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Aiming High For The Big Bang
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Story Colin Parker FCA Photography Getty Images

 
Pending AASB standards have been developed in preparation for the Big Bang, to assist in the speedy transition to 2005. 
 
To manage the business risks associated with the transition to 2005, we have been working from exposure drafts, monitoring the deliberations of both the Australian Accounting Standards Board (AASB) and International Accounting Standards Board (IASB), and making some educated guesses. It has been a difficult and time-consuming task. We have been anxiously awaiting the first of the adoption standards to confirm our knowledge, and for some, to start their deliberations on 2005.  
 
In December 2003, the AASB released seven pending accounting standards to assist with the speedy transition to the Australian equivalents of international accounting standards; a further nine are scheduled for release in early 2004. 
 
A pending standard is a short-term designation for a standard to assist entities to identify changes that may be necessary for the preparation of their first-time adoption balance sheet and financial reporting systems. Pending accounting standards are not yet accounting standards; they have not been ‘made’ by the AASB, nor passed though the Parliamentary approval process. Pending accounting standards are presented in a style and format expected to be used when the standards are formally made. The pending AASB standards are available on the AASB website, www.aasb.com.au.  
 
The AASB intends to approve all Australian standards that are equivalents to IASB standards on the same day in 2004, the so-called ‘Big Bang’. The AASB has yet to announce the ‘Big Bang’ date, but it is likely to be in the second quarter of 2004, when some 40 IASB standards will be issued as AASB standards. Let’s look at two of these pending standards to become familiar with their form and content.  
 
AASB 1 ‘First-Time Application’ 
 
The pending AASB 1 ‘First-time Application of Australian International Financial Reporting Pronouncements’ is based on ED 107 ‘Request for Comment on IASB ED 1 First-time Application of International Financial Reporting Standards’, and is the starting point for implementing the transition to Australian IASB equivalents. AASB 1 incorporates IASB 1 ‘First-time Application of International Financial Reporting Standards’. AASB 1 applies for the first annual reporting period beginning on or after 1 January 2005. Early adoption of AASB 1 is prohibited. 
 
The purpose of AASB 1 is to ensure that the first financial report (including the interim financial report), prepared under Australian equivalents to the IASB standards and interpretations, contains high quality information that is transparent for users, and comparable for all periods presented. 
 
AASB 1 contains requirements about the recognition and measurement policies to be applied and the presentation and disclosure requirements of the first AIFRPs financial report and interim financial reports forming part of the period of the first AIFRPs financial report, to facilitate the transition to accounting under the IFRSs basis of accounting. 
 
AASB 1 requires the preparation of an opening balance at the transition date as the starting point for the accounting of the Australian equivalents to the standards and interpretations of the IASB termed Australian International Financial Reporting Pronouncements (‘AIFRPs’). 
 
For December balancing entities, the transition date is 1 January 2004. For 30 June balancing entities, the transition date is 1 July 2004. All reporting entities will have a transition date during 2004.  
 
For-profit-seeking entities that comply with the requirements of AIFRPs will also comply with the requirements of the IASB standards and interpretations. Where a not-for-profit entity complies with the requirements of AIFRPs that conflict with its IASB counterpart, it will not be able to make an explicit and unreserved statement of compliance with IFRS. 
 
AASB 1 applies to all reporting entities. It does not explicitly apply to non-reporting entities that prepare and lodge financial reports under the Corporations Act 2001. It is unclear whether this exclusion is intentional or an oversight by the AASB. 
 
AASB 1 requires the recognition of all assets and liabilities, the derecognition of assets and liabilities, reclassification of items, and measurement of all recognised assets and liabilities in accordance with the Australian equivalents to IASB standards and interpretations. 
 
Limited exemptions are available where the cost of compliance is likely to exceed the benefits to users of financial reports e.g., business combinations. Retrospective application of aspects of some standards is prohibited i.e., derecognition of financial assets and financial liabilities, hedge accounting, and estimates. 
 
AASB 1 requires disclosures that describe how the transition from existing Australian GAAP to Australian GAAP in compliance with IASB standards and Interpretations has affected the financial position, performance and cash flows of the entity. 
 
