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As at 31 December 2011
2 3 4
4 7 13 15 17 19 20 21 22
IASB Projects
Introduction
Ernst & Youngs pocketbook guide summarises the key features of active projects of the International Accounting Standards Board (IASB or the Board) . This publication also includes potential financial and business implications of the proposed standards, along with our views on the respective projects that have been shared with the Board. We hope you have found the previous editions of this pocketbook guide helpful. In previous editions, we highlighted a number of standards and amendments that the IASB finalised in 2010 and 2011. Details of these new and amended standards can be found in our publication, IFRS Update for the financial year ending 31 December 2011. This edition of the pocketbook guide provides updates on the IASBs active projects, incorporating activities and tentative decisions made up to 31 December 2011. We highlight the Boards proposals for consolidation of investment entities and the re-exposure of the proposal on revenue recognition. Other significant updates from our June 2011 edition include tentative decisions on significant aspects of the leases, financial instruments and insurance contracts projects. The IASB updated its work plan on 20 December 2011 to reflect the amended timetable for its projects. Highlights of the current IASBs work plan are provided in this publication. In addition to re-exposing the revenue recognition proposal, the IASB and FASB also decided to formally expose their joint lease proposal for a second time because they have made significant changes to the model they proposed last year. A second exposure draft is expected in the first half of 2012. The decision to re-expose the leases and revenue recognition proposals will allow constituents an opportunity to provide further feedback. We also refer you to our Joint Project Watch IASB/FASB joint projects from an IFRS perspective for additional details of projects discussed in this pocketbook guide that have been undertaken jointly by the Boards. We trust that you will find this guide, as well as the Joint Project Watch, useful. Yours sincerely, Ruth Picker Global Leader IFRS Services Global Professional Practice December 2011
IASB Projects
Project timeline
2011 Ongoing projects
Consolidation Transitional guidance for IFRS 10 Investment entities Financial Instruments1 Impairment General hedge accounting Macro hedge accounting Asset and liability offsetting Leases Revenue recognition Insurance contracts Annual improvements 2009-2011 Amendments to IFRS 1 Agenda consultation Post implementation reviews IFRS 8 Operating Segments IFRS 3 Business Combinations Exposure draft (including re-exposure) SD Supplementary document
1 2 3 4 5
First half
First half
Second half
SD
RD2,
3 4
5
Agenda decision
IR
TC IR
TC Target Completion
The IASB addressed this project in stages. Final IFRSs for classification and measurement-assets and liabilities were issued in Q4 2009 and Q4 2010, respectively. An RD of the general hedge accounting proposals is expected to be made available on the IASB website for a period of 90 days. Re-exposure or RD. Annual improvements 2009-2011 is expected to be completed in the first half of 2012; separate EDs on annual improvements 2010-2012 and 2011-2013 are expected to be issued in Q1 and Q3 2012, respectively. The Board will decide whether to proceed with the amendments based on comments received on the ED.
IASB Projects
Project
Consolidation overview
Implications
Splitting the project into parts allowed the IASB to publish IFRS 10, while allowing time for due process regarding the proposed changes in the accounting by investment entities.
IASB Projects
Project
Consolidation investment entities Joint project (ED issued August 2011)
Implications
This would be a significant change for investment entities, which are currently required to consolidate investees that they control.
IASB Projects
Project
Consolidation investment entities contd
Implications
Some constituents (including the FASB) consider it appropriate that an entity should be able to retain, in its consolidated financial statements, the fair value accounting applied by its subsidiary in the parents consolidated financial statements. Proponents of this view generally believe that if fair value provides the most decision-useful information in the financial statements of the investment entity, it also provides the most decisionuseful information in the groups financial statements.
IASB Projects
Project
Financial instruments (IAS 39 replacement) - overview
Implications
The IASB and FASB have divergent views on several areas, particularly on the extent of use of fair value. The limited scope review of IFRS 9 creates uncertainty as to what IFRS 9, if amended, will require. This could be of concern to entities that have already adopted IFRS 9.
IASB Projects
Project
Financial instruments (IAS 39 replacement) - overview contd
Implications
We fully support the deferral of the effective date of IFRS 9. We also fully support the IASBs decision to continue to permit earlier application of IFRS 9, particularly as it would allow first-time adopters to apply only one set of financial instruments requirements. Relief from restating comparatives addresses constituents concerns about the original IFRS 9 requirements.
IASB Projects
Project
Financial instruments impairment Joint project (Re-exposure expected first half 2012)
Implications
We support the Boards efforts to arrive at a converged solution to accounting for credit impairment under IFRS and US GAAP.
IASB Projects
Project
Financial instruments asset and liability offsetting (Amendments to IFRS issued December 2011
Implications
Although a fully converged framework for balance sheet offsetting between IFRS and US GAAP has not been achieved by these changes to IFRS, the amendments to IFRS 7 will enable a reconciliation of the effect of the IFRS and US GAAP difference. The amendments will not have a major effect on accounting practice, but the new disclosure requirements may result in system modification.
