Financial Reporting - Raising The Bar: Improving IFRS

As the result of its first improvement project, the IASB has 'tweaked' a number of standards including IAS 16, 38 and 40.

The IASB has recently issued revisions to a number of IFRS as a consequence of completing its first annual improvements project. The IASB views the project as an efficient way to make non-urgent but necessary amendments to IFRS.

The amendments, which are all contained in one document, were published in two parts. Part I contains the amendments that result in accounting changes to presentation, recognition or measurement, while Part II contains terminology or editorial changes only.

The majority of the changes in Part I deal with inconsistencies in some of the less widely applied aspects of standards and may therefore be of little relevance to most preparers. However, three of the improvements are likely to have wider application.

1. Assets that are both rented and subsequently sold

Some businesses, most notably in the leasing industry, both rent and subsequently sell the same asset. However, when such assets are derecognised (i.e. sold), IAS 16 'Property, plant and equipment' does not currently permit gains made to be included as part of revenue. IAS 16 has therefore been amended to permit entities whose normal business is both renting and subsequently selling the same asset to recognise both income from rental and from the subsequent sale as revenue. A consequential amendment to IAS 7 'Statement of cash flows' will also allow both rental and sale cash flows to be included as operating activities.

2. Advertising costs

Preparers' inconsistent interpretation of the application of IFRS to the treatment of advertising and promotion costs has been subject to considerable debate amongst international standards setters. Initially, the International Financial Reporting Interpretations Committee (IFRIC) was asked to issue an interpretation on the subject, but after lengthy consideration they concluded that this was a matter most appropriately addressed by an amendment to IAS 38 'Intangible assets'. This amendment now forms part of the annual improvement project.

The IASB concluded that it would be inconsistent for an entity to recognise as an asset the costs associated with an advertisement that had yet to be published if the economic benefits flowing to the entity were effectively the same as those arising as a result of a brand or customer relationship which, while enhanced, could not itself be recognised as an asset. Consequently, the amendment to IAS 38 prohibits recognising goods or services received in respect of future advertising or promotional activities as assets.

A number of respondents to the exposure draft of the amendment argued that mail-order catalogues are not a form of advertising and should therefore be But the IASB rejected their arguments and has included mail-order catalogues as a specific example of advertising costs.

3. Investment property under construction

Historically, investment property under construction was excluded from the scope of IAS 40 'Investment property'. This was instead dealt with in IAS 16 which required such assets to be accounted for as property, plant and equipment until they were complete – at which point they were transferred to investment property and accounted for under IAS 40.

However, the IASB has acknowledged that developments in the property market mean that it is now possible to measure the fair value of property under construction and, accordingly, it has amended IAS 40 to bring such property within its scope. The amendment allows property under construction to be measured at cost, where fair value cannot be measured reliably until either it becomes measurable or construction is complete. An amendment to IAS 16 removes the current accounting treatment.

These three amendments apply for periods beginning on or after 1 January 2009 with early application permitted in all cases. However, the amendment to IAS 40 can only be applied early if the fair value of investment properties under construction was determined at that date.

Other amendments

There are a number of further changes which are unlikely to have a widespread impact. The other standards subject to amendment are as follows.

• IFRS 5 'Non-current assets held for sale and discontinued operations'

• IAS 1 'Presentation of financial statements'

• IAS 19 'Employee benefits'

• IAS 20 'Accounting for government grants and disclosure of government assistance'

• IAS 23 'Borrowing costs'

• IAS 27 'Consolidated and separate financial statements'

• IAS 28 'Investments in associates'

• IAS 29 'Financial reporting in hyperinflationary economies'

• IAS 31 'Interests in joint ventures'

• IAS 36' Impairment of assets'

• IAS 39 'Financial instruments: recognition and measurement'

• IAS 41 'Agriculture'

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.