ifrs news - pwc · 2015-06-03 · ifrs news 1 ifrs news shedding light on the iasb’s activities*...

IFRS News

1

IFRS NewsShedding light on the IASBrsquos activities

IFRS News ndash Issue 63May 2008

In this issuehellip

1 Reducing complexityin reporting financialinstruments

3 Discussion paperPost-employmentbenefits

5 InterviewIASB member Zhang Wei-Guo

6 Country updateIndia

8 IASB projecttimetable

9 IFRIC projecttimetable

9 EU endorsementstatus

Issue of the month

Reducing complexity in reportingfinancial instruments ndash part 2The IASB issued a discussion paper lsquoReducing Complexity in ReportingFinancial Instrumentsrsquo in March 2008 It is the first step towards a newstandard for reporting financial instruments that is principle-based and lesscomplex than the current requirements under IAS 39 Part 2 of the articlelooks at the IASBrsquos proposal that fair value is the only measure appropriatefor all types of financial instruments Jessica Taurae of the Global ACSCentral team considers that proposal

The discussion paper asserts that complexity in financial instrument accounting is drivenby different measurement attributes Moving to a single model is therefore the Boardrsquossuggested way to reduce complexity The last section of the discussion paper sets out theBoardrsquos arguments as to why fair value is the only measure appropriate for all types offinancial instruments It sets out some concerns about using fair value to measure financialinstruments in some circumstances It also raises issues that need to be addressed beforefair value measurement of financial instruments can become a general requirement

Fair value the only measure appropriate for all types of financial instrument

The Board acknowledges that arguments can be made for measuring some types offinancial instruments differently but concludes that fair value is the only measurementattribute suitable for all types of financial instruments Measuring all types of financialinstrument using a cost-based method is not a feasible alternative For example it iswidely accepted that the cost of a derivative does not provide users of financial statementswith information about future cash flows

To explain its view the Board has compared instruments with highly variable cash flowswith those with fixed or only slightly variable cash flows The Board considers allderivatives (including interest rate swaps) to be instruments with highly variable cash flowsIt argues that fair value is the only relevant measure for derivatives because the initial cashflows for a particular instrument are not highly correlated with ultimate cash flows andtherefore cost based measures have little or no relevance for assessing future cash flows

Future cash flows are correlated with the initial cash flows for instruments with fixed or onlyslightly variable cash flows (such as debt instruments) where the instrument is held tomaturity and credit risk is low Low credit risk makes cash flows highly probable Thediscussion paper acknowledges that for those instruments accreted cost is a feasiblealternative to fair value and provides some relevant information to users

connectedthinking

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Reducing complexity in financial reporting IFRS News ndash Issue 63 May 2008

IFRS News

2PRINT CONTINUED HOME

Counter-arguments given in thediscussion paper for the use of fair valuefor instruments with fixed or only slightlyvariable cash flows include bull having a single measurement method

for all types of financial instrumentwould eliminate any confusion aboutthe measurement of different financialassets

bull there would be no requirement forwhen and how to quantify impairmentlosses

bull fair value better reflects the price of afinancial asset that would be receivedif an entity needed to sell an asset atthe balance sheet date Theinformation is useful even ifmanagement has no plans to sell theasset

bull for financial assets it providesinformation about anticipated futurelosses not just losses that have beenincurred

bull for financial assets it providesinformation about improvements incredit risk since origination oracquisition

bull for financial liabilities entities withcomparable credit ratings andobligations will report liabilities atcomparable amounts

bull for financial liabilities fair value wouldresult in an entity reporting the samemeasure for two equally securepayment obligations with identicalcash flows and

bull fair value better reflects the cashflows that would be paid if liabilitieswere transferred at the measurementdate

Concerns about the fair valuemeasurement of financialinstruments

Three main concerns about fair valuemeasurement of financial instruments arediscussed the relevance of a reportedchange in fair value why shouldunrealised gains and losses affect profitor loss and the difficulty and uncertaintyin estimating fair values of financialinstruments when no market-basedinformation is available

The key concern about the relevance ofreported change in fair value results fromthe volatility that arises in profit or lossConcerns have been raised that the

volatility in profit or loss arising fromfactors beyond managementrsquos controlshould not be reported as the volatility iscaused by market forces

The second concern is whetherunrealised gains and losses in profit orloss can be misleading The discussionpaper considers bull whether the information is sufficiently

objective and reliable bull what use is the information about

gains and losses that may never berealised

bull why recognise an unrealised gain orloss on a financial liability when anentityrsquos obligation is unchanged and

bull why recognise unrealised gains onfinancial liabilities when an entityrsquosfinancial position worsens

The third concern relates to thedifficulty and uncertainty in estimatingfair values when no market-basedinformation is available This will oftenrequire the use of valuation and othernon-accounting experts who may notbe widely available in somejurisdictions It also acknowledges thatjudgement will be required by preparersin estimating fair values and that therequirement to measure all financialinstruments at fair value will exacerbatethese difficulties

What remains to be done beforefair value measurement isrequired

The last section of the discussion paperhighlights four main issues that need tobe addressed before fair valuemeasurement for financial instrumentscan become a general requirementThese arebull presentation how should the effects

of changes in fair values bepresented in profit or loss

bull disclosure what information aboutfinancial instruments should bedisclosed

bull measurement what is the definitionof fair value and how should fairvalues be measured

bull scope what is the appropriatedefinition of a financial instrumentWhich financial instruments if anyshould be outside the scope of astandard for financial instruments

