Bombay Chartered Accountants Society Recent developments in AS/ IFRS and IND AS Global and India. Presented by: CA P.R.Ramesh December 07, 2011
Contents Amendments to Existing Standards 2 New Pronouncements 18 Amendments and New Pronouncements in the Pipeline 30 Changes to the Framework 42 Research and Other projects 44 Changes under IGAAP 47 1 Technical Pronouncements and Updates
Recent Amendments to Existing Standards 2 Deloitte PowerPoint timesaver August 2011
Amendments to Standards IFRS 1 Limited Exemption from Comparative IFRS 7 disclosures for First-time Adopters Comparatives not required Relief to first-time adopters from providing comparative period disclosures under IFRS 7 Effective Date: Annual period beginning on or after July 1, 2010 Earlier application permitted Accounting Policy changes between Interim reporting and Final reporting for First-time Adopters Changes in accounting policies or use of the exemptions in IFRS 1 after the interim financial report is published in accordance with IAS 34 but before first IFRS financial statements are issued: - explain those changes and - update the reconciliations between previous GAAP and IFRSs Effective Date: Annual period beginning on or after July 1, 2010 Earlier application permitted 3 Technical Pronouncements and Updates
Amendments to Standards IFRS 1 (Contd..) Event Driven Fair Value as Deemed Cost for First-time Adopters Permitted to use an event driven fair value as deemed cost at the measurement date for measurement events that occurred after the date of transition to IFRSs but during the period covered by the first IFRS financial statements Any resulting adjustment shall be recognised directly in equity at the measurement date Effective Date: Annual period beginning on or after January 1, 2011 Earlier application permitted Use of previous GAAP carrying amounts subject to rate regulations for First-time Adopters 4 Technical Pronouncements and Updates May elect to use the previous GAAP carrying amount of items of property plan and equipment or intangibles that are, or were, used in operations subject to rate regulations. Election is available on an item by item basis Effective Date: Annual period beginning on or after January 1, 2011 Earlier application permitted
Amendments to Standards IFRS 1 (Contd..) Removal of Fixed Dates for First-time Adopters Replacing the date of prospective application of the derecognition of financial assets and financial liabilities of 1 January 2004 with the date of transition to IFRSs so that first-time adopters of IFRSs do not have to apply the derecognition requirements in IAS 39 retrospectively from an earlier date Relieving first-time adopters from recalculating day 1 gains and losses on transactions occurring before the date of transition to IFRSs Effective Date: Annual period beginning on or after July 1, 2011 Earlier application permitted 5 Technical Pronouncements and Updates
Amendments to Standards IFRS 1 (Contd..) Entities emerging out of severe Hyperinflation either resumption or First-time Adopters 6 Technical Pronouncements and Updates when an entity s date of transition to IFRSs is on or after the functional currency normalisation date, the entity may elect to measure all assets and liabilities held before the functional currency normalisation date at fair value on the date of transition to IFRSs and use that fair value as deemed cost of those assets and liabilities in the opening IFRS statement of financial position When the functional currency normalisation date falls within a 12-month comparative period, the comparative period may be less than 12 months, provided that a complete set of financial statements is provided for that shorter period Adjustments arising from this election must be recognised directly in equity at the date of transition to IFRSs and must be accompanied by an explanation of how, and why, the entity had, and then ceased to have, a functional currency that was subject to severe hyperinflation Effective Date: Annual period beginning on or after July 1, 2011 Earlier application permitted
Amendments to Standards IFRS 3 Valuation of Non-Controlling Interests in Financial Statements the option to measure NCI either at fair value or at the proportionate share of the acquiree s net identifiable assets at the acquisition date under IFRS 3(2008) applies only to NCI that are present ownership interests and entitle their holders to a proportionate share of the acquiree s net assets in the event of liquidation All other components of NCI should be measured at their acquisition date fair value, unless another measurement basis is required by IFRSs Measurement of Stock Awards of acquirer which replace acquiree awards The current requirement in accordance with IFRS 2 at the acquisition date ( market-based measure ) applies also to share-based payment transactions of the acquiree that are not replaced. Effective Date: Annual period beginning on or after July 1, 2010 Earlier application permitted 7 Technical Pronouncements and Updates
Amendments to Standards IFRS 3 (Contd..) Contingent Consideration arising from business combinations IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures do not apply to contingent consideration that arose from business combinations whose acquisition dates preceded the application of IFRS 3(2008). Effective Date: Annual period beginning on or after July 1, 2010 Earlier application permitted 8 Technical Pronouncements and Updates
