current issues of existing and planned ifrs

®International Accounting Standards

Board

Current issues of existing and planned IFRS

Roundtable, Moscow, 8 June 2006Roundtable, Moscow, 8 June 2006

Prof. Dr. Hans-Georg Bruns, Liaison Board Member (Germany)Prof. Dr. Hans-Georg Bruns, Liaison Board Member (Germany)International Accounting Standards Board, LondonInternational Accounting Standards Board, London

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OutlineOutline

I. OverviewII. Status of the SME projectIII. Business Combinations IIIV. Financial Statements Presentation V. Revenue RecognitionVI. Status of the project Extractive IndustriesVII. MeasurementVIII. Fair value approach of FASB


Board

I. OverviewI. Overview

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Projects on the agendaProjects on the agenda

Convergence FASB Conceptual Framework Revenue Recognition Financial Instruments Financial Statements Presentation Business Combinations Consolidation Insurance SMEs

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Research – what the future holdsResearch – what the future holds

Measurement objectives Concessions Extractive industries Hyperinflation Intangible assets Investment entities Joint Ventures Leases Management commentary

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SEC RoadmapSEC Roadmap

2005 – 2007 Application of IFRS Investors gain knowledge All share implementation experiences

2007 – 2009 Status of IFRS/GAAP convergence SEC review additional filings Evaluate significance of differences Recommend elimination of reconciliation

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Additions to agenda neededAdditions to agenda needed

Derecognition (x) Fair Value measurement Financial Instruments – Replacement (x) Intangible assets (x) Leases (x) Pensions

(x) on Research agenda already


Board

II. Status of the SME projectII. Status of the SME project

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Objective of the ProjectObjective of the Project

IASB standards for SMEs should: Reduce the burden on SMEs preparing financial

statements Meet needs of users of SME financial statements Be based on full International Financial

Reporting Standards (IFRSs), but simplified by reduced disclosures and maybe some changes to recognition and measurement principles

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IASB’s Preliminary ViewsIASB’s Preliminary Views

IASB deliberated SME standards during second half of 2003 and early 2004:

Reached some preliminary views on the approach

Discussion Paper June 2004120 responses

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January 2005 DecisionsJanuary 2005 Decisions Board discussed responses in late 2004 In Jan. 2005 made tentative decisions:

1. Clear demand for IASB SME standards

2. Focus on non-publicly accountable entities that publish general purpose financial statements for external users; no quantified “size test”

3. Each jurisdiction should develop detailed guidelines on which entities are eligible to use

4. Board will consider recognition and measurement simplifications – based on user needs and cost/benefit

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January 2005 DecisionsJanuary 2005 Decisions

5. “Mandatory fallback” to full IFRS if the SME standard does not address an issue – Yes

6. “Optional fallback” to full IFRS if SME standard is different from full IFRS – No

7. Clear disclosure that SME standards are being followed, rather than full IFRSs – Yes

8. Organise SME standards by topic, with cross-references to the numbered IASs/IFRSs

9. Add preparers and users to Working Group

10. Conduct round tables with preparers and users

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Recognition and Measurement Recognition and Measurement QuestionnaireQuestionnaire

1 April 2005: Brief questionnaire was sent to all DP

respondents, SAC, Working Group, and posted for public response

To identify recognition and measurement issues for discussion at round tables

101 responses received

®Recognition and Measurement Recognition and Measurement QuestionnaireQuestionnaire

Recognition and measurement means: Some items recognised as assets and liabilities

under full IFRSs might not be recognised by SMEs.

Example: Deferred taxes. Some assets, liabilities, income, and expenses

might be measured differently by SMEs than under full IFRSs.

Example: Premium or discount amortised straight-line rather than effective interest method.


28 June 2005: Discussed responses with IASB’s

Advisory Council and received views. 29-30 June 2005:

IASB SME Working Group met. Discussed responses. Recommendations to the Board.


26 September Discussion with World Standard Setters

from over 40 countries. 13-14 October 2005:

Round-table discussions of possible recognition and measurement simplifications.

43 groups participated.

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Draft Exposure Draft (1)Draft Exposure Draft (1)

January 2006 IASB staff presented a draft ED to the Board.

Preliminary discussion. Working Group – 2 days discussion of draft ED.

Views sent to Board. February 2006

ED discussed by Board in detail. March 2006

Discussion continues.

