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FASB adopts fair value option for financial instruments

16 Feb 2007

The US Financial Accounting Standards Board has issued a standard that provides companies with an option to report selected financial assets and liabilities at fair value.

Statement 159 The Fair Value Option for Financial Assets and Financial Liabilitiesalso establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for an entity's first financial year beginning after 15 November 2007, with earlier adoption permitted. Under FAS 159, the fair value option:
  • May be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method
  • Is irrevocable (unless a new election date occurs)
  • Is applied only to entire instruments and not to portions of instruments.
The FAS 159 fair value option is similar, but not identical, to the fair value option in IAS 39 Financial Instruments: Recognition and Measurement. The IAS 39 fair value option is subject to certain qualifying criteria not included in FAS 159, and it applies to a slightly different set of instruments. Click for FASB's News Release (PDF 58k). You can download FAS 159 from FASB's Website.

IAS Plus Newsletters for February 2007

16 Feb 2007

The February 2007 IAS Plus Quarterly Newsletter has been published.

The newsletter reports on the 4th quarter 2006 and early 2007 activities of the IASB, the IFRIC, and the IASC Foundation, and also on worldwide issues and events relating to international financial reporting. The Asia-Pacific edition has the same 22-page news content as the Global Edition plus 7 more pages of accounting standards updates for the Asia-Pacific region.

IASB invites comments on SME exposure draft

15 Feb 2007

The IASB has published an Exposure Draft of an 'International Financial Reporting Standard for Small and Medium-sized Entities' (IFRS for SMEs).

The ED is a simplified, self-contained set of accounting principles for SMEs. Compared to full IFRSs, the volume has been reduced by 85%.

The IFRS for SMEs is based on full IFRSs, which are developed for public capital markets. Modifications are based on user needs and cost-benefit considerations.

The IFRS for SMEs would enable investors, lenders, and others to compare SMEs' financial performance, financial condition, and cash flows while, at the same time, reducing the burden of preparing SME financial statements. Thirteen Board members voted in favour of the ED, and one opposed. An overview is presented below.

Comment deadline is 1 October 2007. Click for Press Release (PDF 98k) and here for Project Background Info. The ED is now available to subscribers on the IASB's website. It will be publicly available 26 February 2007.



Definition of an SME

The IFRS for SMEs is intended for an entity with no public accountability. An entity has public accountability (and therefore should use full IFRSs) if:

  • it has issued debt or equity securities in a public market; or
  • it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund, or investment bank.

Stand-alone document

The Board intends the IFRS for SMEs to be a stand-alone document for a typical SME with about 50 employees. The IASB has not specified a quantified size test, though jurisdictions adopting the IFRS for SMEs may add one. There is no mandatory fallback to full IFRSs.

Small listed companies

They are not eligible to use the IFRS for SMEs. Listed companies, large or small, have elected to seek capital from outside investors who are not involved in managing the business and who do not have the power to demand information that they might want. Full IFRSs have been designed to serve public capital markets.

Based on concepts and principles in full IFRSs

The draft IFRS for SMEs was developed by extracting the fundamental concepts from the IASB Framework for the Preparation and Presentation of Financial Statements and the principles and related mandatory guidance from IFRSs with appropriate modifications in the light of users' needs and cost-benefit considerations.

Modifications of IFRSs

The modifications are of three broad types based on needs of users of SMEs' financial statements and cost-benefit considerations:

1. Topics omitted. IFRS topics not relevant to a typical SME are omitted, with cross-references to the IFRS if needed. These are:

  • General price-level adjusted reporting in a hyperinflationary environment.
  • Equity-settled share-based payment (the computational details are in IFRS 2 Share-based Payment).
  • Determining fair value of agricultural assets (look to IAS 41 Agriculture, but the ED also proposes to reduce the use of fair value through profit or loss for agricultural SMEs).
  • Extractive industries (look to IFRS 6 Exploration for and Evaluation of Mineral Resources).
  • Interim reporting (look to IAS 34 Interim Financial Reporting).
  • Lessor accounting finance leases (finance lessors are likely to be financial institutions who would be ineligible to use the IFRS for SMEs anyway).
  • Recoverable amount of goodwill (SMEs would test goodwill for impairment much less frequently than under IAS 38 Intangible Assets, but if an SME is required to perform such a test it would look to the calculation guidance in IAS 38).
  • Earnings per share and segment reporting, which are not required for SMEs, and Insurance contracts (insurers would not be eligible to use the IFRS for SMEs).