Amendments to Standards IFRS 7 Qualitative Disclosures in the context of quantitative disclosures 9 Technical Pronouncements and Updates encourages qualitative disclosures in the context of quantitative disclosures required to help users to form an overall picture of the nature and extent of risks arising from financial instruments Clarifies the required level of disclosure around credit risk and collateral held and provides relief from disclosure of renegotiated loans. Examples: description of collateral held as security and of other credit enhancements, and their financial effect. the amount that best represents its maximum exposure to credit risk at the end of the reporting period without taking account of any collateral held or other credit enhancements an analysis of the age of financial assets that are past due as at the end of the reporting period but not impaired Effective Date: Annual period beginning on or after January 1, 2011 Earlier application permitted
Amendments to Standards IFRS 7 (Contd..) Disclosures on Transfer of Assets Transfer of all or part of a financial asset Continuing involvement Retains any contractual rights or obligations in the transferred financial asset Disclosure required where transferor retains continuing involvement in transferred asset, if entity: o transfers contractual rights to receive cash flows of that financial asset; or o retains contractual rights to receive cash flows, but assumes contractual obligation to other recipients. OR Obtains new contractual rights or obligations relating to the transferred financial asset Effective date: Annual periods commencing on or after July 1 2011. Earlier application permitted. Disclose fact if applied prior to effective date.
Amendments to Standards IFRS 9 Classification and Recognition as per IFRS 9 11 Technical Pronouncements and Updates The classification criteria for financial liabilities contained in IAS 39 move to IFRS 9 unchanged and the IAS 39 classification categories of amortised cost and fair value through profit or loss are retained. Financial liability designated as at FVTPL using the fair value option, the change in the liability s fair value attributable to changes in the liability s credit risk is recognised directly in other comprehensive income, unless it creates or increases an accounting mismatch The amount that is recognised in other comprehensive income is not recycled when the liability is settled or extinguished. Credit Risk distinguished from asset-specific performance Cost exemption in IAS 39 for derivative liabilities to be settled by delivery of unquoted equity instruments is eliminated Effective Date: Annual period beginning on or after January 1, 2013 Earlier application permitted provided portion relating to financial assets is also applied early
Amendments to Standards IAS 12 Deferred Tax: Recovery of Underlying Assets Exception to the general principles of IAS 12 for investment property measured using the fair value model in IAS 40 Investment Property including those acquired in a business combination if the acquirer applies the fair value model in IAS 40 subsequent to the business combination Measurement: introduce a rebuttable presumption that the carrying amount of such an asset will be recovered entirely through sale The amendments also incorporate that deferred tax arising on a non-depreciable asset measured using the revaluation model in IAS 16 should be based on the sale rate Effective Date: Annual period beginning on or after January 1, 2012 Earlier application permitted 12 Technical Pronouncements and Updates
Amendments to Standards IAS 19 Employee Benefits 13 Technical Pronouncements and Updates Basic Principle - Recognition of changes in the defined benefit obligation and in plan assets when those changes occur, eliminating the corridor approach and accelerating the recognition of past service costs Presentation - Changes in the defined benefit obligation and plan assets are disaggregated into three components: service costs, net interest on the net defined benefit liabilities (assets) and remeasurements of the net defined benefit liabilities (assets). Net interest is calculated using a high quality corporate bond yield. This may be lower than the rate currently used to calculate expected return on plan assets, resulting in a decrease in net income. Remeasurements are never reclassified to profit or loss. Effective Date: Annual period beginning on or after January 1, 2013 Earlier application permitted
Amendments to Standards IAS 1 Presentation of Items of Other Comprehensive Income Change in Title - The Statement of Comprehensive Income is changed as Statement of Profit or Loss and Other Comprehensive Income. This is not mandatory. The existing title can still be used The amendments retain the option to present profit or loss and other comprehensive income in either a single continuous statement or in two separate but consecutive statements. Items of OCI are required to be grouped into those that will and those that will not subsequently be reclassified to profit or loss. Tax on items of OCI is required to be allocated to the above groups of OCI. 14 Technical Pronouncements and Updates The measurement and recognition of items of profit or loss and OCI are not affected by the amendments. Effective Date: Annual period beginning on or after January 1, 2012 Earlier application permitted
