IASB

IAS 32, FINANCIAL INSTRUMENTS: PRESENTATION

The International Accounting Standards Board (IASB) has issued an amendment to

IAS 32, Financial Instruments: Presentation, and IAS 1, Presentation of Financial Statements, which deals with puttable financial instruments and obligations arising on liquidation.

IAS 32 requires a financial instrument shall be classified as a liability if the holder of that instrument can require the issuer to redeem it for cash. That straightforward principle works well in most situations. However, many financial instruments that would usually be considered equity, including some ordinary shares and partnership interests, allow the holder to 'put' the instrument, that is require the issuer to redeem it for cash. Currently these financial instruments are treated as liabilities, rather than as equity.

The amendment to

IAS 32 requires that these financial instruments should be classified as equity provided they have particular features and meet specific conditions. This will lead to the reclassification as equity of some:

•    puttable financial instruments; and

•    instruments, or components of instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation.

The amendment affects a relatively small, but significant, group of instruments, for example some shares issued by cooperative entities, some partnership interests and some shares issued by limited life entities.

For such an instrument to be classified as equity, the instrument must have all the following features. It must entitle the holder to a pro rata share of the entity's net assets in the event of liquidation. It must be in a class of instruments that is subordinate to all other classes of instruments and all the instruments in that class must have identical features.

The instrument must not include any other contractual obligation that would otherwise mean that it meets the definition of a financial liability. Lastly, the total expected cashflows attributable to the instrument over its life must be based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity over the life of the instrument.

In addition to the instrument meeting all the above features, the issuer must have no other financial instrument or contract that has:

•    total cashflows based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity; and

•    the effect of substantially restricting or fixing the residual return to the puttable instrument holders.

The amendment to

IAS 1 requires additional disclosures about the instruments affected by the amendments. As a consequence of the classification of such instruments as equity, they will no longer be within the scope of IFRS 7, Financial Instruments: Disclosures.

The amendments to

IAS 32 and IAS 1 will apply for annual periods beginning on or after 1 January 2009. Earlier application is permitted. The amendments are available from www.iasb.org.

IAASB

AUDITING ACCOUNTING ESTIMATES

The International Auditing and Assurance Standards Board (IAASB) has issued a revised ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, which requires the auditor to focus attention on areas of higher risk, accounting judgment and possible bias, thereby assisting the auditor to form appropriate conclusions about the reasonableness of estimates in the context of an entity's financial reporting framework.

The revised ISA 540 adopts a risk-based approach to the audit of accounting estimates including fair value accounting estimates. It addresses matters such as the auditor's evaluation of the effect of estimation uncertainty on risk assessments, management's methods for making estimates, the reasonableness of assumptions used by management, and the adequacy of disclosures. The ISA provides expanded guidance on auditing fair value accounting estimates, including audit considerations relating to the proper application of the requirements of the financial reporting framework relevant to such estimates and the use of models in valuations.

The revised ISA 540 replaces the former ISA 540 and ISA 545, Auditing Fair Value Measurements and Disclosures. The revised standard applies to audits of financial periods commencing on or after 15 December 2009, the same date when all the standards redrafted under the IAASB's Clarity project become effective. The revised ISA is available from www.ifac.org.

IPSASB

PUBLIC SECTOR ACCOUNTING

The International Public Sector Accounting Standards Board (IPSASB) has issued two new standards, IPSAS 25, Employee Benefits, and IPSAS 26, Impairment of Cash-generating Assets, as part of its programme to converge its standards with International Financial Reporting Standards (IFRS).

In addition to the four categories of employee benefits dealt with in

IAS 19, Employee Benefits, IPSAS 25 deals with specific issues for the public sector including the discount rate related to post-employment benefits, treatment of post-employment benefits provided through composite social security programmes and long-term disability benefits. IPSAS 25 is effective for reporting periods beginning on or after 1 January 2011.

IPSAS 26 deals with assets used by public sector entities to generate a commercial return. Non-cash-generating assets, those used primarily for service delivery, are dealt with in IPSAS 21, Impairment of Non-cash-generating Assets. IPSAS 26 sets out the procedures for a public sector entity to determine whether a cash-generating asset has lost future economic benefit or service potential and to ensure that impairment losses are recognised in its financial reports. It is effective for reporting periods beginning on or after 1 April 2009.

•    Both standards are available from www.ifac.org.

CANADA

ADOPTION OF IFRS

The Canadian Accounting Standards Board (AcSB) has confirmed that the use of IFRS will be required in interim and annual financial statements for years beginning on or after 1 January 2011. Comparative information will be required for the prior period.

The requirement applies to the financial statements of publicly-accountable profit-oriented enterprises, including listed companies and other profit-oriented enterprises that are responsible to large or diverse groups of stakeholders. Other private enterprises and not-for-profit organisations are permitted, but not required, to adopt IFRS in 2011.

The Canadian Securities Administrators (CSA) - the consortium of the provincial securities regulators - has issued a concept paper on the related regulatory issues.

David Cairns provides IFRS training and consulting services for preparers, auditors and users of IFRS financial statements (www.cairns.co.uk). He was the director of the project on the evaluation of IFRS financial statements of EU companies, which the ICAEW carried out on behalf of the European Commission. He is also a member of the UK's Financial Reporting Review Panel.