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We comment on IASB's Improvements Exposure Draft

14 Jan 2008

Deloitte has submitted to the IASB a letter of Comments on the IASB Exposure Draft of Proposed Improvements to IFRSs.

The ED was issued on 11 October 2007 proposing miscellaneous amendments to 25 IFRSs. Our letter expresses concern that "it is not clear what are regarded by the Board as minor amendments and how such amendments are distinguished from 'major' amendments. We are concerned that this lack of clarity might lead to changes to IFRSs that would better be dealt with as part of the normal due process, i.e. separate exposure of the amendments. Although we acknowledge that the Annual Improvements document is subject to due process as set out in the IASB's Due Process Handbook we are concerned that the level of scrutiny may be less for Annual Improvements than it would be for amendments exposed on a stand-alone basis." Click for More Information about the ED. Here is an excerpt from our letter:

We believe that several of the proposed amendments are major amendments to IFRSs and should be exposed as separate documents because the proposed amendments either change or challenge important principles in IFRSs or have consequences beyond the situation the amendment is aiming to address....

In our opinion the following proposed amendments in the exposure draft could not be considered 'minor':

  • the requirement of additional disclosures if an entity is not able/willing to apply IFRSs in full in IAS 1 Presentation of Financial Statements
  • the proposed deletion of guidance for classification of leases of land in IAS 17 Leases
  • the proposed replacement of the term 'fall due' in IAS 19 Employee Benefits
  • the change in the accounting treatment for property under construction/development in IAS 40 Investment Property
Click to view Comments on the IASB Exposure Draft of Proposed Improvements to IFRSs (PDF 224k). Our past comment letters are Here.

 

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IASB's Financial Instruments Working Group will meet

14 Jan 2008

The IASB's Financial Instruments Working Group will meet at the Crowne Plaza London–The City Hotel, 19 New Bridge Street, London, on Thursday, 17 January 2008. The agenda for the meeting centres around two draft IASB Discussion Papers.

Topics to be discussed:

Financial Instruments Working Group 17 January 2008 Agenda

  • Background and aims of the meeting
  • Discussion of the Draft Discussion Paper on Reducing Complexity in Reporting Financial Instruments:
    • Section 1: Problems related to measurement and the possible long-term solution
    • Section 2: A single measurement method for financial instruments and the boards' long-term measurement objectives
    • Section 3: Intermediate solutions to measurement and related problems
    • Key communication messages to accompany the draft DP on Reducing Complexity
  • Discussion of the Draft Discussion Paper on Financial Instruments with Characteristics of Equity:
    • Draft Invitation to Comment
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Guide de référence sur les IFRS 2007

13 Jan 2008

Deloitte & Touche (Canada) has published Guide de référence sur les IFRS 2007 – a French translation of IFRSs in your Pocket 2007. It includes a foreword from Ken Wild (Deloitte Global IFRS Leader); a description of the IASB structure; biographies of IASB members; an IASC/IASB chronology; table on use of IFRSs around the world; summaries of all IFRSs including Interpretations up through 30 June 2007; overviews of all IASB agenda projects; and more.

Click to view Guide de référence sur les IFRS 2007 (PDF 588k, 98 pages).
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Notes from the January 2008 IFRIC meeting

12 Jan 2008

The International Financial Reporting Interpretations Committee (IFRIC) is meeting at the IASB's offices in London on Thursday 10 January 2008 and Friday 11 January 2008. Thursday 10 January 2008 Revenue Recognition - Sales of Real Estate The IFRIC discussed comments received on the draft Interpretation D21 Real Estate Sales.

We've posted further Deloitte observer notes from the meeting.
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IAS Plus Newsletter on revisions to IFRS 3 and IAS 27

11 Jan 2008

Deloitte's IFRS Global Office has published a special edition IAS Plus Newsletter on the Revisions to IFRS 3 and IAS 27.

Our news story immediately below this one has information about those revisions. The newsletter includes a table of the major differences remaining between IFRSs and US GAAP for business combinations and related transactions and another table comparing the new IFRS requirements with the existing ones.
Click to view IAS Plus Newsletter on the Revisions to IFRS 3 and IAS 27 (PDF 122k). You will find all Past IAS Plus Newsletters Here.

 

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Agenda for January 2008 IASB meeting

11 Jan 2008

The International Accounting Standards Board will hold its January 2008 meeting at the IASB's offices, 30 Cannon Street, London on Tuesday to Thursday 22-24 January 2008. The meeting is open to public observation and will be webcast.

The full agenda for the meeting can be found here. Deloitte observer notes from the meeting will also be on this page as they are available.
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SEC letter on accounting effects of subprime loan crisis

11 Jan 2008

Deloitte & Touche LLP (USA) has published Financial Reporting Alert 08-1 that discusses a Letter to the FEI and AICPA from US SEC Chief Accountant Conrad Hewitt addressing the accounting implications of the American Securitization Forum's Streamlined Foreclosure and Loss Avoidance Framework.