Full fair value for all financialinstruments

The discussion paper is an interestingcontribution to the debate on fair values inthe marketplace at the moment Thetiming of moving to a full fair value modelwould be a key consideration to anydecision as would the following bull The Board has already identified that it

needs to define fair value and how fairvalues should be measured Withoutknowing what fair value means it isdifficult to conclude on itsappropriateness

bull There is a need to consider theobjectives of financial reporting and inparticular whether the impact ofcurrent market conditions on fairvalues really helps usersrsquo analysis ofissued debt or an asset that will beheld to maturity

bull On that note what do users wantMembers of the CRUF1 stated that fairvalue is a good idea but that an extralayer of information on cash flows thatwould be useful

bull Are valuation models sufficientlyrobust The FSF2 has requested theIASB to undertake a project toimprove its guidance on determiningfair values particularly when marketsare no longer active The Board hasbeen requested to form an expertadvisory panel to assist them withthis It would be imprudent to pushahead with a full fair value modelwithout the results of this analysis

bull Is any single number meaningful on itsown The worldrsquos leading regulatorsand supervisors3 have all stated thattransparency is key to understandingfair values and that the quality ofdisclosures about valuations valuationmethodologies price verificationprocess and the uncertaintyassociated with valuations must beenhanced So a move to full fair valueshould be accompanied by moremeaningful disclosures

1 From the Corporate Reporting Userrsquos Forumdiscussion at the joint IASBFASB meeting on22 April 20082 Financial Stability Forum in its Report of theFinancial Stability Forum on Enhancing Marketand Institutional Resilience 7 April 20083 The Senior Supervisors Grouprsquos reportLeading practice disclosures for selectedexposures April 2008

Post-employment benefits IFRS News ndash Issue 63 May 2008

IFRS News


The Boardrsquos intention is to improve thereporting and presentation of definedbenefit plans It also wishes to addressperceived problems for plans that fallsomewhere between defined benefit anddefined contribution The proposalscreate another category ndash lsquocontribution-based plansrsquo ndash with specific recognitionand measurement requirements butthey leave the requirements for definedbenefit and defined contribution plansuntouched

Reporting and presentation

Some argue that getting rid of thedeferred recognition options allowedunder IAS 19 is overdue and a muchneeded fix to ensure a meaningfulbalance sheet ndash in particular thecorridorspreading approach torecognition of actuarial gains andlosses The FASB addressed this issueas a quick fix in SFAS 158 beforestarting a wider-ranging and possiblyprotracted debate as phase 2 of theirconsiderations

Others argue that recognising in theincome statement an assumed rate ofreturn on assets irrespective of what theactual return is does not reflect realityLooking back to the falling markets thatfollowed the lsquodot com boomrsquo somecompanies recognised income with anexpected rate of return that was greaterthan their disclosed profit for the yeareven though their investments weredropping in value In other words themarket value of investments was fallingbut income was being recognised for theexpected return The difference betweenthe actual (negative) and expected(positive) returns was deferred as anactuarial loss

If we accept the premise that smoothingtools are not appropriate where in the

performance statement should theresulting (potentially volatile and large)pension expense be recognised Thealternatives under the current IAS 19 areeither all through profit or loss oractuarial gains and losses through theSoRIE and everything else through profitor loss

The discussion paper proposes threealternative approaches

These alternatives reflect two principles bull there is a natural offset between the

unwinding of the discount on thevalue of the liabilities and the returnon plan assets set aside to matchthose liabilities so the interest costand at least some part of theinvestment return should be in thesame part of the performancestatement and

bull there is a difference betweenchanges in the value of the liability(which arise from the present valueapproach ndash ie interest cost andchanges in the discount rate) and

changes in the estimate of howmuch benefit will be paid (mortalityturnover and salary or pensionincreases)

These proposals would put more of thecomponents of pension expense intoprofit or loss than the current SoRIEapproach Whether this would increaseor reduce the profit or loss is anotherquestion which depends on how goodactuaries really are at predicting thefuture

lsquoContribution-based plansrsquo

The truly radical part of the proposals isthe introduction of a new classificationlsquocontribution-based plansrsquo and the useof a fair value measurement approachfor these plans The definition ofcontribution-based plans encompassesthe current defined contribution plansand many other plans that are currentlyconsidered defined benefit Theintroduction of a fair value measurementmodel also allows the standard to reflectthe economics of plans that base theirbenefit on the higher of two alternatives

The premise behind contribution-basedplans is that there are many benefitsthat can be expressed in the form of acontribution ndash for example a percentageof current salary or fixed amount ndash plussome form of indexation or return ndash forexample the actual return on a pool ofassets or a stock market index or themovement in an index of consumerprices The benefit earned in any yeardoes not depend on future salaries

Consider a pension scheme where thebenefit is a lump sum equal tocontributions of 5 of salary each yearplus the return on a stock market indexIf the contributions are invested in anindex tracker fund through a pension

Post-employment benefits DPThe IASB issued a discussion paper in March proposing the first stage of improvements to post-employment benefit accounting under IAS 19 The proposals represent a radical change to pensionaccounting for companies with defined benefit plans Richard Davis explains

