March

The Bruce Column — Looking to the future

07 Mar 2012

IASB Chairman, Hans Hoogervorst used a speech in Mexico City as an opportunity to set out the next stages of IFRS development. Robert Bruce, our regular resident columnist, reports on what is likely to happen next.

Clearing the decks, spring cleaning, using a new broom, call it what you like, it is always a gratifying task to undertake. There is a pleasant feeling of having taken an overview, assessed what really needs to be done, and then set about the task with gusto. And this appears to be what Hans Hoogervorst was doing in what was billed as an important speech in Mexico City in early March. He ran through the issues of the moment and indicated that they were all going reasonably well. Then he looked at two specific issues: the way the IASB’s future agenda would look, and the need to look at formalising the IASB’s relationship with standard-setters, regulators and the accounting profession.

First the calm part of the process. He praised Mexico for being a model IFRS citizen. ‘Mexico has become the destination of choice for multinational companies looking to tap into a business-friendly environment, with a highly skilled workforce’, he said and pointed out the value of adopting IFRSs in full and without modification. ‘Business is more efficient when recognised industry standards are adopted’, he said. ‘The same is true of financial reporting’. Mexico will ‘become fully compliant with financial reporting norms used by more than 100 countries, including two-thirds of G20 members’.

Then he started the tidying up process. Convergence projects would be completed ‘in relatively short order’. The work priorities of the first decade of the IASB were largely complete. ‘For the first time in the history of the IASB, we will have a relatively clean slate’, he said. This meant that the new agenda could be planned. Apart from the post-implementation reviews which would have to be carried out ‘everything else is up for grabs’. Hence the emphasis on enhanced consultation and, in particular, with investors. Recognising that this had been difficult in the past extra efforts had been made and ‘as a direct result of this work we received more investor feedback on the agenda consultation than on any other IASB activity to date’.

And what did they want? No surprises here. ‘The most common feedback is a request for a period of stability’, he said. People do want to get used to this new world without always having to change it. ‘Now we have most of the world on board’, he said, ‘even a small change to a standard can be like dropping a pebble into still water. The changes will ripple out and affect tens of thousands of preparers. Investors must become familiar with the new rules. Auditors must learn how to audit them and regulators will need to enforce them’. And he could have added the word ‘consistently’ there.

So in the immediate future it is a case, as Hoogervorst said, of ‘Let’s fix what needs fixing, and no more’. This is sensible. As we all know the idea of perfection in financial reporting will always be an illusion.

So while the future work programme will remain uncertain, it is likely that the IASB will be working on the conceptual framework and sorting out disclosure overload, and, of course, deciding what to do with Other Comprehensive Income, (OCI). From the outset, last July, Hoogervorst made it clear that this was one of his pet projects. And it is clear that he still thinks so. ‘OCI is increasingly used as a home for income of a less than certain nature’, he said. ‘It is true that income reported in OCI should come with a health warning, yet investors ignore OCI at their peril’. There were no easy answers but providing a clearer conceptual definition would help.

That leaves the really big issue for the future – dealing with recommendations from the Trustees’ Strategy Review and the Governance Review of the Monitoring Board. And for Hoogervorst the largest and most important point raised in the context of the IASB was: ‘The need for the IASB to strengthen and formalise its relationships with standard-setters, regulators and the accounting profession’.

The development of IFRS, he suggested, had involved close cooperation with national and regional standard-setters, endorsement of standards around the world, auditors checking the work, and regulators enforcing their use. And up until now all this had been carried out through pretty much an informal dialogue with everyone in this supply chain. But IFRS is now, by virtue of the critical mass of its work and its global reach, in need of something more. ‘It is now time to move from this loose affiliation to a more integrated supply chain based on strengthened and more formalised relationships’, he said.

There are benefits here. The formalisation of this network will, as Hoogervorst made clear, ‘greatly assist our global standard-setting activities by binding-in national and regional standard-setting bodies more closely and earlier on in the standard-setting process’ and ‘it will also provide a more formal mechanism for this input to feed into our standard-setting process’. This, the IASB hopes, will share the burden. Research, field-testing and outreach activities could be shared. Duplication of effort and confusions over endorsement could be mitigated. And, above all, Hoogervorst hopes it would encourage greater consistency in the implementation of IFRS. More communication would mean greater understanding.