Amendments to Standards Other Standards IAS 1 OCI presentation IAS 27 Consequential changes Clarification issued that an entity may present the analysis of OCI by item either in the statement of changes in equity or in the notes to the financial statements Effective Date: Annual period beginning on or after January 1, 2011 Earlier application permitted Consequential amendments to IAS 21, IAS 28 and IAS 31 as a result of IAS 27(2008) should be applied prospectively (with the exception of paragraph 35 of IAS 28 and paragraph 46 of IAS 31, which should be applied retrospectively) Effective Date: Annual period beginning on or after July 1, 2010 Earlier application permitted 15 Technical Pronouncements and Updates
Amendments to Standards Other Standards (Contd..) IAS 34 Interim Financial Reporting Emphasises the principle that the disclosure about significant events and transactions in interim periods should update the relevant information presented in the most recent annual financial report and Clarifies how to apply this principle in respect of financial instruments and their fair values. IFRIC 13 Customer Loyalty Programmes Clarifies that the fair value of award credits should take into account: (i) the amount of discounts or incentives that would otherwise be offered to customers who have not earned award credits from an initial sale; and (ii) any expected forfeitures. Effective Date: Annual period beginning on or after January 1, 2011 Earlier application permitted 16 Technical Pronouncements and Updates
New Accounting Standards and Interpretations 17 Deloitte PowerPoint timesaver August 2011
New Standards and Interpretations Package of FIVE The following five new standards have been issued: IFRS 10 Consolidated Financial Statements. IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IAS 27 (2011) Separate Financial Statements IAS 28 (2011) Investments in Associates and Joint Ventures Issuance Date: May 12, 2011 Effective Date: Annual period beginning on or after January 1, 2013 Earlier application permitted provided each of the other standards in the package of FIVE are also applied early. Disclosure requirements of IFRS 12 can be included in financial statements without early application of the package of five 18 Technical Pronouncements and Updates
Consolidation and Disclosure IFRS 10 Consolidated Financial Statements Objectives To provide a single control model for all entities Key Features 19 Technical Pronouncements and Updates Revised definition of control Exposure to, or rights to variable returns and ability to affect those returns through its power over the entity. Power = existing rights giving an investor the current ability to direct the relevant activities Power arises from voting rights (or potential voting rights) and/or other rights (e.g. contractual arrangements). Careful assessment of facts and circumstances, judgment required Continuous assessment required guidance on how to apply the control principle in a number of situations, including agency relationships and holdings of potential voting rights IFRS 10 replaces those parts of IAS 27 that address when and how an investor should prepare CFS and replaces SIC-12 in its entirety.
Consolidation and Disclosure IFRS 11 & IAS 28 (2011) Joint Arrangements Objectives Key Features To improve the financial reporting for joint arrangements: Removal of IAS 31 s policy choice for jointly controlled entities Revision to require accounting based on the substance rather than the legal form of the arrangement Classifies joint arrangements as either joint operations (combining the existing concepts of jointly controlled assets and jointly controlled operations) or joint ventures (equivalent to the existing concept of a jointly controlled entity). Joint operations: Joint Operators have rights to the assets and obligations for the liabilities relating to the arrangement Joint ventures: Joint venturers have rights to the net assets or a share of the net outcome of the arrangement Requires the use of the equity method of accounting for interests in joint ventures thereby eliminating the proportionate consolidation method. The existence of separate legal vehicle no longer a key factor in determination of as to whether a joint arrangement is a joint operation or a joint venture IFRS 11 supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities-Non-Monetary Contribution by Venturers. 20 Technical Pronouncements and Updates
Consolidation and Disclosure IFRS 12 Disclosure of Interests in Other Entities Objectives Key Features Slide 21 To disclose information that helps users of an entity s financial statements evaluate the nature and extent of, and risks associated with, the entity s interest in other entities and the effects of those interests on the entity s financial statements An entity should disclose information about significant judgements and assumptions it has made in determining whether it has control, joint control or significant influence over another entity and the type of joint arrangement when the arrangement has been structured through a separate vehicle Interest in Subsidiaries An entity should disclose information about the nature, extent and financial effects of its interests in joint arrangements and associates, including information about contractual relationships with the other parties to the joint arrangements or other investors that have interests in associates requires extensive disclosures to help users understand the nature and extent of an entity s interests in unconsolidated structured entities and the risks associated with those interests requires that the level of detail provided through disclosures should satisfy the needs of users of financial statements but should not result in excessive detail that may not be helpful to those users. An entity may aggregate information but only if that does not obscure the information provided.
