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Current issues of existing and planned IFRS

Current issues of existing and planned IFRS. Roundtable, Moscow, 8 June 2006 Prof. Dr. Hans-Georg Bruns, Liaison Board Member (Germany) International Accounting Standards Board, London. Outline. Overview Status of the SME project Business Combinations II Financial Statements Presentation

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Current issues of existing and planned IFRS

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  1. Current issues of existing and planned IFRS Roundtable, Moscow, 8 June 2006 Prof. Dr. Hans-Georg Bruns, Liaison Board Member (Germany) International Accounting Standards Board, London

  2. Outline • Overview • Status of the SME project • Business Combinations II • Financial Statements Presentation • Revenue Recognition • Status of the project Extractive Industries • Measurement • Fair value approach of FASB

  3. I. Overview

  4. Projects on the agenda • Convergence FASB • Conceptual Framework • Revenue Recognition • Financial Instruments • Financial Statements Presentation • Business Combinations • Consolidation • Insurance • SMEs

  5. Research – what the future holds • Measurement objectives • Concessions • Extractive industries • Hyperinflation • Intangible assets • Investment entities • Joint Ventures • Leases • Management commentary

  6. SEC 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

  7. Additions to agenda needed • Derecognition (x) • Fair Value measurement • Financial Instruments – Replacement (x) • Intangible assets (x) • Leases (x) • Pensions (x) on Research agenda already

  8. II. Status of the SME project

  9. Objective 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

  10. IASB’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 2004 • 120 responses

  11. January 2005 Decisions • Board discussed responses in late 2004 • In Jan. 2005 made tentative decisions: • Clear demand for IASB SME standards • Focus on non-publicly accountable entities that publish general purpose financial statements for external users; no quantified “size test” • Each jurisdiction should develop detailed guidelines on which entities are eligible to use • Board will consider recognition and measurement simplifications – based on user needs and cost/benefit

  12. January 2005 Decisions • “Mandatory fallback” to full IFRS if the SME standard does not address an issue – Yes • “Optional fallback” to full IFRS if SME standard is different from full IFRS – No • Clear disclosure that SME standards are being followed, rather than full IFRSs – Yes • Organise SME standards by topic, with cross-references to the numbered IASs/IFRSs • Add preparers and users to Working Group • Conduct round tables with preparers and users

  13. Recognition and Measurement Questionnaire • 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

  14. Recognition and Measurement Questionnaire • 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.

  15. Recognition and Measurement Questionnaire • 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.

  16. Recognition and Measurement Questionnaire • 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.

  17. 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.

  18. Draft Exposure Draft (2) • 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.

  19. Draft Exposure Draft (3) • 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.

  20. Draft Exposure Draft (4) • 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.

  21. Draft Exposure Draft (5) • Comments about the draft ED: • Goals of: • High quality standards. • Meet SME user needs. • Reduce preparer burden. • Broadly consistent with full IFRSs. • Global applicability.

  22. Draft Exposure Draft – Section of Draft ED (1) IN Introduction 1 Concepts and Pervasive Principles 2 Financial Report of an SME 3 Balance Sheet 4 Income Statement 5 Statement of Changes in Equity 6 Cash Flow Statement • Notes to the Financial Statements Model Financial Statements 8 Consolidated Financial Statements

  23. Draft Exposure Draft – Section of Draft ED (2) 9 Accounting Policies, Estimates, and Errors 10 Financial Assets and Financial Liabilities 11 Inventories 12 Investments in Associates 13 Investments in Joint Ventures 14 Investment Property 15 Property, Plant and Equipment 16 Intangible Assets Other Than Goodwill

  24. Draft Exposure Draft – Section of Draft ED (3) 17 Business Combinations and Goodwill 18 Rights and Obligations under Leases 19 Assets Held for Sale • Provisions and Contingencies • Equity • Revenue • Construction Contracts • Government Grants • Borrowing Costs

  25. Draft Exposure Draft – Section of Draft ED (4) 26 Share-Based Payment 27 Impairment of Assets 28 Employee Benefits 29 Income Taxes 30 Financial Instruments – Additional Issues 31 Financial Reporting in Hyperinflationary Economies 32 Foreign Currency Translation • Segment Reporting

  26. Draft Exposure Draft – Section of Draft ED (5) • Events After the Balance Sheet Date • Related Party Disclosures 36 Earnings Per Share 37 Specialised Industries 38 Discontinued Operations 39 Interim Financial Reporting 40 First-Time Adoption of IFRSs for SMEs

  27. Next Steps Please understand that these dates are tentative: • Exposure Draft – by 30 June2006 • Field tests? • Final Standard – by 30 June 2007 • Effective – 2008

  28. III. Business combinations II

  29. Business 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

  30. Significant proposed Amendments (1) • Goodwill Proposed treatment Current treatment Goodwill Full Goodwill Fair Value of the acquiree Cost Acquirer’s interest in the net fair value of recognised identifiable assets / liabilities* Net amount of the recognised identifiable assets and liabilities * including contingent liabilities recognised in accordance with paragraph 36

  31. Significant proposed 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

  32. Significant proposed Amendments (3) • 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

  33. Significant proposed Amendments (4) • 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)

  34. Significant proposed Amendments (5) • 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

  35. Significant proposed Amendments (6) • 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 thefair value of any remaining investment and the interest in the carrying amount of the former subsidiary ’s net asset

  36. Significant proposed Amendments (7) • 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

  37. IV. Financial StatementsPresentation

  38. Objective • Define common financial reporting package • Improve decision-relevance of information provided • Better relationship to market metrics • Better integration of information across statements

  39. Background (1) • Boards started their separate projects independently because of user demand for improvement • Some progress made • Common conclusions on need to segregate financing • Some differences in direction in other areas

  40. 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

  41. Segment A Decisions (IASB) • Required financial statements agreed • Will be exposed for comment as ED in Q1 2006 • No changes to information already required to be presented • Change to where some information is presented • income and expenses must not be presented in the statement of changes in equity

  42. Complete Set of Financial Statements -- 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

  43. Other Requirements • Each statement shown with equal prominence • Comparative information for one year • EPS required on face of Earnings Statement only for net income • All other per share amounts disclosed in notes

  44. Statement of Recognised Incomeand Expense (1 statement) Sales xxxxx Cost of sales (xxxxx) Gross profit xxxxx Expenses (xxxxx) Profit before taxes xxxx Income taxes (xxxx) Profit or loss for the periodxxxx Changes in AFS securities (xxxx) Change in FX translation xxxx Change in cash flow hedges (xxxx) Total recognised income and expensexxxx

  45. Statement of Recognised Income and Expense (2 statements) Sales xxxxx Cost of sales (xxxxx) Gross profit xxxxx Expenses (xxxxx) Profit before taxes xxxx Income taxes (xxxx) Profit or loss for the periodxxxx

  46. Statement of Recognised Income and Expense (2 statements) Profit or loss for the periodxxxx Changes in AFS securities (xxxx) Change in FX translation xxxx Change in cash flow hedges (xxxx) Total recognised income and expense xxxx

  47. Segment 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

  48. V. Revenue Recognition

  49. Overview • Joint project with FASB • Objectives: • Amend IASB Framework • New standard to replace IAS 18 Revenue • Discussion Paper in 2006

  50. Objectives • 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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