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Comments about the draft ED: Organised by topic. 40 sections. Each paragraph cross-referenced back to

full IFRS. Nearly all “black letter” paragraphs from

IFRSs are included. Except where there is cross reference back to

an IFRS.

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Comments about the draft ED: Pervasive principles up front – look to in

absence of specific standard. No “black-letter/grey letter” distinction. Model financial statements. 233 pages, but sections on financial

instruments, taxes, several others to be added. Full IFRSs now 2,400 pages.

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Comments about the draft ED: ED developed by considering needs of

company with 50 employees and annual revenue of approximately €10 million.

Which companies are required or permitted to use is up to each individual jurisdiction.

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Comments about the draft ED: Goals of:

High quality standards. Meet SME user needs. Reduce preparer burden. Broadly consistent with full IFRSs. Global applicability.

®Draft Exposure Draft – Section of Draft Exposure Draft – Section of Draft ED (1)Draft ED (1)

IN Introduction1 Concepts and Pervasive Principles2 Financial Report of an SME3 Balance Sheet4 Income Statement5 Statement of Changes in Equity6 Cash Flow Statement7 Notes to the Financial StatementsModel Financial Statements8 Consolidated Financial Statements

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Draft Exposure Draft – Section of Draft Exposure Draft – Section of Draft ED (2)Draft ED (2)

9 Accounting Policies, Estimates, and Errors10 Financial Assets and Financial Liabilities 11 Inventories12 Investments in Associates13 Investments in Joint Ventures14 Investment Property15 Property, Plant and Equipment16 Intangible Assets Other Than Goodwill

®Draft Exposure Draft – Section of Draft Exposure Draft – Section of Draft ED (3)Draft ED (3)

17 Business Combinations and Goodwill18 Rights and Obligations under Leases19 Assets Held for Sale20 Provisions and Contingencies21 Equity22 Revenue23 Construction Contracts24 Government Grants25 Borrowing Costs

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26 Share-Based Payment27 Impairment of Assets28 Employee Benefits29 Income Taxes30 Financial Instruments – Additional Issues31 Financial Reporting in Hyperinflationary Economies32 Foreign Currency Translation33 Segment Reporting

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34 Events After the Balance Sheet Date 35 Related Party Disclosures36 Earnings Per Share37 Specialised Industries38 Discontinued Operations39 Interim Financial Reporting40 First-Time Adoption of IFRSs for SMEs

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Next StepsNext Steps

Please understand that these dates

are tentative: Exposure Draft – by 30 June 2006 Field tests? Final Standard – by 30 June 2007 Effective – 2008


Board

III. Business combinations IIIII. Business combinations II

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Business Combinations IIBusiness Combinations II

Joint IASB – FASB project Proposed revised IFRS 3 and SFAS 141R Objectives

Convergence Improvement

Process Comment period ended 28 October Round-tables were held in London and Norwalk The FASB and IASB received 287 comment letters on the

core proposals Redeliberation by the boards is about to commence

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Significant proposed Significant proposed Amendments (1)Amendments (1) Goodwill

Current treatment

Cost

Goodwill

Acquirer’s interest in the net fair

value of recognised

identifiable

assets / liabilities*

Proposed treatment

Fair Value of the

acquireeNet amount

of the recognised identifiable assets and liabilities

Full Goodwill

* including contingent liabilities recognised in accordance with paragraph 36

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Significant proposed Significant proposed Amendments (2)Amendments (2)

Measuring fair value of the acquiree Fair Value of the consideration given

= fair value of the acquirer’s interest in the acquiree and should be used as basis for measuring the fair value of the acquiree

If the consideration does not provide the best basis for measuring the fair value of the acquiree, valuation techniques should be used

Transaction costs Are not part of the fair value and should be recognised

immediately as expense

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Business Combinations achieved in stages Acquirer shall remeasure its non-controlling

equity investment in the acquiree at fair values as of the acquisition date

Acquirer shall recognise any unrealized gains or losses in profit or loss

Contingent Consideration Is part of the consideration given and shall be

measured at fair value at the acquisition date

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Recognising and measuring the assets aquired and liabilities assumed The acquirer shall recognise items acquired

and obligations assumed that are part of the exchange and that meet the definition of assets and liabilities

Recognition at fair value with few exceptions(assets held for sale, deferred taxes, post-employment benefit obligations, operating leases, goodwill)

