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January 14, 2008

German board raises ED9 concerns

The German Accounting Standards Board (GASB) is opposed to the proposals in the International Accounting Standards Board’s (IASB) Exposure Draft 9 Joint Arrangements (ED9). The ED9 project is part of the conversion process between IFRS and US GAAP, and ED9 involves suggested improvements to IAS 39 Interests in Joint Ventures.

In a comment letter to the IASB, the GASB said its primary concern is the proposed elimination of proportionate consolidation. The IASB proposed the removal of proportionate consolidation as a choice of accounting treatment for interests in jointly controlled entities, because IAS 31 gives an entity a choice between that and equity method. According to the standard setter, the choice makes it difficult to compare financial reports.

Susann Pochop, the GASB’s project manager responsible for ED9, told TA the GASB is opposed to accounting choices. “It is better to say the preparer has to use one accounting method,” she said. “However, we think that the IASB does not give enough compelling arguments that the equity method is the better one of the two methods, or perhaps another method would be best.”

The GASB is also concerned that the core principle of ED9, which leads to splitting up assets into rights, could change underlying accounting concepts and principles regarding the definition of an asset and its boundaries. The GASB claims this prejudges the outcome of Phase B of the IASB and US Financial Accounting Standards Board’s conceptual framework project – Elements and Recognition of the Framework Project. Pochop said the GASB believes that as long as Phase B has not been finalised, the principles of ED9 lack a sound foundation and will cause unavoidable problems in their application.

The German committee suggests that concepts and principles regarding the definition of an asset and its boundaries should be codified in the framework rather than at a standard level. The committee also questioned to what extent the IASB has considered the effects that changes to ED9 would have on other projects.

The GASB’s final concern is that ED9 does not achieve convergence between IFRS and US GAAP as US GAAP allows exceptions that are not allowed in ED9.

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