But in the end it is the single set of global standards which is the key. And this move to formalising the network would be, as Hoogervorst suggested, ‘the missing piece of the jigsaw of global accounting standards’. ‘This network will provide a forum for securities and audit regulators, the profession and the IASB to discuss ways to improve consistency, and to address areas of divergence’, he said.

It will be interesting to see how the form of this great global network will emerge. There is a downside. It will create a greater reliance on process. The network organisations will inevitably move from advice to a more overtly political function. And the way that the network is organised will further complicate things. Hoogervorst pointed out, for example, that some existing organisations around the world were fully independent bodies while others were simply extensions of the ministry of finance.

But those are problems of detail for the future. Hoogervorst has cleared the decks. ‘I am convinced that establishing this fully integrated supply chain of financial reporting is essential if the promise of global financial reporting standards is to be achieved’, he said. Every project starts with a design. And here is Hoogervorst laying out his design to build his IASB for the future.

 

Robert Bruce
March 2012

Agenda for the IASB-EFRAG meeting

07 Mar 2012

The agenda is now available for the IASB and European Financial Reporting Advisory Group (EFRAG) joint meeting to be held on Friday 9 March 2012 in London.

The agenda is available on our meeting page for this meeting.

Final notes from the February IASB meeting

04 Mar 2012

The IASB held its regular monthly meeting on 27 February – 2 March 2012 in London, part of it a joint meeting with the FASB. We have posted the final Deloitte observer notes from the sessions held on Thursday and Friday.

Click through for direct access to the notes:

Thursday, 1 March 2012 (earlier sessions)

Friday, 2 March 2012

  • Annual improvements — 2009-2011 cycle (IASB only)
    • Repeated application of IFRS 1
    • IFRS 1 — Exemption for borrowing costs
    • IAS 1 — Comparative information
    • IAS 16 — Classification of servicing equipment
    • IAS 32 — Tax effect of distribution to holders of equity instruments
    • IAS 34 — Interim financial reporting and segment information
    • Proposed changes to IAS 1 derived from the Conceptual Framework for Financial Reporting
  • Annual improvements — 2010-2013 cycle (IASB only)
    • IFRS 3 — Scope exclusion for the formation of a joint venture
    • IFRS 3 — Definition of a business

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

FEE comment letter on proposed European Commission Directive

04 Mar 2012

The Federation of European Accountants (Fédération des Experts-comptables Européens, FEE) has publicly released its comment letter on the European Commission proposal for a Directive on the Annual Financial Statements, Consolidated Financial Statements and Related Reports of Certain Type of Undertakings, including comments on amended Transparency Directive, which were released by the Commission on 26 October 2011.

FEE welcomes proposals aimed at better regulation and simplification, as well as reducing excessive and unnecessary administrative burdens. However, FEE comments that the Commission should "have considered and carried out a broader exercise focused on a more fundamental review to better adapt the Directives to 21st century accounting requirements characterised by principles-based standards and reflecting the dynamic developments in corporate reporting".

FEE also laments the lack of an option for European member states to permit the use of the IFRS for SMEs. An extract from the letter follows:

From a European perspective, FEE regrets that the Proposal does not seize the opportunity to allow Member States to make their own decision regarding IFRS for SMEs. It is unfortunate that this opportunity is missed because of differences in the accounting treatment of relatively minor matters between the Proposal and the current IFRS for SMEs.

FEE supports high quality and principles-based global standards in financial reporting, which promote consistency and transparency: we believe that IFRS for SMEs fulfils these characteristics particularly for larger SMEs and large unlisted entities.

The letter also comments on the proposed requirement for companies in the extractive industries and certain forestry companies to provide disclosures about their payments to government on a country-by-country basis, recommending these disclosures should be separate from the annual report, perhaps on company websites.

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Full convergence with IFRSs in Singapore will not occur by 2012

02 Mar 2012

The Accounting Standards Council in Singapore has determined that full convergence of Singapore Financial Reporting Standards with IFRSs will not be implemented in 2012, as had originally been planned.

After a review of the plan for full convergence of Singapore Financial Reporting Standards (SFRSs) with IFRSs, the Accounting Standards Council (ASC) has determined that full convergence will not occur in 2012, as had originally been planned. Outstanding issues on a few key projects was noted as the reason for the delay in fully converging with IFRSs.

The following is an excerpt from the ASC's press release:

The timeline for full convergence will be adjusted in tandem with international developments, and will depend on the progress of several key projects undertaken by the IASB. These key IASB projects are still in progress and are not expected to take effect before 1 January 2015. The ASC had also noted during its review that major capital markets such as the US are still in the process of working out their IFRS convergence plans. The revised timeline will be announced at an appropriate juncture.

