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News

Audit issues arising from first-time adoption of IFRSs

2004-09-07

To help auditors address reporting issues arising from the first-time adoption of International Financial Reporting Standards, the staff of the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) along with staff of professional accountancy bodies, national standard setters, and audit firms have prepared a series of key questions and answers.

IFAC has published the Q&As; in a document entitled First Time Adoption of IFRSs – Guidance for Auditors on Reporting Issues. Click to download: The UK Auditing Practice Board has proposed similar guidance. Please see our news story of 30 August 2004.

Second day of the September 2004 IFRIC meeting

2004-09-05

The International Financial Reporting Interpretations Committee (IFRIC) met in London for two days: 2 and 3 September 2004. Presented below are the preliminary and unofficial notes taken by the Deloitte observers at the second and final day of the meeting. .

The International Financial Reporting Interpretations Committee (IFRIC) met in London for two days: 2 and 3 September 2004. Presented below are the preliminary and unofficial notes taken by the Deloitte observers at the second and final day of the meeting.

Notes from the IFRIC Meeting3 September 2004

Determining Whether an Arrangement Contains a Lease (Rights of Use) (D3)

The chairman noted that a quorum was not present and therefore decisions made on this issue could not be officially voted. All members present agreed to issue a final interpretation consistent (nearly word for word) with EITF 01-8. The members clarified that the final interpretation would answer the question of when a lease exists – not how that lease would be classified under IAS 17.

The discussion focussed on the effective date (annual periods beginning on or after 1 January 2006) and transition. The members stated that first-time adopters should adopt the interpretation at the date of transition if the reporting date was for periods beginning on or after 1 January 2006. For existing IFRS users (which will include the 2005 adopters in Europe), transactions should be assessed at the effective date and presented in accordance with the new interpretation from the earliest period presented forward.

The IFRIC intends to take a final vote on this issue at the next meeting and expects to issue the interpretation shortly thereafter, for approval by the IASB.

Emission Rights (D1)

A quorum was present for the remainder of the meeting. The IFRIC concluded to issue D1 with minor changes as a final Interpretation. There were no dissenting votes. The staff intends to finalise drafting issues with the members prior to the next meeting and an interpretation is likely to be issued in the early part of the fourth quarter of 2004. No further discussions are planned on this topic.

The IFRIC noted that guidance is needed on this issue now and that if the IFRIC were to wait for the Board to complete several related current projects, guidance was not likely for at least a further year. While there were some reservations about the effects of the conclusions in D1, all members believed the conclusions were consistent with current IFRSs. Therefore, the issuance of such guidance would be better than non-issuance.

As a result, the IFRIC removed its recommendation that IAS 38 be amended to require the intangible assets with attributes of a currency to be presented at fair value with changes in profit or loss.

IAS 37 Provisions: Obligating Event in the Light of the EU Directive on Waste Electrical and Electronic Equipment

The IFRIC continued its discussion of the issue raised by the German standard setters on when a liability should be recognised for the decommissioning of waste electrical equipment (WEE). The IFRIC concluded that the scope should be limited to the accounting for historical waste related to household buyers. Under an EU directive, costs incurred to decommission an asset placed in service prior to 13 August 2005 to household buyers will be borne by the companies selling product in the market at the date the costs are incurred to decommission the asset based on each company's market share. Therefore, the higher the market share at a future point in time, the higher the obligation to decommission.

The IFRIC concluded that the obligating event was the gaining of the market share and therefore no obligation should be recognised prior to that date. Some members expressed a view that the obligating event was the issuance of the legislation (since the equipment to be decommissioned is already in the market) and therefore the issue of market share was a measurement issue. The IFRIC rejected this view.

No further discussions are planned on this topic. The staff will finalise an exposure draft for IFRIC members' review and expect to issue it in the early part of the fourth quarter of 2004.

Decommissioning Funds (D4)

The IFRIC decided to finalise D4 as it was issued with minor changes. There were no dissenting votes. The final interpretation will also clarify that no additional asset should be recorded for rights to excess funds unless the criteria in IAS 37 have been met (virtually certain). The IFRIC may also clarify that when a participant in a fund has the rights to the residual interest in the fund, that residual interest may meet the definition of an equity instrument which should be accounted for in accordance with IAS 39.

No further discussions are planned on this topic. A final interpretation is expected in the early part of the fourth quarter of 2004.

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

Scroll down for notes from 2 September 2004.