IFRS 13 Fair Value Measurement Objective A common IFRS/US GAAP standard providing guidance on how to measure fair value for both nonfinancial items and financial instruments when other standards require fair value measurement. Establishes single framework for measuring fair value where it is required by other Standards. Applies both to financial and non-financial items measured at fair value Overview Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price) Fair valuations under Share based payments and Leases out of scope 22 Technical Pronouncements and Updates
IFRS 13 Fair Value Measurement Contd.. Overview Contd.. The entity must determine the following: The asset or liability to be measured The principal (or most advantageous) market in which an orderly transaction would take place for the asset or liability For non-financial asset, the highest and best use of the asset and whether the asset is used in combination with other assets or on a standalone basis. The assumptions that market participants would when pricing the asset or liability Overview Contd.. The fair value of a liability or equity instrument is determined under the assumption that the instrument would be transferred on the measurement date, but would remain outstanding. Standard provides hierarchy of methods to arrive at the fair value. Where no observable inputs available valuation technique is used. 23 Technical Pronouncements and Updates
IFRS 13 Fair Value Measurement Contd.. Overview Contd.. Level 3 fair value measurements requirements (i.e. significant unobservable inputs): Disclose effect of changes in unobservable inputs that could have reasonably been used that would significantly affect fair value Take into account correlation between unobservable inputs, if there is a relationship between 2 or more unobservable inputs Describe valuation techniques and inputs used to develop fair values Overview Contd.. Valuation Techniques The Market approach The Income approach The Cost approach 24 Technical Pronouncements and Updates
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine Objectives Key Features Applies to all types of natural resources that are extracted using the surface mining activity process and provides guidance on accounting for the costs from stripping activity. The costs from a stripping activity which provide improved access to ore should be recognised as a non-current asset ( stripping activity asset ) when certain criteria are met Costs of normal ongoing operational stripping activities should be accounted for in accordance with IAS 2 The stripping activity asset should be accounted for as an addition to, or as an enhancement of, an existing asset and classified as tangible or intangible according to the nature of the existing asset of which it forms part The stripping activity asset should be initially be measured at cost and subsequently carried at cost or its revalued amount less depreciation or amortisation and impairment loss Entities will need to consider carefully the identification of the ore body or component of the ore body to which capitalised costs relate as this will determine how the asset is depreciated. 25 Technical Pronouncements and Updates Effective Date: Annual period beginning on or after January 1, 2013 Earlier application permitted
New Standards and Interpretation Other Pronouncements: Practice Statement on Management Commentary Background Not an IFRS, guidance (i.e. voluntary) Objective To assist Management in providing useful commentary on IFRS financial statements The requirement (or ability) to comply with the statement will be subject to jurisdictional requirements. Although developed for listed entities, it may also be applied by other entities that prepare IFRS financial statements that include management commentary. Issued Date: December 8, 2010 Can be applied prospective from that date 26 Technical Pronouncements and Updates
Amendments/ New Pronouncements in the pipeline 27 Deloitte PowerPoint timesaver August 2011
Amendments/ new pronouncements in the pipeline ED/2010/2 Conceptual Framework for Financial Reporting- The Reporting Entity - issued on 11 March 2010: Scope Project Insights Pervasive a reporting entity is a circumscribed area of economic activities whose financial information has the potential to be useful to existing and potential equity investors, lenders and other creditors who cannot directly obtain the information they need in making decisions about providing resources to the entity in assessing whether management and the governing board of that entity have made efficient and effective use of the resources provided The ED reconfirms that the existence of a legal structure is not determinative of the existence of a reporting entity. Instead of placing emphasis on the legal structure, the ED focuses on the economic activities. mandates the presentation of consolidated financial statements whenever a parent controls one or more entities Next Steps Final IFRS expected in December 2011 Slide 28