Click for ASC Press Release (link to ASC website).

Further notes from the February IASB meeting

01 Mar 2012

The IASB is holding its regular monthly meeting on 27 February – 2 March 2012 in London, part of it a joint meeting with the FASB. We have posted Deloitte observer notes from some sessions held on Monday, Tuesday and Wednesday.

Click through for direct access to the notes:

Monday, 27 February 2012

Tuesday, 28 February 2012

Wednesday, 29 February 2012

Notes from the remaining sessions held on Tuesday and Wednesday will be posted soon.

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

EFRAG Update with summaries for January and February conference calls and the February 2012 EFRAG TEG meeting

01 Mar 2012

The European Financial Reporting Advisory Group (EFRAG) has released the February 2012 issue of its 'EFRAG Update' newsletter.

The European Financial Reporting Advisory Group (EFRAG) has released the February 2012 issue of its EFRAG Update newsletter. On 26 January, 31 January and 8 February, EFRAG held meetings via public conference call. The EFRAG TEG meeting was held 22 to 24 February 2012. A highlight of the meetings was draft endorsement advices on IFRS 10, IFRS 11, IFRS 12, IAS 27 and IAS 28.

Click for the EFRAG Update (PDF 353k, link to EFRAG website). Links to earlier issues are available here.

Business Accounting Council of Japan moves forward with its discussion over IFRS

01 Mar 2012

Following on from the meeting in December 2011, the Business Accounting Council of Japan (BAC) met twice in February to continue planned deliberation over the use of IFRSs in Japan.

No decisions were made at the sessions, which are summarised below:

Meeting held 17 February 2012

During the opening remarks by the Minister for Financial Services, he touched on his meeting with the IASB Chairman which was held earlier in the month in Tokyo. The Minister summarised points communicated to the Chairman as:

  1. Japan’s firm intent to contribute to the IASB’s activities
  2. the importance of the standard setter listening to voices in the country
  3. the need to avoid negative impacts on the economy, while acknowledging international convergence of accounting standards is important.

Afterwards, participants were briefed on the final report of the Trustee’s strategy review 2011 issued 9 February by the IFRS Foundation.

The BAC also reviewed the results of international research visits conducted by the BAC members during November and December 2011. The research was primarily conducted by face-to-face interviews of approximately 40 organisations in 7 countries across 3 continents, consisting of regulators/standard-setters, preparers, users, and auditors. The research topics included 1) local financial reporting system and IFRS, 2) experience of and/or views on using IFRS, 3) impact of IFRS on business activities, and 4) local standard setting and its relationship with the IASB. The full report (in Japanese) is available as a part of the meeting handout.

Meeting held 29 February 2012

Following up on opening remarks by the Minister, representatives from Keidanren (Japanese Business Federation) reported the results of a survey on the use of IFRS it conducted in September 2011, covering certain of its member preparers and business organisations. The survey captured the following themes (among others):

  • The country’s overall direction on IFRS is to be clearly envisioned by the end of 2012, while there is a need for monitoring developments in US and cautious deliberation
  • Retention and enhancement of influence by the country over the international standard setter is important
  • There is wider support for the use of IFRS to be limited to consolidated financial statements, while there are divergent views with regard to the mechanism of incorporating IFRS such as by voluntary adoption vs. mandatory adoption and the scope of companies using IFRS.

The BAC then discussed "impact of principle-based accounting standards&quoot;, which is the sixth topic out of 11 'specific aspects' proposed by the Financial Services Agency (FSA) for deliberation in August 2011. Members expressed various views on and around the topic, such as a need for further technical accounting guidance, preparer protection for non-compliance without intent/fault, concern over comparability, multiple international and local mechanisms to facilitate using such standards including cooperation with the IASB and active communication/discussions among stakeholders, departure from IFRSs requirements, judicial implications, and guidance on accounting judgement in the CIFiR report.

The timing of the next BAC meeting is to be posted to the FSA’s website in due course.

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The 29 February Meeting handout is expected to be posted to the FSA website in due course.

The Bruce Column — Words of Reassurance

01 Mar 2012

The SEC’s Chief Accountant spoke frankly and personally at the recent IFRS Advisory Council meeting. Robert Bruce, our resident, regular columnist assesses what it means for the future of US, and global, financial reporting.

