australian gaap vs ifrs

A S S U R A N C E & A D V I S O R Y

Differences between Australian GAAP and IFRS and the future direction of accounting standards

As at 31 March 2003

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There are a number of differences, both big and small, between IFRSs (International

Financial Reporting Standards, previously known as International Accounting

Standards (IAS)) and AASBs.

The table below outlines the major differences

that currently exist between Australian GAAP

and IFRS and the effect of current proposed

changes. In this respect, both sets of standards

are currently in a state of flux, particularly

those issued by the IASB, who are currently

undertaking a number of major projects

including:

2003

2004Qtr 2 Qtr 3 Qtr 4

Improvements to existing International Financial Reporting Standards

IFRS

Amendments to IASs 32 and 39 Financial Instruments IFRS

First-time application of International Financial Reporting Standards

IFRS

Deposit-taking, lending and securities activities: disclosures and presentation

ED IFRS

Business combinations phase I IFRS

Share-based payment IFRS

Reporting performance ED IFRS

Business combinations Application of the purchase method ED IFRS

Insurance contracts phase I ED IFRS

Insurance contracts phase II To be determined

Concepts—revenue, liabilities and equity ED IFRS

Consolidation and special purpose entities To be determined

Convergence of International Financial Reporting Standards and national accounting standards

Short-term issues ED IFRS

Other issues To be determined

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Based on Standards and Interpretations on issue at 31 March 2003 and effective for financial years ending 30 June 2003

Note, the proposed changes column reflects

major proposed changes as reflected in current

EDs issued by the IASB before 31 March 2003.

Following the IASBs full due process, the

proposed changes outlined in the following

analysis may not reflect the final requirements.

Disclosure differences are generally not noted.

Topic International Australia Proposed changes

1. Presentation of Financial Statements (IAS 1 & AASB 1001/1018/1034/1040)

Financial statements required

Balance sheet

Income statement

Statement of changes in equity

Cash flow statement

Similar statements required although referred to by different names, except that statement of changes in equity shown in the statement of financial performance (income statement).

True and fair override Departure from IFRS is required where compliance would be misleading or is necessary for fair presentation.

Compliance with Australian standards is compulsory under the Corporations Act 2001 with separate disclosure where compliance does not result in a true and fair view.

Departure from IFRS permitted where compliance would be misleading and the relevant regulatory framework requires or does not prohibit such a departure. Where departure is not permitted under the regulatory framework separate disclosures will be required.

Extraordinary items Extraordinary items arise from events that are clearly distinct from the ordinary activities of the company and therefore are not expected to recur frequently or regularly – examples given are the expropriation of assets or an earthquake or other natural disasters.

Extraordinary items to be prohibited.

Liabilities classification – current/non-current

Where current liabilities and non-current liabilities are presented separately,

(a) long-term interest-bearing liabilities must continue to be categorised as non-current, even when they are due to be settled within twelve months of the reporting date, when all of the following conditions apply:

• the original term was for a period of more than twelve months

• the entity is committed to an agreement to refinance, or to reschedule payments, prior to the time of completion of the financial report; or

(b) in the event that an undertaking, including a covenant included in a borrowing agreement, is breached such that the liability becomes payable on demand, the liability must be categorised as current unless all of the following conditions apply:

• the lender has agreed, prior to the time of completion of the financial report, not to demand payment as a consequence of the breach;

• it is not probable that further breaches will occur within twelve months of the reporting date; and

• in the absence of the breach, the liability would not have been due for settlement within twelve months of the reporting date.

Ability to continue to classify liabilities as non-current where they are renegotiated by the time of completion of the financial report would be removed.

Where an undertaking or covenant is in breach, and no period of grace has been provided at reporting date, generally the liability becomes payable on demand. The amount will be classified as current even where the lender has waived or otherwise dealt with the breach subsequent to the reporting period end.

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2. Inventories (IAS 2 & AASB 1019)

Compliance with AASB 1019 will ensure compliance with IAS 2. Some minor differences exist with respect to disclosure and the allowed alternative treatment of LIFO under IFRS is not acceptable in Australia.

Elimination of the LIFO method.

IFRS scope exclusion regarding certain inventories measured at net realisable value extended to include inventories of brokers and dealers.

3. Cash Flow statements (IAS 7, & AASB 1026)

Compliance with AASB 1026 will ensure compliance with IAS 7. Additional disclosures are required under AASB 1026.

4. Profit or loss for the period, fundamental errors and changes in Accounting Policies (IAS 8 & AASB 1001)

Changes in accounting policies

A change in accounting policy should only be made if required by statute, or by a standard-setting body, or so as to give a more appropriate presentation of events or transactions in the financial statements.

A change made on the basis of a new IFRS should be accounted for in accordance with the transitional provisions specified in the Standard.

Benchmark treatment – other changes should be applied retrospectively with an adjustment to the opening balance of retained earnings. Comparative information should be restated where practicable.

Allowed alternative treatment – the effect of the retrospective application of the accounting policy may be included in the current period’s results and comparative information presented as previously reported.

A change in accounting policy should be applied prospectively when the adjustment to opening retained earnings cannot be reasonably determined.

