2010

The Bruce Column — The governor goes for common sense

23 Nov, 2010

Sir David Tweedie, the Chairman of the International Accounting Standards Board, has always taken a robust view about the value of a company's management mixing up disconnected information and then trying to rely on the resulting data when taking a strategic decision.

If you or I had a £20 note for the number of times that Tweedie has told a conference, often in the context of pension accounting, that you might as well take the number of miles to the moon, multiply it by your Grannie's shoe size, and then divide it by the number you first thought of, for all the good it would do you, we would all be able to retire tomorrow.

There is a fundamental problem here. People really love the idea that complex issues, whole views of corporate and financial performance, can be reduced to one figure, one magic number. But anyone close to accounting, auditing or financial reporting knows that life, and complex corporate entities, are not like that. So it was good, last week, to find the Governor of the Bank of England saying exactly the same thing.

Mervyn King was giving evidence to the House of Lords Economic Affairs Committee, which has been looking into the audit market and, by extension, some of the confusions involved in the financial crisis. Suddenly, at the end of a complaint about the inconsistent way banking folk had used the principle of mark-to-market, he came out with a simple, common-sense statement. It may not have had the humorous and folksy effect of a Tweedie joke, but it was saying the same thing.

"The idea that there is one number which is going to accurately capture the risks and challenges facing an institution is really very silly", he said. And then he went on to say that it was wrong to blame accounting rules for the behaviour of banks. It would be inaccurate to say that rays of sunshine suddenly penetrated the windows of Committee Room 1 on the House of Lords Committee corridor. But certainly the ideas being discussed ceased to bound incoherently around the room and instead found themselves sealed in a small box clearly marked: 'Common Sense'.

This can only be for the good. Financial reporting tends to be complex because, particularly in the field of banking and financial services generally, the entities it reports on are, in themselves, ferociously complex. But that shouldn't mean that the fundamentals underlying them are devoid of common sense. Many people know this, but it doesn't stop financial institutions trying to convince the world otherwise. King pointed out that the principle of mark-to-market had been "very convenient" to people in the good times. But these same people, come the financial crisis, tried to cover up the true state of affairs by saying that they mustn't use mark-to market and so "concealing from many people the true state of losses that had arisen". There was a need, he said, for a prudent judgement of expected losses. As for how those should be accounted for, he said, that "is something I am quite happy to leave to the accounting profession".

In fact he took this approach consistently throughout. When offered the opportunity to criticise IFRS and mark-to-market measurement he refused to do so and he was critical of the idea of using the 'mark' as a basis for compensation.

Instead he homed in on banking behaviour. The accounting figures do not drive behaviour. "The fact that the accounting convention says you don't have to recognise a loss until the lack of payment has actually occurred doesn't seem to me to be a very sensible or prudent basis to make business decisions", he said. But that was not an excuse for business behaviour. "Business decisions need to be separated from saying this is what the accounts say we can or cannot do".

Very elegantly he had pulled the rug from under the feet of all those who argue that their behaviour is somehow in thrall to accounting rules.

As for the rest of his wise words he made it clear that in future he wanted to get back to a system where the Bank and bank auditors had sensible dialogue and conversations with accurate and sensible judgements about what was happening in the market and which highlighted any risks that might be scurrying in from over the horizon.

But in the end his message was plain. Accountants and financial reporting were not the scapegoats. In answer to the final question of the day he said it again: "The idea that there is just some magical set of numbers which in all circumstances are the only ones we want to look at is a very dangerous philosophy".

Robert Bruce
November 2010

Related links

 

Deadline reminder – EDs on Insurance Contracts, Stripping Costs, Hyperinflation and Annual Improvements

23 Nov, 2010

We remind you that comments on the Exposure Drafts Insurance Contracts, Stripping Costs in the Production Phase of a Surface Mine, Severe Hyperinflation – Proposed amendment to IFRS 1 and The annual improvements process: Proposals to amend the Due Process Handbook for the IASB are due on 30 November 2010.

The ED on insurance contracts proposes a single IFRS that all insurers, in all jurisdictions, could apply to all contract types on a consistent basis. The proposed IFRS would apply to writers of both insurance and reinsurance contracts.

The ED on stripping costs reflects the IFRS Interpretations Committee's conclusion that costs associated with a 'stripping campaign' should be accounted for as an additional component of an existing asset, and that this component should be written down over the reserves that directly benefit from the campaign.

The ED on hyperinflation proposes guidance on how an entity should resume presenting financial statements in accordance with International Financial Reporting Standards (IFRSs) after a period when the entity was unable to comply with IFRSs because its functional currency was subject to severe hyperinflation.

The ED on the annual improvement process suggests amended criteria for determining whether a matter relating to the clarification or correction of IFRSs should be addressed using the annual improvements process

Click for our earlier exposure draft news stories on:

IFRS Illustrative Financial Statements for 2010

22 Nov, 2010

We have posted Deloitte's IFRS Illustrative Financial Statements for 2010.

