Appendix B: The IOSCO Recommendations for the Use of International Accounting Standards


Appendix B: The IOSCO Recommendations for the Use of International Accounting Standards

As discussed in the body of Chapter 1, the Working Party of IOSCO has reviewed the current body of IAS Standards and Interpretations and has produced its report to IOSCO's Technical Committee, which in turn has recommended that the IOSCO membership permit the use of IAS for cross-border filings. This recommendation is qualified by three types of modifications—namely, that for selected IAS the financial statements be augmented by either reconciliation, supplemental disclosure, or interpretation. The report does not stipulate that any of these must be done in any given fact situation, but rather it is essentially a compendium of concerns expressed by the IOSCO Technical Committee's membership over each of the thirty standards recommended for use.

In the following tabulations, the various reconciliations, supplemental disclosures and interpretations that have been identified by IOSCO are set forth, classified by IAS standard. It is important to remember that it ultimately is up to each nation's securities regulators to determine which augmentations are to be mandated for filings in their respective jurisdictions. Some, for example, may choose to permit IAS usage without any further reconciliation, supplemental disclosure, or interpretation, while others may demand that many IAS be augmented by these assorted methods.

The supplemental treatments are defined as follows:

  1. Reconciliation— Requiring reconciliation of certain items to show the effect of applying a different accounting method, in contrast with the method applied under IASC standards. This reconciliation is expected to be presented in a footnote to the financial statements and would quantify the effect of applying the specified alternative accounting treatment.

  2. Disclosure— Requiring additional disclosures, either in the presentation of the financial statements or in the footnotes, but not a reconciliation of amounts prepared using one methodology to what would have resulted from applying a different measurement methodology.

  3. Interpretation— Specifying use of a particular alternative provided in an IASC standard, or a particular interpretation in cases where the IASC standard is unclear or silent. For example, in cases where an IASC 2000 standard permits different approaches to an issue, generally with one approach identified as a "benchmark" and another as an "allowed alternative," specifying which approach (the benchmark or allowed alternative) is accepted in a host jurisdiction.

I. Items That Possibly Will Be Reconciled to IAS Treatment

IAS and specific issue

Possible reconciliation

IAS 12: Some believe that the subsequent recognition of acquired tax benefits should be allocated to intangibles in addition to goodwill.

Presentation of alternative balance sheet or selected assets on an "as if" basis, assuming allocations had been made to intangibles as well as to goodwill.

IAS 17: The immediate recognition of gains resulting from sale-leaseback transactions involving operating leases has been questioned.

Reconciliation to how earnings would have computed had gain on operating leaseback been deferred, consistent with how gains are for finance leaseback transactions.

IAS 19: Nonrecognition of a balance sheet liability for employee termination costs in cases when a board decision is taken before the balance sheet date and the decision is confirmed before the issuance of the financial statements is challenged.

Reconciliation of liabilities and retained earnings to alternative amounts had these costs been accrued as of the balance sheet date.

IAS 22: The appropriateness of goodwill lives exceeding twenty years, permissible under this standard, has been questioned.

Alternative measure of earnings based on amortization of goodwill over a maximum of twenty years could be presented.

IAS 22: The appropriateness of the accounting for negative goodwill has been questioned, particularly the requirement to recognize negative goodwill on a nonlevel basis related to expectations of future expenses.

Reconciliation of negative goodwill balance and retained earnings, assuming straight-line amortization of negative goodwill, could be provided.

IAS 27: The appropriateness of consolidating subsidiaries operating in dissimilar activities, in certain circumstances, has been challenged.

Alternative presentation of the balance sheet (and perhaps also the statement of operations) excluding certain subsidiaries' financial position (and results of operations) could be mandated.

IAS 32: The required accounting for treasury shares as a deduction from equity (instead of as an asset) is seen as not being consistent with certain legal environments in which those transactions are authorized. The belief is that, if shares are repurchased for trading purposes, they should be allowed to be presented as assets in the balance sheet, with the difference between the purchase amount and the resale price included as part of profit and loss when the shares are resold.

Alternative presentation of balance sheet while the treasury shares are held, showing qualifying treasury shares as an asset, and alternative presentation of the balance sheet after the shares are resold, with any gain included in retained earnings and reported in current earnings in period of sale.

IAS 36: The appropriateness of measuring impairment losses based on an asset's recoverable amount, instead of its fair value, has been challenged.

An alternative presentation would be based on fair value, rather than recoverable amount, which is defined as the greater of an asset's net selling price and value in use.

IAS 36: The appropriateness of permitting the reversing of previously recognized impairment losses has been questioned.

An alternative presentation would treat the amount to which the impaired asset was written down as a new cost basis, from which level carrying value subsequently could not be increased.

IAS 37: The appropriateness of not recognizing a provision for the sale of assets when (1) there is sale of a subsidiary through a public offering such that the enterprise would be demonstrably committed no later than the publication of the prospectus, when publication obligates the enterprise to accept offers received, and (2) for piecemeal sales when a demonstrable commitment to the restructuring occurs through the adoption of a plan and a public announcement of that plan, which may occur before any or substantially all of the assets are sold and liabilities assumed or settled, is questioned.

The alternative presentation would include a provision for sales of assets when it constructively takes place, which could be before the criteria of IAS 37 are fully met.

IAS 37: The appropriateness of not recognizing a provision in circumstances where a board decision taken before the balance sheet date is complemented by another event occurring after the balance sheet date but before the issuance of the financial statements (e.g. public announcement or implementation) is questioned.

An alternate presentation could recognize a constructive obligation (and therefore a provision) at the balance sheet date when a board decision is taken before the balance sheet date even when, before the balance sheet date, the restructuring plan has not been implemented or even publicly announced.

IAS 38: Capitalizing costs associated with the development of internally generated intangible assets has been criticized, on the theory that expensing internal development costs and providing meaningful disclosures about the nature and amounts of those expenses, provides more useful information to investors.

The alternative presentation would exclude these assets and treat these costs as having been expensed as they were incurred so that both research and development costs would be immediately expensed.

IAS 38: Using amortization periods longer than twenty years for intangibles has been questioned.

The financial statements could be recast to treat the intangible assets' lives as not exceeding twenty years.

IAS 39: The propriety of allowing nonderivative financial instruments to be used as hedging instruments has been questioned. Only derivatives should be permitted as hedging instruments, in the critics' view.

A reconciliation would require that arrangements being accounted for as hedges be revised to eliminate special hedge accounting in cases where a nonderivative financial asset or liability was designated as a hedging instrument for hedges of foreign currency exchange risks.

IAS 39: The appropriateness of including the accumulated gain or loss on a forecasted transaction or firm commitment in the initial cost basis of an acquired asset or liability (i.e., as a basis adjustment) has been challenged.

The alternate presentation would eliminate these gains or losses from the capitalized asset cost. The gains or losses would be taken into earnings and accumulated in retained earnings.

IAS 39: Concerns have been raised about the appropriateness of recognizing the cumulative amount of recognized gains or losses on the hedging instrument pertaining to a forecasted transaction in equity.