The ASF, coordinating with the US Department of the Treasury, developed the Framework to encourage mortgage loan servicers to refinance or modify classes of adjustable-rate subprime mortgage loans with certain risk characteristics that make them susceptible to default. However, a potential hurdle has been whether the modifications of mortgage loans violate qualifying special-purpose entity (QSPE) status under FASB Statement 140 (see August 29, 2007 Heads Up (PDF 119k) for further background). The SEC's letter indicates that the Commission "will not object to continued status as a QSPE if Segment 2 subprime ARM loans are modified pursuant to the specific screening criteria in the ASF Framework". The letter also states that the "OCA believes that it would be reasonable to conclude that Segment 2 subprime ARM loans are 'reasonably foreseeable' of default in absence of a modification based upon a qualitative consideration of the expectation of defaults".
Click to view:

 

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IASB issues a revised standard on business combinations

10 Jan 2008

The IASB has published a revised IFRS 3 'Business Combinations' and related revisions to IAS 27 'Consolidated and Separate Financial Statements'.

There are also consequential amendments to other standards, most notably IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures. The amendments result from proposals that were in an Exposure Draft published by the Board in June 2005.

The amendments are effective for annual periods beginning on or after 1 July 2009. Earlier application is permitted but only back to an annual reporting period that begins on or after 30 June 2007. Click for IASB Press Release (PDF 60k).

Some of the significant amendments to IFRS 3
  1. Acquisition costs. Costs of issuing debt or equity instruments are accounted for under IAS 39. All other costs associated with the acquisition must be expensed, including reimbursements to the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include finder's fees; advisory, legal, accounting, valuation, and other professional or consulting fees; and general administrative costs, including the costs of maintaining an internal acquisitions department.
  2. Contingent consideration. If the amount of contingent consideration changes as a result of a post-acquisition event (such as meeting an earnings target), accounting for the change in consideration depends on whether the additional consideration is an equity instrument or cash or other assets paid or owed. If it is equity, the original amount is not remeasured. If the additional consideration is cash or other assets paid or owed, the changed amount is recognised in profit or loss. If the amount of consideration changes because of new information about the fair value of the amount of consideration at acquisition date (rather than because of a post-acquisition event) then retrospective restatement is required.
  3. Goodwill and noncontrolling interest. An option is added to IFRS 3 to permit an entity to recognise 100% of the goodwill of the acquired entity, not just the acquiring entity's portion of the goodwill, with the increased amount of goodwill also increasing the noncontrolling interest [new term for 'minority interest'] in the net assets of the acquired entity. This is known as the 'full goodwill method'. Such noncontrolling interest is reported as part of consolidated equity. The 'full goodwill' option may be elected on a transaction-by-transaction basis.

Example: P pays 800 to purchase 80% of the shares of S. Fair value of 100% of S's identifiable net assets is 600. If P elects to measure noncontrolling interests as their proportionate interest in the net assets of S of 120 (20% x 600), the consolidated financial statements show goodwill of 320 (800 +120 - 600). If P elects to measure noncontrolling interests at fair value and determines that fair value to be 185, then goodwill of 385 is recognised (800 + 185 - 600). The fair value of the 20% noncontrolling interest in S will not necessarily be proportionate to the price paid by P for its 80%, primarily due to control premium or discount as explained in paragraph B45 of IFRS 3.

