Revaluation Group

An important milestone in the work of the Revaluation Group takes place at IASB’s meeting with national standard-setters at the end of October. The New Zealand Chair will present the Group’s report. It is likely that the report will recommend that the option to revalue property, plant and equipment contained in IAS 16 should be retained, and that the basis of valuation should reflect an entry or exit perspective, depending on the most rational course of action that is open to the entity.

The ASB has been participating actively in the Group. It has been arguing for an approach that, like FRS 15 ‘Tangible Fixed Assets’, reflects the courses of action that are open to the entity instead of an approach that relies on a market that is in some cases hypothetical. The ASB is grateful for the considerable help it has had from members of the valuation profession in developing its arguments and for its advice on the circumstances that arise in practice.

Leases

The ASB believes that the arbitrary distinction between operating and finance leases that is required by SSAP 21, IAS 17 and other lease accounting standards internationally is unsatisfactory, and that the comparability (and usefulness) of financial statements would be enhanced if existing standards were replaced by an approach that applied the same recognition and measurement principles to all leases.

The project has been developing proposals for accounting by lessees. The objective of a revised standard would be to ensure that the rights of use that the lessee controls are reported as assets and the obligations the lessee has incurred are reported as liabilities. Key issues concern how optional or contingent lease payments and guarantees should be reflected in the measurement of the lessee’s assets and liabilities. Commentators have argued for various conceptual approaches that could make large differences to the amounts reported in the balance sheet. The ASB is presenting a paper to the IASB at its October meeting.

Financial instruments

FRED 23
In May 2002 the ASB issued an exposure draft of a proposed UK accounting standardFRED 23 ‘Financial instruments: Hedge accounting’, which proposed that hedge accounting should be permitted only if the hedging relationship involved was pre-designated and met certain hedge effectiveness tests. Although FRED 23 has been issued primarily to improve UK accounting, it also represents a step towards convergence of international practice, because the principle on which it is based also underpins the hedge accounting requirements in IAS 39 ‘Financial Instruments: Recognition and Measurement’ and US FAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’.

The comment period for the FRED ended on 16 September and the ASB is now considering the responses received. It will also be monitoring IASB’s discussions on IAS 39, as the proposal is that the UK standard should use the same words as IAS 39 wherever possible.

FRED 30
The ASB has proposed that it should respond to the EU Regulation requiring listed companies to prepare their consolidated financial statements in accordance with adopted international accounting standards by ensuring, as far as possible, that unlisted companies will continue to be able to use the accounting standards that listed companies are required to use. In June 2002, the ASB issued a FRED that explained how this might work in the case of the IASB’s two financial instruments standards, IAS 32 and IAS 39. FRED 30 ‘Financial Instruments: Disclosure and Presentation & Recognition and Measurement’ proposes in particular that although no entity will be forced by a UK standard to comply with the measurement and hedge accounting requirements of IAS 39, those entities that voluntarily choose to adopt fair value accounting will be required to adopt IAS 39’s measurement and hedge accounting requirements in full. Although listed entities preparing consolidated financial statements will be required by the Regulation to comply with IAS 39 in full from 2005, the FRED proposes that the pre-2005 non-mandatory regime it sets out should continue to apply to other entities.

The comment period for the FRED ended on 14 October and the responses received are now being analysed.

UK / IAS convergence programme

FREDs 24 to 29 and a discussion paper on certain proposed amendments to IASB standards, issued in May 2002, are also part of the ASB’s programme to highlight new international proposals and to bring about convergence between UK standards and those of the IASB. In particular, for certain topics, the ASB proposes to implement some international standards in the UK in the next two years, in order to reduce the number that have to be implemented for the first time in 2005.

The comment period for this consultation ended on 16 September, and the ASB has started to consider the responses received. It has, in the first instance, focused on highlighting to the IASB the Board’s views on the international proposals, many of which reflect strong views expressed by UK respondents.

As concerns UK implementation of the international proposals, the ASB has noted that the responses from the DTI’s current consultations (page 2) will be relevant to its deliberations. The IASB’s reactions to responses to its consultation, and its new work programme with FASB (see page 1), will also impact the UK convergence project, because the ASB has expressed its intention to use the final IASB text as the basis for future UK standards.

The ASB is also seeking clarification from the IASB of the likely future scope and timing of work on pensions accounting, before finalising its views on the proposal to defer mandatory application of FRS 17 ‘Retirement Benefits’, which was published in July 2002 and for which the comment period ended on16 September.

OFR

Proposals to update the ASB’s statement on Operating and Financial Review were published in June 2002. The comment period ends on 31 October. The ASB has noted an intention from IASB to consider the potential for an international statement and is therefore very keen to receive views on the UK proposals.

Derecognition

The building and operation of significant public infrastructure assets, such as roads, bridges, tunnels and hospitals are increasingly carried out by the private sector under arrangements made with the public sector. One of the key accounting questions is how to recognise the rights and obligations of the entities on both sides of the arrangements. The current UK approach is set out in Application Note F to FRS 5, ‘Private finance initiative and similar contracts’.

The IASB has invited the ASB to lead a project examining the critical accounting issues involved with such schemes. The project’s initial findings will be reported to the IASB at a 2003 meeting with national standard setters.

Revenue recognition

The Board is continuing to discuss issues arising on revenue recognition on the basis of its 2001 Discussion paper, responses received and further research.

The IASB has a joint project on the subject with the FASB and it is hoped that ASB’s work will provide a useful contribution to an eventual international standard.

First-time application of International Financial Reporting Standards (IFRSs)

The Accounting Standards Board published a consultation paper in July on the IASB’s proposals for the first-time application of IFRSs. Comments should reach the IASB by 31 October.