Approach 1 Everything is recognisedin profit or loss

Approach 2 The interest cost actual return on assets and changes in the discount rate are recorded in other comprehensive income (SoRIE) and everything else in profit or loss

Approach 3 The impact of changes in the discount rate and the difference between the actual return on planassets and a (to be determined) measure of income on plan assets are recorded in other comprehensive income and everything else in profit or loss


IFRS News


fund the plan would currently be definedcontribution If the contributions are notinvested in pension plan assets thatguarantee the promised return the planwould currently be defined benefit Theproposals would classify such a benefitpromise as a contribution-based plan nomatter how the contributions areinvested

The proposed measurement approach forcontribution-based plans is to attributethe benefits in line with the benefitformula and then measure the obligationat lsquofair value assuming the terms of thebenefit promise do not changersquo

Going back to the example schemeabove the treatment for the definedcontribution plan should not changeHowever for the unfunded plan insteadof using a projected unit credit valuationwith a high-quality corporate bond yielddiscount rate management would usefair value assuming the terms of thebenefit promise do not change Whatdoes this mean in practice

The unfunded promise will only be paid ifthe company is still solvent when thebenefit falls due so the fair value shouldreflect the default risk inherent in thepromise In principle that should be thecredit risk of the employer dependingwhere the pension benefits would fit inthe order of priority on any winding-up

This is a major change from current IAS 19 The measurement of the samebenefit promise today for two differentcompanies would be the sameirrespective of differences in their creditrating or how they choose to finance thebenefits The proposals could lead towide variations in the values placed onidentical benefit promises by differentemployers

An example of this divergence alsoarises when you look at benefits inpayment The measurement bases fordefined benefit plans and contributionbased plans are different A pension ofeuro1000 a year would be measured at fairvalue if it was from a contribution-basedplan and in accordance with current IAS 19 for a defined benefit plan Theextent of any difference will depend onhow fair value is determined but inmany territories where pension plans arefunded pensions in payment are oftengiven highest priority so that the defaultrisk may be very small

If fair value is an exit model as in SFAS 157 one view is that the cost ofbuying an annuity from an insurancecompany is the fair value The mortalityassumptions used by insurancecompanies in many territories are moreconservative or perhaps lessoptimistic than those used by pensionfunds Insurance companiesrsquo often

assume that the retiree will live longerand draw more benefits than theassumptions made by the employerAlso the yields underlying annuitycontracts are seldom as high as high-quality corporate bond yields The valueplaced on a euro1000 pa pension from acontribution-based plan could beconsiderably higher than the valueplaced on the same pension payablefrom a defined benefit plan

Looking to the future

What follows the revised version of IAS 19 that will result from this discussionpaper Phase 2 of the Boardrsquos review Itis difficult to see that the standard canmaintain two models for valuing anidentical obligation This implies thateither the measurement model forcontribution-based plans will be relativelyshort-lived or defined benefit plans willmove to the same model

The proposals will have significantimpacts on the accounting for manyforms of benefit design and could setthe framework for benefits accountingfor a long time to come Preparers andusers of accounts are encouraged toconsider these proposals and respond tothe Boardrsquos invitation to comment nowrather than wait for an exposure draft oreven a standard The comment periodends on 26 September 2008

PricewaterhouseCoopersrsquo IFRS pocket guide 2008 is available this month

It is intended to be used as an lsquoat-a-glancersquo guide summarising the recognition andmeasurement requirements of IFRS published up to March 2008

Order your hard copy now from wwwcchcoukifrsbooks Or download the PDFfrom wwwpwccomifrs

IFRS pocket guide 2008

Interview IFRS News ndash Issue 63 May 2008

IFRS News


IASB member Zhang Wei-GuoZhang Wei-Guo joined the IASB in July 2007 as a full time member He previously worked as ChiefAccountant and Director General of the Department of International Affairs at the China SecuritiesRegulatory Commission (CSRC) He has been involved in accounting standard-setting auditoroversight and cross-border regulatory co-operation issues at the CSRC and with the InternationalOrganization of Securities Commissions

What have you found most enjoyableabout your role at the Board so far

There are two things I particularly enjoyFirstly we are achieving much wideradoption and convergence than anyoneexpected China has alreadyimplemented the converged newaccounting standards Japan and Koreahave announced their adoption orconvergence programmes The SEC haswaived the US GAAP reconciliationrequirements for foreign private issuersand is now seeking the possibility ofallowing US domestic companies to useIFRS

Secondly I am working with a very goodteam including board members and stafffrom more than 20 countries They areprofessional and friendly and havecreated a spirit of co-operation

What do you want to be rememberedfor from your time at the IASB

My philosophy is quite simple ndash try ourbest to solve issues in the mostappropriate way When someone retiresor moves from their current position heor she should be proud of thejudgements and decisions that they havemade He or she will also hope others willlearn from any mistakes he or she made

What do you see as the mostimportant project on the Boardsagenda and why

Revenue may be one of the mostimportant projects on the Boardrsquosagenda Accounting and reporting forrevenue was traditionally based on arevenueexpense view (or the incomestatement approach) Now we aremoving to an assetliability view (or the

balance sheet approach) It will not onlycover income statement items but alsotouch many balance sheet itemsincluding the timing of recognitionmeasurement as well as presentationand disclosure issues The Boardrsquos finaldecision will determine the extent of thepossible changes