2. Only the simpler option included. Where full IFRSs provide an accounting policy choice, only the simpler option is in the IFRS for SMEs. An SME is permitted to use the other option by cross-reference to the relevant IFRS. These are:

  • Cost-depreciation model for investment property (fair value through profit or loss is permitted by reference to IAS 40 Investment Property).
  • Cost-amortisation-impairment model for property, plant and equipment and intangibles (the revaluation model is allowed by references to IAS 16 Property, Plant and Equipment and IAS 38).
  • Expense borrowing costs (capitalisation allowed by reference to IAS 23 Borrowing Costs).
  • Indirect method for reporting operating cash flows (the direct method is allowed by reference to IAS 7 Cash Flow Statement).
  • One method for all grants (or an SME can use any of the alternatives in IAS 20 Government Grants and Disclosure of Government Assistance).

In adopting the IFRS for SMEs, an individual jurisdiction could decide not to allow the option that is cross-referenced to the full IFRS.

3. Recognition and measurement simplifications. Here are some examples:

  • Financial instruments:
    • Two categories of financial assets rather than four. This means no need to deal with all of the intent-driven held to maturity rules or related 'tainting', no need for an available for sale option, and many other simplifications.
    • A clear and simple principle for derecognition - if the transferor has any significant continuing involvement, do not derecognise. The complex 'pass-through testing' and 'control retention testing' of IAS 39 Financial Instruments: Recognition and Measurement are avoided.
    • Much simplified hedge accounting.
  • Goodwill impairment - an indicator approach rather than mandatory annual impairment calculations.
  • Expense all research and development cost (IAS 38 would require capitalisation after commercial viability has been assessed).
  • The cost method for associates and joint ventures (rather than the equity method or proportionate consolidation).
  • Less fair value for agriculture - only if 'readily determinable without undue cost or effort'.
  • Defined benefit plans - a principle approach rather than the detailed calculation and deferral rules of IAS 19 Employee Benefits. Complex 'corridor approach' omitted.
  • Share-based payment - intrinsic value method.
  • Finance leases - simplified measurement of lessee's rights and obligations.
  • First-time adoption - less prior period data would have to be restated than under IFRS 1 First-time Adoption of IFRSs.

Frequency of updating the IFRS for SMEs

  • Approximately once every two years via an 'omnibus' exposure draft.

Organisation of the ED

The ED is issued in three documents:

  • The draft IFRS for SMEs (254 pages),
  • Implementation guidance (80 pages, consisting of illustrative financial statements and a disclosure checklist), and
  • Basis for conclusions (48 pages).
The IFRS for SMEs is organised topically, rather than in IAS/IFRS statement number sequence. It has 38 sections and a glossary.

Next steps

  • Comment deadline on the ED is 1 October 2007.
  • During the exposure period the Board will conduct round-table meetings with SMEs and small firms of auditors to discuss the proposals. The Board will field test the proposals in the ED.
  • Final standard is expected in mid-2008.
  • It would be effective according to decisions in each jurisdiction that adopts the IFRS for SMEs.

New UK publication on interim financial reporting

15 Feb 2007

Deloitte (United Kingdom) has published Clear All Year–Considering New Rules and Practice in Interim Reporting. This 92-page publication considers, among other things, the EU Transparency Obligations Directive and its impact on United Kingdom reporting by fully listed companies.

The publication consists of seven parts:
  1. An overview of the new rules in UK periodic reporting arising from Disclosure and Transparency Rules (DTR).
  2. A survey on corporate periodic reporting.
  3. A model half-yearly financial report in accordance with IAS 34 Interim Financial Reporting and the DTR.
  4. A half-yearly financial report disclosure checklist.
  5. A model Interim Management Statement (IMS).
  6. An IMS disclosure checklist.
  7. A guide to IAS 34.
It is aimed at:
  • Finance Directors and Financial Controllers of public and AIM companies; and
  • non-executive directors, including Audit Committee members, of listed and AIM companies, who may be interested in financial reporting issues.
Click to Download Clear All Year (PDF 760k).

Agenda for leases working group meeting

14 Feb 2007

The IASB and FASB Working Group on Lease Accounting will meet on 15 February 2007 (tomorrow) at the Crowne Plaza London - St James, 45-51 Buckingham Gate, London.

