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February

IASB proposes urgent amendments to hedge accounting to respond to G20 OTC initiatives

28 Feb 2013

The International Accounting Standards Board (IASB) has issued ED/2013/2 'Novation of Derivatives and Continuation of Hedge Accounting'. The exposure draft proposes changes to IAS 39 and the forthcoming hedge accounting chapter of IFRS 9 to permit the continuation of hedge accounting where hedging instruments are novated to a central counterparty in accordance with laws or regulations introduced by jurisdictions to implement the G20's agreed reforms around over the counter (OTC) derivatives. As a number of jurisdictions are currently considering implementing these laws, the IASB is proposing an urgent amendment and has set a 30 day comment period.


Background

This project arose out of a request to the IFRS Interpretations Committee in respect of a European Regulation on OTC derivatives, central counterparties and trade repositories (the so-called European Market Infrastructure Regulation - EMIR) which implemented central clearing for certain classes of OTC derivatives.

The legislation in Europe giving rise to the Committee request arose out of a commitment from the G20, in response to the global financial crisis, to implement new requirements for  centralised clearing for standardised OTC derivative contracts.  Specifically, in September 2009, the G20 leaders agreed that:

All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. We ask the FSB [Financial Stability Board] and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.

The original request to the Committee concerned the impact on hedge accounting from when an OTC derivative is novated to a central counterparty (CCP) in accordance with EMIR. Specifically, the Committee considered whether the novation of OTC derivatives in these circumstances would result in the discontinuing of hedge accounting and recommended a limited scope amendment to provide relief so that hedge accounting could be continued.

The IASB considered the issue and agreed to add this project to its active agenda at its January 2013 meeting, determining that without an amendment, the novation of an existing OTC derivatives in these circumstances would lead to its derecognition and lead to the discontinuation of hedge accounting.


Overview of the proposed amendments

ED/2013/2 proposes that the novation of a hedging instrument should not be considered an expiration or termination giving rise to the prospective discontinuation of hedge accounting if all of the following (summarised) criteria are met:

  • the novation is required by laws or regulations
  • the novation results in a central counterparty becoming the new counterparty to each of the parties to the novated derivative
  • the changes in terms of the novated derivative are limited to those necessary to effect the terms of the novated derivative.

As such, the amendment is narrowly focused on the specific fact pattern introduced by the G20's OTC derivative reforms.  The IASB's view is that accounting for the  hedging relationship that existed before the novation as a continuing hedging relationship in these circumstances provides more useful information to financial statement users. However, given its limited scope the amendment would not grandfather continuation of hedge accounting for any voluntarily novated derivative that the two original parties to the contract agreed to (e.g., if the entities agreed to novation as a preemptive measure knowing that the change in legislation was coming). This represents a difference to U.S. GAAP where similar requirements to the EMIR Regulation are included in the Dodd-Frank Act. In the U.S. the SEC has opined that hedging relationships where the hedging derivative was novated to a central counterparty would be continued even if the exchange of counterparties took place before the effective date of the Act.

The exposure draft notes that since the forthcoming hedge accounting chapter of IFRS 9 Financial Instruments will require the discontinuation of hedge accounting where novation occurs, the exposure draft proposes amendments to be incorporated into IFRS 9 in addition to IAS 39 Financial Instruments: Recognition and Measurement.

Given that many jurisdictions are in the process of finalising legislation to introduce the G20's OTC reforms, the proposed amendments are being expedited and the exposure draft is open for a short comment period of only 30 days, which closes on 2 April 2013.

Click for:

The ED will be discussed in the upcoming Dbriefs webcast — IFRS: Important developments on 27 March.

    IASB updates work plan

    27 Feb 2013

    The International Accounting Standards Board (IASB) has updated its work plan. The timing of a number of due process steps have been clarified or extended, and a new project on IAS 19 introduced.


    Summary of changes

    Details of the changes are:


      Due process documents expected before the end of the first quarter 2013

      According to the plan, the following due process documents are expected to be issued by the end of the March 2013 (this includes those items already noted above in some cases):

      Exposure drafts

      Discussion papers

      Click for IASB work plan dated 25 February 2013 (link to IASB website). We have updated our project pages to reflect the updated work plan and other known developments.

      Notes from day 2 of the February 2013 IFRS Advisory Council meeting

      26 Feb 2013

      The IFRS Advisory Council met in London on 25-26 February 2013. We have posted the Deloitte observer notes from the second day of the meeting. The discussions included a review of the Due Process handbook, an outlining of the IASB's XBRL initiative, high-level summary of the preliminary results of a survey on the use of IFRSs globally, an EFRAG presentation of the preliminary feedback analysis of the comments received on the its discussion paper on disclosure framework, recent IASB activities in disclosure framework, and limited amendments to IFRS 9.

      The Council also expressed its concerns on the state of the Impairment project. There were mixed opinions on which direction the IASB should take in the development of its standard. Some council members were in favour of a converged solution with the FASB, while others wanted an IFRS issued to avoid further delay and have convergence efforts continue in parallel.

      Please click to access the preliminary and unofficial notes taken by Deloitte observers during the first day of the meeting.

      The next council meeting is on 10-11 June 2013 in London.

      EFRAG and NSS conduct field-test on proposals to IFRS 9

      26 Feb 2013

      The European Financial Reporting Group (EFRAG), along with the National Standard Setters (NSS) ANC, ASCG, FRC and the OIC, is performing a field-test on how the new requirements in IFRS 9, as amended by Exposure Draft (ED) ‘Classification and Measurement: Limited Amendments to IFRS 9’, would affect the current classification and measurement of financial assets.

