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IASB Chairman doubts we are ready for the next crisis, but sees great improvements in financial reporting

Dec 11, 2018

On December 11, 2018, the International Accounting Standards Board (IASB) released a speech by IASB® Chairman Hans Hoogervorst, given at the 2018 AICPA Conference on Current SEC and PCAOB Developments. In his speech, Mr. Hoogervorst looked at the lessons learned from the global financial crisis, sketched the enormous risks in the global economy and admitted doubt as to whether the financial system as a whole is ready for the next financial crisis.

Mr. Hoogervorst began his speech by outlining the global situation financial situation regarding global debt, interest rates and the debt trap as well as the capitalization of the banking system. Against that backdrop, he analyzed whether accounting standards are fit for purpose in a possible new financial crisis.

Mr. Hoogervorst first turned to IFRS 9 and the expected loss models the IASB and the FASB have developed. He commented on the fear that IFRS 9 would lead to overreaction as economic expectations might be overly pessimistic during a recession, which might strengthen the downward turn of the economic cycle. However, he believed those fears are not to be justified for three reasons:

  • The fact that IFRS 9 leads to a much quicker crystallization of loan losses should have a preventative effect.
  • Timely loan loss recognition should contribute to limiting imprudent dividend distribution and remuneration policies.
  • Quick loan loss recognition should lead to timely clean-up of banks’ balance sheets, which in turn will contribute to much quicker restoration of credit flows to healthy companies.

Mr. Hoogervorst then turned to IFRS 17 and its contributions to financial stability. The slides that supported the speech noted six of these:

  • Insurance liabilities properly measured
  • Transparent costs of options and guarantees
  • Updated information on risk margins
  • Immediate recognition of onerous contracts
  • End of up-front profit taking
  • Less earnings management

Finally, Mr. Hoogervorst turned to goodwill and the risk that goodwill just keeps on accumulating over time even when the economics do not justify this. He did not believe that the accounting for goodwill poses a significant risk in terms of triggering a financial crisis, however, he noted that in the next financial crisis, a lot of goodwill that has been building up since the last one would be impaired all at once, which might add to unrest in the capital markets. Mr. Hoogervorst pointed out the discussion paper on this topic the IASB plans to publish that will present some new approaches to goodwill. The paper will look at is whether it will be possible to improve disclosures that will help investors to judge whether an acquisition has been successful, will consider a disclosure that shows what a company’s balance sheet will look like without goodwill, and include a discussion on the reintroduction of amortization of goodwill.

Mr. Hoogervorst closed his speech noting that he was not sure whether the financial system as a whole is ready for the next financial crisis. However, he added: "What I am sure of is that the recent improvements in our accounting standards will provide much more transparency that will help investors and regulators identify risks at a much earlier stage. That is the best contribution that accounting can give to financial stability."

Review the full speech (with slides embedded) on the IASB's website.


IFRS Foundation publishes proposed general improvements to the IFRS Taxonomy

Dec 06, 2018

On December 6, 2018, the IFRS Foundation published "IFRS Taxonomy 2018 — Proposed Update 2 "General Improvements''". Comments are requested by February 4, 2019.

The proposed changes aim to improve the quality of tagged data and to make the IFRS Taxonomy easier to use by:

  • introducing implementation notes that explain how to use specific IFRS Taxonomy elements and avoid tagging errors;
  • introducing the duration element type for reporting information about a period of time to achieve more consistent tagging; and
  • removing entry points without documentation labels to make it easier to access the IFRS Taxonomy.

Review the press release and proposed update on the International Accounting Standards Board’s website.

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PCAOB Inspections Outlook for 2019

Dec 06, 2018

On December 6, 2018, the Public Company Accounting Oversight Board (PCAOB) Division of Registration and Inspections staff provided this Outlook on their objectives and potential focus areas for planned 2019 inspections of audits of issuers and brokers and dealers.

This Outlook outlines their ongoing inspections transformation efforts and provides an overview of various areas of inspection focus for 2019. Auditors should consider this information when planning and performing their current and upcoming audits and review of their quality control systems.

The key areas of focus for PCAOB inspectors include:

  • System of quality control
  • Independence
  • Recurring inspection deficiencies
  • External considerations
  • Cybersecurity risks
  • Software audit tools
  • Digital assets
  • Audit quality indicators
  • Changes in the auditor's report
  • Implementation of new accounting standards

Review the publication on the PCAOB's website.