First day of the September 2004 IFRIC meeting

2004-09-03

The International Financial Reporting Interpretations Committee (IFRIC) is meeting in London for two days: 2 and 3 September 2004. Presented below are the preliminary and unofficial notes taken by the Deloitte observers at the first day of the meeting. .

The International Financial Reporting Interpretations Committee (IFRIC) is meeting in London for two days: 2 and 3 September 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 Meeting2 September 2004

Report of the Agenda Committee

Staff gave a report back of the Agenda Committee meeting and presented a list of the issues that were not taken onto the agenda.

On the issue of the accounting for contingently convertible debt with certain features, particularly with regards to their effect on diluted earnings per share (commonly referred to as 'Co-Cos'), IFRIC noted that this issue should be monitored. Staff was asked to prepare an analysis of the issues with the objective of identifying differences between US GAAP and IFRS in this area. In addition, it was noted that the differing debt / equity models used by the two accounting frameworks warranted a revisit of this issue at a later stage.

Service Concession Arrangements

Staff advised IFRIC that education sessions on this issue had been planned to take place in September so as to prepare the IASB for the issues dealt with in this project.

The Chairman indicated that the planned way forward was to have draft interpretations at the October meeting for IFRIC to formally vote on, hence the purpose of the discussion was to finalise the principles contained in the current draft interpretations as well as raise issues to be dealt with before the October meeting.

It was agreed that any dissenting views at this stage would be documented and presented to the IASB during the education sessions to be held in September.

A general discussion ensued in which members indicated that with hindsight, this project was essentially a standard setting type project and not one of an interpretive nature. This discussion was held in the context of the difficulties surrounding the project given the number of additional issues that had arisen during debates particularly the revenue recognition issues that appear to pre-empt the IASB's project on that issue. A proposal to have the IASB complete work done so far was generally rejected, with members noting that constituents required guidance and hence IFRIC agreed to move forward with preparing the Interpretations.

It was noted that the IASB should be made aware of areas within this project that IFRIC believed certain principles had been stretched (such as the control notion and the clarity of the scope of this project given the existence of IFRIC D3), if those areas still existed at the time of presenting the drafts to the IASB.

Scope

There was significant discussion around the scope paragraphs with IFRIC agreeing that the draft interpretations should specify that they would apply to 'public to private' arrangements but without limiting their application (e.g. to 'private to private' arrangements). IFRIC would then ask for comment from constituents during the exposure period as to whether this was appropriate.

IFRIC agreed that these draft interpretations should only deal with the accounting by the 'operator' and not the 'grantor'. It was noted that there was no intention to ask constituents for comments on this issue.

The guidance contained in SIC 29 Disclosure - Service Concession Arrangements was discussed in the context of providing a definition in the draft interpretations of service concession arrangements in order to ensure that general outsourcing type arrangements would be excluded from D10. Members noted that the definition per SIC 29 would be problematic (e.g. the term 'gives public access' and reference to 'social facilities' may be difficult to apply in practice). There was general agreement that the words 'service concession arrangements' should be used in the draft interpretations as opposed to referring using other words as this would create confusion particularly with outsourcing type arrangements that exist.

The distinction in the applicability of D3 and D10 was discussed with some members expressing concern in this area. IFRIC agreed to make it explicitly clear in the scope paragraphs that these interpretations would be mutually exclusive (it would not be a choice, which interpretation to apply).

Issues and Consensus

Members expressed concern at the number of issues that were being dealt with in this project and suggested a way forward that would deal with the broader issues only without necessarily dealing with the detailed ramifications that may arise depending on various scenarios. There was general support for this view.

The distinction between the receivables and intangibles model was discussed at length. The following basic fact pattern is only meant to give context to the debate observed:

An operator builds a road but gets paid based on usage of the road by the general public

IFRIC first debated whether upon completion of construction, the operator should recognise a financial asset, an IAS 11 type asset which could be a receivable, an intangible asset or whether that asset was essentially a contingent asset.

This debate included whether a financial asset should be recognised when the road is complete, such that the variability in cash inflow becomes a measurement issue (this was supported by members with reference to the principles surrounding certain derivatives). Some members supported the view that a financial asset should be recognised based upon usage of the road.

There appeared to be general support for the view that the operator had a financial asset based on AG8 of IAS 32 particularly where the grantor has an obligation to make payment based on usage (as opposed to the operator receiving cash directly from the general public - e.g. toll road collections).

Members supporting the intangible asset model, did so, where the operator was paid directly by the general public, on the basis that a third party was making the payments whereas, a contract existed between the operator and the grantor and its that contract that gives rise to an intangible asset.

