Accounting and Auditing News Today (ANT) Issue No 47 - 8 December 2006

1. New IFRS standard on segment reporting

As a result of the International Accounting Standards Board's (IASB) ongoing convergence work with the FASB, the IASB has now issued new international Financial Reporting Standard (IFRS) 8 'Operating Segments'. In accordance with the IASB's previously announced policy of providing a stable platform, the new standard is applicable for financial years beginning on or after 1 January 2009 although earlier application is permitted. It is expected that the AASB at its meeting next week (13-14 December) will issue the AIFRS version of IFRS 8 without change.

IFRS 8 replaces IAS 14 'Segment Reporting' and aligns IFRS segment reporting requirements with those of the US standard on this topic SFAS 131 'Disclosure about Segments of an Enterprise and Related Information'.

The IFRS requires an entity to adopt the 'management approach' to reporting on the financial performance of its operating segments. It therefore requires explanations of the basis on which the segment information is prepared and reconciliations to the amounts recognised in the income statement and balance sheet. This enables users of financial statements to review the operations through the eyes of the management and provision of timely segment information at few extra costs.

For further information, please go to the IASB website by clicking here.
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2. IFRIC issues interpretation on service concession arrangements

As highlighted in ANT 46 the IASB has now formally issued IFRIC interpretation 12 Service Concession Arrangements. It is applicable for financial years beginning on or after 1 January 2008.

Service Concessions are arrangements whereby a government or other public sector entity grants contracts for the supply of public services such as roads and water supply to private sector operators. Control of the assets remains in public hands but the private sector operator is responsible for construction activities as well as for operating and maintaining the public sector infrastructure.

IFRIC 12 addresses how service concession operators should apply existing IFRSs to account for the obligations they undertake and rights they receive in service concession arrangements.

For further information, visit the IASB website by clicking here.

The AASB is expected to release IFRIC 12 as an Australian Interpretation at its December meeting.
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3. Responding to Exposure Drafts

The Faculty of Economics and Commerce of the University of Western Australia would like to invite you to take about five minutes of your time to respond to our survey on reasons for low responses to proposed accounting standards.

Both the International Accounting Standards Board (IASB) and the Australian Accounting Standards Board (AASB) have a due process where there is an opportunity to comment on proposed accounting standards. The AASB now asks constituents to respond on exposure drafts to both the AASB and the IASB. The response to the AASB is normally about 1 month prior to the closing date for comments to the IASB. This is to allow time for the AASB to consider the views of Australian constituents in formulating its own response on the exposure draft to the IASB.

This survey is aimed at gathering evidence on the extent to which members of the accounting profession participate in the due process and whether this has changed with the adoption of IFRS. The faculty would appreciate if you are able to take about five minutes to complete the survey as the results of the survey may well influence the due process approach adopted by the AASB now that Australia has adopted IFRS. In addition you are eligible to win a gourmet food hamper valued at $150.

The faculty is particularly keen to get responses from members who have never made a submission to the AASB or who did so before the adoption of IFRS but have not done so since then.

If you would like to participate in this study please click on this link: http://survey.xrar.com.au/index.php?sid=86.
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4. Deloitte summary of ED 151 available

Deloitte has posted a summary of the proposals and implications of ED 151 on its website at http://www.deloitte.com/dtt/article/0,1002,cid=137650,00.html. Members considering preparing a submission may find this analysis useful.
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5. IASB meeting agenda - 12-14 December

The next meeting of the International Accounting Standards Board will be held on 12-14 December in London. Items to be discussed include:

• Post-employment benefits
• Consolidations
• Short-term convergence: Borrowing costs
• Conceptual framework
• Annual improvements - 2006
• Financial statement presentation Phase A and B
• Business combinations Phase II
• IFRIC Due Process Handbook

6. AASB meeting agenda 13-14 December

The next meeting of the AASB is scheduled for Melbourne on 13-14 December 2006. Items for discussion include:

• Update on the IASB insurance project
• IFRS 8 - Operating Segments
• IFRIC issues including Group and Treasury Share Transactions, Service Concessions, Emission Rights and Petroleum Resource Rent Tax
• Differential reporting and SMEs
• Business regulation proposals
• Review of AASs 27, 29 and 31
• Common control transactions
• IPSASB EDs Non-exchange revenue

7. Draft IFAC guidance on Codes of conduct and quality control

IFAC's Professional Accountants in Business Committee has a proposed good practice guide 'Defining and Developing an Effective Code of Conduct' . The guide highlights the varied roles accountants have in developing business ethics programmes in their organisations and provides practical guidance on the design, development and implementation of such codes.

