Financial Markets Meltdown
12 November 2008
Posted by: Author: Moses Kgosana and Sue Ludolph
Financial Markets Meltdown
Spurs SA accountancy body into action on accounting standards
International board initiates far-reaching amendments
The current deterioration in the world’s financial markets has prompted rapid and far-reaching amendments to two key accounting standards.
The Accounting Practices Board (APB) issued amendments to:
•IAS 39(AC 133) – Financial Instruments: Recognition and Measurement; and
•IFRS 7(AC 144) – Financial Instruments: Disclosures, as statements of Generally Accepted Accounting Practice (GAAP).
Outlining the relevance of the amendments, Moses Kgosana, chairman of the APB,explains that it will permit an entity to reclassify non-derivative financial assets in the following instances:
1. Where they are in the held-for-trading category – but only in ‘rare circumstances’ –except for financial assets that would otherwise have met the definition of loans and receivables.The APB considers it unlikely that such rare circumstances – defined as"arising from a single event that is unusual and highly unlikely to recur in the near term” – currently exist in South Africa; though there may well be rare circumstances affecting South African companies that have operations or assets in other countries;
2. Where they would otherwise have met the definition of loans and receivables, they maybe transferred out of the held-for-trading category in the event that the entity has both the intention and ability to hold the financial asset for the foreseeable future or until maturity; and/or
3. From available-for-sale to loans and receivables, where the entity has both the intention and ability to hold the financial asset for the foreseeable future or until maturity.Relevant disclosure requirements include:
• Note disclosure of the carrying value and fair value of all instruments that have been reclassified.
• What the impact on profit and loss and other comprehensive income would have been had the asset not been reclassified until it is removed from the balance sheet.
Any reclassification of a financial asset before 1 November 2008 can take effect from1 July 2008 or a subsequent date, up until 31 October 2008. A reclassification cannot be applied retrospectively before 1 July 2008. Any reclassification made on or after 1 November 2008 will be effective only from the date of reclassification.Kgosana emphasises that the amendments should not be viewed as a ‘free-for-all’ to reclassify non-performing financial instruments in order to make the financial statements look healthier.
"Such re classifications can occur only in the very specific circumstances prescribed by the IASB and accepted by the APB, and with extensive disclosure requirements to inform the investors and other users of the financial statements as to the why, how and effect of the reclassification.”
Kgosana says that the rapid deterioration of the world’s financial markets over recent months occasioned the urgent amendments.
"The International Accounting Standards Board (IASB) responded briskly to the request of various users of International Financial Reporting Standards (IFRS) to reduce differences between IFRS and US GAAP in order to level the playing fields of companies reporting under the two frameworks.
"The amendments to IAS 39 introduce the possibility of reclassification of financial instruments for companies applying IFRS, which was already permitted under US GAAP in rare circumstances.”
Kgosana says that the APB had reacted instantly to the release of the amendments to ensure that South African GAAP continued to be consistent with IFRS.
Source: By Moses Kgosana and Sue Ludolph (TaxTalk)