Compendium of IFRS Publications 2011

Foreword Welcome to ADAA’s first “Compendium of IFRS publications.” The Compendium comprises ADAA’s IFRS monthly Digests for the year 2011 and the accounting briefing papers on “Related Part Disclosures,” “Impairment of assets” and “Transactions with Government.” At the beginning of the Compendium is a list of the topics covered and a cross reference to the original publication and the page of the Compendium where you will find the topic. In addition, if you want to research a topic a little further, we have provided web links to articles and publications provided by the Accounting Profession. We hope that you find this Compendium useful and would welcome any feedback you might wish to provide.

ADAA’s IFRS Compendium editorial team (from left to right) Steven Ralls: steven.ralls@adaa.abudhabi.ae (Tel:02-6107467) Head of Accounting and Auditing Standards Richard Wright: Richard.wright@adaa.abudhabi.ae Nader Chatila: Nader.chatila@adaa.abudhabi.ae Muhammad Shabbir: Muhammad.shabbir@adaa.abudhabi.ae Mahmoud Shahin: Mahmoud.shahin@adaa.abudhabi.ae Ahmed Al Meleegy: Ahmed.elmeleegy@adaa.abudhabi.ae Ashraf Sawiries: Ashraf.sawiries@adaa.abudhabi.ae

The Abu Dhabi Accountability Authority IFRS Compendium is written by the Accounting and Auditing Standards Desk of the Financial Audit and Professional Regulations Group of the Abu Dhabi Accountability Authority (ADAA). All rights reserved.

The Compendium considers recent IFRS content, updates, amendments and exposure drafts issued by the IASB and the accounting profession. All content is intended as information for the reader only and none of the content is intended as accounting advice. Entities should refer to ADAA direct if advice is required for a particular issue.

Any references to third party articles or websites are only intended for information purposes and should not be considered as an ADAA endorsement.

The Abu Dhabi Accountability Authority Compendium is intended primarily for the use of the clients of Abu Dhabi Accountability Authority, and it is issued in line with the terms of use that govern the Abu Dhabi Accountability Authority’s use of the International Accounting Standards Board (IASB) Website and its relationship with the International Accounting Standards Committee Foundation (IASCF).

Abu Dhabi Accountability Authority accepts no responsibility for loss or damage caused to any party who acts or refrains from acting in reliance on this publication, whether such loss is caused by negligence or otherwise.

Topic Issue Publication Page

IFRS Banks Proposed changes to accounting Aug 11 17 Chemical and performance technology companies

Application of IFRS Dec 11 25

Consolidation issues Insight with reference to IFRS 3, IAS 27, IAS 38, IAS 40, SIC 12, IFRS 10, IFRS 11

Nov 11 Article 24

IASB hot topics New standards expected in 2011 Feb 11 7 IASB hot topics Updates from IASB/FASB joint sessions May 11 13 IASB update July 2011 updates Aug 11 17 IASB update IFRS 9 date delayed, changes to IAS 19 Sep 11 19 IAS 1. Presentation of financial statements

Changes to presentation of OCI Aug 11 17

IAS 24 Related party disclosures ADAA briefing paper Feb 11 27 IAS 36 Impairment of assets What do the regulators want to see Oct 11 21 IAS 36 Impairment of assets ADAA briefing paper Mar 11 30 IAS 40. Investment property Survey highlighting accounting issues Mar 11 9 IFRS 1. First-time adopters Relief for first-time adopters as available before revision to

IAS 20 Nov 11 23

IFRS 8. Segment Reporting Benefits of segment reporting Jan 11 Article 6 IFRS 8. Segment Reporting Disclosures clarified by IASB Dec 11 25 IFRS 9 Hedge accounting Exposure draft Jan 11 5 IFRS 9 Hedge accounting Developments in hedge accounting Sep 11 19 IFRS 10 Consolidated financial statements

New standard issued Jun 11 15

IFRS 11 Joint arrangements New standard issued Jun 11 15 IFRS 11 Joint arrangements Effect analysis from IASB Sep 11 19 IFRS 11 Joint arrangements Insight on new standard Oct 11 Article 22 IFRS 12 Disclosure of interests in other entities

New standard issued Jun 11 15

IFRS 13 Fair value measurement New standard issued Jun 11 15 IFRSs 2011 New IFRSs in 2011, a practical guide Apr 11 11 IFRIC 20 Stripping costs Clarification issued by IASB Nov 11 23 IFRIC update Update Nov 2011 Dec 11 25 Financial crisis Address by Hans Hoogervorst Oct 11 21 Financial crisis Address by Harvey Goldsmith Oct 11 21 Financial reporting Benefits of timely reporting Mar 11 Article 10 Financial reporting Complexity issues from IFAC Apr 11 11 Financial reporting Current economic conditions Sep 11 19 Financial reporting Illustrative financial statements Nov 11 23 Financial reporting Improving financial reporting Feb 11 Article 8 Financial reporting Recommendations for improving risk disclosures Dec 11 25 Financial reporting Non-technical summaries from IFRS Foundation Apr 11 11 Financial reporting Objectives of financial reporting from IASB Chair Mar 11 9 Goodwill Insight into goodwill referring to IFRS 3, IAS 36 & IAS 12 Apr 11 Article 12 Investment entities Exposure draft Oct 11 21 Lease accounting Latest updates to project Apr 11 11 Lease accounting Latest developments May 11 13 Lease accounting Latest updates to project Nov 11 23 Management commentary Transparency and corporate governance Sep 11 Article 20 Offsetting financial assets and liabilities

Exposure draft Feb 11 7

Professional scepticism Key focus of the accountancy profession Aug 11 Article 18 Revenue New standard, insight into revenue referring to IAS 18, IAS

11 & IFRIC 15 May 11 Article 14

Revenue Latest updates to project May 11 13 Revenue New standard proposes five steps to revenue recognition Nov 11 23 Revenue, leasing and financial instruments

Proposed new and revised standards Mar 11 9

Sustainability framework New framework from IFAC May 11 9 Tax guide: oil and gas Global tax guide Aug 11 17 Transactions with government ADAA briefing paper Nov 10 33 UK Bribery Act UK Bribery Act catches up with the UAE Oct 11 21 US GAAP Convergence Insight from IFRS Foundation Trustee Harvey Goldschmid Jan 11 5 Year-end accounting reminders 2010

Newly effective standards Jan 11 5

Year-end accounting reminders 2011

Newly effective standards Dec 11 25

Year-end accounting reminders 2011

ADAA’s top tips Dec 11 Article 26

IPSAS IPSAS 26 Impairment of cash-generating assets

Main features of the standard Mar 11 9

New conceptual framework IPSASB seeks views Jan 11 5 New conceptual framework Progress update Oct 11 21 Transition to IPSAS Lessons from IFRS converters Jan 11 5 Transition to IPSAS IPSASB study 14. Moving from cash to accrual accounting Feb 11 7

January 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

5 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics

What’s new this month?

The benefits of segment reporting – on the back page ADAA’s Muhammad Shabbir highlights how IFRS 8 provides management with a unique opportunity to convey to shareholders how they review and monitor business performance.

IFRS at critical crossroads? IFRS Foundation trustee Harvey Goldschmid increases the pressure on FASB and the SEC to let go of USGAAP and adopt IFRS. Harvey explains his concerns that the quality of accounting standards might diminish.

Hedge accounting under IFRS — Good news! The IASB has released an exposure draft to substantially simplify hedge accounting. This is the third phase of the IASB’s project to replace IAS 39.

Mastering the transformation to IPSAS Time, knowledge, resources are limited so how best to approach the transfer from cash accounting to accruals and to full IPSAS? IPSASB seeks views on the new Conceptual Framework: Alongside the IASB’s program IPSASB is updating its framework that sets out the principles of IPSAS. If there isn’t a standard to apply accountants turn to the framework. If there is a standard but applying it is not clear, accountants turn to the framework. You have an opportunity to have your say. Year-end accounting reminders

Reminder: effective dates of IFRSs for interim and annual periods ending 31 December 2010. ADAA suggests the new standard on IAS 24 Related Parties is adopted early.

The IASB is located in Cannon Street in London The IPSASB is located on the 5th Avenue in New York

What’s new from the IASB? What’s new from the IPSASB?

IFRS at critical crossroads?

Foundation trustee Harvey Goldschmid expresses his concerns If the US SEC comes to a negative decision on IFRS adoption:

That the coalition of nations supporting IFRS could break apart and nations return to pre-2000 fragmentation of many national accounting systems.

That the coalition in support of IFRS could hold, the US becomes isolated and the quality of IFRS accounting standards suffers as a result.

The full article is available here

Mastering the transformation to IPSAS a few thoughts on the lessons learned from IFRS converters;

Start early – there is never enough time.

It is a change project, people, processes and systems will change and this can be uncomfortable.

Short-term solutions are only short-term.

Do not underestimate the need to train people well.

Two documents that may help can be accessed

from Deloitte’s website here and here.

IPSASB seeks views on the new Conceptual Framework: Key principles are: Relevance, Faithful Representation, Understandability, Timeliness, Comparability and Verifiability. The

ED can be read here.

Please turn the page for ADAA’s monthly accounting insight…

What’s new from the Accounting Profession?

Hedge accounting under IFRS — Good news! Actually it’s not all good news. The IASB’s theme of “through the eyes of management” continues and hedge effectiveness will be driven by an entity’s risk management strategy. The 80-125% rule goes but mandatory discontinuance of a hedge relationship remains if the relationship no longer qualifies. There are changes to what goes to Other Comprehensive Income. There are new rules for groups of hedges and significant new disclosures. EY’s publication may be accessed here

Year-end accounting reminders For 31 December 2010 reporters here is a reminder of the newly effective standards (and of standards issued and not effective). Access

KPMG’s publication here. A major change is for leases of land that may result in operating leases being reclassified as finance leases. Reclassification is retrospective.

Access KPMG’s publication here. ADAA suggests the new standard on IAS 24 Related Parties is adopted early. Our September

article can be accessed here.

January 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

6 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

IFRS 8 – Benefits of segment reporting and key differences – Muhammad Shabbir

Background

IFRS 8 “Operating Segments” replaced its predecessor IAS 14 from 1 January 2009. It is only mandatory for entities whose equity or debt securities are publicly traded or that issue, or are in the process of issuing an instrument in a public market.

In the first year the quality of compliance with the new disclosure has been notably inconsistent. If it’s not mandatory then why report operating segments voluntarily?

Because the reason for producing financial information is so that users can make informed decisions about an entity’s future. IFRS 8 provides an opportunity to enable management to provide users information in the same way that they view and review the entity’s performance. The expression used is “through the eyes of management.”

The segment information disclosed is not necessarily the Revenue, Profit, Asset and Liability measures used in the primary statements. What management use is what should be disclosed, (with reconciliation to the measures in the primary statements) Non GAAP measures are also encouraged (appropriately labeled).

These features of IFRS 8 enable management to provide information it considers to be useful and relevant, which should help users and stakeholders to better understand the performance of the entity.

Cost of reporting is generally a concern when standards change however since the underlying principle of IFRS 8 is “through the eyes of management” there should be no or not much extra cost. The information required is that which management (or in IFRS 8 terms) the Chief Operating Decision Maker (CODM) already receives. What are the key differences with the previous Segment standard?

As referred to above the most prominent change in IFRS 8 is the introduction of "through the eyes of management." This means that identifying and disclosing segments is based on internal management information.

IAS 14 defined segments in both business and geographic form and measured segment financial results based on the entity’s IFRS accounting policies. IFRS 8 does not do this. In addition terms such as ‘segment revenue’, ‘segment profit or loss’, ‘segment assets’, and ‘segment liabilities’ are not defined by IFRS 8.

Neither does IFRS 8 distinguish (for the purpose of identifying reportable segments) between revenues and expenses relating to transactions with third parties and revenues and expenses relating to transactions with other parts of the group.

How do I comply with IFRS 8?

We suggest three steps; 1- Identify operating segments

For any activity which earns revenues and incurs expenses, for which discrete financial information is available and whose operating results are regularly reviewed by the CODM. 2- Identify reportable segments

A reportable operating segment (or aggregation of two or more operating segments having similar economic characteristics and meeting certain other specific criteria) is one which exceeds the quantitative threshold of 10%.

I.e. If any of revenue (internal + external), profit and loss or assets is equal to or greater than 10% of the entity’s total revenue, profit and loss or assets respectively, then it is reportable.

3- Disclose segment information

For reportable segments, an entity discloses information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. To do this the entity discloses the following for each period for which a statement of comprehensive income is presented:

a) General information. The factors used to identify the entity's reportable segments, including the basis of organization; and types of products and services from which each reportable segment derives its revenues.

b) Information about reported segment profit or loss, including specified revenues and expenses included in reported segment profit or loss, segment assets, segment liabilities and the basis of measurement (details of which are available in paragraphs 23–27 of IFRS 8); and

c) Reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment liabilities and other material segment items to corresponding amounts in the financial statements.

What next?

You should consider the benefits of adopting IFRS 8 and if reporting segment information would improve the quality and relevance of information presented in your financial statements for the benefit of your stakeholders.

