International Briefing

The Determination and Communication of Levels of Assurance Other than High
Financial reporting European Union

IAS regulation receives final approval

The EU has given final approval to its regulation on the application of International Accounting Standards. Unlike an EU directive, the regulation has the force of law and no further action is required by member states before the regulation comes into effect. The regulation applies in all member states plus Iceland, Norway and Liechtenstein. It will also apply to EU accession countries when they join the EU.

The regulation requires virtually all EU-listed companies to publish IAS consolidated financial statements for accounting periods beginning on or after 1 January 2005. The term IAS encompasses all standards and interpretations issued or adopted by the International Accounting Standards Board.

Member states may allow a two-year extension for companies that have their securities publicly traded outside the EU and which, for that purpose, have been using internationally accepted standards (in practice, US GAAP) since a financial year that started before the regulation was published. Member states may also allow a two-year extension for companies that have only debt securities listed on a regulated market.

While the regulation requires the publication of IAS consolidated financial statements, the European Commission is required to decide on the applicability of individual IASs with the EU. It may adopt an IAS only if:

•   it is not contrary to the principles of the EU Fourth and Seventh Directives;

•   it is conducive to the European public good; and

•   it meets the criteria of understandability, relevance, reliability and comparability required of financial information needed for making economic decisions and assessing stewardship of management.

The Commission is expected to adopt all current IASs as well as proposed changes to those standards and the forthcoming IFRS on the firsttime adoption of IAS/IFRS. The Commission will be assisted by the Accounting Regulatory Committee and must decide by 31 December 2002 on those IASs that will apply when the regulation comes into force.

Member states have the option of extending the application of the regulation to unlisted companies and legal entity, rather than consolidated, financial statements.

The IAS regulation may be downloaded from

Improvements to Fourth and Seventh Directives

The European Commission has a draft directive that seeks to modernise the Fourth and Seventh Directives, in particular bringing them closer to IAS. Among other things, the amendments:

•   empower member states to allow or require a cash flow statement;

•   bring the definition of parent and subsidiary fully into line with

IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries, and SIC 12 - Consolidation - Special Purpose Entities ;

•   require the consolidation of subsidiaries with dissimilar activities;

•   achieve consistency between the format requirements for the financial statements and IAS requirements;

•   allow for likely IAS requirements on performance reporting;

•   allow the revaluation of intangible assets and any other class of assets;

•   specify in more detail the content of the annual report (or management analysis of the business);

•   extend the disclosures about environmental and social aspects of a business; and ! modify the format and content of the audit report to reflect current best practice and achieve harmonisation.

The draft directive may be downloaded from

FEE position paper on role of accounting and auditing

The Fédération des Experts Comptables Européens has published a position paper, The Role of Accounting and Auditing in Europe, which highlights the essential issues facing the accountancy profession in the light of the current debate about the state of corporate governance and financial reporting in Europe. The paper can be downloaded from

IFAC: Assurance engagements study issued

The International Federation of Accountants' International Auditing and Assurance Standards Board (IAASB) has issued a study, , which offers guidance on the determination of the appropriate level of assurance needed on different engagements, and the best method for reporting on these engagements. The study includes an extensive literature review, a survey of national practices in 12 countries and a survey of the practices adopted by audit firms.

The study can be downloaded from

Basel Committee: Survey of bank disclosures - room for improvement

The Basel Committee's new survey of disclosures shows that internationally-active banks make good disclosures about capital structure and ratios, accounting policies, credit risk and market risk. Disclosure rates generally decrease as the sophistication, complexity or degree of ownership of the information increases. Fewer than half the banks disclose information about credit risk modelling, credit derivatives and securitisation.

Furthermore, while banks are meeting most of the proposed disclosure requirements emanating from the Basel Committee's , there is still room for improvement. The committee also expects to see disclosures increase in anticipation of the new capital accord coming into force.

Copies of Public Disclosures by Banks: Results of the 2000 Disclosure Survey, which covers banks in 13 countries, may be downloaded from

Australia: Related party disclosures - exposure draft

The Australian Accounting Standards Board (AASB) has issued exposure draft ED 106, Director, Executive and Related Party Disclosures, which seeks to redress shortcomings in existing Australian disclosures and incorporate the best features of overseas reporting. It is also intended to overcome inconsistencies between existing standards and

IAS 24, Related Party Disclosures.

The proposed standard will require extensive disclosures about the remuneration of directors and executives (not required by

IAS 24), as well as details of their holdings and transactions in the entity's equity and any loans from the entity.

The exposure draft can be obtained from Comments are requested by 30 September 2002.


Accounting standards issued

The Accounting Standards Board of Japan (ASBJ) has issued two reports that deal with questions raised on the application of existing pronouncements. Report 1 deals with accounting for new share subscription rights and bonds with new share subscription rights. Report 2 deals with transfers between retirement benefit plans.

Auditing standards

The Japanese Institute of Certified Public Accountants has issued exposure drafts of three proposed auditing standards: Auditor's Consideration of Going Concern Assumption; Disclosures Concerning Going Concern Assumption; and Assessment of Control Risk in Financial Statement Audits.


