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January

The Bruce Column — At a loss to explain

31 Jan 2011

The difference between incurred losses and expected losses might seem to the outside world to be a relatively arcane piece of accounting.

Within the accounting world, as the publication of the joint IASB/FASB supplement to the exposure draft on amortised cost and impairment shows, it is important. But no one, in the run-up to the supplement's publication, expected to find the ideas being bounced around at a hearing of the UK House of Lord's Economic Affairs Committee a few days before.

Their Lordships were focussing on the effectiveness of IFRS during the economic crisis and were asking the Government ministers in front of them at the hearing if they expected significant changes. And suddenly Richard Carter, Director, Business Environment, at the Department for Business, Innovation and Skills, decided to talk about what was about to be produced on losses, whether incurred or expected.

'What I think we are likely to see emerge is a standard which people can understand, a standard which people can apply, and a standard which people have confidence in and which will avoid, as far as any standard can, the sort of issues we've had over the last couple of years', he said.

Those, as anyone involved in the world of standard-setting will realise, are bold words. But the hope is that the new supplement will achieve some of those hopes. What the joint IASB/FASB publication does show is that they have achieved their goal of recognising losses earlier, which was after all where the pressure was coming from. And this part of the overall project was the hardest hurdle the Boards had to overcome. They must hope that, with this now out for comment, the rest will prove easier.

And it takes the lead from banks, which have tended to make a distinction between the 'good book', loans which are expected to hold up, and the 'bad book', which is the dodgy stuff. Now this concept will be extended to all entities. And that will bring all manner of change. But not all of it will be expensive system changes. It will force organisations to bring together their efforts in risk management, corporate reporting and investor relations.

There is logic to this. Most people would see it as common sense. At present no one provides for anything before a loan goes definitively bad. This is the incurred loss. This is a dead parrot, as the Monty Python comedy team would have once said. What needed to happen was the acceptance that you know that some loans, despite looking good at the outset, will turn out to be bad. These are the expected losses. And, under the new proposals these can be provided for.

As Richard Carter went on to explain in the House of Lords: 'Historically we have been in a situation where the banks' accounting would only take account of those losses which they already knew had been incurred. But there is the suggestion, which I think is probably quite a good one which is going forward that they should take account of those losses which they expect are going to be incurred because of something which is going to happen in the future. That', he said, 'is quite a significant change. At one level it sounds technical. In practical terms I think that it could be very important'.

This is important to politicians because there is a view that had losses been recognised and provisions made earlier some of the economic carnage in recent years might have been avoided. But, as Carter went on to say of the new proposals: 'Would it actually have produced a significant difference three or four years ago? I don't know'.

And there is another reason why politicians will be welcoming the proposals. Governments would love to see that if financial services companies start making provisions for losses from Day One then it might change some of the attitudes which led to unsuitable loans being handed out like free gifts, free from responsibilities, and free from what the politicians call moral hazard. It was always going to be a temptation for banks, if they didn't have to deal with losses until loans actually went bad, to provide large and cheap mortgages to anyone who wanted them.

That is why this new supplement from the joint Boards has another political dimension. Having come through the awful period of the crash and hopefully having picked up a few lessons along the way people now feel uncomfortable about the concept of incurred losses and only booking them after the event. Although we are probably no better placed at predicting future losses on loans than we were before the financial crisis it now feels irresponsible not to give the new model a go.

Robert Bruce
January 2011

Related links

 

 

Harvard Business School e-book on integrated reporting

31 Jan 2011

Harvard Business School has made available a free e-book entitled 'The Landscape of Integrated Reporting: Reflections and Next Steps'.

On 14-15 October 2010, "A Workshop on Integrated Reporting: Frameworks and Action Plan" was held at the Harvard Business School, which discussed the concept of integrated reporting, what its contribution could be to creating a more sustainable society, and what must be done to ensure its rapid and broad adoption in a high quality way. Attendees included companies, analysts and investors, NGOs, regulators and standard setters, accounting firms, technology and data vendors, academics, students, and civil society.

Following the workshop, the Harvard Business School decided to publish a free "e-book". Everyone who attended the workshop was invited to write a contribution for the book, which saw 64 pieces contributed totalling some 110,000 words. The objective of the book is to capture the current state of integrated reporting in the world, highlight the critical issues that must be addressed to ensure its rapid and broad adoption, and offer many good suggestions for an effective action strategy to make this happen.

With the International Integrated Reporting Committee (IIRC) aiming to issue an international discussion paper later in 2011 and include integrated reporting on the agenda of the G20 meeting in November 2011, the e-book may be useful reading for those interested in understanding the developing push towards integrated reporting.

The e-book can be accessed for free through the Smashwords website. The Harvard Business School has also published an Executive summary (link to HBS website, PDF 2130k) of the workshop. Click for our Sustainability reporting page.

Deloitte publications update

31 Jan 2011

The following Deloitte publications are now available:

Global publications

Deloitte (United States)

  • Heads Up Blue-Ribbon Panel Reports on Private-Company Accounting Standards (PDF 98k) - discusses the Blue-Ribbon Panel's recently issued report to the Financial Accounting Foundation, the US FASB's parent organization. The report contains recommendations on how "accounting standards can best meet the needs of users of U.S. private company financial statements".

Deloitte (Canada)

  • Clôture de 2010 (PDF 151k) – a French translation of IFRS in Focus: Closing out 2010

 

EFRAG and UK ASB issue discussion paper on accounting standards

31 Jan 2011

The European Financial Reporting Advisory Group (EFRAG) and the UK Accounting Standards Board (ASB) have issued a Discussion Paper Considering the Effects of Accounting Standards.

