What is meant by a ‘current issue’?
In relation to ‘current issues’, the ACCA P2 study guide says that candidates need to be able to discuss:
- recent IFRS Standards
- practice and regulatory issues
- proposed changes to IFRS Standards
- problems with extant standards.
2 Recent IFRS Standards
Recently issued standards
IFRS 16 Leases was issued recently. This standard is covered in Chapter 7.
3 Practice and regulatory issues
Key issues for regulators
The European Securities and Markets Authority (ESMA) regularly highlights areas of focus for European national regulators when they review financial statements. The financial reporting topics identified by ESMA in recent years are:
- financial instruments
- impairment of non-financial assets
- defined benefit obligations
- preparation and presentation of consolidated financial statements
- joint arrangements
- deferred tax assets
- fair values
- cash flows.
Transparency of information relating to financial instruments is important for users of the financial statements, particularly as a result of the financial crisis. The disclosure requirements of IFRS 7 are therefore a key area for concern. Entities must include relevant quantitative and qualitative disclosures that reflect the nature of their risk exposure.
Impairment of non-financial assets
The current economic environment increases the likelihood that the carrying amount of assets will exceed their recoverable amounts. Therefore, users must be provided with sufficient information, in accordance with IAS 36, about impairment reviews conducted during a reporting period.
When calculating value-in-use, ESMA emphasises the need to use realistic assumptions. Disclosures should include entity-specific information related to assumptions used when preparing discounted cash flows (such as growth rates, discount rate and consistency of such rates with past experience) and sensitivity analyses.
Defined benefit obligations
A defined benefit obligation should be discounted using the yield on high-quality corporate bonds. However, if a country does not have a deep market in such bonds then the market yields on government bonds should be used instead. As a result of the economic crisis, some entities will need to change their approach. ESMA emphasises the need for entities to be transparent about the yields used and the reasons for using them.
Information about provisions is key because it highlights the risks and uncertainties that an entity is subject to. Yet the information provided is often over-aggregated and overly standardised in nature. ESMA emphasises that, in accordance with IAS 37, entities should disclose descriptions of the nature of the obligations concerned, the expected timing of outflows of economic benefits, uncertainties related to the amount and timing of those outflows as well as major assumptions about future events. This should be done for each class of provision and should reflect the risks specific to the entity.
Preparation and presentation of consolidated financial statements
ESMA notes that entities must consult the application guidance in IFRS 10 Consolidated Financial Statements when assessing whether control exists. Such assessments require significant judgement and so entities must carefully explain these judgements in the financial statement disclosures.
ESMA has also stressed the importance of disclosing whether there are restrictions on the use of cash and cash equivalent balances within the group.
The classification of a joint arrangement is based on the rights and obligations of the parties to the arrangement. ESMA notes that joint arrangements with similar characteristics may need to be classified in different ways depending on their structure. As such, it is vital that entities adequately disclose the significant judgements and assumptions made regarding the nature of interests in joint arrangements.
Deferred tax assets
In accordance with IAS 12 Income Taxes, the recognition of a deferred tax asset is limited to the extent that future taxable profits will be available against which the deductible temporary differences can be utilised. Recent losses provide strong evidence that future profits may be lacking and therefore the recognition of deferred tax assets should be conditional on convincing evidence. ESMA notes that entities should disclose the nature of the evidence used when assessing deferred tax asset recognition, the period used for the assessment, and any key judgements or assumptions made.
ESMA believes that there is room for improvement with regards to the measurement and disclosure of the fair values of non-financial assets. Fair value measurement should maximise observable inputs.
ESMA notes that entities need to provide greater disclosure of the reasoning behind the classification of cash flows, particularly when this is judgemental. Entities also need to assess more carefully whether their financial instruments meet the definition of a ‘cash equivalent’.
4 Proposed changes to IFRS Standards
The change process
The International Accounting Standards Board (the Board) is continually engaged in projects to update and improve existing standards and introduce new ones.
At any time there are a number of discussion papers (DPs) and exposure drafts (EDs) in issue as part of these projects.
A good source of up to date information is the current projects page of the Board’s website at www.iasb.org.
The following table outlines documents, other than issued IAS and IFRS Standards, that are examinable in P2 and indicates where these are covered in this text.
|IFRS Practice Statement: Application of Materiality in||1|
|ED 2015/3 Conceptual Framework for Financial Reporting||1|
|ED 2015/1 Classification of Liabilities – proposed||3|
|amendments to IAS 1|
|Practice Statement on Management Commentary||17|
|The International <IR> Framework||17|
|ED 2014/4 Measuring Quoted Investments in Subsidiaries,||19|
|Joint Ventures and Associates at Fair Value|
5 Extant standards
Critiques of existing standards
Although knowledge of developments in the accountancy profession and upcoming standards are a central part of the P2 syllabus, the Examiner has also noted the importance of being able to critique existing accounting standards. Critiques of existing standards can be found within the relevant chapters in this text. For example:
- The Conceptual Framework for Financial Reporting –
- IAS 1 Presentation of Financial Statements –
- IFRS 15 Revenue from Contracts with Customers –
- IFRS 2 Share-based payments –
- IAS 37 Provisions, Contingent Liabilities and Contingent Assets – 0
- IAS 12 Income Taxes – 2
- IFRS 8 Operating Segments – 3
- IFRS 3 Business Combinations – 9
- IAS 7 Statement of Cash Flows – Chapter 24
Test your understanding 1 – Mineral
Mineral owns a machine that is central to its production process. At the reporting date, the machine’s carrying amount exceeds its tax base. This difference is due to the revaluation of the asset to fair value in the financial statements. Due to its importance, it is extremely unlikely that the machine will be sold.
At the year-end, Mineral received $10 million. In return, Mineral must issue ordinary shares in 12 months’ time. The number of shares to be issued will be determined based on the quoted price of Mineral’s shares at the issue date.
For each of the transactions above:
- Briefly explain how it should be accounted for in accordance with International Financial Reporting Standards
- Discuss why the accounting treatment could be argued to contradict the definition of the elements given by the Framework.