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| Subject: IASwillsoonbeapplied in atleast fifteendifferentcountriesinEurope and in other regions of the world. | |
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Author: NEWS ABOUT INTERNATIONAL ACCOUNTING STANDARDS 24/12/02 |
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Date Posted: 20:40:43 12/28/02 Sat http://www.iasplus.com/index.htm NEWS ABOUT INTERNATIONAL ACCOUNTING STANDARDS 24 December 2002: Views from the SEC on convergence In a presentation titled International Developments: Convergence and You at the annual AICPA SEC conference, Jackson M. Day, Acting Chief Accountant of the US Securities and Exchange Commission, said: [Link to Full Text] Convergence of accounting standards is the centerpiece of the efforts to build a global financial reporting infrastructure. And, the desire for convergence of accounting standards is greater than ever. Achieving this would greatly aid cross-border investing and decision-making.... IAS will soon be applied in at least fifteen different countries in Europe and in other regions of the world. We recognize that achieving the right balance of sufficiently detailed principles and base implementation guidance is extremely important. Appropriate use of national and international interpretative bodies, such as the Emerging Issues Task Force in the U.S. and the International Financial Reporting Interpretations Committee, or IFRIC, is a critical element to the success of this effort. While not every question can be answered, there cannot be fifteen answers to a pervasive question as well. That would undermine the credibility of the system. http://www.unavarra.es/gempresas/pdf/dt34-99.pdf http://www.aasb.com.au/public_docs/acc_interpret/AI01_6-99.pdf http://www.iasplus.com/standard/ias38.htm HISTORY OF IAS 38 February 1977 Exposure Draft E9, Accounting for Reearch and Development Costs July 1978 IAS 9 (1978), Accounting for Research and Development Costs 1 January 1980 Effective Date of IAS 9 (1978) August 1991 Exposure Draft E37, Research and Development Activities December 1993 IAS 9 (1993), Research and Development Costs 1 January 1995 Effective Date of IAS 9 (1993) June 1995 Exposure Draft E50, Intangible Assets August 1997 E50 was modified and re-exposed as Exposure Draft E59, Intangible Assets September 1998 IAS 38, Intangible Assets 1 July 1999 Effective Date of IAS 38 (1998) 5 December 2002 Significant amendments proposed as part of the IASB's project on Business Combinations RELATED INTERPRETATIONS SIC 6, Costs of Modifying Existing Software SIC 32, Intangible Assets – Web Site Costs SUMMARY OF IAS 38 Objective The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another IAS. The Standard requires an enterprise to recognise an intangible asset if, and only if, certain criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets. Scope IAS 38 applies to all intangible assets other than: [IAS 38.1] financial assets mineral rights and exploration and development costs incurred by mining and oil and gas companies intangible assets arising from insurance contracts issued by insurance companies intangible assets covered by another IAS, such as intangibles held for sale, deferred tax assets, lease assets, assets arising from employee benefits, and goodwill. Key Definition Intangible asset: An identifiable nonmonetary asset without physical substance. An asset is a resource that is controlled by the enterprise as a result of past events (for example, purchase or self-creation) and from which future ecnomic benefits (inflows of cash or other assets) are expected. Thus, the three critical attributes of an intangible asset are: [IAS 38.7] identifiability control future economic benefits Examples of possible intangible assets include: computer software patents copyrights motion picture films customer lists mortgage servicing rights licenses import quotas franchises customer and supplier relationships marketing rights Intangibles can be acquired: by separate purchase as part of a business combination by a government grant by exchange of assets by self-creation (internal generation) Recognition IAS 38 requires an enterprise to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if: [IAS 38.19] it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and the cost of the asset can be measured reliably. This requirement applies whether an intangible asset is acquired externally or generated internally. IAS 38 includes additional recognition criteria for internally generated intangible assets (see below). The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. [IAS 38.20] If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognised as an expense when it is incurred. [IAS 38.56] The Standard also prohibits an enterprise from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense. [IAS 38.59] In the case of a business combination, expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date. If the intangible meets the definition in IAS 38, recognise and measure at fair value. If fair value cannot be measured reliably, include the cost in goodwill. [IAS 38.56] Initial Measurement Intangible assets are initially measured at cost. [IAS 38.22] Subsequent Expenditure Subsequent expenditure on an intangible asset after its purchase or completion should be recognised as an expense when it is incurred, unless it is probable that this expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance and the expenditure can be measured and attributed to the asset reliably. [IAS 38.60] Research and Development Costs Charge all research cost to expense. [IAS 38.42] Development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have been established. This means that the enterprise must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. [IAS 38.45] If an enterprise cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the enterprise treats the expenditure for that project as if it were incurred in the research phase only. Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets. [IAS 38.51] The following items must be expensed internally generated goodwill [IAS 38.36] start-up, pre-opening, and pre-operating costs [IAS 38.57] training cost [IAS 38.57] advertising cost [IAS 38.57] relocation costs [IAS 38.57] Computer software Purchased: capitalise Operating system for hardware: include in hardware cost Internally developed (whether for use or sale): charge to expense until technological feasibility, probable future benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost. Amortisation: over useful life (presumption of not more than 20 years), based on pattern of benefits (straight-line is the default). Amortisation and Impairment An intangible asset should be amortised over the best estimate of its useful life. [IAS 38.79] IAS 38 does not permit an enterprise to assign an infinite useful life to an intangible asset. It includes a rebuttable presumption that the useful life of an intangible asset will not exceed 20 years from the date when the asset is available for use. If there is persuasive evidence that the useful life of an intangible asset will exceed 20 years (cases should be rare), an enterprise should amortise the intangible asset over the best estimate of its useful life. The amortisation method should reflect the pattern by which the asset's economic benefits will be used up. [IAS 38.88]. If an enterprise controls an intangible asset by contract, the amortisation period should not exceed the contract period unless the enterprise has a legal right to renew and renewal is virtually certain. [IAS 38.85] The residual value of an intangible asset should normally be assumed to be nil unless either there is a commitment by a third-party purchaser to buy the asset or there is an active market for this kind of intangible asset. [IAS 38.91] The amortisation period and method should be reviewed annually. [IAS 38.94] IAS 36, Impairment, applies to intangible assets. There is a compulsory annual test if amortisation period exceeds 20 years or intangible is not ready for use), plus special disclosures. Measurement Subsequent to Initial Recognition After initial recognition the benchmark treatment is that intangible assets should be carried at cost less any amortisation and impairment losses. [IAS 38.63] The allowed alternative treatment is that certain intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortisation and impairment losses. Revaluation is permitted only if fair value can be determined by reference to an active market. Such markets are expected to be rare for intangible assets. [IAS 38.64] Examples where they might exist: milk quotas stock exchange seats taxi medallions Disclosure For each class of intangible asset, disclose: [IAS 38.107 and 38.111] useful life or amortisation rate amortisation method gross carrying amount accumulated amortisation line items in the income statement in which amortisation is included reconciliation of the carrying amount at the beginning and the end of the period showing: additions retirements/disposals revaluations impairments reversals of impairments amortisation foreign exchange differences explanation about any intangible being amortised over longer than 20 years description and carrying amount of individually material intangible assets certain special disclosures about intangible assets acquired by way of government grants information about intangible assets whose title is restricted commitments to acquire intangible assets Comparative prior-period information is not required. [IAS 38.107] Additional disclosures are required about: intangible assets carried at revalued amounts [IAS 38.113] the amount of research and development expenditure recognised as an expense in the current period [IAS 38.115] http://www.sec.gov/news/speech/spch121302jmd.htm Speech by SEC Staff: International Developments: Convergence and You by Jackson M. Day Acting Chief Accountant U.S. Securities & Exchange Commission AICPA SEC Developments Conference December 13, 2002 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the speaker, and do not necessarily represent the views of the Commission or of the speaker's colleagues upon the staff of the Commission. Thank you very much. I am delighted to have this opportunity to speak with you today about such a timely and critical topic. My goals today are to describe how international convergence is affecting U.S. standard setting and to encourage you to become an active