Update on Leasing, Revenue, Financial Instruments and Insurance convergence programs

The IASB and FASB have recently advised that their 30 June 2011 deadline for significant amendments to the various major standards projects (Leasing, Revenue, Financial Instruments and Insurance), whilst still broadly on track, will probably be delayed until the end of 2011. Following the April 2011 meetings, the two Boards stated that ‘further work and consultation with stakeholders’ was needed, with only the Insurance standard not likely to be jointly finalised.

If, and it is an ‘if’, the Revenue, Leasing and Financial Instruments standards are completed and issued by the end of 2011, it is unlikely that any of the amended standards will apply in Australia before 2016 as the Boards have said that the effective application dates will need to allow adequate time to enable proper implementation of the respective standards.  The Boards have also said that they will use the additional time to work through the concerns and issues raised by stakeholders. Given the significant amendments made to the earlier Exposure Draft (ED) proposals on revenue (service industries guidance) and leases (perhaps short term leases can stay off balance sheet), it is clear that the Boards are prepared to deal their way through issues to ensure that there is broad agreement on the respective standards when they are issued.

Interestingly, as part of this work through and consult process, the Boards have also said that before each standard is issued they will consider whether re-exposure is necessary, with the final test being whether sufficient ‘outreach’ has occurred so that the proposed standard is operational and will bring improvements to financial reporting.

For those interested in following the latest developments, the IASB’s website provides a frequently updated summary at www.iasb.org under the tabs: Quick Links - Work plan for IFRSs, and then select the specific standard (e.g.  Leases).

Revenue
The Revenue recognition project is probably the most crucial to convergence given the IASB’s more principles-based approach to the myriad of rules in the US on how revenue should be recognised which often depends on when the individual standards were issued. Generally, the submissions made on the ED were supportive with the main areas of concern being the need to clarify just how the revenue recognition model of transfer works in the services industry and what is a continual transfer of services.

Leasing
Lots of work is being done in this area with the objective of the revised standard being to get leases on the balance sheet. It is somewhat surprising that the Boards seem to have bowed to ‘simplification’ pressures and allowed an option of leaving short term leases (12 month term or less) off balance sheets subject to appropriate disclosure. Still there is some room for change as this decision is to be further discussed! However, there is no backing down on longer term leases and there is likely to be anti-avoidance provisions in the final standard to overcome a series of short term renewal leases. Most submissions have accepted that leases should be on balance sheets whether reluctantly or not, so the major tweaking for lessee accounting is to keep it simple.

The major stumbling block has been lessor accounting with the original four way classification of leases being seen as confusing and impractical. Whilst the Boards claim that they have made progress in this area, further ‘outreach’ is being conducted. When the standard is finally issued, it will be the most researched standard ever with 785 submissions made, seven roundtables to date, 15 preparer workshops and some 200 individual meetings so far held!

Financial Instruments
This has been a frustrating project for the IASB as it did meet its Group of 20 deadline for re-issuing a comprehensive accounting standard on financial instruments measurement and classification (IFRS 9) following criticisms raised during the Global Financial Crisis. However, it had much less success in getting convergence with the US as the IASB’s phased approach was rejected by the US which instead is endeavouring to produce a single comprehensive standard. As it now stands, the IASB hopes to have Impairment, Asset and Liability Offsetting and most of Hedging completed and issued as an updated IFRS standard by the end of 2011, with the exception being Macro Hedge accounting that will be issued as an ED. Because the two Boards did not publish a joint ED, we have seen two different approaches and two different results. Once both Boards have finalised their standards, they will start sorting out their differences; as the Boards put it:  ‘ in an effort to reconcile our differences in ways that foster improvement and convergence’. So a converged financial instruments standard maybe on issue in late 2014 with an effective date probably not until 2018!

Insurance     
This is the one project which started in 2001 and where it is clear that there will not be convergence by the end of 2011. The IASB has stated that whilst it hopes to have completed its work by the end of 2011 with an IFRS standard ready to go, the US FASB will only have an Exposure Draft ready. This means that before a final converged standard can be issued, the Boards will need to go through the submissions made on the FASB ED and re-assess any fundamental differences.

If you would like to discuss this issue, please contact me or your usual Grant Thornton advisor or the author of this article.

Keith Reilly
National Head of Professional Standards
T  +61 2 8297 2400
E  keith.reilly@au.gt.com