March

Notes from day 4 of the March 2009 IASB meeting

20 Mar 2009

The IASB is holding its March 2009 meeting at its offices in London from Monday through Friday, 16 to 20 March 2009.

Among the key decisions on day 4 were:
  • The IFRS for NPAEs will be issued without re-exposure, with 13 Board members indicating that they will vote affirmatively and one Board member indicating an intention to dissent.
  • The IASB will not issue the FASB draft FSP FASB 157-e for comment; nor will it delay the issue of the ED on fair value measurement so that they can discuss it. The draft FSP and the IASB's activities related to it will be referred to in the Invitation to Comment.
The draft FSP and the IASB's activities related to it will be referred to in the Invitation to Comment. Click here to go to the preliminary and unofficial Notes Taken by Deloitte Observers at the Meeting.

New accounting alert from Deloitte New Zealand

19 Mar 2009

Deloitte New Zealand has published a 'What's New Alert' that reviews all of the new and revised pronouncements that either are to be applied for the first time at 31 March 2009, or which may be early adopted at that date.

The What's New Alert (PDF 127k) summarises a current exposure draft that may be approved with retrospective effective dates before an entity's financial statements for 31 March 2009 are authorised for issue. The Alert identifies two 'big picture issues' for March 2009:

  • The impact of the 'credit crunch' on financial reporting, including such areas as fair value and impairment, classification of debt as current or non-current, foreign exchange exposures, and associated disclosure requirements.
  • Whether piecemeal early adoption of the standards comprising 'the next wave of IFRS' should be considered, or left to a 'big bang' for 2009/10 periods. These include new or revised standards on segment reporting, borrowing costs, financial statement presentation, share-based payment, business combinations, and consolidated and separate financial statements.

Notes from day 3 of the March 2009 IASB meeting

19 Mar 2009

The IASB is holding its March 2009 meeting at its offices in London from Monday through Friday, 16 to 20 March 2009.

Click here to go to the preliminary and unofficial Notes Taken by Deloitte Observers at the Meeting.

IASB publishes preliminary views on leases

19 Mar 2009

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have published, for comment, a discussion paper (DP) 'Leases: Preliminary Views'. Comments are requested by 17 July 2009.

The DP is available on the IASB Website (PDF 594k). In the DP the IASB and the FASB propose a possible new model for lease accounting. The model is based on the principle that all leases give rise to liabilities for future rental payments and assets (the right to use the leased asset) that should be recognised in an entity's statement of financial position. Below are a few of the boards' preliminary views in the DP. Click for IASB press release (PDF 61k).

Lessee Accounting

Recognition principle. For all leases, the lessee will recognise:

  • an asset representing its right to use the leased item for the lease term (the 'right-of-use' asset)
  • a liability for its obligation to pay rentals.
Components of a lease contract. A lessee would not recognise the components of a lease contract separately (such as options to renew, purchase options, contingent rental arrangements or residual value guarantees). Instead, the lessee would recognise:
  • a single right-of-use asset that includes rights acquired under options; and
  • a single obligation to pay rentals that includes obligations arising under contingent rental arrangements and residual value guarantees.
Measurement of the liability. The lessee's obligation to pay rentals should be measured initially at the present value of the lease payments (including a probability-weighted estimate of contingent rentals) discounted using the lessee's incremental borrowing rate. Subsequent measurement would be on an amortised cost basis. Measurement of the asset. The lessee's right-of-use asset should be measured initially at cost. Cost equals the present value of the lease payments over most likely lease term (which might include renewal periods) discounted using the lessee's incremental borrowing rate. The lessee should amortise the right-of-use asset over the shorter of the most likely lease term and the economic life of the leased item.
Lessor Accounting
The discussion paper deals mainly with lessee accounting. However, it also describes some of the issues that will need to be addressed in a future proposed standard on lessor accounting.

Notes from day 2 of the March 2009 IASB meeting

18 Mar 2009

The IASB is holding its March 2009 meeting at its offices in London from Monday through Friday, 16 to 20 March 2009.

Click here to go to the preliminary and unofficial Notes Taken by Deloitte Observers at the Meeting.

Fair value measurement added to IASB agenda

18 Mar 2009

The IASB has added to its meeting agenda for Thursday 19 March 2009 the topic of fair value measurement.

The Board will discuss how it wants to proceed with the draft IFRS on fair value measurements in view of the proposed FSP FAS 157-e Determining Whether a Market is Not Active and a Transaction is Not Distressed, published by the FASB on 17 March 2009.

 

Comment deadline on consolidation ED

18 Mar 2009

We remind you that comments are due on 20 March 2009 on the IASB's exposure draft Exposure Draft 10: 'Consolidated Financial Statements', which was issued on 18 December 2008.

The exposure draft would strengthen and improve the requirements for identifying which entities a company controls and, therefore, must include in its consolidated financial statements. For more information on Exposure Draft 10: Consolidated Financial Statements, click to view our earlier story.

FASB issues two mark-to-market proposals

18 Mar 2009

The US Financial Accounting Standards Board published for comment the two proposed FASB Staff Positions (FSPs) on fair value measurements and impairments of financial instruments that we mentioned in our 17 March 2009 news story.

