International reporting: August 2014

In our monthly review of international reporting issues, Peter Walton assesses the impact of IFRS 15 on reporting of revenue recognition issues and business combinations under IFRS 3


Both the revenue standard and new financial instruments standard are to be given ‘implementation resource groups’ to help consistent application of the new accounting rules. The International Accounting Standards Board (IASB) has formed an implementation steering committee to make sure there is sufficient support in place for new International Financial Reporting Standards (IFRS)

IASB staff told the last meeting of the IFRS Advisory Council that in the wake of the 2012 strategy review, it had decided that more support should be given during the implementation stage of a standard. As a result, the implementation steering committee had been formed internally to oversee this.

The first manifestation of the new approach was the revenue transition research group (RTRG), set up jointly with the US Financial Accounting Standards Board (FASB) to discuss issues arising from IFRS 15, Revenue from Contracts with Customers.

The RTRG has 20 members, mostly preparers but also professional advisers, who will debate implementation issues submitted by constituents. Their meetings will be public, but they will issue no guidance. If issues arise that called for amendment or elaboration of the standard, this will be done by the Interpretations Committee or the IASB. IASB technical director Henry Rees said that the RTRG was intended to have a short life and be disbanded after the mandatory implementation date.

The IASB is planning to provide a similar support group for impairment issues arising from the final version of IFRS 9, Financial Instruments. As with IFRS 15, the mandatory adoption date is not close, but early adoption is permitted, and the IASB expects financial institutions to have a number of queries once they start to put the systems in place.

The IASB considers that the new impairment requirements for financial instruments represent a significant change in practice and therefore are a candidate for the new support policy.

IASB advisory council member Gavin Francis, deputy group chief accounting officer of HSBC Holdings, agreed and said it was possible the regulator would also want close involvement. However, he warned that there should not be a proliferation of such resource groups.

Business combinations under IFRS 3

The IASB staff is currently gathering evidence about the implementation experience of IFRS 3, Business Combinations, as part of a post-implementation review (PIR) of the standard. So far outreach has identified that constituents are

least happy about valuing intangible assets at fair value, the definition of a business, the measurement of non-controlling interest and the treatment of step transactions where the reporting entity increases or decreases its stake in an investee company.

The definition of a business is significant because, where a company buys a set of assets and liabilities from another, the subsequent accounting depends on whether the set is considered to be a business or not. If it is a business, it has to be consolidated and the assets and liabilities have to be measured at fair value, and goodwill is recognised.

If it is not a business, the consideration is allocated proportionally across the set of assets and liabilities.

IFRS 3 says that if the set of assets is capable of being run as a business, ie, it has inputs, a process and outputs, it should be accounted as a business, irrespective of the acquirer’s intentions. Outreach shows that some constituents think this definition is too broad and captures too many transactions.

Preparers also think that recognising all separable intangible assets at fair value is a complex and costly exercise, and generates values that are uncertain.

Some suggest that recognising intangibles that cannot be separated from the business, and have an indefinite life, is not useful, and they should be left within goodwill.

Against that, other constituents think that the systematic testing of goodwill for impairment is also costly and in practice does not result in a timely recognition of a decline in value. When debating the IFRS for SMEs the IASB acknowledged that, for smaller business at least, maintaining a goodwill asset in the balance sheet was not useful and allowed amortisation over ten years. The FASB has subsequently followed suit in respect of private companies.

IFRS 3 was one of the IASB’s first completed convergence projects with the FASB. The US regulator had taken the radical step of banning merger accounting and requiring that all business combinations were treated as acquisitions. The standard brought the IASB into line with the FASB position, and was subsequently updated at the same time as the US requirements.

Any modifications to the standard are therefore likely to be seen through the prism of the US experience. The IASB findings will be shared with the FASB.

Peter Walton PhD FCCA is emeritus professor, Open University Business School

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