EFRAG seeks views on two recommendations to EC

09 Sep 2005

The European Financial Reporting Advisory Group (EFRAG) has invited comment on the following two draft 'endorsement advice' letters to the European Commission.

In both cases EFRAG supports the IASB standards and recommends their adoption for use in Europe. EFRAG requests comments by 30 September 2005.


IFRSs and Bank Tier 1 capital in Australia

09 Sep 2005

The Australian Prudential Regulation Authority has released the second of two discussion papers setting out its proposed regulatory response to the adoption of IFRSs by APRA-regulated institutions.

APRA is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, and insurance companies, among others. Australia has adopted national GAAP that starting in 2005 is virtually equivalent to IFRSs. The paper deals with the treatment of eligible Tier 1 capital instruments and securitisation for authorised deposit-taking institutions and general insurers. APRA is proposing to de-couple the definition of capital instruments eligible for Tier 1 capital from Australian accounting standards. At the same time, it is proposing to harmonise its approach to innovative capital instruments with the decisions of the Basel Committee on Banking Supervision and regulatory practice in major jurisdictions. APRA is also proposing to de-couple the assessment of securitised assets for capital adequacy purposes from the accounting treatment of these assets. Comments are due 28 October 2005. Click to download the APRA's new discussion paper, (PDF 134k). Please see our 27 February 2005 News Story for details about the first APRA discussion paper and an earlier overview paper.

US SEC Chief Accountant will step down

08 Sep 2005

The US Securities and Exchange Commission has announced that Chief Accountant Donald T.

Nicolaisen will leave the Commission in October 2005 to return to the private sector. Mr. Nicolaisen joined the Commission as Chief Accountant in September 2003 and has led numerous initiatives to improve financial disclosure, strengthen the audit process, and rebuild investor confidence. Click for (PDF 34k).

IFAC will develop an ISA guide for SMEs

08 Sep 2005

The International Federation of Accountants (IFAC) is seeking proposals for the development of an explanatory guide on implementing International Standards on Auditing (ISAs) for audits of small- and medium-sized entities (SMEs).

The purpose of the guide would be to help auditors around the world understand, comply with, and apply ISAs when conducting SME audits. Click for IFAC Announcement (PDF 76k), which includes a link to download the IFAC request for proposals. Proposals are due 18 November 2005.

New Accounting Roundup is available

07 Sep 2005

We have posted (PDF 180k).

This newsletter, published by Deloitte & Touche LLP (United States), summarises recent accounting and financial reporting developments and provides Internet links to related content. This edition includes:
  • FASB developments, including three proposed amendments to Statement 140 (derecognition); a final FSP on freestanding financial instruments originally issued as employee compensation; a proposed FSP on accounting for guaranteed investment contracts, and summaries of recent FASB meetings.
  • GASB developments, including an Implementation Guide on Post-employment Benefits Other Than Pensions.
  • SEC developments, including recommendations of the SEC Advisory Committee on Smaller Public Companies; the SEC's XBRL programme; and swearing in of Christopher Cox as SEC Chairman.
  • International developments, including IFRS 7 Financial Instruments: Disclosures; amendment of IAS 1 for capital disclosures; financial guarantee contracts; and IASB's proposed technical corrections policy.
  • Adoption dates and deadlines – an eight-page chart of significant adoption dates and deadlines for the FASB, EITF, GASB, AICPA/AcSEC, SEC, PCAOB, and IASB/IFRIC.
You will find links to all past issues Here.

IASB will meet in London 20-22 September 2005

07 Sep 2005

The IASB will meet at its offices in London on Tuesday to Thursday, 20-22 September 2005. The announced agenda for the meeting is below.

The Board will also host a meeting of national standard setters on 26-27 September 2005, also in London. We announced the agenda for that meeting in our news story of 24 August 2005.

agenda.gif20-22 September 2005, London Tuesday, 20 September 2005

Wednesday, 21 September 2005 Thursday, 22 September 2005

SEC must address off-balance-sheet assets and liabilities

06 Sep 2005

Jeffrey Diermeier, President of the CFA Institute, has urged incoming US SEC Chairman Christopher Cox to make building investor trust and confidence his top priority.

In a Public Statement (PDF 23k), Mr. Diermeier suggests four critical priorities for the SEC, including one on improvements to financial reporting:

A third priority for [Chairman Cox's] agenda is fair, transparent financial reporting, which is critical in evaluating whether a company is a good investment opportunity. Expensing of employee options is one example, and Chairman Cox told Senators that he respected the independence of the Financial Accounting Standards Board, which sets accounting rules, and, further, thought 'the FASB rule that will force companies to treat stock options granted employees as an expense is an issue already decided'. His message was a good first step to show investors he will act in their interests.