A change in an accounting policy must be made only when:

(a) it is necessary in order to comply with another Accounting Standard or an Urgent Issues Group Consensus View; or

(b) no specific Accounting Standard applies and the change will result in an overall improvement in the relevance and reliability of financial information about the financial performance, financial position and cash flows of the entity; or

(c) an Accounting Standard permits alternative accounting policies and the change from one permitted accounting policy to another permitted accounting policy will result in an overall improvement in the relevance and reliability of financial information about the financial performance, financial position and cash flows of the entity.

Allowed alternative treatment as per IFRS is the only permitted treatment in the absence of transitional provisions of a new accounting standard or UIG.

Comparative information not to be restated but detailed disclosure of the impact on comparative information is disclosed in the notes to the financial statements.

Allowed alternative treatment under IAS 8 to be prohibited.

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Errors/fundamental errors

Fundamental errors are of such significance that the financial statements of one or more prior periods can no longer be considered to have been reliable at the date of their issue.

Benchmark treatment – treat the correction of a fundamental accounting error as an adjustment of the opening balance of retained earnings and restate comparative information.

Allowed alternative treatment – the amount of the correction may be included in the current period’s results and comparative information presented as previously reported.

All other errors are accounted for in accordance with the allowed alternative treatment.

All errors must be corrected in the reporting period in which they are discovered unless the entity has amended and reissued the financial report relating to the prior reporting period.

Detailed disclosures in the notes to the financial statements of the impact on comparative information of fundamental errors.

The distinction between errors and fundamental errors to be removed and accounted for in accordance with the benchmark treatment under IFRS.

5. Events after the balance sheet date (IAS 10 & AASB 1002)

Post balance sheet events

Adjust for events that indicate that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.

No adjustment is made if the event indicates that the entity ceases to be a going concern after the reporting date.

Dividends A liability must be recognised for dividends declared, determined, or publicly recommended on or before the reporting date.

Dividends declared before reporting date would not be recognised as liabilities if they are subject to approval by the shareholders after reporting date.

6. Construction Contracts (IAS 11 & AASB 1009)

Compliance with AASB 1009 will ensure compliance with IAS 11.

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7. Income taxes (IAS 12 & AASB 1020)

Compliance with revised AASB 1020 will ensure compliance with IAS 12, other than some minor differences that exist. Revised AASB 1020 is effective for financial years beginning on or after 1 January 2005. The following analysis is based on the superseded version of AASB 1020, which is still operative.

Recognition – deferred tax liabilities

Balance Sheet Approach

A deferred tax liability should be recognised for all taxable temporary differences other than differences arising from:

• goodwill which is not deductible for tax purposes;

• the initial recognition of an asset/liability other than in a business combination;

• undistributed profits from investments in subsidiaries, branches, associates and joint ventures, where the entity is able to control the timing of the reversal of the difference and it is probable that the reversal will not occur in the foreseeable future.

Income Statement Approach

Full provision for all timing differences.

Recognition – deferred tax asset

A deferred tax asset should be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised other than differences arising from:

• negative goodwill treated as deferred income;

• the initial recognition of an asset/liability other than in a business combination;

• investments in subsidiaries, branches, associates and joint ventures where the temporary difference will not reverse in the foreseeable future.

Realisation of a deferred tax benefit for all timing differences must be regarded as being assured beyond reasonable doubt.

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Unused tax losses and unused tax credits

A deferred tax asset should be recognised for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised.

Realisation of the benefit must be virtually certain.

Measurement – deferred tax assets and liabilities

Deferred tax assets and liabilities should not be discounted.

No reference to discounting, although in practice deferred tax liabilities are not discounted other than as required under acquisition accounting standards to be measured at their fair value.

Financial statement presentation

Current and deferred tax should be recognised as income or an expense and included in net profit or loss for the period, except to the extent that the tax arises from:

• a transaction or event which is recognised directly in equity; or

• a business combination that is an acquisition.

If the tax relates to items that are credited or charged directly to equity, the tax should also be charged or credited directly to equity.

If the tax arises from a business combination that is an acquisition, it should be recognised as an identifiable asset or liability at the date of acquisition in accordance with IAS 22, thus affecting goodwill or negative goodwill.

Not specifically addressed. Current and deferred taxes usually recognised in the income statement. Tax arising on the hedge of a net investment is however required to be recognised in the FCTR.

8. Segment reporting (IAS 14 & AASB 1005)


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9. Property, plant and equipment (IAS 16 & AASB 1015, 1014 and 1021)

Initial measurement Where the asset is acquired in exchange for another asset, the cost will be recorded in the case of an asset which has a similar use in the same line of business, at the carrying value of the asset given up (no gain or loss recognised on the transaction).

The estimated costs of dismantling and removing an asset and restoring the site, should be included in the cost of acquisition to the extent that it is recognised as a provision under IAS 37.

IFRS is silent on how to account for net proceeds from selling items produced in bringing the asset to that location, or revenues and expenses incidental to construction or development, but not necessary to bring the asset to its required location or working condition.

No relief is provided from the acquisition rules in accounting for the exchange of similar assets that are not goods and services – the acquired asset is to be recorded at the fair value of the asset given up.