The full text of IFRS 8 is available free of charge at the IASB website subject to being a registered user. Registration is free and takes only a few minutes.

To access further details and illustrative examples of segment reporting under IFRS 8, click on the following link PWC.

February 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

7 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics

What’s new this month?

Offsetting Financial Assets and Financial Liabilities –your opportunity to shape the rules to determine the basis for offsetting financial assets and financial liabilities by commenting on Exposure Draft 2011/1. Hot topics from the IASB this year - It is going to be a busy year for the IASB (and us). Ten new (or updated) standards are expected this year. Public Private Partnerships (PPP) challenged. State owned entities (SOEs) rise Having rescued the private sector with state investments and citizen taxes, the idea that the private sector model is always the best model for creating wealth and improving public services is being doubted by many policy-makers.

Transition to the Accrual Basis of Accounting – Public Sector – Additional guidance from IPSASB to help Government entities moving from cash accounting to accruals accounting. Does your corporate business plan harness the growth prospects of emerging markets - PWC survey 1,201 business leaders and CEOs in 69 countries during the last quarter of 2010. This publication highlights where they see growth coming from, and how to achieve it. Raising the Bar - On the back page ADAA’s Steve Ralls provides an insight into improving financial reporting.

The IASB is located in Cannon Street in London The IPSASB is located on the 5

th

Avenue in New York

What’s new from the IASB? What’s new from the IPSASB?

Offsetting Financial Assets and Financial Liabilities Offsetting will only be allowed when there exists a right enforceable at all times. Comments to be received by 28 April 2011. Click the link for the Full text of Exposure Draft 2011/1 Hot topics from the IASB this year - It is going to be a busy year for the IASB and us so if you are thinking of retiring….! We expect ten new (or updated) standards in 2011.

Financial institutions will be particularly affected by the change to IAS 39/IFRS 9, impairment and hedge accounting.

Conglomerates will need to reconsider entities that they control and SPEs.

All of us will need to consider the new leasing and revenue standards. If you are entering into new leases now we suggest you test the accounting under the proposed revised IAS 37. Click the link to View IASB Work Plan

Transition to the Accrual Basis of Accounting – Public Sector. IPSASB released study 14 “Transition to the accrual basis accounting: Guidance for Governments and Government entities (Third Edition)”. The publication is a “must read” for Public Sector entities this quarter. It runs to more than 300 pages so it will take a while to work through it! Study 14 is structured into four parts.

Part I address the logistics of the transition process.

Part II deals with the selection, development, and approval of accounting policies, and issues associated with the definition and identification of reporting entities.

Part III outlines the broad steps required for the identification, recognition, measurement, and disclosure of assets, liabilities, revenues, and expenses.

Part IV highlights implementation issues associated with specific IPSASs. Get Study 14

Please turn the page for ADAA’s monthly accounting insight…

What’s new from the Accounting Profession?

Public Private Partnerships (PPP) challenged. State owned entities (SOEs) rise - SOEs can outperform private companies if they possess four key factors: governance, strategy, innovation and corporate social responsibility. Evidence is found in many of the fastest-growing economies – particularly China. EY surveyed over 12,000 citizens in 24 countries they reported they had largely positive feelings about the state-owned companies of their own countries. The full article is available in this link. Get Government as Best in Class Shareholder

Does your corporate business plan harness the growth prospects of emerging markets - Chief executives are nearly as confident of growth this coming year as in the boom years before the financial crisis. Big emerging markets like China, India and Indonesia are growing much faster than the world economy. This multi-speed recovery will have a big impact on strategies going forward. Get the 14th Annual Global CEO Survey from PWC.

February 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

8 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

“Raising the bar” – Steve Ralls

Raising the bar

It is a favourite expression of mine. Every day we try to improve the quality of what we do and the outputs we provide. We can’t all be as innovative as entities such as Apple and change industries (after all we are accountants!) but we can innovate in improving our financial reporting. So how to raise the bar?

If one enters “quality” into an internet search engine, the results show there are two aspects to quality;

Quality Control, and

Quality Assurance. Quality control procedures ensure the quality of reporting and quality assurance procedures affirm or “attest” the quality achieved. So what can be done to improve these? For the Auditors

For the Auditing profession the IAASB has published “Audit Quality an IAASB perspective” access it here. Their focus is on the new clarity International Auditing Standards (IASs) which particularly cover;

Instilling a thinking audit and the importance of professional scepticism

Focussing on higher risk areas; estimates, fair value and related party transactions

Quality of evidence – external third party compared to management representations

For group audits is it appropriate to rely on the work of others

Communicating important matters in a clear and meaningful way The words in the ISAs might be aimed at the auditors but they seemingly apply to accountants in preparing financial statements too. For the Accountants

The IASB continues its programme to enhance and improve International Financial Standards. In May 2010 they published the annual “Improvements to IFRS,” in November IAS 24 Related party disclosures and in October the first of the amendments to financial instruments. They are going to be busy this year too and so will we! Topics will include; the remaining changes to financial instruments, fair value measurement guidance, control and SPE’s, Presentation, Revenue, Post employment benefits and liabilities.

The growing consensus is that to achieve high quality financial reporting entities should apply IFRS (or in the Public Sector IPSAS). US GAAP continues to align with the IASB as evidenced by their latest project on offsetting financial assets and liabilities which will result in offsetting only where there exists a right enforceable at all tImes. Click here to visit the web page, review the project and listen to the web cast.

For Management

Quality in financial reporting is demonstrated by doing more than just compliance. High quality financial statements tell a story and they enhance the understanding of the reader by answering the questions as they arise. They are easy to read, deal with the key risks and judgments and have a logical flow. Here are four ideas to consider;

Investor studies confirm that increasing the transparency of an organization increases its value. The IASB has recently published a non-mandatory practice statement to help entities present a narrative report. This information helps management to explain to users of financial statements management’s objectives, their strategies for achieving them and how they affect financial performance and financial position.

IFRS 8 segment reporting is not mandatory unless an entity is listed. However for non-listed entities the application of IFRS 8 is a huge opportunity to improve the transparency of their reporting and when combined with a high quality management commentary is of great benefit to users of the financial statements.

Adopt standards early. Every standard or amendment to a standard has a date by when it must be implemented. However, the standards also normally encourage early adoption. Why? Because the new treatment is better, so why do something that is not so good? There are a series of amendments to standards that are not effective until 2011 or 2012. But why leave them until then? Is the accounting treatment less favorable? Or is the cost too much or the change too difficult? Are any of these good reasons not to implement the change early?

IPSAS 24 – presentation of budget information in financial statements. Just in case you thought we had forgotten our Public Sector friends! IPSAS 24 is only mandatory if budgets are published – most aren’t and neither are the financial statements either – IPSAS 24 arguably gives a better opportunity to explain the results than Management commentary gives to IFRS reporters.

As you close your 31 December 2010 reporting we wish you well with your financial close and encourage you to continue on your path “raising the bar.”

March 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

9 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics

What’s new this month?

The benefits of timely financial information: on the back page ADAA’s Richard Wright provides an insight. The objectives of financial reporting. The incoming Chair of the IASB addresses the European Commission’s conference “Financial Reporting and auditing – A time for change?” Big changes coming soon will you be ready? Proposed new and revised standards on accounting for revenue, leasing and financial instruments. We show you where you can learn more.

IFRS for real estate. This survey of nearly 40 property companies including two from the UAE highlights the issues around accounting for investment properties. The continuing uncertainty in the sector has led to an increase in demand for greater transparency in accounting and reporting, seemingly a greater number of companies have improved the quality of their disclosure. IPSAS 26—Impairment of Cash-Generating Assets. To help Government Agencies in their transition to IPSAS, we highlight the main features of the standard.

The IASB is located in Cannon Street in London The IPSASB is located on the 5

th Avenue in

New York

What’s new from the IASB? What’s new from the IPSASB?

The objectives of financial reporting. The incoming Chair of the IASB Hans Hoogervorst considers that the overall objective of financial reporting standards must be transparency.

Speaking on the financial crisis Hans considers that a lack of focus on transparency by banks resulted in risks being kept out of the balance sheet.

Hans notes that there is still much for the IASB to consider but accounting standards improving.

Hans cites “OCI as a pragmatic way of shielding the P&L from volatility” as being one of the successes. His full speech can be accessed here

IPSAS 26—Impairment of Cash-Generating Assets

The Standard provides the requirements for the identification of assets that may be impaired.

IPSAS 26 is drawn primarily from IAS 36. The main differences between the standards are:

IPSAS 26 does not apply to cash-generating assets carried at revalued amounts, IAS 36 does.

IPSAS 26 does not apply to intangible assets that are regularly revalued to fair value, IAS 36 does.

Goodwill is outside the scope of IPSAS 26. It is inside the scope of IAS 36.

IPSAS 26 does not consider a forced sale to be a reflection of fair value less costs to sell. IAS 36 does if management is compelled to sell immediately.

The full text of IPSAS 26 and further details on IAS 36 differences are on the IFAC website here

Please turn the page for ADAA’s monthly accounting insight…

What’s new from the Accounting Profession?

Big changes coming soon will you be ready?

The proposed new and revised standards on accounting for revenue, leasing and financial instruments will have a major impact on the financial statements of almost every entity. KPMG has produced a series of publications “New on the horizon” that showcase an exposure draft’s requirements and provides background and comment. If you want to get ahead of the competition on a host of topics click here.

IFRS for real estate: current issues and financial statements survey. The survey undertaken by EY concludes;

90% of entities use fair value rather than the cost model in IAS 40.

Disclosure of assumptions and valuation methods has greatly improved.

The number of companies providing sensitivity analysis is now nearly half.

The survey includes ALDAR Properties and EMAAR Properties. Full access to the survey is available here

March 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

10 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

The benefits of timely financial information – Richard Wright

Before you leave home do you check the weather forecast?

Before leaving for the airport do you check the website to see if your flight is on time?

Before you drive, do you check the traffic news?

Before you invest do you check a company’s financial performance?

Before we make any decision we seek information to check our decision is the ‘best.’ Critical to the decision is the timeliness of that information.

Yesterday’s weather forecast will not tell you whether you can leave your umbrella behind in London although it does in Abu Dhabi! Why timely financial information is important?

IAS 1.9 states “the objective of financial statements is to provide information about the financial position, performance and cash flows of an entity that is useful.” The IFRS Framework notes “The usefulness of financial information is enhanced if it is timely. Timeliness means available in time to influence decisions. The older the information is the less useful it is”. The US Government (Accounting) Standards Board stated “the passage of time diminishes the usefulness that the information otherwise would have had". It is hard to think of any benefit old financial information has. Why a last minute rush reduces quality

When a deadline approaches a disproportionate amount of time can be required by management, finance teams and statutory auditors to get the reporting finished. Sometimes quality suffers. Timely financial reporting improves quality, improves efficiency and enables management to focus on telling the financial story. Timely reporting must be balanced against reliable reporting since there is no point in reporting wrong information. Most entities should be capable of reporting within 6 months from the end of their financial year. How to achieve timely reporting?

Finance management, statutory auditors and non-finance management all need to be committed, enthusiastic, well briefed and working as one team. Fail to plan, plan to fail. The team needs a well thought through agreed project plan. Making the year-end just another month (or just another quarter); there really should not be anything ‘special’ that happens at the year-end.

Users of timely information

Public entities have many user groups; employees, shareholders, suppliers, customers and government. All need information to consider how they will interact with an entity and to assess how effective the entity is in achieving its objectives. Timely financial information is naturally more relevant and useful in these respects. Improved financial management

Timely reporting helps entities to identify and correct weaknesses in their financial systems. There is a clear link between excellence in financial management and the ability to prepare financial information in a timely manner. Entities can use the financial reporting process as an iterative learning and quality enhancing cycle such that the quality of the financial systems continually improves and timelines of reporting becomes a by-product of effective financial management. Improving use of resources

Automating processes, improving controls, removing blocks, streamlining, enhancing and refining the flow of information improves the use of resources and balances the demands placed on finance departments throughout the year. Timely reporting promotes good governance

Timely reporting evidences and enhances good governance because it enhances an entity's ability to plan for the future by spotting opportunities and avoiding threats. It clearly also helps with budget setting discussions! What is timely?

Most listed entities report within 3 months of their year-end date. Many private and government entities report within 6 months of their year-end date. In Abu Dhabi listed entities report within 3 months and the Government plans to report within 6 months. Government entities will therefore need to report within 5 months i.e. May 31

st for 31

December reporters. A timely conclusion!

Timely financial reporting is a positive response to the objectives of the Abu Dhabi Government. It demonstrates managerial capability, accountability and transparency. Timely reporting builds trust and confidence and improves relevance and usefulness of information. Timely financial reporting is a key characteristic for all standard setters. Timely financial information enhances quality, makes effective use of resources, promotes good governance and strengthens the relevance of information to users.

April 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

11 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics

What’s new this month?

IFRS resources directly from IASB Briefing for Chief Executives, Audit Committees and Boards of Directors

Forward looking or just want to stay ahead of competition, listen to what standard setter has to say: A bank of valuable insights and tools from the accounting profession

A Practical guide to new IFRSs for 2011. More on lease project – lease term and variable lease payments simplified.