Amendments/ new pronouncements in the pipeline ED/2010/8 Insurance Contracts-issued on 30 July 2010: The ED proposed building block approach for recognition of insurance contract obligation The Boards tentatively decided to improve the definition of an insurance contract that is currently in IFRS 4 Insurance Contracts to clarify the role of timing in insurance risk and specifying that insurance risk would exist if there is at least one scenario in which the present value of net cash flows due under the Insured event could exceed the present value of premiums. The Boards will slightly adjust the scope of the current IFRS 4, including: Fixed-fee service contracts Warranties issued directly by a manufacturer, dealer or retailer Residual value guarantees embedded in a lease provided by lessee or lessor, or provided by a manufacturer, dealer or retailer Employers assets and liabilities under employee benefit plans and retirement benefit obligations reported by defined benefit retirement plans, and Contingent consideration payable or receivable in a business combination Financial guarantee contracts will no longer be scoped out of IFRS 4 29 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline - ED/2010/9 Leases Objective To provide investors with better information and transparency on leasing activity undertaken by an entity Project Insights Lessees Under the proposals, all leasing activity would be reflected on the statement of financial position through recognition of a right-of-use asset and a liability for lease rentals The right-of-use asset would be presented as part of property, plant and equipment and amortised over the life of the lease Scope exemption for very short-term leases for lessors only Lessors Dual approach proposed performance obligation or derecognition model depending on underlying risk/reward transfer Proposals significantly less well-developed than lessee accounting Slide 30 At the July 2011 Board meeting, the Boards noted that decisions taken to date during the redeliberations were sufficiently different from those published in the ED to warrant a re-exposure of the Next Steps revised proposals. Based on feedback and comments, significant tentative decisions have been taken and the ED will be re-exposed during March or April 2012. Technical Pronouncements and Updates
Lessee accounting Overview of proposals Rights and obligations arising under all leases to be recognised on the statement of financial position of the lessee Initial measurement Liability to pay rental PV of lease payments @ lessee s incremental borrowing rate Right-of-use asset Liability amount + Initial direct costs Subsequent measurement Amortised cost Amortised cost or revaluation 31 Technical Pronouncements and Updates
Lessor accounting Overview of proposals Two accounting models proposed in the ED Does the lessor retain exposure to significant risks or benefits associated with underlying asset? Yes Yes No No Performance obligation approach Derecognition approach 32 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline ED/2010/13 Hedge Accounting- issued on 9 December 2010 : Scope Project Insights Next Steps A new general hedge accounting model. The rules relating to what items can qualify for hedge accounting, what instruments can be designated and the effectiveness test are proposed to be relaxed Issued to better align the accounting with an entity s risk management activities Develop a macro hedge accounting model that would permit designation of bottom layer within a portfolio rather than a proportionate amount of the entire portfolio as the hedged item Expand the scope of eligible hedge items to include equity investments designated at fair value through OCI under IFRS 9 Permit cash instruments measured at fair value through profit or loss as eligible hedged items Permit a combination of written and purchased option, regardless of whether the instrument arises from a single or multiple contracts, as an eligible hedging instrument unless the combination results in a net written option Certain changes in the hedge effectiveness testing and disclosures Re-exposure of the tentative decisions taken in December quarter 2011 33 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline ED/2011/1 Offsetting Financial Assets and Financial Liabilities - issued on 28 January 2011 : Scope Project Insights Applicable to financial assets and financial liabilities with the same counterparty or counterparties Proposal - Offsetting applied only when the right of set off is: enforceable at all times; unconditional; and entity intends to net settle or simultaneously settle. Offsetting required when an entity has unconditional right of set-off in the normal course of business and also in bankruptcy or default. The offsetting criteria and amendments to the offsetting application guidance should remain in IAS 32, and the disclosures should be placed in IFRS 7 Financial Instruments: Disclosures Next Steps Final IFRS expected in December 2011 34 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline Financial Instruments: Impairment - developed jointly by the IASB and the FASB- issued on 31 January 2011 (joint supplement to ED/2009/12: Scope Project Insights Applicable to financial assets measured at amortised cost under IFRS 9 Expected loss model Expected value approach considers all available internal and external information Reasonable level of approximation permitted Original ED proposes recognition of interest revenue, less initial expected credit losses, over a financial asset s life using an adjusted effective interest rate ( EIR ) Supplement issued in January 2011 proposes revisions: Calculation of interest revenue is decoupled from recognition of expected losses Separate methods proposed for recognition of expected losses for the good book and for the bad book Next Steps Expected to issue draft in first quarter of 2012 35 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline ED/2011/2 Improvements to IFRSs 2011-issued on 22 June 2011-The ED proposes to amend five IFRSs viz. IFRS 1, IAS 1, IAS 16, IAS 32 and IAS 34: Proposed effective date: Annual periods beginning on or after 1 January 2013. Proposed amendments are as follows: IFRS 1- (i)an entity is required to apply IFRS 1 when the entity s most recent previous annual financial statements did not contain an explicit and unreserved statement of compliance with IFRSs, even if the entity applies IFRS 1 in a period prior to that period. (ii) An entity that capitalised borrowing costs as per previous GAAP before the date of transition to IFRSs, may carry forward without adjustment the amount previously capitalised in the opening statement of financial position at the date of transition. Borrowing costs incurred on or after the date of transition, including those on qualifying assets under construction at the date of transition, should be accounted for under IAS 23. 