Not specifically addressed, general practice has been to record the liability over the life of use but not to impact the carrying value. (Excluded from scope of AASB 1044.)

Same as IFRS.

Relief only to be provided where the fair value of neither of the assets exchanged can be determined reliably.

Cost of an asset to include the cost of dismantling and removing an asset and restoring the site on which the asset was created.

Net proceeds from selling items produced in bringing the asset to that location (such as the sale of samples from testing equipment) would be deducted from the capitalised cost of the asset. However, revenue and expenses incidental to construction or development, but not necessary to bring the asset to its required location or working condition, would be separately recognised in net profit or loss.

Subsequent remeasurement

Benchmark treatment – record at cost less accumulated depreciation and impairment losses.

Allowed alternative treatment – record at fair value at the date of valuation less subsequent depreciation.

Similar to IFRS in that can choose between cost and fair value. However, IAS 16 does not permit an asset to be carried at deemed cost, being the previous revalued amount, where the entity reverts from the fair value to the cost basis.

Treatment of revaluation movement

Where a revaluation gives rise to a value uplift, it should be credited to the revaluation surplus (equity) unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised as income.

A decrease arising as a result of a revaluation should be recognised as an expense in so far as it exceeds the amount that can be charged to the revaluation surplus (i.e. the amount held in the revaluation surplus relating the same asset).

An impairment write-down should be recognised as an expense in so far as it exceeds the amount held in the revaluation surplus relating to the same asset.

Similar to IFRS except that movements can be offset within a class and only the net amount recognised in the revaluation surplus or the statement of financial performance, as appropriate. The reversal of a decrease previously recognised as an expense in respect of the same class of asset is recognised as income.

Similar to IFRS except that a charge to income will only arise to the extent that the write-down exceeds the balance of the revaluation reserve in respect of the same class of assets.

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Residual value Residual value is estimated at the date of acquisition and is not subsequently increased for changes in prices, unless the asset is revalued.

Residual value is reviewed at each balance date and is based on the current net amount expected from the disposal of the asset if it were already at the age and condition expected at the end of its useful life at the date of estimation.

10. Accounting for leases (IAS 17 & AASB 1008)

Accounting treatment in the financial statements of lessees – finance leases (or equivalent)

Record an asset and a liability at the lower of:

• the fair value of the asset; and

• the present value of the minimum lease payments.

Record an asset and a liability equal in amount to the present value of the minimum lease payments.

Lessor accounting for lease incentives

The lessor should recognise the aggregate cost of incentives as a reduction of rental income over the lease term on a straight-line basis unless another systematic basis is more representative of the time pattern of the benefit.

UIG was not able to reach consensus on this issue and under generally accepted practice certain incentives are capitalised by lessors.

Operating leases of investment property

Accounted for as operating leases with lease payments recognised as an expense over the lease term based on the pattern of benefit.

A property interest held under an operating lease can be classified as investment property provided that the rest of the definition of investment property is met and the lessee uses the fair value model in IAS 40 to account for the interest.

11. Revenue (IAS 18 & AASB 1004)

Recognition criteria Based on transfer of risks and rewards of ownership.

Based on the transfer of control.

Disposal of non-current assets

Net gain recognised as a component of revenue.

Proceeds from disposal recognised as a component of revenue.

12. Employee benefits (IAS 19 & AASB 1028)

Defined benefit plans Fundamental difference exists between the method of accounting for defined benefit retirement benefits and similar post employment benefits under IAS 19 and that adopted under Australian GAAP. There is currently no Australian accounting standard that deals with accounting for retirement benefits and an expense is generally brought to account as contributions are paid to the fund.

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Discounting of non-current employee benefits

High quality corporate bond rate used to discount non-current employee benefits except where no deep market exists. Use then made of government bond rates.

All non-current employee benefits measured on a discounted basis.

Increase in present value because employee benefit liability is one period closer to settlement is to be treated as an interest cost.

National government guaranteed security rates used to discount non-current employee benefits.

Salaries and wages, annual leave and sick leave, regardless of whether they are current or non-current, to be measured at nominal amounts.

Interest component is not required to be separately disclosed.

Share-based payments Disclosure only model for share-based payments. Recognise fair value of share options as an expense over vesting period, based on fair value at grant date.

13. Government grants (IAS 20 & UIG 11)

Criteria for recognition Government grants should not be recognised until there is reasonable assurance that:

• the enterprise will comply with the conditions attaching; and

• the grants will be received.

No standard dealing specifically with government grants. Standards dealing with contributions state that non-reciprocal contributions should be recognised when the enterprise obtains control.

Income recognition Recognise as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis – not to be credited directly to equity.

Grants other than in monetary form usually recorded at fair value, but sometimes recorded at nominal amount.

Recognise non-reciprocal contributions as assets and revenue in the period in which control is obtained.

Contributions in non-monetary form should be recorded at the fair value of the assets received at the date the enterprise obtains control.

Presentation Grants relating to assets may be presented as deferred income or by deducting the grant from the asset value.

Grants relating to income may be reported separately as ‘other income’ or deducted from the related expense.

Contributions must be recognised as income.

