November 2009
International Financial Reporting Standards
Some key accounting
issues
AOSSG Malaysia
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASC Foundation or the IASB
Lessor accounting
• DP describes lessor issues
– No preliminary views
• Discussed two models
– Derecognition approach
– Recognition of a performance obligation
Lessor accounting
Derecognition
approach
Performance
obligation approach
Leased asset
No
Yes
Receivable
Yes
Yes
Performance
obligation
No
Yes
Revenue
At the start of the lease
Over the lease term
Interest income
Yes
Yes
Lessor accounting
• Way forward?
– Different accounting for different business models?
– Manufacturer/dealers
– Finance companies
– Rental companies
– Investment properties
• Next steps
– Further discussions on lessor model
– Decide whether to include lessor accounting in ED
Consolidations: agency relationships
• Control – power criterion
– Removal (“kick out”) rights
– ED 10: the right to remove a party, without cause, is
an indicator that the party acts as an agent
– FASB –to be substantive must be held by one party
(FAS 167)
– IASB – can be substantive if held by more than one
party
Consolidations: agency relationships
• Benefits/returns criterion
– Remuneration
– ED10: remuneration commensurate with the services
performed by a party is an indicator the party acts as
an agent
– FASB – control if (a) fee is significant (in monetary
terms) and absorbs significant variability of expected
returns and/or (b) holds variable interest that absorbs
significant variability of expected returns
– IASB – control if receive or exposed to (a) majority of
variable returns and/or (b) significantly more variable
returns than any other party
Consolidations: defacto control
• ED 10: an entity with less than half the voting rights in
another entity can have the power to direct the activities
of that entity if it has more voting rights than any other
party and those voting rights are sufficient to give it the
ability to direct the activities of the entity.
• Is it necessary that there be active demonstration of
power to direct activities?
Emission trading schemes
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1 Jan Company receives free of charge 100 allowances from administrator.
MV at 1 Jan, €10 per allowance. Plans to emit 10 tonnes per month.
Allowances
•
Allowances received free of charge meet the asset definition
‘An asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the entity.’
[IASB Framework]
•
how initially recognised and measured?
•
does intended use of allowances matter (eg held to settle obligation vs
held for trading)
2008 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Obligation to repay allowances
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Contentious: Is there a present obligation on receiving allowances?
‘A liability is a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits.’ [IASB Framework]
• When does repayment of allowances that is contingent on an entity’s future
actions create a liability?
– View 1: when emissions occur
– View 2: upon receipt of allowances
2008 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
cross cutting issues
View 1: when emissions occur
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• no obligation arises until company emits. Until that point, company can
avoid outflow by its future actions
– estimated future repayment forms unit of account with related assets
– measurement mismatch if allowances initially measured @FV
• proponents argue View 1 is consistent with accounting for
– decommissioning costs (IAS 37 Provisions, Contingent Liabilities
and Contingent Assets)
– future operating costs (IAS 37)
– tax on future taxable profits (IAS 12 Income Taxes)
2008 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
View 2: upon receipt of allowances
• obligation to repay allowances is unconditional. Only the ultimate
amount is uncertain
– estimated future repayment creates separate unit of account (ie
liability)
– how is liability initially measured (@FV of allowances received)?
• proponents argue View 2 is consistent with accounting for
– contingent consideration (IFRS 3 Business Combinations)
– contingent rents (Discussion Paper Leases)
– regulatory liabilities (Exposure Draft Rate-regulated Activities)
2008 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
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Tentative decisions of the boards
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IASB (March 2009)
• allowances received free of charge are recognised as assets
(initially measured @FV)
• liability to repay allowances received free of charge
(initially measured @FV of allowances received)
FASB (April 2009)
• FASB did not make any decisions
• staff were asked to perform additional analysis about the existence of
liabilities in various fact patterns
• initial analysis was presented in a July 2009 FASB education session
related to stand-ready obligations
2008 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org
Insurance: measurement approaches
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Selected approaches (tentatively)
• IASB:
– Updated IAS 37 model, modified to exclude no day one gains
– Pre-claims short-duration - unearned premium method
• FASB:
– Current fulfilment value with a composite margin
– [Unearned premium approach yet to be discussed by FASB]
• ED will probably explain both approaches
© 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Measurement approaches continued
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The updated IAS 37 model:
• What would an insurer rationally pay at reporting date to be
relieved of an insurance obligation
– No active market: estimated by the value of not having to
fulfil the obligation (building block approach)
• Margins for insurance contracts:
– Risk margin
– Other services (if any)
– Residual margin, to be released over the coverage period
© 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
Measurement approaches continued
Current Fulfilment Value:
• The expected present value of the costs of fulfilling the
insurance obligation with the policyholder over time
– Building block approach
• Margins for insurance contracts :
– Composite margin, calibrated at inception to the
premium [release of composite margin yet to be
discussed by FASB]
© 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
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Measurement approaches continued
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Overview of Margins
Composite Margin
Residual Margin
Service Margin
Risk Margin
Cash outflows
Premiums
IAS 37
© 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
CFV
Questions or comments?
Expressions of individual views
by members of the IASB and
its staff are encouraged.
The views expressed in this
presentation are those of the
presenter. Official positions of
the IASB on accounting matters
are determined only after
extensive due process
and deliberation.
© 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
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