Are there any new projects you wouldlike to see added to the Boardrsquosagenda

We are now in an environment wherepeople have different views Some wantmore problems to be resolved toenhance the quality of IFRS and to meetthe needs of those countries in adoptingor implementing IFRS Others prefer astable platform for a period I think weneed to scrutinise what should be put onthe agenda and only put throughamendments that are strictly necessaryPreparers auditors national standard-setters and other will inevitably raisesissues to us but the Board needs to bemore careful when making this kind oftough decision

What about the lsquocommon controlprojectrsquo It must be important toChina

It is quite important to China becausethere are many transactions in listedcompanies either government orprivately controlled under commoncontrol This is why the currentaccounting standards in China onbusiness combinations divide into twoparts one on non-common controltransactions the other on commoncontrol transactions When the Boardsought advice from the StandardsAdvisory Committee the membersidentified this as the number one

project to be added to the agenda Tomy surprise many other countriesincluding those in Europe alsorequested to add this project to theagenda So the Board did so inDecember last year

This is a difficult project I think theBoard has made the right decision to putit onto the agenda The project willexamine the definition of a businesscombination involving entities orbusinesses under common control andthe methods of accounting for thosetransactions in the acquirerrsquosconsolidated and separate financialstatements The Board also decided toinclude demergers in the scope of theproject because these two issues areoften closely related

How do you see standard settingevolving over the next five years

First more countries will either adoptIFRS or converge with IFRS Amongthem the most important decision iswhether the US will allow domesticpreparers to use IFRS

My second prediction is how the Boardresolves issues from different countriesand regions When IFRS is more andmore widely used and strictly enforcedthe result will inevitably be morequestions from around the world TheBoard will face some challenges fromdifferent regional issues

Thirdly the Board has to make a trade-off between expected stability andrequired changes to the standards

The views expressed in this article arepersonal ones and not necessarily thoseof the IASC Foundation or the IASB

Country update IFRS News ndash Issue 63 May 2008

IFRS News


What has happened since the Instituteof Chartered Accountants of India(ICAI) announced that India wouldalign its accounting standards toIFRS

The prerequisite for achievingconvergence successfully is to lay downthe strategy This includes a roadmap forachieving convergence in a systematicand consistent way keeping in viewIndiarsquos legal economic and otherpeculiarities

The ICAI which regulates the accountingprofession in India has embarked on itsIFRS convergence exercise in earnestThe 2011 deadline allows us plenty oftime (deliberately so)

The Accounting Standard Board (ASB)of ICAI was entrusted with theresponsibility of preparing the lsquoConceptPaper on Convergencersquo The paperrsquosobjective was to (a) explore theapproach for achieving convergencewith IFRS and (b) lay down a detailedroad map The ASB set up a Task Forcecomprising of members from differentbackgrounds ndash industry professiontraining government IASCF Trusteesand others The concept paperincluding the road map was publishedin the second half of 2007 It outlines theobjectives roles responsibilitiesstrategy and action plans

Will accounting prepared under IndianIFRS qualify as lsquofull IFRSrsquo or will therebe differences If different what willthis mean for Indian entities

The ICAI considered whether(a) the existing Indian Accounting

Standards should be revised to makethem fully compliant with IFRSs or

(b) the IFRSs including the IFRSreference numbers should beadopted from 1 April 2011

The ICAI believes that it would be morecumbersome to follow the first approachand has therefore chosen option (b) TheIFRSs will be issued as lsquoIndian ASsrsquowhich will be IFRS-equivalent Theexisting Accounting Standard referencenumber will be given along with the IFRSnumber

As far as the legal and regulatory aspectsare concerned the ICAI has decided thatwhere there are conflicts between IFRSand Indian lawsregulations the latter willprevail The ICAI believes that thisapproach is appropriate because it wouldnot be practicable to postpone fullconvergence until the relevantlawsregulations are amended as suchamendments may not take place formany years For example AS 21Consolidated Financial Statementsdefines lsquocontrolrsquo as ownership of morethan one-half of the voting power of anenterprise or control over thecomposition of the governing body of anenterprise This definition is largely basedon the definitions of lsquoholding companyrsquoand lsquosubsidiary companyrsquo as per theCompanies Act 1956 However IAS 27Consolidated and Separate FinancialStatements defines lsquocontrolrsquo as ldquothepower to govern the financial andoperating policies of an enterprise so asto obtain benefits from its activitiesrdquoTherefore until the correspondingamendments are made to the CompaniesAct there would be ambiguity and so thecurrent regulations would prevail

The task force has also stratified thetarget companies into two groups publicinterest entities (PIEs) and small andmedium enterprises (SMEs)

PIEs include all companies(a) whose equity or debt securities are

listed or are in the process of listingon any stock exchange whether inIndia or outside

(b) that are banks (including cooperativebanks) financial institutions mutualfunds or insurance entities

(c) whose turnover (excluding otherincome) exceeds rupees 1 billion inthe immediately precedingaccounting year

(d) that has public deposits andorborrowings from banks and financialinstitutions in excess of rupees 250million at any time during theimmediately preceding accountingyear or

(e) that is a holding or a subsidiary of anentity that is covered in (a) to (d)above

The ICAI only wants PIEs to becomeIFRS compliant to start with It believesthat it may be appropriate to have aseparate standard for SMEs But SMEsdo not need to adopt the IASBrsquos lsquoIFRSfor SMEsrsquo for India to be an IFRS-compliant country

