Explanatory Statement

Interpretation and Application of Standards

EXPLANATORY STATEMENT

Reasons for Issuing AASB 1048

The Australian Accounting Standards Board (AASB) is implementing the directive of the Financial Reporting Council (FRC) to adopt the Standards of the International Accounting Standards Board (IASB) for application to reporting periods beginning on or after 1 January 2005.  In considering the adoption of the Standards of the IASB, the AASB reached the conclusion that it was desirable to issue an Accounting Standard clarifying the status of the pronouncements of the Urgent Issues Group, the UIG Interpretations (previously known as UIG Abstracts), that are approved by the AASB.

All UIG Interpretations have the same authoritative status and those that are equivalent to the IASB Interpretations must be applied to achieve compliance with the International Financial Reporting Standards (IFRSs) of the IASB.

The IASB defines IFRSs as comprising:

(a) International Financial Reporting Standards;

(b) International Accounting Standards; and

(c) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).

The Australian equivalents to IFRSs are:

(a) Accounting Standards issued by the AASB that are equivalent to Standards issued by the IASB, being AASBs 1 – 99 corresponding to the IFRS series and AASBs 101 – 199 corresponding to the IAS series; and

(b) UIG Interpretations issued by the AASB corresponding to the Interpretations adopted by the IASB, as listed in AASB 1048 Interpretation and Application of Standards. 

Before identifying the main features of this Standard, the adoption of the IASB Standards is described and the need for a ‘service Standard’ like this is explained.

Adoption of IASB Standards

In implementing the FRC’s directive, the AASB is replacing relevant existing AASB Standards with Australian Standards equivalent to those of the IASB.  The AASB has decided it will continue to issue sector-neutral Standards, that is, Standards applicable to both for-profit and not-for-profit entities, including public sector entities.  Except for Standards that are specific to the not-for-profit or public sectors or that are of a purely domestic nature, the AASB is using the IASB Standards as the “foundation” Standards to which it adds material detailing the scope and applicability of a Standard in the Australian environment.  Additions are made, where necessary, to broaden the content to cover sectors not addressed by an IASB Standard and domestic, regulatory or other issues.

This Standard complements the set of Australian equivalents to each IASB Standard (IFRS and IAS) and Interpretation of the IASB.  This set includes UIG Interpretations that correspond to the IASB Interpretations originated by the IFRIC or the SIC.  When considering the most effective approach to implementing the FRC directive, the AASB decided that Australian-source documents were needed to provide equivalents to the IASB Interpretations, and that these should be UIG Interpretations.  Correlation between the UIG Interpretations and the IASB Interpretations is provided in Table 1 of this Standard.  This Standard will be re-issued when necessary to bring the correlation up to date.

Need for a Service Standard

In the Australian context, UIG Interpretations do not have the same legal status as Standards (delegated legislation) and are treated as ‘external documents’ by the Acts Interpretation Act 1901 (and also by the Legislative Instruments Act 2003).  Although references in one Standard to a second Standard are ambulatory (automatically moving forward to refer to the most recently-issued version of the second Standard), references in a Standard to external documents are stationary (being fixed in time to refer to the contents of the external document when the Standard was issued).  A reference to an UIG Interpretation in an AASB Standard issued earlier (for example, in July 2004) than the reporting date at the end of the first effective reporting period of a new Standard can only refer to the Interpretation that existed then (in July 2004).  It cannot refer to any revised version of the UIG Interpretation that may exist at the nominated reporting date (for example, 30 June 2006).  However, an AASB Standard can be issued in July 2004, referring to a second AASB Standard (existing in July 2004) and, when the first Standard is applied at 30 June 2006, the reference will be to the then-current version of the second Standard (even if it has been re-issued after July 2004).

After analysing the issues, the AASB decided the service Standard approach constitutes the most effective way to ensure that the compliance required in the Australian equivalent of IFRS 1, AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, has the same meaning as intended in IFRS 1. 

The service Standard approach involves issuing an AASB Standard listing the UIG Interpretations corresponding to each IASB Interpretation, and referring to that Standard in every other AASB Standard where necessary to refer to an UIG Interpretation.  This enables references to UIG Interpretations in all other AASB Standards to be updated by re-issuing the service Standard. 

This approach preserves the status of UIG Interpretations as ‘external documents’ referred to in a Standard, with the ‘contents’ fixed in time to that existing when the Standard takes effect.  It does not treat the UIG Interpretations as delegated legislation or confer ambulatory status on the reference.  In each AASB Standard where there is a need to refer to an Australian equivalent of an IASB Interpretation, the reference will be to this Standard, phrased as “UIG Interpretation (number) (title) identified in AASB 1048 as corresponding to IFRIC (or SIC) (number)”.  This reference, being to another AASB Standard, is ambulatory and will refer to the Standard, AASB 1048, that is in force from time to time.  AASB 1048 itself will contain the direct references to the external documents and it will be re-issued recurrently to keep all references to UIG Interpretations in the other Standards up to date. 