Other disclosure issues, however, must be addressed, to bring 'on' the balance sheet many off-balance-sheet items that make it hard for financial analysts to assess a company's liabilities and assets. A starting point, here, is a recent report by the SEC staff, as required by the Sarbanes-Oxley Act. The recommendations included reforms to discourage companies from structuring transactions merely to obtain off-balance-sheet accounting.

Day 2 of the September 2005 IFRIC meeting

04 Sep 2005

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday, and Friday 1-2 September 2005. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the second and final day of the meeting.Notes from the IFRIC Meeting2 September 2005 IAS 19 - Minimum Funding Requirements and the Asset Ceiling The IFRIC continued its deliberations on two issues: When refunds and reductions in contributions are 'available'. How a statutory minimum funding requirement affects that 'availability'? At the previous meeting the IFRIC consensus was that a refund of surplus should be treated as 'available' to the extent that either of the following is true: the IAS 19 surplus exceeds the MFR surplus or is expected to exceed the MFR surplus in future because the assumptions underlying the MFR measurement are based on historical values that have changed; or in the jurisdiction of the plan in question, the surplus existing on the wind up of the plan, after taking into account all costs associated with the wind-up, will revert to the entity.

To the extent that an asset is recognised on this assumption, that fact shall be disclosed in the financial statements.

At this meeting, the IFRIC discussed the remaining questions as well as some related issues identified at the previous meeting including:

1. The definition of availability;

The IFRIC discussed a proposed definition of the term 'available' in the context of IAS 19. The staff proposed the following definition:

A refund of plan assets or reduction in future contributions is available to the extent that there is no restriction on the entity, by virtue of any legal or constructive obligation, to use the surplus assets in this way.

The IFRIC indicated that the definition does not seem to encompass situations where a potential future merger of funds will result in the utilisation of the surplus in one of those funds, as a method of utilising the surplus.

2. The treatment of the refund that may be available assuming the gradual run-down of the plan;

The point was made that in the case where a surplus exists in a fund, and is not distributable to the sponsor at the discretion of the fund itself, an asset exists. This is despite any MFR requirements which would only be taken into account in assessing the extent to which that asset is recognised (that is, the ceiling). A concern was raised about allowing recognition issues to affect measurement considerations when discussing the MFR issues.

3. The methodology and assumptions to be used for determining the reduction in employer contributions that may be possible;

The IFRIC discussed at some length, the differences that would arise in the methodology and assumptions when determining the reduction in employer contributions depending on whether the fund is a closed or an open fund and compared this to the situation where a fund is being run-down and one that is fully functional. The point was made that the MFR issues under discussion, highlight the difficulties in applying IAS 19 in its present state.

IFRIC members expressed concerns about allowing for future changes in the size and demographics of the workforce consistent with the management's forecasts. Instead, there was general support for the view that only the circumstances at the balance sheet date should be taken into account without a futuristic forecast of changes. The counter argument to this view is based on the fact that although the asset is measured based on conditions existing at the balance sheet date, It will be available to employees or former employees in the future.

4. The treatment of any additional obligation on the entity that arises as a result of the MFR

If the MFR contribution requirement exceeds the entity's future contribution requirement in any given year, the staff recommended that an additional liability be recognised in respect of the difference in that year. In other words, the difference between the MFR contribution requirement and the entity's future contribution requirement is not limited to zero in any given year. The IFRIC considered whether any additional obligation arising from the MFR requirement would be accounted for in terms of IAS 19 or IAS 37 but no decision was made.

The staff was asked to prepare a summary of the points raised during the discussion for purposes of including them in the IFRIC Update publication so as to indicate to constituents the current thinking of IFRIC. After considering other issues to be tabled at a subsequent meeting, the IFRIC will be asked to consider whether to proceed with the drafting of an interpretation.

Scroll down for notes from the first day of the IFRIC meeting.

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

EU ambassador to USA says convergence is 'urgent'

04 Sep 2005

In (PDF 42k), John Bruton, Ambassador of the European Union to the United States of America, described as 'urgent' the need to remove accounting standards differences and other inefficiencies and frictions caused by differing regulation in different jurisdictions.

An excerpt:

Cooperation between regulators and supervisors is not only necessary, it is essential. We aim not at harmonisation, but at fundamental equivalence and at mutual recognition.... Up to now, European companies listed in the US have had to reconcile their IFRS accounts to US GAAP. In a world where two sets of acceptable standards exists, this is unsatisfactory. Companies which are already publishing their accounts to one high-class standard have then to reconcile them expensively to another equally high-class, but different, standard. For some European companies raising capital in the United States, this cost has been estimated at between US $5 and $10 million per annum. The IASB and the FASB are engaged in a process of converging the two standards over time. And the European Commission and the SEC are working with these two institutions to ensure that convergence programme has a clear timetable, clear objectives and is transparent to all stakeholders. This is urgent.