FASB issues guarantees interpretation ED

The Financial Accounting Standards Board has issued an exposure draft of a proposed interpretation, . The proposed interpretation clarifies and expands on existing disclosure requirements for guarantees, including loan guarantees. It also requires the recognition, at the time the guarantee is issued, of a liability for the fair value, or market value, of its obligations under that guarantee.

Derivatives and hedge accounting

The FASB has issued an exposure draft of a proposed amendment to FAS 133, which seeks to clarify the circumstances under which a financial contract - either an option-based or non-option-based contract - with an initial net investment meets the characteristic of a derivative.

Financial institutions

The FASB has issued an exposure draft, which:

•   removes all financial institution acquisitions (except transactions between two or more mutual enterprises) from the scope of FAS 72, ; and

•   brings certain long-term customer relationship intangible assets, such as depositor and borrower-relationship assets, and credit-cardholder intangible assets within the scope of FAS 144, .

IASB meeting

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

The International Accounting Standards Board met in technical session on 22-24 May.

Business combinations - Phase 1

The process of drafting an exposure draft highlighted some additional issues relating to the subsequent recognition of, or changes in the values assigned to, the acquiree's identifiable assets, liabilities and contingent liabilities. It was agreed that the IFRS replacing IAS 22, , should include the following requirements:

If either the amounts to be assigned to the identifiable assets, liabilities or contingent liabilities of the acquiree or to the cost of the business combination can be determined only on a provisional basis, the acquirer should initially account for the business combination using those provisional amounts. Any adjustments to those provisional amounts as a result of completing the initial accounting for the combination should be made and recognised no later than 12 months from the acquisition date.

Adjustments to the initial accounting for a business combination after that accounting has been completed should be recognised only in order to correct an error as defined in

IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. Adjustments to the initial accounting should not be recognised for the effect of changes in accounting estimates. The effect of a change in an accounting estimate should be recognised in current and future periods in accordance with IAS 8. Business combinations - Phase 2

Value of large block of equity instruments. The fair value of a large block of equity instruments might differ from the market price of a single equity instrument multiplied by the number of equity instruments issued. Board members agreed to defer consideration of this issue pending developments in both an American Institute of Certified Public Accountants' project and the IASB's financial instruments 'next steps' project.

Acquisition-related costs. The IASB observed that the agreed working principle for phase 2 was based on the fair value measurement objective. Consistent with the decision of the US Financial Accounting Standards Board (joint project leaders with the IASB), the board concluded that acquisition-related costs are not part of the fair value of the exchange transaction with the former owners of the business acquired and, therefore, should be accounted for normally in accordance with their nature rather than being included in the cost of the business combination.

Restructuring provisions. The IASB considered the treatment of restructuring provisions that were not the acquiree's liabilities immediately before the business combination. During the project's phase 1 deliberations, the IASB considered the recognition of liabilities for terminating or reducing activities that were not the acquiree's liabilities at the acquisition date (at present, IAS 22 requires recognition in some circumstances). In October last year it was agreed that those liabilities should be included as part of the allocation of the cost of acquisition only when the acquiree has, as at the date of acquisition, an existing liability recognised in accordance with

IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The board confirmed its phase 1 decisions relating to amounts that were not liabilities of the acquiree immediately before the business combination.

Post-employment benefit obligations triggered by a business combination. The FASB agreed that these are obligations assumed in a business combination that should therefore be included as part of the allocation of the acquisition cost. However, during its phase 1 deliberations the IASB had concluded that such obligations represent post-acquisition expenses of the combined entity and should, therefore, be recognised in the combined entity's income statement. The IASB agreed to proceed with its phase 1 decisions on this matter; the IASB and FASB will reconsider this issue with a view to reaching agreement before an exposure draft is prepared.

First-time application of IFRS

It was agreed that an entity recognises the cumulative gains and losses on an available for sale financial asset in a separate component of equity in its opening IFRS balance sheet, rather than in retained earnings as had been originally concluded at its March meeting. On subsequent disposal, those cumulative gains and losses are included in the gain or loss on disposal recognised in income.

The IASB discussed the treatment of a subsidiary that has previously reported to its parent using IFRSs without preparing a full set of financial statements under IFRSs. If the subsidiary subsequently begins to prepare financial statements that contain an explicit and reserved statement of compliance with IFRSs, it becomes a first-time adopter at that point. It was agreed that the susbidiary should give the same disclosures as other first-time adopters. However, in some cases, the proposed ED might result in measurements that differ from those reported to the parent, and these differences could persist in the future. To avoid this, it was agreed that the subsidiary should not be treated as a first-time adopter for recognition and measurement purposes if: its parent presents financial statements that contain an explicit and unreserved statement of compliance with IFRSs; and the subsidiary is a wholly-owned subsidiary or the owners of the minority interests, including those not otherwise entitled to vote, unanimously agree that the subsidiary is not treated as a first-time adopter for recognition and measurement purposes.