IFRIC also discussed the implications of the above issues where floors and / or caps were added to the contractual terms by the grantor (e.g. operator will be paid based on usage directly by the public subject to a minimum of $X etc.) but no decisions were taken.

As a result, concern was raised at the possible structuring opportunities if IFRIC decided that both the financial asset and intangible asset models were acceptable depending on the means of payment. Members noted that this may indicate a need to amend IAS 38 such that the accounting result would not differ simply because of the way the arrangement is structured.

IFRIC decided to go ahead and present all supportable solutions based on existing literature with a view that the IASB may then consider to make the necessary amendment to IAS 38 in order for there to be only one solution.

Summaries of the draft Interpretations presented to IFRIC, as prepared by the Staff (contained in observer papers), are as follows (note that this is prior to making any changes that may arise from IFRIC's debate):

Summary of proposals in draft D10A Service Concession Arrangements - Determining the Accounting Model

Recognition of the infrastructure items as assets of the grantor

Infrastructure items constructed or acquired by the operator for the purpose of a service concession shall be recognised as assets of the grantor, and not the operator, if they are controlled by the grantor. Otherwise, subject to the effects of any leases from the operator to the grantor, they shall be recognised as assets of the operator.

It is usual that assets are controlled by their owner. However, this is not always so. In particular, the grantor of a service concession controls the infrastructure used in that concession even when it is owned by the operator, if the grantor both:

  • a. controls or regulates what services the operator must provide using the infrastructure, to whom it must provide them, and at what price; and
  • b. will control, through ownership, beneficial entitlement or otherwise, the residual interest in the infrastructure at the end of the concession, and the residual interest is significant.

Infrastructure items transferred to the operator by the grantor, and used in the concession, shall continue to be recognised as assets of the grantor unless the conditions in IAS 18 for recognising revenue on a sale of goods are met, in which case they shall be recognised as assets of the operator. Among other circumstances, those conditions will not be met when the grantor controls the infrastructure.

Choice of accounting model

The operating lease model applies if the operator has the right of use of the infrastructure.

  • If, as is usual, the grantor controls the use to which the infrastructure is put, the operator does not have the right of use of the infrastructure but only the right of access to the infrastructure to provide the specified services on the specified terms.
  • The accounting under the operating lease model is generally similar to that under the intangible asset model, except that the operating lease prepayment is accounted for under IAS 17.

The receivable model applies if the operator does not have the right of use, and:

  • the grantor (rather than users) has the primary responsibility to pay the operator for its services, or
  • although the operator is entitled to be paid by users, the effect of the contractual arrangements is that substantially all of the demand risk associated with the service concession is retained by the grantor.

The intangible asset model applies in all other cases where the infrastructure items are recognised as assets of the grantor.

Summary of proposals in draft D10B Service Concession Arrangements - The Receivable Model

Recognition and measurement

Contract obligations and related rights shall be recognised and measured in accordance with IASs 11 and 18.

As regards recognition:

  • no obligation or related right is recognised to the extent that contracts are executory.
  • an obligation is recognised when consideration is received in advance of performance.
  • an asset, being a receivable under a contract, is recognised when an entity performs in advance of receiving consideration.

As regards measurement:

  • obligations under contracts shall be measured on the basis of the consideration receivable for their performance.
  • consideration receivable shall be measured at fair value.

The receivable in respect of construction or other services

The receivable shall be accounted for in accordance with IAS 39 as either:

  • a loan or receivable;
  • if so designated upon initial recognition, an available-for-sale financial asset; or
  • if so designated upon initial recognition, at fair value through profit or loss. This designation shall not be made unless the fair value is reliably measurable.

In the first two cases, IAS 39 requires interest income calculated using the effective interest method to be recognised in profit or loss.

The receivable shall be classified as available for sale (unless designated as at fair value through profit or loss) when the holder may not recover substantially all of its initial investment, other than because of credit deterioration. This applies if the operator's recovery may vary significantly with variations in demand. However, it does not apply solely because revenue may vary for reasons relating to the quality of subsequent services, such as variations in availability or service levels.

If revenue may vary for reasons relating to the quality of subsequent services, the operator shall account for the receivable on the basis of expected cash flows. Variations because quality levels are more or less than expected shall be recognised as they occur.

Borrowing costs incurred by the operator

If the operator adopts the allowed alternative treatment in IAS 23, it shall capitalise borrowing costs attributable to contract activity, if the costs are reliably estimated to be recoverable.