An alternate balance sheet would reflect such gains and losses in retained earnings, and these would be included in the current period's results of operations.

IAS 39: The appropriateness of including an enterprise's own creditworthiness in measuring the fair value of a liability has been questioned.

The logical alternative would remove the reporting entity's creditworthiness as a consideration in determining the fair value of its debt obligations.

II. Possible Additional Disclosure Items

IAS and specific issue

Possible additional disclosure item(s)

IAS 1: More information about defaults under credit agreements might be desirable. Items that arguably should be disclosed include: (1) the nature and amount of any default in principal, interest, sinking fund or redemption provisions or any breach of covenant that has not been cured subsequently should be disclosed; and (2) for a default or breach that has been waived for a period of time, the period of the waiver should be disclosed.

The IAS 1 disclosure requirements could be supplemented. Some or all of the items at the left could be required disclosures.

IAS 1: The need for guidance on the classification of stock subscriptions receivable has been noted.

These are typically shown as contra-equity, unless collected before the financial statements are published, but specific disclosure requirements could be added.

IAS 1: Concerns have been raised about the need for comparative disclosures relating to the reconciliation of the opening and closing balances of tangible and intangible assets.

IAS 38 requires, for intangible assets, only a reconciliation for the current period. IAS 16 similarly requires only a current year reconciliation for tangible property and equipment. Corresponding reconciliations for the preceding year in comparative financial statements could be provided if this requirement is created.

IAS 1: The need for disclosure of amounts classified as current that are not convertible into cash within twelve months has been raised.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 1: The need for the disclosure of maturities for each of the next five years and thereafter for interest-bearing liabilities, liabilities under finance leases, and amounts to related parties, has been stated.

IAS do not generally require disclosure of maturities, but this information could readily be presented in the notes to the financial statements, if desired or required.

IAS 1: Separate disclosure of gains and losses on investments is seen by some as being necessary, although existing standards do not address this.

Supplemental disclosure of gains and losses on investments could obviously be presented by including disaggregated information in the notes to the financial statements, or by expanded captions on the face of the statement of operations.

IAS 1: Disclosures about the reliability of estimates made in preparing the financial statements have been identified as an issue. No specific mention of disclosures relating to the reliability of estimates used in the financial statements is made in IAS 1.

Certain other IAS do require that the use of estimates be made explicit in financial reporting, and a general disclosure of this fact could also be added to the notes.

IAS 1: The possible need for disclosure of risks and uncertainties has been raised. No specific mention of disclosures regarding risks and uncertainties is in the final standard.

Certain other IAS do require that particular uncertainties be made explicit in financial reporting, and a general disclosure of this fact could also be added to the notes.

IAS 1: The absence of presentation guidance on alternative equity structures (e.g., partnerships, limited liability corporations, etc.) has been noted.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 1: The possible need for disclosure of transfers from reserves to accumulated profits or reclassification to net profit or loss has been cited.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 10: The need for certain disclosures when a pre-balance-sheet-date board decision does not give rise to an obligation at the balance sheet date has been noted. Items potentially to be disclosed include: (1) the nature, expected amount and timing of any related expenditures; (2) the conditions supplemental to the board decision necessary to recognize the provision; and (3) the fact that the board decision has been confirmed before the issuance of the financial statements, together with the nature of the confirming event.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 12: Some believe that deferred tax assets and liabilities derived from current assets and liabilities should be classified as current, rather than in conformity with the requirements of this standard.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 12: There may be a need to disclose unrecognized deferred tax liabilities arising from investments in subsidiaries.

Disclosure of the aggregate underlying timing differences is required under the standard, but not the deferred tax liabilities. This disclosure could easily be added, however.

IAS 12: Disclosure of the treatment of significant proposed tax changes is cited as being necessary.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 14: Disclosure of foreign sales by segment for both primary and secondary segments is suggested, which would include total export sales in each segment with elimination of internal sales.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 14: A possible need for disclosure of the amount of significant (10%) concentration of revenue from one customer, including the segment in which revenue is recognized, has been raised.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 14: The need for disclosure of revenue by product or service or by groups of closely related products or services is noted.

Under IAS 14, there is no such requirement, but this could obviously be added, if deemed necessary.

IAS 16: The acceptability of accounting for property, plant, and equipment at revalued amounts without disclosure of information providing significant balance sheet and income statement effects of revaluation has been criticized.

IAS 16 does require disclosure of the carrying amounts for each class of property, plant and equipment had they been accounted for at cost.

IAS 17: The need for disclosure of maturities for each of the next five years and thereafter for interest-bearing liabilities, liabilities under finance leases, and amounts to related parties is suggested.

Only disclosure of maturities for not later than one year, later than one year and not later than five years and later than five years is required, but further disaggregation could clearly be accomplished.

IAS 17: The need for separate presentation or disclosure of income and expenses relating to rentals for significant lessor activity is suggested.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 17: The possible need to require the disclosures set forth in IAS 8.16 both at the time of a sale and leaseback transaction and on a continuing basis for both quantitative and qualitative reasons has been raised.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 19: There is a perceived need for disclosures of enterprise and affiliate securities held by pension funds and other transactions between such parties.

While IAS 19 requires the disclosure of each category of the reporting enterprise's own financial instruments included in plan assets, there is no specific disclosure requirement for affiliate securities held. IAS 24 provides general guidance on disclosures of related-party transactions. Other disclosures could also be mandated.

IAS 19: There have been concerns raised about the need for enhanced disclosures relating to equity compensation plans. Items to be disclosed might include: (1) the pro forma effect on net income of using fair value accounting for equity compensation plans, including disclosure of the method and significant assumptions used to estimate fair value of options; (2) the date for which the market value should be disclosed (grant date?) for shares issued to employees; and (3) for employee share options, disclosures should be segregated into meaningful ranges of exercise prices and exercise dates. Also, there may be a need to clarify whether the requirement to disclose "amounts recognized in the financial statements in respect of equity compensation plans" refers to costs or expense. While actuarial computations address total costs, those costs may be allocated between net profit and loss and assets (e.g., inventories).

These matters have been, respectively, (1) not addressed; (2) addressed by IAS 19, which stipulates that the fair value at the date of issue of financial instruments (other than share options) issued to employees is relevant; and (3) suggested, but not required, as disclosure under IAS 19. Other, expanded disclosures could be mandated if deemed necessary.

Clarification about whether the requirement to disclose "amounts recognized in the financial statements in respect of equity compensation plans" refers to costs or expense could be developed.

IAS 24: The need for enhanced disclosures or accounting for expenses and liabilities paid by a principal shareholder or stock plans established by a principal shareholder for the enterprise's benefit has been noted.

This has not been addressed, but IAS 24 provides examples, including financing transactions, where related-party disclosures may be required.

IAS 27: Disclosure of summarized financial information for subsidiaries not consolidated that are material individually or in the aggregate might be needed.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 28: The disclosure of summarized financial information for material equity investees is seen as a need.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 28: The need for disclosure of available market values for equity investee securities owned is noted.

