Preparing For 2009 year-end reporting under IFRS

Are you ready?
Recent years have seen major changes in financial reporting worldwide with the adoption of IFRS being the ‘common language’ in the financial reporting world. The global economic downturn and recession has also prompted the IASB, to incorporate some significant changes on financial instruments within the IFRS, effective from the financial year - ending December 31, 2009.

As many of these changes affect the presentation and disclosures within the financial statements, there is likely to be an impact on management information and reporting systems of organisations.

SIGNIFICANT CHANGES TO IFRS AT A GLANCE
A few of the important changes within IFRS which are likely to significantly affect organizations in their financial reporting process for the year-end 2009 are as follows:

IAS 1 - Presentation of financial statements (Revised)
IAS 1 (revised), ‘Presentation of financial statements’ was released in September 2007 by replacing the existing IAS 1 (2005) for annual periods beginning on or after 1 January 2009.
The key changes in this revision are…
• Entities need to aggregate information in the financial statements on the basis of shared characteristics.
• The introduction of ‘Statement of Comprehensive Income’. Entities will have the option of presenting income and expense and components of other comprehensive income either in a single statement (‘statement of comprehensive income’) or in two separate statements (a separate ‘income statement’ followed by a ‘statement of comprehensive income’). Components of comprehensive income are not permitted to be presented in the statement of changes in equity.
• Entities need to distinguish changes in equity arising from transactions with owners in their capacity as owners from non-owners changes in equity. One of the significant corollaries of this statement is that the entity requires dividends recognised as distributions to owners and related amounts per share to be presented in the statement of changes in equity or in the notes. The presentation of such disclosures in the statement of comprehensive income is not permitted, as opposed to the previous version of IAS 1, that allowed such disclosures in the income statement, in the statement of changes in equity or in the notes.
• Changes in titles of some of the financial statements and a number of changes in terminologies and amendments in the respective references in other IFRS. Entities have the choice of using these new titles in financial statements as per the revised IAS 1 or continue to use the old titles as per the previous IAS 1. Some of the wording changes introduced in IAS 1 (revised) include; ‘Balance sheet’ to ‘statement of financial position’, ‘Cash flow statement’ to ‘statement of cash flows’, ‘Balance sheet date’ to ‘end of the reporting period’, ‘Equity holders’ to ‘owners’. Though the changes in terminologies do not appear significant, accountants and finance professionals are advised to refer the interpretations and practical application guidance.

IAS 23 - Borrowing costs (Revised)
Under the revised IAS 23, entities no longer have a policy choice to capitalise or expense borrowing costs incurred that are directly attributable to the acquisition, production or construction of a qualifying asset. IAS 23 (revised) requires borrowing costs directly attributable to a qualifying asset to be capitalised. The revised standard also eliminates inconsistencies between interest expense as calculated under IAS 23 and IAS 39 Financial Instruments: Recognition and Measurement. Revised IAS 23 refers to the effective interest rate method as described in IAS 39. The revised IAS 23 is effective from 1 January 2009.

IAS 40 - Investment property - Investment property under construction
Historically, investment property under construction was excluded from the scope of IAS 40 ‘Investment property’. This was instead dealt within IAS 16, ‘Property, plant and equipment’. In May 2008, IASB revised the scope of IAS 40 (and correspondingly the scope of IAS 16) and introduces new requirements for accounting for properties under construction or development for future use as investment properties. These are now within the scope of IAS 40 and previously, IAS 16 was applied regardless of the intentions for future use as either ownused property or investment property. The revision is effective from 1 January 2009.


IFRS 7 - Financial instruments: Disclosures
Amendments to IFRS 7 require that all financial instruments measured at fair value are disclosed by the source of their inputs used to determine the fair value, using a three-level hierarchy. Also the amendment requires entities to provide additional disclosures about the relative reliability of fair value measurements and has enhanced the existing requirements of liquidity risk disclosures. The additional disclosures required will be extensive for some entities and may require significant
time and investment to understand the information needed and how the hierarchy will apply to each entity. The amendments are applicable from 1 January 2009.


IFRS 8 - Operating Segments
IFRS 8, ‘Operating segments’ issued in November 2006 and it replaces IAS 14. It is effective for periods beginning on or after 1 January 2009.

The key principle behind IFRS 8 is that the disclosures will enable users to evaluate the nature and financial effects of the business activities in which it engages and the economic environment in which it operates, and based on information that management uses to run the business. It is therefore possible for the segment disclosures to be presented on a basis different from that of the financial statements. However, there is a requirement for this to be reconciled.

IFRS FOR SMEs
The IFRS for SMEs issued by IASB attempts to make compliance simpler, more relevant and cost-effective for SMEs in their financial reporting process. This is expected to affect a majority of entities in the Middle East region, which is dominated by the SME sector.

The definition of SMEs does vary worldwide and among various stakeholders of this sector. Some segregate by turnover, some by balance sheet size and others by a combination of both. However, the definition of SMEs in the context of the IFRS for SMEs is based on the nature of an entity rather than on its size. The definition of ‘SMEs’ is entities that do not have public accountability but that publish general purpose financial statements. IASB states in their guidance notes that it is a matter for authorities in each territory to decide which entities are permitted or even required to apply IFRS for SMEs.

The IFRS for SMEs are expected to meet the following objectives:
• improved comparability for users of financial statements of SMEs;

• enhance the overall confidence in the financial statements of SMEs;

• reduce significant costs involved for the local accounting regulatory bodies, in maintaining and monitoring financial reporting standards in the SME sector.

Effective date…
The standard was issued on 9 July 2009 without any specific date of application. IASB has kept the option of adoption of the standard by an entity flexible.
We shall be publishing more summaries and reference notes including highlights on recent changes of financial instruments for the benifit of our readers, both through our newsletter and
our website.

Mahesh Ranasinghe
Assistant Audit Manager