The meeting is open to public observation. The agenda is below. Click here to Download the Agenda Papers (AP) from the IASB's website.

Agenda: IASB and FASB Working Group on Lease Accounting

15 February 2007, 10:00am to 17:30pm

  • The need for change – IASB Member Warren McGregor
  • Project overview and objectives of the meeting – AP 1
  • Identification of the assets and liabilities arising in a simple lease contract and analysis of different possible accounting models – AP 5 and AP 6
  • Characteristics and terms of common lease contracts – AP 7
  • Initial recognition of assets and liabilities arising in a lease contract – AP 8
  • Identification of the assets and liabilities arising in a lease with a lessee option to renew and analysis of different possible accounting models – AP 9 and AP 10
  • Options to terminate a lease – AP 11

Additional agenda papers are:

  • AP 2 History of Lease Accounting
  • AP 3 Academic research on Lease Accounting
  • AP 4 Asset and Liability definitions

US SEC plans roundtable discussion of the 'roadmap'

14 Feb 2007

On 6 March 2007, senior SEC staff members from the Office of the Chief Accountant, the Division of Corporation Finance, and the Office of International Affairs will hold a roundtable discussion on the 'roadmap' regarding IFRSs.

The roadmap is a plan for eliminating the need for non-US SEC registrants that file IFRS financial statements to reconcile to US GAAP. That plan was first articulated by then SEC Chief Accountant Donald Nicolaisen in April 2005. The 6 March 2007 roundtable will be moderated by Conrad Hewitt, the SEC's Chief Accountant, and John W. White, Director of Corporation Finance. It will be held at the SEC's offices in Washington, DC, and will be open to the public.

The roundtable will consist of three panels organised to address each of the following issues with respect to the roadmap:

  • the effect on the capital raising process in the US capital markets;
  • the effect on issuers in the US capital markets; and
  • the effect on investors in the US capital markets.

Click to download:

EFRAG proposes to support IFRIC 12 on service concessions

13 Feb 2007

The European Financial Reporting Advisory Group has invited comment on its draft letter to the European Commission proposing to endorse IFRIC 12 Service Concession Arrangements for use in Europe.

EFRAG reached that decision after discussion that included a special meeting on 23 January 2007. Here is a link to download EFRAG's Draft Comment Letter (DOC 132k). Comments are requested by 28 February 2007. Four EFRAG members have concerns about IFRIC 12 that cause them to believe that EFRAG should not recommend the Interpretation for endorsement. Those members' reasoning is explained in an appendix to the draft letter.

IAASB survey on plan for 2008-2010

12 Feb 2007

The International Auditing and Assurance Standards Board (IAASB) is developing a strategic plan for its activities for the period 2008-2010. The Board is seeking public comments on key issues for discussion during strategy review forums and meetings planned for 2007.

To obtain those views, the Board is conducting an on-line survey to which responses are invited by 23 February 2007. Here is the link to the On-Line Survey Questionnaire.

SEC Chief Accountant comments on reconciliation

11 Feb 2007

In remarks at a recent conference, US SEC Chief Accountant Conrad W. Hewitt commented on the goal of eliminating the US GAAP reconciliation requirement for IFRS filers by '2009 or possibly sooner'.

Click for Mr Hewitt's Remarks (PDF 66k). An excerpt:

International convergence is another ongoing major project for us, and we are monitoring very closely what is commonly referred to as the 'Roadmap', which my predecessor laid out. The Roadmap sets forth the milestones toward eliminating the need for the US GAAP reconciliation requirement for foreign issuers who list in the US capital markets and who prepare financial statements using International Financial Reporting Standards ('IFRS') by 2009 or possibly sooner. The SEC staff continues to review foreign registrants' IFRS filings to help us better understand the differences and application of IFRS.

ARC recommends endorsement of IFRS 8, IFRICs 10 and 11

10 Feb 2007

At its meeting on 2 February 2007, the European Commission's Accounting Regulatory Committee (ARC) voted to recommend that the EC endorse IFRS 8, IFRIC 10, and IFRIC 11 for use in Europe.

The ARC will consider IFRIC 12 at its 16 March 2007 meeting. Click for Summary Votes at ARC 2 Feb 07 Meeting (PDF 13k).

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