Day 1 of the September 2005 IFRIC meeting

03 Sep 2005

The International Financial Reporting Interpretations Committee (IFRIC) is meeting at the IASB's offices in London on Thursday, 1 September (afternoon only) and Friday 2 September (morning only) 2005. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the first day of the meeting.Notes from the IFRIC Meeting1 September 2005 Service Concession Arrangements Scope IFRIC spent most of their time considering Agenda paper 2A, which dealt with the scope of draft interpretation D12. Many respondents expressed either opposition to the scope of the interpretation, or confusion over it.

Staff had analysed the comments received and determined ten key areas where change may be necessary.

Proposal 1: grantor's accounting should be outside the scope

D12 does not deal with how grantors should account, as IFRIC was asked to provide guidance for operators. Many respondents commented that the scope exclusion limited the usefulness of the draft interpretation. Staff recommended that IFRIC not address the accounting by grantors in this interpretation, mostly due to time constraints, and the urgency of this project.

IFRIC broadly agreed with the staff recommendation, but noted that one of the reasons for confusion here was that whilst D12 purports not to deal with the accounting by grantors, it does consider a grantor's involvement in the arrangement. D12 should only deal with the operator's accounting, but some of the wording should be re-drafted to clarify that generally, when an asset is not an operator's, it will be a grantor's, but this may not always be the case.

Proposal 2: existing assets of the operator should be outside the scope of the interpretation

An operator may have owned the infrastructure before the concession arrangement. It will have recognised this infrastructure as property, plant and equipment. The service concession arrangement may convey a right of use of the infrastructure to the grantor, in which case the operator would apply the requirements of IAS 16, IAS 17, and IFRIC 4 to determine whether it should derecognise the existing infrastructure. The basis for conclusions to D12 justifies this decision on the grounds that it would be:

  • difficult to add to the requirements of IAS; and
  • unusual for such assets to be significant in the context of a service concession arrangement as a whole.

Many respondents did not understand that such infrastructure was excluded as IFRIC regarded existing requirements as clear. They further challenged the assertion that it would be unusual for these assets to be significant in the context of a service concession arrangement as a whole.

IFRIC concluded that clarification and increased explanation was necessary. They noted that the current words were unclear in situations such as privatisations, whereby a formal contract may not have been signed at the outset of the concession arrangement (for instance, it may only have been signed at the date of privatisation.)

Additionally, D12 should clarify that deals with recognition; it does not deal with derecognition. An operator may face derecognition issues, but these should be addressed by looking at IAS 16, IAS 17, and IFRIC 4.

Proposal 3: Amendments to the 'significant residual interest' criterion

The scope of D12 includes public-to-private service concession arrangements where the grantor controls or regulates the service provided by the operator and controls the significant residual interest in the infrastructure at the end of the concession.

Many respondents questioned the exclusion of arrangements where no significant residual interest exists. They pointed out that significant residual interest is a good indicator of control, but questioned the validity of the assumption that infrastructure without a significant residual interest necessarily precludes control by the grantor.

This issue prompted much debate by IFRIC members. An example was given of government land on which an operator builds and runs a school, whereby the concession and useful economic life of the school are both 30 years. It was noted that the residual value of the school after 30 years may not be zero, and would be a function of the money spent maintaining it during the concession period.

This prompted discussion of whether assets that were constructed or bought for the concession, and whose useful economic life (determined at the outset of the arrangement) was no greater than the concession period were within the scope of D12.

It was decided that staff would present a new paper, which would cover which assets are within the scope of D12, distinguishing between those assets with rights of use or access attached to them, and all other assets (which are presumed to be assets of the operator). The paper would also cover whether assets that must be returned at the end of the concession are within the scope of D12.

Proposal 4: Clarifying the requirements for control of usage

Respondents questioned how the criteria for control in D12 reconciled to those in IFRIC 4. They were also unclear on how to apply paragraph 5(a) of D12, which states that D12 applies to infrastructure if 'the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price?'. For example, a grantor could set a fixed price that the operator must charge, or it could set a maximum price.

Staff agreed that the extent of control over pricing and usage may vary, and that D12's scope should extend beyond contracts where the grantor controls almost every aspect.

In principal, many IFRIC members agreed with the staff, but did not consider the proposed amendments to be any clearer than the original text. Staff were asked to consider this issue as part of the paper they were going to present at a later meeting (see above).

Proposal 5: Reconcile the scope of D12 to IFRIC 4 and SIC 29

Some respondents expressed concerns that the scope creates inconsistencies with IFRIC 4, as it does not require specific assets to be used in the concession arrangements to be identified. Additionally, SIC 29 identifies concession arrangements more widely.

