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

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Financial Statement PresentationGeneral Requirements Potential Differences from U.S. GAAP••••••Primary standards – IAS 1, IAS 7, IAS 8, IAS 10, IAS24, IAS 33, IAS 34, IFRS 5, IFRS 8Guidance addresses the basic form and contentof financial statements and includes generalconsiderations such as fair presentation, goingconcern, accrual accounting, consistency ofpresentation, materiality and offsettingFinancial statement components include a statementof financial position, statement of comprehensiveincome, statement of changes in equity, statement ofcash flows, and notes to the financial statementsMay have a “condensed” presentation for interimreportingCertain disclosures are required for public companies(e.g., EPS, segments)No specific industry guidance•••••Format and structure of the financial statements;may present alternative performance measures;no “extraordinary items” in the statement ofcomprehensive income; classification of expenses maybe based on function or natureCash-flow classification of interest, dividends, incometaxes and bank overdrafts; disclosure of discontinuedoperations by categoryLevel and nature of disclosure in the notes to thefinancial statements; more of a focus on judgmentsmade and assumptions usedEvents occurring after the reporting period do notaffect classifications as of the end of the reportingperiod (i.e., refinancing of bank loans or debt covenantwaivers)Narrower definition of a discontinued operationImplementation Considerations•••••Data capture may be more or less detailed, which could lead to changes in the chart of accountsThe process around monitoring debt covenants or calculating EPS may need to be revisitedDisposals may result in more or less discontinued operationsManagement reporting may change as a result of different financial statement formats and the use of alternativeperformance measuresCommunication with investors may be affected as financial statement formats; questions may be asked aboutaccounting differences and how general principles were applied• Changes pending: There is an IASB/FASB joint project to develop a comprehensive standard for the organizationand presentation of information in the financial statements with an emphasis on presentation of a cohesive pictureof an entity’s operations and enhanced cash flow information to assess liquidity and financial flexibility. An exposuredraft is expected in early 2010 with a final standard in 2011. The boards also have a joint project to develop acomment definition of a discontinued operation, which is expected to be finalized by early 2010.Key Questions to Ask•••••How would the presentation format change?What is the potential impact on EPS?What are the key performance measures and how will they change?How do the presentation formats compare with those of others in the industry?Is a communication strategy in place to address reporting under IFRS?RevenueGeneral Requirements Potential Differences from U.S. GAAP••••••Primary standards – IAS 11, IAS 18Guidance addresses general principles related torevenue from the sale of goods and services; littledetailed guidance; also addresses revenue frominterest, royalties and dividendsA key issue is understanding the “unit of account”(i.e., combining and segmenting contracts, multipleelement arrangements)Principles relating to the sale of goods focus on thetransfer of “risks and rewards” and “control” overthe goodsRevenue from the sale of services is recognized basedon the “percentage of completion”Emphasis on fair-value measurement of theconsideration received•••Overall level of guidance is much less; limited detailedguidance resulting in more judgment in determiningrevenue recognition policiesVariances in applying judgment may result indifferences in the revenue recognition related toarrangements with multiple elements and thoseinvolving upfront fees; as well as in real estate sales andother industry issuesContract accounting – when the stage of completioncannot be estimated reliably, revenue is recognizedto the extent that recoverable expenses have beenincurredImplementation Considerations•The selection of revenue recognition policies will require increased judgment; an overall approach to revenuerecognition will need to be developed that focuses on a judgment frameworkData capture may be more or less detailed, which could lead to information systems changesContract designs may be affectedChanges in the timing of revenue recognition may affect income taxes• Changes pending: There is an IASB/FASB joint project to develop a single contract-based model for revenuerecognition upon completion of performance obligations that can be applied consistently across industries andgeographies. An exposure draft is expected in 2010 with a final standard in 2011.•••Key Questions to Ask•••What is the overall approach to revenue recognition and how does it compare to others in the industry?What processes are in place for decision-making regarding revenue recognition, and are the appropriate resourcesinvolved?Are revenue policy disclosures sufficient?12