Under IAS, associates may be remeasured at fair value in parent's entity statements, but there is no requirement to disclose this fair value in the consolidated financial statements.

IAS 32: Disclosure of the effect of bifurcating and separately accounting for the components of compound financial instruments has been suggested as a requirement.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 32: Disclosure of restrictions on disposals or utilization of financial assets (e.g., restrictions on cash, investments, etc.) could be useful.

IAS 32 requires a general disclosure of information about the extent and nature of financial instruments, including significant terms and conditions that may affect the amount, timing, and certainty of future cash flows. Other such disclosure requirements also exist under other provisions of the IAS.

IAS 32: Further details about the composition of financial assets (e.g., held to maturity, trading, etc.) may be needed disclosures.

IAS 32 provides guidance on the determination of classes of financial instruments, and also requires that financial assets be classified as either: loans and other receivables originated, held-to-maturity investments, available-for-sale financial assets and financial assets held for trading. No specific requirement exists to disclose further detail of these categories. Also, no classification content is specified in IAS 1.

IAS 32: The need for disclosure of leverage features of certain financial instruments has been suggested.

IAS 32 requires general disclosure of information about the extent and nature of financial instruments, including significant terms and conditions that may affect the amount, timing, and certainty of future cash flows.

IAS 32: The need for disclosure of value at risk has been mentioned.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 33: Concerns have been raised about the need for the disclosure of securities that potentially could dilute basic EPS in the future that were not included in the computation of diluted EPS because they were antidilutive.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 33: The possible need for disclosure of EPS amounts for discontinued operations, extraordinary items, accounting changes and fundamental errors, is raised.

IAS 33 only requires the disclosure of basic and diluted EPS for ordinary income. Other disclosures could be made.

IAS 34: There may be the need to disclose whether a set of interim financial statements complies with the recognition and measurement principles of IAS 34, as well as with information required by securities regulators, particularly if a required statement has been omitted or the periods presented do not comply with the standard.

An enterprise is required to disclose whether its interim financial report is in compliance with IAS. In order to assert compliance, all of the requirements of each applicable standard and interpretation of the SIC must be complied with.

IAS 34: The need to disclose the amounts used in the computation of the numerator and denominator of EPS, as well as a reconciliation of the numerator to the net profit or loss for the period, has been noted.

IAS 34 does not require this, but this information could readily be disclosed.

IAS 34: Explicit disclosure in the notes as to the limited nature of the information provided is seen as being of use.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 34: There is a perceived need for precise information on contingencies and major uncertainties, particularly when a going concern is in question. This may include disclosures in IAS 10.

IAS 34 only requires disclosure of changes in contingent assets and liabilities since the last annual balance sheet date.

IAS 34: Concerns have been raised about the need for disclosure of the nature and amount of significant changes in the components of the minimum line items (for each financial statement) since the last annual report.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary. These additional disclosures could be required, if deemed to be of use to financial statement users.

IAS 34: There may be the need for disclosure of dispositions not considered discontinued operations under IAS 35, possibly also including information from IAS 27.

IAS 34 only requires disclosure of the effect of changes in composition resulting from a disposition. Other disclosures could be mandated, however.

IAS 34: Concerns have been raised about the need for disclosure of EPS and income tax amounts relating to accounting changes, fundamental errors, discontinued operations and extraordinary items.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 34: There may be the need to disclose the reasons for any significant changes since the last annual period in total assets and segment result for each segment.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 34: The need to include specific disclosures of the items whose measurement is based on annual data or data related to several interim periods has been raised.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 34: The clarity and consistency of content in interim financial reports has been questioned. That is, specific line items in the balance sheet, income statement and statement of cash flows should correspond to those in IAS 1, together with any additional significant line items that appeared in the entity's most recent annual balance sheet.

IAS 34 only requires interim financial statements to include the "headings and subtotals" from the most recent annual financial statements.

IAS 34: There is seen to be a need to disclose the effects of changes in the composition of the reporting entity. In addition, the major assumptions used in measuring the effect should be disclosed.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 34: The need for the disclosures in IAS 8, as appropriate, for error corrections and changes in accounting policy has been cited for interim reporting.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 36: There may be a need for disclosure of the nature, the reasons and the effects of any material change in goodwill allocation in a breakdown into cash generating units (CGU).

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 36: A need has been identified for disclosure of how a CGU was determined (regardless of whether the enterprise has tested one or more CGU for impairment), and the accumulated impairment losses of tangible assets, intangible assets and goodwill. Also, disclosure of the carrying amount and the accumulated impairment losses of each CGU should be encouraged.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 37: There is the perceived need for additional disclosures related to contingent assets.

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

IAS 38: Disclosure of the reasons why a useful life longer than five years was selected is seen as necessary by some.

IAS 22 and 38 only require disclosure when lives greater than twenty years are used. This requirement could be lowered to some other threshold point, if desired.

IAS 38: A need for disclosure of the nature and amounts of expenses related to internally developed intangibles has been observed.

IAS 38 requires certain disclosures related to research and development expenditures. Other disclosures could be mandated, as deemed necessary.

IAS 39: There may be a need for additional information equivalent to cost accounting for an equity instrument that does not have a quoted market price in an active market or for which other methods of estimating fair value are clearly inappropriate or unworkable (e.g., investments in associates, joint ventures and subsidiaries, investments with access to internal information of the investee resulting from a representation of the investor on the governing body of the investee, without significant influence of the investor).

Nothing specific has been suggested, but some expanded disclosures could be mandated if deemed necessary.

III. Items That Might Require Further Interpretative Guidance

IAS and specific issue

Possible interpretive position

IAS 1: The fact that classified balance sheets are not required, and that each entity may choose whether to have a classified balance sheet, is criticized.

Either a requirement to present a classified balance sheet, or alternatively, a prohibition against it, might be adopted.

IAS 1: There is a perceived insufficiency of guidance on stock dividends and splits, dividends in kind, increasing rate preferred stock, contingent warrants, greenmail transactions, forward stock transactions, and the hedging of an enterprise's stockholder equity.

Presumably specific guidance might be adopted by various jurisdictions for some or all of these matters.

IAS 1: The going concern assumption under this standard is not strictly defined as being at least twelve months from the date of approval of the financial statements, but rather is defined as being at least, but not limited to, this twelve-month threshold.

A strict twelve-month criterion could be mandated.

IAS 8: Changes in accounting policy may be accounted for as either restatements of prior periods or as a cumulative adjustment to net profit and loss in the current period; and fundamental errors may be accounted for either as a cumulative adjustment to net profit and loss in the current period or as restatements of prior periods.

Reporting jurisdictions may elect to require either the benchmark method or the allowed alternative method for one or both of these items.

IAS 12: There is a perceived need for guidance—including appropriate disclosures—on the allocation of current and deferred income taxes in cases where the reporting entity is part of a consolidated tax return.

Specific guidance may be offered on these matters.