The staff view was that IFRIC did not need to re-articulate the all the requirements of IFRIC 4; it is implicit in service concession arrangements that the asset is specified. Further, SIC 29 is an interpretation requiring disclosures for a broad range of arrangements, whereas IFRIC does not need to address all such arrangements in this project. IFRIC concurred with the staff view.

Proposal 6: Clarify application of the requirements to partly regulated assets

At its December 2004 meeting, IFRIC considered draft guidance explaining how to account for infrastructure that is used partly for regulated and partly for non-regulated purposes. IFRIC concluded this guidance should not be included, as it was not possible for the interpretation to deal with every possible fact pattern.

Several respondents requested clarification on dealing with infrastructure that is used for both regulated and unregulated purposes. Staff believed that the extent of the confusion was such that guidance should be given, and should be based on the guidance proposed in the December 2004 meeting.

IFRIC members agreed that the accounting for such infrastructure was unclear. They also agreed, however, that the proposed guidance was not sufficient and that further analysis was needed.

Proposal 7: Clarify the requirement for a public service obligation

IFRIC agreed with the staff that paragraph 2 should be amended to clarify what is meant by public service obligation. The requirement is that the infrastructure be available for public use. It is irrelevant whether the public chooses to use the infrastructure. Where the infrastructure is not available for the public to use, a public service obligation does not exist. It was acknowledged that public service obligations may vary from country to country.

Proposal 8: Clarify application where operator provides the infrastructure but not the services

Some commentators remarked it was unclear whether D12 applied in situations where the operator provides the assets, and the services related to those assets, but the grantor provides the public service. For example, an operator builds and operates a hospital, and the government provides the medical services.

Staff proposed that such arrangements should be within the scope of the interpretation. IFRIC felt this issue was similar to that in proposal 7 above, and that it depended on whether there was a public service obligation. A contract to build and maintain a building would not be within the scope, however if other services were provided (that is, all services other than the provision of medical services, such as timetabling operations), this would be within the scope. Clearer drafting was needed on this point.

Proposal 9: Scope should exclude private-to-private service concession arrangements

Many respondents commented the scope of D12 was too limited, as it excludes private-to-private service concession arrangements. Staff believed that private-to-private service concession arrangements should have to apply D12, rather they should determine whether existing literature provided guidance, and if not, whether the principles of D12 should be applied by analogy in accordance with the hierarchy in IAS 8. IFRIC agreed that there should be no change to broaden the scope.

Proposal 10: Editorial text to clarify the term infrastructure

Several respondents requested clarification on the meaning of 'infrastructure'. Staff proposed to amend paragraph 1 to clarify that infrastructure comprises all assets from which the public service derives.

IFRIC asked that this issue also be considered in the paper the staff would present to it (see proposals 3 and 4 above).

Other Issues Raised by Commentators

Paper 2A contained an appendix of other issues raised by commentators. These were issues that staff did not believe IFRIC needed to dedicate significant resources to. IFRIC asked that renewal options be considered further by staff as part of its paper revisiting 'significant residual interest'.

Revenue Recognition

IFRIC briefly considered agenda paper 2C, which dealt with the issue of double recognition of revenue in the intangible asset model proposed in draft interpretation D14.

Paper 2C notes that the double recognition of revenue only occurs in the intangible asset model. It does not occur in the financial asset model. The paper considers the guidance in IAS 18 on exchanges of goods or services, and IAS 16 on whether an exchange lacks commercial substance. The paper argues that the future cash flows that underpin the constructed infrastructure are the same as those that underpin the intangible asset (the right to operate the infrastructure to generate revenues). Therefore there has been an exchange of similar assets, and the transaction lacks commercial substance.

As a result, the staff recommendation was that the intangible asset model should be revised to require that no revenue be recognised on the exchange of constructed infrastructure for an intangible asset giving the right to operate that infrastructure to generate future cash flows. The staff acknowledged that the resulting accounting would be the same as under the 'acquired intangible asset' alternative dismissed in D14.

IFRIC members were not generally supportive of the staff view. They did not see why who the cash is received from (that is, from the grantor, or from a right to charge the public) should determine whether revenue is recognised during the construction phase of the arrangement. Further, arguing that the exchange lacked substance appears inconsistent with the logic that the asset is the grantor's, and not the operator's. If the operator has merely constructed an asset, on what basis does it transfer to the books of the grantor? An additional problem was that different accounting results would arise from a situation in which the same party constructs and operates the infrastructure to the situation where different parties construct and operate the infrastructure.

Staff were asked to present a new paper that deals separately with the two main issues: double recognition of revenue and recognition of profit during the construction phase.

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

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.