What has been the response of CFOsinvestors analysts preparers andothers in India

The announcement was received verypositively by one and all although fordifferent reasons An independent surveyconducted in India found that 95 ofCFOs of large Indian companies areinterested in swiftly converging withglobal accounting standards mainlyIFRSs

How prepared are Indian entities forthe transition to IFRS

That is difficult to answer In any suchlarge-scale transformation there arealways different challenges at differentstages And different companies areplaced differently to tackle thosechallenges For example a company thathas a foreign parent and has beenreporting under IFRS or parent company

India moves to full IFRSIndia announced in July 2007 its plan to converge fully with IFRS by 2011 The announcement hasbeen widely welcomed Sanjay Hegde the head of PwCrsquos Capital Markets Group in India talks toIFRS News about preparations

euro1 Rs 6292


IFRS News

7

GAAP for some time would probably findit relatively easy to transition to IFRS buta company doing the transition fromIndian GAAP to IFRS would find ittougher particularly regarding theconcepts related to fair valueinvestment property businesscombinations and derivatives

Current Indian GAAP although styled onIFRS deviates from it for variousreasons ndash for example maintainingconsistency with the legal and regulatoryrequirements the economicenvironment levels of preparedness andconceptual differences ndash although theaim has always been to follow IFRS tothe extent possible while formulating theIndian Accounting Standards

However one refreshing and positiveaspect in Indiarsquos case is the willingnessto move to IFRS and the acceptance ofthe inevitable change That could be adifferentiating factor between thetransition story in India compared withother countries In fact unlike theexperience in other transitioningcountries many companies in Indiamight go for a lsquostrategic approachrsquo toadopting the standards Given Indiarsquos ITstrength companies may embed thesystems along the way rather than firstconverging to IFRS and then embeddingor taking a tactical approach where high-level differences are identified andplugged mostly on spreadsheets

That said it will take time to embed therequirements in systems and thebusiness so that the managementinformation systems the accounts andthe huge amount of disclosures can begenerated readily and reliably

What will be the biggest change forentities reporting under IFRS

There will be many big changes but if Ihave to pick one I believe it will be the

fair value accounting be it IFRS 3 IAS 39 IAS 40 or IFRS 2 etc All ofthese pose a challenge not onlybecause of the mindset (of theaccounting professionals in industry andin practice) of prudence and cost-basedaccounting but also we will be askedquestions like ldquoWhy fair value Itcouldnrsquot prevent an Enron or a subprimesituation in the worldrsquos biggest economywith the deepest and safest securitiesmarketsrdquo

From a presentation and disclosureperspective Indian companies areaccustomed to following Schedule VI ofthe Companies Act of India with itsstandard presentation and disclosuresThis will be a significant change forcompanies in their transition to IFRSThey will have to assess for themselvesthe various disclosures andpresentations required for their companyespecially considering IFRS 7 FinancialInstruments Disclosures which isalready proving to be a challenge forcompanies across the world

IFRS 7 will be really demanding forbanking and financial companies inIndia which have traditionally reportedfollowing norms set by the Reserve Bankof India ICAI Companies Act andBanking Regulation Act and IAS 39This is not only because of thederivatives accounting impairmentreserve calculations and the requirementto carry most of your investments at fairvalue but also because of the rigorousdisclosures it requires The data requiredfor such disclosures will be substantialas are the data points with which theyare captured Indian companies are notgeared up for that at present and willfind this a significant challenge

What about IFRS 3R

As mentioned above we believe thatdifferent entities will find different

standards a challenge to applyHowever in the international contextaccounting standards that areextremely relevant today particularly inthe light of cross-border and domesticdeals are the standards on businesscombinations (IFRS 3) and consolidatedfinancial statements (IAS 27 and SIC-12)

There is no comprehensive guidanceavailable currently in Indian GAAP thataddresses the accounting for specialpurpose vehicles Professionals look toAS 21 Consolidated FinancialStatements which lays a lot of emphasiseither on lsquomajority equity stakersquo ormajority representation at the boardwhen defining control This will bedifficult under IFRS which has stricterguidance on interpreting control ldquoThepower to govern the financial andoperating policies of an enterprise so asto obtain benefits from its activitiesrdquo

Companies moving to IFRS in India willhave to think about their SPE structuresand check whether they should beconsolidated or not In most casesunder IFRS SPEs will qualify forconsolidation affecting the balancesheet and the results of operationsSpecifically financial servicescompanies may find their capitaladequacy ratios impacted

Another challenge will be therequirement to perform a fair valuebased purchase price allocation in abusiness combination Indian GAAPrequires a book-value-based goodwillaccounting

However I would like to emphasise thatwith clarity as to the approach andobjectives and determination of thepurpose India is moving steadily butsurely towards achieving goal ofconvergence with IFRS by 2011

PRINT CONTINUED HOME

IASB project timetable IFRS News ndash Issue 63 May 2008

IFRS News


Project ED published Comment deadline Standard published Effective date (early expected due adoption permitted)