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Treatment of Contingencies ED clarifies that conditional rights and

obligations are not recognized But an asset that accompanies a contingent

asset and that is identifiable and a liability that accompanies a contingent liability shall be recognised

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Changes in ownership interest without loss of control To be recognised directly in equity

Changes in ownership interest with loss of control Any resulting gain or loss shall be recognised in

profit or loss Gain / loss is the difference between the

proceeds plus the fair value of any remaining investment and the interest in the carrying amount of the former subsidiary ’s net asset

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Attributing losses between controlling and minority interests Allocate on the basis of respective ownership

interests, even if losses exceed the minority interest’s investment in the subsidiary


Board

IV. Financial StatementsIV. Financial StatementsPresentationPresentation

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ObjectiveObjective

Define common financial reporting package

Improve decision-relevance of information providedBetter relationship to market metricsBetter integration of information across

statements

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Background (1)Background (1)

Boards started their separate projects independently because of user demand for improvement

Some progress madeCommon conclusions on need to segregate

financingSome differences in direction in other areas

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Background (2)Background (2)

Project restarted jointly with the FASB Divided into 2 segments

A – package of required financial statements (IASB only)

B – fundamental reconsideration of format and display

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Segment A Decisions (IASB)Segment A Decisions (IASB)

Required financial statements agreed Will be exposed for comment as ED in Q1

2006No changes to information already

required to be presentedChange to where some information is

presented income and expenses must not be presented

in the statement of changes in equity

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Complete Set of Financial Complete Set of Financial Statements -- 1 YearStatements -- 1 Year

Beginning and end of period statements of financial position

Statement of recognised income and expense (1 or 2 statements)

Statement of changes in equity Statement of cash flows Notes

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Other RequirementsOther Requirements

Each statement shown with equal prominence

Comparative information for one year EPS required on face of Earnings

Statement only for net incomeAll other per share amounts disclosed in

notes

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Statement of Recognised IncomeStatement of Recognised Incomeand Expense (1 statement)and Expense (1 statement)

Sales xxxxxCost of sales (xxxxx)Gross profit xxxxxExpenses (xxxxx)Profit before taxes xxxxIncome taxes (xxxx)

Profit or loss for the period xxxxChanges in AFS securities (xxxx)Change in FX translation xxxxChange in cash flow hedges (xxxx)

Total recognised income and expense xxxx

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Statement of Recognised Income Statement of Recognised Income and Expense (2 statements)and Expense (2 statements)

Sales xxxxxCost of sales (xxxxx)Gross profit xxxxxExpenses

(xxxxx)Profit before taxes xxxxIncome taxes (xxxx)

Profit or loss for the period xxxx

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Statement of Recognised Income Statement of Recognised Income and Expense (2 statements)and Expense (2 statements)

Profit or loss for the period xxxx

Changes in AFS securities(xxxx)

Change in FX translation xxxx

Change in cash flow hedges(xxxx)

Total recognised income and expensexxxx

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Segment B ActivitiesSegment B Activities

JIG formed and two meetings held to date

Meetings have provided useful guidance to staff on next issues to pursue

Objective is to develop concepts and issue Discussion Paper for comment in Q4 2006 / early 2007


Board

V. Revenue RecognitionV. Revenue Recognition

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OverviewOverview

Joint project with FASB Objectives:

Amend IASB FrameworkNew standard to replace IAS 18 Revenue

Discussion Paper in 2006

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ObjectivesObjectives

Convergence between IFRS and US GAAP

Single conceptual model to apply to all industries and transaction types

Additional guidance based on model, eg for: multiple-component sales measurement of obligations to customers

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Conceptual modelConceptual model Revenue arises from changes in assets and

liabilities

Liabilities – performance obligations to customers

Every performance obligation has revenue associated with it, eg: obligation to deliver goods

warranty obligation

obligation to accept returns

Amount of revenue recognised depends on measurement of remaining obligations

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Measuring obligations (1)Measuring obligations (1)

First proposal - fair value Fair value = price would have to pay another

party to take over obligation to customer

Concerns! fair value typically less than consideration from

customer so revenue recognised before any obligations

discharged fair value often difficult to measure reliably

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Measuring obligations (2)Measuring obligations (2)

Current proposal – ‘customer consideration amount’

Total contract price allocated among performance obligations

Revenue recognised only when each obligation is discharged.