The comment deadline for both is 1 April 2009. The IASB discussed drafts of these proposals at its meeting yesterday.

European consultation agenda includes mark-to-market

18 Mar 2009

The European Commission has begun a consultation on the improvement of supervision for the European financial services sector.

As a first step, the Commission is inviting comments (due by 10 April 2009) on the Report of the High-level Group on Financial Supervision in the EU chaired by Jacques de Larosiere. The Commission has already endorsed the key principles in the report and intends to put forward, in June, a detailed plan for revising the European supervisory architecture. In the autumn, the Commission intends to bring forward legislative proposals on the new supervisory framework. Click for:

The report makes the following recommendation with respect to accounting:

Recommendation 4: With respect to accounting rules the Group considers that a wider reflection on the mark-to-market principle is needed and in particular recommends that:

  • expeditious solutions should be found to the remaining accounting issues concerning complex products;
  • accounting standards should not bias business models, promote pro-cyclical behaviour or discourage long-term investment;
  • the IASB and other accounting standard setters should clarify and agree on a common, transparent methodology for the valuation of assets in illiquid markets where mark-to-market cannot be applied;
  • the IASB further opens its standard-setting process to the regulatory, supervisory and business communities;
  • the oversight and governance structure of the IASB be strengthened.

In support of the recommendation, the report states:

The mark-to-market principle 73) The crisis has brought into relief the difficulty to apply the mark-to-market principle in certain market conditions as well as the strong pro-cyclical impact that this principle can have. The Group considers that a wide reflection is needed on the mark-to-market principle. Whilst in general this principle makes sense, there may be specific conditions where this principle should not apply because it can mislead investors and distort managers' policies.

74) It is particularly important that banks can retain the possibility to keep assets, accounted for amortised cost at historical or original fair value (corrected, of course, for future impairments), over a long period in the banking book - which does not mean that banks should have the discretion to switch assets at will from the banking to the trading book. The swift October 2008 decision by the EU to modify IAS-39, thereby introducing more flexibility as well as convergence with US GAAP, is to be commended. It is irrelevant to mark-to-market, on a daily basis, assets that are intended to be held and managed on a long-term horizon provided that they are reasonably matched by financing.

75) Differences between business models must also be taken into account. For example, intermediation of credit and liquidity requires disclosure and transparency but not necessarily mark-to-market rules which, while being appropriate for investment banks and trading activities, are not consistent with the traditional loan activity and the policy of holding long term investments. Long-term economic value should be central to any valuation method: it may be based, for instance, on an assessment of the future cash flows deriving from the security as long as there is an explicit minimum holding period and as long as the cash flows can be considered as sustainable over a long period.

76) Another matter to be addressed relates to situations where assets can no longer be marked to market because there is no active market for the assets concerned. Financial institutions in such circumstances have no other solution than to use internal modelling processes. The quality and adequacy of these processes should of course be assessed by auditors. The methodologies used should be transparent. Furthermore internal modelling processes should also be overseen by the level 3 committees, in order to ensure consistency and avoid competitive distortions.

77) To ensure convergence of accounting practices and a level playing-field at the global level, it should be the role of the International Accounting Standard Board (IASB) to foster the emergence of a consensus as to where and how the mark-to-market principle should apply – and where it should not. The IASB must, to this end, open itself up more to the views of the regulatory, supervisory and business communities. This should be coupled with developing a far more responsive, open, accountable and balanced governance structure. If such a consensus does not emerge, it should be the role of the international community to set limits to the application of the mark-to-market principle.

78) The valuation of impaired assets is now at the centre of the political debate. It is of crucial importance that valuation of these assets is carried-out on the basis of common methodologies at international level. The Group encourages all parties to arrive at a solution which will minimise competition distortions and costs for taxpayers. If there are widely variant solutions – market uncertainty will not be improved.

79) Regarding the issue of pro-cyclicality, as a matter of principle, the accounting system should be neutral and not be allowed to change business models – which it has been doing in the past by 'incentivising' banks to act short term. The public good of financial stability must be embedded in accounting standard setting. This would be facilitated if the regulatory community would have a permanent seat in the IASB (see chapter on global repair).

CEBS report on valuations of financial instruments

18 Mar 2009

The Committee of European Banking Supervisors (CEBS) has published a report titled 'Assessment of Measures Taken With Respect to the Issues Raised in the CEBS June 2008 Valuation Report' evaluating the measures taken by the IASB and by banks 'to improve the valuation of complex and illiquid financial instruments with the aim to enhance the quality and the comparability of banks' financial statements'.

With respect to measures taken by the IASB, the report concludes that:

  • as a priority, the IASB should aim to address wider valuation-related issues such as impairment measurement of available-for-sale assets, treatment of Day 1 profits and losses and the determination of the effect of own credit risk and related disclosures;
  • it should further clarify particular aspects of fair value measurement guidance; and
  • clarifications should also be provided regarding all aspects of the reclassification of instruments containing embedded derivatives.

CEBS intends to review European banks' 2008 preliminary year-end financial reports and publish a report, by the end of March 2009, on the transparency of its accounting and adequacy of disclosures.

Click to view Assessment of Measures Taken With Respect to the Issues Raised in the CEBS June 2008 Valuation Report (PDF 257k).

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