In previous discussions, the IASB agreed various exemptions from the general proposal that a first-time adopter applies all IFRSs retrospectively. The board agreed that it should not prevent full retrospective application. Accordingly:

An entity should not be required to use the first-time application standard. However, if an entity does not comply completely with retrospective application, it must use the first-time application standard.

If an entity does not use the first-time application standard, it should apply the IFRSs that were in effect in each period and may, therefore, need to consider superseded versions of IFRSs if later versions have required prospective application. By contrast, if an entity uses the firsttime application standard, it should apply only the latest version of IFRSs.

Insurance contracts

The IASB noted that it would not be realistic to expect implementation of a full recognition and measurement standard for insurance contracts by 2005. Accordingly, it was agreed that the board would investigate whether the following components of the project could be put in place by 2005, without delaying the rest of the project: presentation and disclosure; application of

IAS 39, Financial Instruments: Recognition and Measurement, to some contracts that do not qualify as insurance contracts for accounting purposes; elimination of a limited number of existing practices that are incompatible with the IASB Framework; consideration of the implications for entities issuing insurance contracts of the hierarchy of pronouncements that an entity is required to consider in the absence of an IFRS that specifically applies to an item.

The IASB confirmed that it has no intention of exempting insurers from existing IFRSs (beyond the scope exclusions for insurance contracts in existing IFRSs such as

IAS 18, 32, 37, 38 and 39). Reporting performance

The IASB continued to discuss a staff concepts paper on this project, which is jointly run with the UK ASB.

Analysis of expenses by nature or function. It was concluded that analysis by function on the face of the performance statement should be required. The board decided not to define categories of functional expense but to leave these to preparers' discretion. Presentation by nature is required by existing standards for certain line items, it was noted, but it was agreed that presentation by nature should not be required for all expenses.

It was decided to prohibit mixed presentation, which arises when, for example, a presentation is mostly by function with the exception of a separate line item for depreciation, causing each of the functional costs to be understated. However, the IASB decided to allow, on the face of the statement, disaggregation of functional components by nature. For example, the total for cost of sales could be broken down into components such as materials and depreciation.

Discontinuing operations. It was decided to require the presentation of discontinuing operations as a single line item within the performance statement with disaggregated disclosure in the footnotes.

Extraordinary, exceptional and unusual items. The board decided that a separate category of reporting performance should not be defined for items such as 'extraordinary', 'exceptional', 'unusual', 'special' or 'abnormal'. An implication is that restructuring costs would no longer be reported as a separate component of performance.

Additionally, the board decided that performance statement components could be disaggregated at management's discretion, in order that certain items can be highlighted. However, the board decided to prohibit the aggregation of such items and the presentation of a profit before and after such items.

It was noted that the column of the proposed performance statement that reports estimate changes related to future periods captures many of the recognised income and expense items that might, under present practice, qualify for inclusion as extraordinary, exceptional or unusual. For example, this column includes goodwill impairment and gains or losses on disposals.

Revisions to estimates. The IASB discussed the line item to be used for presenting differences between amounts initially recognised as accounts receivable and amounts actually received. It was agreed that, under a functional classification, such items should be reported under the expense category relating to debt collection. This might vary among entities.

Share-based payment

The IASB reached the following tentative conclusions, which are based on the assumption that the IFRS would require a fair value measurement basis to be applied to all share-based payment transactions:

•   There should be no exemption from the IFRS for employee share purchase plans.

•   The measurement principles applying to all share-based payment transactions should be as follows:

1.  Transactions in which goods or services are received as consideration for the issue of equity instruments should be measured at the fair value of the goods or services received, or the fair value of the equity instruments issued (or to be issued), whichever is more readily determinable. For transactions measured at the fair value of the equity instruments issued (or to be issued), fair value should be estimated at grant date.

2.  For transactions with parties other than employees, there should be a rebuttable presumption that the fair value of the goods or services received is more readily determinable. For transactions with employees, there should be a rebuttable presumption that the fair value of the equity instrument issued (or to be issued) is more readily determinable.

•   Repricing of options (and other changes in terms and conditions), whether before or after vesting date, should be accounted for by recognising additional remuneration expense based on the incremental value given on repricing (that is, the difference between the fair value of the repriced option and that of the original option, both estimated as at the date of repricing).

The IASB discussed whether an unlisted entity that is unable to estimate reliably the fair value of the goods or services received should be permitted to use the minimum value method. It was agreed that further advice on this issue should be sought from the project's advisory group.

It was tentatively agreed that newly-listed companies should not be permitted to use the minimum value method, and that the IFRS should give guidance on estimating the expected volatility of newly-listed entities, similar to that contained in the US standard SFAS 123, .

The IASB continued its discussions of vesting conditions. It considered a worked example of its proposed approach, compared with the approach applied in SFAS 123. Under the IASB's proposed approach, the grant date valuation of the options would take into account the existence of vesting conditions, with that valuation then applied to the services actually received. Some board members expressed concerns about the approach proposed to adjust the grant date valuation, and it was agreed to request further guidance from the advisory group.

Compiled by David Cairns, a consultant on international financial reporting issues and author of Applying International Accounting Standards (Tolleys, October 2002) and the International Accounting Standards Survey 2000 (

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