Joint IASBFASB projectsndash Amendments to IFRS 3 and to IAS 27 12 July 2005 28 October 2005 10 January 2008 1 July 2009_ IAS 31 Joint Ventures September 2007 11 January 2008 Q3 or Q4 2008 Undecided_ Amendment of IAS 33 Earnings per share Q1 2008 Undecided Some time in 2008 Undecidedndash IAS 37 12 July 2005 28 October 2005 Q3 or Q3 2009 Undecidedndash IAS 12 Income Taxes Some time in 2008 Undecided Some time in 2009 Undecidedndash Amendment to IAS 20 Government Grants Deferred until IAS 37 Undecided Undecided Undecided

finalisedndash Leases DP due Q1 2009 Undecided Undecided Undecidedndash Revenue and related liabilities DP due Q2 2008 Undecided Undecided Undecidedndash Impairment Active project Undecided Undecided Undecided

IAS 1 Presentation of Financial Statementsndash Segment A 16 March 2006 17 July 2006 September 2007 1 January 2009ndash Segment B DP due Q3 2008 Undecided Undecided Undecided

ED due some time2008

IFRS 2 amendments ndash vesting conditions 2 February 2006 2 June 2006 17 January 2008 1 January 2009and cancellations

IAS 32 ndash Financial Instruments Puttable at 22 June 2006 23 October 2006 14 February 2008 1 January 2009Fair Value and Obligations arising onLiquidation

Amendment to IAS 24 Related Party 22 February 2007 25 May 2007 Q1 2008 1 July 2009Disclosures

IFRS for SMEs 15 February 2007 30 November 2007 Q4 2008 Undecided

IAS 39 Financial Instruments portions 6 September 2007 11 January 2008 Undecided RetrospectivelsquoExposures qualifying for hedge accountingrsquo application but wonrsquot

be effective before Q2 2008

Annual improvement project 11 October 2007 11 January 2008 Undecided Undecided

IFRS 1 and IAS 27 Cost of investment in a 13 December 2007 26 February 2008 Undecided Undecidedsubsidiary jointly-controlled entity or associate

Amendments to IFRS 2 and IFRIC 11 lsquoIFRS 2 ndash 13 December 2007 17 March 2007 Undecided Not for 1 JanuaryGroup and treasury share transactionsrsquo 2009

IFRS 4 Insurance Contracts ndash phase 2 DP issued 3 May 2007 Undecided Some time in 2010 UndecidedED expected 2009

Post-retirement benefits (including pensions) DP issued Undecided Undecided 1 January 2013lsquoAmendments to IAS 19rsquo 27 March 2008

comment deadline 26 Sept 2008

Fair value measurement guidance DP issued Undecided Undecided Undecided6 May 2007 Standard-by-standard review began 25 Feb 2008 roundtable discussions with constituents Q4 2008

Consolidation (including SPEs) DP due Q3 or Q4 2008 Undecided Undecided Undecided

Emission rights Undecided Undecided Undecided Undecided(depends on IAS 20)

IAS 39 Financial Instruments Liabilities DP issued Undecided Undecided Undecidedand equity ndash phase 2 28 February 2008


Improvement to IAS 32 Financial instruments DP issued Undecided Undecided Undecidedwith characteristics of equity 28 February 2008


IAS 39 Financial Instruments (replacement DP issued Undecided Undecided Undecidedof existing standards) lsquoReducing complexity 19 March 2008


Extractive activities DP due late 2008 Undecided Undecided Undecided

IASB project timetable

IFRIC project timetable IFRS News ndash Issue 63 May 2008

IFRS News

9

Project ED published Comment deadline Standard published Effective dateexpected due

IFRIC 13 (D20) Customer Loyalty Programmes 7 September 2006 6 November 2006 June 2007 1 July 2008

IFRIC 14 (D19) IAS 19 ndash The Asset Ceiling 24 August 2006 31 October 2006 June 2007 1 January 2008Availability of Economic Benefits and Minimum Funding Requirements

D21 Real estate sales 5 July 2007 5 October 2007 Undecided Undecided

D22 Hedges of a Net Investment in a July 2007 19 October 2007 Undecided UndecidedForeign Operation

D23 Distribution of non-cash assets to owners 17 January 2008 25 April 2008 Undecided Undecided

D24 Customer contributions 17 January 2008 25 April 2008 Undecided Undecided

IFRIC project timetable

Has EFRAG issued Has the ARC voted on it When might its endorsement advice endorsement be

expected

StandardsRevised IFRS 3 Business Combinations Expected in Q3 2008 Expected at the Q1 2009(Issued 10 January 2008) October meeting

InterpretationsIFRIC 12 Service Concession Arrangements u Expected at By the end of 2008 (Issued 30 November 2006) either the June or

July meeting

IFRIC 13 Customer Loyalty Programmes Expected in April Expected at By the end of 2008(Issued 28 June 2007) or May 2008 either the June

or July meeting

IFRIC 14 IAS 19 ndash The Limit on a Defined Benefit Asset u Expected at By the end of 2008Minimum Funding Requirements and Their Interaction either the June(Issued 05 July 2007) or July meeting

AmendmentsAmendment to IAS 23 Borrowing Costs u Expected at By the end of 2008(Issued 29 March 2007) either the June

or July meeting

Amendments to IAS 1 Presentation of Financial Expected at By the end of 2008Statements A Revised Presentation either the June(Issued 06 September 2007) or July meeting

Amendments to IAS 27 Consolidated and Separate Expected in Q3 2008 Expected at the Q1 2009 Financial Statements October meeting(Issued 10 January 2008)

