International Briefing

Improvements to International Accounting Standards

Compiled by David Cairns, a consultant on international financial reporting issues and author of the International Accounting Standards Survey 2000 (


Improvements to IAS

The International Accounting Standards Board has published an exposure draft, , which proposes revisions to 12 of the extant 34 IASs. Among other things, the proposed changes seek greater convergence of national and international standards and the elimination of free choices of accounting treatments for like transactions and events (see also this issue p 96).

The main convergence changes are:

•   use of a current/non-current distinction in the balance sheet unless a liquidity presentation is more relevant (IAS 1);

•   elimination of extraordinary items (

IAS 8); ! adoption of a functional currency approach for foreign currency accounting (IAS 21);

•   extension of the definition of related parties to include joint ventures and pension plans (

IAS 24);

•   disclosure of monetary amounts for related party transactions, balances and guarantees and the terms and conditions of such transactions (

IAS 24);

•   further guidance on the calculation of eps in more complex situations (

IAS 33); and

•   classification of property held under an operating lease as investment property (

IAS 40).

The ED proposes the elimination of the following accounting treatments:

•   LIFO (last in, first out) formula for inventory valuation (IAS 2);

•   correction of prior period errors through the current period's income statement (

IAS 8);

•   inclusion of the adjustment arising on a voluntary change in accounting policy in the current period's income statement (

IAS 8);

•   immediate recognition as an expense of a lessor's initial direct costs on a lease (

IAS 17);

•   the capitalisation of certain foreign currency losses arising on the recent acquisition of an asset (

IAS 21).

Other improvements include:

•   modifications to the fair presentation override (IAS 1);

•   a requirement to disclose the critical judgments made by management in applying accounting policies (IAS 1);

•   disclosure of the key assumptions about the uncertainties that could cause material adjustment of the carrying amounts of assets and liabilities (IAS 1);

•   disclosure of the amounts by which inventories have been written down (IAS 2);

•   disclosure of the effects of a future change in accounting policy arising from a new or revised IAS/IFRS (

IAS 8);

•   use of a components approach to depreciation (

IAS 16);

•   use of fair values for all exchanges of property, plant and equipment (

IAS 16);

•   annual review of residual value of property, plant and equipment (

IAS 16);

•   segregation of leases of land from leases of buildings on that land (

IAS 17);

•   classification of venture capital investments as financial assets (

IAS 39) rather than associates (IAS 28) or joint ventures (IAS 31).

The IASB intends that the improved IAS will take effect before EU listed companies implement IAS from 2005.

Comments are due by 16 September 2002. Visit for copies of the ED.

Amendment to IAS 19

The IASB has a revised version of

IAS 19, Employee Benefits, that reflects the changes proposed in the exposure draft on the asset recognition ceiling test ( Accountancy, April, p 108). The change deals with the interaction between the ceiling test for asset recognition on a defined benefit plan and the optional requirements for the deferral and amortisation of actuarial gains and losses and past service costs. The change precludes recognition of a gain when the amount of unrecognised asset has declined and the resulting actuarial loss is deferred and amortised (see also this issue, p 100).

Copies of the revised

IAS 19 may be obtained from IASB publications ( Preface to IFRS

The IASB has published the revised Preface to International Financial Reporting Standards, which reflects developments since its last revision in 1982. The Preface sets out the objectives and due process of the IASB and explains the scope, authority and timing of application of IFRS (including existing IASs that the ASB adopted in April 2001).

The states that IFRSs are intended to apply to the general purpose financial statements of all profit-orientated enterprises whatever their form and whether in the private or public sector. IAS/IFRS do not apply to private or public sector not-for-profit entities (IFAC's Public Sector Committee is dealing with nonbusiness government entities).

After considering the comments on the ED, the IASB has agreed to the distinction between the standards (in bold, italic text) and related guidance (plain text).

The new Preface is available from IASB Publications (


E-commerce and audit

The International Federation of Accountants' International Auditing and Assurance Standards Board has issued an International Auditing Practice Statement, Electronic Commerce - Effect on the Audit of Financial Statements, that will assist auditors to address an enterprise's e-commerce risks. The guidance in the new statement is particularly relevant to the application of ISA 300, Planning; ISA 310, Knowledge of the Business; and ISA 400, Risk Assessments and Internal Controls.