Capitalisation shall cease once revenue is recognised in relation to the relevant expenditure.

Items contributed by the grantor

Under the receivable model, infrastructure items contributed by the grantor for use in the service concession continue to be recognised as assets of the grantor. Therefore, the operator does not recognise them as assets. If the grantor makes no charge for these items, the operator shall recognise an expense for their use, and corresponding additional income from the grantor, only when the operator both:

  • has the right of use of the items, and
  • is providing services to the grantor, rather than to other users.

The grantor may also contribute other items to the operator, which the operator can keep or deal with as it wishes. In accordance with the general recognition and measurement principles:

  • such items are recognised as assets of the operator at fair value.
  • in a reciprocal transaction, they will have been contributed in consideration for the assumption of contract obligations by the operator. The operator recognises a corresponding liability in respect of those obligations, unless they have already been performed.

Handover obligations

Because the infrastructure items are recognised as assets of the grantor, the operator shall not recognise any obligation in respect of its commitment to hand them over to the grantor at the end of the service concession.

Summary of proposals in draft D10C Service Concession Arrangements - The Intangible Asset Model

General

The requirements of D10B also apply to the intangible asset model, unless a different treatment is specified by D10C.

The intangible asset shall be accounted for in accordance with IAS 38.

Revenue and profit or loss recognition

When construction or other services are provided in exchange for the intangible asset, revenue and profit or loss shall be recognised on the exchange.

Revenue and costs shall be recognised and measured in accordance with IASs 11 and 18. In particular, revenue shall be measured at the fair value of the intangible asset received or receivable, unless its fair value cannot be measured reliably, in which case revenue is measured at the fair value of the services provided, adjusted in either case by the amount of any cash or cash equivalents transferred.

Timing of recognition of the intangible asset

The intangible asset shall be recognised when it meets the recognition criteria of IAS 38, which is usually the earlier of (a) when the operator is entitled to earn revenue from it, and (b) when costs are incurred (either in cash or otherwise, such as by providing construction or other services).

If the intangible asset is recognised in advance of payment, the operator has an obligation that is discharged upon payment. When payment is in the form of construction or other services, payment occurs when revenue is recognised on those services.

Contractual obligations included in the consideration given for the intangible asset

Obligations to construct new infrastructure, or to enhance either new or existing infrastructure to a condition better than at the start of the concession, are included in the consideration given for the intangible asset, and therefore in its cost.

Contractual obligations excluded from the consideration given for the intangible asset

All other contractual obligations of the operator - including obligations to maintain, replace or restore infrastructure, except for any enhancement element - are excluded from the consideration given for the intangible asset. They shall be recognised and measured in accordance with IAS 37, i.e. at the best estimate of the expenditure required to settle the present obligation at the balance sheet date.

Borrowing costs

Subject to the next paragraph, if the operator adopts the allowed alternative treatment in IAS 23, it shall capitalise borrowing costs attributable to the acquisition or production of the intangible asset. Under IAS 23, capitalisation ceases when substantially all activities necessary to prepare the asset for its intended use are complete. In most cases, this will be no later than when the intangible asset is paid for, either in cash or in the form of construction or other services.

If the operator has a right to recover its borrowing costs from the grantor or another party, which is not contingent on other revenues being insufficient to cover those costs, it shall expense the borrowing costs and recognise revenue in respect of its right of recovery.

If the ability to recover borrowing costs is contingent on other revenues being insufficient to cover those costs, it is not a right of recovery but an agreement designed to limit the operator's exposure to variations in demand, and shall be accounted for as described below.

Revenue caps, floors and similar agreements

The operator shall account for revenue caps, floors and other agreements included in the terms of the service concession, designed to limit the operator's exposure to variations in demand, as follows:

  • if their fair value is reliably measurable, the operator may elect to account for them at fair value through profit or loss, separately from the intangible asset. On initial recognition, this requires an allocation to be made between the value of these agreements and of the intangible asset.
  • if the agreements are not accounted for at fair value through profit or loss:
    • any premium effectively paid or received for the agreements shall not be accounted for separately from the intangible asset.
    • any rights under them shall be recognised only if and when they satisfy the recognition criteria in IAS 37.
    • any obligations under them shall be accounted for in accordance with IAS 37.