Amendment to IFRS 2 Share-based Payment Expected in April Expected at By the end of 2008Vesting Conditions and Cancellations or May 2008 either the June(Issued 17 January 2008) or July meeting

Amendments to IAS 32 and IAS 1 Puttable Financial Expected in April Expected at the Q1 2009Instruments and Obligations Arising on Liquidation or May 2008 October meeting(Issued 14 February 2008)

EU endorsement status IASBIFRIC documents not yet endorsed

Note these dates are provisional only and subject to change

The information shown in the lsquoWhen is endorsement expectedrsquo column is the EUrsquos best estimate of the latest date for endorsement assuming endorsement is to occur

The information in this table and the table on p10 are correct as at 21 April 2008


IFRS News


EU endorsement status IFRS News ndash Issue 63 May 2008

Date of endorsement Date of publication in the Official Journal

IFRS 8 Operating Segments 21 November 2007 22 November 2007

IFRIC 11 IFRS 2 Group and Treasury Share Transactions 1 June 2007 2 June 2007

IFRIC 10 Interim Financial Reporting and Impairment 1 June 2007 2 June 2007

IFRIC 9 Reassessment of Embedded Derivatives 8 September 2006 9 September 2006

IFRIC 8 Scope of IFRS 2 8 September 2006 9 September 2006

IFRIC 7 Applying the Restatement Approach under IAS 29 8 May 2006 9 May 2006Financial Reporting in Hyperinflationary Economies

Amendments to IAS 21 The Effect of Changes in Foreign 8 May 2006 9 May 2006Exchange Rates

IFRS 7 Financial Instruments Disclosures 11 January 2006 27 January 2006

IFRIC 6 Waste Electrical and Electronic Equipment 11 January 2006 27 January 2006

Amendments to IFRS 1 and IFRS 6 11 January 2006 27 January 2006

Amendments to IAS 39 and IFRS 4 Financial Guarantee

Contracts 11 January 2006 27 January 2006

Amendment to IAS 1 Capital Disclosures 11 January 2006 27 January 2006

Amendment to IAS 39 Cash Flow Hedge Accounting 21 December 2005 22 December 2005

Amendment to IAS 39 The Fair Value Option 15 November 2005 16 November 2005

IFRIC 5 Interests in Decommissioning Funds 8 November 2005 24 November 2005

IFRIC 4 Determining whether an arrangement contains a lease 8 November 2005 24 November 2005

Amendments to IAS 19 Employee Benefits Actuarial Gains and 8 November 2005 24 November 2005Losses Group Plans and Disclosures

IFRS 6 Mineral Resources 8 November 2005 24 November 2005

Amendment to IAS 39 Transition and Initial Recognition of 25 October 2005 26 October 2005Financial Assets and Financial Liabilities

Amendment to SIC-12 25 October 2005 26 October 2005

IFRIC 2 Membersrsquo Shares in Co-operative Entities and Similar 7 July 2005 8 July 2005Instruments

IFRS 2 Share-based Payments 4 February 2005 11 February 2005

Amendments to IASs 1 2 8 10 16 17 21 24 27 28 31 33 29 December 2004 31 December 2004

and 40

IAS 32 Financial Instruments Disclosure and Presentation 29 December 2004 31 December 2004

IFRIC 1 Changes in Existing Decommissioning Restoration and 29 December 2004 31 December 2004Similar Liabilities

IFRS 5 Non-current Assets Held for Sale and Discontinued 29 December 2004 31 December 2004Operations

IFRS 4 Insurance Contracts 29 December 2004 31 December 2004

Amendments to IAS 36 and IAS 38 29 December 2004 31 December 2004

IFRS 3 Business Combinations 29 December 2004 31 December 2004

IAS 39 Financial Instruments Recognition and Measurement 19 November 2004 9 December 2004

IFRS 1 First-time Adoption of IFRS 6 April 2004 6 April 2004

Extant standards and interpretations as at 1 March 2002 other 29 September 2003 13 October 2003than IAS 32 and 39 and related interpretations (In other wordsIASs 1 2 7 8 10 11 12 14 15 16 17 18 19 20 21 22 2324 26 27 28 29 30 31 33 34 35 36 37 38 40 and 41 andSIC 1 2 3 6 7 8 9 10 11 12 13 14 15 18 19 20 21 22 2324 25 27 28 29 30 31 32 and 33)

IASBIFRIC documents that have been endorsed

Regulations and amendments to Regulations legally come into force 3 days after publication in the Official Journal

Two parts of IAS 39 were not endorsed in 2004 One of those parts was subsequently endorsed in December 2005 at the same time as Amendment to IAS 39 The FairValue Option The other part relates to hedge accounting

Contacts IFRS News ndash Issue 63 May 2008

IFRS News

11PRINT HOME

For further help on IFRS technical issues contact

Business Combinations and Adoption of IFRSmarydolsonukpwccom Tel + 44 (0)20 7804 2930 olivierschererukpwccom Tel +44 (0)20 7213 1497 shelleyhsoukpwccom Tel +44 (0)20 7804 8679 michaeljstewartukpwccom Tel +44 (0)207 804 6829carolinewoodwardukpwccom Tel +44 (0)207 804 7392

Financial Instruments and Financial Servicespaulinewallaceukpwccom Tel +44 (0)20 7804 1293 francesconagariukpwccom (insurance) Tel +44 (0)20 7804 2036