The proposed guidance may be downloaded at http://www.ifac.org/EDs, and comments are requested by February 16, 2007.

IFAC is also seeking feedback on an Explanatory Guide to assist small and medium practices apply International Standard on Quality Control (ISQC) 1. The guide is designed to help these entities understand, comply with, and apply ISQC 1 within the quality control systems they apply to audit and other engagements. Proposals are requested by December 29, 2006. For more information, see the Request for Proposal by clicking here.
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8. E&Y specimen accounts for 31 Dec 2006 now available

Ernst & Young has announced the release of an updated version of Endeavour (International) Limited.

Ernst & Young's Endeavour (International) Limited illustrates an Australian company's second annual financial report prepared in accordance with Australian equivalents of International Financial Reporting Standards (AIFRS), incorporating all Australian Accounting Standards effective for years beginning on or after 1 January 2006.

Endeavour (International) Limited can be accessed and downloaded by clicking here.
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9. Institute proposes a 4-tier financial reporting framework

A further draft of the Institute's initial thoughts on the Government's Red Tape Issues Proposal is now available on the Institute's website here for members comment to techsubmissions@icaa.org.au. Further analysis of the IASB's Staff Draft Exposure Draft 'International Financial Reporting Standard for SMEs' emphasises the inter linking between the 2 Projects. The SME draft ED is designed for Non-Listed Reporting Entities and defines its 'audience' as 'economically significant' with 50+ Employees', but not 'publicly accountable'. The Issues Proposal which recommends an uplift factor of 2.5 times is also justified on the basis that such Large Pty Companies (Revenues $25M+ and Assets $12.5M+ are 'economically significant'.

There is a risk that the identical 'economically significant' term could lead to confused thinking on the Australian Financial Reporting Framework. At this time AIFRS (Australian equivalents to IFRS) apply to reporting entities, although the IASB SME ED (IFRS Lite) will restrict IFRS to mainly Listed Companies. Non-Listed reporting entities which would include the larger more significant private not-for-profit entities, will be encouraged to apply the forthcoming SME Standard but will still able to adopt full IFRS.

This then leaves a void for non-reporting entities as to what they should use in preparing their financial statements. The Institute's BPG is designed for such entities but would be probably too onerous for very small businesses where Revenues and Assets are less than say $1M and few employees. Such Entities would be better served with MYOB type financial statements, which would include a Cash Flow Statement, Balance Sheet, Profit & Loss Statement, and 1 or 2 basic Notes. Further work is being done by the Institute in this area, and will be included in a revised Business Practice Guide.

The Public Sector has a similar challenge on how it responds to IFRS Lite. At this time the whole Public Sector is considered a Reporting Entity, but clearly 'public accountability' may not necessarily apply to all Public Sector Entities. In addition there is an argument that some smaller sectors of the Public Sector (eg individual schools - in rural and regional Australia) may not need to prepare AIFRS or even IFRS Lite Financial Statements as such, given that Consolidation packages are separately prepared for consolidation at the Department level.

The future Financial Reporting Framework may well develop as follows:

Tier 1 - AIFRS - Listed Companies & major Government Departments
Tier 2 - IFRS Lite - Non-Listed Reporting Entities (would include major Large Pty Cos, major Non-Listed Publics & significant Not-For-Profits & Government Entities)
Tier 3 - Non-Reporting Entities (would include minor Large Pty Cos, minor Non-Listed Publics, some major Small Pty Cos, and less significant Not-For-Profit & Public Sector Entities)
Tier 4 - Micro entities (Private & Public) with Revenues & Assets of say less than $1M

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10. Free 2007 Members' Handbook for Institute members

The Institute of Chartered Accountants in Australia is providing members with a free copy of the 2007 Members' Handbook. The Members' Handbook is Australia's most comprehensive guide to the standards, by-laws and regulations that affect Chartered Accountants.