Sharing deal insight PwC reviews deal activity in EMEA. Rethinking the role of government in the 21

st century -

to respond to change in the economic climate, and the onset of public sector recessions in many countries.

Financial statements face complexity issues Business leaders demand a new form of business reporting which integrates an entity’s social and environmental performance with its economic performance. How profound are the required changes to financial reporting?

US CPA exam in UAE His Excellency Riyad Al Mubarak, Chairman of ADAA noted: “We are very pleased at Abu Dhabi Accountability Authority with the news; it is overwhelming to see that our efforts have been successful and our initiative becoming a reality. It has been a long journey since our first contact with the Illinois Board of Examiners proposing to administer the exam in Abu Dhabi.”

Goodwill – is it good? On the back page ADAA’s Ahmed El Meleegy provides an insight.

The IASB is located in Cannon Street in London The IPSASB is located on the 5

th Avenue in

New York

What’s new from the IASB? What’s new from the IPSASB?

Briefing for Chief Executives, Audit Committees and Boards of Directors: The IFRS Foundation of IASB has published concise and easy to use briefing notes which provide summaries of all IFRS in non-technical language. Briefing notes are specially prepared to provide a broad overview of IFRS and of the business implications of implementing them. For a nominal charge it can be accessed here.

Forward looking or just want to stay ahead of competition, listen to what standard setter has to say: Podcast provides short summary of the main topics and projects discussed at IASB Board and Interpretations Committee meetings. This month’s summaries also include discussions on IFRIC 15 “Agreement for the Construction of Real Estate” and can be accessed here.

Financial statements face complexity issues IFAC interviewed business leaders and published a report titled “Integrating the Business Reporting Supply Chain”. They expressed the need for profound changes to financial reporting.

'Elemental changes to the current format of financial reporting need to be made to increase its relevance and stakeholder value and stem the increasing complexity that has plagued financial reporting in recent years', IFAC’s report says.

Please turn the page for ADAA’s monthly accounting insight…

What’s new from the Accounting Profession?

A practical guide to new IFRSs for 2011 This 24-page guide by PwC provides a high-level outline of the key requirements of new IFRS standards and interpretations that come into effect in 2011, in question and answer format. Get started here.

More on lease project - lease term and variable lease payments simplified E&Y publication highlights the latest updates to IASB and FASB joint lease project. Get hold of the proposed changes here.

Sharing deal insight PwC reviews the financial services deal activity in EMEA. To get the recent trends and future developments, including analysis of latest transactions and insights into emerging investment opportunities click here.

Rethinking the role of the government in the 21st century With the change in the economic climate, and the onset of public sector recessions in many countries, governments are now being called on to rethink their roles and develop policies to achieve ‘good growth’ and tackle their deficits by doing things very differently, as well as doing fewer (and different) things. This PwC report assesses the changing relationship between government and business as the world emerges from the depths of global recession.

Good news! CPA Exam in UAE ADAA hosted a press conference at the Emirates Palace to announce the beginning of the international administration of the Uniform CPA Examination this coming August in the UAE, Bahrain, Kuwait and Lebanon. For full press coverage and many other useful links click here.

April 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

12 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

Goodwill – is it good? ADAA’s Ahmed El Meleegy provides a view

Goodwill is a good intangible

In a merger or acquisition management will focus on the percentage of the purchase price accounted for by goodwill. Generally speaking, the higher this figure, the better! Goodwill is good, because it is not amortised. As a result it doesn’t hurt earnings, unlike other intangible and tangible assets

Perhaps this is why the IASB updated IFRS 3 and increased in the focus on intangibles.

Often very little information is disclosed by entities about their goodwill, even at the time of an acquisition. It is just the residual.

IFRS 3R now places even more emphasis on management looking much more closely at transactions for specific intangibles, even if the result is more amortisation of intangibles to earnings. Goodwill should be definable

Goodwill is the residual in a business combination after recognising all of an acquiree’s identifiable assets, liabilities, and contingent liabilities. This results in the illusion that goodwill is not measurable. It is just the last number standing, with no basis for it.

IFRS 3R does not accept this. Goodwill is definable and an acquirer should understand what the residual un-definable goodwill represents.

Appendix B to the standard requires disclosure of a description of the factors that make up goodwill. Goodwill often comes down to a combination of one or more of the following four factors:

Workforce value.

Going-concern value.

Payment of anticipated synergies between the merging organisations.

Overpayment! Effect of IFRS 3R on the measurement of Goodwill

Goodwill continues to be a residual but It is likely a different residual compared to the previous standard.

IFRS 3R provides additional clarity that may result in more intangibles being recognised reducing the residual goodwill.

All consideration, including any previously held interest, is measured at fair value. Changing the residual.

IFRS 3R provides an option, on each transaction to measure non-controlling interests at full fair value or at the fair value of their proportion of identifiable assets and liabilities (same as previous standard). The first option, will result in higher goodwill.

Goodwill Impairment principle

The principle of impairment under IFRS is to impair an asset (or a group of assets) when the entity is not able to recover the carrying value either through use or the sale of the asset (or group of assets).

Goodwill created by applying IAS 12

Goodwill may be created due to the requirement of IAS 12 to measure deferred tax based on the difference between the carrying amount of an asset or liability and its tax base rather than measuring the deferred tax based on its fair value, which could be tiny or even zero.

For the purpose of impairment assessment, IAS 36 explicitly requires tax to be excluded from the estimate of future cash flows and therefore deferred taxes are also excluded in determining the value of the cash generating unit. This causes a problem and there has been some debate in the accounting profession as to the intention of IAS 36 to require an immediate impairment of goodwill caused by the recognition of deferred tax liabilities in excess of their fair value.

To avoid this impairment it has been suggested that the deferred tax liability in excess of the fair value may be offset against the goodwill and the net amount only to be tested to determine whether that goodwill is impaired. ADAA does not subscribe to this view and considers that if Fair Value Less Cost To Sell is used to test the goodwill then the problem of IAS 12 interacting with IAS 36 is avoided.

The IASB have issued an amendment to IAS 12 (effective 2011) which deals specifically with this problem where it relates to investment properties. Goodwill Impairment and the crisis

The results of the latest study by Houlihan Lokey. (European Goodwill Impairment Study 2010-2011) on the goodwill impairment recorded by the 600 largest European companies listed in the STOXX Europe 600 Index surprisingly indicates that overall reported levels of goodwill have not really been affected by the financial crisis. This is reflected in the reported goodwill impairment from 2005 to 2009 of Euro 2 trillion, of which only Euro 0.1 trillion was booked during the crisis period of 2008 to 2009.

The situation appears dramatically different in the USA. Duff & Phelps (2010 Goodwill Impairment Study) on 5,175 U.S companies indicates a substantial goodwill impairment in 2005–2009 which occurred just as the financial crisis was reaching its peak. Reported goodwill impairment of US$ 227 billion from 2005 to 2009, of which US$ 188 billion was booked in 2008 and US$ 26 billion in 2009.

This huge variance between the goodwill impairment reported in

Europe (IFRS adopter) and USA (US GAAP adopter) could raise a question about the effectiveness of impairment testing under IFRS compared to US GAAP. However, the standards are pretty similar. Perhaps more likely is that the assumptions that rest behind the assessments came under greater challenge and scrutiny in the USA.

May 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

13 of 34

ABU DHABI ACCOUNTABILITY AUTHORITY MONTHLY DIGEST

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics

What’s new this month?

Revenue; what’s the problem? On the back page ADAA’s Mahmoud Shahin provides an insight to the current standards and the changes that are coming.

Hot topics and updates from IASB. The IASB and FASB joint sessions reached several critical tentative decisions on impairment of financial assets, leases and hedge accounting.

The IASB has issued four new standards IFRS 10, 11, 12, 13. These will feature in the ADAA digest over the next four issues.

New sustainability framework for accountants and their organizations A new framework from IFAC establishes the role of professional accountants and the finance function in building long-term sustainable organizational success.

From the accounting profession 1) An insight into the major IASB projects of leases and revenue. 2) Publications on managing public sector performance in a challenging economic situation and 3) The effect of technological advancement on the oil and gas sectors globally.

The IASB is located in Cannon Street in London The IPSASB is located on the 5

th Avenue in

New York

What’s new from the IASB? What’s new from the IPSASB?

Hot topics and updates from IASB this month: The IASB and FASB joint sessions reached the following critical tentative decisions which may form the basis of changes to future standards:

Hedge accounting to be allowed for equity investments at fair value through other comprehensive income

Expected losses on financial assets to be discounted

Tentative decisions on “top down” approach to determine discount rate for insurance contracts

Leases to be classified as finance leases or other-than-finance leases; both on balance sheet for lessees but with a straight line expense for the latter

Tentative decisions reached on determination of transaction price for revenue recognition when consideration is uncertain.

The IASB staff summaries can be accessed here and for the podcasts click here. For more details relating to the above topics, KPMG’s publication is available here.

New sustainability framework for accountants and their organizations IFAC has published its second edition of their Sustainability Framework which primarily targets professional accountants working in commerce, industry, financial services, education, and the public and not-for-profit sectors.

IFAC strongly believes that professional accountants can influence the way organizations integrate sustainability into their mission, goals and objectives, strategies, management and operations, definitions of success, and stakeholder communications.

The framework also complements IFAC's vision for the global recognition of professional accountants as business leaders and strategic partners in building long-term sustainable organizational success.

To get started on the path of sustainable leadership click here.

Please turn the page for ADAA’s monthly accounting insight…

What’s new from the Accounting Profession?

The future of lease accounting. With many fundamental unanswered questions the general notion is “you can’t have a standard on leasing if you can’t define a lease”. KPMG’s recent publication on lease accounting highlights the latest developments on the leases project, including discussions at the Boards’ April 2011 meeting. To obtain a view of the future direction of lease accounting, view the publication here.

Another step towards a final revenue standard This EY publication discusses the latest topics addressed by the IASB including the accounting for uncertain (variable) consideration and allocating the transaction price. It also highlights the recently reached conclusion of the Boards on applying the proposed model to certain unique transactions.

Managing in a Downturn: Delivering public sector change in a volatile market This PWC publication examines the critical challenges being faced by government organizations, and explores how lessons from the private sector might be used to deliver significant change in the public sector. It also discusses the fundamental priorities that the public sector should focus on during the downturn and the efficiencies that the Government plans to achieve through the Operational Efficiency Program.

New energy boom, new challenges? Energy markets are adjusting to the commercialization of oil and gas resources on a massive scale due to the perfect storm of higher energy prices and lower costs brought about by technological advancement. This PWC publication sheds light on the recent developments, opportunities and challenges faced by the oil and gas industry primarily as a result of recent technological advancements access here.

May 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

14 of 34

ABU DHABI ACCOUNTABILITY AUTHORITY MONTHLY DIGEST

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

Revenue; what’s the problem? - ADAA’s Mahmoud Shahin provides a view

A potted history

IAS 11 ‘Construction Contracts’ was issued in 1993 alongside the updated IAS 18 ‘Revenue’ (previously ‘Revenue Recognition’ issued in 1982!) The standards have been collectively updated a total of 18 times since then. The major update being IFRIC 15 ‘Agreements for the construction of Real Estate’ which some see as bridging the gap between the two standards. So what’s the problem?

Put simply the standards have different core principles and IAS 18 is inconsistent within itself. Neither are the standards truly in line with the IFRS Framework. The Framework refers to “increases in economic benefits.” IAS 11 requires revenue to be recognized by reference to the stage of completion of a contract at the end of a reporting period. IAS 18 for the sale of goods requires that revenue is recognized only when effective control and the risks and rewards of ownership of the goods are transferred to the customer, and IAS 18 for the sale of services refers to the stage of completion. So IAS 11 and IAS 18 for services focuses on the amount of work (or service) undertaken by an entity and then smoothes the recognition of profit over the work done (or service) plus or minus any generous or ungenerous provision for contingencies! Whilst IAS 18 for the sale of goods focuses on the customer taking control and receiving the economic benefits of receiving control of an asset. Do the different principles make a real difference?

Put simply – YES because the differences result in reporting different (and sometimes hugely different) revenue and profit numbers. IFRIC 15 bridging the gap

IFRIC 15 ‘Agreements for the Construction of Real Estate’ changed things. The IFRIC intended to address diversity in practice in the real estate industry however the IFRIC can also be applied by analogy to other industries.

The IFRIC set out to put contracts clearly into either IAS 11 or IAS 18 by focusing on which of the contracting parties has the ability to control what happens to the asset. The result in the Real Estate sector was that entities engaged in delivering a standard property to a customer stopped using IAS 11 and started using IAS 18. Why? Because IFRIC 15 follows a continuous control concept. Paragraph 17 states “The entity may transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses. In this case if all the criteria (for the sale of goods in IAS 18.14) are met continuously as construction progresses….revenue shall be recognised according to the stage of completion.) In practice it appears it has been too difficult to identify when this continuous control concept should apply and the IFRIC appears to have achieved its objective of putting contracts into IAS 11 or IAS 18. So will a new Revenue standard deal with the problem?