In addition, ED 129 ‘Disclosing the Impacts of Adopting Australian Equivalents to IASB Standards’ requires an explanation of the adoption of the year 2005 standards on changes in accounting policies expected to have material impacts on the financial position and operating results of the entity; and any known or reliably estimable information relevant to assessing the expected future impacts of adopting the year 2005 standards. 
 
All paragraphs in AASB 101 have equal authority and subsequent standards have equal authority. This is a change from the black letter (mandatory) and grey letter (supporting not mandatory commentary) drafting style.  
 
IFRS 1 is expected to be reissued incorporating changes introduced by other IFRSs. AASB 1 may, therefore, be subject to further change. AASB 1 states that ‘implementation guidance’ is to be added at the time when the standard is formally approved by the AASB.  
 
AASB 123 ‘Borrowing Costs’  
 
The pending AASB 123 ‘Borrowing Costs’ is based on ED 111 ‘Request for Comment on IAS 23 Borrowing Costs’. AASB 123 incorporates IAS 23 ‘Borrowing Costs’ and supersedes AASB 1036/AAS 34 ‘Borrowing Costs’ (issued December 1997). AASB 123 ‘Borrowing Costs’ introduces an entity-specific option to capitalise or expense borrowing costs to qualifying assets.  
 
Most corporate reporting entities will continue with capitalisation of borrowing costs to qualifying assets. Expensing of borrowing costs reduces reported profits, and lessens the opportunity to pay dividends. Expensing of borrowing costs affects the key performance of EBIT (earnings before interest and taxes) and EBITDA (earnings before interest, taxes, depreciation and amortisation). 
 
The carrying amounts of assets are also affected, which has implications for KPIs and debt covenants based on carrying amounts of assets. Public sector reporting entities are more likely to select expensing of borrowing costs given that government financial statistics framework requires expensing. Where an entity changes its accounting policy to the ‘expense as incurred’ basis, under pending AASB 1 ‘First-time Application of International Financial Reporting Standards’, retrospective application and restatement of prior period financial statements is required. 
 
The pending AASB 123 ‘Borrowing Costs’ has been founded on IAS 23 ‘Borrowing Cost’ content and format, with the proposed inclusion of Australian paragraphs on application, materiality, and effective date (designated as ‘AUS’ within the standard).  
 
To the extent that exchange differences arising from foreign currency borrowings are not regarded as an adjustment to interest costs, they are excluded from the definition of borrowing costs under AASB 123. These were included in borrowing costs (net of the effect of any hedge on the borrowing) under AASB 1036/AAS 34. 
 
The AASB has foreshadowed that when AASB 123 is formally issued, it intends to provide guidance similar to that in AASB 1036/AAS 34 where it is relevant to Australian constituents (‘Australian Guidance’). The pending version of AASB 123 does not include additional ‘Australian Guidance’. The content of such guidance has not been specified.  
 
Other Pending Standards Developments 
 
The AASB has released other pending standards: AASB 107 ‘Cash Flow Statements’, AASB 132 ‘Financial Instruments; Presentation and Disclosure’, AASB 141 ‘Agriculture’, AASB 139 ‘Financial Instruments: Recognition and Measurement’ and AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’. The AASB is to meet in January 2004 to approve a further nine pending standards addressing: Consolidations; Earnings per Share, Equity Accounting; Hyperinflationary Economies; Inventories; Leases; Financial Institutions; Property, Plant and Equipment; and Segment Reporting. 
 
The progressive release of the pending standards provides preparers with a degree of certainty as to the content and format of the Australian equivalents to IASB standards. Entities should use these pending standards to assist with their transition to international accounting standards. 
 
Given the requirements of AASB 1 for an opening balance sheet at transition date and proposed requirements in ED 129, these pending standards provide  
a good start for the 2005 transition pending the ‘Big Bang’.  
 
Colin Parker FCA is an independent adviser on financial reporting ( www.gaap.com.au) and a visiting academic at the School of Accounting and Law, RMIT University. 
 
DISCLAIMER: 
 
The views and opinions of the authors appearing in Charter are not necessarily those of the Institute of the Chartered Accountants and should be viewed as such.