14. Changes in foreign exchange rates (IAS 21 & AASB 1012)

Reporting currency SIC 19 specifies that the measurement currency is that currency used to a significant extent in the entity’s operation or that currency having a significant impact on the entity.

Presentation currency not prescribed.

Australian companies are required to present their financial statements in Australian dollars.

Financial statements may be presented in any currency. Where presentation currency differs to functional currency, that is the currency of the primary economic environment in which the entity operates, any translation difference is recognised directly in equity.

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Exchange differences dealt with in reserves

Differences arising on a monetary item that, in substance, forms part of an investment in a foreign enterprise (settlement neither planned or likely to occur) should be dealt with in reserves until the disposal of the net investment, at which time they should be recognised as income/expense.

Differences arising on a foreign currency liability, accounted for as a hedge of an enterprise’s net investment in a foreign entity, should be dealt with in reserves until the disposal of the investment, at which time they should be recognised as income/expense.

Similar to IFRS but differences recognised in reserves cannot be recognised in income/expense on disposal of the investment.

15. Business combinations (IAS 22 & Various AASBs)

Pooling of interests/merger accounting

Pooling of interests method used in accounting for uniting of interests.

Pooling of interests method is not an acceptable basis of accounting for a business combination. Acquisition/purchase accounting is required to be used.

Elimination of the pooling of interests method.

Group restructures Group restructures (transactions among entities under common control) are excluded from the scope of the Standard and therefore frequently accounted for at carrying values.

No relief provided for group restructures.

Acquired contingent liabilities

Identifiable liabilities recognised at the date of acquisition where it is probable that any associated resources embodying economic benefits will flow from the acquirer, and a reliable measure is available of their cost or fair value. Therefore contingent liabilities are not recognised at the date of acquisition.

For subsequent changes in value, refer below.

Contingent liabilities of the acquiree should be identified and recognised at their fair value at acquisition date and at each subsequent reporting date. Any changes in fair value should be recognised in the income statement.

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Acquired restructuring provisions

Restructuring provisions that do not qualify as liabilities of the acquiree are recognised at acquisition if, and only if:• at, or before, the date of acquisition, the acquirer has developed

the main features of a plan that involves terminating or reducing the activities of the acquiree and that relates to compensating employees of the acquiree, closing facilities of the acquiree, eliminating product lines of the acquiree, or terminating contracts of the acquiree that have become onerous because the acquirer has communicated to the other party at, or before, the date of acquisition that the contract will be terminated;

• by announcing the main features of the plan at, or before, the date of acquisition, the acquirer has raised a valid expectation in those affected by the plan that it will implement the plan; and

• by the earlier of three months after the date of acquisition and the date when the annual financial statements are authorised for issue, the enterprise has developed those main features into a detailed formal plan.

Restructuring provisions should be included as part of the cost of acquisition only when the acquiree has an existing liability for restructuring at the date of acquisition.

Subsequent identification of changes in value of assets and liabilities

Carrying amounts should be adjusted when additional evidence becomes available to assist with the estimation of the fair value of assets and liabilities at the date of acquisition.

Goodwill should also be adjusted if the adjustment is made by the end of the first annual accounting period commencing after the acquisition otherwise the adjustment should be treated as income or expense.

Provision for restructure should be reversed only if restructure costs are no longer probable or detailed formal plan to implement as anticipated or within the timeframe established, not achieved. Such reversals should be reflected as adjustments to goodwill regardless of the period since acquisition.

Similar to IFRS except that the adjustment is always made against goodwill and never treated as income or expense, even beyond the first annual accounting period commencing after the acquisition.

If the amounts to be assigned to the identifiable assets, liabilities or contingent liabilities of the acquiree can be determined only on a provisional basis by the end of the reporting period in which the combination occurred, the acquirer must account for the combination using those provisional values. Any adjustments to those provisional values as a result of completing the initial accounting for the combination must be completed and recognised within twelve months of the acquisition date.

Adjustments to the initial accounting for a business combination after that accounting has been completed can be recognised only in order to correct an error, and therefore accounted for retrospectively. Adjustments to the initial accounting shall not be recognised for the effect of changes in accounting estimates. A change in an accounting estimate shall be accounted for prospectively.

Goodwill Capitalised and amortised over its useful life, with a rebuttable presumption of 20 years. Amortisation will normally be on a straight-line basis.

Capitalised and amortised over its useful life, a period that is not to exceed 20 years. Straight-line basis of amortisation required.

Goodwill, allocated to the smallest ‘cash-generating unit’, capitalised and subject to an annual impairment test but no amortisation.

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Intangible assets Unless there is an active market for intangible assets acquired in a business combination, the fair value recognised for the intangible asset is limited to an amount that does not increase negative goodwill.

There is no such limitation on the recognition of the fair value of an intangible provided that the fair value is reliably measurable.

Intangible assets acquired in a business combination should be recognised separately from goodwill if they arise as a result of contractual or legal rights or are separable from the business.

In-process research and development (IPR&D)

IPR&D can only be separately recognised as part of an acquisition where the definition and recognition requirements for intangible assets are met.

IPR&D can only be separately recognised as part of an acquisition where research and development costs are expected beyond any reasonable doubt to be recoverable.

IPR&D to be recognised as an asset at fair value when acquired as part of a business combination.