36 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline ED/2011/2 Improvements to IFRSs 2011-issued on 22 June 2011-The ED proposes to amend five IFRSs viz. IFRS 1, IAS 1, IAS 16, IAS 32 and IAS 34 (Contd..): IAS 1- (i) Additional financial statement information is not necessary for periods beyond the minimum comparative information requirements. If additional comparative information is provided, the information should be presented as per IFRSs. When an entity changes accounting policies, or makes retrospective restatements or reclassifications (a) the opening statement of financial position should be presented as at the beginning of the required comparative period; and (b) related notes are not required to accompany the opening statement of financial position. (ii) Objective of financial statements is replaced with the objective stated in the (amended) Conceptual Framework. IAS 16- Servicing equipment should be classified as property, plant and equipment when it is used during more than one period and as inventory otherwise 37 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline ED/2011/2 Improvements to IFRSs 2011-issued on 22 June 2011-The ED proposes to amend five IFRSs viz. IFRS 1, IAS 1, IAS 16, IAS 32 and IAS 34 (Contd..): IAS 32- Income-tax relating to distributions to holders of an equity instrument and Income-tax relating to transaction costs of an equity transaction should be accounted for as per IAS 12. IAS 34- In interim financial reports, total assets for a particular reportable segment would be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change in the total assets for that segment from the amount disclosed in the last annual financial statements 38 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline ED/2011/3 Mandatory Effective Date of IFRS 9-issued on 4 August 2011: The ED proposes to defer the mandatory effective date of both the 2009 and 2010 versions of IFRS 9 to annual periods beginning on or after 1 January 2015 (from the existing date of 1 January 2013) with early application permitted. ED/2011/3 Mandatory Effective Date of IFRS 9-issued on 4 August 2011: The ED proposes that an investment entity is required to measure its investments in entities it controls at FVTPL instead of consolidating those entities. However, this relief is not extended to the parent of an investment entity, unless the parent itself is an investment entity. ED/2011/3 Mandatory Effective Date of IFRS 9-issued on 4 August 2011: The ED proposes relief to first-time adopters of IFRSs by amending IFRS 1 to permit prospective application of the requirement of IAS 20 to recognise the benefit of a government loan advanced either interest free or at a below-market rate of interest as a government grant. This transitional relief is already available to existing preparers of IFRS financial statements. 39 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline ED/2011/6 Revenue from Contracts with Customers-issued on 14 November 2011: Scope Project Insights Improve financial reporting by creating a single revenue recognition standard would replace IAS 11 and IAS 18 To develop a revenue model to apply to all industries and all types of revenue-generating transactions. Driven primarily by a model of recognising revenue as an entity delivers goods and services to a customer with more detailed guidance. Introduction of restriction on unbundling performance obligations within a contract into a combined item and the elements are significantly modified or customised. A loss may be recognised at contract inception on specific elements of a contract even though the overall contract or portfolio of contracts is expected to be profitable. Provides guidance on the circumstances under which revenue may be recognised even though the total consideration to be received is uncertain. Extensive financial statements disclosures would be required Next Steps Final standard expected to be published at the end of 2012. Slide 40
Revenue Summary of the proposals Core principle Recognise revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration received or expected to be received in exchange for those goods or services 1. Identify the contract(s) with the customer 2. Identify the separate performance obligations ( POs ) 3. Determine the transaction price 4. Allocate transaction price to separate POs 5. Recognise the revenue when a performance obligation is satisfied Entities would need to identify all customer contracts and understand their key terms to ensure that the new model is appropriately applied. This may include understanding the practices and processes for establishing contracts in an entity s legal jurisdiction and the customary business practices of an entity and its industry 41 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline ED/2011/6 Revenue from Contracts with Customers (Contd..) Key features - Identifying Separate Performance Obligations Determining transaction price Collectability The restriction on unbundling highly interrelated elements of a contract may require careful consideration by, for example, entities that supply a core software product together with associated professional services