Well certainly the answer the IASB and the FASB are looking for is YES! What are the key features of the new standard

We expect to see it in its final form in Q4 this year. Its core principle is to ‘recognise revenue to depict the transfer of goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services.’ The IASB has developed 5 steps to apply the principle;

1. Indentify the contract(s) with the customer 2. Indentify the separate performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognise revenue when a performance obligation is satisfied. In practice, for simple revenue transactions there will be no change. Where there are multiple contracts and multiple performance obligations, there may be little change or there may be quite a big change. What do I need to do?

Entities will need to review their revenue recognition policies as soon as the standard is issued in Q4 2011. More information may be accessed on the IASB’s website here

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

June 2011

15 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics IFRS 10 IFRS 11 IFRS 12 IFRS 13 ADAA’s Muhammad Shabbir explains

What’s new this month? Four new standards!

Four new standards effective for annual periods beginning on or after 1 January 2013. Earlier application is permitted as long as IFRS 10, 11, 12, IAS 27 (2011) and IAS 28 (2011) are adopted at the same time. Although IFRS 12 may be adopted early by itself.

IFRS 10 Consolidated Financial Statements introduces a single model for assessment of control.

IFRS 11 Joint Arrangements. Joint control does not exist unless contractually agreed.

IFRS 12 Disclosure of Interests in Other Entities combines the disclosures in IAS 27, 28, 31 and adds new disclosures on top.

IFRS 13 Fair Value Measurement. A unified definition and measurement is published for fair value.

IFRS 10 - Consolidated Financial Statements IFRS 11 - Joint Arrangements

Why another standard on consolidation? IFRS 10 deals with divergent control models in IAS 27 and SIC 12. IAS 27 defines control as the “power to govern.” SIC-12 places greater emphasis on risks and rewards.

So what will happen to IAS 27 and SIC 12? SIC 12 is replaced entirely as the issues raised by it are addressed in IFRS 10. What remains in IAS 27 is the accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements.

Concurrent with issuing IFRS 10, the IASB also issued IAS 27 (revised 2011) and IAS 28 (revised 2011).

What you need to know about IFRS 10. Consolidation is based on “control.” The control model applies to all entities including ‘special purpose entities.’ Control has three elements:

Power over an investee

Exposure or rights to variable returns of the investee and

Ability to use power over the investee to affect the investor’s return.

IFRS 10 contains detailed guidance on applying the control principle.

Power can exist over a portion of an investee (silos) which can become a “deemed entity” and consolidated.

Control is reassessed if there is a change in facts and circumstances.

The standard introduces new terminology in its control model, like the term “investor” to refer to a reporting entity that potentially controls another entity and “investee” to refer to an entity that is, or may be a subsidiary of a reporting entity.

Will IFRS 10 replace IFRS 3 also? No. IFRS 10 only changes who or what to consolidate not how.

A final thought. IFRS 10 is deliberately written to bring entities that are structured to be off balance sheet onto the balance sheet and it applies retrospectively.

Further reading Access Deloitte’s detailed commentary on IFRS 10 here.

IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly controlled Entities — Non-monetary Contributions. It addresses two aspects of IAS 31:

1) That the structure of the arrangement was the only determinant of the accounting and,

2) That an entity had a choice of accounting treatment.

IFRS 11 improves on IAS 31 by establishing principles that are applicable to the accounting for all joint arrangements.

Key requirements and changes Defines joint control as “the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control”.

Where there is joint control, IFRS 11 address only two forms of joint arrangements (joint operations and joint ventures). Whereas IAS 31 identified three forms of joint ventures (i.e., jointly controlled operations, jointly controlled assets and jointly controlled entities).

A Joint operation exists when parties have joint control over assets and liabilities.

A Joint venture exists when parties have joint control of the arrangement that has the rights to assets and liabilities.

The determination whether a joint arrangement is a joint operation or a joint venture is based on the parties’ rights and obligations under the arrangement. The existence of a separate vehicle is a necessary, but not sufficient condition for a joint arrangement to be considered a joint venture.

Accounting for joint arrangements Proportional consolidation has gone. Not many entities used it and it doesn’t make accounting sense to keep it.

Joint ventures are equity accounted under IAS 28 (revised 2011)

Joint arrangements are accounted by recognizing the share of the assets, liabilities, revenues and expenses.

Another key consideration Due to the differences in the way joint arrangements are assessed and now proportionate consolidation has gone, entities may need to restate their financial statements. Detailed transitional guidance is available in IFRS 11.

Further reading Access Deloitte’s detailed commentary on IFRS 11 here.

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

June 2011

16 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, IPSAS and updates from the IASB, IFAC and the Accounting Profession

IFRS 12 - Disclosure of Interests in Other Entities IFRS 13 - Fair Value Measurement

IFRS 12 is a disclosure standard. It applies to entities that have an interest in subsidiaries, joint arrangements, associates or unconsolidated structured entities. All of the disclosure requirements of the existing IAS 27, 28 and 31 have been removed from those standards and are included in IFRS 12.

There are substantial disclosure requirements in the new standard including a number of new ones. One of the most significant is that an entity is now required to disclose the judgments made to determine when it does not control another entity.

The new disclosures will assist readers of the financial statements to make their own assessment of the financial impact were management to reach a different conclusion regarding consolidation of an entity — by providing more information about the unconsolidated entities.

The standard requires an entity to disclose information that helps users of its financial statements evaluate the nature of and risks associated with its interest in other entities and the effects of those interests on its financial statements.

Further reading. Access E&Y’s publication on implications of IFRS 12 on real estate and construction industry here.

IFRS 13 aims to improve consistency and reduce complexity by providing, for the first time, a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. Accordingly all fair value measurement guidance will be removed from all other standards!

Scope. The standard applies to all transactions and balances for which IFRSs require or permit fair value measurement (whether financial or non-financial), with the exception of share based transactions accounted for under IFRS 2 and leasing transactions within the scope of IAS 17.

Definition of fair value The price obtained to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Summary of key guidance for fair value measurement; Asset or liability: Fair value considers the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Characteristics may include condition, location and restrictions on the sale and use of asset.

The transaction: Fair value assumes that the transaction will take place between market participants in the principal market or in the most advantageous market (in the absence of principal market) to sell the asset or transfer the liability.

Market participants: Fair value measurement assumes that the market participants act in their economic best interest.

Non-financial asset: For non-financial assets fair value measurement assumes highest and best use of the asset by market participants.

Liabilities and entity’s own equity instruments: Fair value is determined assuming that the instrument would be transferred on the measurement date, but would remain outstanding (i.e., it is a transfer value, not an extinguishment or settlement cost).

Non-performance risk: The fair value measurement of a liability must take account of non-performance risk, including entity’s own credit risk.

Valuation techniques: Use must be appropriate in the circumstances and sufficient data available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

Further reading. Access E&Y’s detailed commentary on IFRS 13 here.

August 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

17 of 34

Abu Dhabi Accountability Authority monthly IFRS digest

ADAA Highlights IFRS news and updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics The IASB is located in Cannon Street in London Please turn the page for ADAA’s monthly accounting insight

What’s new?

IASB update July 2011. The first meeting for the new chair Hans Hoogervorst, Vice Chair Ian Mackintosh and Takatsugu Ochi Global Economic Outlook “Policy makers confront reality” Probably the hardest job in the economic world at the moment is predicting what the future holds. EY have released their 2011 A to Z global oil and gas tax guide PwC continue their Straight away guidance on developments to IFRS.

KPMG issue “the Bank Statement.”

IASB issues amendments to IAS 1 Presentation of Financial Statements which introduces changes to the presentation of items of other comprehensive income. And last but not least IFRS training is available on line. The large firms all have on-line training tools and so does the AICPA with their IFRS certificate program and the ICAEW IFRS certificate program. The ICAEW also has an IPSAS online training tool. On the back page ADAA’s Steve Ralls looks at Professional skepticism – a key focus for the accountancy profession.

What’s new from the IASB?

IASB update July 2011. The first meeting for the new chair Hans Hoogervorst, Vice Chair Ian Mackintosh and Takatsugu Ochi. link Topics discussed were:

Asset and liability offsetting disclosure required. Only offset under master netting arrangements.

The IASB will allow early application of the standards resulting from the four major projects of financial instruments, insurance, leases and revenue recognition. FASB will not.

Revenue standard will not apply until after 1.1.2015.

Expected loss model for banks focuses on losses expected in the next 12 months. This will be a huge change for banks!

Leasing standard to be re-exposed (but we don’t expect any further change.)

Lessors recognize right to receive lease payments and a residual. Profit recognized if reasonably assured.

Leasing disclosure looks onerous!

Hedge accounting debates continue. But looks like support for hedging groups of items and net positions.

IFRS 9 not likely until 1.1.2015 now

What’s new from the Accounting Profession?

Global Economic Outlook “Policy makers confront reality” Probably the hardest job in the economic world at the moment is predicting what the future holds. Euroland is struggling, the US recovery is going soft and the rest of the world overheating! Deloitte’s publication tries to shed some light. EY have released their 2011 A to Z global oil and gas tax guide publication from Algeria to Vietnam a snap shot of each country in between. PwC continue their Straight away guidance on developments to IFRS. The full content can be accessed here KPMG issue “the Bank Statement” which looks at the impact of the proposed changes in accounting standards on Banks access it here.

IASB issues amendments to IAS 1 Presentation of Financial Statements which introduces changes to the presentation of items of other comprehensive income. The amendments requires to group together items within OCI that may be reclassified to the profit or loss section of the income statement. It also reaffirms existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements. This KPMG publication assesses the changes and provides a useful illustration of new presentation requirements. And last but not least IFRS training is available on line. The large firms all have on-line training tools and so does the AICPA with their IFRS certificate program access here and the ICAEW IFRS certificate program access here. The ICAEW also has an IPSAS online training tool.

August 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

18 of 34

Abu Dhabi Accountability Authority monthly IFRS digest

ADAA Highlights IFRS news and updates from the IASB, IFAC and the Accounting Profession

ADAAs Steve Ralls explains

Professional skepticism is a key focus for the Accountancy Profession - Steve Ralls

The Audit Inspection Unit (AIU) of the UK’s Professional Oversight Board published its 2011 report in July. The key issues and concerns it identifies are; Professional skepticism, Audit quality, Auditor Independence, Group audits, reporting to Audit Committee and audit of disclosures. link

The Chairman of the Public Company Accounting Oversight Board (PCAOB) in a speech to the SEC and Financial Reporting Institute 30

th Annual Conference,

June 2011 said; “auditors must approach their jobs with independence and skepticism.” link

The Institute of Chartered Accountants in England and Wales (ICAEW) in their May 2011 publication on the clarified ISA’s say: “The need for professional skepticism under clarified ISAs is more important than ever. ISA 200.13 defines professional skepticism as an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. ” link

Section 290.6 of the International Federation of Accountants (IFAC) April 2010 handbook of the Code of Ethics for Professional Accountants states; “Independence of Mind. The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.” link

Why are the AIU, PCAOB, ICAEW and IFAC focusing on professional skepticism? Is not professional skepticism a key tool for all accountants, be they in audit, or industry? All fully paid up members of the professional bodies are signed up to IFAC and its code of ethics. At the heart of the code it states; “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer.”

The IFAC code emphasizes integrity, objectivity professional confidence and due care. So clearly there is an emphasis on all professional accountants to apply professional skepticism at all times.

However it is difficult to maintain skepticism when market information is telling you something else.

If something seems too good to be true then it usually is! History highlights the need for skepticism. For example the tulip craze and the 2008 financial crisis, the South Sea bubble and Madoff, arguably all had the same root cause – a lack of skepticism.

In the year 1634 in Amsterdam tulip bulbs were traded as a means of exchange and a store of value. Black bulbs being highest in value. The craze lasted 4 years before the market burst and the price of bulbs fell in days to a fraction of their previous worth.

In October 2008 many of the world’s largest financial institutions nearly collapsed, needed financial support or went under as a result of risks arising in the USA from home loans, mortgages and imaginative lending standards which had been passed to the world market’s through credit default instruments.

In 1720 shares in the South Sea Company chartered a boom and bust path, created by market misinformation and some rather unscrupulous practices of the UK aristocracy.

In December 2008 the Madoff investment scandal broke when former NASDAQ chairman Bernie Madoff admitted his wealth management business was an elaborate Ponzi scheme. It took in new capital to fund above market returns to investors.

There does seem to be a difference between the tulip scandal and the 2008 financial crisis, and the South Sea bubble and Madoff. In the tulip scandal and the 2008 financial crisis investors lost sight of the risks. In the South Sea bubble and Madoff investors were bewitched by the impossible (as it turned out) returns.

Professional skepticism is making a welcome return. This can be seen in the focus of the IASB’s projects. Bringing prudence back into accounting by moving to an expected loss model for financial instruments, bringing leases onto the balance sheet and challenging the valuation and impairment models and disclosures with the new standard IFRS 13, which greatly emphasizes the use of market observable inputs. (A discounted cash flow is just accountants playing with the numbers).