Negative goodwill Any remaining negative goodwill that relates to expectations of losses and expenses which can be reliably measured but which do not meet the definition of a liability, must be carried forward and recognised as income when the losses and expenses are recognised.

Otherwise recognise amount of negative goodwill not exceeding fair values of non-monetary assets, over remaining weighted average useful life of depreciable assets.

Excess of negative goodwill over fair values of non-monetary assets to be taken to income immediately.

Negative goodwill (discount on acquisition) must be accounted for by reducing proportionately the fair values of the non-monetary assets acquired. Any remaining balance must be recognised as revenue in the profit and loss account.

Negative goodwill should be recognised immediately in the income statement as a gain.

Reverse acquisitions Where an entity (the issuer) acquires another entity (the target) such that control of the combined enterprise passes to the holders of the shares issued as consideration (i.e. to the shareholders of the target), then the issuer may be deemed to have been acquired by the target and the purchase method of accounting be applied to the assets and liabilities of the issuer.

Treating the subsidiary as acquirer is incompatible with the requirement to fair value the net assets of the subsidiary and compute goodwill accordingly.

Additional guidance on how to account for reverse acquisitions to be provided in the annexures.

Fair values of employee benefit liabilities

Requires the discount rate used to measure the fair value of a provision for termination benefits arising out of an acquisition to reflect current market assessment of time/value of money and risks specific to the liability.

The discount rate used must be the market yield on national government bonds.

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16. Borrowing costs (IAS 23 & AASB 1036)

Compliance with AASB 1036 will ensure compliance with IAS 23, however the benchmark treatment under IFRS permits the immediate recognition of borrowing costs as an expense, which is not allowed under Australian Standards for qualifying assets.

17. Related party disclosures (IAS 24 & AASB 1017)

Definitions of related parties between AASB 1017 and IAS 24 differ, with the IFRS written in more general terms. In addition the AASB requires more disclosures.

Definition of related party to be amended and additional disclosures to be included.

18. Consolidation and subsidiaries (IAS 27 & AASB 1024)

Subsidiaries to be excluded from consolidation

A subsidiary should be excluded from consolidation when control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future or if it operates under severe long-term restrictions, which significantly impair its ability to transfer funds to the parent.

No specific exclusions, but may be able to exclude entities that operate under severe long-term restrictions if ability to control is impaired.

Exclusion to only exist in relation to subsidiaries acquired and held exclusively with a view to subsequent disposal in twelve months from acquisition date.

Accounting policies Uniform accounting policies should be used throughout the group. If it is impracticable to do so, that fact should be disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied.

Uniform accounting policies are to be followed in the preparation of the consolidated financial statements.

Uniform accounting policies are to be followed in the preparation of the consolidated financial statements.

Accounting year-ends The difference between the dates of financial statements used for consolidation purposes should not exceed three months. If they are drawn up to different dates, adjustments should be made for the effects of significant transactions or other events that occur between those dates and the date of the parent’s financial statements.

Consolidated financial statements are to incorporate financial statements of subsidiaries for the same financial year as the parent’s financial statements. This may necessitate the preparation of interim financial information for the subsidiary.

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Presentation of minority interests

Minority interests in the assets of subsidiaries should be presented separately from liabilities and parent’s equity.

Where losses applicable to the minority exceed its interest in the equity, the excess and any further losses attributable to the minority are charged to the group except to the extent that the minority has a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently makes profits, the group is allocated all such profits until the minority’s share of losses previously absorbed by the group has been recovered.

Outside equity interest is disclosed as an equity item.

Losses are attributable to the minority in full unless the parent entity agrees to bear the responsibility for outgoings resulting from accumulated losses.

Minority interests to be disclosed as an equity item.

Treatment in parent’s financial statements

Investments in subsidiaries that are included in the consolidated financial statements should be included in the parent’s own financial statements either:

• using the equity method of accounting; or

• carried at cost or revalued amounts.

No provision that permits inclusion in the parent’s financial statements using equity accounting. Usually carried at cost, although revaluation is permitted.

Investments in subsidiaries that are included in the consolidated financial statements should be included in the parent’s own financial statements either:

• at cost; or

• in accordance with IAS 39.

19. Investments in associates (IAS 28 & AASB 1016)

Accounting year-ends Where it is not possible to obtain financial statements to the same date as the investor, the most recent available financial statements of the associate should be used in applying the equity method, and adjustments made for the effects of any significant events occurring between the accounting period ends.

Similar to IFRS except that significant events occurring between the accounting period ends will be disclosed in a note rather than being adjusted for.

Differences in reporting dates to be limited to three months.

Treatment in parent financial statements

Where the investor issues consolidated financial statements, in the investor’s separate financial statements, associates other than those acquired and held exclusively with a view to disposal in the near future, should be either carried at cost, accounted for by the equity method, or accounted for as available-for-sale financial assets under IAS 39.

Where the investor does not issue consolidated financial statements, in the investor’s separate financial statements, associates should be either carried at cost, accounted for using the equity method, or accounted for as available-for-sale or held for trading financial assets under IAS 39.

Where the investor issues consolidated financial statements, in the investor’s separate financial statements, associates should be accounted for at cost.