      The EFRAG and NSS seeks participants from all entities that may have a significant impact by the proposals made to IFRS 9, in particular, banks, insurers and other financial institutions. Participants of the field-test are requested to complete a questionnaire that will asks participants to identify those financial assets for which the measurement basis would change as a result of the transition to IFRS 9, as amended by the ED. Information from the field-test will be shared in discussions between the EFRAG, NSS, the European Commission and the IASB.

      More information on the field-test is available on the EFRAG website.

      Final notes from the February 2013 IASB meeting

      26 Feb 2013

      The IASB's monthly meeting was held in London on 18-22 February 2013, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from Wednesday's session on Conceptual framework (recognition and derecognition), Thursday's sessions on Conceptual framework (measurement principles, Initial and subsequent measurement, and elements of financial statements – definition of equity and distinction between liabilities and equity instruments), and Friday's sessions on Bearer biological assets (IAS 41) and Rate-regulated activities.

      Click through for direct access to the notes:

      Wednesday, 20 February 2013

      Thursday, 21 February 2013

      Friday, 22 February 2013

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

      Notes from day 1 of the February 2013 IFRS Advisory Council meeting

      26 Feb 2013

      The IFRS Advisory Council is currently meeting in London. We have posted the Deloitte observer notes from the first day of the meeting. The discussions included the impact of the newly created Accounting Standards Advisory Forum (ASAF) on the IFRS Advisory Council and the question of the membership criteria for the ASAF.

      Yael Almog, Executive Director of the IFRS Foundation, explained in an extended session on the ASAF the background of the proposal and the results of the consultation and also stated that the Memorandum of Understanding and Terms of Reference would be amended to clarify that membership of the Forum would be open to jurisdictions that had not adopted IFRSs, but were otherwise qualified (i.e., had the technical capacity and infrastructure to make a significant contribution to the ASAF).

      Please click to access the preliminary and unofficial notes taken by Deloitte observers during the first day of the meeting.

      Australian analysis of the usefulness of IFRS financial statements

      25 Feb 2013

      CPA Australia has posted to its website a paper by former IASB member Warren McGregor evaluating the criticisms that have been levelled at IFRS financial statements by CFOs and others in and outside of Australia and seeking to defend the usefulness of IFRS financial statements.

      Warren McGregor, IASB member from its inception in 2001 until 2011, looks at the expectations regarding benefits that were expected to flow from the adoption of IFRSs and claims made again and again that IFRS financial reports are useless and have driven disclosures to unmanageable levels.

      The paper focuses on four issues:

      • Investors never read IFRS financial statements.
      • Investors focus on ‘underlying profit’ measures.
      • IFRS financial statements are too complex.
      • Are IFRS financial statements delivering the expected benefits?

      It concludes that IFRS financial statements are both used by investors and analysts and are useful to them, that the use of alternative profit measures and other financial metrics is complementary to the information provided by IFRS financial statements and not a sign that these are not useful, and that the reporting requirements are not the primary source of complexity in financial reporting but rather the complexity derives from complexities of modern business operations and the diverse needs of investors. Mr. McGregor also claims that the "IASB should discontinue its convergence project with the FASB as soon as possible" because rule-based requirements cause complexity, and although the convergence project is not the only source of rule-based requirements in IFRS, the "FASB's tendency to support more rather then less rules" is a threat to the IASB's principle-based approach that is designed to improve financial reporting and reduce complexity.

      The paper closes on a positive note regarding the benefits that were expected by countries and companies that adopted IFRS in place of their national accounting standards:

      Evidence to date appears to provide general support for the notion that adoption of IFRS has produced improvements in comparability, understandibility and transparency of financial information. In addition, studies by academics provide evidence that IFRS have improved capital market efficiency and promoted cross border investment. However, the evidence so far is mixed and appears to be impacted by the presence or absence of effective enforcement.

      Please click for access to Mr McGregors's paper In defence of IFRS financial statements on the CPA Australia website.

      Continued notes from the February 2013 IASB meeting

      22 Feb 2013

      The IASB's monthly meeting is being held in London on 18-22 February 2013, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from the sessions on Conceptual framework and IFRIC issues (IAS 19) held on Thursday; and Guide for micro entities applying IFRS for SMEs and IFRIC issues (IFRS 7) held on Friday.

      Click through for direct access to the notes:

      Thursday, 21 February 2013

      Friday, 22 February 2013

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

      Gary Kabureck appointed to the IASB

      22 Feb 2013

      The IFRS Foundation Trustees have announced the appointment of Gary Kabureck to serve as a member of the International Accounting Standards Board (IASB). Mr Kabureck will join the IASB in April 2013 for an initial term ending 30 June 2017, which will be renewable for a further three years. With the appointment of Mr Kabureck the IASB reaches for the first time its full size of 16 members.

      Since 2001, Mr Kabureck has served as the Chief Accounting Officer (and since 2003 as a Corporate Vice President) for Xerox Corporation, a Fortune Global 500 company.  He is also an active member of Financial Executives International (FEI) and has served on a range of other advisory boards, including currently to the Public Company Accounting Oversight Board (PCAOB) and previously the US Financial Accounting Standards Board (FASB).

      Click for IASB press release (link to IASB website).

      More notes from the February 2013 IASB meeting

      21 Feb 2013

      The IASB's February meeting is being held in London on 18-22 February 2013, some of it a joint meeting with the FASB. We have posted Deloitte additional observer notes from the sessions on Insurance contracts, Revenue recognition, and Leases, which were held on Tuesday and Wednesday.

      Click through for direct access to the notes:

      Tuesday, 19 February 2013

      Wednesday, 20 February 2013

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

      Correction list for hyphenation

      These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.