It can also be seen in the AIU “…findings continue to identify the need for firms to ensure that both partners and staff exercise appropriate professional skepticism, particularly in respect of key areas of audit judgment such as the valuation of assets and the impairment of goodwill and other intangibles.”

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

September 2011

19 of 34

Abu Dhabi Accountability Authority monthly IFRS digest

ADAA Highlights IFRS news and updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics

What’s new?

IASB issues effect analysis of IFRS 11 Joint Arrangements. A “must read” for all entities dealing with IAS 31. Hedge accounting; Another step forward. Explaining the developments in hedge accounting. Stay informed; listen to what the standard setter has to say. Useful podcast summaries Including discussions on IFRS 11. IASB update, Exposure draft issued to delay the mandatory date for IFRS 9 and investors’ perspective on key changes to IAS 19 explained.

Current economic conditions — financial reporting considerations. What you need to know regarding the impact of the current economic crisis on financial reporting. Still some good news? Opportunities in adversity. Probabilities for global banking growth, including the emerging markets of the world. Management Commentary boosts transparency and enhances corporate governance - On the back page ADAA’s Nader Chatila looks at the role of management commentary in achieving transparency and enhancing corporate governance.

The IASB is located in Cannon Street in London

What’s new from the IASB?

IASB issues effect analysis of IFRS 11 Joint Arrangements; analyze the expected effect on your financial statements.

With proportionate consolidation gone and significant changes to the definition of joint control, IFRS 11 Joint Arrangements is expected to have a significant impact on how these arrangements are accounted for. For this reason IASB has published an effect analysis of IFRS 11. Besides discussing JV activity overview and other details, the analysis provides useful info on the financial statements effect of IFRS 11.

The standard becomes mandatory for annual periods beginning on or after 1 January 2013. Get hold of this important analysis here.

Stay informed; listen to what standard setter has to say. The recent podcast from the Interpretation Committee includes discussions on IFRS 11 and the Board podcast covers critical topics of lease, revenue and hedge accounting and can be accessed here. IASB update. IFRS 9 delayed; proposed effective date postponed to 1 January 2015. To read and comment on the exposure draft, access the project page here and PWC’s discussion paper here.

Addressing the investors’ perspective, IASB published an article on key changes relating to presentation of net pension liabilities or assets and net pension cost. Access it here and PWC’s practical guide here.

Please turn the page for ADAA’s monthly accounting insight

What’s new from the Accounting Profession?

Hedge accounting; Another step forward The Board has tentatively decided that:

A cash flow hedge of a net position can be an eligible hedged item even if the individual forecast transactions within the net position affect profit or loss in different periods.

The proposed accounting for forward points will allow financial institutions to better reflect the economic yield achieved in funding swap transactions.

An aggregated exposure qualifies as a hedged item.

The fair value option is extended to ‘own use’ contracts. To access full publication from E&Y, click here.

Current economic conditions — financial reporting considerations. The recent downgrade by Standard & Poor’s (S&P) of the long-term credit rating of the US and current economic conditions raise a number of financial reporting considerations. Key highlights are;

Notwithstanding S&P’s downgrade, the US Treasury rates can continue to be used as the “risk-free interest rate”.

All movements in US treasury rates represent movements of the “benchmark interest rate.”

Companies should continue to monitor ongoing developments and consider their potential financial reporting effects. To access the full publication click here.

Still some good news? Opportunities in adversity KPMG’s report explains why some senior banking executives are still optimistic about global banking growth.

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

September 2011

20 of 34

Abu Dhabi Accountability Authority monthly IFRS digest

ADAA Highlights IFRS news and updates from the IASB, IFAC and the Accounting Profession

ADAAs Nader Chatila explains

Management Commentary boosts transparency and enhances corporate governance - Nader Chatila

The global economic crisis and corporate collapses in the last few years had a severe impact on capital markets. Investors perhaps believe they were misguided by entities’ financial information and management commentaries that did not properly explain the risks. Improving communication between the corporate community and investors is key to restoring confidence in the capital markets.

In recent years, disclosure requirements regarding capital structure, liquidity and cash flows have become the focus of standard setters whom consider that a good management commentary can complement the financial statements by providing; an explanation of the amounts presented in the financial statements, an understanding of management’s strategy, objectives and actions and a commentary on future performance.

The SEC has proposed extensive new Management Discussion & Analysis (MD&A) requirements for the disclosure of short term borrowings throughout reporting periods to reduce the potential for window dressing of liquidity positions.

In Australia an association of senior finance executives has produced the G100 guidance to assist the preparation of management commentary on an entity’s operations and financial condition (G 100 Guidance).

In December 2010 the International Accounting Standards Board (IASB) acknowledged inconsistencies in international reporting and released a Practice Statement on Management Commentary. This non-binding publication provides practical guidance on how entities can enhance their Management Commentary. (IASB Practice Statement)

The practice statement considers the following areas for management commentary to consider:

1. The nature of the business;

2. Management’s objectives and strategies for meeting those objectives;

3. The entity’s most significant resources, risks and relationships;

4. The results of operations and prospects; and

5. The critical performance measures and indicators that management uses to evaluate the entity’s performance against stated objectives.

We enclose an example of (Rio Tinto Management Commentary 2010)

1. Nature of the business: This covers a discussion of the entity’s main markets, its competitive position within those markets and the significant features of the legal, regulatory and macro-economic

1. environment that influences the entity and the markets in which the entity operates.

2. Objectives and strategies. Here management disclose their objectives and strategies in a way that enables users of the financial statements to understand the priorities for action as well as to identify the resources that must be managed to deliver results in a manner that provides users with insight that may shape their expectations about the entity’s future performance.

3. Key resources, risks and relationships. Management report the critical financial (i.e. capital, cash flows, liquidity) and non-financial resources (human resources and intellectual capital) available to the entity and how those resources are used in meeting management’s objectives. In terms of risks, management should distinguish the principal risks and uncertainties facing the entity, rather than listing all possible risks and uncertainties. Management also identifies the significant relationships that the entity has with stakeholders to help users understand whether an entity’s relationships expose the business to substantial risk.

4. The results of operations and prospects. The financial statements forming part of the Annual Report are focused on past performance. Management commentary focuses on the entity’s future path, to help aid investor understanding in making decisions about the allocation of capital.

5. Critical Key Performance Indicators. Management disclose performance measures and indicators (both financial and non-financial) that they use to assess progress against their stated objectives.

In conclusion. There are opportunities for entities to boost their transparency and to enhance their corporate governance by voluntarily providing a Management Commentary. The key matters to consider in providing such a commentary are:

1. Ensure a balanced discussion of opportunities and threats.

2. Ensure that the commentary is forward looking rather than focused on past performance.

3. Communicate the key factors impacting financial performance, position and cash flows for the period rather than a high level discussion of increases and decreases compared to prior periods.

4. Clearly articulate KPIs and their link back to the objectives and strategies of the company with industry specific KPIs discussed where relevant.

5. Avoid announcing or reporting a measure of profit that is not reported in the financial statements.

October 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

21 of 34

Abu Dhabi Accountability Authority monthly IFRS Digest

ADAA Highlights IFRS news and updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics

What’s new this month?

Hans Hoogervorst addresses the European Parliament ECON Committee and AICPA Foundation conference. Quote “I wondered why it had taken the markets so long to figure out this emperor was not wearing any clothes”

Harvey Goldsmith makes keynote address at the AICPA Conference. Reflects on lessons learned from the financial crisis

IFRS 11 Joint Arrangements – on the back page ADAA’s Muhammad Shabbir addresses a number of questions on the new standard. If you have joint ventures this is a must read!

The IPSASB’s highest profile project―with a goal of completion in late 2013―The Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities (the Conceptual Framework)

Exposure draft for Investment Entities. Entities set up for investment purposes will be affected if they meet the definition of ‘investment entities’

Impairment – what do the regulators want to see? Is an entity capable of (at least) realising the book value of its assets?

UK Bribery Act catches up with the UAE. The UK bribery Act came into force on 1 July 2011.

The IASB is located in Cannon Street London The IPSASB is located in 5

th

Avenue New York

What’s new from the IASB? What’s new from the IPSASB?

Hans Hoogervorst addresses the European Parliament ECON Committee and the AICPA IFRS Foundation conference in Boston. In Hans’ ECON speech he reflects on the IASB’s ongoing transition to become a global standard setting organization and addresses the IASB’s approach toward disagreement amongst vested interests “Where disagreement happens, the onus is on the IASB to demonstrate that the choices we have made as part of our standard-setting activities are based on well-informed, sound judgement with appropriate due process and oversight.”

In both speeches Hans uses the expression; ”the emperor has no clothes” to describe the financial crisis of banks operating on ‘the flimsiest of capital margins.’ His view on the root cause of the issue? “Lack of transparency.” Hans speeches are on the IASB website here

The IPSASB’s highest profile project―with a goal of completion in late 2013. Task Force progress updates as of September 2011:

IPSASB consider a paper on Presentation, which refines and reduces the number of presentation concepts and has alternative approaches based on direct application of qualitative characteristics and a more extensive analysis of user needs.

The definition of an asset should include reference to both service potential and economic benefits. The definition of a liability should not include identification the party to whom an obligation is owed or a requirement for a settlement date.

The IPSASB directs Staff to develop a single measurement objective. Project status Here

Please turn the page for ADAA’s monthly accounting insight…

What’s new from the Accounting Profession?

Harvey Goldsmith makes keynote address at the AICPA Conference. Reflecting on lessons learned from the financial crisis he notes that though accounting standards were not a root cause of the crisis:

1) Weak or inadequate standards (e.g. pre-crisis US GAAP standards on off balance sheet structures) can do real harm.

2) There is great danger of arbitrage and unhealthy political interference when two systems, IFRS and US GAAP can be played off against each other.

He notes that IFRS is likely much improved with the support, enforcement and consistent quality of interpretation of IFRS standards by the SEC and that in the long run multi nationals will benefit from having one internal and external reporting framework i.e. IFRS. Access his address here.

Exposure draft Investment Entities. The IASB has published an exposure draft on ‘Investment entities’. An investment entity is one that exists only to invest to receive investment income and capital returns. All investments, regardless of percentage held, are carried at fair value through profit or loss (FVTPL). However there is a sting in the tail, a significant part of the ownership interest must be held by unrelated investors. PWC’s IFRS news has more details here.

Impairment – what do the regulators want to see?

CGU’s identified at an appropriate level.

Quality disclosure of indefinite lived intangible assets.

Events and circumstances of impairments disclosed. To view PWC’s IFRS news click here.

UK Bribery Act catches up with the UAE. The UAE Penal Code already contains certain provisions relating to bribery and corruption. The UK has a new Act and if you have businesses in the UK or are UK national You are caught. Read the ICAEW briefing paper here

October 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

22 of 34

Abu Dhabi Accountability Authority monthly IFRS Digest

ADAA Highlights IFRS news and updates from the IASB, IFAC and the Accounting Profession

IFRS 11 Joint Arrangements – ADAA’s Muhammad Shabbir addresses a number of questions on the new standard

Financial statements of companies with Joint Ventures could look different as a result of IFRS 11 issued in the ‘May Package’ of standards of IFRS 10, 11, 12, 13 and IAS 27 and 28. We highlighted some of these changes in June’s IFRS Digest. However because of the significant changes and the wide use of Joint Ventures by UAE reporters we thought we should delve a little deeper into IFRS 11. IFRS 11 replaces IAS 31 and SIC 13 and changes the definition of “Control” and “Joint Arrangements.” Joint Arrangements include “Joint Ventures” and “Jointly Controlled assets.”

What is a joint venture and why do the changes matter?

The changes matter because the old joint venture accounting rules included a choice of proportional consolidation or not and this choice has now gone. Under the proportional consolidation rules a 50% (say) share of each line item in the Income statement and the Balance sheet is brought into the consolidated accounts. This meant entities increased the overall size of their consolidated results and perhaps therefore an investor’s view of their operations.

Why did the IASB change the standard?

Comparability is one answer. Fundamental to International Accounting Standards is that entities results can be compared. Comparability improves transparency and enhances governance and accountability. Reducing ‘game playing’ is another answer! The alternative choice under the old standard (which is the only option under the new standard) was to equity account, which together with IAS 1 gave room for interpretation.

How is comparability improved?

The choice has gone so all joint ventures are recognised using equity accounting. For many entities this will not change their financial statements as proportional consolidation was not the popular choice under IAS 31. Mainly because the reason for setting up a joint venture was to make it standalone and therefore not bring its debt onto the consolidated balance sheet and upset the gearing.

What ‘game playing?’

Under the old standard operating profit could be improved and gearing reduced by arbitraging between IAS 27 and IAS 31. The definition of joint control was looser so this meant it was easier to determine that an entity was a joint venture rather than a 50% owned subsidiary. This enabled the option of equity accounting. By equity accounting only half the debt of the entity appears in the consolidated balance sheet hence gearing could be improved. This is not the case with a subsidiary where 100% of the debt is consolidated (albeit there is an adjustment in the calculation of the non-controlling interest.)