IAS 12: Some argue that the criterion for recognition of deferred tax assets is too stringent and is inappropriate, and that a lesser threshold, such as "more likely than not," should be substituted.

Alternative criteria for recognition of deferred tax assets could be imposed.

IAS 12: The need for backward tracing for an item previously charged or credited to equity is seen as needing further guidance.

The "difficulty exception" in IAS 12 might be eliminated or expanded by interpretive guidance.

IAS 12: The term "substantive enactment" (used in conjunction with changes in tax rates) may need interpretive guidance.

This term might be defined by various jurisdictions in ways that have not been suggested at this time.

IAS 12: The treatment of a change in the tax status of an enterprise (e.g., through equity or profit and loss) may need further interpretive guidance.

Specific treatments might be mandated.

IAS 12: There is seen to be a need to prescribe an intraperiod tax allocation method for income statement items—for example, income tax expense could first be determined for profit and loss from ordinary activities and the remainder proportionately allocated to other items.

Various operational rules could be devised for this.

IAS 12: The accounting for the effects of investment tax credits has not been specified.

Specific guidance could be devised for this item.

IAS 12: There is seen to be the need for guidance in accounting for transactions with both income statement and equity attributes that result in disproportionate tax benefits in relation to the income statement charge—for example, a tax benefit could be recognized in the income statement proportionate to the related expense, with the balance going to equity.

IAS 12 allows for reasonable pro rata or more appropriate allocation. However, various jurisdictions might prescribe specific guidance on how to allocate such amounts.

IAS 14: The need to restate comparative segment information subsequent to a business combination accounted for as a uniting of interests may benefit from interpretive guidance.

Specific guidance could be offered by different jurisdictions.

IAS 14: There is some concern that the definition of segment revenue and segment expense excludes gains or losses on sales of investment property unless the segment's operations involve the operation of investment properties.

Potentially, interpretive guidance might dictate an alternative approach to this.

IAS 16: There may be a need for more guidance on circumstances that indicate that there has been a disposal of an asset—for example, the effect on sale treatment and corresponding potential gain recognition on disposal of operating assets, businesses, or nonperforming assets of factors such as continuing involvement, dependence upon future successful operation of the acquirer for realization, guarantees, recourse obligations, and participation in the rewards of ownership.

Such guidance could be offered, with varying degrees of specificity, by various jurisdictions.

IAS 17: The effect of attendant factors, such as continuing involvement, on lease classification might be interpreted.

Various factors could be identified as criteria.

IAS 17: Reporting for contingent lease income could be addressed by interpretive guidance.

Appendix 2 of IAS 34 retains the guidance on contingent lease payments. There is no comparable guidance in IAS 17 for contingent lease income or expense, which could be addressed by interpretive guidance in specific jurisdictions.

IAS 17: There is thought to be the need for guidance on what the term "reasonable certainty" means. Reasonably certain is also used in the definitions of a noncancelable lease, minimum lease payments, and the lease term.

This could be given specific meaning via interpretive guidance.

IAS 17: Concerns have been raised about the appropriateness of recognizing unearned finance income equal to the initial direct costs expensed. This is seen as potentially incompatible with the fair valuation exercise for finance leases of lessors, since the addition to the receivable may result in an amount different from the fair value of the receivable.

IAS 17 permits two alternative accounting treatments for initial direct costs related to finance leases of lessors; these costs either may be expensed immediately or allocated against income over the lease term. Jurisdictions may mandate one of these methods as being required in all cases.

IAS 17: The accounting for any deferred costs remaining when leases are modified may need to be supplemented by interpretive guidance. The accounting should be consistent with the treatment of debt issuance costs on extinguishment or modification, or costs of property rights, as appropriate, depending on the nature of the deferred costs.

It is thought to be clear that, for finance leases, such amounts generally would be considered part of minimum lease payments. For operating leases, however, this has not been addressed, and might be subject to interpretive guidance at the individual jurisdiction level.

IAS 17: There may be a need for guidance on the accounting for lease renewals and extensions.

Various guidance may be developed for these items.

IAS 19: The need for the recognition of a minimum pension liability may need further guidance, given the introduction of a transitional provision.

While IAS 19 introduced a transition provision that permits recognition of the transition-date obligation over a period up to five years, no minimum liability requirement was introduced. This might become mandated, however.

IAS 19: Concerns have been raised that the definition of a defined benefit plan may permit an opportunity for inappropriate accounting, if the terms of a plan provide a defined level of benefit but the sponsoring entity's current obligation is limited to the amount of the legally required funding. Arguably, defined benefit accounting should be applied whenever the terms of the plan provide a defined level of benefit.

A plan providing for a defined level of benefit but with the sponsoring entity's current obligation is limited to the amount of the legally required funding would be considered a defined benefit plan unless the sponsor has no future legal or constructive obligation. However, further interpretive guidance might be established.

IAS 19: Concerns have been raised about the appropriateness of a corridor within which recognition of actuarial gains and losses would not be permitted.

IAS 19 provides for a corridor in which actuarial gains and losses are not required to be recognized; however, it allows for faster recognition of actuarial gains and losses, even for amounts falling within the corridor.

IAS 20: The appropriateness of recognizing government grants related to assets as deferred income (rather than as a deduction of the carrying amount of the asset) has been questioned.

IAS 20 offers a choice between these methods. Interpretive guidance might make one or the other of these methods mandatory.

IAS 21: The appropriateness of recognizing certain exchange differences in the carrying amount of the related asset has been questioned.

IAS 21 allows for certain exchange differences resulting from a severe devaluation to be either capitalized or recognized in net profit and loss. Interpretive guidance could limit these choices, however.

IAS 21: The appropriateness of translating goodwill and fair value adjustments using the exchange rate at either the date of the transaction or at the closing date has been challenged.

While IAS 21 allows for goodwill and fair value adjustments to be translated at either the exchange rate at the date of the transaction or at the closing date, this choice might be limited by a given jurisdiction.

IAS 23: The choice of allowing borrowing costs to either be immediately expensed or capitalized has been commented upon.

The use of one approach or the other might be mandated.

IAS 27: The appropriateness of consolidating SPE formed pursuant to certain national laws that specify, for example, the business purpose, business contents and the distribution of revenue has been challenged.

SIC 12 states that such entities may be consolidated. This could be altered if jurisdictions offer interpretive guidance on criteria for consolidation of SPE.

IAS 28: Consideration of potential voting interests in the determination of whether significant influence exists has been identified as a matter in need of interpretive guidance.

Criteria for determination of significant influence could be mandated by reporting jurisdictions.

IAS 31: The available choice of methods in the accounting for investments in joint ventures, either using proportionate consolidation or the equity method, has been noted.

One or the other method could potentially be mandated.

IAS 31: Concerns have been raised about the accounting for situations where the assets contributed to a joint venture are considered a "business," and (in such cases) whether the contribution is, in substance, an exchange of assets or a business combination.

Criteria could be established to clarify this issue.

IAS 32: The aggregation of similar financial instruments is cited as an area where there is the need for guidance.

Criteria could be established to clarify this issue.