  • Pre-existing relationships and reacquired rights. If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer had granted the acquiree a right to use its intellectual property), this must must be accounted for separately from the business combination. In most cases, this will lead to the recognition of a gain or loss for the amount of the consideration transferred to the vendor which effectively represents a 'settlement' of the pre-existing relationship. The amount of the gain or loss is measured as follows:
    • for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value
    • for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable contract position and (b) any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavourable.
    However, where the transaction effectively represents a reacquired right, an intangible asset is recognised and measured on the basis of the remaining contractual term of the related contract excluding any renewals. The asset is then subsequently amortised over the remaining contractual term, again excluding any renewals.
  • Intangible assets. Must always be recognised and measured. There is no 'reliable measurement' exception.
  • Step acquisition. Prior to control being obtained, the investment is accounted for under IAS 28, IAS 31, or IAS 39, as appropriate. On the date that control is obtained, the fair values of the acquired entity's assets and liabilities, including goodwill, are measured (with the option to measure full goodwill or only the acquirer's percentage of goodwill). Any resulting adjustments to previously recognised assets and liabilities are recognised in profit or loss. Thus, attaining control triggers remeasurement.
  • Partial disposal of an investment in a subsidiary while control is retained. This is accounted for as an equity transaction with owners, and gain or loss is not recognised.
  • Partial disposal of an investment in a subsidiary that results in loss of control. Loss of control triggers remeasurement of the residual holding to fair value. Any difference between fair value and carrying amount is a gain or loss on the disposal, recognised in profit or loss. Thereafter, apply IAS 28, IAS 31, or IAS 39, as appropriate, to the remaining holding.
  • Acquiring additional shares in the subsidiary after control was obtained. This is accounted for as an equity transaction with owners (like acquisition of 'treasury shares'). Goodwill is not remeasured.
  • Scope changes. The revised IFRS 3 applies to combinations of mutual entities and combinations without consideration (dual listed shares). These are excluded from the existing IFRS 3. The revised IFRS 3 does not apply to combinations of entities under common control. The IASB added to its agenda a separate agenda project on common control transactions in December 2007.
  • Transitional requirements. The revised Standard must generally be applied on a prospective basis, with some exceptions. The prospective application will impact post-transition changes in ownership interests in subsidiaries and deferred taxes, but will not impact accounting for contingent consideration related to business combinations with an acquisition date prior to the date of transition.
Some of the significant amendments to IAS 27, IAS 28, and IAS 31
  1. Partial disposals of subsidiaries. Items 5 and 6 above in changes to IFRS 3 are also changes in IAS 27.
  2. Partial disposals of associates and joint ventures. If an investor loses significant influence over an associate, it derecognises that associate and recognises in profit or loss the difference between the sum of the proceeds received and any retained interest, and the carrying amount of the investment in the associate at the date significant influence is lost. Similar treatment when an investor loses joint control over a jointly controlled entity.
  3. Attributing income to the NCI. Total comprehensive income is allocated to the noncontrolling interest (NCI) even if this results in the NCI having a deficit balance.

The revised IFRS 3 resulted from a joint project with the US Financial Accounting Standards Board. FASB issued a similar standard in December 2007 (SFAS 141(R)) – see our News Story of 5 December 2007.

The revisions will result in a high degree of convergence between IFRSs and US GAAP in these areas, although some potentially significant differences remain. Among the differences: the FASB standard requires (rather than permits) the full goodwill method. There are also differences in scope, the definition of control, and how fair values, contingencies, and employee benefit obligations are measured, as well as several disclosure differences. A booklet of illustrative examples issued along with the revised IFRS 3 and IAS 27 includes a comparison with SFAS 141(R).

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EC adopts an 'equivalence mechanism' to assess non-EU GAAPs

10 Jan 2008

Following a favourable opinion of the European Parliament, the European Commission has adopted Regulation (EC) No 1569/2007 that sets out the way in which the Commission will assess the equilvalency of 'third-country' (non-EU) GAAPs to IFRSs as adopted by the EU.

If a non-EU GAAP is deemed equivalent, then foreign companies whose securities trade in EU markets would be permitted to use that GAAP in Europe without providing a reconciliation to IFRSs as adopted by the EU. The regulation adopts the following definition of 'equivalence':

Equivalence definition: The GAAP of a third country may be considered equivalent to IFRS adopted pursuant to Regulation (EC) No 1606/2002 if the financial statements drawn up in accordance with GAAP of the third country concerned enable investors to make a similar assessment of the assets and liabilities, financial position, profit and losses and prospects of the issuer as financial statements drawn up in accordance with IFRS, with the result that investors are likely to make the same decisions about the acquisition, retention or disposal of securities of an issuer.

The Commission would determine the equivalence of a non-EU GAAP on its own initiative or if requested either by an EU member state or upon application of an authority responsible for accounting standards or market supervision of a non-EU country.

Special provisions through 31 December 2011: The regulation provides that for a limited period ending 31 December 2011, the Commission may continue to accept non-EU GAAPs that are not currently deemed equivalent to IFRSs as adopted by the EU if either:

  1. that country's accounting standard setter has made a public commitment before 30 June 2008 to converge their standards with IFRSs before 31 December 2011 and both of the following conditions are met:
    • that country has established a convergence programme before 31 December 2008 that is comprehensive and capable of being completed before 31 December 2011, and
    • the convergence programme is effectively implemented, without delay, and the resources necessary for its completion are allocated to its implementation.
  2. that country has made a public commitment before 30 June 2008 to adopt IFRSs before 31 December 2011 and measures are in place to ensure a timely transition, or has reached a mutual recognition agreement with the EU before 31 December 2008.
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We comment on eight IAASB proposals

09 Jan 2008

Deloitte has recently submitted letters of comment to the International Auditing and Assurance Standards Board (IAASB) on seven proposed International Standards on Auditing (ISAs) and on the IAASB's proposed strategy for 2009-2011, as listed below.

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.