The purpose of the Discussion Paper is noted as "to put forward, for public comment, proposals to integrate (or further embed) into the standard setting due process a systematic process for considering the effects of accounting standards as those standards are developed and implemented". The discussion paper is open for comment until 31 August 2011.

Click for EFRAG press release (link to EFRAG website) and the discussion paper (PDF 1,421k).

Le point sur les IFRS – Édition Décembre 2010

31 Jan 2011

Deloitte (Canada) has published a translation into French of the November 2010 edition of our IFRS on Point Newsletter.

IFRS on Point, published at the end of each month, highlights the month's critical financial reporting developments and provides a great way to catch up on the main IFRS-related news stories of the month. Click to download Le point sur les IFRS – Édition Décembre 2010 (PDF 97k).

IASB publishes supplement to exposure draft on impairment

31 Jan 2011

Today the IASB and FASB have published for public comment joint proposals on the impairment of financial assets, a supplementary document to the November 2009 IASB exposure draft 'Financial Instruments: Amortised Cost and Impairment'.

Many respondents to the IASB's original exposure draft agreed with the impairment approach proposed but considered it to be operationally too difficult to apply, especially in the context of open portfolios.

Financial Instruments: Impairment proposes to replace the incurred loss impairment models in IAS 39 Financial Instruments: Recognition and Measurement and US GAAP with an expected loss impairment model including separate approaches to recognising expected losses for performing assets in a "good book" and for troubled assets in a "bad book". Expected credit losses in the "good book" would be recognised under a time-proportional approach based on the weighted average age and expected life of the assets in the portfolio, but subject to a minimum allowance of at least those credit losses expected to occur in the foreseeable future (a period on not less than twelve months from the reporting date). When assets are transferred from the "good book" to the "bad book" the proposals would require the expected credit loss to be immediately recognised.

The supplement also includes an IASB-only Appendix Z Presentation and Disclosure for public comment, which includes separate proposals on impairment of financial assets specifically addressing scope, presentation and disclosure. These proposals have been deliberated only by the IASB at this time. The FASB may separately deliberate presentation and disclosure requirements related to proposals in the supplementary document.

The exposure draft forms part of the IASB's overall project to replace IAS 39 Financial Instruments: Recognition and Measurement, and when their proposals are confirmed they will be incorporated into IFRS 9 Financial Instruments.

The supplement has a 60-day comment period with comments due on 1 April 2011.

Click for:

 

Deloitte publications update

28 Jan 2011

The following Deloitte publications are now available:

Deloitte (United States)

Deloitte (Canada)

Deloitte (New Zealand)

  • Accounting Alert update (January 2011) (PDF 313k) - includes discussion of relief for some entities affected by the NZ Budget 2010 in relation to loss of tax depreciation on buildings, changes to financial instruments, management commentary, Securities Commission review of financial reporting and other topics

 

IASB publishes exposure draft on offsetting

28 Jan 2011

The International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) have published for public comment joint proposals on the offsetting of financial assets and financial liabilities in the statement of financial position.

ED/2011/01 Offsetting Financial Assets and Financial Liabilities proposes to require offsetting when an entity has the right to set-off a financial asset and financial liability and intends to either settle on a net basis or simultaneously.

The main proposals of the ED in detail

  • Under the proposals, an entity would be required to offset (ie present as a single net amount in the statement of financial position) a recognised financial asset and a recognised financial liability if, and only if, it has an enforceable unconditional right of set-off and intends either to settle the asset and liability on a net basis or to realise the asset and settle the liability simultaneously (the offsetting criteria).
  • The proposals clarify that the offsetting criteria apply whether the right of set-off arises from a bilateral arrangement or from a multilateral arrangement (ie between three or more parties). The proposals also clarify that a right of set-off must be legally enforceable in all circumstances (including default by or bankruptcy of a counterparty) and its exercisability must not be contingent on a future event.
  • The proposals would require an entity to disclose information about offsetting and related arrangements (such as collateral agreements) to enable users of its financial statements to understand the effect of those arrangements on its financial position.

The proposed requirements would supersede the requirements on offsetting in IAS 32 Financial Instruments: Presentation. Although the proposals are broadly comparable to the requirements contained in IAS 32 currently, they would modify the offsetting criteria in IFRSs by clarifying that the right of set-off should not only be currently enforceable. Additionally, the proposal would enhance the disclosures by requiring improved information about the assets and liabilities subject to set-off and the related arrangements.

The ED has a 90-day comment period with comments due on 28 April 2011.

Click for:

 

CICA report on MD&A discussion of IFRS

27 Jan 2011

The Canadian Institute of Chartered Accountants (CICA) has published a special year-end publication produced by staff from CICA's Canadian Reporting Performance Board, which reviews various considerations for companies in preparing their Management Discussion & Analysis (MD&A).

The publication notes the focus for the IFRS changeover discussion in the MD&A should be moving from reporting progress on the IFRS conversion plan to communicating the impact of the changeover. It also emphasises that users will want to understand how much of the change in reported performance in the first quarter of 2011 relates to business issues and how much relates to the change in accounting regime.

Click for CPR Alert Issue 12 (link to CICA website)

Agenda for the February 2011 IASB meeting

27 Jan 2011

The IASB will hold its monthly meeting for February 2011 at the IASB offices in London on 1 and 2 February 2011. The meeting are joint meetings with FASB.

You can access the agenda on our February 2011 IASB meeting page. We will also post Deloitte observer notes on this page as they are available.

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