IAS 32: There may be a need for additional guidance regarding the computation of earnings per share (EPS) when an enterprise has acquired shares of its own preferred stock for an amount different than the recorded book value of those shares. In such cases, the numerator of the EPS computation, net profit or loss for the period attributable to ordinary shareholders, is adjusted for the amount of the difference between the acquisition price of the shares and their book value, because that difference is considered to be a dividend to the holders of the preferred security.

Specific guidance might be offered on this issue, which could affect the actual computation of EPS.

IAS 33: The definition of "contingently issuable shares" has been questioned, as has its consistency with standards developed jointly with national standard setters.

Criteria such as those in US GAAP (SFAS 128), which includes reference to "... little or no cash consideration ..." in the definition of contingently issuable shares, could be developed.

IAS 33: Concerns have been raised about whether the following "claims" would be included in the computation of basic EPS: (1) redemption premiums (or discounts) for the redemption or induced conversion of preferred shares; and or induced conversion of preferred shares; and (2) a dividend stream calculated using an effective interest method for increasing rate preference shares classified in equity.

IAS 33 is not specific as to whether redemption premiums or discounts for the redemption or induced conversion would be included in basic EPS, and this could be clarified via interpretive guidance by the jurisdictions. Also, earning for basic EPS purposes includes a deduction for preference dividends, although there is no specific mention of how the dividends are calculated; this too might be subject to interpretive guidance.

IAS 33: The issue of whether vesting of fixed employee stock options is a contingent condition that must be met before such options are considered in the computation of diluted EPS should be resolved, it has been observed.

Definitive criteria could be set forth to resolve this.

IAS 33: How "participating securities" should be considered in the EPS computation may need further interpretation; additionally, whether or not the two-class method is used for securities convertible into the other class could be clarified.

IAS 33 refers to multiple classes of ordinary shares but does not provide any specific guidance on when EPS for each class should be disclosed. These matters thus could be subject to local jurisdictions' interpretations.

IAS 37: Concerns have been voiced about the appropriateness of using a risk-adjusted (versus a risk-free) discount rate when computing the present value of a provision.

IAS 37 requires that the discount rate reflect the risks specific to the liability, but further interpretations could be developed.

IAS 38: The appropriateness of measuring intangible assets at revalued amounts has been questioned.

IAS 38 allows intangible assets to be measured at revalued amounts in certain circumstances, but this could be banned by local jurisdictions (mandating only the cost method).

IAS 39: Concerns have been raised about the appropriateness of leaving unrealized gains in equity upon reclassification of an asset to amortized cost (versus being subject to reversal if the asset is found to be impaired).

Under IAS 39, losses on remeasured assets that are recorded in equity are recognized in profit or loss upon impairment. Other interpretations could be mandated, however.

IAS 39: A more specific definition of trading activities is seen by some as being needed.

IAS 39 provides that trading liabilities include derivatives not used for hedging purposes and short sales. Other interpretive guidance may be rendered.

IAS 39: There may be a need for additional guidance in determining whether impairment exists. Items to be considered include (1) the length of time and the extent to which the fair value has been less than cost, and (2) the intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Various positions might be taken by various jurisdictions, if they choose to address this matter.

IAS 39: The meaning of the term "insignificant" is seen as being in need of additional guidance.

Various interpretive guidance could evolve for this.

IAS 39: The meaning of the term "similar assets or liabilities" is seen as being in need of additional guidance. For example, could derivatives be included in a group at all, or only in a grouping with other derivatives? How would these hedges be treated if a portion of the hedged group is sold, extinguished or transferred?

Various interpretive guidance could evolve for this.

IAS 39: The ability to reliably measure the fair value of a contract that includes an embedded derivative, if the embedded derivative cannot be measured separately may need further guidance. In these cases, the exception to fair value accounting would apply to the entire contract.

There is a presumption that fair value can be reliably determined for most financial assets classified as available-for-sale or held-for-trading. That presumption can be overcome for an investment in an equity instrument that does not have a quoted market price in an active market and for which other methods of estimating fair value are clearly inappropriate or unworkable. The presumption can also be overcome for a derivative that is linked to and that must be settled by delivery of such an unquoted equity instrument. Other guidance could be offered by various jurisdictions.

IAS 39: The appropriateness of allowing changes in the fair value of financial assets to be either recorded directly in equity or to be recognized in net profit and loss has been challenged.

One or the other of these allowable alternative meth ods, for available-for-sale securities, might be made mandatory.

IAS 39: Measuring impairments for a portfolio of homogeneous assets, such as loans, receivables (debtors) or securities, on a portfolio basis rather than on an individual security basis has been questioned. Also, some believe that portfolio analysis should not be applied to securities.

IAS 39 states that if it is probable that all amounts due will not be collected, then an impairment loss is recognized and generally measured for individual assets. Impairment may be measured on a portfolio basis for similar assets. No mention is made in IAS 39 of application to securities. However, there may be room for definitive guidance on these matters.

IAS 39: Concerns have been raised about the need for additional guidance on the ability to use hedge accounting. For example, it is unclear whether assets, liabilities, firm commitments or forecasted transactions measured at fair value, through profit or loss, can be designated as the hedged item in a fair value or cash flow hedge.

Various guidance may be offered on these matters.

IAS 39: Concerns have been raised about how certain financial services industries would apply the fair value measurement principles in this standard.

IAS 39 indicates that certain financial services industries measuring substantially all financial assets at fair value will be able to continue to do so if their financial assets are classified under IAS 39 as either available-for-sale or held-for-trading. If an enterprise does not designate any financial assets as held-to-maturity then they must use fair value under IAS 39. If financial assets are classified as held for trading, then fair value changes must be recorded in net profit or loss. While these rules seem to be quite definitive, there may be room for further interpretive guidance.

In addition to the aforenoted reconciliation, disclosure, and interpretation matters, IOSCO has identified a handful of items that might be subject to waivers, plus dozens of future projects it would like to see action taken on. The waivers represent financial accounting and reporting requirements under IAS from which, as part of national or regional specific requirements, waivers might be envisaged. Note that these waivers would not necessitate presenting reconciliations to IAS, unlike the items discussed above. According to IOSCO, the use of waivers should be restricted to exceptional circumstances such as issues identified by a domestic regulator when a specific IASC standard is contrary to domestic or regional regulation.

Four issues have been noted for which waivers have been contemplated, as follows:

  1. The deferred tax recognition criterion under IAS 12 has been seen as perhaps being at variance with national standards. Under IAS 12, deferred tax assets are recognized based on a "probable" test. This is contrasted, for example, to the "more likely than not" criterion under US GAAP. If a waiver were granted, an entity using IAS to prepare financial statements for filing in the US would apply the "more likely than not" criterion to determine whether deferred tax assets are to be given recognition, rather than using the IAS 12 criterion of "probable" (which is a significantly higher recognition threshold). There would be no need to reconcile deferred tax assets or the tax provision from a pure IAS 12 approach to the hybrid IAS 12 using the alternative deferred tax asset criterion.