Where the investor does not issue consolidated financial statements, in the investor’s separate financial statements, associates should be accounted for using the equity method.

Where the investor issues consolidated financial statements, investments in associates should be included in the investor’s own financial statements either:

• at cost; or

• in accordance with IAS 39.

Where the investor does not issue consolidated financial statements it may choose to apply IAS 28 or apply the above measurement criteria.

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Carrying amount of investment in an associate

The carrying amount of an investment in an associate must only include ordinary shares and other financial instruments which satisfy the characteristics of an ownership interest.

Amount to reduce to nil when an associate incurs losses to be widened to include other long-term interests.

20. Financial reporting in hyperinflationary economies (IAS 29 & AASB 1012)

Compliance with AASB 1012 will ensure compliance with IAS 29 in relation to the translation of self-sustaining foreign operations, which report to the parent entity in the currency of a hyperinflationary economy. AASB 1012 does not deal with the primary financial statements of an entity in a hyperinflationary economy however it currently is not applicable in the Australian context.

21. Disclosures by financial institutions (IAS 30 & AASB 1032)

Compliance with AASB 1032 will ensure compliance with IAS 30, except with respect to the disclosure of the profit/loss impact of hedges and certain in-substance defeasances where no offsetting is allowed under IFRS.

22. Joint ventures (IAS 31 & AASB 1006)

Compliance with AASB 1006 will ensure compliance with IAS 31, however where joint ventures are acquired and held exclusively with a view of disposal or operate under severe long term restrictions, IFRS requires these to be measured in accordance with IAS 39, which is likely to result in fair value measurement, with movements in fair value being recognised potentially in equity until the investment is disposed of (for joint ventures operating under severe long term restrictions) and in income (for joint ventures acquired and held exclusively with a view to disposal).

Joint ventures acquired and held exclusively with a view of disposal within twelve months from acquisition date must be measured at fair value, with changes in fair value recognised in the profit or loss. No other exceptions will apply.

All venture capital investments held by venture funds, investment funds, and unit trusts, can be classified as held-for-trading financial assets under IAS 39. Otherwise IAS 31 will apply.

Amount to reduce to nil when an equity accounted joint venture incurs losses to be widened to include long-term loans to joint ventures.

23. Financial instruments: Presentation and disclosure (IAS 32 & AASB 1033)

Compliance with AASB 1033 will ensure compliance with IAS 32, other than the transitional provisions for compound financial instruments issued prior to 1 January 1998.

Elimination of options for measurement of liability and equity elements of compound financial instruments – liability element to be determined first and the residual is equity.

Some changes and additional guidance on the classification of financial instruments will result in units in unit trusts and resetting preference shares being classified as financial liabilities, as well as some derivatives.

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24. Earnings Per Share (IAS 33 & AASB 1027)

Compliance with AASB 1027 will ensure compliance with IAS 33 except that the IFRS does not specifically state that potential ordinary shares for which conversion to, calling of, or subscription for, ordinary share capital is mandatory, or at the option of the entity and based on conditions at reporting date it is probable that the entity will successfully exercise its option at some time in the future, are always considered dilutive.

The improvements project proposes a number of amendments to the standard including the disclosure of parent entity EPS information, gains/losses on the settlement of preference shares to be deducted from earnings used in the EPS calculation, and annual EPS determined based on the number of potential ordinary shares included in the EPS calculation in each interim financial report.

25. Interim financial statements (IAS 34 & AASB 1029)


26. Discontinued operation (IAS 35 & AASB 1042)

Compliance with AASB 1042 will ensure compliance with IAS 35, except that IAS 35 prohibits a discontinuing operation from being classified as an extraordinary item and requires the amount of gain or loss before income tax expense/revenue recognised on disposal of assets or settlement of liabilities attributed to each discontinuing operation to be disclosed on the face of the statement of financial performance.

Extraordinary items to be prohibited.

27. Impairment of assets (IAS 36 & AASB 1010)

Exploration and evaluation costscarried forward

Exploration and evaluation costs carried forward by entities in the extractive industries in respect of an area of interest prior to any activity in that area of interest entering the development stage are not excluded from the scope of IAS 36.

Exploration and evaluation costs carried forward by entities in the extractive industries in respect of an area of interest prior to any activity in that area of interest entering the development stage are not tested for impairment provided exploration and evaluation activities in the area of interest have not at balance date reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in, or in relation to, the area of interest are continuing.

Reversal of goodwill impairment

Reversal of the impairment of goodwill is required if it is clear that the effect of the specific external event giving rise to that impairment loss has been reversed.

Reversal of the impairment of goodwill is not permitted.

Reversals of impairment losses recognised in respect of goodwill to be prohibited.

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Definition of recoverable amount

Recoverable amount is the higher of the asset’s net selling price and value in use (determined on a discounted basis).

Recoverable amount is defined as the amount that is expected to be recovered through cash inflows and outflows from the continued use and subsequent disposal of the asset. The cash flows may be discounted or undiscounted.

Impairment test Detailed guidance provided for calculating the impairment of an asset particularly when such assessment has to be done by cash generating unit rather than individual asset.

No such guidance provided.

