The International Accounting Standards Board (IASB) recently published Exposure Draft ED/2012/2 Annual Improvements to IFRSs 2011 – 2013 Cycle (ED 229 in Australia) which sets out proposed amendments to four standards under the annual improvements project. The annual improvements project provides a way for the IASB to deal efficiently with a collection of narrow scope amendments to IFRSs.
The changes proposed in the 2011-2013 annual improvement cycle cover the following standards:
- AASB 1 First-time Adoption of International Financial Reporting Standards
- AASB 3 Business Combinations
- AASB 13 Fair Value Measurement
- AASB 140 Investment Property.
The proposed effective date for the amendments, if finalised, is for annual periods beginning on or after 1 January 2014. It is proposed that earlier application is permitted for all of the amendments. All amendments apply retrospectively, except for the amendments to AASB 140 Investment Property, which are prospective.
Comments on the exposure draft are due to the Australian Accounting Standards Board (AASB) by 4 February 2013 and to the IASB by 18 February 2013.
AASB 1 First-time Adoption of International Financial Reporting Standards
Issue: Meaning of effective standards
There has been uncertainty about which version of a standard should be applied in an entity’s first IFRS financial statements where a new/revised standard has been issued that is not yet mandatory but can be adopted early.
The IASB proposes to amend the basis of conclusions to state that an entity has an option to use either the current mandatory standard or the new standard that is not yet mandatory, if that new standard permits early application. However, if the new standard (that is not yet mandatory) is adopted early in the first IFRS financial statements, it must be applied in all periods presented in its first IFRS financial statements, unless that new IFRS provides an exemption or an exception that permits or requires otherwise.
AASB 3 Business Combinations
Issue: Scope exception for joint ventures
AASB 3 currently includes a scope exemption for the formation of a ‘joint venture’, which under AASB 131 Interests in Joint Ventures covers jointly controlled entities, jointly controlled operations and jointly controlled assets. The wording for the scope exemption was not amended when AASB 131 was replaced by AASB 11 Joint Arrangements, which uses the term ‘joint venture’ to describe a specific arrangement. Under AASB 11, all joint arrangements are classified as either ‘joint ventures’ or ‘joint operations’. This means that not all joint arrangements are covered by the scope exemption in AASB 3.
There was also uncertainty over whether the exemption applied only to the accounting by the joint arrangement in its own financial statements or to the accounting by the parties to the joint arrangement for their interest in the joint arrangement.
The proposed amendments to AASB 3 clarify that:
- The formation of all types of joint arrangements as defined in AASB 11 (i.e. joint ventures and joint operations) are excluded from the scope of AASB 3
- The scope exception only applies to the accounting by the joint arrangement in its own financial statements and not to the accounting by the parties to the joint arrangement for their interests in the joint arrangement.
AASB 13 Fair Value Measurement
Issue: Portfolio exception
AASB 13, paragraph 52, contains a scope exception that permits an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis. This is referred to as the ‘portfolio exception’.
It is unclear whether the exception also applies to other contracts under AASB 139 Financial Instruments: Recognition and Measurement or AASB 9 Financial Instruments that do not meet the definition of ‘financial assets’ and ‘financial liabilities’ under AASB 132 Financial Instruments: Presentation (such as contracts to buy or sell non-financial items that can be net settled).
The proposed amendment clarifies that the portfolio exception applies to all contracts within the scope of AASB 139 (or AASB 9), regardless of whether they meet the definition of financial assets or financial liabilities in AASB 132 Financial Instruments: Presentation.
AASB 140 Investment Property
Issue: Asset acquisition or business combination
There is divergence in practice in dealing with the scope interaction of AASB 3 Business Combinations and AASB 140 Investment Property. Some view AASB 3 and AASB 140 as mutually exclusive when considering the accounting required for the acquisition of an investment property with associated insignificant ancillary services and that such an acquisition is of a single asset called ‘investment property’.
However, others do not view AASB 3 and AASB 140 as being mutually exclusive, their view being that when an entity acquires an investment property with insignificant ancillary services, it has to make two independent assessments:
- Firstly, whether the acquisition meets the definition of an asset, a group of assets, or a business under AASB 3
- Secondly, whether the acquired property meets the definition of an investment property under the guidance set out in AASB 140, paragraphs 7 to 15.
The IASB agrees with the latter view and proposes an amendment be made to AASB 140 to clarify that:
- Judgement is required to determine whether the acquisition of investment property is the acquisition of an asset, a group of assets or a business combination in the scope of AASB 3
- The judgement of whether it is a business combination is based on the guidance in AASB 3 and not on AASB 140, paragraphs 7 to 15
- The judgement needed to distinguish investment property from owner-occupied property is based on AASB 140, paragraphs 7 to 15 and not the judgement of whether or not a transaction is a business combination.