By Alok Jain, ContributorTHE INSTITUTE of Chartered Accountants of Jamaica (ICAJ) has adopted International Accounting Standards (IAS) as Jamaica's national accounting standards for accounting periods beginning on or after July 1, 2002.
The International Accounting Standards Board has recently published exposure drafts proposing several changes to IAS. The previous article discussed the exposure draft of proposed changes to IAS 32 and 39 dealing with Financial Instruments. Another exposure draft called the "Improvements Exposure Draft" proposes amendments to twelve standards and the withdrawal of one. This two-part article summarises the main changes proposed for each standard. IAS 1, Presentation of Financial Statements
A balance sheet presentation that classifies assets and liabilities between "current" and "non-current" will be required unless a liquidity presentation (decreasing order of liquidity) provides more relevant and reliable information. IAS 1 currently allows either presentation.
A long-term financial liability due to be settled within twelve months of the balance sheet date should be classified as a current liability, even if an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the balance sheet date and before the financial statements are authorised for issue.
A long-term financial liability that is payable on demand because the entity breached a condition of its loan agreement should be classified as current at the balance sheet date even if the lender has agreed after the balance sheet date not to demand payment as a consequence of the breach. An exception is provided where the lender has agreed by the balance sheet date to provide grace period within which the entity can rectify the breach and, at the date the financial statements are authorised for issue, the entity has rectified the breach within the grace period or the grace period has not expired.
Certain disclosures will be eliminated - profit/loss from operating activities, entity's country of incorporation (country of domicile will still be required), address of registered office and number of employees.
IAS 2, Inventories
The last-in, first-out (LIFO) inventory costing method will be eliminated as an allowed alternative. The only permissible methods will be specific identification, first-in first-out (FIFO) and weighted average.
The scope exception for inventories of agricultural and forest products, and mineral ores and agricultural produce that are measured at net realisable value in accordance with well established practices in certain industries will be extended to include brokers and dealers as well as producers.
The amount of any write-downs of inventory to net realisable value will need to be disclosed.
IAS 8, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies
The distinction between "fundamental errors" and other material errors will be eliminated. All material errors will be accounted for retrospectively by restating all prior periods presented and adjusting opening retained earnings of the earliest period presented.
The "extraordinary item" classification will be eliminated. All income and expense items will be reported as part of ordinary activities of the entity.
Accordingly, the name of the Standard will be changed to "Accounting Policies, Changes in Accounting Estimates and Errors".
For any new Standard that has not yet come into effect, disclosure will be required of the nature of the future change in accounting policy, the date the entity plans to adopt the Standard, and the estimated effect of the change on financial position.
Exemption from restating comparative information will be permitted on grounds of "undue cost or effort". Currently, the exemption is based on "impracticability".
IAS 10, Events After the Balance Sheet Date
If dividends are declared after balance sheet date, the entity should not recognise a liability at the balance sheet date.
IAS 15, Information Reflecting the Effects of Changing Prices
IAS 15 will be withdrawn.
IAS 16, Property, Plant and Equipment
A components approach to depreciation will be required that each material component of a composite asset with different useful lives is accounted for separately.
Subsequent expenditure will be capitalised as part of the cost of the asset if the expenditure increases the asset's future economic benefits above the "standard of performance assessed immediately before the expenditure was made". Currently, IAS 16 refers to the "originally assessed standard of performance".
Estimated useful lives will need to be reviewed for continuing appropriateness at every balance sheet date rather than "periodically" as is currently required.
The cost of acquisition should include the amount of any provision for the estimated cost of dismantling and removing the asset and restoring the site on which that asset is located.
Residual value should be based on current prices for assets of similar age and condition to the estimated age and condition of the asset when it reaches the end of its useful life.
Exchanges of items of property, plant and equipment will be measured at fair value (regardless of whether the assets are similar) except that when the fair value of neither of the assets exchanged can be determined reliably, the cost of the asset acquired in the exchange is measured at the carrying amount of the asset given up. IAS 16 currently distinguishes between exchanges of similar and dissimilar assets.
The reconciliation of opening to closing balances will be required in respect of both the current and comparative period. For revalued assets, additional disclosures will include methods and significant assumptions used in estimating fair values.
IAS 17, Leases
When a lease of both land and buildings is classified, the lease will be split into two elements - a lease of land and a lease of buildings. The land element is generally classified as an operating lease. The buildings element is classified as an operating or finance lease by applying the conditions in IAS 17.
Initial direct costs that are incremental and directly attributable to the lease will be capitalised and allocated over the lease term. The currently allowed alternative to expense such costs will be eliminated.
IAS 21, The Effects of Changes in Foreign Exchange Rates
The concept of "reporting currency" will be replaced with two concepts: "functional currency" (the currency in which the entity measures the items in its financial statements) and "presentation currency" (the currency in which the entity presents its financial statements). Functional currency is the currency of the primary economic environment in which the entity operates. Greater emphasis will be given to the currency of the economy that determines the pricing of transactions than to the currency in which transactions are denominated. Consequently, an entity (whether a stand-alone entity or within a group) would not have a free choice of functional currency. However, an entity will be free to present its financial statements in any currency it chooses. There will be free choice of presentation currency.
The allowed alternative to capitalise certain exchange losses arising from a severe devaluation will be eliminated.
Alok Jain is a partner at PricewaterhouseCoopers (PwC) in Kingston, Jamaica. He is a Chartered Accountant and a U.S. Certified Public Accountant. This article contains general information only; it is not a substitute for consultation with a professional. For further information, questions, or comments, e-mail: alok.jain@jm.pwcglobal.com. For reprints of this article visit PwC Jamaica's IAS Resource Centre at www.pwcglobal.com/jamaica