28. Provisions (IAS 37 & AASB 1044)

Recognition of restructure provision in relation to the sale of an operation

Where an operation is to be sold, a demonstrable commitment for the restructure arises when there is a binding sale agreement.

Under generally accepted practice a demonstrable commitment can exist before a binding sale agreement has been entered into provided that the entity has a detailed formal plan and is without realistic possibility of withdrawal, by having raised a valid expectation in those affected.

Expected recovery of costs relating to provisions

Recognised as assets when it is virtually certain that they will be received.

Recoveries of costs related to provisions are recognised when it is probable that they will be received.

29. Intangible assets (IAS 38 & AASB 1011)

Internally generated intangibles

Internally generated goodwill, brands, mastheads, publishing titles, customer lists and similar items may not be recognised.

Internally generated goodwill cannot be recognised as an asset, however there is no such prohibition under Australian accounting standards for the other types of internally generated intangibles.

Recognition of research costs

Should be expensed when incurred and should not be subsequently recognised as an asset.

May be deferred where expected beyond reasonable doubt to be recoverable.

Revaluation Revaluation only permitted if there is an active market.

Revaluation to fair value allowed provided that it is reliably determinable.

Amortisation Rebuttable presumption of 20 years and does not permit use of an indefinite life.

Residual value is assumed to be zero unless there is a commitment by a third party to purchase the asset or there is an active market for the asset.

No limit placed on the useful life of intangible assets.

No restrictions placed on the estimation of residual value.

Intangible assets able to have indefinite useful lives, or finite lives longer than 20 years. Intangible assets with indefinite useful lives to be subject to an annual impairment test. Intangible assets with finite useful lives to be amortised over useful life.

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30. Financial instrument: Recognition and measurement (IAS 39 & AASB 1012, AASB 1014, UIG 33)

Financial assets – measurement

Depends on classification of asset:

• if held to maturity or originated by the entity then carried at amortised cost, subject to impairment;

• available for sale carried at fair value with unrealised gains and losses recognised in equity or earnings. If recognised in equity then on subsequent realisation they are recognised in profit or loss;

• financial assets held for trading purposes carried at fair value with unrealised gains and losses recognised in profit or loss. Derivatives are deemed to be held for trading unless hedging instruments.

Fair value is not required if the financial asset does not have a quoted market price in an active market and its fair value cannot be reliably determinable. The standard provides guidance when a financial instrument can be reliably measured.

Specific criteria exists as to when it is acceptable to classify investments as held to maturity.

No specific guidance. Financial assets are generally not carried at fair value unless they are trading assets or are non-current assets being revalued through the asset revaluation reserve. Where revalued assets are sold, the asset revaluation reserve is not recognised in current profit or loss but may be transferred to retained earnings.

Any financial asset can be designated as held for trading or available for sale on initial recognition and measured at fair value. The option to recognise unrealised gains and losses on available for sale financial assets in profit or loss will be eliminated as the ability to designate as either held for trading or available for sale means the option is redundant.

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Financial assets – derecognition

A financial asset, or portion of a financial asset, should be derecognised when, and only when, the enterprise loses control of the contractual rights that comprise the financial asset (or portion of the financial asset). The enterprise loses such control when it realises the rights to benefits specified in the contract, the rights expire, or the enterprise surrenders such rights.

On derecognition, the profit or loss on disposal, being the difference between:

(a) the carrying amount of the asset (or portion of the asset); and

(b) the sum of the proceeds and any prior adjustment to fair value previously dealt with in equity should be included in net profit or loss for the period.

If an enterprise transfers a part of a financial asset to another party while retaining a part, the carrying amount of the financial asset should be allocated between the part retained and the part sold based on their relative fair values at the date of sale.

If an enterprise transfers control of an entire financial asset but, in doing so, creates a new financial asset or assumes a new financial liability, the enterprise should recognise the new financial asset or financial liability at fair value and should recognise a gain or loss on the transaction based on the difference between:

(a) the proceeds; and

(b) the carrying amount of the financial asset sold plus the fair value of any new financial liability assumed, minus the fair value of any new financial asset acquired, and plus or minus any adjustment that had previously been reported in equity to reflect the fair value of that asset.

No specific guidance provided. A financial asset, or a portion of a financial asset, to be derecognised when, and only when:

• the entity’s rights to the cash flows that constitute the financial asset (or a portion of the financial asset) expire or are forfeited; or

• the entity transfers the contractual rights to the cash flows that constitute the financial asset (or a portion of the financial asset) and the entity has no continuing involvement in all or a portion of those rights.

Guidance provided on what continuing involvement means.

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Financial liabilities – measurement

Measure liabilities that are held for trading at fair value with changes in the fair value recognised through the profit and loss. Derivatives are deemed to be held for trading unless hedging instruments.

All other financial liabilities are recognised at amortised cost.

No specific guidance. Liabilities usually recognised at amortised cost.

Any financial liability can be designated as held for trading on initial recognition and measured at fair value.

Financial liabilities – derecognition

Liabilities may only be derecognised when extinguished.

The difference between the carrying amount of a liability (or part of a liability) extinguished or transferred to another party, including related unamortised costs, and the amount paid for it should be included in net profit or loss for the period.