To download the online version, simply visit the Members' Handbook section of the Institute's website at http://www.charteredaccountants.com.au/handbook. For the CD Rom version, members must update their profile before Friday 15 December 2006. See the Institute's website at here for instructions and details.
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11. Query of the week - AASB 2 and vesting conditions

Q: I have a share based payment scheme where certain employees are granted options for shares that vest in 3 years' time subject to the employee still being employed at the end of the 3 year vesting date. Each year I estimate the number of employees that are still eligible for shares (i.e. still employed) but do I adjust each year's expense for those employees who have left and no longer have options that are excisable, which means that the cumulative expense is correct?

A: Yes. The question states the options vest provided the employees remain employed for the 3 years. For service conditions such as this, or other conditions NOT related to the entity's share price, paragraph 19 of AASB 2 applies and the number of options are adjusted each year so the number ultimately recognised is the number that eventually vest.

Paragraph 19 of AASB 2 'Share-based Payment' states that "vesting conditions shall be taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest".

IG Example 1 - illustrates a 3 year expense calculation that is based on the cumulative remuneration expense adjusted each year for the change in the number of employees that are eligible to have the options vested as shares, The final year 3 amount represents the actual options that vest as shares.

However, if the conditions attached to the options are market conditions - ie conditions related to the entity's share price - they are treated quite differently. Paragraph 21 is relevant for these conditions - the market conditions must be taken into account when calculating the fair value of the options granted, but the number of options granted is NOT adjusted if the market conditions are not met.

IG Example 5 - illustrates a grant of options with a market condition, noting that the amounts are recognised irrespective of the outcome of the market condition.

The Basis for Conclusions issued by the IASB which is available to Australian residents on the AASB's website explains why the IASB adopted this approach.

Query amended 16 February 2007.

12. EDs: comment closing dates

Outlined below are the comment closing dates for all current exposure drafts. Members are encouraged to prepare their own submission on each document and submit them to the Institute no later than one week before the closing date shown.

For more information, refer to the Institute's Technical Standards' exposure drafts web page

Forward all ED submission/comment emails to techsubmissions@icaa.org.au.

15 December 2006
IAESB - 'Approaches to Developing and Maintaining Professional Values, Ethics and Attitudes' http://www.ifac.org/Eds
Treasury - Comparative review of the Australian Auditor Independence Requirements
http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1184

22 December 2006
Corporate & Financial Services Regulation Review Proposals Paper
http://www.treasury.gov.au/contentitem.asp?NavId=002&ContentID=1189

29 December 2006
IFAC - Proposals request on Explanatory Guide to assist small and medium practices apply International Standard on quality Control (ISQC) 1
http://www.ifac.org/Downloads/SMP_Quality_Control_Guide_Request_for_Proposal.pdf

31 January 2006
AASB ED 151 - 'Australian Additions to, and Deletions from, IFRSs'
http://www.aasb.com.au

15 February 2007
IAASB EDs
ISA 320 (Revised and Redrafted), Materiality in Planning and Performing an Audit;
ISA 450 (Redrafted), Evaluation of Misstatements Identified during the Audit;
ISA 260 (Revised and Redrafted), Communication with Those Charged with Governance.
http://www.ifac.org/Guidance/EXD-Outstanding.php

28 February 2007
IPSASB ED 30 "Impairment of Cash-Generating Assets"
IPSASB ED 31 "Employee Benefits"
http://www.ifac.org/EDs

31 March 2007
IPSASB ED ' Financial Reporting under the Cash Basis of Accounting - Disclosure Requirements for Recipients of External Assistance'
http://www.ifac.org/EDs

2 April 2007
IASB Discussion Paper on Fair Value Measurements
http://www.iasb.org/

Technical Query Service
The Institute's Technical Standards Team responds to inquiries from members on auditing and financial reporting issues. This service provides general assistance and guidance only. Members have the responsibility to apply their own professional judgment. The service can be contacted on (02) 9290 5702.

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TECHNICA/XFILES/ARTICLES/ANT/ANT ANT47_06_12_08.doc. The Technical Standards team comprises, Jeanette Dawes CA, Roslyn Hatton CA, Stephanie Kemp CA, Claire Locke CA, Keith Reilly CA, Andrew Stringer; Benjamin Lau and Jane Ma - Technical Standards Assistants.