should be made to the scope of SIC-12 in respect of post-employment benefit plans is to simply add a reference to 'other long-term employee benefit plans', i.e. so as to read:

"This Interpretation does not apply to post-employment benefit plans or other long-term employee benefit plans."

D6 Multi-employer Plans

Due to the overwhelmingly unfavourable responses to D6, staff proposed that IFRIC recommend to the IASB that an amendment to IAS 19 be considered so as to provide a blanket exemption from defined benefit accounting and to require instead, defined contribution accounting with additional disclosures. Respondent's main concern was the availability of information as well as the reliability of the apportionment amongst participants in a multi-employer plan.

The IFRIC discussed this issue at length with certain members indicating that the staff proposal was a step backward from the correct answer. Members reaffirmed the intention of D6 as that of moving the accounting by participants of multi-employer plans towards defined benefit accounting. A blanket exemption would therefore be less satisfactory than the current IAS 19 requirements that IFRIC sort to improve.

IFRIC decided not to proceed with D6 but to bring the issue to the IASB's attention for consideration and guidance.

D3 - Determining Whether an Arrangement Contains a Lease

Editorial type issues were discussed and no objections were noted to the finalisation of D3.

Waste Electrical and Electronic Equipment

Editorial type issues were discussed and no objections were noted. A draft Interpretation will be finalised and forwarded to IASB members for negative clearance.

Report of Agenda Committee and Activities of Other Interpretive Bodies

Staff presented the issues raised to the Agenda Committee as well as other interpretive bodies. These issues were noted.

Application Issues for IAS 1

The IFRIC were asked to consider whether to add to its agenda, the following application issues in respect of IAS 1:

a. whether it is acceptable to present net finance costs on the face of the income statement without showing the finance costs and finance revenue composing it; and

b. whether particular expenses (such as impairments, inventory write-downs and restructuring costs) may be omitted from functional classifications to which they relate and presented on a nature of expense basis.

The IFRIC was in general agreement that in the case of issue (a), netting is not allowed.

After some discussion, the IFRIC decided to not to take issue (b) on the agenda as this could best be dealt with as an amendment to IAS 1. The IFRIC agreed to raise both these issues with the IASB in order to gauge whether the Board could deal with these issues under the Performance Reporting project.

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

Comment letters posted on SMEs, D7, D8, D9

07 Oct 2004

The IASB has Posted on its Website comment letters received on the following projects: IASB Discussion Paper Preliminary Views on Accounting Standards for Small and Medium-sized Entities IFRIC D7 Scope of SIC-12 Consolidation–Special Purpose Entities* IFRIC D8 Members' Shares in Co-operative Entities* IFRIC D9 Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions *Some letters on D7 and D8 had previously been posted.

These are additional letters.

Agenda for October 2004 IASB meeting

07 Oct 2004

The IASB will meet at the offices of the Financial Accounting Standards Board (FASB), Norwalk, Connecticut, USA, on 18-20 October 2004. The third day will be a joint meeting with the FASB.

The agenda topics for the meeting are as follows:

Agenda of the IASB Meeting 18-20 October 2004

Agenda – IASB only, 18-19 October 2004

  • Business Combinations II
  • Convergence - Post-employment Benefits
  • Convergence - Income Taxes
  • IAS 37 Amendments
  • IFRIC Matters
  • Financial Reporting by Small and Medium-sized Entities
Agenda – Joint IASB/FASB Meeting, 20 October 2004
  • Convergence - Income Taxes
  • Conceptual Framework
  • Financial Instruments
  • Revenue Recognition

IFAC exposure draft on ethics

06 Oct 2004

The International Federation of Accountants has invited comment on an exposure draft of a Revised Code of Ethics for Professional Accountants.

The revisions are intended to clarify the independence requirements for professional accountants in public practice who perform assurance engagements. Comment deadline is 30 November 2004.

Latest Accounting Roundup posted

06 Oct 2004

The (PDF 245k) is now available.

This newsletter is published by Deloitte (USA) and includes the latest news from FASB, GASB, SEC, PCAOB, AICPA, IASB, and IFRIC. You will find past issues of Accounting Roundup Here.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.