If an enterprise transfers a part of a financial liability to others while retaining a part, or if an enterprise transfers an entire financial liability and in doing so creates a new financial asset or assumes a new financial liability, the enterprise should account for the transaction in a similar manner to the derecognition of part of a financial asset or where derecognition is coupled with a new financial asset or liability.

Similar to IFRS but also allows in-substance defeasance to be treated as extinguishment if certain conditions are met.

22


Hedging instruments and hedge accounting

The use of derivatives as hedging instruments is not restricted, except for some written options. However non-derivative financial instruments can only hedge foreign exchange risk. There are three types of hedge relationships:

• fair value hedge – In addition to the gain or loss from the hedging instrument (derivative) being recognised in profit or loss, changes in fair value of the hedge item related to the hedge risk are also recognised in net profit or loss. Any ineffectiveness is automatically recognised in profit or loss;

• cash flow hedge – The effective portion of the change in fair value of the hedging instrument is recognised in equity until the hedged transaction occurs. The ineffective portion is recognised in profit or loss;

• hedge of net investment – Similar accounting to cash flow hedges.

Foreign currency hedges carried at current spot rate with exchange differences and costs or gains on entering the hedge deferred as an asset or liability until the transaction occurs.

Hedge of net investment similar to IFRS, except no requirement to account for any ineffectiveness separately.

Hedges of firm commitments will be treated as fair value hedges rather than cash flow hedges.

When a hedged forecasted transaction actually occurs and results in an asset or liability, the gain or loss deferred in equity will not adjust the initial carrying amount of the asset or liability but remains in equity and will be reported in profit or loss in a manner that is consistent with the reporting of gains or losses on the asset or liability.

Effectiveness of hedge The effectiveness of the hedge must be reliably measurable. The hedge is required to be highly effective with guidance indicating that there should be an expectation that cash flows of the hedge item will be almost fully offset by changes in the cash flow of the hedge instrument, with actual results within a range of 80 to 125%.

The hedge is required to be assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting period.

No specification of how effective the hedge has to be.

At the inception of the hedge and during the term of the hedging instrument, it is expected that the hedge will be effective in reducing exposure to the risks intended to be hedged. There is no requirement to actually measure or determine that effectiveness.

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Embedded derivatives An embedded derivative should be separated from the host contract and accounted for as a derivative if all of the following conditions are met:

(a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract;

(b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

(c) the hybrid (combined) instrument is not measured at fair value with changes in fair value reported in net profit or loss.

No specific guidance. Embedded derivatives are generally not separated from the host contract.

Hedged items A held to maturity investment (as opposed to an originated loan or receivable) cannot be designated as a hedged item with respect to interest rate risk.

If the hedged item is a financial asset or liability, it may be designated as a hedge item only in relation to those risks where effectiveness can be measured.

If the hedged item is a non-financial asset or liability, it may be designated as a hedge item only for foreign currency risk or in its entirety because of the difficulty of isolating risks.

No specific exclusion.

No specific requirement for effectiveness to be measured.

No specific exclusion.

Hedge documentation At the inception of the hedge there is formal documentation of the hedging relationship and the enterprise’s risk management objective and strategy for undertaking the hedge. That documentation should include identification of the hedging instrument, the related hedged item or transaction, the nature of the risk being hedged, and how the enterprise will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or the hedged transaction’s cash flows that is attributable to the hedged risk.

The hedging relationship is required to be designated prospectively, specifically identifying the hedging instrument as well as the hedged anticipated purchases or sales – the characteristics of the hedged purchases or sales must be designated with sufficient specificity so that when a purchase or sale occurs it is clear whether that transaction is or is not a hedged purchase or sale.

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Trade verses settlement date

A contract for the purchase or sale of financial assets that requires delivery of the assets within the time frame generally established by regulation or convention in the market place concerned (sometimes called a ‘regular way’ contract) is a financial instrument. A ‘regular way’ purchase or sale of financial assets should be recognised using trade date accounting or settlement date accounting.

When settlement date accounting is applied, an enterprise will account for any change in the fair value of the asset to be received during the period between the trade date and the settlement date in the same way as it will account for the acquired asset i.e. trade, available for sale or held to maturity.

No corresponding guidance and practice may vary.

31. Investment property (IAS 40)

IAS 40 permits the use of the cost (including subsequent depreciation and impairment) or fair value model for accounting for investment property. If the fair value model is adopted changes in the fair value are taken through the income statement and not the revaluation reserve as would be the case under current Australian accounting standards.

32. Self-generating and regenerating assets (Agriculture) (IAS 41 & AASB 1037)

AASB 1037 and IAS 41 are similar, however IFRS includes guidance with respect to government grants and fair value which may vary under AASB.

Other Resources

Accounting Alerts – provide regular updates of accounting developments in Australia.

Available at www.deloitte.com.au

IAS Plus – www.iasplus.com is a Deloitte website dedicated to all things related to IFRS. The website includes

summaries of IASB decisions, quarterly newsletters, various IFRS publications and plenty more.

AASB – The AASB has published an in depth analysis of the differences between IFRS and Australian

standards. The Australian Convergence Handbook is available at www.aasb.com.au

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