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Next stepsNext steps

Further work on ‘customer consideration’ model

Definition of revenue

Discussion Paper in 2006


Board

VI. Status of the project Extractive VI. Status of the project Extractive IndustriesIndustries

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Accounting for extractive Accounting for extractive activities (1)activities (1)

The “comprehensive” project to replace IFRS 6 Exploration for and Evaluation

of Mineral Resources – the “interim” Standard Project currently in the research phase Scope of research:

financial reporting of reserves/resources (primary emphasis)

other extractive activity accounting issues (including those identified in 2000 Issues Paper)

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An international project team is progressing the research phase

The project team comprises Australia – leading Canada South Africa Norway

Advisory Panel is assisting project team

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Research Project deliverables: Discussion Paper with IASB preliminary views

timeframe – early-to-mid 2007

Active Project deliverables: Exposure Draft International Financial Reporting Standard

timeframe uncertain and is dependent on: outcomes of Discussion Paper IASB agenda

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Financial reporting of Financial reporting of reserves/resourcesreserves/resources

Key issues…1.How should reserves/resources be

defined?

2.Can or should reserves/resources be recognised as assets at their fair values?

3. If not, should pre-development costs be capitalised or expensed?

4.Should reserves/resources information be disclosed? If so, what information?

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1. Defining reserves/resources (1)1. Defining reserves/resources (1)

No single agreed definition of reserves/resources for the extractive industries as a whole. oil & gas: SPE/WPC/AAPG mining: JORC Code and equivalents, CRIRSCO United Nations Framework Classification for

Energy and Mineral Resources US SEC also has separate definitions for mining

and oil & gas

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1. Defining reserves/resources (2)1. Defining reserves/resources (2)

Key issues… Should existing definitions be used? If so, which

definitions? Or, should the IASB develop its own definitions

(in conjunction with others)? There are some significant differences between

the major mining and oil & gas definitions. Would the use of different definitions for mining and oil & gas adversely affect comparability of financial reports? Any other risks?

What might be the effect on existing reserves/resources reporting requirements?

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2. Applying fair value to 2. Applying fair value to reserves/resources (1)reserves/resources (1)

Do reserves/resources meet the definition of an ‘asset’?

Is the asset capable of being recognised? That is: are future economic benefits probable? can the fair value of reserves/resources be

measured reliably? What would be the impact on comparability

and verifiability of financial reports

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2. Applying fair value to 2. Applying fair value to reserves/resources (2)reserves/resources (2)

Which categories of reserves/resources can (should) be recognised and measured?

When to first recognise reserves/resources as an asset

How to initially and subsequently measure the asset

How to treat changes in measured amounts Whether costs incurred prior to discovery of

reserves/resources should be expensed or capitalised?

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3. Applying historical cost to 3. Applying historical cost to reserves/resourcesreserves/resources

Should pre-production costs be expensed or capitalised? If expensed…

should those expenses be able to be reinstated?

If capitalised…what is the cost centre?how should those costs be subsequently

measured and assessed for impairment?

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4. Reserves/resources disclosures4. Reserves/resources disclosures

Whether different types of mineral reserves/resources should be disclosed separately?

What categories of reserves/resources should be disclosed?

Disclose quantities and/or values (e.g. standardised measure of proved reserves)?

Other disclosures??

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Tentative conclusions so far (1)Tentative conclusions so far (1)

For the definition of reserves/resources… to consider developing an

overarching/generic definition of “resources” to support the recognition and measurement of reserves/resources (which may be at historic cost or fair value) intention is for the definition to be suitable for

both mining and oil & gas to use existing definitions as the basis for the

disclosure of reserve/resource information

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to approach the major setters of industry definitions – CRIRSCO (mining) and SPE (oil & gas) – to explore the feasibility of converging/refining elements of their definitions that may not need to be different between industries or with accounting principles a CRIRSCO/SPE joint working group has been

formed to undertake this review

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to select a preferred set/s of reserves/resources definitions on the basis of which provides the most useful information to users this will involve liaising with the SEC

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Research underwayResearch underway

The project team are currently considering: Application of the IASB Framework’s definition

and recognition criteria to reserves/resources Usefulness and reliability of reserve/resource

volume and value estimates Potential applicability of various historical cost

models to reserves/resources


Board

VII. MeasurementVII. Measurement

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Why is measurement Why is measurement a hot topic?a hot topic?