IASB Projects
10
Project
Financial instruments general hedge accounting (IFRS expected first half of 2012)
Implications
A principles-based approach is proposed, which is consistent with the IASBs objective to reduce complexity. Under the propsed model, there would be a better link between an entitys risk management strategy, the rationale for hedging and the impact of hedging on the financial statements. For entities that already apply IFRS, it is expected that almost all of the previous hedge accounting relationships under IAS 39 would still qualify under the proposed standard. The proposals are likely to have a significant impact on entities that use economic hedging practices, but are currently unable to reflect this in their financial statments.
11
IASB Projects
Project
Financial instruments general hedge accounting contd
Implications
The most significant benefit may be for non-financial services entities, because hedge accounting would be permitted for risk components of non-financial items.
IASB Projects
12
Project
Leases Joint project (Re-exposure expected first half of 2012)
Implications
This would be a significant change from existing IFRS. The classification of leases as either finance or operating would cease and be replaced with a right of use approach. As a result, key ratios (e.g., gearing, EBITDA and interest coverage), bank covenants and other key performance metrics are likely to be impacted. Initial and ongoing estimation would require new processes and changes to information systems to capture information required by the proposed standard (e.g., lease term, lease and non-lease components). Entities would need to focus on separating services and executory payments from existing operating leases. Previously these costs may have been split out as the accounting treatment for such payments was often the same as operating lease payments under existing IFRS.
13
IASB Projects
Project
Leases contd
Implications
We support the Boards decision to re-expose and strongly encourage companies to re-evaluate the proposed revised model and provide feedback to the Boards.
IASB Projects
14
Project
Revenue recognition Joint project (Re-exposure November 2011)
Implications
Accounting for multiple-element deliverables in a contract may impact the timing of revenue recognition. The notion of transfer of control would have a significant impact on revenue recognition, mainly in long-term contracts. This would need to be taken into consideration in existing and forthcoming contracts. No significant impact is expected for normal sales contracts. Revenue and its related key performance indicators may change. For example, the presentation of bad debts expense as a separate line item adjacent to the revenue line instead of part of operating expenses would result in a lower gross margin amount. Among other changes, the proposal would require additional disaggregated disclosures of revenue, reconciliations of contract asset and liability account balances between periods, and disclosure of key estimates. These changes may require significant modifications to existing internal data gathering efforts and processes.
15
IASB Projects
Project
Revenue recognition contd
Implications
Many of the changes will have a significant impact on entities and may require significant cost to implement. Accordingly, we strongly support the Boards decision to give constituents a chance to formally comment on the revised proposal.
16
Project
Insurance contracts Joint project (Re-exposure or review draft expected first half 2012)
Implications
The Boards proposals are far-reaching and may have a significant impact on insurers (e.g., estimating all future cash flows arising from the fulfilment of an insurance contract on a probability-weighted basis, accounting for acquisition costs incurred by insurers to secure contracts with policyholders). This would have a related impact on key processes and internal controls. The proposed model would result in a significant change to a number of financial metrics and may also result in an increase in volatility of profit or loss. The tentative decisions made by the IASB differ from the FASB decisions in some important areas (e.g., margins and acquisition costs). As a result, there is a risk that the Boards may not reach a converged solution.
17
IASB Projects
Project
Insurance contracts contd
Implications
In our comment letter, we expressed concerns about some of the features of the measurement model proposed in the ED. We believe these must be resolved before a standard on insurance contracts can be finalised. We also proposed a number of changes to aspects of the model. We are closely monitoring the impact of the Boards recent decisions on our concerns and convergence with the FASB. In particular, the Boards decisions on the topic of asset and liability mismatch will be a critical aspect of finalising the model.
IASB Projects
18
Project
Annual improvements 2009-2011 (Final amendments expected first half 2012)
Implications
Amendments made as part of annual improvements are generally intended to clarify requirements rather than result in substantive changes to current practice. However, management may need to re-evaluate existing policies, procedures or disclosure practices.
19
IASB Projects
Project
Amendments to IFRS 1 (ED issued October 2011)
Implications
The proposed amendments are expected to be applicable to jurisdictions where below-market interest rate loans from governments are available to entities. This would provide relief to first-time adopters with such government loans that were accounted for at cost under previous GAAP.
IASB Projects
20
Project
Agenda consultation (Agenda decision expected 2012)
Implications
The IASB has the unique ability at this point in time to step back and re-assess the strategic direction of IFRS as a valuable tool for financial reporting. To achieve this, we believe the IASBs agenda should include a long-term project on the future of performance reporting. This project would focus on the decision usefulness of IFRS and consider IFRS financial statements as a whole. This will help to enhance confidence in the relevance of IFRS financial statements for both users and preparers.
21
IASB Projects
Project
Post implementation reviews IFRS 8 and IFRS 3
Implications
One outcome of these reviews could be proposals for revisions to IFRS 8 and IFRS 3.
IASB Projects
22
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