While most people in South Africa are focusing on 2010 and the soccer World Cup; 2009 will be the year of the next wave of change in accounting standards. There are no fewer than twenty five standards that are new or that have been amended or revised, which need to be applied from 2009. This brings back memories of 2005 when we had the last big wave of change. Now is the time to start considering the potential impact of the 2009 changes.
The reason why there are so many changes in 2009 is as a result of the moratorium that the IASB agreed to in 2006 under which there would be no new or amended standards effective before 1 January 2009. This was done in order to have a stable platform for a four year period. During this period, the IASB has been busy on its own projects as well as on joint projects with the FASB. The objective of the changes and new standards is to improve financial reporting and achieve, ultimately, convergence of global accounting standards. This article highlights some of the significant changes that are effective in 2009.
Annual Improvements Project
In October 2007, the IASB started its annual improvements project by issuing an exposure draft of proposed amendments to standards. This annual project is intended to be a vehicle for making non-urgent but necessary amendments to standards. The amendments are generally meant to be clarifications of expected practice. Arising out of the first project are improvements/changes to 20 standards that were published in May 2008 – some of these changes are only editorial or terminology changes, and are likely to have no or but a minimal accounting effect. Refer to the Improvements to IFRSs, also issued by the Accounting Practices Board as Improvements to Statements of GAAP, in the SAICA on-line handbook.
Some of the more significant changes are highlighted below.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations – Plan to sell the controlling interest in a subsidiary
If an entity is committed to a sale plan involving the loss of control of a subsidiary (regardless of whether a non-controlling interest is retained), then it should classify all of that subsidiary’s assets and liabilities as held for sale when the held for sale criteria in paragraphs 6 to 8 of IFRS 5 are met. Disclosures for discontinued operations would be required when the subsidiary meets the definition of a discontinued operation.
Prior to the amendment it was not clear how to apply IFRS 5 if say a 70% investment in a subsidiary was reduced to 20%. Some possible views were to:
classify none of the subsidiary’s assets and liabilities as held-for-sale on the basis that an interest is retained; or
classify 80% of the subsidiary’s assets and liabilities as held-for-sale on the basis that a 20% interest is retained and therefore effectively 80% is sold; or
classify 100% of the subsidiary’s assets and liabilities as held-for-sale on the basis that, since the subsidiary would no longer be consolidated after the sale, it is as if 100% of the assets and liabilities have been sold.
IAS 16 Property, Plant and Equipment – Sale of assets held for rental
Assets that are rented and then subsequently sold on a routine basis in the course of ordinary activities (for example, cars held by car rental companies) should be transferred to inventories at their carrying amount when they cease to be rented and are held for sale. The proceeds from the sale of such assets should be recognised as revenue in accordance with IAS 18 Revenue. Such assets are outside the scope of IFRS 5. IAS 7 Statement of Cash Flows is also amended to require the cash flows to acquire or manufacture such assets and the cash receipts from renting and subsequent sale of such assets to be classified as cash flows from operating activities.
Prior to the amendment, IAS 16 only permitted the recognition of a net gain or loss on disposal. It did not permit the recognition of the proceeds as revenue and the carrying amount as cost of sales.
IAS 19 Employee Benefits – Replacement of term ‘fall due’
The IASB has concluded that the critical factor in distinguishing between short-term and other long-term employee benefits is the timing of the expected settlement. Accordingly, the words ‘fall due’ have been replaced with ‘due to be settled’ in the definitions for short-term and other long-term employee benefits. As a result, accrued leave that is due to an employee, but is not expected to be taken within twelve months after the end of the period in which the related services are rendered, would be treated as an other long-term benefit.