Trend to increased use of fair value in accounting standards

Enron falloutPerception that accounting requiring

energy derivatives to be carried at fair value allowed manipulation of profit and over-statement of assets

Proposed Amendments to IFRS 3 Business Combinations

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Fair Value is not a new idea (1)Fair Value is not a new idea (1)

Fair value measurement is already extensively used by many entitiesBanks for trading booksCanadian Life insurance companies for all

assets (market related values)Pension plans and mutual funds for all

assets, including real estate and venture capital investments

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Fair Value is not a new idea (2)Fair Value is not a new idea (2)

Fair value measurement is already used in many situationsTo allocate purchase price in business

combinations and other basket purchasesTo measure impairment in value of a

variety of assets (FV less costs to complete and sell)

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The big pictureThe big picture

Canada leading international research project as basis for improving frameworks

“lack of an agreed, coherent set of measurement bases and supporting theory has seriously impeded progress on convergence”

Discussion paper published in November 2005

FASB has limited Measurement project

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Criteria for choosing a Criteria for choosing a measurement basismeasurement basis

Consistent with frameworkObjectives of financial reportingQualitative characteristicsElements of financial statements

Cost/benefit constraint

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Objectives of Objectives of financial reportingfinancial reporting

Decision usefulness to a wide range of usersFor predictive purposesFeedback value in relation to predictive

purposesAssess stewardship

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Qualitative characteristics (1)Qualitative characteristics (1)

UnderstandabilityWill users get it?

RelevanceDoes it make a difference to the decision?

ComparabilityBetween entities and over time

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Qualitative characteristics (2)Qualitative characteristics (2)

ReliabilityRepresentational faithfulnessNeutralityVerifiability

• Knowledgeable, independent observers would agree on amount from applying basis within reasonable degree of precision

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ElementsElements

Assets and liabilities are fundamental building blocks

Primary focus of financial accounting is amount, timing and uncertainty of future cash flows

Relevant attribute for focus of measurement is cash-equivalent expectations

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Measurement alternatives Measurement alternatives

Historical cost Current cost

Reproduction costReplacement cost

Net realizable value Value in use Fair value Deprival Value

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What is fair value?What is fair value?

The amount for which an asset or liability could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

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Fair Value measurement guidanceFair Value measurement guidance

Fair Value

Observable market price for identical or similar assets/ liabilities, if necessary reliable adjustment consistent with market expectations

1

2 Estimation based on accepted model, all inputs based

on market data

Alter-natives

Current cost (replacement cost, reproduction cost, historical cost)3

4 Models that depend significantly on entity-specific

expectations


Board

VIII. Fair Value approach of FASBVIII. Fair Value approach of FASB

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ObjectiveObjective

Define fair value used in US-GAAP

Establish a framework for fair value measurement

Enhance disclosure about fair value

Simplify

and

codify

existing

GAAP

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Definition (1)Definition (1)

Fair value is the price that would be:

received for an asset or paid to transfer a liability

in a current transaction

between marketplace participants

in the reference market for the asset or liability.

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Definition (2)Definition (2)

IASB Exit price objective Distinguished from the entry price Consistent with the definition of assets / liabilities Transaction cost shall not be included

Current Transaction Orderly transaction Absence of a transaction: reference to a hypothetical

transaction Marketplace Participants

Independent Knowledgeable Able to transact Willing to transact

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Fair Value Hierarchy (1)Fair Value Hierarchy (1)

Quoted prices

Levels 2 – 4

Level 5

Level 1

Other Market Inputs

Entity Inputs

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LEVELII

Quoted prices not included within Level I Restricted securities Shall be adjusted as appropriate

Quoted prices for identical assets and liabilities in active markets the entity has the ability to access

Price is quoted in bid and asked prices: price within the bid-ask spread

Not adjusted by a blockage factor

LEVELI

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LEVEL III

LEVELIV

Market inputs not directly observable but corroborated by other market data

Inputs derived through extrapolation or interpolation

LEVELV

Entity inputs Should be developed within market parameters,

eliminating specific entity factors

Inputs other then quoted prices that are directly observable for the asset or liability

Examples: Interest rate, Yield curves, Volatilities, Default rates

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Identified discussion topics Identified discussion topics by IASBby IASB

IASB Exit price objective Distinguished from the entry price Consistent with the definition of assets / liabilities Transaction cost shall not be included

Current Transaction Orderly transaction Absence of a transaction: reference to a hypothetical

transaction Marketplace Participants

Independent Knowledgeable Able to transact Willing to transact

current issues of existing and planned ifrs

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