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January 2016

Annual financial reporting review guide

Jan 26, 2016

On January 26, 2016, we released our Annual financial reporting review guide. For directors to be successful in meeting their financial reporting obligations, they need the support of management and they need to ask the right questions. This publication includes questions directors may ask management regarding their annual financial filings to ensure that an appropriate level of challenge is given. Non-public companies may also find these considerations useful in preparing their financial filings.

FASB constituents of the TRG will continue to meet

Jan 29, 2016

In January 2016, Wesley R. Bricker, deputy chief accountant in the SEC’s Office of the Chief Accountant (OCA) spoke at the 43rd Annual Securities Regulation Institute (sponsored by the Northwestern Pritzker School of Law) about the implementation of the new revenue standard.

Mr Bricker noted that the SEC staff continues to support the TRG as a mechanism to promote more consistent application of the new revenue standard. While the IASB will no longer attend TRG meetings, the FASB will continue to address implementation issues and has scheduled three TRG meetings for 2016. Mr Bricker noted that the SEC staff attends TRG meetings and will use the discussions as a basis to assess the appropriateness of domestic and foreign registrants’ revenue recognition policies.

For more information, see Deloitte US's journal entry.

Hoogervorst discusses major IASB projects at European Parliament meeting

Jan 11, 2016

On January 11, 2016, the International Accounting Standards Board Chairman Hans Hoogervorst exchanged views with the Committee on Economic and Monetary Affairs (ECON) of the European Parliament. Mr. Hoogervorst discussed four high-priority projects for the IASB in 2016: IFRS 9, the leases standard, insurance contracts and the Conceptual Framework.

Mr. Hoogervorst began by discussing IFRS 9 and noted that the introduction of an expected loss model for credit losses is the most important change to the standard. He noted the positive reception the standard has gotten throughout Europe.

The IASB's long-awaited leases standard will be published on Wednesday, January 13. Mr. Hoogervorst promoted the comparability and "economic reality" that IFRS 16 will bring to listed companies around the world. He admitted that it wouldn't be popular with everyone and that half of all listed companies would be affected by changes to leases guidance. However, he affirmed that the IASB had "looked at all the possible risks very carefully" and concluded that the risks and costs associated with the new standard are "manageable".

Moving on to insurance, Mr. Hoogervorst said that the IASB expects to (1) finish its deliberations "soon" and (2) publish a new standard "around the end of 2016". He noted the importance of the insurance project:

Today’s accounting Standards for the insurance contracts are highly defective. There is no real global standard and there is a wide variety of practices around the world. Some of these standards provide information that is clearly wrong.

Mr. Hoogervorst noted that the IASB's new standard would be based on current measurement, but that the complexity of the insurance industry is making it difficult to resolve all the accounting issues involved. He said that the effective date of the new insurance contracts standard would be later than that of IFRS 9, but understands that this will be problematic to the insurance industry:

We have recently exposed a possible solution to this problem, which includes the option of a deferral of IFRS 9 for pure insurance companies. For conglomerates that combine insurance with banking activities, we will make it possible to adjust Profit or Loss for the effects of IFRS 9 through what we have called the overlay approach. We will evaluate the feedback we get on our proposals in the spring and expect to finalize our decisions well before the summer.

For more information, see Mr. Hoogervorst's full remarks on the IASB's Web site or a video recording of the entire ECON meeting, which also features a Q&A session with the Chairman of the IFRS Foundation Trustees, Michel Prada.

IASB announces IFRS 16 release date

Jan 06, 2016

On January 6, 2016, the International Accounting Standards Board (IASB) announced that it will publish its long-awaited leases standard, IFRS 16 on January 13, 2016.

The IASB also announced two live web presentations introducing the new standard which will occur on the same day.

IASB finalizes amendments regarding the recognition of deferred tax assets for unrealized losses

Jan 19, 2016

On January 19, 2016, the International Accounting Standards Board (IASB) published final amendments to IAS 12 'Income Taxes'. The IASB had concluded that the diversity in practice around the recognition of a deferred tax asset that is related to a debt instrument measured at fair value is mainly attributable to uncertainty about the application of some of the principles in IAS 12. Therefore the amendments consist of some clarifying paragraphs and an illustrating example.

The amendments in Recognition of Deferred Tax Assets for Unrealized Losses clarify the following aspects:

  • Unrealized losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument's holder expects to recover the carrying amount of the debt instrument by sale or by use.
  • The carrying amount of an asset does not limit the estimation of probable future taxable profits.
  • Estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences.
  • An entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilization of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type.

The amendments are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted. As transition relief, an entity may recognize the change in opening retained earnings of the earliest comparative period on initial application. The Board has not added additional transition relief for first-time adopters.

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IASB finalizes amendments to IAS 7 under its disclosure initiative

Jan 29, 2016

On January 29, 2016, the International Accounting Standards Board (IASB) published amendments to IAS 7 'Statement of Cash Flows'. The amendments are intended to clarify IAS 7 to improve information provided to users of financial statements about an entity's financing activities. They are effective for annual periods beginning on or after January 1, 2017, with earlier application being permitted.