IAS 27 Consolidated and Separate Financial Statements – Measurement of subsidiary held for sale in separate financial statements
IAS 27 is aligned with IFRS 5 by clarifying that a parent entity that accounts for an investment in a subsidiary in accordance with IAS 39 (in its separate financial statements) and subsequently classifies the investment as held for sale (or held in a disposal group classified as held for sale) would continue to account for the investment in accordance with IAS 39. Previously, it was unclear as to how IFRS 5 should be applied in the separate financial statements of the parent when the investment was recognised at fair value prior to being reclassified as held-for-sale.
IAS 28 Investments in Associates – Impairment of investment in associate
IAS 28 is amended to clarify that an impairment loss on an investment in an associate is not allocated to any asset, including goodwill, that forms part of the carrying amount of the investment in the associate. This is because the investment in associate is treated as a single asset. For this reason, all such impairment losses are permitted to be reversed. Prior to the amendment some were of the view that impairment losses on investments in associates needed to be allocated to the individual assets, including goodwill, making up the investment.
IAS 38 Intangible Assets – Advertising and promotional activities
IAS 38 is amended to clarify the timing of recognition of an expense for advertising and promotional activities. In the case of goods (for example, catalogues), an expense is recognised when the entity has the right to access those goods. A right to access goods is received by the entity when the supplier has made them available to the entity. In the case of services (for example, airing an advertisement on television), an expense is recognised when the entity receives those services. A prepayment can be recognised as an asset only when payment has been made in advance of the entity obtaining the right to access the goods or receiving the services.
The clarification is likely to impact current practice. For example, say a retailer who wants to distribute catalogues to its customers in order to advertise its products, orders 1000 catalogues to be printed from a print shop. The retailer’s year-end is 31 December 2009, the catalogues are delivered to the retailer on 28 December 2009 and only distributed to the customers in January 2010. The cost of the catalogues would need to be expensed in 2009 since the retailer had access to the catalogues then.
IAS 40 Investment Property – Property under construction or development for future use as investment property
IAS 40 is amended to include property under construction or development for future use as investment property in its definition of ‘investment property’. This results in such property being within the scope of IAS 40; previously it was within the scope of IAS 16.
IAS 41 Agriculture – Additional biological transformation
The previous prohibition in IAS 41 from considering ‘additional biological transformation’ when calculating fair value using discounted cash flows has been deleted. The amendment also clarifies that a discounted cash flow model is used to estimate a market-based value of the asset in its current location and condition.
As noted above, the IASB has many projects that it has been and/or is currently working on in order to improve the quality of financial reporting standards and working towards achieving convergence of global accounting standards. It is worth noting that in 2007 the Securities Exchange Commission (SEC) approved the application of IFRS in the preparation of financial statements of foreign companies listed on the New York Stock Exchange without a reconciliation to US GAAP. In fact, the SEC is considering a proposal to permit US companies to apply IFRS rather than US GAAP.
The following highlights those new or amended standards that are effective during 20091:
IAS 1 (AC 101) Presentation of Financial Statements – New format and terminology
This revised standard introduces the concept of ‘total comprehensive income’. Total comprehensive income is defined as the change in equity for the period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. ‘Other comprehensive income’ comprises items of income and expense that are not recognised in profit or loss as required or permitted by the standards. Although the standard uses new terminology, for example, what was previously referred to as a ‘balance sheet’ is now a ‘statement of financial position’, the new terminology is not mandatory. A set of financial statements now comprises: a statement of financial position (balance sheet), a statement of comprehensive income (either in one statement or an income statement, and a separate statement of items recognised in other comprehensive income), a statement of changes in equity (showing only owner movements in equity), a statement of cash flows and notes to the financial statements.
IAS 23 (AC 114) Borrowing Costs
The benchmark treatment of expensing borrowing costs has been deleted, which means that all borrowing costs need to be capitalised where there are qualifying assets. This amendment could have a significant impact because many South African companies currently do not capitalise borrowing costs.