  2. Another area where waivers are deemed likely to be needed concerns the IAS 16 provision that permits reporting plant assets at revalued amounts, particularly when significant inflation is being experienced. This issue has not been further developed at this time, however.

  3. A need has been identified to provide (as an alternative to the requirements of IAS 38) an option to either capitalize or expense the costs for internally generated intangible assets other than goodwill and computer software. It is argued that such an option may be appropriate provided that the rebuttable presumption for the maximum amortization period is reduced to five years; and disclosure of what the effect on financial statements would be if the other option were applied (capitalize versus expense). The ramifications of this "waiver" argument have not been addressed.

  4. Concerns have been raised about whether it would be appropriate to use fair value accounting (as opposed to the cost method of accounting) for an equity instrument that does not have a quoted market price in an active market. This has also received no further attention.

The future projects are defined as being areas of financial reporting practice that the IOSCO working party (the entity which reviewed the IAS and made the recommendation that they be endorsed) believes demand ongoing attention. These projects may result in SIC interpretations or may require standard-setting activities. The issues to be addressed with future projects are those where members currently are not specifying a supplemental treatment (e.g., reconciliation) but may do so in the future if an IOSCO assessment determines that one or more jurisdictions believe the issue has not been addressed satisfactorily. The identified future projects are set forth below.

IAS/proposed future project needed to address

Comments

IAS 1: The types of items that should be recognized in equity, including enhanced guidance for disclosure of changes in equity accounts and related recognition and measurement issues (e.g., whether such items should be "recycled" through income).

The IASC has added a project on Reporting Financial Performance, which would probably address these matters.

IAS 1: The proper accounting basis when the going concern assumption is not justified.

This has not been addressed at this time.

IAS 1: Further guidance (and examples) on the circumstances in which management would be expected to develop polices that reflect the economic substance of events and transactions and not merely the legal form, as required by IAS 1.

This has not been addressed at this time.

IAS 12: The discounting of deferred tax assets and liabilities.

IAS 12 prohibits the discounting of deferred tax assets and liabilities.

IAS 12: The apparent conflict between IAS 12 and the requirement in IAS 22 to measure any minority interest at the minority's proportion of the fair values of the assets and liabilities recognized.

This has not been addressed at this time.

IAS 12: Guidance about the exceptions to the accounting for deferred assets and liabilities, and the meaning of "probable."

This has not been addressed at this time.

IAS 12: The exceptions in IAS 12 regarding timing difference arising on investment in subsidiaries.

The exception in IAS 12 applies to all investments in subsidiaries.

IAS 14: The quality of segment disclosures, with a goal of further convergence with national standard setters.

This has not been addressed at this time.

IAS 16: Whether either a gross or net presentation should be used in light of the broader general guidance in IAS 20 and IAS 1.

Income statement presentation not explicitly addressed, although the gross amount of the compensation should be disclosed (per SIC 14).

IAS 16: Clarification that compensation received relating to an insurance reimbursement, an indemnity for the expropriation of assets, and as a result of an involuntary conversion, be classified as extraordinary when it relates to a loss reported as an extraordinary item.

This has not been addressed at this time.

IAS 17: Guidance on accounting for the costs incurred by a lessee in negotiating and securing either a finance lease or an operating lease. This should be consistent with debt issuance costs or costs of property rights, depending on the nature of the costs, even though operating leases are not accounted for as property rights currently.

IAS 17 requires that initial direct costs relating to finance leases be capitalized. Initial direct costs relating to operating leases are not addressed.

IAS 17: New approaches for lease capitalization (e.g., capitalize all leases with a term greater than one year).

This has not been addressed at this time.

IAS 21: The situation where forward exchange contracts are entered into to establish the amounts of the reporting currency required or available at the settlement dates of foreign currency transactions.

IAS 21 provides that a foreign currency transaction should be recorded by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This appears to conflict with IAS 39.

IAS 21: The apparent conflict between IAS 21 and 39 in accounting for the translation of nonmonetary items measured at cost.

IAS 21 provides that nonmonetary items measured at cost be reported using the exchange rate at the date of the transaction while IAS 39 requires consideration of the change in the foreign exchange rates.

IAS 21: Guidance on how the payment of a dividend does not constitute a return of the investment.

Not addressed. IAS 21 says that "the payment of a dividend forms part of a disposal only when it constitutes a return of the investment."

IAS 21: Guidance on how to account for a change in the classification of a foreign operation occurring during a financial year.

This has not been addressed at this time.

IAS 22: Guidance on the presentation of shareholders' equity and comparative financial statements following a reverse acquisition.

This has not been addressed at this time.

IAS 22: The amortization requirements for goodwill and other intangible assets, which are different in nature (i.e., goodwill is a residual). The current approach may encourage not allocating the cost of acquisition properly and lead to not measuring reliably the assets or groups of assets acquired, an approach not consistent with IAS 36.

Amortization requirements for goodwill and other intangibles are similar. IAS 22 restricts the conditions of separate recognition for assets and liabilities of the acquiree that existed at the date of acquisition. In contrast, when it is not possible to estimate the recoverable amount of an individual asset, IAS 36 requires the identification of cash-generating units and does not use the origin of the assets as a classification criterion.

IAS 22: The accounting for legal mergers (i.e., common control transactions) due to legal constraints in certain jurisdictions.

This has not been addressed at this time.

IAS 22: Expanding the accounting requirements for negative goodwill relating to expected future costs to cases where subsequent changes are made to the acquirer's plan. Corresponding disclosure requirements are essential to application of this approach, with a requirement to explain any changes to the original restructuring plan.

IAS 22 limits the treatment to those items that are identified in the acquirer's plan and requires that if the costs are not recognized in the expected period, then the corresponding negative goodwill should be recognized as if it were negative goodwill that does not relate to expected future losses.

IAS 22: Clarifying the accounting for negative goodwill if the acquired assets are all (or substantially) nonmonetary and nondepreciable or amortizable (e.g., land).

This has not been addressed at this time.

IAS 22: The accounting for assumed liabilities associated with planned restructurings.

IAS 22 requires recognition of a provision for postacquisition restructuring that was not a liability of the acquiree if the plan has been developed, announced and within three months of acquisition, developed into a formal detailed plan.

IAS 27: The issue of effective control and thus potential consolidation when share options or other convertible securities are held and exercise is discretionary.

This has not been addressed at this time.

IAS 27: How a position as general partner of a partnership is interpreted with regard to effective control and, thus, potential consolidation.

Not specifically addressed, but SIC 12 would apply to partnerships that are SPE.

IAS 27: Delimiting the "if practicable" exception for the application of uniform accounting policies to, in any event, require the use of acceptable international standards.

This has not been addressed at this time.

IAS 27: Creating a rebuttable presumption that an enterprise consolidate an SPE if certain of the indicators in SIC 12 are present.

No specific guidance provided on how to apply the "indicators" of consolidation.

IAS 28: Guidance on how the 20% presumption may be overcome and disclosures when it is overcome.

This has not been addressed at this time.