Implementation of this approach to clarifying the status of UIG Interpretations ensures there is no difference between the status in the hierarchy accorded to Interpretations in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors compared to AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.

A further advantage of this approach, compared to alternative approaches, is that it is able to be combined with implementing the perceived need for an AASB Standard clarifying the status of all UIG Interpretations, irrespective of whether they correspond to an IASB Interpretation. 

The Standard will be re-issued when necessary to keep the listing up to date.  All UIG Interpretations listed in the Standard will be available on the AASB’s website (www.aasb.com.au) and able to be downloaded without charge.

First Issue of AASB 1048 (July 2004)

AASB 1048 was first issued in July 2004 at the same time as the set of Australian equivalents to IFRSs.  Like them, its operative date was specified as 1 January 2005 (annual reporting periods beginning on or after that date) and early adoption was explicitly prohibited.

The Standard identified the UIG Interpretations approved by the AASB at date of issue and classified them into two groups:  those that correspond to an IASB Interpretation and those that do not.

In respect of the first group (Table 1), it is necessary for those UIG Interpretations, where relevant, to be applied in order for an entity to be able to make an explicit and unreserved statement of compliance with IFRSs.  The IASB defines IFRSs to include the IFRIC and SIC Interpretations.

In the second group (Table 2), the Standard listed the other UIG Interpretations, not corresponding to an IASB Interpretation, to assist financial report preparers and users to identify the other authoritative pronouncements necessary for compliance in the Australian context.

Tables 1 and 2 were located in paragraphs 9 and 10 respectively of the Standard and are reproduced here for ease of reference.

Second Issue of AASB 1048 (December 2004)

Following the initial issue of AASB 1048 in July 2004, the UIG continued its work reviewing IASB Interpretations and existing UIG Abstracts and issued more UIG Interpretations.  These were approved by the AASB at several meetings between July and December 2004.  At its meeting in December 2004, the AASB issued AASB 1048 amended to include all changes to UIG Interpretations since July.

The second issue of AASB 1048 had the same effective date as the first issue, that is, annual reporting periods beginning on or after 1 January 2005.  Likewise, early adoption was not permitted.

Changes in AASB 1048 (issued December 2004) from AASB 1048 (issued July 2004)

The differences between the first issue of the Standard in July 2004 and the second issue in December 2004 are as follows.

Table 1 – Replacement

UIG Interpretation 112 Consolidation – Special Purpose Entities (issued July 2004) is replaced by the version approved by the AASB in December 2004.

Third Issue of AASB 1048 (March 2005)

At its meeting on 9-10 March 2005, the AASB approved two more UIG Interpretations (equivalents to IFRIC 2 and IFRIC 3) and decided to re-issue AASB 1048 so as to include the new Interpretations.

This Standard (issued March 2005) supersedes the previous version of AASB 1048, issued in December 2004.

Application Date

This Standard is applicable in general to annual reporting periods beginning on or after 31 March 2005 (see paragraph 3, AASB 1048).  To be consistent with the position for AASB Standards equivalent to IFRSs, early adoption of this Standard is not permitted for annual reporting periods beginning before 1 January 2005.  However, early adoption is otherwise permitted as specified in paragraph 4, AASB 1048.

First-time Application and Comparatives

When an entity first applies this Standard in the context of adopting all Australian equivalents to IFRSs, AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, the Australian equivalent of IFRS 1, requires prior period information, presented as comparative information, to be restated as if the requirements of the Australian equivalents to IFRSs (including those UIG Interpretations equivalent to the IASB Interpretations) had always applied.  This differs from the requirements in previous Australian Standards, where changes in accounting policies did not require the restatement of the income statement and balance sheet of the preceding period.

Changes in AASB 1048 (issued March 2005) from AASB 1048 (issued December 2004)

The difference between AASB 1048 (issued December 2004) and this version issued in March 2005 is the addition of two UIG Interpretations, listed below, to Table 1 in paragraph 9 of the Standard.

Consultation prior to Issuing this Standard

Public consultation was part of the process undertaken by the UIG prior to its decision to issue UIG Interpretations 2 and 3.  Accordingly, there appeared no need for the AASB to undertake further public consultation in respect of this Standard.  In making this Standard, the AASB was mindful of its obligations under section 334 of the Corporations Act 2001 and also that failure to maintain an up-to-date register of UIG Interpretations corresponding to the IASB Interpretations could endanger compliance with the FRC directive on adoption of IFRSs in Australia.

A Regulatory Impact Statement has not been prepared in connection with the issue of this Standard as the amendments it makes do not have a direct, or substantial indirect, effect on business or restrict competition, are of a minor or machinery nature and do not substantially alter existing arrangements.