Revised IASB standards 

 

Standards

Revised IASB standards

Recent changes to some of the IASB standards will have an impact on standards in the United States and Canada.

 

FROM: MAY-JUN 2004 ISSUE | BY STEPHEN SPECTOR

In December 2003, the International Accounting Standards Board (IASB) released revised versions of thirteen of its existing standards. These changes came about as a consequence of the Improvements project begun in 2001. All of the revised standards apply to periods beginning on or after January 1, 2005, with earlier adoption encouraged.

The revised standards will apply for companies required to (or electing to) adopt International Financial Reporting Standards (IFRS) for the first time in their December 2005 financial statements, and will be of critical importance to European Union public companies. They will also have an impact on North America standards because the Norwalk agreement of October 2002 calls for the U.S. Financial Accounting Standards Board and IASB to work to eliminate differences between their standards. Consequently, changes in one set of standards will impact the other.

The thirteen revised IASB standards are:

IAS 1 IAS 2 IAS 8 IAS 10 IAS 16 IAS 17 IAS 21 IAS 24 IAS 27 IAS 28 IAS 31 IAS 33 IAS 40

Presentation of Financial Statements Inventories Accounting Policies, Changes in Accounting Estimates, and Errors Events after the Balance Sheet Date Property, Plant, and Equipment Leases The Effects of Changes in Foreign Exchange Rates Related Party Disclosures Consolidated and Separate Financial Statements Investments in Associates Interests in Joint Ventures Earnings per Share Investment Property

Here is a quick overview of the changes most likely to impact North American standards over the next two years:

IAS 1:
The revisions provide guidance on what is meant by "present fairly" in the context of the auditor's report, and emphasize that the application of IFRS is presumed to achieve a fair presentation. This focus reflects the increasing demands by investors and creditors that the information presented in the financial statements reflects "reality."

In keeping with that goal, IAS 1 requires disclosure of the major judgments, apart from those involving estimations, in the process of applying the entity's accounting policies that have the most significant effect on the amounts recognized in the financial statements. In addition, entities will be required to disclose judgments, estimations, and key assumptions concerning the future where there is considerable risk that a material adjustment to the carrying amounts of assets and liabilities may be necessary within the next financial year.

These are significant changes. The requirements of Sarbanes-Oxley in the United States and the Canadian Securities Administrators Multilateral Instruments in Canada reflect a similar focus. In particular, the need for the CEO and CFO to personally certify that the financial statements "present fairly, in all material respects, the financial condition, results of operations, and cash flows of the issuer" bears witness to the dissatisfaction with current accounting standards. The UK view of "true and fair" seems to be making inroads against the North American concept of "presents fairly … in accordance with GAAP." We may see revisions to Canadian standards to reflect this perspective.

IAS 2:
The use of the last-in-first-out (LIFO) cost formula has been proscribed. While not widely used in Canada due to its prohibition in the Income Tax Act, it is nonetheless, still permitted for accounting purposes. It will be interesting to see if the Accounting Standards Board follows suit, especially since LIFO is permitted in the United States.

IAS 16:
Changes to this standard now stipulate that the amount to be capitalized as an item of "property, plant, and equipment" includes costs incurred to acquire or construct an item of property, plant, and equipment, as well as costs incurred to subsequently add to, replace part of, or service the item. Previously, IAS 16 contained a separate recognition principle for subsequent expenditures — called "betterments" in North America.

Another interesting change is that the amount initially recognized is to include any cost related to the asset's dismantlement, removal, or restoration if the entity bears the obligation for such costs. For example, if as part of the construction of a hydroelectric generating station, the contractor must build a cofferdam to temporarily divert water flow while construction is underway, knowing full well that the cofferdam has to be dismantled, the cost of removal is added to the capitalized amount of the asset.

Such treatment is not found in Canadian or U.S. standards. In North America, standards address "site restoration costs," whereby an entity is responsible for restoring the environment to its pre-use state in certain circumstances. For example, a mining company agrees to restore the landscape and terrain surrounding its mine as close as possible to what it was before mining operations began. However, these costs are recognized separately from the assets associated with the mine.

IAS 24:
Disclosure of the compensation of key management personnel is required, and the definition of "related party" has been expanded by adding three new categories: parties with joint control over the entity; joint ventures in which the entity is a venturer; and post-employment benefit plans for employees of the entity, or of any entity that is a related party.

The impact of these changes is less obvious; however, one thing is clear: the ability to "hide" critical data from investors will become much more difficult as standards extend their ambit. For instance, under the revised IAS 24, it is no longer acceptable to state "related party transactions account for less than 1 per cent of all transactions." Specific amounts must now be provided.

In addition, there still remain differences between the revised IASB standards and Canadian and U.S. standards.

IAS 27:
The standard stipulates that all subsidiaries should be consolidated, except, if at acquisition, control is expected to be temporary, or the subsidiary operates under severe long-term restrictions, which result in the entity losing control. The exemption from consolidation in the case of temporary control has been tightened up relative to what it used to be to specify that there must be an intention to dispose of the investment within twelve months (instead of the "near future," which was open to various interpretations) and that management is actively seeking a buyer. Notwithstanding, Handbooksection 1590 provides no such exemption. In fact, the "temporary control" exclusion was removed from the Handbookin 2002.

IAS 31:
As with IAS 27, IAS 31 allows that when a joint venture is acquired and held with a view to its disposal within twelve months of acquisition, and management is actively seeking a buyer, neither proportionate consolidation nor equity accounting is required. This treatment is inconsistent with Handbooksection 3055, which requires proportionate consolidation with no exclusion for temporary control.

Overall, the IASB has tightened the standards that form the body of International Accounting Standards. Alternatives have been curtailed or eliminated, and differences between IASB standards and North American standards have also been reduced. As the inexorable movement towards a single set of globally acceptable accounting standards continues, these actions bode well for the acceptance of IASB standards as that set.

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Stephen Spector, MA, FCGA, owns Spector and Associates and teaches Financial and Managerial Accounting at Simon Fraser University. He also serves on CGA-BC’s board of governors. E-mail shspector@shaw.ca.