News

IASB/FASB proposal to limit revenue recognition, to where a contract with a customer exists, may affect income presentation for some agricultural co-operatives (Jan 2009)

A joint IASB/FASB discussion paper, on revenue recognition in contracts with customers, was published in December 2008. The paper will be of interest to agricultural co-operatives in respect of the presentation of increases in agricultural product. Currently, in the case of some agricultural products, revenue is recognized from increases in the value of the product before there is a contract with the customer (see IAS 41 and AICPA SOP 85-3).

The discussion paper indicates that there is no intention to change the way agricultural businesses measure inventory. However the paper goes on to state that the IASB/FASB boards will be considering whether such increases should be presented as revenue or whether they should be presented as another component of income. The need to resolve this matter is a consequence of the boards' proposal to limit revenue recognition to situations where a contract with the customer exists.

The discussion paper can be downloaded from the IASB web site. The deadline for comments is 19th June, 2009.

 

Co-ops participate in FASB roundtable discussion on financial instruments (Oct 2008)

Four co-operative organizations (three US and one European) participated in a roundtable discussion organized by the US Financial Accounting Standards Board (FASB) on September 8th. The co-operative participants were representatives from: European Association of Cooperative Banks, Federal Home Loan Bank, National Cooperative Business Association and National Society of Accountants for Cooperatives.

The roundtable considered financial instruments and their classification as equity or liabilities. At the heart of the discussion was the FASB basic ownership approach which seeks to simplify the identification of financial instruments with characteristics of equity. Co-operative engagement in the roundtable was wide ranging and issues discussed included: defining equity, the classification of co-operative financial instruments and the treatment of patronage dividends as liability or equity. The minutes of the meeting include some discussion of the potential difficulties in applying the basic ownership approach to different co-operative ownership models.

Minutes of the meeting and background handout are available at the FASB website: http://www.fasb.org/board_meeting_minutes/09-08-08_fi_roundtable.pdf.

 

iSORP discussion paper - reporting co-op members' funds(Aug 11, 2008)

The iSORP project takes another step forward with a paper looking at reporting co-op members' funds. (Aug 11, 2008) ... Click to go to page.

 

CEARC report on accounting topics survey(July 2008

We asked people to let us know their top three co-operative accounting issues or topics. This is what they told us (July 25, 2008) ... Click to download report.

 

CEARC report on feedback on working paper 1 (July 2008)

Our first working paper looked at the idea of developing an international statement of recommended practice (iSORP) for co-operative accounting and reporting. We asked for and received comments on this paper and you can find a downloadable copy of the resulting report at the iSORP project section of our website, on the CEARC working paper 1 page.

 

Adopting IFRS in Canada. Exposure draft (Apr 8, 2008)

The Canadian Accounting Standards Board (AcSB) has published an exposure draft on adopting IFRS in Canada. The draft is a comprehensive document looking at all of the IFRS standards and interpretations and is available for download at http://www.cica.ca/4/4/0/3/6/index1.shtml  . At the website you'll also find a readers guide to adopting IFRS, which takes you through the process of identifying key and current areas. The closing date for comments on the draft is July 31, 2008. The document is part of a range of information and materials available at a CICA website dedicated to the transition to international standards. You can find out more by visiting http://www.cica.ca/IFRS

 

IASB discussion paper on financial instruments offers

co-ops opportunity to add to equity debate (Feb 28, 2008)

The publishing of a discussion document by the International Accounting standards Board (IASB), provides another opportunity for co-operatives to join in on current discussions on the distinction between equity financial instruments and non-equity instruments. This discussion paper follows the FASB preliminary views document (see news item <"FASB proposing a new approach to defining financial instruments as equity" below) and is looking for feedback regarding the appropriateness of the FASB document as a starting point for further deliberations.

The IASB discussion paper is initially (28th Feb, 2008) available to subscribers and will be made more widely available, through free download from their website, starting 10th March, 2008.

The deadline for comments was 5th September, 2008.

 

Loss Absorption Approach (LAA) could provide co-op friendly solution on equity issue (Jan 30, 2008)

A discussion paper developed by the German Standard-Setter and published1 by the European Financial Reporting Advisory Group (EFRAG) on behalf of Pro-active Accounting Activities in Europe (PAAinE), sets out an alternate approach to defining financial instruments as equity or liabilities.

