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News

Prada warns that modification of IFRSs will lead to lack of international recognition

13 Nov 2014

The Chairman of the IFRS Foundation Trustees, Michel Prada, delivered a speech entitled 'Accounting, markets and global economic growth' at the Shanghai National Accounting Institute. In his speech, he explained how the application of global standards is interrelated with economic growth and commented on the situation in China.

Mr Prada's overview of the success of IFRSs around the world was similar to his explanations in Tokyo earlier this week. He praised IFRSs as global standards for financial information that can help to power the global economy, which would be especially important today, "because every major jurisdiction seeks to maintain a level of economic growth, to provide further time to heal the wounds from the global financial crisis and to facilitate a continued economic recovery".

From the world economy Mr Prada turned to the role of efficient markets in China in connection with the 2020 reform programme that identifies the decisive role of markets and the need to facilitate overseas companies' entry to China and Chinese companies' expansion abroad. He stressed that the IFRS Foundation is very willing to work with the Chinese authorities to achieve this goal and he also included the hope, that a funding mechanism might be found that allows China to fully contribute to the costs of the IFRS Foundation and would see increased Chinese support for the Asia-Oceania office of the IFRS Foundation in Tokyo.

However, Mr Prada identified the modification of IFRSs as the major challenge China is facing. He noted the efforts China made in modernising its accounting systems and called them a "considerable undertaking for a country the size of China". He also mentioned that is was very impressive that the new Chinese standards are required for use by all large and medium-sized Chinese companies, not just listed ones. Yet similar to the point about familiarity he made in Japan, Mr Prada pointed out that international investors are wary when the IASB's standards are modified, even if only in small ways. He commented:

China has not fully received the international recognition it deserves by your efforts to move to global accounting standards. It is the same problem faced by any jurisdiction that chooses to adjust IFRS to meet local requirements. Other jurisdictions that have adopted IFRS in full and without modification often assume that the adjustments must be substantial to warrant such a change. So, the question for China is whether the relatively minor deviations from IFRS warrant the lack of international recognition that results from those changes? This is a question that China alone can answer.

The full text of Mr Prada's speech is available on the IASB's website.

IFRS Foundation updates the IFRS Taxonomy

12 Nov 2014

The IFRS Foundation has published IFRS Taxonomy 2014 Interim Release 2 which updates the taxonomy for IFRS 15 and common reporting practice in transport and pharmaceuticals sectors.

The interim release provides additional taxonomy concepts that support the consistent adoption and implementation of IFRS.

More details (and a link to the interim release) are available in the press release on the IASB website. Our dedicated XBRL page is here.

Chairman Michel Prada explains that only full use of IFRSs will bring needed familiarity

11 Nov 2014

The Chairman of the IFRS Foundation Trustees, Michel Prada, delivered a speech entitled 'Japan and global standards' at a meeting of the Financial Accounting Standards Foundation's (FASF) stakeholders in Tokyo, Japan. In his speech, he took stock of the adoption of IFRS around the world and commented on the situation in Japan.

Mr Prada commented on the ever growing number of jurisdictions adopting IFRS and explained that for most industry sectors in the world, IFRS is now the predominant basis on which companies' financial statements are prepared. As part of the reason for this success he made out that "investors have a clear bias for the familiar" and that IFRS have by now become the means to provide that familiarity to international investors. Jurisdictions or companies that decide not to apply IFRSs would need to be aware of becoming increasingly isolated and that the "costs of being outside the familiarity of the IFRS system" would rise.

Mr Prada then looked at the large economies that still have not adopted IFRS (China, India, the US, and Japan) and made out encouraging developments in all of them although he admitted that in the case of the US "progress has been slower than anticipated". Among these jurisdictions, he especially noted Japan and the careful and considered approach to the use of IFRS in Japan that has been chosen. He claimed that the option of voluntary adoption of IFRS was being watched carefully by other jurisdictions as it would allow larger, multinational companies to benefit from IFRS without immediately forcing smaller, more domestically focused companies to adopt a new system.

Among the Japanese encouraging developments, Mr Prada also looked at the introduction of Japanese Modified International Standards (JMIS) where an exposure draft has been published in July 2014. He commented:

I have no strong views on JMIS, and it is up to the Japanese authorities to determine what transitional steps to IFRS are required. However, if investor familiarity is the goal then this can only come from the full use of IFRS.

Mr Prada concluded his speech by underlining that the IFRS Foundation and the IASB have evolved into a global accounting standard-setter, willing and able to take on the resulting responsibilities but also willing to always keep and open mind and listen to and learn from the stakeholders.

The full text of Mr Prada's speech is available on the IASB's website.

IASB Vice-Chairman reflects on the progress of the IFRS

10 Nov 2014

On 10 November 2014, IASB Vice-Chairman, Ian Mackintosh gave a speech on how significant changes that occurred in IFRS over the past decade may be coming to an end and what should be expected from the IASB in the future.

