International Financial Reporting Standard 9 “Financial Instruments”

IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The two classification criteria is identified as the following:

• The business model test – is the asset held within a business model whose objective is to hold assets in order to collect contractual cash flows (rather than to sell the instrument before its contractual maturity to realize its fair value changes?
• The cash flow characteristic test – Do the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the outstanding principal?

If the financial asset satisfies the two classification criteria above, the financial asset typically must be measured at amortized costs and financial assets that do not meet the above criteria are required to be measured at fair value.

The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39. IFRS 9 is intended to improve comparability and make financial statements easier to understand for investors and other users.

The effective date for mandatory adoption of IFRS 9, Financial Instruments, is for annual periods beginning on or after January 1, 2013, with early adoption permitted.

 

IFRS adoption to require risk planning and changes to internal controls

Based on the Securities and Exchange Commission’s proposed road map for the adoption of International Financial Reporting Standards, U.S. companies would be required to perform U.S. GAAP/IFRS parallel accounting over a multiyear period.  In creating a parallel accounting environment, the internal control and operational audit staff may need to consider the ramifications of modifying the company’s systems and processes.   Companies can leverage the expertise of their Sarbanes-Oxley compliance staff to evaluate the effects of IFRS conversion to business processes and internal control over financial reporting.

IASB amends the retrospective application of IFRSs for first-time adopters

On July 23, 2009, The International Accounting Standards Board (IASB) issued amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendments address the retrospective application of IFRSs to particular situations and are aimed at ensuring that entities applying IFRSs will not face undue cost or effort in the transition process.

The amendments:

• exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets.
• exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance with IFRIC 4 Determining whether an Arrangement contains a Lease when the application of their national accounting requirements produced the same result.

 IASB Proposes Guidance for the Preparation and Presentation of Management Commentary

The IASB has issued for public comment an exposure draft, Management Commentary, which provides a proposed non-mandatory framework to help entities prepare and present a narrative report, often referred to as “management commentary.” Management commentary is an opportunity for management to outline how an entity’s financial position, financial performance and cash flows relate to management’s objectives and its strategies for achieving those objectives. The information contained in management commentary is of interest to investors and other users of financial statements. However, while management commentary reporting is mandatory in many jurisdictions, some do not have guidance for this type of narrative report. Many preparers and users therefore indicated a need for the IASB to provide such guidance. This proposal draws upon international best practice in the preparation and presentation of management commentary. The IASB believes that providing non-mandatory guidance will improve the consistency and the comparability of management commentary across jurisdictions.

Comments on this proposal are due March 1, 2010.

IFRS for Private Entities

The IASB has been working since 2003 to develop an IFRS designed to meet the financial reporting needs of private entities.  The standard is now finished and expected to be issued in late June 2009.

The standard will be applicable for an entity that does not have public accountability, which generally means its securities are not publicly traded and it is not a financial institution.  The standard differs from the full IFRS in that it will be a little over 200 pages, as compared to 2,855 pages in the 2009 IFRS “Bound Volume”.  It’s organized by topic and also differs significantly in content with five types of simplifications:

•  Some topics in IFRSs are omitted if irrelevant to private entities- for example, earnings per share, operating segments, interim reporting.
•  Most of the complex options in full IFRSs are omitted- for example, only the cost method is permitted for PPE and borrowing costs should always be expensed.
•  Simplified principles for recognizing and measuring assets, liabilities, income and expense, with limited details (for example, goodwill is amortized, the cost method is used for associates and joint venture, all R&D is expensed, there is much less fair value).
•  Reduced disclosures (roughly 400 as compared to 3,000 in full IFRSs)
•  Simplified drafting.

 IFRS Updates

 IASB Amends Financial Instrument Disclosures

On March 5, 2009, the IASB issued Improving Disclosures About Financial Instruments (Amendments to IFRS 7), which requires enhanced disclosures about fair value measurements and liquidity risk.  The new disclosures introduce a three-level hierarchy for fair value measurement disclosures and “require entities to provide additional disclosures about the relative reliability of fair value measurements.”  The amendments are required for annual periods beginning on or after January 1, 2009; however, comparative disclosures in the first year of application are not required.

IASB Proposes New Consolidation Standard

In December 2008, the IASB issued an exposure draft (ED) that would amend IAS 27, “Consolidated and Separate Financial Statements” requirements for identifying which entities a company controls and therefore must include in its consolidated financial statements. 

The IASB states on its Web site that the consolidation exposure draft proposes a “new, principle-based, definition of control of an entity that would apply to a wide range of situations and be more difficult to evade by special structuring.  The proposals also include enhanced disclosure requirements that would enable an  investor to assess the extent to which a reporting entity has been involved in setting up special structures and the risks to which these special structures expose the entity.”

The exposure draft defines “control of an entity” as follows:

A reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity

The ED further clarifies that a “reporting entity can have power even if…it has not exercised its voting rights or options to acquire voting rights, or is not actively directing the activities of another entity.”

In addition, the ED proposes guidance on “how to assess power and returns when:
• A reporting entity has less than a majority of the voting rights
• Assessing control of a structured entity