This update was first published in the July 2011 UK edition of Accounting and Business magazine.
Following a long period in which no new International Financial Reporting Standards (IFRSs) were issued, in May 2011 the International Accounting Standards Board (IASB) issued four new standards.
Three of the standards are the culmination of the project to improve the accounting requirements in respect of off-balance sheet arrangements and, as a result, IFRS and US GAAP are now closely aligned in this important area of accounting.
IFRS 10, Consolidated Financial Statements, will replace parts of IAS 27, Consolidated and Separate Financial Statements, and the whole of SIC 12, Consolidation – Special Purpose Entities. The new standard builds on existing principles by identifying the concept of control as the factor that determines whether or not an entity should be included in the consolidated financial statements of a parent entity. Additional guidance is provided to assist in determining whether control exists in circumstances where a straightforward assessment is not possible.
IFRS 11, Joint arrangements, will supersede IAS 31, Interests in Joint Ventures, and SIC 13, Jointly Controlled Entities – Disclosure of Interests in Other Entities. Current accounting focuses on the legal form of the arrangement between the parties, but IFRS 11 requires consideration of the rights and obligations of the arrangements between the parties. The IASB considers that a focus on substance will result in a more realistic consideration of the arrangements. Current inconsistencies and choice of method for the accounting for joint arrangements have been removed in the new standard. One of the consequences will be that equity accounting will have to be applied for all joint ventures and the option of proportional consolidation has been removed.
IFRS 12, Disclosure of Interests in Other Entities, is an entirely new standard that covers disclosures for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles.
All three of the above standards will apply for periods beginning on or after 1 January 2013 with earlier application permitted.
IFRS 13, Fair Value Measurement, marks the completion of one of the major convergence projects between IFRS and US GAAP. The harmonisation of fair value measurement and disclosure requirements was also an important element of the two standard setters’ responses to the global financial crisis.
IFRS 13 does not extend the use of fair value accounting, but it does provide guidance as to how the concept of fair value should be applied in practice. The new standard provides, for the first time, a precise definition of fair value and a single source of fair value measurement and disclosure requirements across all IFRSs. As a consequence, the IASB believes that there will be greater consistency and complexity may be reduced. IFRS 13 applies for periods beginning on or after 1 January 2013 and earlier application is permitted.
In the US, equivalent guidance has been included in an update to Topic 820 in the Financial Accounting Standards Board’s Accounting Standards Codification.