IFRS for Private Entities - Recognition, measurement and presentation

Date recorded:

The Board continued its redeliberations of the proposals in the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED). In this session the Board discussed the key issues relating to sections 13 to 19 excluding any disclosure issues and requests for additional implementation guidance. The main decisions are outlined below.


Investments in associates and joint ventures (sections 13 and 14)

The Board had a thorough debate regarding the options permitted in accounting for associates and joint ventures. Currently, the ED permits using the cost model, the equity method, proportionate consolidation (joint ventures only) or fair value through profit or loss.

The Board decided to add an exception to the use of the cost model. The cost model would not be permitted when the shares of the associate or joint venture have public price quotations.

The Board deferred its decision on elimination of proportionate consolidation for joint ventures but indicated that the requirements in ED 9 Joint Arrangements will be considered if the ongoing project on joint ventures results in elimination of proportionate consolidation and if the final standard of that project is issued before publication of the IFRS for Private Entities.

In addition, the Board decided to replace the requirement that the difference between the reporting date of the financial statements of the associate/joint venture and those of the investor must not be greater than three months by a general statement that the most current information should be used.


Investment property (section 15)

The Board decided to not to make any changes to the guidance in this section.


Property, plant and equipment (section 16)

The Board agreed the following:

  • To retain the requirement for component depreciation in paragraph 16.14 but to rewrite the paragraph by addressing the normal case (being no component depreciation) first.
  • To clarify in paragraph 16.17 that reassessing residual value, useful life and depreciation method should be performed only if there is a clear indication of change since the last reporting date. The additional guidance should also clarify that such an assessment does not require a full impairment test.
  • To retain the option to use the revaluation model
  • Not to add an undue cost or effort exemption to for the requirement to separate the land and building components when land and building are acquired in a single purchase transaction. This decision also applies to similar requirements in sections 15 Investment Property and section 19 Leases.


Intangible assets other than goodwill (section 17)

The Board agreed the following:

  • Not to add a presumption that all intangible assets other than goodwill have a finite life, which would allow amortisation of indefinite-lived intangibles. Instead, as proposed in the ED, private entities will be required to distinguish between intangible assets with finite and indefinite useful lives. The Board noted that such a simplification would not be appropriate since private entities can have material intangible assets with indefinite useful lives (franchises, licenses, etc.).
  • To include a clarification regarding reassessment residual value, useful life and depreciation method (same as for property, plant and equipment).
  • To retain the accounting policy choice either to expense all development costs or capitalise that portion of development costs that is incurred after commercial viability has been assessed.
  • To retain the option to use the revaluation model


Business combinations and goodwill (section 18)

The Board agreed the following:

  • Not to amortise goodwill over its estimated useful life
  • Not to add an undue cost or effort exemption regarding separation of intangible assets acquired and contingent liabilities assumed in a business combination
  • To add the requirements in IFRS 3(2008) regarding the 'measurement period' to account for adjustments to the fair values of identifiable assets and liabilities after acquisition
  • Not to permit the pooling of interests method


Leases (section 19)

The staff proposed to add an exemption to the application of the straight-line method for operating leases if payments to the lessor are structured to compensate for the lessor's expected cost increases. Some Board members raised the concern that such an exemption could open the door for earnings management by structuring lease arrangements. The Board deferred its decision and asked the staff to prepare a more detailed analysis focussing on inflation clauses.

In addition the Board decided to retain the guidance in the ED relating to classification of leases as either operating or financing but to include additional guidance regarding the application of the criterion 'major part of the economic life of the asset'.

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