Liabilities Revenue Recognition and Other Areastonymdebellukpwccom Tel +44 (0)20 7213 5336 marklohmannukpwccom Tel +44 (0)20 7212 4482

richarddavisukpwccom (actuarial issues) Tel +44 (0)20 7212 4565

IFRS News editor

joannacmalvernukpwccom Tel +44 (0)20 7804 9377

copy 2008 PricewaterhouseCoopers All rights reserved lsquoPricewaterhouseCoopersrsquo refers to the network of member firms of PricewaterhouseCoopers International Limited each of which is a separateand independent legal entity

Reducing complexity in financial reporting IFRS News ndash Issue 63 May 2008

IFRS News


Counter-arguments given in thediscussion paper for the use of fair valuefor instruments with fixed or only slightlyvariable cash flows include bull having a single measurement method

for all types of financial instrumentwould eliminate any confusion aboutthe measurement of different financialassets

bull there would be no requirement forwhen and how to quantify impairmentlosses

bull fair value better reflects the price of afinancial asset that would be receivedif an entity needed to sell an asset atthe balance sheet date Theinformation is useful even ifmanagement has no plans to sell theasset

bull for financial assets it providesinformation about anticipated futurelosses not just losses that have beenincurred

bull for financial assets it providesinformation about improvements incredit risk since origination oracquisition

bull for financial liabilities entities withcomparable credit ratings andobligations will report liabilities atcomparable amounts

bull for financial liabilities fair value wouldresult in an entity reporting the samemeasure for two equally securepayment obligations with identicalcash flows and

bull fair value better reflects the cashflows that would be paid if liabilitieswere transferred at the measurementdate

Concerns about the fair valuemeasurement of financialinstruments

Three main concerns about fair valuemeasurement of financial instruments arediscussed the relevance of a reportedchange in fair value why shouldunrealised gains and losses affect profitor loss and the difficulty and uncertaintyin estimating fair values of financialinstruments when no market-basedinformation is available

The key concern about the relevance ofreported change in fair value results fromthe volatility that arises in profit or lossConcerns have been raised that the

volatility in profit or loss arising fromfactors beyond managementrsquos controlshould not be reported as the volatility iscaused by market forces

The second concern is whetherunrealised gains and losses in profit orloss can be misleading The discussionpaper considers bull whether the information is sufficiently

objective and reliable bull what use is the information about

gains and losses that may never berealised

bull why recognise an unrealised gain orloss on a financial liability when anentityrsquos obligation is unchanged and

bull why recognise unrealised gains onfinancial liabilities when an entityrsquosfinancial position worsens

The third concern relates to thedifficulty and uncertainty in estimatingfair values when no market-basedinformation is available This will oftenrequire the use of valuation and othernon-accounting experts who may notbe widely available in somejurisdictions It also acknowledges thatjudgement will be required by preparersin estimating fair values and that therequirement to measure all financialinstruments at fair value will exacerbatethese difficulties

What remains to be done beforefair value measurement isrequired

The last section of the discussion paperhighlights four main issues that need tobe addressed before fair valuemeasurement for financial instrumentscan become a general requirementThese arebull presentation how should the effects

of changes in fair values bepresented in profit or loss

bull disclosure what information aboutfinancial instruments should bedisclosed

bull measurement what is the definitionof fair value and how should fairvalues be measured

bull scope what is the appropriatedefinition of a financial instrumentWhich financial instruments if anyshould be outside the scope of astandard for financial instruments

Full fair value for all financialinstruments

The discussion paper is an interestingcontribution to the debate on fair values inthe marketplace at the moment Thetiming of moving to a full fair value modelwould be a key consideration to anydecision as would the following bull The Board has already identified that it

needs to define fair value and how fairvalues should be measured Withoutknowing what fair value means it isdifficult to conclude on itsappropriateness

bull There is a need to consider theobjectives of financial reporting and inparticular whether the impact ofcurrent market conditions on fairvalues really helps usersrsquo analysis ofissued debt or an asset that will beheld to maturity

bull On that note what do users wantMembers of the CRUF1 stated that fairvalue is a good idea but that an extralayer of information on cash flows thatwould be useful

bull Are valuation models sufficientlyrobust The FSF2 has requested theIASB to undertake a project toimprove its guidance on determiningfair values particularly when marketsare no longer active The Board hasbeen requested to form an expertadvisory panel to assist them withthis It would be imprudent to pushahead with a full fair value modelwithout the results of this analysis

bull Is any single number meaningful on itsown The worldrsquos leading regulatorsand supervisors3 have all stated thattransparency is key to understandingfair values and that the quality ofdisclosures about valuations valuationmethodologies price verificationprocess and the uncertaintyassociated with valuations must beenhanced So a move to full fair valueshould be accompanied by moremeaningful disclosures

1 From the Corporate Reporting Userrsquos Forumdiscussion at the joint IASBFASB meeting on22 April 20082 Financial Stability Forum in its Report of theFinancial Stability Forum on Enhancing Marketand Institutional Resilience 7 April 20083 The Senior Supervisors Grouprsquos reportLeading practice disclosures for selectedexposures April 2008


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ifrs news - pwc · 2015-06-03 · ifrs news 1 ifrs news shedding light on the iasb’s activities*...

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