Exposure Draft ED/2012/2, issued by the International Accounting Standards Board (IASB)
Comments from ACCA
18 February 2013
ACCA generally agrees with all four of the proposed improvements, and the implementation dates which are proposed for three of these.
As set out in our specific comments below, we also make a number of related recommendations related to the proposed improvements. These concern the content of the amendments, and in one case (IFRS 1), the explanatory material issued along with the proposals.
Finally, we also express the view that compliance with one of the proposed amendments (IAS 40) should be assisted if extra definitional guidance is provided. The IASB may wish to consider this suggestion as part of a future round of proposals for improvements.
We now give our comments on the specific questions raised in the ED, as follows:
Do you agree with the IASB’s proposal to amend the Standard as described in the Exposure Draft? If not, why, and what alternative do you propose?
Do you agree with the proposed transitional provisions and effective date for the issue as described in the Exposure Draft? If not, why, and what alternative do you propose?
IFRS 1 First Time Adoption of Accounting Standards
On first adopting IFRS, para 7 of IFRS 1 requires an entity to comply with ‘each IFRS effective at the end of its first IFRS reporting period’ (subject to certain exceptions). In response to one or more requests, the IASB proposes to clarify that a new or revised IFRS is considered ‘effective’ if it can be adopted early by the end of the entity’s first IFRS period, even if mandatory adoption is at a later date. This clarification will be added to the Basis for Conclusions, and confirms that first-time adopters can (but are not required to) adopt early, as is the case for existing adopters.
ACCA agrees with the proposed amendment, which in our view clarifies what is already provided for in paras 7 and 8 of IFRS 1.
It is not entirely clear why this clarification is in fact needed. Para 8 of IFRS 1 already states: ‘An entity may apply a new IFRS that is not yet mandatory if that IFRS permits early application.’ An explanation may possibly lie in the Basis for Conclusions, where a reference to the ‘current’ version of IFRS has been removed (BC11), and a new sub-paragraph added (BC11A). We would be able to comment more fully if the IASB had explained, in the Introduction to the amendment, the nature of the difficulties reported and how the proposed amendment aims to address these.
References throughout the amendment are to ‘new’ IFRS, whilst the issue mentioned in the Introduction to this section relates to the adoption of both new and revised IFRS. Consequently, we suggest that fuller clarification would be provided if the Basis for Conclusions refers to revised IFRS as well as new IFRS.
No effective date is proposed. As the amendment is a clarification involving a choice by preparers, and the first-time adoption of IFRS is a one-off occurrence, ACCA agrees that the amendment should be effective immediately.
IFRS 3 Business Combinations
IFRS 3 states at para 2(a) that it does not apply to the formation of a joint venture. Since IFRS 3 was issued, IAS 31 Interests in Joint Ventures has been replaced by IFRS 11 Joint Arrangements (of which a joint venture is one of two types). It is proposed that the above exclusion in IFRS 3 is amended to cover joint arrangements.
We agree that the proposed change reflects appropriately the replacement of IAS 31 by IFRS 11.
Furthermore, the IASB proposes to add a clarification in para 2(a) of IFRS 3 that the exclusion in the Standard applies to joint arrangements in their own financial statements, rather than the financial statements of the parties to the arrangement. It is unclear to ACCA why this addition is needed, as accounting by the participators in a joint arrangement is already covered in IFRS 11 (paras 20-25).
We recommend that para 2(a) of IFRS 3 also cross-refers to paras 20-25 of IFRS 11, to draw attention to the provisions which already exist for the accounting by the participators in a joint arrangement.
ACCA supports the effective date of accounting periods starting on or after 1 January 2014 (applying retrospectively), with earlier application being permitted. We believe that this will give the reporting entities affected sufficient time to prepare, once the proposed amendment becomes final.
IFRS 13 Fair Value Measurement
The ‘portfolio exception’ in para 48 of IFRS 13 allows financial assets and liabilities managed on a net basis, to be fair-valued on the same basis. Para 52 of IFRS 13 restricts the application of this exception to financial assets and liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement, or IFRS 9 Financial Instruments. The IASB reports that the question has arisen whether the exception also applies to certain non-financial items within the scope of IAS 32 Financial Instruments: Presentation (para 8 of IAS 32).
ACCA agrees with the proposed amendment to IFRS 13, which clarifies that the exception can be applied to the above non-financial items, as has been the IASB’s intention throughout.
ACCA supports the effective date of accounting periods starting on or after 1 January 2014 (applying retrospectively), with earlier application being permitted. For the majority of entities to which it applies, the amendment is likely to be a clarification that their existing practice is correct. Otherwise, changes to comply with the amendment will be straightforward to make.
IAS 40 Investment Property
The IASB proposes to address an identified divergence in practice. Certain preparers regard IAS 40 as applying to the exclusion of IFRS 3 Business Combinations, such that when investment property is acquired, no consideration is then needed of whether a business combination has taken place. The proposed amendment reflects the IASB’s view that IAS 40 and IFRS 3 are not, in fact, mutually exclusive.
ACCA supports the proposed amendment, as we agree that on an acquisition, there are separate questions of whether property is an investment property or group of such properties (dealt with by IAS 40), and whether the transaction constitutes a business combination (dealt with by IFRS 3). Consequently, we agree that both Standards should be considered in this situation.
It is also considered helpful, as a related future exercise, for the IASB to clarify when an investment property or properties would constitute a business for the purposes of IFRS 3. Paras B7 – B10 of IFRS 3 (Definition of a Business) have a focus on input, process and output elements, which is less instructive for an investment property business than other types of business. Additional guidance for investment property (and similar asset-holding) businesses could, for example, be placed adjacent to these paragraphs, or an example could be added to the Illustrative (IE) section which accompanies IFRS 3.
ACCA also agrees with the prospective application of the change for accounting periods starting on or after 1 January 2014 (with early adoption permitted). We acknowledge the practical difficulties of retrospective application, compared to the benefits of producing consistent comparative information.