Business CombinationsGeneral Requirements Potential Differences from U.S. GAAP•••••••Primary standard – IFRS 3Based on the “control” notionGuidance addresses the accounting by the acquirer;requires use of the acquisition method for therecognition and measurement of assets acquired,liabilities assumed and any noncontrolling interests inthe acquired entityRestructuring provisions are generally prohibited fromrecognition as acquired liabilitiesTransaction costs are expensedGuidance addresses the accounting for goodwill;annual impairment test is required; no amortization,and the deferral of “negative goodwill” is prohibitedScope includes transactions involving mutual entitiesand control by contract; does not address commoncontrol transactions••••May account for noncontrolling interests at either fullfair value or the fair value of the proportionate share ofthe net assets acquired; accounting policy choice on atransaction-by-transaction basisAcquisition of noncontractual liabilities are initiallyrecognized at fair value; subsequent measurement maybe differentAccounting for common control transactions are notaddressedRelated pro forma financial information is required forall entities (public and nonpublic)Implementation Considerations••Processes for the capture of financial information related to business combinations will need to be developed,particularly for fair-value information related to contingent liabilitiesChanges in the amount of certain items acquired or assumed in a business combination and the related goodwill mayaffect income taxes• Changes pending: NoneKey Questions to Ask•••How will the terms and structuring of future business combination transactions be affected?What will be the effect of any changes in the valuation of assets acquired and liabilities assumed?How will any future exit strategies or other restructuring plans related to acquired businesses be affected?Investments in Associates & Joint VenturesGeneral Requirements Potential Differences from U.S. GAAP•••••••Primary standards – IAS 28 and 31Key issue is determining whether “significantinfluence”/“joint control” existsSignificant influence is the power to participatein financial and operating policy decisions of theentity Entities where significant influence exists areconsidered to be “associates” and are accounted forusing the “equity method”Investment in an associate is initially recognized atcost; subsequent carrying amount is increased ordecreased based on investor’s share of profit/loss ofassociate; distributions reduce the carrying amountThere are scope exceptions for “investment”companies and investments “held for sale”Joint control exists when the financial and operatingpolicy decisions require the consent of all venturersthrough the contractual sharing of controlInvestments in jointly controlled entities may beaccounted for under either the equity method ofaccounting or the “proportionate consolidation”method. The proportionate consolidation method isexpected to be eliminated•••••••Exception from equity accounting for associates / jointventures held for salePotential voting rights must be considered whenassessing whether significant influence / joint controlexistsThe accounting policies of all associates / joint venturesmust be conformedThe reporting dates of all associates / joint venturesmust be conformedIf losses exceed the interest in associate, discontinuerecognition unless a legal obligation existsImpairment testing not based on an “other thantemporary” notionProportionate consolidation, used in some industries(e.g., oil and gas, real estate) under U.S. GAAP, to bediscontinued as a policy option under IFRSImplementation Considerations••••Determining whether entities should be considered associates or jointly controlled entities will require increasedjudgmentProcesses 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 for all entities being accounted for as associates or jointly controlledentities will need to be developed, and accounting policies and reporting dates will need to be conformedChanges in the reporting entity as a result of more or fewer entities being accounted for as associates or jointlycontrolled entities may affect income taxes• Changes pending: The IASB’s ED for the Joint Ventures project (ED 9, Joint Arrangements) proposed theelimination of the proportionate consolidation accounting policy option. The IASB is currently in the process offinalizing the new Joint Arrangements standard.Key Questions to Ask••••••Will more or fewer entities be accounted for under the equity method of accounting?Will more or fewer entities be considered joint ventures?What changes will need to be made to the joint venture arrangements?What processes are in place relating to making judgments related to the accounting for associates or joint ventures?Do the reporting dates or accounting policies of any investments in associates or jointly controlled entities differ?Are the current information systems capable of capturing the information needed to account for investments inassociates and joint ventures?IFRS: What should boards and audit committees be considering now? 13
Page 2: Contents3 Foreword by Jim Quigley4
Page 7 and 8: --What steps are being taken to edu
Page 9 and 10: ConclusionWith IFRS so clearly on t
Page 11: InventoryGeneral Requirements Poten
Page 15 and 16: Intangible AssetsGeneral Requiremen
Page 17 and 18: Employee BenefitsGeneral Requiremen
Page 20: #9126About DeloitteDeloitte refers

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

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