The statement focuses on:

•   the level of skills and knowledge required to understand the effect of e-commerce on the audit;

•   the extent of knowledge the auditor should have about the entity's business environment, activities and industries;

•   business, legal, regulatory and other risks faced by entities engaged in e-commerce activities;

•   internal control considerations, such as an entity's security infrastructure and transaction integrity; and ! the effect of electronic records on audit evidence.

The statement applies where an organisation engages in commercial activity over both a public network, such as the internet, and a private one. It will be helpful in the audits of entities organised primarily for e-commerce activities (dot.coms), but the IAASB warns that it does not deal with all audit issues that would be addressed in the audit of such entities.

The new statement, price $22, can be downloaded at

Public sector study

IFAC's Public Sector Committee has released Study 14, , which identifies: ! the key issues that need to be addressed in the migration from the cash to the accrual basis of accounting; and ! alternative approaches that can be adopted in implementing the accrual basis in an efficient and effective manner in the public sector

PSC Study 14 may be downloaded from

European Union

Enforcement of IFRS

The Fédération des Experts Comptables Européens has issued a discussion paper, , that addresses the enforcement issue which needs to be resolved before implementation of the EU IAS Regulation in 2005.

The FEE paper calls on EU member states to review their arrangements for enforcement urgently. It argues that EU enforcement should be built on effective national enforcement bodies. It recommends the use of the review panel model (as in the UK) for those countries that currently lack an enforcement body.

FEE also calls for the creation of a European Enforcement Coordination in order to ensure consistency in applying decisions within Europe. It urges action by the EU Commission, the Committee of European Securities Regulators (CESR) and other relevant parties.

FEE warns enforcement bodies to limit interpretations on accounting issues to application guidance in individual cases. In appropriate cases, guidance should be referred to the IASB, IFRIC or EFRAG. FEE also suggests that regulators should offer 'pre-clearance' only when cost-effective and with the full involvement of the directors and auditors of the company concerned. Preclearance should be limited to issues where there is no IFRS or IFRIC interpretations.

The FEE discussion paper may be downloaded from


Financial performance

The Australian Accounting Standards Board has released an exposure draft, ED 105, Statement of Financial Performance: Amendments to AASB 1018/AAS 1, which proposes amendments to AAS 1, Statement of Financial Performance. The main proposals seek to:

•   improve and clarify the requirements relating to the face of the statement of financial performance;

•   clarify the required disclosures of expenses; and

•   deem gains and losses on the disposal of property, plant and equipment to be revenues and expenses for disclosure purposes.

Copies of ED 105 can be obtained from


Asset retirement obligations

The Canadian Accounting Standards Board has issued an exposure draft, , which would harmonise Canadian GAAP requirements for asset retirement obligations with the corresponding US GAAP requirements. The exposure draft proposes that an entity should generally recognise a liability for such an obligation at its fair value when incurred. The corresponding cost should be added to the asset's carrying amount. In subsequent periods, the liability's carrying amount should be adjusted to reflect the passage of time and any revisions to the previously recognised fair value. The accretion of discount should be charged to expense on a systematic and rational basis over its useful life, subject to write-down for impairment.

Copies of the ED can be obtained from Comments are due by 15 July 2002.

Cash flow and other per share information

The AcSB has issued an exposure draft, Cash Flow and Other Per Share Information, which proposes to ban disclosure of cash flow amounts per share in financial statements, except for amounts related to dividends or similar cash distributions paid or payable to shareholders, unitholders or partners. It also proposes to ban disclosure of income per share amounts, other than earnings per share required by other CICA Handbook sections.

Copies of the exposure draft can be obtained from Comments are requested by 15 July 2002.


Standards and guidance

The Accounting Standards Board of Japan (ASBJ) has issued: ! Financial Accounting Standards 1, ;

•   Financial Accounting Standards Implementation Guidance 1, ;

•   Financial Accounting Standards Implementation Guidance 2, ; and

•   Financial Accounting Standards Implementation Guidance 3, .

The Japanese Institute of Certified Public Accountants has issued Industry Audit Committee Report 24, , which includes guidance for new accounting such as hedging activities to be applied from fiscal and semiannual periods beginning after 31 March 2002.