Mr Mackintosh began by stating that most of Europe and many other parts of the world have already made the transition to IFRS and that “IFRS is a decade-old news story.” He noted the following:

  • The European Union’s adoption of IFRS on 1 January 2005, with Australia, New Zealand, Hong Kong and South Africa adopting soon after.
  • IFRS becoming the predominant reporting language for most global industry sectors.
  • Survey of 138 countries showed that 114 countries require the use of IFRS; while the remaining countries surveyed have shown positive progress towards IFRS.

Next, he commented on the more than 12 year collaboration by the IASB with the FASB to develop converged high quality standards. He mentioned that the convergence project has had several achievements (segment reporting, business combinations, fair value measurement, and revenue recognition) as well as setbacks (financial instruments).

Further, he provided his expectation for the IASB for the next decade. He believes there would be a “period of calm” in the standard-setting process after the IASB completes its leases, insurance, and conceptual framework projects. However, he noted with next year’s agenda consultation, constituents will have a chance to comment on the future path the IASB will take.

Lastly, he goes on to emphasise the need to consistently implement IFRS across all jurisdictions. Several steps the IASB has done to achieve consistent implementation include:

  • Public consultation during each phase of standard-setting.
  • Co-operation with national and regional accounting standard-setters.
  • Emerging Economies Group to gain perspective of countries without deep and liquid capital markets.
  • Islamic Finance consultative group to consider the effect of IFRS for Shariah-compliant transactions.
  • Expanding the role of the IFRS Interpretation Committee to address divergence in practice.
  • A Statement of Protocols with the IOSCO and ESMA to share information on the implementation of IFRS worldwide.
  • Education Initiative.

Text of the full speech is available on the IASB's website.

EFRAG, EFFAS/ABAF, and IASB announce rate-regulated activities outreach event

07 Nov 2014

The European Financial Reporting Advisory Group (EFRAG), the European Federation of Financial Analysts Societies (EFFAS) and the Association Belge des Analystes Financiers (ABAF), and the International Accounting Standards Board (IASB) have announced a new joint outreach event will be held on 18 December 2014 to discuss whether additional information should be included in financial statements for those involved in rate-regulated activities.

In particular, the outreach event will focus on the following questions:

  • “Is there a need for a special standard for rate-regulated activities?
  • Should balances arising out of rate-regulated activities be included in the balance sheet or is note disclosure a better way forward?
  • How is the performance of rate-regulated activities best reflected?
  • What corrections/adjustments are analysts making to the financial statements of companies with rate-regulated activities?”

Registration for this event is requested by 12 December 2014.

For more information, see the press release on the EFRAG website.

Agenda for November 2014 IASB meeting

07 Nov 2014

The International Accounting Standards Board (IASB) will meet at its offices in London on 19 and 20 November 2014. Part of the meeting will be held jointly with the Financial Accounting Standards Board (FASB) to discuss the leases project. Additionally, the IASB will discuss the IFRS for SMEs, insurance contracts, the conceptual framework, emission trading schemes, and the disclosure initiative.

The full agenda for the meeting, dated 07 November 2014, can be found here.  We will post any updates to the agenda, and our Deloitte observer notes from the meeting, on this page as they are available.

IFRS Foundation begins its review of the ASAF

07 Nov 2014

The IFRS Foundation (IFRSF) has published a questionnaire to assess the Accounting Standards Advisory Forum (ASAF). The questionnaire intends to gain views from those in the accounting standard-setting community that are not members of the ASAF.

As stated in the Terms of Reference, “[a]ll aspects of ASAF and its operations shall be reviewed by the IFRS Foundation two years after the establishment of the group (as from the date of signing the Memorandum of Understanding (MOU)).” The questionnaire is the first step in assessing how the ASAF has performed in relation to its Terms of Reference and Memorandum of Understanding.

The IFRSF expects to publish a feedback statement detailing the findings and actions from the review after the Trustees and IASB have had time to consider the findings. It is expected to be issued mid-2015. Participants are requested to complete the questionnaire by 9 January 2015.

For more information, see the press release on the IASB’s website.

ESMA sees room for improvement in EU endorsement process

07 Nov 2014

The European Securities and Markets Authority (ESMA) has responded to the European Commission's questionnaire seeking respondents' views on the impact of International Financial Reporting Standards (IFRS) in the European Union. ESMA believes that the responsibility for advising the European Commission on endorsement should be given further consideration and also supports new endorsement criteria to be included in the IAS Regulation.

In the response to the European Commission's questionnaire, ESMA agrees with most respondents that the adoption of IFRSs has made companies' financial statements in the EU significantly more transparent and comparable and was over all beneficial. ESMA states that continuous commitment to the use of IFRS is the most appropriate approach in the context of global markets and a growing use of IFRS around the world.