Summary of the November 2018 CMAC meeting

Dec 05, 2018

On December 5, 2018, the International Accounting Standards Board (IASB) released a summary of the Capital Markets Advisory Committee (CMAC) meeting, which was held in London on November 1, 2018.

The topics discussed at the meeting included:

  • Primary financial statements:
    • Defined subtotals in the statement(s) of financial performance;
    • Management performance measures; and
    • Disaggregation.
  • Financial instruments with characteristics of equity (FICE):
    • Additional disclosures, including priority of issued financial liabilities and equity instruments on liquidation, the maximum potential dilution of ordinary shares, and terms and conditions that affect the timing and amount of cash flows of the financial instruments issued by the entity;
    • Expanded statement of changes in equity, which will show how total comprehensive income of an entity is attributed between different classes of equity instruments; and
    • Presentation in other comprehensive income (OCI) of income and expenses from particular types of financial liabilities i.e. those that have the amount feature that is not independent of the entity’s available economic resources.
  • Management commentary:
    • Objective of management commentary;
    • Applying materiality in preparing management commentary; and
    • Principles for preparing management commentary.
  • Goodwill and impairment:
    • Additional disclosures at acquisition date;
    • Why do users need information on the subsequent performance of the acquired business?; and
    • Additional disclosures about subsequent performance.

The next CMAC meeting will take place on March 21, 2019.

Review the press releasemeeting page and meeting summary on the IASB's website.

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KASB research paper on the usefulness of note disclosures

Dec 04, 2018

On December 4, 2018, the Korea Accounting Standards Board (KASB) made available a research report that looks into the usefulness of financial information that is provided in the form of financial statements.

The KASB argues that financial statements currently consist of an overly simplified body and an extensive volume of notes that disclose a list of disorderly information necessary in decision-making. As the KASB believes that this inevitably leads to the on-going criticism that users of the financial statements cannot effectively utilize the information which are useful in making decisions, the KASB sought to find ways to better understand the current status of note disclosure preparation in entities and analyze usefulness of disclosed information in the notes through in-depth interviews with financial statement users. The research report The Usefulness of Note Disclosures: Examination and Suggestions for Improvement was issued in the hope of sharing the outcome of the research conducted with a wider range of stakeholders in Korea and overseas.

Review the research report on the KASB's website.

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Department of Justice eases “Yates Memo” requirements for cooperation credit

Dec 02, 2018

On December 2, 2018, the D&O Diary published an article on how one of the important questions about U.S. Department of Justice’s approach following the change of Presidential Administration two years ago was whether DOJ would continue emphasizing its policy of individual accountability in the agency’s 2015 statement known as the Yates Memo.

In a recent speech, Deputy Attorney General Rod J. Rosenstein announced changes to the policy. The changes, which are more in the form of an adjustment rather than a wholesale change, makes it clear that companies seeking cooperation credit no longer need to identify “all” individuals involved in the wrongdoing, so long as the companies identify those who were “substantially involved” in the misconduct.

Review the full article on the D&O Diary's website.


IFRS Foundation Trustees Chair delivers speech on the EU fitness check

Nov 30, 2018

On November 30, 2018, the Chair of the IFRS Foundation Trustees, Erkki Liikanen, delivered the keynote speech at the EU Conference in Brussels, discussing the results of the EU fitness check.

Mr. Liikanen began by reviewing the history of how the EU decided to adopt IFRS instead of adapting them into EU GAAP. He noted the importance of that decision and how most of the world has followed suit. He then stated:

All things considered, the IFRS project has been a success at an international level. Is it also viewed as a success at an EU level? The answer to that is provided by the EU Fitness Check.

He went on to praise the EU fitness check, mentioning high participation within — and outside of — the EU. He explained that the number of external comments could be attributed to (1) many non-EU domiciled companies and investors having interests in the EU and being impacted by EU policies; and (2) the EU's approach to corporate reporting — particularly IFRS Standards — is "highly influential in shaping the policies of other jurisdictions".

Mr. Liikanen described the financial reporting perspective of the EU fitness check, mentioning that "the report shows that things are working well". He acknowledged that not everything is perfect, but highlighted that there is not much support for substantive change:

Most respondents felt that IFRS Standards are effective, helping to reduce the cost of capital and increase investments within the EU. Few believed that the Standards have led to procyclicality and short-termism, while most believed that the EU’s policy on IFRS Standards has promoted more integrated capital markets in the EU and internationally. This is encouraging feedback and shows the importance of our Standards to the EU’s Capital Markets Union project and the wellbeing of the global economy more broadly.