Having achieved joint venture accounting some entities then used the re-ordering of line items rules in IAS 1 to argue that the joint venture is a core part of operations and include the joint venture profit from ‘below the line’ within operating profit thus boosting reported margins and other profitability indicators.

What is the focus of the new standard?

The old standard focused on the requirement for a joint venture to be a separate legal vehicle. This is not the case under the new standard. The new standard does have this as a requirement but it is not a key determinant. The new standard focuses strongly on the rights and obligations of the parties under the arrangement. A joint arrangement is defined as an “arrangement of which two or more parties have joint control” and that joint control exists only when “decisions about the relevant activities require the unanimous consent of the parties that control the arrangement collectively.”

A joint operation is a joint arrangement whereby parties that have joint control have rights to the assets and obligations for the liabilities. A joint venture is a joint arrangement whereby the parties have joint control of the arrangement (vehicle) having rights to the net assets of the arrangement.

The focus on control is a natural result from the IASB’s focus on control in the IFRS 10 which will likely bring more entities into consolidated financial statements as subsidiaries.

The IASB has recognized that there are situations where control is by more than two parties. IFRS 11 includes an example of 3 entities that have 50%, 25% and 25% shares’ respectively. Decisions require a 75% majority therefore the entity is not considered a joint arrangement because the 50% holder can combine with either the 25% holders to exercise control. The concept of unanimous consent is not therefore achieved.

The IASB has published its effect analysis (access here) and there are two issues that standout;

1) US GAAP requires a joint venture to be a ‘Corporate.’ IFRS does not, only a separate legal entity.

2) US GAAP’s definition of ‘joint control’ is potentially wider than IFRS because it only requires the approval of two or more of the owners and is not defined as relating to ‘relevant activities.’

The implication of the IASB’s analysis is that if you are an IFRS reporter that consolidates US GAAP entities your US colleagues in converting and reporting to you under IFRS may not report entities that in fact are joint ventures and may report entities that in fact are not joint ventures.

When is the standard effective?

1 January 2013 however you can adopt IFRS 11 earlier, as long as the all the May Package of standards is early adopted.

More reading

The May package of standards are highlighted in the June 2011 ADAA digest issue. The accounting profession has published some excellent insights into the potential effects of IFRS 11 and you may wish to read more from PWC here EY here Deloitte here and KPMG here

November 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

23 of 34

Abu Dhabi Accountability Authority monthly IFRS Digest

ADAA Highlights IFRS news and updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics

What’s new this month?

Clarification of production stripping costs issued by IASB. The interpretation clarifies when to recognise an asset. A better revenue accounting model? The new standard proposes five steps to revenue recognition. Changes to IFRS 1 proposed. The amendment provides the same relief to first-time adopters as was available before IAS 20 was revised. 2012 IFRS (blue book) Consolidated without early application contains only those standards applicable on 1 January 2012. Illustrative 31 December 2011 financial statements are available in the links below. A guide through international Financial Reporting Standards July 2011. The IASB’s green book of all the standards approved as at 1 July 2011.

IFRS interpretations committee has published its November agenda and podcasts of the discussions from meetings. Updated IFRS resource list available. IASB member Paul Pacter’s eight page list of IFRS resources. 35 Accounting changes by 2015. If you have particular industry needs then also look at PwC’s industry insights Leasing update Assessment of how one of the decisions was reached on how lessors should account for multiple-use assets And on the back page - Consolidation issues - ADAA’s Ahmed Al Meleegy provides an insight into; Business combination accounting, determining control and common control transactions.

The IASB is located in Cannon Street London

What’s new from the IASB?

After a quiet September the IASB has been busy. Yesterday they released the new revenue standard. Access the project page here. Clarification of production stripping costs issued by IASB. The Interpretation clarifies when production stripping leads to the recognition of an asset and how that asset should be measured, both initially and in subsequent periods. Changes to IFRS 1 proposed. The amendment for the treatment of government loans provides the same relief to first-time adopters as was available before IAS 20 was revised in 2008. This allows first-time adopters to limit the retrospective fair valuation on initial recognition of government loans provided at a below-market rate of interest. Exposure draft here.

2012 IFRS (blue book) Consolidated without early application contains only those standards applicable on 1 January 2012 and will be published in December here. A guide through international Financial Reporting Standards July 2011. The IASB’s green book of all the standards approved as at 1 July 2011. It contains cross-references to basis of conclusions and interpretations. If you buy no other book buy this one here. IFRS interpretations committee published its November agenda and podcasts of the discussions from meetings. Catch up with Michael Stewart (IASB’s Implementation Director) here (link in right hand corner). Updated IFRS resource list available. IASB member Paul Pacter’s eight page list of IFRS resources. It would be surprising if you can’t find something of interest here.

Please turn the page for ADAA’s monthly accounting insight…

What’s new from the Accounting Profession?

A better revenue accounting model - The new revenue standard proposes five steps to revenue recognition;

1. Identify the contract(s) with the customer 2. Identify separate performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Satisfy the performance obligations and recognise

revenue. The model is straightforward for uncomplicated transactions. However when multiple goods and services are provided over an extended period of time the model becomes complex and increasingly reliant on judgment and estimates. To access E&Y’s IFRS Outlook click here. Illustrative 31 December 2011 financial statements. It is the time of the year for planning your 31 December 2011 financial statements. Recent illustrative examples are available from Deloitte here EY “Good Group (International)” here KPMG here and PWC IFRS GAAP PLC here.

A word of caution, don’t just cut and paste from the examples as this reduces the usefulness to the user. Do consider whether the proposed presentation and disclosure is properly customized for your circumstances. Have a look at similar entities web sites and have a read through their accounts to find good examples of disclosures too. 35 Accounting changes by 2015. If you have particular industry needs then also look at PwC’s industry insights which detail the changes that will need to be applied by IFRS reporters between now and 2015 here. Leasing update Assessment of how one of the decisions reached on how lessors should account for multiple-use assets has led some to question the tentative decisions made earlier on the lessee model. If this issue were to be re-opened, it could put pressure on the boards’ timetable. Link available here.

November 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

24 of 34

Abu Dhabi Accountability Authority monthly IFRS Digest

ADAA Highlights IFRS news and updates from the IASB, IFAC and the Accounting Profession

Consolidation issues – an insight from ADAA’s Ahmed Al Meleegy

“No bright lines” is an expression often used by accounting technical functions in applying accounting principles under IFRS.

Business combination accounting highlights the issue. In May 2011, the IFRS Interpretations committee (IFRIC) received a request for clarification on whether an asset with a relatively simple process associated with it met the definition of a business in accordance with IFRS 3. Specifically the question was whether a single investment property, with lease agreements with multiple tenants over varying periods and with associated processes such as cleaning, maintenance and administrative services such as rent collection, constitutes a business as defined in IFRS 3.

So why does identifying a business matter? It matters because in Business combination accounting, intangible assets are recognised under IFRS 3 that are not recognised by IAS 38 and each intangible asset recognised is required to be separated and fair valued. So in the example above each of the agreements for leases, cleaning, maintenance, administrative services etc. would need to be considered if they were an intangible asset and if they were, fair valued. Any residual difference that remains between the fair values of the assets and liabilities acquired and the purchase price is the intangible asset known as goodwill and since goodwill is not depreciated and can in some (albeit unusual) circumstances be negative (resulting in a credit to the income statement) an acquisition presents opportunities for “earnings management.”

So how to decide if the transaction is a Business combination or a purchase of assets? IFRS 3 contains guidance that a business consists of inputs and that processes applied to the inputs have the ability to create outputs. Although businesses usually have outputs (goods, services, solutions), outputs are not required for an integrated set of activities and assets to qualify as a business. Which makes sense because development-stage businesses that are working towards producing next generation goods and services will often generate substantially more intangible (and likely not recognizable) assets as they work towards taking a proposition to market. The standard provides guidance that inputs are any economic resource that creates, or has the ability to create, outputs when one or more processes are applied to them. Processes are any system, standard, protocol, convention, or rule that when applied to an input or inputs, creates or has the ability to create outputs. Outputs are the result of inputs and the processes applied to those inputs that provide or have the ability to provide a return.

That’s all very clear. What did the IFRIC decide for the investment property example? They decided that two judgments are needed to determine 1) whether the acquisition of an investment property is the acquisition of a single asset in the scope of IAS 40 or 2) a business combination in the scope of IFRS 3. The IFRIC also observed that the difficulty in determining whether an acquisition meets the definition of a business is not limited to the acquisition of investment property and therefore suggested that the IASB consider the issue in a post

implementation review of IFRS 3. Until that happens there is likely to continue to be divergence in practice between reporting entities. In order to avoid confusion entities should establish clear guidelines before undertaking any significant acquisitions of what constitutes a “business” in the scope of IFRS 3.

Control, joint control or no control? Determining whether an investment in an entity results in that entity being consolidated as a subsidiary or treated as a jointly controlled entity or as an associate has been a problem in some situations as well as the source of a number of high profile accounting scandals – Enron for example.

The IASB has sought to improve the consolidation decision with the issue of its latest standards. IFRS 10 “Consolidated financial statements” replaces the (sometimes) conflicting consolidation models of IAS 27 and SIC 12. IAS 27 focused control on the “power to govern” the financial and operating policies of the investee to derive benefits; SIC 12 focused on “risks and returns”. IFRS 10 brings both of these together and considers that an investor controls an investee when the investor; “is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to affect those returns through its power over the investee.”

The definition of joint control is also changed in IFRS 11 (which replaces IAS 31). Previously the legal structure of the arrangement was the primary determinant of joint control, now IFRS 11 focuses on the substance of the arrangement and places emphasis on contractual rights and obligations in determining the existence of joint control. There is also a sting in IFRS 12 which requires the judgments made over control to be disclosed. Entities should revisit their consolidation decisions particularly if the decision to not consolidate an entity was a close call.

Common control Business Combinations? These are transactions in which an entity is sold by one entity to another entity however all entities are controlled by the same ultimate parent entity before and after the transaction. U.S. GAAP accounts for these transactions using the carryover basis. IFRS does not contain any guidance and IFRS 3 specifically states it does not address such transactions. Confusingly this doesn’t mean they are scoped out of IFRS 3. IAS 8 simply states that where IFRS does not have a standard for a particular transaction then management should decide on the appropriate accounting. In making such a decision management should consider the IFRS Framework and other relevant accounting pronouncements. That does not of course allow US GAAP into IFRS through the back door!

Typically entities use either the acquisition method of IFRS 3 or the pooling of interest method, which is similar to using the carryover basis under U.S. GAAP.

Since common control business combinations generally arise from a group reorganization the pooling of interest method is the simplest and most commonly used.

December 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

25 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, updates from the IASB, IFAC and the Accounting Profession

ADAA’s hot topics The IASB is located in Cannon Street, London And finally please turn the page for ADAA’s monthly accounting insight…

What’s new this month?

IASB Podcast on the new Revenue exposure draft. If you have not read the 200 plus pages of the draft you may prefer to listen to this.

IASB update November2011. Operating segment disclosures clarified.

IFRIC update November 2011. Issues covered; provision for levies charged, disclosure of cash flows from construction or upgrade of a service concession asset. Meaning of continuous transfer in IFRIC 15.

Chartered Financial Analyst User perspectives on financial instrument risk disclosures under IFRS. This study proposes general and specific recommendations for improving risk disclosure.

AICPA National Conference. SEC’s Chief Accountant addresses skepticism, skill sets and supervision.

2011 IFRS (red book) available in Arabic language. The red book contains the standards in issue as of 1 January 2011. The translation is available both in printed format and online for eIFRS subscribers. Access it here.

Year-end accounting reminders from PWC; IAS 8, IFRS 3 and changes to standards that could be adopted early.

Application of IFRS in chemicals and performance technologies companies. This survey based report from KPMG discusses many of the key industry accounting issues and provides illustrations of how companies have sought to address them.

On the back page “AASD’s top tips for 2011 reporters” The AASD editorial team provides an insight into problematic areas.

What’s new from the IASB?

IASB Podcast on the new Revenue exposure draft. The proposed new Revenue standard and application guidance runs to over 200 pages so there is a lot of information to absorb and understand. We have featured many publications in previous Bulletins and the IASB is obviously keen for feedback. If you are negotiating long-term contracts or provide multiple goods and services it will be worthwhile keeping up-to-date with the proposed changes. Access the podcast and other related material here KPMG publication here.

IASB update November 2011. Operating segment disclosures clarified and a brief description of segments aggregated and the economic indicators assessed added to the improvements project. IASB update here.

IFRIC update November 2011. Recognising a provision for levies charged for participation in a market added to the IFRIC agenda. Cash flows from the construction or upgrade of a service concession asset are disclosed as operating. The meaning of continuous transfer in IFRIC 15 is under debate. IFRIC update here.

What’s new from the Accounting Profession?

Chartered Financial Analyst User perspectives on financial instrument risk disclosures under IFRS. CFA states; "a principles-based definition of disclosure is not the antidote to fears about boilerplate and uninformative disclosures." It proposes general improvements including: - Having an executive summary. - Differentiating components of market risk into more

specific categories such as interest, foreign currency and commodity.

- Ensuring qualitative disclosures explain quantitative measurements.