IAS 29: Clarifying the accounting treatment of accumulated changes in value accounted for in equity under IAS 39.

IAS 29 makes a distinction between historical financial statements and current cost financial statements. Under the historical cost basis of accounting, revalued non-monetary items are restated from the date of the revaluation. At the beginning of the first period of application of IAS 29, any revaluation surplus that arose in previous periods is eliminated and restated retained earnings are derived from all the other amounts in the restated balance sheet.

IAS 31: Developing criteria for recognition of a new basis by the venture itself for net assets sold or contributed to the joint venture.

This has not been addressed at this time.

IAS 31: Limiting the various treatments currently allowed in IAS 31.

An entity can still use either the cost method or IAS 39. That is, there still are three permitted alternatives in accounting for investments in joint ventures in the separate financial statements of the investor. (This will be corrected by E66, however.)

IAS 31: Guidance on how "additional consideration" (such as cash) affects the computation of the "appropriate portion" of gain or loss on a contribution of assets to a joint venture.

The wording of SIC 13 is still not clear about how the "appropriate portion" is calculated.

IAS 32: Clarifying that SIC 16 excludes from its scope transferable shares of the enterprise held by an employee benefit plan that is reflected in the enterprise's consolidated financial statements. Also, whether this scope exclusion would remain appropriate regardless of the percentage of the reporting enterprise's shares held as plan assets by the employee benefit plan.

This has not been addressed at this time.

IAS 34: The practical issues arising from the effect of different legal environments on the concept of "authorized for issue," particularly as it relates to interim financial statements.

This has not been addressed at this time.

IAS 34: Guidance on determining the "estimated average annual effective rate," particularly regarding the changes in deferred taxes.

Appendix 2 of IAS 34 provides guidance on measuring interim income tax expense, including a discussion of the "estimated average annual tax rate."

IAS 37: The appropriateness discounting provisions. In addition, additional computational guidance should be provided.

Provisions are required to be discounted if the time value of money is material. However, there is no specific computational guidance. A discounting project was added to IASC's agenda.

IAS 37: The apparent inconsistency between IAS 37 and 12 regarding the anticipation of changes in regulations.

IAS 37 requires incorporating future tax legislation whose passage is "virtually certain" (vs. "substantively enacted" in IAS 12).

IAS 37: The appropriateness of using probability as a recognition criterion (as contrasted to being used only as a measurement criterion).

Probability is a recognition criterion. A provision should be recognized when it is probable that an outflow of resources will be required.

IAS 37: Additional guidance on the techniques to be used in determining the best estimate, particularly when the obligation being measured does not involve a large population of items. One possibility may be to discuss, as an example, an inappropriate application of the basic principle, then indicate why the application is not appropriate and what should be done.

Provisions are measured at the "best estimate." For a large population, the best estimate is generally computed using the "expected value" method. For a single obligation, the best estimate is generally computed using the most likely outcome.

IAS 38: Ways to adopt consistent recognition and measurement criteria with the impairment standard. The concept of a "group of assets" is a key factor to follow the value of an enterprise in a more efficient way, as, for the components of a group, there is a link between the elements used for amortization purposes and those used for impairment purposes (e.g., useful lives, amortization periods, amount and timing of cash flows, and residual values). Therefore, it should be considered to the extent it would be possible to recognize revenue earning activities and to use segments as such.

This has not been addressed at this time.

IAS 38: The accounting for costs incurred in issuing debt securities.

This has not been addressed at this time.

IAS 38: The appropriateness of capitalizing certain expenses (e.g., preliminary studies and functional analysis) relating to the development of computer software. Such amounts should be explicitly excluded from the production cost.

This has not been addressed at this time.

IAS 38: The appropriateness of separability as a minimum criterion for recognition of an intangible asset (purchased or acquired).

Under IAS 38, separability is not a necessary condition for identifiability.

IAS 38: The introduction of "the ability to restrict the access of others to future economic benefit coming from the asset" as an additional characteristic for the recognition of a purchased intangible asset.

This has not been addressed at this time.

IAS 38: Providing more guidance regarding: (1) whether expenses have enhanced the originally assessed standard of performance, and (2) the amortization method to be applied to such capitalized costs.

No additional guidance has been provided in IAS 38, although IAS 16.41-.52 discusses depreciation.

IAS 38: Capitalization of subsequent costs if: (1) it is virtually certain that those costs will enable the asset to generate specifically attributable future economic benefits or enhancing the originally assessed standard of performance, and (2) the asset is subject to an impairment test at the end of the reporting period in which capitalization has occurred, even if there is no indication that the asset is impaired.

IAS 38 requires capitalization when additional benefits are probable (as opposed to virtually certain). No special impairment tests are required.

IAS 38: Creating an exception to the general requirement for amortization as far as long-lived intangible assets are concerned.

All intangible assets should be amortized over their useful life. The rebuttable presumption is that the useful life of an intangible asset would not exceed twenty years.

IAS 39: Providing guidance for the situations where an investment is: (1) held but not acquired with a view to its subsequent disposal in the near future, and (2) acquired and held exclusively for with a view to its disposal in the near future.

IAS 28, as amended, applies only to an investment in an associate that is included in the financial statements of an investor that issues consolidated financial statements and that is not held exclusively with a view to its disposal in the near future (vs. an investment "held and not acquired" or "acquired and held" with a view to its disposal in the near future), whereas former [AS 28 did not make the latter distinction.

IAS 39: Fair value accounting for investments acquired and held exclusively with a view to the subsequent disposal of those investments in the near future, so long as those investments are traded on efficient markets, while still permitting cost method of accounting for: (1) enterprises operating under severe long-term restrictions, and (2) nonmarketable securities.

IAS 27 applies to a subsidiary acquired and held exclusively with a view to its subsequent disposal in the near future or operating under severe long-term restrictions. In contrast, IAS 28 provides that an investment acquired and held with a view to its disposal in the near future should be accounted for under the cost method.

IAS 39: The use of nonderivatives as hedging instruments, providing that the following situations are addressed:

Fair value hedges:

The hedged item and the hedging instrument are not measured on the same basis and the changes in fair value do not follow the same accounting treatments:

  1. Should both legs be measured at fair value in the following cases: (1) hedge of a held-to-maturity asset by a fair value liability (derivative or nonderivative instrument) or by a liability measured at cost; and (2) hedge of a liability measured at cost by a fair valued asset?

  2. Should the gain or loss on the hedged item be recognized in net profit or loss, even if a hedged item otherwise is measured at cost with some changes in fair value unrecognized (unrealized gains or partially unrealized losses other than impairment losses)?

Cash flow hedges:

More guidance is needed on the accounting treatment of the ineffective portion that relates to the hedge of an asset or liability otherwise carried at (amortized) cost; as regards foreign exchange hedges using nonderivative instruments, some points remain open: (1) measurement basis, when one of the legs otherwise is measured at cost; (2) presentation principles in that situation; (3) treatment applicable to the amounts recognized in equity, for transactions accounted for as cash flow hedges other than forecasted transactions and unrecognized firm commitments; and (4) principles to be followed to designate the hedging instrument and the hedged item in a hedging relationship between a nonderivative monetary liability and a monetary asset forming part of a net investment in a foreign entity, and subsequently to identify the accounting treatment applicable (IAS 21 or 39).