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

Reminder – eight comment deadlines coming up

2004-09-03

Just in case some of us put these out of our minds during our summer holidays, we thought it would be helpful to remind IASPlus visitors of the eight IASB and IFRIC comment deadlines that loom ahead in the next month and a half: D7 Amendment to SIC 12 Consolidation of SPEs – 13 September 2004 D8 Members' Shares in Co-operative Entities – 13 September 2004 D9 Employee Benefit Plans with a Promised Return – 21 September 2004 Discussion Paper: SMEs – 24 September 2004 ED: Financial Guarantee Contracts and Credit Insurance – 8 October 2004 ED: Cash Flow Hedge Accounting of Forecast Intragroup Transactions – 8 October 2004 ED: Transition and Initial Recognition of Financial Assets and Liabilities – 8 October 2004 ED 7: Financial Instruments: Disclosures – 22 October 2004 .

Just in case some of us put these out of our minds during our summer holidays, we thought it would be helpful to remind IASPlus visitors of the eight IASB and IFRIC comment deadlines that loom ahead in the next month and a half:

Deloitte's global transfer pricing strategy matrix

2004-09-03

Deloitte's Strategy Matrix for Global Transfer Pricing (7th edition) is a compilation of essential information regarding the transfer pricing regimes in 39 jurisdictions around the world and the OECD.

The 2004 edition includes a new country: Norway. The information regarding the 38 countries included in last year's edition has been thoroughly reviewed and updated to reflect any changes implemented since that edition. The book represents the collective knowledge of the members of Deloitte's Global Transfer Pricing Service Line. Given the complexity of transfer pricing issues, this book should be the starting point rather than the finish line for all your transfer pricing inquiries. If you seek assistance, the book identifies transfer pricing specialist contact people in Deloitte member firms in each of the 39 jurisdictions. Click to download Deloitte's 2004 Strategy Matrix for Global Transfer Pricing (PDF 1,421k). [Note: This 2004 edition has gone out of date. You can find a later version Here.]

Deloitte guide to compliance with SOX Section 404

2004-09-03

Deloitte & Touche LLP has released Taking Control, a comprehensive guide to compliance with Section 404 of the Sarbanes Oxley Act.

That section requires the management of a company registered with the SEC to assess and report on the effectiveness of the company's internal control over financial reporting, and requires auditors to attest to and report on management's assessment. Section 404 applies to "accelerated filers" effective for financial years ending on or after 15 November 2004. The date is deferred until years ending on or after 15 July 2005 for foreign (non-US) registrants and non-accelerated filers. Taking Control targets non-accelerated filers and foreign private issuers that may be just getting their work under way, as well as companies currently involved in their section 404 projects. Click to download (PDF 397k).

Strong US support for uniform global accounting standards

2004-09-03

& Roughly three-fourths of 101 US senior financial executives surveyed support expensing stock options.

By about the same percentage, the executives believe that there should be uniform global accounting standards and that greater transparency is needed in financial reporting. The survey was conducted by DePaul University for Grant Thornton LLP. Click for Press Release (PDF 94k).

Non-US companies registered with the SEC

2004-09-02

We have posted to our Statistics Page the list of non-US companies registered with the SEC at 31 December 2003, based on lists recently posted on the SEC's Website.

At 31 December 2003 there were 1,232 foreign registrants (compared to 1,319 a year earlier) from 57 countries (compared to 59 a year earlier). Click to download:

New IFAC policy on translation of standards

2004-09-02

A new Policy Statement on Translation of Standards and Guidance Issued by the International Federation of Accountants has been issued by IFAC to encourage high-quality translations.

The policy applies to standards and guidance issued by IFAC's Education Committee, International Auditing and Assurance Standards Board, and Public Sector Committee. The policy addresses such issues as responsibilities of the translating body, design and implementation of a translation plan, translation of key words, and the translating body's translation process. English is the official language of IFAC standards and guidance, and in the event of any dispute as to the meaning of a translated word or phrase, IFAC will refer to the English meaning thereof. Click to Download IFAC's Translation Policy from IFAC's website (PDF 204k).

Deloitte comment letter on IFRIC D7

2004-09-01

We have submitted our letter of comment on IFRIC Draft Amendment D7 to the Scope of Interpretation SIC 12 Consolidation—Special Purpose Entities.

Click to (PDF 53k). Deloitte's overall view:

We support the removal of 'equity compensation plans' from the scope exemption in SIC 12 and encourage the IFRIC to continue its project on providing guidance to determine whether these plans should or should not be consolidated. However, we question whether the additional change – unrelated to equity compensation plans – that eliminates defined contribution plans accounted for under IAS 19 from the exemption is appropriate at this time.

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.