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Conceptual Framework - ASBJ research on the use of OCI (IASB education session)

Date recorded:

The Board continued their redeliberations on the Conceptual Framework project and the discussion paper (DP).

The Board meeting opened with a presentation by Staff of the Accounting Standards Board of Japan (ASBJ) on the research that they had undertaken on the use of Other Comprehensive Income (OCI) under existing IFRS.  The Staff of the ASBJ presented their findings to the IASB members based upon the order of the slides that each IASB member had.

The Staff of the ASBJ noted to the IASB members that the objective of their work was to understand the extent to which OCI was being used internationally under IFRS by investigating the proportions among:

  • Balance sheet (Accumulated OCI balances for each type of OCI with total equity)
  • Profit or Loss (OCI for each type of OCI with Profit or loss for the year and comprehensive income for the year)
  • Recycling (recycling adjustments for each type of OCI with profit or loss for the year)

The Staff of the ASBJ also noted that they had performed analysis by country and by industry.  A total of 178 companies had been sampled for the years 2010 and 2011.  Key highlights were:

Balance sheet

  • The ratio of AOCI balances to translation adjustments (TA) were the highest and the ratios of AOCI balances to revaluations of property, plant and equipment were found to be immaterial
  • On a country analysis (for Available for Sale (AFS) financial assets), the ratio relating to Italian companies was very high mainly due to a rise in interest rates caused by the downgraded credit ratings of Italian sovereign bonds.
  • On an industry analysis (for AFS financial assets), the ratios relating to insurance were high and also in Spain due to one particular company within the sample.  This was also true of the high ratios in the category “other” sectors.
  • On a country by country analysis for cash flow hedges there were high ratios in the Netherlands due to one of the companies in the sample having a large AOCI balance relating to foreign currency derivative contracts on future sales.
  • On an industry analysis for cash flow hedges, there were high ratios in aerospace and defence and airlines.
  • On a country by country analysis for translation adjustments, there were high ratios in Belgium (a specific company in the sample had investments in the US which caused large AOCI balances) and Switzerland and Japan (appreciation of the Swiss Franc and Japanese Yen)

Profit or loss account

  • OCI figures resulting from business operations can be significant
  • In Italy, the ratio of OCI to Profit or loss for the year (for AFS financial assets) was high mainly due to the rise of interest rates and was also high in 2011 in Germany as several German banks recognised negative OCI figures relating to the sovereign debt crisis.  In terms of industries, in 2010 airlines reported a high ratio (over 40%) and in 2011 banking and capital markets and Insurance reported high ratios due to the sovereign debt crisis.
  • Extremely high ratios (over 120%) was seen in Aerospace and Defence for cash flow hedges and over 100% for airlines.
  • There were high ratios for translation adjustments in Brazil in 2010 and Japan.  There were also high ratios in 2011 for Canada.
  • Regarding pension liabilities, the highest ratios were in the UK where in 2010 UK companies recognised large OCI figures in connection with the change in the inflation rate.  In 2011 large OCI figures were reported due to the decrease in discount rates and lower returns on plan assets.

Recycling analysis

  • There was a high ratio relating to available for sale financial assets in 2011 as a result of several European banks and insurance companies recognising impairment losses in connection with Greek sovereign bonds.
  • The highest ratios were in 2011 in Canada and Germany for AFS financial assets.  Banking and Capital markets and Insurance had high ratios in 2011 due to impairment losses in connection with Greek sovereign bonds.
  • In 2011 high ratios (for cash flow hedges) were in the airline industry as these companies recognised recycling adjustments mainly relating to fuel price hedges.

The Staff of the ASBJ also highlighted research that they had performed relating to different ratios (under the same three headings as noted above) across GAAPS.  It was noted that under US GAAP there were high ratios of AOCI to total equity in 2010 and 2011.  It was also noted that under Japanese GAAP in 2010 and 2011 there were high ratios of OCI to profit or loss for the year.

It was noted by one IASB member that as the study showed that 100 out of 178 companies studied had adopted an accounting policy of recognising actuarial gains and losses immediately in advance of IAS 19(R) one would not expect the size of OCI due to pension liabilities to increase much anymore.

The Chair noted that the results were not surprising not least that the use of OCI is more prevalent in the financial industry.

No significant further comments were received from the Board members in relation to this presentation.

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