such as customisation and integration. It is possible in such circumstances that the license and service may be combined and treated as a single performance obligation resulting in recognition of revenue over time. The proposal to allow the use of a best estimate approach in certain circumstances would alleviate concerns relating to unreliable estimates where there is lack of information or required use of mathematical average that does not correspond to either of two possible outcomes. ED requires estimates of expected credit losses to be recognised in a separate line item within the statement of comprehensive income adjacent to the gross revenue line item. Entities may need to assess the implications of such changes in the presentation on the financial ratios such as gross margin ratios as the effects of credit risk would now be shown within the gross margin 42 Technical Pronouncements and Updates
Amendments/ new pronouncements in the pipeline ED/2011/3 Mandatory Effective Date of IFRS 9-issued on 4 August 2011: The ED proposes that an investment entity is required to measure its investments in entities it controls at FVTPL instead of consolidating those entities. However, this relief is not extended to the parent of an investment entity, unless the parent itself is an investment entity. ED/2011/3 Mandatory Effective Date of IFRS 9-issued on 4 August 2011: The ED proposes relief to first-time adopters of IFRSs by amending IFRS 1 to permit prospective application of the requirement of IAS 20 to recognise the benefit of a government loan advanced either interest free or at a below-market rate of interest as a government grant. This transitional relief is already available to existing preparers of IFRS financial statements. 43 Technical Pronouncements and Updates
Changes to the Framework 44 Deloitte PowerPoint timesaver August 2011
Changes to the Framework The IASB and FASB completed the first phase of their joint project to develop an improved and converged conceptual framework with the issue of Chapter 1: The objective of general purpose financial reporting and Chapter 3: Qualitative characteristics of useful financial information. The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. The fundamental qualitative characteristics of useful financial information are relevance and faithful representation. These fundamental characteristics are further enhanced if information is comparable, verifiable, timely, and understandable. A decision about whether to include information in financial reports should take into account materiality and cost-benefit constraints. 45 Technical Pronouncements and Updates
Research and Other Projects 46 Deloitte PowerPoint timesaver August 2011
Research and Other Projects Conceptual Framework: The Board completed Phase A by publishing in September 2010 the Objectives and Qualitative characteristics chapters of the new Conceptual Framework. The IASB and the FASB will amend sections of their conceptual frameworks as they complete individual phases of the project. The boards have considered the comments they received on the exposure draft for Phase D Reporting Entity. In the light of those comments the boards have decided that they will need more time to finalise this chapter than they initially anticipated. The boards have not yet published discussion papers for Phase B Elements or Phase C Measurement. The IASB expects to recommence development of the Conceptual Framework at the beginning of 2012. Agriculture, particularly bearer biological assets: a future project could be a limitedscope improvement to IAS 41. Country-by-country reporting - In October 2010, the European Commission published a questionnaire to gather views on reporting on a country-by-country basis by multinational entities. A future project could consider whether a similar requirement should also be included in IFRSs, including consideration of whether such a requirement should apply to entities in all industries or only to selected industries Discount rate - Various accounting measurements involve estimates of discounted cash flows. IFRSs use a variety of discount rates. That variation arises because different standards have different measurement objectives and were developed at different times. A future project could aim to provide more consistent guidance on how to determine discount rates. 47 Technical Pronouncements and Updates
Research and Other Projects Equity method of accounting-the application of the equity method of accounting can be complex in some circumstances. Complexities include the calculation of goodwill, the partial elimination of profits on upstream and downstream transactions, and the measurement of impairment. Some have questioned the appropriateness of the use of the equity method and challenged whether it should be permitted, whereas others have argued for the extension of the use of equity accounting to separate financial statements. A future project could reconsider when the equity method of accounting is appropriate and, if so, whether it could be simplified. Alternatively a future project could be of more limited scope focusing only on clarifying and/or simplifying the application of the equity method of accounting Foreign currency translation-the existing IFRS on foreign exchange (IAS 21 The Effects of Changes in Foreign Exchange Rates) is based on the US standard. Some have criticised IAS 21 as designed for companies that operate in a reserve currency. Recent volatility in exchange rates, especially in emerging economies, has led some to ask that this standard be reconsidered. At the Board s request, a group of national standard-setters led by the Korea Accounting Standards Board has been exploring this issue. In particular, they are considering whether the project should be limited to narrow implementation issues or should address questions of currency accounting more generally. They are also considering whether a project should be limited to the scope of IAS 21, or should address other situations in which exchange rates interact with other IFRSs. 48 Technical Pronouncements and Updates
