IFRS: What should boards and audit committees be ... - IAS Plus

InventoryGeneral Requirements Potential Differences from U.S. GAAP••••••Primary standard – IAS 2Guidance addresses the recognitionand measurement of inventoryAlternatives for measuring the cost of inventoryinclude FIFO and weighted average cost; “retailmethod” also is allowed if it approximates costThe same cost formula must be used for all inventoryhaving a similar nature and useThe subsequent measurement of inventory is basedon the lower of cost or “net realizable value”NRV is the estimated selling price of the inventoryin the ordinary course of business less the estimatedcosts of completion and of making the sale•••••Use of LIFO as a measurement basis for inventory isprohibited under IFRSInventory is required to be measured at the lower ofcost or NRV, which may not be the same as a “marketvalue”Same cost formula must be used for inventory of asimilar natureCosts related to asset retirement obligations may beincluded as part of inventory cost basis, rather thanproperty, plant and equipment (PP&E)Impairment charges on inventory are required to bereversed, if certain criteria are metImplementation Considerations•••••Data capture may be more or less detailed leading to possible inventory system changesCost formulas for inventories whose nature and use are similar may need to be aligned throughout the entityNRV will need to be calculated and trackedProcesses and controls will need to be developed for monitoring whether inventory impairment should besubsequently reversedChanges in the measurement basis of inventory may affect income taxes, particularly if LIFO currently is used as ameasurement basis• Changes pending: NoneKey Questions to Ask••••Will the basis of inventory measurement change?What processes are in place to monitor the reversal of inventory impairment?Have tax implications been assessed relating to potential changes in accounting for inventory?Has the cost formula been adjusted to include capitalized inventory costs, such as those associated with assetretirement obligations?Consolidation PolicyGeneral Requirements Potential Differences from U.S. GAAP••••••••Primary standard – IAS 27Key issue is determining whether “control” existsAll controlled entities are required to beconsolidated, with limited exceptions for certainnonpublic entitiesControl is the power to govern the financial andoperating policies of an entity so as to obtainbenefit from its activitiesGuidance provides a number of control “indicators”that focus on governance and decision-makingactivities, as well as economic factors such asbenefits and risksPotential voting rights must be considered whenassessing whether control existsEntities holding less than majority of voting rightsmay still consolidate under “de facto” controlGuidance also included on the presentation of theparent’s separate financial statements••••Overall consolidation approach is based on whether anentity controls another; applies to all types of entitiesregardless of legal structureThere is no exception from consolidation for “investmentcompanies”The accounting policies of all subsidiaries must beconformed to those used in consolidationThe reporting dates of all subsidiaries must be conformedImplementation Considerations••••Determining whether entities should be consolidated will require increased judgmentProcesses and controls will need to be developed for monitoring potential voting rights and whether they arecurrently exercisable or convertibleProcesses for the capture of financial data related to all controlled entities will need to be developed, and accountingpolicies and reporting dates will need to be conformedChanges in the reporting entity as a result of more or fewer entities consolidated may affect income taxes• Changes pending: The IASB is currently working on a new consolidation standard, as part of a joint project withthe FASB, which will revise the definition of control, include more application guidance, and require enhanceddisclosures. In addition, the FASB issued guidance (Statement 167) in June 2009 to improve the financial reportingfor variable interest entities.Key Questions to Ask••••Will more or fewer entities be consolidated, and how will that affect existing transactions between or among entitieswithin the consolidated group?What processes are in place for making judgments about consolidation policy?Do the reporting dates or accounting policies of any entities within the consolidated group differ?Are the current information systems capable of capturing the information needed to reflect changes in the reportingentity?IFRS: What should boards and audit committees be considering now? 11