- Standardising quantitative disclosures to improve comparability.

- Providing integrated, centralised and tabular risk disclosure.

And areas for specific improvements such as: - Informative entity-specific qualitative disclosures. - Improved and more meaningful sensitivity analysis. - Sufficient disaggregation to inform of respective risk

exposures. - Full disclosure of risks associated with counterparties. - Risk information related to off-balance sheet items.

Click to access report here

Year-end accounting reminders from PwC: IAS 8 requirement to disclose new standards focuses on those having a material impact. IFRS 3 requires qualitative descriptions of items comprising goodwill. Last, changes to standards that can be adopted early. Access here. Application of IFRS in chemicals and performance technologies companies: With IASB currently occupied towards the completion of its four high priority projects of financial instruments, insurance contracts, leases and revenue recognition, the entities in the chemicals and performance technologies industry can take advantage of this useful guide from KPMG to tackle the ever increasing and evolving complex accounting issues relevant to the industry. This survey based report discusses many of the key industry accounting issues and provides illustrations of how companies have sought to address them. Access the executive summary here. AICPA National Conference. SEC’s Chief Accountant addresses skepticism, skill sets and supervision. Regulators on both sides of the Atlantic are considering enforced rotation of Audit firms, which is something ADAA does not support. We do support the SEC’s view on Auditor’s maintaining their objectivity, taking a step back and adequately challenging information provided to them by management. Read the address here.

December 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

26 of 34

Abu Dhabi Accountability Authority monthly digest

ADAA Highlights IFRS news, updates from the IASB, IFAC and the Accounting Profession

AASD’s top tips for 2011 reporters

Achieving a timely and effective yearend close results from effective management and communication between all stakeholders: Management and Auditors require detailed plans in place that cover the timetable, the risks to the process, the key judgments and the sources of information required. In March 2011 Digest Richard Wright wrote about "The benefits of timely financial information." Financial statements communicate the financial wealth and well-being of an entity and its achievements and disappointments in a period. International Financial Reporting Standards (IFRS) help preparers to determine how to account and present transactions however not all IFRS’s are mandatory. Some only apply to listed entities. The opt out for non-listed entities should be carefully considered because providing segment information, KPI’s and a good management commentary (or budget information for IPSAS reporters) can be useful communication tools. In the September 2011 issue Nader Chatila provided the insight “Management Commentary boosts transparency and enhances corporate governance.” Intangible assets, investment properties, goodwill, non-performing loan and debtor provisions, warranty provisions, decommissioning provisions and many other areas require the application of judgment. Judgment is best rooted in reliable information, which sometimes can be difficult to provide however the Audit (and Accounting) Profession are coming under increasing pressure to be skeptical. In August 2011 issue we wrote “Professional skepticism is a key focus for the Accountancy Profession.” It is likely that there will be much greater pressure on management this year to provide Audit Committees and Auditors with appropriate relevant and reliable information in these areas. Transactions with Government for Government owned entities fall between IAS 1 which requires transactions with owners in their capacity as owners to be presented in equity and IAS 20 “Accounting for government grants and disclosure of Government Assistance” which takes the transaction either immediately to Income or defers it on the balance sheet. IAS 20 was written in 1983, contains conflicting treatments within it and it was not written with the concept in mind that the Government would also be the (or a) shareholder. It is an issue that was taken to the ADTF and AASD published IFRS Accounting briefing paper on transactions with Government in November 2010. The key is to have clear accounting policies and clear disclosures. The standards on SPEs and joint ventures and jointly controlled entities have changed (although the changes are not effective until 2013) however it may be timely to revisit your judgment and if the decision was borderline reconsider. In June 2011 issue AASD highlighted the changes. In October 2011 issue we addressed a number of questions on IFRS 11 “Joint arrangements” and in the November 2011 issue we discussed consolidation issues.

IAS 1 requires critical accounting judgments and estimates to be identified so that users of the accounts can estimate what the financial impact is and will be in the future. Only significant accounting policies are required, tailor them and avoid boiler plate and extracting from illustrative financial statements. IFRS 8 “Operating Segments” is not new however Regulators consistently report problems with aggregation and disclosure and the European Securities and Markets Authority placed it on the IASB’s agenda. Review segment analysis when aggregating economically similar ones and compare the disclosures to the information used to manage the business to ensure the Chief Operating Decision Maker has been identified at an appropriate level. January 2011 IFRS Digest contains an article on the back page. If you have financial assets, debt or equity, consider adopting IFRS 9 early. One great benefit is that if adopted before 1 January 2012 comparatives will not need to be restated. To help you decide refer to the article in IFRS Digest November 2010 by Ahmed Al Meleegy. Tax, Long Term Employee Benefits and Employee share option plans are less well used standards in the Middle East, if they appear in overseas subsidiaries it may be worth undertaking a review. Impairment of intangible assets and goodwill is a sensitive area since no-one feels good about taking a write down (as many of us have this year on our pension assets). One mistake often made is that if there is impairment IAS 36 requires disclosure of the Cash Generating Unit affected, not the operating segment. AASD published an IAS 36 Briefing paper and the article ”Goodwill-is it good?” in the April 2011 issue. The IASB’s program to change the leasing standard is going backwards and whilst it does, it may seem appropriate to leave reviewing lease arrangements until the position is more certain however the one certainty that is not expected to change is that all (material) leases will be brought on to the balance sheet. It may be opportune to review operating leases carefully and reconfirm the accounting treatment. In December Mahmoud Shahin provided an insight in the article Planes trains and automobiles. Related Party transactions. IAS 24R is effective from 1 January 2011. The Government related party exemption means that qualitative and quantitative disclosures are still required but these don’t have to be numerical. Consider the illustrative examples in the standard and Muhammad Shabbir’ s article in IFRS Digest September 2010 and AASD’s February 2011 IAS 24 R briefing paper. We hope that you have found the above insights helpful and if you have an issue you wish to discuss in more detail please do approach the members of ADAA’s IFRS Digest editorial team.

February 2011

Compendium of IFRS Publications is issued by ADAA. All rights reserved.

27 of 34

Abu Dhabi Accountability Authority – IFRS Accounting briefing paper on Related Party disclosures

– guidance for early adopters

Related party disclosures Relevant standards IAS 24 (revised) and IPSAS 20

Overview IAS 24 (revised) simplifies the previously onerous disclosure requirements for government-related entities to something more sensible and it clarifies who, or what is a related party. It is mandatory for 31 December 2011 year ends and early application is permitted and recommended. The objective is that financial statements disclose information to draw attention to the possibility that an entity’s financial position or financial performance may have been affected by a related party relationship and by transactions and balances with such parties. IAS 24 (revised):

Identifies related party relationships and transactions and balances with related parties

Determines when disclosure of such transactions and balances is required, and

The form the disclosure should take. Related parties We addressed the definition of related parties in the IFRS Digest September 2010. Access available here Related party transactions A related party transaction is a transfer of resources, services or obligations between related parties, regardless of whether a price is charged. Related party disclosures IAS 24 (revised) requires the following disclosures:

NAME of the reporting entity's parent and, if different, the ultimate controlling party. If neither the parent nor the ultimate controlling party prepares financial statements available for public use then the name of the next most senior parent that does so should also be disclosed.

NATURE of relationships between parent, controlling entity and subsidiary or controlled entity, even if there were no transactions between them.

AGGREGATE of Key Management Personnel (KMP) compensation split between: short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits and share-based payments.

If there have been transactions between related parties, an entity should disclose the nature of the relationship (but there is no requirement to identify the related parties by name) and the details of the transactions (including commitments) and outstanding balances. As a minimum such details should include:

The amount of the transaction. The amount of outstanding balances, including their terms and

conditions, whether they are secured and the nature of consideration to be provided.

Details of guarantees given or received. Provisions for bad and doubtful debts and the expense

recognized during the period in respect of balances with related parties.

Any other information necessary for an understanding of the potential effect of the relationship on the financial statements.

A statement that a transaction was made on arm's length terms may only be made if it can be substantiated. Disclosures are made separately for each of the following categories:

The parent or controlling entity;

Entities with joint control or significant influence over the reporting entity;

Subsidiaries or controlled entities;

Associates;

Joint ventures in which the entity is a venturer;

KMP; and

Other related parties. Items of a similar nature may be aggregated, except when separate disclosure is required to explain the effects of related party transactions on the entity's financial statements. Government related-entities Government-related entities are entities that are controlled, jointly controlled or significantly influenced by the government or a government-related entity. IAS 24 (revised) reduces the disclosure requirements for government-related entities which are required to disclose:

The name of the government and the nature of the relationship.

The nature and amount of any individually-significant transactions.

The qualitative or quantitative extent of any collectively-significant transactions.

IPSAS 20 IPSAS 20 is drawn from the 1994 reformatted IAS 24 and has not yet been converged with IAS 24 (revised). The key substantive difference is that IPSAS 20 requires disclosure only of transactions which are not on normal terms and conditions, except for those requirements related to KMP.

February 2011

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Abu Dhabi Accountability Authority – IFRS Accounting briefing paper on Related Party disclosures

– guidance for early adopters

Related party disclosures

Illustrative Example IFRS Government related entity

Government G directly or indirectly controls Entities 1 and 2 and Entities A, B, C and D. Person X is a KMP of Entity 1. Entity A is the reporting entity.

For Entity A’s financial statements, the reduced disclosure requirements for government-related entities apply for transactions with Government G; and transactions with Entities 1 and 2 and Entities B, C and D. However, the exemption does not apply to transactions with Person X.

The following is an example of the new related party disclosures we expect to see in an entity’s financial statements. RELATED PARTIES Parent and ultimate controlling party During the year a majority of the Company’s shares were acquired by XYZ Corporation. As a result the new ultimate controlling party of the Company is Government. The nature of the Company’s relationship with Government is as a supplier of procurer of industrial products and services. Transactions with KMP Loans to directors Unsecured loans to directors issued during the year amounted to AED 85 thousand (2009: AED 32 thousand). No interest is payable by the directors, and the loans are repayable in cash in full 12 months after the issue date. At 31 December 2010 the balance outstanding was AED 78 thousand (2009: AED 32 thousand) and is included in other receivables. KMP compensation In addition to their salaries, the Company also provides non-cash benefits to directors and executive officers. Key management includes directors (executive and non-executive), members of the Executive Committee, the Company Secretary and the Head of Internal Audit. The compensation paid or payable to key management for employee services is shown below: 2010

000’s 2009 000’s

Salaries and other short-term employee benefits 2,000 1,900 Termination benefits 700 - Post-employment benefits 900 200 Other long-term benefits 50 50 Share-based payments 1,000 200

3,750 2,350

A - Quantitatively significant transactions (for each category of Related Party – see IAS 24.19) 2010

000’s 2009 000’s

Sales or transfer out of:

- Goods 1,000 2,000 - Property and other assets 5,000 - - Services 350 700 - Leases 5,00 400 - Resend ad development 2,000 1,500

Transfers under license agreement 750 750 Transfer under finance arrangement (loans, equity cash) 4,000 3,000 Collateral and guarantees provided 10,000 10,000 Commitments contingent upon future events 7,000 6,000 Liabilities settled on behalf of related party 2,000 -

B - Qualitatively significant transactions during the year include:

1) The provision of specialist technical support to the Electricity and Water Authority. AED 100,000 2) Consultancy services provided to the Capital Gate project entity AED 75,000

C - Individually significant transaction during the year include:

February 2011

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Abu Dhabi Accountability Authority – IFRS Accounting briefing paper on Related Party disclosures

– guidance for early adopters

1) 10 million AED interest bearing loan at 5% 2) Receipt of buildings from Abu Dhabi Building Entity. Fair value of buildings AED 2.5 million

NOTE – In using its judgment to determine the level of detail to be disclosed in accordance in A, B, C above the reporting entity shall consider the closeness of the related party relationship and other facts relevant in establishing the level of significance of the transaction such as whether it is; Significant in terms of size, carried out on non market terms, outside normal day to day operations, disclosed to regulatory bodies or, reported to senior management. (The items reported under B in our example are significant because they are reported to senior management.) Accounting briefing papers are designed to assist readers in determining their accounting treatments. However a briefing paper cannot provide a definitive answer since the treatment will depend on the facts and circumstances of each situation.

March 2011

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Abu Dhabi Accountability Authority – IFRS Accounting briefing paper on IAS 36

“Impairment of assets”

Introduction

One of the qualitative characteristics of financial statements set out in the IFRS framework is “reliability”. Reliability means that the financial statements are free from material error and bias. Financial statements include “assets”. Assets represent future economic benefits that will contribute to an entities flow of cash. Put simply, users of financial statements expect that an asset recorded in the financial statements will at some point in time become cash. Assets are recorded in the financial statements at historic cost or at fair value. Because users of financial statements are concerned at how these assets turn into cash, IFRS includes an impairment standard, IAS 36.