participant in the process. During the last 12 months, the accounting profession in the United States has been significantly challenged and changed. At the same time, momentum is building overseas towards creating a global financial reporting infrastructure, which would also be a tremendous change. Perhaps the most significant of these international developments is the adoption of International Accounting Standards by at least fifteen different countries around the world. EU, Australian, and Russian public companies, among others, will be required to use International Accounting Standards in the next few years. For example, 7000 companies in the European Union will be required to adopt IAS by 2005. That's right - 7000 companies in the EU alone. The anticipated conversion to international accounting standards by countries throughout the world has been the catalyst for a number of recent actions that are intended to encourage financial reporting consistency and transparency on a global level. These developments are not limited to the convergence of accounting standards. Currently, countries such as Canada, the UK, and Japan have efforts underway to introduce or improve minimum standards for audit quality assurance and to strengthen auditor independence. China had issued guidance related to professional ethics. And, the Committee of European Securities Regulators, or CESR, has issued for comment a Draft Statement of Principles on Enforcement. All of these advancements are very encouraging and important to the continual development of the world capital markets. In the interest of investors, I assure you we will be closely monitoring all of these efforts. The consequences of these and other international developments are already impacting preparers and auditors in the United States today, even though US GAAP continues to be our standard. Allow me to elaborate. Convergence - What Does it Mean? Convergence of accounting standards is the centerpiece of the efforts to build a global financial reporting infrastructure. And, the desire for convergence of accounting standards is greater than ever. Achieving this would greatly aid cross-border investing and decision-making. While convergence can have a wide variety of different meanings, it is generally assumed that, ultimately, all standard setters should agree on a single, high-quality answer. The accounting standards setters at the IASB, in the U.S., and elsewhere are working together as never before. They are collaborating on projects and working toward convergence as they address urgent issues and improve accounting. The SEC staff has encouraged both the FASB and IASB to develop reasonable and pragmatic short-term solutions to eliminating as many accounting principle differences as possible. In particular, the US FASB and the IASB have recently published a memorandum of understanding regarding their plans for convergence of global accounting standards, a decision that was praised by many. The recent memorandum of understanding is evidence that both Boards are working actively on solutions. In particular, the MOU specifies that both Boards plan to issue an Exposure Draft in 2003 related to convergence efforts. Both Boards by virtue of the MOU have given high priority to work on "short-term convergence" - to iron out as many differences as possible with an eye towards the approaching conversion to IAS by specific countries. That priority is important, because improvements to the accounting model will go on forever. With that said, by addressing numerous issues that can be resolved in the short-term, the Board should be able to reduce differences and make comparisons easier for investors. Preparers and users of financial statements must be willing to accept that convergence of accounting standards will involve changes to both existing US GAAP and IAS. While it is premature to speculate about what changes may be forthcoming, it should be understood by everyone that achieving high quality accounting standards in a relatively short-time frame may involve picking the best of two accounting alternatives or developing an alternative approach that does not currently exist. Changes in both US GAAP and IAS will occur, and it may be to the other way of thinking. Some may be initially uncomfortable with that. As examples, look at the effects of international efforts on matters in the U.S. on issues such as business combinations and financial instruments. And the FASB's revenue recognition project is part of a joint effort with the IASB. And so even if you are a single line domestic manufacturing company with no foreign customers, your accounting may still change because of what's happening in London. At the end of the day, investors should be the winners because the convergence of accounting standards should provide more transparency and disclosure. Both U.S. and international accounting standards have been criticized over the past few years. IAS has been criticized for being incomplete, too full of optionality, and lacking sufficient details to ensure comparable, consistent, and appropriate implementation. In contrast, U.S. standards have been criticized for being overly detailed and complex and containing on/off switch rules that worship