The cabinet ordinances on corporate disclosures and financial statements have been amended with effect from April 2002. The amendments have been made in conjunction with the June 2001 amendment of the Commercial Code and the ASBJ's pronouncement of accounting standards for treasury stock.


Updates and clarifications

The Financial Accounting Standards Board has issued SFAS 145, , which updates, clarifies and simplifies the following existing pronouncements:

•   SFAS 4 on the classification of gains and losses from extinguishment of debt;

•   SFAS 44 on the transition to the Motor Carrier Act of 1980; and

•   SFAS 13 on certain lease modifications that have economic effects similar to sale-leaseback transactions.

SFAS 145 also makes certain other technical corrections to existing pronouncements that, while not substantive, may change accounting practice.

The FASB has also issued an exposure draft that seeks to clarify the definition of a derivative in FAS 133, . The draft deals with the accounting for beneficial interests in securitised financial assets such as beneficial interests in securitised credit card receivables.

The exposure draft may be downloaded from Comments are requested by 1 July 2002. SFAS 45 may be ordered from


Compiled by Lesley Bolton based on information supplied by the IASB (

The International Accounting Standards Board met in technical session on 16-19 April, during which it discussed certain aspects of its projects on share-based payment and reporting performance (a partnership project) with the UK's Accounting Standards Board.

Meeting with UK ASB

Share-based payment

The discussion centred on option pricing models, beginning with issues relating to the inputs (eg, expected volatility, dividends, etc). This was followed by a discussion of issues relating to the application of option pricing models. The following particular employee share option features were discussed:

•   There is usually a vesting period, before which the options are not exercisable.

•   There are usually service and sometimes performance conditions attached to vesting.

•   The options are usually non-transferable.

Reporting performance

The UK ASB and the IASB discussed their objectives for the performance statement's design. There was general preference that there should be a structured categorisation based on (1) operating v financing activities; and (2) income relating to the current period v income arising from revised capitalisations of future performance.

There were mixed views on whether it is desirable (or even possible) to proscribe specific subtotals. The discussion included the question of whether a definition of 'operating earnings' is a desirable outcome from the project. Although there were wide-ranging views on this issue, it was generally held that it would be best to decide on this at a later stage in the project.

The two boards evaluated three performance statement formats: the ASB's FRED 22; the IASC steering committee's DSOP (alternative C); and the concepts paper format. Many favoured the concepts paper format.

Subjects for future discussion were suggested, including: more complex financial instruments; restructuring costs and other exceptional items.

Preface to IFRS

After consideration of the comment letters received on the exposure draft, the IASB agreed:

•   that IFRSs are designed to apply to the general purpose financial statements of all profit-orientated entities, as defined;

•   to make conforming amendments to the rubric at the beginning of each standard.

As far as the preface was concerned, the board decided to:

•   amend the references to the IFRIC and the SAC to be consistent with the IASC Foundation constitution, and to clarify that IFRIC has a nonvoting chairman;

•   clarify that IFRSs include standards and interpretations approved by the IASB, as well as IASs and SIC interpretations issued under the previous constitution;

•   clarify that IFRSs apply to all general-purpose financial statements;

•   clarify that the IASB intends to issue IFRSs that do not contain alternative accounting treatments;

•   remove the reference that IFRSs need not be applied to immaterial items;

•   clarify steps in the IASB and IFRIC's due process;

•   clarify that consideration will be given to all comments received within the comment period on discussion documents, draft IFRIC interpretations and exposure drafts;

•   clarify that the requirements of an existing IFRS that would be affected by proposals in an exposure draft remain in force until the effective date of a new IFRS;

•   clarify that the requirements of an existing IFRS that would be affected by proposals in an exposure draft remain in force until the effective date of a new IFRS.

Business combinations - Phase 1

The IASB agreed the following in relation to the effective date that should be included in the exposure drafts for phase 1 of the business combinations project:

•   The IFRSs replacing IAS 22, Business Combinations, the revised

IAS 36, Impairment of Asssets, and the revised IAS 38, Intangible Assets, should be applied to all business combinations for which the agreement date occurs on or after the date those standards are issued, and to any goodwill and intangible assets acquired in those business combinations.

•   The same IFRSs should, in all other respects, be applied as from the beginning of the first annual reporting period commencing on or after the date those standards are issued. However, entities should be encouraged to go for early adoption. If an entity adopts the IFRS replacing IAS 22 before the effective date, it should be required also to adopt the revised

IAS 36 and the revised IAS 38 at the same time, and vice versa.