Research and Other Projects Inflation accounting (revisions to IAS 29 Financial Reporting in Hyperinflationary Economies)-IAS 29 provides guidance on the preparation of financial statements in a functional currency that is suffering from hyperinflation. Concerns have been raised from some countries whose economies suffer from high inflation, but which are not hyperinflationary. Those concerns are that the effects of high inflation on an entity s financial results are not adequately reflected in IFRS financial statements. A research paper was prepared on this issue and submitted to the IASB by the Federación Argentina de Consejos Profesionales de Ciencias Económicas. A future project could use this research paper to consider revisions to IAS 29 to include guidance for entities whose functional currency is that of an economy subject to high inflation, but not to hyperinflation Interim reporting-ifrss do not require entities to prepare interim financial reports, but guidance is provided in IAS 34 Interim Financial Reporting on how an entity should prepare such a report. The objective of the current standard is that the frequency of reporting should not affect the measurement of the annual financial statements. However, there can be tensions between this objective and the requirement to apply a discrete accounting period approach in the preparation of interim financial reports. Associated with this is the question of whether full remeasurement of assets and liabilities is required at each interim reporting date. For example, should the defined benefit obligation of a defined benefit pension plan be remeasured at each interim date in the same level of detail as at the end of the financial year? A future project could consider what improvements should be made to overcome these issues. 49 Technical Pronouncements and Updates
Research and Other Projects Islamic (Shariah-compliant) transactions and instruments-modern Islamic finance emerged from a belief that conventional forms of financing may contain elements prohibited by Shariah. As an alternative, a myriad of Islamic financial transactions have been developed on the basis of a combination of classical trade-based contracts and other accompanying arrangements. These products are considered to be in compliance with Shariah precepts, yet provide some level of economic parity with comparable forms of conventional financing. Some stakeholders have asked the IASB to investigate whether, and if so how, financial reporting guidance for these transactions and instruments can be incorporated into IFRSs. The IASB staff are currently researching both the issues involved and possible approaches that the IASB might take. The Malaysian Accounting Standards Board and others have been especially helpful in this effort. The IASB would need to enlist the help of those knowledgeable in both Shariah precepts and the structure of these transactions to a much greater degree than for other IASB projects Other comprehensive income-an important issue raised by many respondents to various IASB proposals in various projects is how to determine which items of income and expense and gains and losses should be included in profit or loss or in other comprehensive income, and whether items included in other comprehensive income should subsequently be recycled to profit or loss and, if so, on what basis. A future project could consider the conceptual and the practical issues associated with other comprehensive income including how the issue cuts across existing IFRSs. 50 Technical Pronouncements and Updates
Indian GAAP 51 Deloitte PowerPoint timesaver August 2011
Changes under Indian GAAP - Amendments IND AS converged with IFRSs were released by MCA. Effective dates yet to be notified. MCA has issued Companies (Accounting Standards) Amendment Rules, 2011 extending the date up to which exchange differences on long-term monetary items can be deferred (optional treatment permitted under para 46 of AS 11) as 31 March 2012 from the existing date of 31 March 2011. 52 Technical Pronouncements and Updates
Changes under Indian GAAP Amendments in Pipeline The following exposure drafts are current: ED of Taxonomy for Non-Banking Financial Companies (NBFCs) has been hosted in ICAI s website on 27-07-2011 ED of Ind AS 111 Joint Arrangements - no ED of Ind AS 27 (as amended) Separate Financial Statements ED of Ind AS 28 (as amended) Investments in Associates and Joint Ventures ED of Ind AS 110 Consolidated Financial Statements - no ED of Ind AS 112 Disclosure of Interests in Other Entities - no ED of Ind AS 41 Agriculture ED of Ind AS 19 (as amended) Employee Benefits difference only in rate to be used to discount post-employment benefit ED of amendments to Ind AS 12 Income Taxes ED of amendments to Ind AS 107 Financial Instruments: Disclosures ED of amendments to Ind AS 1 The Presentation of Financial Statements ED of amendments to Ind AS 101 First-time Adoption of Indian Accounting Standards ED of Ind AS 113 Fair Value Measurement ED of Guidance Note on Recognition of Revenue by Real Estate Developers (by ASB of ICAI) ED of Guidance Note to Revised Schedule VI (by Corporate Laws and Corporate Governance Committee of ICAI) 53 Technical Pronouncements and Updates
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