IFRS 2 (AC 129) Share-based Payment – Vesting conditions and cancellations
This amendment clarifies that vesting conditions are either service or performance conditions, and that performance conditions must require, either explicitly or implicitly, services to be rendered by the counterparty. All other conditions that need to be satisfied are non-vesting conditions, which should be factored into the fair value of the equity instruments and are not subject to any true-up if the conditions are not met. For example, if, under an employee share-option scheme at a gold mining company, share options can only be exercised if the gold price reaches $1000 per ounce, this would be a non-vesting condition. Therefore, if any service conditions are met (an IFRS 2 charge is recognised in profit and loss over the service period), but the target gold price is not met, there can be no reversal of any previously recognised IFRS 2 charge.
IFRS 8 (AC 145) Operating Segments
This new standard replaces IAS 14 Segment Reporting. IFRS 8 is fundamentally different from IAS 14 in that it requires segment identification and segment information to be determined and presented ‘through the eyes of management’ – i.e. on the basis used by the chief operating decision maker for allocating resources and evaluating the performance of components of the business. IAS 14 specified how segments should be determined and required segment information to be IFRS-compliant.
IFRS 3 (AC140) Business Combinations and IAS 27 (AC132) Separate and Consolidated Financial Statements
These revised standards bring about some significant changes to accounting for business combinations and investments in subsidiaries. For example, transaction costs need to be expensed, they cannot be included in the purchase price (and ultimately included in goodwill); goodwill can be recognised in respect of the non-controlling interest (minority interest); reacquired rights need to be recognised at fair value (previous standard was silent); settlement of pre-existing relationships gives rise to gains or losses (previous standard was silent); in step acquisitions, previous non-controlling equity interests held are deemed to be disposed of at fair value, which is then included in the purchase price to determine goodwill; and similarly on disposal of a controlling interest, the interest retained is also measured at fair value, which is included in the sale proceeds to determine the profit or loss on disposal.
Under the revised IAS 27, transactions to increase or decrease an investment in a subsidiary while maintaining and retaining control are treated as equity transactions – i.e. there can be no impact on profit or loss or any asset (including goodwill) or liability. Only once control is lost is there an impact on profit or loss. Also, there is no longer a restriction on allocating losses of a subsidiary to the non-controlling interest (minority interest) – the non-controlling interest can have a debit balance.
IFRS 1 (AC 138) First-time Adoption of IFRS and IAS 27 (AC132) Separate and Consolidated Financial Statements
The most significant change here relates to the treatment of dividends received. There is no longer a requirement to determine whether they were paid out of pre- or post-acquisition profits to determine whether they should be shown as revenue or as a reduction of the investment. Now, all dividends should be recognised in profit or loss. An impairment test may then be required to be performed to determine whether any write-down is required.
IAS 32 (AC 125) Financial Instruments: Presentation – Puttable instruments
The amendment permits the classification of certain financial instruments as equity, which would ordinarily be classified as financial liabilities, as long as certain requirements are met. This amendment is not expected to have wide-spread application given that one of the requirements is that the instruments need to be the most subordinate class of instruments. For a company, the most subordinate class of instruments is the ordinary shares, which anyway are equity. The amendment is likely to be applicable to unit trusts and similar entities that do not have ordinary shares.
For completeness, it is noted that the following interpretations2 are also effective during 2009:
- IFRIC 13 (AC 446) Customer Loyalty Programmes – effective for annual periods beginning on or after 1 July 2008;
- IFRIC 15 (AC 448) Construction of Real Estate – effective for annual periods beginning on or after 1 January 2009; and
- IFRIC 16 (AC 449) Hedges of a Net Investment in a Foreign Operation – effective for annual periods beginning on or after 1 October 2008.
Do not wait for 2009 or worse, 2010. Start preparing now for the next wave of changes in accounting standards. They are likely to affect your financial reporting.
1 This is at the time of writing the article
2 This is at the time of writing the article
Kim Bromfield CA(SA), is a Partner in the Technical Department of Professional Practice at KPMG.