In relation to transitional provisions, the IASB agreed that:

•   The requirements of the IFRS replacing IAS 22 should be required to be applied prospectively to business combinations after the effective date of the IFRS, with two modifications: (1) the recognition, but not the measurement, requirements for negative goodwill in the IFRS should be applied prospectively; and (2) the carrying amount of an intangible asset acquired in a business combination before the effective date of the IFRS and recognised as an asset separately from goodwill as at that effective date should be reclassified as goodwill if it is: not separable and does not arise from contractual/legal rights or; an assembled workforce.

•   The IFRS replacing IAS 22 should prohibit, as from the beginning of the first annual reporting period commencing on or after the date those standards are issued, the continued amortisation of goodwill recognised prior to that date. Instead, goodwill recognised prior to the IFRS's effective date should be accounted at its then carrying amount in accordance with the IFRS's requirements (ie, impairment tested only).

•   For equity accounted investments acquired before the beginning of the first annual reporting period commencing on or after the date those standards are issued, the IFRS should (1) prohibit, as from that date, the continued amortisation of notional goodwill included within the investment's carrying amount for the purpose of determining the investor's share of the investee's profit or loss; and (2) require, as from that date, any notional negative goodwill included within the investment's carrying amount to be derecognised with a corresponding adjustment to opening retained earnings. The IASB also agreed that the IFRS should clarify that notional goodwill included within an equity-accounted investment's carrying amount should not be tested for impairment by applying the goodwill impairment test in the revised

IAS 36. Rather, it should continue to be reviewed for impairment in accordance with the requirements in IAS 36 (and in the revised IAS 36) for impairment testing assets other than goodwill.

•   The revised

IAS 36's requirements should be required to be applied prospectively.

•   The revised

IAS 38's requirements should be required to be applied to intangible assets recognised before its effective date. However, any reassessment of an intangible asset's useful life as a result of the initial application of the revised IAS 38, including a reassessment from a finite to an indefinite useful life, should be accounted for as a change in an accounting estimate. Therefore the effect of such a reassessment should be recognised on a prospective basis.

•   The revised

IAS 38's requirements for subsequent expenditure on in-process R&D acquired in a business combination and recognised separately-from goodwill should be required to be applied prospectively to expenditure incurred after the revised IAS 38's effective date. Business combinations - Phase 2

The project on the application of the purchase method is to be conducted jointly with the US Financial Accounting Standards Board, with FASB taking the lead role. The treatment of contingencies in an acquisition was considered, and it was agreed that the staff should explore the idea of amending the definitions of contingent assets and liabilities in

IAS 37, Provisions, Contingent Liabilities and Contingent Assets, in order to make it clear that there is no difference in the population of items regarded as contingent assets and contingent liabilities under US GAAP and under IASs. The aim is not to change the recognition rules under IAS 37, and if the definitions in IAS 37 cannot be reworded (and consequential changes made) without altering the effect of IAS 37, the approach will be reconsidered.

It was further agreed that in accounting for items exchanged in a business combination:

•   The acquiree's contingent assets and liabilities should be recognised at the acquisition date at fair value.

•   Contingent consideration should be recognised at the acquisition date at fair value.

•   Subsequent adjustments to the measurement of the contingent consideration classified as liabilities should not be treated as adjustments to the cost of acquisition.

•   Contingent consideration that takes the form of financial instruments that are classified as equity should not be remeasured subsequent to initial recognition.

•   The exception in para 1(g),

IAS 39, Financial Instruments: Measurement and Recognition, which excludes contingent consideration from the standard's scope, should be removed.

•   Contingent assets and liabilities that are financial instruments should be remeasured in accordance with

IAS 39.

•   Contingent liabilities that are financial instruments but that are outside

IAS 39's scope, and contingent liabilities that are not financial liabilities, should be subsequently remeasured at fair value.

•   Contingent assets that are not financial instruments should be remeasured in the same way as intangible assets under

IAS 38, Intangible Assets. Reporting performance

There was more discussion of a concepts paper developed by staff. The board discussed the two primary categories within the performance statement, in the context of financial instruments: the distinction between operating and financing activities, and the distinction between income relating to the current period and that arising from revised capitalisations of future performance.

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