However, ESMA remains critical of the EFRAG reform and maintains that the responsibility for giving endorsement advice to the European Commission "can only be entrusted to a public body that has the duty to protect the public interest". The Maystadt report had originally recommended that the new EFRAG Board should consist of three pillars with one of them being European public institutions (ESMA, EBA, EIOPA and ECB). However, given that they believe that endorsement advice should entirely rest with public institutions, the European Supervisory Authorities and the ECB have declined full membership and will only be observers on the new Board.

ESMA also disagrees with many respondents in believing that two new endorsement criteria (that any accounting standards adopted should not jeopardise the EU's financial stability and that they must not hinder the EU's economic development) should be added to the IAS Regulation. Again, ESMA argues from a public interest and public good perspective. ESMA also adds that in pre-consultation with national enforcers, some proposed a specific consideration of transparency as part of the endorsement criteria.

Please click to download the full response (link to ESMA website). The endorsement mechanism and criteria are subject of questions 21 and 22.

Research report reviewing academic research into the effects of mandatory adoption of IFRS in the EU

06 Nov 2014

The Institute of Chartered Accountants in England and Wales (ICAEW) has responded to the European Commission's consultation on the impact of International Financial Reporting Standards (IFRSs) in the EU and has supplemented its response with a report reviewing 170 academic research papers that have looked at the impact of IFRS adoption both in the EU and in other countries.

In comparison with earlier surveys of research into the effects of IFRS adoption, the new report expressly addresses the objectives of the IAS Regulation, its scope is restricted, as far as possible, to evidence from the EU, and it excludes, as far as possible, the literature on the effects of voluntary IFRS adoption in the EU. It reviews the research for evidence in respect of transparency, comparability, the cost of capital, market liquidity, corporate investment efficiency, cross-border investment, other benefits, costs, and the financial crisis.

The report finds that there is evidence of benefits following IFRS adoption in relation to financial reporting transparency and comparability, the cost of capital, market liquidity, corporate investment efficiency and cross-border capital flows. However, the report also states that the evidence on some of these matters is disputed and it is unclear how far the benefits identified are attributable to the adoption of IFRS or to other concurrent institutional changes, particularly in enforcement. The report also notes that the benefits found are uneven, varying with the institutions and incentives that apply for different companies in different countries.

The report also identifies a number of challenges to IFRS. Among the challenges that apply to any set of financial reporting standards are the importance of surrounding institutions and preparers' incentives, the role of options in standards, the effects of principles-based standards, and the one-size-fits-all problem. Challenges that apply specifically to IFRS are identified as the role of fair value accounting and the priority given to the valuation role of accounting.

As the report was drawn up in response to the European Commission's consultation on the impact IFRSs in the EU, it also contains a conclusion for policy makers and the way forward:

For policy makers, the research findings summarised in this report will not end controversy on the effects of IFRS adoption in the EU, but they should help to form views on what has been achieved to date and what needs to be done in the future. Perhaps the most significant point to emerge from the research is the importance of institutions and incentives. The balance of evidence suggests that the objectives of Regulation 1606/2002 have been achieved to some extent. But differing institutions and incentives mean that its effects vary from firm to firm and from country to country. [...] If the EU wishes to achieve further progress in financial reporting and to reap the benefit of these improvements, it may make most sense to look at the incentives for those involved in the financial reporting process and at the institutions that surround it [...].

The report detailing the research results is available on the ICAEW website. It can be accessed in a seven page executive summary or in the 164 page full report.

FEE criticises lack of coordination in connection with non-GAAP measures

06 Nov 2014

The Federation of European Accountants (Fédération des Experts-comptables Européens, FEE) has responded to the International Organization of Securities Commissions (IOSCO) consultation on non-GAAP financial measures. FEE calls for the efforts around non-GAAP measures to be coordinated with the IASB.

In an opening statement before commenting directly on the IOSCO proposals, FEE expresses support for improvements in corporate reporting and stresses that non-GAAP measures play an important role as they can improve the communication between the entity and its stakeholders as long as they are reported in a transparent and unbiased manner. Nevertheless, FEE "identifies that there is a lack of coordination between market oversight bodies and regulators on one hand and the IASB on the other hand, which leads to a high degree of divergence in practice. FEE expressly references the ESMA consultation on alternative performance measures, but recently also the IFAC has issued guidance on supplementary financial measures. FEE states:

We believe that the International Accounting Standards Board (“IASB”) should also be involved in the reporting of Non-GAAP Measures in the context of financial reporting. Some IFRSs currently include guidance on how an entity can present Non-GAAP Measures within its financial statements. Therefore, [...] FEE suggests all the market oversight bodies and regulators (international, regional and national) to work with the IASB in order to develop a common comprehensive framework on Alternative Performance Measures/Non-GAAP measures.

The IASB has a disclosure initiative on its agenda that is split into several smaller projects. The project on principles of disclosure considers information that should be included in a complete set of financial statements and the presentation of non-IFRS information and comparative information. A discussion paper is currently expected in the second quarter of 2015. 

Please click for the FEE comment letter, which also contains detailed comments on the IOSCO proposals, on the FEE website.

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