ACCOUNTING

Accountancy SA, Oct 2008

INTERPRETATIONS

AGREEMENTS FOR THE CONSTRUCTION OF REAL ESTATE

The IFRIC has issued IFRIC 15 - Agreements for the Construction of Real Estate. The Interpretation will standardise accounting practice across jurisdictions for the recognition of revenue among real estate developers for sales of units, such as apartments or houses, 'off-plan', i.e. before construction is complete.

The Interpretation provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11(AC 109) - Construction Contracts, or IAS 18(AC 111) - Revenue, and when revenue from the construction should be recognised. The main expected change in practice is a shift for some entities from recognising revenue using the percentage of completion method (i.e. as construction progresses, by reference to the stage of completion of the development) to recognising revenue at a single time (i.e. at completion upon or after delivery). Agreements that will be affected will be mainly those currently accounted for in accordance with IAS 11(AC 109) - Construction Contracts, that do not meet the definition of a construction contract as interpreted by the IFRIC and do not transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses.

IFRIC 15 applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly, or through subcontractors. The interpretation is effective for annual periods beginning on or after 1 January 2009 and is to be applied retrospectively.

This interpretation was approved by the APB in August 2008 and issued as an Interpretation of Statements of GAAP. The Interpretation is available online in the SAICA Handbook.

HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION

The IFRIC has issued IFRIC 16 - Hedges of a Net Investment in a Foreign Operation. The IFRIC was asked for guidance on accounting for the hedge of a net investment in a foreign operation in an entity's consolidated financial statements. Practice has diverged as a result of differing views on which risks are eligible for hedge accounting according to International Financial Reporting Standards (IFRSs).

IFRIC 16 clarifies the following three main issues;

1. Whether risk arises from the foreign currency exposure to the functional currencies of the foreign operation and the parent entity, or from the foreign currency exposure to the functional currency of the foreign operation and the presentation currency of the parent entity's consolidated financial statements.

IFRIC 16 concludes that the presentation currency does not create an exposure to which an entity may apply hedge accounting. Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation.

2. Which entity within a group can hold a hedging instrument in a hedge of a net investment in a foreign operation and, in particular, whether the parent entity holding the net investment in a foreign operation must also hold the hedging instrument.

IFRIC 16 concludes that the hedging instrument(s) may be held by any entity or entities within thegroup.

3. How an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item when the entity disposes of the investment.

IFRIC 16 concludes that while IAS 39(AC 133) - Financial Instruments: Recognition and Measurement, must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21(AC 112) - The Effects of Changes in Foreign Exchange Rates, must be applied in respect of the hedged item.

This interpretation was approved by the APB in August 2008 and issued as an Interpretation of Statements of GAAP, and is available on the SAICA Handbook-on-line.

REVIEW OF THE CONSTUTITION

The Trustees of the International Accounting Standards Committee (IASC) Foundation have published a discussion document, Review of the Constitution: Public Accountability and the Composition of the IASB - Proposals for Change. The Accounting Practices Committee has issued this as Exposure Draft 242.

The document contains proposals that are dealt with in the first phase of the organisation's five-yearly Constitution Review. The public comment deadline on the document is 20 September 2008.

The proposals would:

* establish a formal link between the organisation and a Monitoring Group comprising representatives of public authorities and international organisations that have requirements for accountability to public authorities; and

* expand the membership of the International Accounting Standards Board (IASB) to 16 members and add new guidelines regarding the geographical diversity of the members of the IASB.

The establishment of the link to a Monitoring Group, a group established by public authorities outside the IASC Foundation's organisational framework, is aimed at enhancing the transparency and public accountability of the IASC Foundation, while not impairing the independence of the standard-setting process. The document is available on the SAICA Website.