IAS 36, Impairment of Assets

The purpose of IAS 36 is to set out the procedures that an entity applies to ensure that assets are carried in the financial statements at no more than their recoverable amount. This situation arises when carrying amount (also known as book value) exceeds the amount that can be recovered through use (value in use or VIU) or sale (fair value less costs to sell or FVLCTS) of the asset. If this is the case, the asset is impaired and the entity should recognise an impairment loss. IAS 36 also specifies when an entity should reverse an impairment loss and prescribes the disclosures. In the current economic climate impairment of assets is an important issue for many entities.

Indicators of impairment

An entity must assess at each reporting date whether there is any indication that any asset may be impaired. If any such indication exists, the entity must estimate the recoverable amount of the asset. Even if there is no indication of impairment, goodwill and intangible assets that have an indefinite useful life must be tested annually for impairment. As such it is essential for entities to have policies and procedures in place to identify and assess indicators of impairment.

Indicators of impairment can be both internal and external. Examples of internal indicators include:

Obsolescence or physical damage

Evidence that the economic performance of the asset will be worse than expected

Significant changes with an adverse effect on the entity have taken place which impacts the way an asset is used e.g. the asset becomes idle, or capacity requirements reduce

Cash required for operating or maintaining the asset are more than budget

Actual cash flows flowing from the asset are significantly worse than budget

A significant decline in actual operating profit, or a significant increase in actual loss from the asset

Loss of key employees resulting in reduced operating capability

Significant reorganisation of business operations. Examples of external indicators include:

Decline in market value of the asset

Changes relating to technological, market, economic, regulatory or legal environment in which the entity operates or in the market to which the asset is dedicated

The carrying amount of the net assets of the entity is greater than the entity’s market capitalisation

Changes in interest rates that affect the discount rate and decrease the asset’s recoverable amount

New competitor to the market

Negative publicity for brands

Change in the proposed use of the asset

Restrictions in available credit and increased perception of risk forcing up borrowing costs.

Changes in tax regulations In addition to the above, impairment indicators for investment property include:

The entity recently sold property and realised losses

The business plan indicates that the entity may liquidate some of the portfolio but has not identified which properties will be sold

Significant vacancy rates

Downturn in the economic environment affecting the rental or sale activities

Uncertainty whether carrying amount of the properties will be recovered through future cash flows

Entity has cash flow difficulties which may require forced sales

Significant increase in the supply of investment properties to the market.

March 2011

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Abu Dhabi Accountability Authority – IFRS Accounting briefing paper on IAS 36

“Impairment of assets”

Calculating Value in Use or Fair Value It is not always necessary to determine both an asset’s FVLCTS and its VIU. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount. It may be possible to determine FVLCTS, even if an asset is not traded in an active market. However, sometimes it will not be possible to determine FVLCTS because there is no basis for making a reliable estimate of the amount obtainable from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. In this case, the entity may use the asset’s VIU as its recoverable amount.

If there is no reason to believe that an asset’s VIU materially exceeds its FVLCTS, the asset’s FVLCTS may be used as its recoverable amount. This will often be the case for an asset that is held for disposal. This is because the value in use of an asset held for disposal will consist mainly of the net disposal proceeds, as the future cash flows from continuing use of the asset until its disposal are likely to be negligible.

The best evidence of FVLCTS of an asset is a price in a binding sale agreement in an arm’s length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset.

When calculating VIU, an entity should estimate the future cash inflows and outflows from the asset and its ultimate sale, and then discount them. Cash flow projections should be based on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset and should be based on the most recent financial budgets and forecasts approved by management. The forecast period should not exceed five years unless a longer period can be justified. Estimates of future cash flows shall not include estimated future cash inflows or outflows that are expected to arise from future restructuring to which an entity is not yet committed, or from improving or enhancing the asset’s performance. The discount rate used in measuring value in use should reflect the current market assessment of the time value of money, and any risks that relate to the asset for which the future cash flows have not yet been adjusted.

Any impairment loss is recognised immediately in the income statement, unless the asset is carried at a revalued amount. In this case, the impairment loss is treated as a revaluation decrease.

In a VIU test, the cash flows exclude various items such as future reorganisations and the costs and benefits of future capital expenditure enhancement. Therefore, the cash flow forecast for a VIU test is highly likely to differ from the cash flows from internal budgets approved by management.

There can be problems in identifying the appropriate discount rate.

If it is not possible to calculate the recoverable amount of an individual asset, then the recoverable amount of the Cash Generating Unit (CGU) to which the asset belongs should be calculated. A CGU is the smallest identifiable group of assets that can generate cash flows from continuing use, and that are mainly independent of the cash flows from other assets or groups of assets.

Any impairment loss calculated for a CGU should be allocated to reduce the carrying amount of the asset first to goodwill, then to the other assets of the unit on a pro rata basis based on the relative carrying value of each asset. When allocating an impairment loss to individual assets within a CGU, the carrying amount of any individual asset should not be reduced below the highest of its FVLCTS, its VIU, and zero.

At each reporting date an entity should assess whether an impairment loss recognised in prior periods for an asset (other than goodwill) may no longer exist or may have decreased. An impairment loss recognised in prior periods shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If this is the case, the carrying amount of the asset shall, except as described below, be increased to its recoverable amount. That increase is a reversal of an impairment loss.

The increase in the carrying value of the asset can only be up to that which the depreciated historical cost would have been if the impairment had not occurred. Any reversal of an impairment loss is recognised immediately in the income statement, unless the asset is carried at a revalued amount, in which case the reversal will be treated as a revaluation increase.

Impairment reviews in practice Impairment testing is time consuming and involves:

Identification of impairment indicators

Assessing the cash flows

Determining the discount rate

Testing the reasonableness of the assumptions

Benchmarking the assumptions with the market.

Entities should plan ahead to ensure they have applied IAS 36 appropriately. There are estimates and judgments that must be made when performing impairment reviews and the outcome may mean that an entities income statement is more volatile.

The forecasting of future cash flows in the VIU calculation is inherently judgmental and subjective. The need to allocate an overall goodwill figure to the CGUs for the purpose of impairment testing needs some thought. There can be difficulties identifying the CGU to be used for the purpose of performing the impairment exercise.

March 2011

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Abu Dhabi Accountability Authority – IFRS Accounting briefing paper on IAS 36

“Impairment of assets”

The discount rate used must be reasonable. Interest rates are currently low, but other factors that affect discount rates such as corporate borrowing rates, cost of equity and risk pricing have increased in the current economic environment.

Disclosures

Disclosure requirements for IAS 36 are extensive, especially where a VIU calculation has been performed for CGU’s containing goodwill or intangibles with indefinite useful lives. If there is impairment, the CGU impacted must be disclosed, the amount of the impairment and the facts and circumstances giving rise to the impairment. Disclosures also include a description of the key assumptions used in impairment testing and details of the discount rates and long-term growth assumptions. Further 'sensitivity' disclosures are required if impairment has been avoided but a reasonably possible change in a key assumption would lead to impairment. There are no exemptions from the disclosure requirements of IAS 36.

Conclusion

In ADAA’s experience many entities are not fully complying with the onerous disclosure requirements of IAS 36. So how to improve? 1) Ensure that appropriate prominence is given to management’s

discussion on impairment in the “critical accounting estimates and judgments” section of the financial statements.

2) Test for impairment at the asset level, the CGU level and operating

segments for goodwill at the level for determining (not reporting) segments.

3) Be clear about the key assumptions and if it helps to improve the

understandability (IFRS framework) of the financial statements why not state how much key assumptions need to change to result in an impairment.

4) FVLCTS is really only used in practice when an asset is being held

for sale. Why? Because if FVLCTS is greater than VIU then the entity should sell it or management should explain within the key assumptions why it is acceptable that its assets are allowed to underperform.

5) Be real. The market value of (commodity) assets goes up and down. Technological change is inevitable. The forces of creative destruction (a phrase borrowed from Alan Greenspan) know no bounds. Users of financial statements should be placed in a position where they can make their own informed judgments based on the information that preparers of financial information provide.

Accounting briefing papers are designed to assist readers in determining their accounting treatments. However a briefing paper cannot provide a definitive answer since the treatment will depend on the facts and circumstances of each situation.

November 2010

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Abu Dhabi Accountability Authority – IFRS Accounting briefing paper on Transactions

with Government

Accounting for transactions with government Relevant standards IAS 1, IAS 18, IAS 20, and SIC 10

Grant, loan, equity, subsidy, income, revenue, gain. Assistance from governments is provided in a number of guises and can be in the form of cash, assets or services. Where the government has less than an insignificant interest in the shares (equity) of the entity receiving the assistance (cash, asset or assistance) and the assistance is available to any entity then the accounting is relatively straightforward and IAS 20 applies. Relatively straightforward yes but not completely straightforward. IAS 20 is an old standard it was published in 1993, before the current version of the IFRS Framework and has been on the IASB’s ‘must update at some stage’ shelf for a while. IAS 20 requires updating because parts of it are inconsistent with itself and with the IFRS Framework. For example it provides a choice of booking the assistance as income (to ‘match’ the depreciation expense), or as a deduction (offsetting) against the cost of the asset itself. For assets that are transferred it provides either a nominal value or a fair value approach for measuring the ‘cost’ of the asset transferred. There are problems with these choices: Matching does not sit well with the concept of prudence since prudence should not result in the overstatement of liabilities. Offsetting is only allowed by IAS1 when it reflects the substance of a transaction. Lastly IFRS generally uses a fair value approach, as seen in IAS 39, 40, 41, IFRIC 18, so the nominal value approach of IAS 20 is not so credible. So even in situations where government is acting as government and the government assistance is available to all entities, care is still required to ensure that the choice of accounting under IAS 20 is the most appropriate for the entities circumstances. Reference to the qualitative characteristics of financial statements in the IFRS Framework will help with making the ‘right’ choice. However, for transactions where government has more than an insignificant interest in the shares of an entity then the accounting becomes more difficult to decide. The difficulty arises because of the equity interest held by government. This means that it is unclear whether government is acting as government or as owner.

Where government is acting as owner then;

IAS 1 (revised in 2009) requires transactions with owners in their capacity as owners to be presented in equity (1.106d).

IAS 32 may treat a transaction as a financial liability

IAS 20 appears to scope out government participation in an entity (20.2c), and

IAS 18 refers that increases in equity relating to contributions from equity participants is not revenue. (18.7)

IAS 1 is pretty clear any transaction with an owner is booked to equity. On the face of it this is sensible. If an entity is making a loss then it does not make sense if a contribution from an owner to cover that loss is treated as a gain in the Income statement. The nature of the contribution from an owner in such circumstance is more likely an equity injection given to cover the loss. Unless of course the contribution is a loan (repayable) and interest bearing in which case IAS 32 informs us it is a financial liability. Government participation and support in Abu Dhabi is wide ranging and focused on achieving certain objectives. Government participates in not-for-profit organisations, profitable organisations and organisations on a spectrum between the two. So given this background it is not surprising that determining how a transaction with government should be accounted for is not straightforward. ADAA, together with the large audit firms that sit on the Abu Dhabi Technical Forum (ADTF) have developed a series of questions that we consider will help guide entities when they receive government assistance to identify the most appropriate accounting treatment.

November 2010

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Abu Dhabi Accountability Authority – IFRS Accounting briefing paper on Transactions

with Government

The questions to consider are; What is the purpose of the assistance?

Is the assistance for a restricted purpose? (If yes IAS 20 probably applies).

Is the assistance provided to assist the receiving entity in meeting its budgeted expenditures or other demonstrated needs? (If yes IAS 20 probably applies).

Are there conditions in substance, even if implied, associated with the receipt of the assistance? (If yes IAS 20 probably applies).

Is there evidence of an equity transaction? A share certificate issued and a promise of future dividends or capital gain? (If yes IAS 1 probably applies). What is the legal form of the government assistance? Is there a choice of legal form? The documentation of the assistance may evidence the transaction as equity, a loan or a grant. What is the underlying substance of the assistance?

Is the assistance to fund revenue expenditure (if yes IAS 20 probably applies) or,

Capital expenditure (if yes IAS 20 probably applies) or,

Investment in other business enterprises? (If yes IAS 1 probably applies).

Is it repayable? (If no IAS 20 probably applies). Has the government’s net equity in the entity increased as a result of the assistance provided? (If no IAS 20 probably applies).

Would similar support or assistance be given by the government to an entity not owned by the government? (If yes IAS 20 probably applies). Is assistance matched in equal proportions by funding from other shareholders? (If yes IAS 1 probably applies). Does the government hold more than an insignificant amount of the interest in the ‘equity’ of the entity receiving the assistance? (if no IAS 20 probably applies). Some closing thoughts; The documentation of transactions with government should capture the intent of the relevant parties when they enter into the transaction. The documentation should provide clarity in determining what the accounting treatment should be. Each transaction should be considered on the basis of its own merits and focusing on the intent of the parties and the substance of the transaction should result in the correct accounting. If in doubt please do consult. Accounting briefing papers are designed to assist readers in determining their accounting treatments. However a briefing paper cannot provide a definitive answer since the treatment will depend on the facts and circumstances of each situation.

Property of: Abu Dhabi Accountability Authority

Hamdan Street, Falcon Tower, Abu Dhabi, P.O. Box: 435

Phone: +971 2 639 2200 Fax: +971 2 633 4122

www.adaa.abudhabi.ae