The paper, Distinguishing between liabilities and equity, proposes that financial instruments be defined as equity or liabilities on the basis of their ability to absorb losses. Co-operative member shares would be defined as equity under this approach. This could include situations where members have no claim on the residual assets in the event of dissolution. The following co-operative example is taken from the discussion paper:

Share puttable, exercise limited to par (cooperative bank)

Fact pattern:

  • Entity J issues puttable shares, repayable at par at the holder's request.
  • Entity J has reserves of 100m CU.
  • Accounting losses are deducted from reserves, but if losses are sufficient to deplete the reserves, further losses are allocated pro-rata amongst shares then in issue, so a member's claim after depletion of the reserves is reduced.
  • The claim of the shareholder is then for the par value less her/his share of further losses after reserves are depleted.

Analysis:

The entity is able to absorb losses of 100m plus the shares in issue before a shortfall arises.

Result:  Equity

This discussion paper sets out a case for abandoning the current IAS 32 approach to defining financial instruments as equity or liabilities, along with the recent FASB proposals (see November 2007 news item below); replacing them with the Loss Absorption Approach. A coherent argument is made that takes into account a range of organizational forms.

You can download the discussion paper from the EFRAG website. The deadline for comments was 28 July 2008.

1Distinguishing between liabilities and equity, published on 28th January, 2008

Revised IFRS 3 does not recognize need for differing approach to mergers for co-operatives (Jan 14, 2008)

On January 10th, 2008, the International Accounting Standards Board (IASB) published a revised IFRS 3 Business Combinations, along with related revisions to IAS 27 Consolidated and Separate Financial Statements. The previous version (2004) of IFRS 3 excluded mutual entities, but the new version extends its scope to encompass mutual entities, including co-operatives.

IFRS 3 requires adoption of the acquisition method, with recognition of an acquirer and acquiree. It does not allow other approaches, such as the pooling of interests method. All mergers are viewed through the lens of acquisition of one business by another.

Some co-operative organizations have made the case that a merger between two co-operatives may not necessarily involve the purchase of one by the other, and may be better understood in terms of a ‘true merger' between co-operatives seeking to pool their resources for the benefit of their members. The IASB project summary and feedback does make reference to comments made by mutuals and co-operatives and arguments put forward concerning differing co-operative identity and purpose. But the IASB response is that while co-operatives exhibit some differing characteristics to investor-owned business (IOB), they also have many characteristics in common. Furthermore the IASB assert that, whatever the initial intentions of each mutual organization embarking on a merger, in the end, one of the organizations will typically obtain control of the other.

Comment letters on the exposure draft of IFRS 3, including comments from co-operative organizations, can be found at the FASB website.

The revised IFRS 3 arises from a joint project with the US Financial Accounting Standards Board (FASB), and reflects increasing convergence between the two standards setters, although some differences remain. The FASB issued their own standards on the topic (SFAS 141(R) Business Combinations and SFAS 160 Noncontrolling interests in Consolidated Financial Statements) back in December 2007. These are available on the FASB website.

FASB proposing a new approach to defining financial instruments as equity (Nov 30, 2007)

The FASB have published preliminary views on Financial Instruments with the Characteristics of Equity. This includes promotion of a “basic ownership approach” which classifies a financial instrument as equity where it has the following two characteristics:

  1. The instrument entitles the holder to a proportional share of the residual net assets (after all other claims have been met) upon liquidation of the entity.
  2. The instrument is subordinate to all other claims to the assets of the entity.

The first characteristic (right to a share of residual net assets) is not always a feature of co-operative member shares. Indeed many UK co-operatives have adopted rules removing members' rights to residual net assets on dissolution, as a safeguard against asset stripping by carpetbaggers.

While the second characteristic (subordination) does not appear contentious, it is important to note that only the most subordinate financial instrument would be considered to be equity.

The FASB preliminary views build on existing work undertaken by the International Accounting Standards Board (IASB) and FASB long term project on liabilities and equity. The FASB had already, in 2006, stated a preference for an “ownership approach” to equity classification, which was modified in 2007 to include only direct ownership instruments. Such direct ownership instruments had already been described in 2006 as exhibiting the characteristic of “a proportional claim to a share of the net assets of the reporting entity that is neither limited nor guaranteed” (FASB, 2006).

The deadline for comments to the FASB on the preliminary views was 30th May, 2008.