He also discussed the fitness check results related to the "carve-in" mechanism proposed to modify IFRS Standards in the EU. Mr. Liikanen reported that three quarters of all respondents supported the status quo of a restricted endorsement process and argued against carve-ins. He did acknowledge that a minority of respondents argued for the carve-in mechanisms; he provided their perspective that it would help the EU exert greater influence on the IASB's standard-setting process. He explained:

This topic of influence is an important one and should not be dismissed. Every major jurisdiction sets out to influence the international agenda, and this is naturally relevant also for the EU. The EU signed up to IFRS Standards from the very beginning, has been a strong and vocal supporter of IFRS Standards as the global standard, and the EU has endorsed pretty much every standard the IASB has ever issued. So, I completely understand the desire to be highly influential in a process to create standards that are mandated for use across the EU.

The question is how best to exert that influence. To collect views, to analyse concerns, to present them well and to win the argument through logic and reason. The EU has a great deal of experience in this area, because that is how its own internal decision-making works.

Mr Liikanen said that many people see carve-ins as an "opt-out" clause from international IFRS system, of which the EU is a major player. He emphasised that he sees the fitness check as an endorsement that the system is working well as-is. He opined that "the best way for the EU to influence the IASB is through the quality of its work and the persuasiveness of its arguments".

Review the full text of Mr. Liikanen's speech on the IASB's website.

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AASB Exposure Draft – Agreed-upon Procedures Engagements

Nov 30, 2018

On November 30, 2018, the Auditing and Assurance Standards Board (AASB) issued an Exposure Draft of a proposed new standard proposing to adopt, with Canadian amendments, ISRS 4400 (Revised). Read and respond to the Exposure Draft by February 15, 2019.

The Exposure Draft consists of:

  • an explanation of why change is needed;
  • key public interest considerations;
  • main features of the Exposure Draft;
  • a link to the IAASB’s Exposure Draft, including its Explanatory Memorandum;
  • a description of the AASB’s process for adopting ISRS 4400 (Revised);
  • discussion of proposed Canadian amendments; and
  • a proposed effective date.

The result would be Canadian Standard on Related Services (CSRS) 4400, Agreed-upon Procedures Engagements, that would replace:


Proposed effective date

The IAASB proposes that ISRS 4400 (Revised) be effective in approximately 18-24 months after the final standard is issued. CSRS 4400 is expected to have the same effective date. Practitioners will be permitted to apply CSRS 4400 before the effective date.

The AASB expects to use the same effective date for the CSRS as the IAASB does for ISRS 4400 (Revised).

Review the exposure draft on the AASB's website.


IFRS Foundation Trustees amend Constitution effective December 1, 2018

Nov 29, 2018

On November 29, 2018, the Trustees of the IFRS Foundation issued amendments to the IFRS Foundation Constitution that increase the maximum tenure of the Trustees’ Chair and Vice-Chair to nine years.

The amendments also clarify that the Chair of the Trustees can be appointed either from among the Trustees or externally and specify that the Vice-Chairs must be appointed from the Trustee ranks.

Review the following additional information on the International Accounting Standards Board's website:

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CSA cautions issuers about problematic promotional activities

Nov 29, 2018

On November 29, 2018, the Canadian Securities Administrators (CSA) published CSA Staff Notice 51-356, "Problematic promotional activities by issuers", cautioning companies to avoid promotional activities that may artificially increase an issuer’s share price or trading volume, or may mislead investors.

The notice outlines CSA Staff’s concerns with certain promotional practices, including dissemination of unbalanced or unsubstantiated material claims. Such practices have been observed among issuers in the venture market, though expectations about disclosure and promotional activities apply to all issuers.

Examples of promotional activities that may be misleading include:

  • Disseminating presentations, marketing materials, social media posts, or other information that describe early-stage plans with unwarranted certainty, or make unsupported assertions about growth of markets or demand for a product;
  • Announcing an issuer name or business change to reference an emerging industry or technology without a supporting business plan or comprehensive risk disclosure;
  • Compensating third parties who use social media and general investing blogs to promote issuers, but do not disclose their agency, compensation or financial interest.

CSA members will continue to monitor promotional activities undertaken by, or on behalf of, issuers, and will take action as necessary, including ordering a clarifying news release, a removal of overly promotional language from company communications, or a re-filing of disclosure documents.

Review the press release on the CSA's website and the Staff Notice on the CSA members’ website.

Correction list for hyphenation

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