Technical Update May-June 2014

IFAC and CIPFA Release Important New Framework for Good Governance in the Public Sector

The International Federation of Accountants (IFAC) and the Chartered Institute of Public Finance and Accountancy (CIPFA) have released international framework on governance in the public sector. The framework contains seven key principles designed to ensure that public sector entities achieve their intended outcomes whilst acting in the public interest at all times. The framework encourages a focus on sustainable economic, social and environmental outcomes and the links between governance and public financial management, and supports the use of International Public Sector Accounting Standards (IPSAS) and Integrated Reporting.

IASB issues amendments to IAS 16 and IAS 41 for bearer plants

The International Accounting Standards Board (IASB) has published amendments that change the financial reporting for bearer plants. The IASB decided that bearer plants should be accounted for in the same way as property, plant and equipment in IAS 16 Property, Plant and Equipment, because their operation is similar to that of manufacturing. Consequently, the amendments include them within the scope of IAS 16, instead of IAS 41. The produce growing on bearer plants will remain within the scope of IAS 41. Entities are required to apply the amendments for annual periods beginning on or after 1 January 2016. Earlier application is permitted.

Prior to these amendments, IAS 41 Agriculture required all biological assets related to agricultural activity to be measured at fair value less costs to sell. This is based on the principle that the biological transformation that these assets undergo during their lifespan is best reflected by fair value measurement. However, there is a subset of biological assets, known as bearer plants, which are used solely to grow produce over several periods. At the end of their productive lives they are usually scrapped. Once a bearer plant is mature, apart from bearing produce, its biological transformation is no longer significant in generating future economic benefits. The only significant future economic benefits it generates come from the agricultural produce that it creates.

IASB publishes Exposure Draft Investment Entities–Applying the Consolidation

The IASB has published for public comment the Exposure Draft Investment Entities–Applying the Consolidation Exception (Proposed amendments to IFRS 10 and IAS 28).

In October 2012, the IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) providing an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities which meet the definition of an ‘investment entity’. Subsequently, the IFRS Interpretations Committee received several submissions regarding the implementation of the exemption. The issues originated from submissions to the IFRS Interpretations Committee, which recommended that the IASB should amend the Standards to clarify the requirements in order to reduce the risk of diversity developing in practice.

The proposed amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures are designed to clarify three issues about the application of the requirement for investment entities to measure subsidiaries at fair value instead of consolidating them. The Exposure Draft is open for comments until 15 September 2014. The proposed amendments:

confirm that the exemption from presenting consolidated financial statements continues to apply to subsidiaries of an investment entity that are themselves parent entities;
clarify when an investment entity parent should consolidate a subsidiary that provides investment-related services instead of measuring that subsidiary at fair value; and
simplify the application of the equity method for an entity that is not itself an investment entity but that has an interest in an associate that is an investment entity.

IASB and FASB issue converged Standard on revenue recognition

The IASB has published its new revenue Standard, IFRS 15 ‘Revenue from Contracts with Customers’. At the same time, the US-based Financial Accounting Standards Board (FASB) has published its equivalent revenue standard, ASU 2014-09 ‘Revenue from Contracts with Customers’ (Topic 606).The standards are the result of a convergence project between the two Boards. The new standard provides a single, principles based five-step model to be applied to all contracts with customers. The five steps are:

Identify the contract with the customer,
Identify the performance obligations in the contract,
Determine the transaction price,
Allocate the transaction price to the performance obligations in the contracts,
Recognise revenue when (or as) the entity satisfies a performance obligation.

The standard supersedes IAS 18 ‘Revenue’, IAS 11 ‘Construction Contracts’ and a number of revenue-related interpretations. Application of the standard is mandatory for all IFRS reporters and it applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts.

IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for: leases within the scope of IAS 17 Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. IFRS 15 must be applied in an entity’s first annual IFRS financial statements for periods beginning on or after January 1, 2017.

IAESB Proposed Changes to Certain Provisions of the Code Addressing Non-Assurance Services for Audit Clients

The International Ethics Standards Board for Accountants (IESBA, the Ethics Board) has proposed changes aimed at enhance the independence provisions in the Code of Ethics for Professional Accountants (the Code) by:

Providing additional guidance and clarification regarding what constitutes management responsibility, including enhanced guidance regarding how the auditor can better satisfy itself that client management will make all judgments and decisions that are the responsibility of management, when the auditor provides non-assurance services to an audit client;
Providing better guidance and clarification on the concept of “routine or mechanical” services relating to the preparation of accounting records and financial statements for non-public interest entity audit clients; and
Removing the provision that permits an audit firm to provide certain bookkeeping and taxation services to public interest entity audit clients in emergency situations.

Comments on Exposure Draft Proposed Changes to Certain Provisions of the Code Addressing Non-Assurance Services for Audit Clients can be submitted by August 18, 2014.

IAASB Proposes Enhancements to Auditing Standards Focused on Financial Statement Disclosures

The International Auditing and Assurance Standards Board (IAASB) has released for public comment proposed changes to the International Standards on Auditing (ISAs) to clarify expectations of auditors when auditing financial statement disclosures. The proposals include new guidance on considerations relevant to disclosures—from when the auditor plans the audit and assesses the risks of material misstatement, to when the auditor evaluates misstatements and forms an opinion on the financial statements. The IAASB invites all stakeholders to comment on the IAASB Exposure Draft of proposed changes to the ISAs to address disclosures in an audit. Comments can be submitted at IAASB’s website by September 11, 2014.