The word first appeared in December 2010. Paul Beswick, Deputy Chief Accountant at the US regulator, the Securities and Exchange Commission (SEC), invented it. In a speech at the AICPA conference outlining a possible approach to IFRS he said this: ‘In my opinion, if the U.S. were to move to IFRS, somewhere in between could be the right approach. I will call it a "condorsement" approach. Yes, I admit I just made up a word. And by the way, the patent is pending as we speak’.

Hold that patent. In comments to the IFRS Advisory Council meeting in mid-February James Kroeker, the SEC Chief Accountant, rowed back on the use of "condorsement" to characterise a possible move to IFRS in the US. A halfway house between convergence and endorsement was no longer being described. The word was not in the dictionary, he said. We shouldn’t make up words.

To many in his audience of senior members of the world’s IFRS community, this must have been encouraging. However, Kroeker remained as elusive as the SEC traditionally has been over whether and how to move the world’s largest economy from its traditional US GAAP financial reporting regime to IFRS, the one used by most of the rest of the world, might be made. ‘Hopefully we are on track for a few months time’, he said. And what does ‘few’ mean in this context? ‘More than a couple and less than many’, he said with a smile.

But the key message was that the SEC’s activities under their previously announced work plan are close to being completed, and a recommended approach will soon be issued as part of an SEC staff report. The worry has been that the SEC, with its astonishing rise in workload in the last year, might find that discussions about IFRS would slide back in importance and priority. Not so. But Kroeker explained some of the pressures which have led to delay. The decision to move ahead with the SEC workplan—involving consideration of the issues, a governance review and the status of convergence projects which would lead to an IFRS decision—was taken in February 2010. And then came the Dodd-Frank Act. Suddenly the gargantuan legislation to bring reform to the US financial markets landed in the SEC in-tray. Kroeker spelled out the details just in case we had underestimated the work involved. There were more than a hundred rule-making studies to be undertaken. It was ‘unprecedented in its magnitude’ since the creation of the SEC. It involved ‘tens of thousands of hours’ of work.

It had been no wonder that the timetable to produce a recommended approach had slipped. But Kroeker explained that ‘the decision last year to take a few additional months time should not be read as a negative indicator’. He said that the report was now in draft. And he praised the Monitoring Board of the IFRS Foundation for its publication, the week before, of its governance review. That was ‘the final point’ which they had been waiting for. The SEC report would be published in a few months time. And the SEC staff was working on a framework proposal. That is not to say that there weren’t challenging issues. Transitioning to IFRS from US GAAP would be complex to say the least. And you can see his point. The use of LIFO accounting in inventories or stock is tied deeply into US tax requirements. Changing to IFRS (which eliminated the practice years ago) would mean a loss of ‘somewhere north of $50 billion’, he said. The US corporate community would be likely to take a dim view. ‘That’, he said, ‘would be a $50 billion fight to have’. The challenges of rate-regulated accounting would have people ‘kicking and screaming’.

But, maintaining his optimistic message, Kroeker said that they would not want a handful of particularly challenging issues to hold up the issuance of the SEC report. ‘We may not align on Day One’, he said.

And the use of ‘US GAAP’ would continue. Inevitably it is embedded, as he pointed out, at multiple levels in the US system, federal, local, state, in regulations, in private party contracts, and so on. He drew a parallel with Canada. When they went for IFRS they retained the use of ‘Canadian GAAP’ so they could deal with the practical issues, engrained throughout the system, which arose.

Listening to the way Kroeker expressed his views, a possible scenario for US commitment to move to IFRS would be over a five-to-seven year timetable, on a framework applicable, eventually, to all public companies, with the FASB acting as the endorsement mechanism to ensure that future standards were in the best interests of US investors, and the SEC as the ultimate arbiter.

As for the option of companies using IFRS on a voluntary basis, this is still up in the air, but Kroeker seemed less warm to the idea of such an option, absent "a broader framework" for incorporation of IFRS into the US financial reporting system. In the context of such a framework, he said he could more easily see "getting there more quickly", although he wouldn’t call it "voluntary use", but rather in the traditional lingo of a standard setter, it would be more akin to "early election" rather than voluntary use.

Overall, those in favour of IFRS should be encouraged, but cautious. One of the longest and most drawn-out sagas of financial reporting does seem to be drawing to an end. However, uncertainty continues – at least for a "few more months".

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