The amend­ments re­quire dis­clo­sures that will en­able users of fi­nan­cial state­ments to eval­u­ate changes in li­a­bil­i­ties aris­ing from fi­nanc­ing ac­tiv­i­ties. To the extent necessary to achieve this ob­jec­tive, the IASB re­quires that the fol­low­ing changes in li­a­bil­i­ties aris­ing from fi­nanc­ing ac­tiv­i­ties are dis­closed): (i) changes from fi­nanc­ing cash flows; (ii) changes aris­ing from ob­tain­ing or los­ing con­trol of sub­sidiaries or other busi­nesses; (iii) the ef­fect of changes in for­eign ex­change rates; (iv) changes in fair val­ues; and (v) other changes.

The amendments state that one way to fulfill the new disclosure requirements is to provide a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities. This is a departure from the December 2014 exposure draft that had proposed that such a reconciliation should be required.

Finally, the amendments state that changes in liabilities arising from financing activities must be disclosed separately from changes in other assets and liabilities.

Dissenting opinion

One Board member voted against the publication of the amendments as this Board member believes that (i) the amendments may provide incomplete information about an entity’s management of liquidity, (ii) the amendments do not meet the needs of users of financial statements, and (iii) the costs of preparing the disclosure will be considerable and may outweigh the benefits.

Effective date and transition requirements

The amendments are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted. Since the amendments are being issued less than one year before the effective date, entities need not provide comparative information when they first apply the amendments.

Additional information

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IASB issues "Investor Perspectives" article on leases

Jan 29, 2016

On January 29, 2016, the International Accounting Standards Board (IASB) issued the latest issue of the "Investor Perspectives." In this edition, Sue Lloyd, IASB Board member, discusses the key features in the new Leases standard.

This issue features:

  • A discussion on why there was a change in the accounting for leases and what these changes mean to investors.
  • A comparison between IFRS 16, previous IFRS standards, and future US GAAP requirements.
  • Illustrative example.

For more in­for­ma­tion, see the press release and Investor Per­spec­tives article on the IASB’s Web site.

IASB issues new leasing standard

Jan 13, 2016

On January 13, 2016, the International Accounting Standards Board (IASB) published a new Standard, IFRS 16, Leases. The new Standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained.

The IASB has now issued a final standard with a single lessee accounting model, whereas the FASB has decided to have a dual lessee accounting model in their forthcoming standard – both however require assets and liabilities to be recognized (with limited exceptions).

Overview of the new accounting model in IFRS 16

Under IFRS 16, a lessee recognizes a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly. The liability accrues interest. This will typically produce a front-loaded expense profile (whereas operating leases under IAS 17 would typically have had straight-line expenses).

A front-loaded expense profile arises, for example, when a lessee recognizes:

  1. a right of use (ROU) asset which is typically amortized on a straight line basis; and
  2. a liability to pay lease rentals, which would be accounted for like a mortgage loan with higher interest charges in the early years.

The combined effect is a front-loaded expense in the income statement, even if the lessee pays the same amount of rent each period.

The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate.

Identifying a lease

A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use.

Recognition exemptions

Instead of applying the recognition requirements of IFRS 16 described above, a lessee may elect to account for lease payments as an expense on a straight-line basis over the lease term or another systematic basis for the following two types of leases:

  • leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset; and
  • leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture) – this election can be made on a lease-by-lease basis.

Effective date

IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019. Earlier application is permitted if IFRS 15, Revenue from Contracts with Customers, has also been applied.

Status of FASB's new standard on lease accounting

The Financial Accounting Standards Board (FASB) is currently finalizing its new leases standard and is expected to issue it in February 2016. We expect the FASB’s new standard on lease accounting will be effective for public business entities for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein. For all other entities, the standard would be effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning on January 1, 2020), and interim periods thereafter. Early adoption would be permitted for all entities.

Additional information on the IASB's Web site:

Review also:

IASB says TRG not scheduled to meet again

Jan 21, 2016

On January 21, 2016, the International Accounting Standards Board (IASB) announced that the Transition Resource Group for Revenue Recognition (TRG) is not scheduled to meet again.

The IASB has completed its decision making on the amendments to IFRS 15 this week. The clarifications are expected to be published in March 2016 and the effective date of the amendments will be January 1, 2018, which is also the effective date of IFRS 15.

Regarding the TRG the Board states:

The Board is now of the view that stakeholders need to know that they can continue their implementation process with the confidence that IFRS 15 will not be subject to further changes. Accordingly, the Board does not plan to schedule further meetings of the IFRS constituents of the TRG. However, the TRG will not be disbanded and will be available for consultation by the Board if needed. In addition, there is still scope for IFRS stakeholders to submit issues through the website.

The IASB also notes that it will continue to collaborate with the FASB and will monitor any discussions that the FASB may have in the future with the US GAAP constituents of the TRG. However, the IASB also stresses that companies reporting using IFRS standards are not required to consider pronouncements or public discussions of the FASB.

Review the press release on the IASB website.

IASB updates work plan

Jan 22, 2016

On January 22, 2016, following its January 2016 meeting, the International Accounting Standards Board (IASB) released its revised work plan.

Updates regarding the im­ple­men­ta­tion projects are:

  • The status of the project on Classification of Liabilities has changed to state that an IFRS is being developed and will be published within six months.
  • A note has been added to indicate that Fair Value Measurement: Unit of Account project will become part of the post-implementation review of IFRS 13.

For research projects, the work plan now provides more details into the initial work that will be done in the Primary Financial Statements project.

The revised IASB work plan is available on the IASB's website.

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