the form and not the substance of the transactions. And both sets of standards have been criticized for their use and proposed use of fair value measurements without providing the necessary implementation guidance and when the relevance of fair value as a measurement basis has been questioned. What is needed is balance. Balance between the mixture of principles and rules. Balance in the level of detail of implementation guidance. And balance between relevance and reliability. Standard setters around the world have plenty of work ahead. How Can Converged Standards be Effective? Now, let me address the issue of whether converged standards can be effectively applied on a worldwide basis. Achieving consistent, comparable, and appropriate application of accounting standards may be difficult under IAS because of diversity of backgrounds and regulatory structures. IAS will soon be applied in at least fifteen different countries in Europe and in other regions of the world. We recognize that achieving the right balance of sufficiently detailed principles and base implementation guidance is extremely important. Appropriate use of national and international interpretative bodies, such as the Emerging Issues Task Force in the U.S. and the International Financial Reporting Interpretations Committee, or IFRIC, is a critical element to the success of this effort. While not every question can be answered, there cannot be fifteen answers to a pervasive question as well. That would undermine the credibility of the system. Let's talk about how to achieve proper and consistent application. Preparers and auditors should develop worldwide networks for communication and consultation on challenging questions. Consultations should ensure that a consistent, high quality accounting or auditing solution is achieved. The use of cross-border experts should be formalized, and the principles being applied and any relevant precedents should be carefully considered. Through this process, the difficult questions can be sifted out. By working together, everyone's interests, especially those of the investors we serve, can be advanced. How Does This Impact Me? At the beginning of my talk, I set out to describe how convergence is impacting you today. Just in case I have not been effective, let me talk specifics for a few moments. Did you realize that the FASB will soon begin deliberations on converging specific areas of US GAAP and IAS, with an Exposure Draft anticipated to be issued by mid-2003? Did you realize that the EITF has been encouraged by the FASB to coordinate activities with the IFRIC - and vice versa for the IFRIC and the IASB? Did you realize that the EITF is in the process of changing its operating procedures, and that they likely will more closely align with IFRIC? Did you realize that the FASB has a research project designed to identify, update, and monitor differences between US GAAP and IAS, with the goal to provide input to the FASB's agenda? Did you realize that the FASB and the IASB have split the responsibilities for the initial research and debates over short-term convergence issues, with the FASB focusing on matters such as research and development, nonmonetary asset exchanges, and others, and the IASB considering topics such as income taxes, discontinued operations, and others? What Else Can Accountants Do? It is an exciting time to be an accountant. Global accounting standards are advancing rapidly. In light of those changes, let me leave you with a few additional thoughts for consideration. Technical and other professional training programs take on a renewed importance in our current environment. Internal processes related to the conduct of audits could be bolstered by a focus on audit quality. Regulators will need increased cross-border communication regarding application of accounting standards. The recent spotlight on the accounting profession will hopefully raise the bar in terms of education, training, execution, and overall quality control considerations for accountants and auditors everywhere. Accountants and auditors can take advantage of events in the global marketplace to strengthen their competencies and refresh their companies' and firms' internal practices. I challenge you to just do it! Conclusion I leave you today with a few questions to ask yourself when assessing your accounting department or firm: Are international developments being monitored to determine the impact on domestic accounting work? Are education and training programs related to international accounting standards being rolled out to broaden technical competencies? Has a robust internal consultative process been developed that facilitates consistent, high quality solutions to accounting and auditing issues - both domestic and international? Are appropriate quality control procedures in place to oversee international accounting and auditing work? What else is being done to contribute to building a global financial reporting infrastructure? Thank you for the opportunity to address you during what I believe is a historic time. I will be happy to take any questions during the Q&A. http://www.sec.gov/news/speech/spch121302jmd.htm [ Next Thread | Previous Thread | Next Message | Previous Message ] |