These have not been addressed at this time.

IAS 39: Additional guidance on the derecognition principles. For example, it is unclear what impact, if any, the following would have on a transferor's ability to derecognize a financial asset: (1) whether a true sale at law has occurred; (2) a deep-in-the-money put option held by the transferee; (3) a removal of accounts provision that allows the transferor to remove individual accounts from the pool of assets sold; (4) a "clean-up call" held by the transferor; (5) a "wash sale" transaction; (6) a right of first refusal held by the transferor; and (7) a call option on the beneficial interest in an SPE held by the transferor.

These have not been addressed at this time.

IAS 39: A specific definition is needed of an active market that used criteria such as the publication and availability of market prices, liquidity, breadth, depth of organization and supervision of the market, and homogeneity of the instruments or components thereof in the market.

This has not been addressed at this time.

IAS 39: The effect of credit, counterparty, prepayment and liquidity risk, on the valuation of loans, bank deposits and nontraded equity securities.

The joint working group on financial instruments is developing a paper on fair value measurement considerations.

IAS 39: How the conditions described in IAS 39 would be applied to prepayment options. Such options should not result in an enterprise classifying most of financial assets with a fixed maturity, including purchased loans, out of the held-to-maturity category. Also, it is unclear whether a borrower may be considered an issuer pursuant to this standard. If this were the case, the issue would not be addressed, as the holder should recover substantially all of the carrying amount of a financial asset to satisfy the criteria for a held-to-maturity investment, which is unlikely to occur when a prepayment option is exercised.

This has not been addressed at this time.

IAS 39: Whether derivatives that are part of a hedging relationship should be recognized and measured at fair value if they hedge cost-measured items.

Derivatives that are used for hedging purposes are measured at fair value under the standard.

IAS 39: Whether there are defined circumstances in which a liability that funds trading activities should be recognized at fair value (versus at cost). For example, trading may involve identifying on the balance sheet the financial assets and liabilities that follow trading accounting (i.e., fair value and recognition in net profit and loss).

IAS 39 indicates that just because a liability is used to fund trading activities that does not make the liability held for trading.

IAS 39: Additional guidance may be needed on testing and measuring impairment, which should give the reasons for the differences that remain in the impairment provisions applicable to different categories of assets.

Different impairment factors and discount rates are used for financial assets carried at cost and fair value. For those carried at cost, expected future cash flows are discounted at the financial instrument's original effective interest rate, if it is probable that an enterprise will not be able to collect all amounts due according to the contractual terms. For those carried at fair value, if there is objective evidence that the asset is impaired and if its recoverable amount is below its original acquisition cost, the cumulative net loss that had been recognized directly in equity should be recognized in net profit or loss; the recoverable amount of a debt instrument is the present value of future cash flows discounted at the current market rate of interest for a similar financial asset; also, there is no use of the notion of probability.

IAS 39: The effect of applying IAS 37 to financial guarantees should be reconsidered.

Financial guarantees that provide for payment in the event that the debtor fails to make payment when due are excluded from the scope of IAS 39 and addressed in IAS 37. However, contracts that provide for payment in response to changes in an underlying are subject to IAS 39.

IAS 39: The definitions of equity instruments and liabilities. For example, it is not clear how the features used in IAS 39 interact with those used under IAS 32, 16, 20, and 21 to differentiate equity instruments from liabilities, which use characteristics opposite to those of a financial liability (e.g., no obligation on the issuer to deliver cash or another financial asset, and no obligation on the issuer to exchange another financial instrument with the holder under conditions that are potentially unfavorable to the issuer). Potential inconsistencies between IAS 32 and 39, or within IAS 39, in cases where emphasis is put on the manner in which the obligation is settled: (1) "An obligation of an enterprise to issue or deliver its own equity instruments ... is itself an equity instrument...," (2) IAS 39 refers to the manner the call option is required to be settled. In addition, other questions might arise, for example, could an instrument issued by an enterprise not be considered equity in the following cases: (1) instrument required to be settled in cash or another financial asset and amount to be settled exposed to gain or loss from fluctuations in the price of an enterprise's own equity or from changes in the equity of the enterprise; (2) instrument required to be settled either in cash or another financial asset or in an enterprise's own equity instrument, exposed to fluctuations or changes (see above) and subject to the enterprise's or its shareholders' decision (principal and/or revenue); (3) same instrument as above with the holder participating in the risks or entitled to benefits.

The IASC has added a project on Reporting Financial Performance, which would probably address these matters. Under IAS 39 and 32, an equity instrument is defined as "any contract that evidences a residual interest in the assets of an enterprise after deducting all of its liabilities." IAS 39 elaborates on the definition of an equity instrument issued by an enterprise, using as new differentiating features the exposure to gain or loss from fluctuations in the price of its own equity securities, or from changes in the equity of the enterprise. Under IAS 32, when an obligation exists, the instrument meets the definition of a financial liability regardless of the manner in which the obligation will be settled. Conversely, under IAS 32, a financial instrument that does not give rise to such an obligation is an equity instrument. Conversely, under IAS 39, an instrument should not be considered equity just because it may be settled in shares. Under IAS 32, the absence of an obligation on the issuer characterizes an equity instrument; therefore the manner of settlement and the participation in the risks and returns would have no impact on the qualification. Under IAS 39, an example of an investment that is, in substance, an equity instrument is special participation rights without a specified yield whose return is linked to an enterprise's performance.

IAS 39: Possible inconsistencies between IAS 39 and 21. For example, foreign exchange gains and losses on monetary financial assets generally are reported in net profit or loss, whereas the other component of the change in fair value may be reported in net profit or loss or equity. With regard to differences in presentation, IAS 39 requires that the fair value adjustments (on both the foreign exchange and the other components) always be included in net profit or loss, which would have the advantage to avoid any mismatch in the presentation of financial statements due to foreign exchange translations. It may be necessary to clarify: (1) the order to be followed to determine the carrying amount (foreign exchange differences should be computed in first or second place); (2) when there are adverse changes in value on the foreign exchange component and the other component, whether or not offsetting is permitted in certain circumstances; for example, in the cases where a foreign exchange gain/loss is recognized (generally in net profit or loss): (a) the gain on the other component is recognized (either in net profit or loss or in equity, for assets measured at fair value) or unrecognized (assets measured at cost); (b) the gain/loss on the other component is unrecognized (nontrading liabilities, which are measured at cost); and (3) how changes in value should be presented or disclosed if the value adjustments are not reported in the same place.

These items have not been addressed as of yet.




Wiley Ias 2003(c) Interpretation and Application of International Accounting Standards
WILEY IAS 2003: Interpretation and Application of International Accounting Standards
ISBN: 0471227366
EAN: 2147483647
Year: 2005
Pages: 147

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