These model financial statements for the year ended 31 December 2010 illustrate the application of the presentation and disclosure requirements of International Financial Reporting Standards (IFRSs) by an entity that is not a first-time adopter of IFRSs. They also contain additional disclosures that are considered to be best practice, particularly where such disclosures are included in illustrative examples provided with a specific Standard. These model financial statements do not reflect the early adoption of IFRS 9. Model financial statements reflecting early adoption of IFRS 9 will be published soon.
Click for Deloitte's IFRS Illustrative Financial Statements for 2010 (Word 777k).

A PDF version of these model financial statements will be available soon and posted with our various IFRS model financial statements and related checklists, including translations, which are available Here.

 

Financial instruments accounting

22 Nov, 2010

In a feature posted to the IASB's website today, Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB), provides an update on the IASB's project to reform financial instruments accounting talking about what has been achieved, as well as the work ahead of the IASB.

The reform of financial instruments accounting is one of the most important and complex projects the Board is undertaking. Sir David provides details on the general approach, the three phases of the project, the convergence with US GAAP, and effective dates. He comes to the conclusion:

On balance, I believe that the development of IFRS 9 has shown how 21st century standard-setting should be done, and the legacy of the project will be a high quality, principle-based standard that provides increased, useful information for investors and other users of financial statements.

Click for the feature on financial instruments accounting on the IASB's website. Our IAS Plus summary of the Board's project to replace IAS 39 is available here.

EITF Snapshot for November 2010

22 Nov, 2010

We have posted the November 2010 edition of EITF Snapshot summarising the 19 November 2010 meeting of FASB's Emerging Issues Task Force.

EITF Snapshot, published by Deloitte & Touche LLP (USA), enables readers to identify relevant topics and to understand quickly the meeting's outcome. Past issues can be downloaded Here.

This EITF Snapshot covers the following issue discussed by the EITF at the meeting:

  • Issue 09-H Health Care Entities: Revenue Recognition – Final consensus
  • Issue 10-A How the Carrying Amount of a Reporting Unit Should Be Calculated When Performing Step 1 of the Goodwill Impairment Test – Final consensus
  • Issue 10-D Fees Paid to the Federal Government by Pharmaceutical Manufacturers – Final consensus on one issue; consensus-for-exposure on a second issue
  • Issue 10-E Accounting for Deconsolidation of a Subsidiary That Is In-Substance Real Estate – No consensus reached
  • Issue 10-F Accounting for Legal Costs Associated With Medical Malpractice and Similar Claims – No consensus reached
  • Issue 10-G Disclosure of Supplementary Pro Forma Information for Business Combinations – Final consensus

Initial EITF consensuses (known as 'consensuses-for-exposure') are exposed for a comment period after ratification by the FASB. At its first scheduled meeting after the comment period, the EITF considers comments received and, as warranted, affirms its consensuses-for-exposure as final consensuses. Those consensuses are then provided to the FASB for final ratification.

Click for EITF Snapshot — November 2010 (PDF 104k).

EC consultation on disclosure of non-financial information by companies

22 Nov, 2010

The Services of the Internal Market and Services Directorate General of the European Commission are conducting a public consultation in order to gather stakeholders' views on ways to improve the disclosure by enterprises of non-financial information (e.g. social and environmental).

In recent years, there have been calls to improve the comparability, reliability, and relevance of information disclosed by enterprises. A better focus on sustainability issues by companies and investors could help European companies respond to, and derive business opportunities from, long-term global challenges, such as increased global competition, resource shortages, climate change, and the fight against poverty. Better disclosure of social and environmental information could enhance the accountability of enterprises, and so contribute to higher levels of trust in business on the part of citizens. On the other hand disclosure of more non-financial information may unduly increase the administrative burden of companies, adding to the length of annual reports which are already considered by many to be too long.

In this context, the EC is conducting the consultation that can be accessed here.

2011 IFRS Blue Book – Coming Soon

22 Nov, 2010

The IFRS Foundation has announced that the 2011 IFRS Consolidated without early application will be published in December 2010. This volume (nicknamed the "Blue Book") will contain all official pronouncements that are mandatory on 1 January 2011. It does not include IFRSs with an effective date after 1 January 2011. For example, the Blue Book will not include IFRS 9 Financial Instruments because it has an effective date of 1 January 2013. The Blue Book differs from the traditional BV, which includes all pronouncements issued at the publication date, including those that do not become mandatory until a future date.

The IASB intends to publish the traditional BV (the "Red Book") in March 2011. The Blue Book will sell for £60 plus shipping (academic, developing country, and volume discounts apply). You will find more information and ordering details here.

 

Webcast on Framework-based teaching of principle-based standards

19 Nov, 2010

On Tuesday 7 December 2010 the IFRS Foundation will hold a webcast designed for those teaching IFRSs with focus on Framework-based teaching of principle-based accounting standards.

Topic: Framework-based teaching of principle-based standards
Date and time: Tuesday, 7 December 2010, 10:00 - 11:30 GMT and repeated 15:00 - 16:30 GMT
More information on the webcast and registration: Click here
More information on IAS Plus: Summary of the IFRS Framework

Notes from Day 3 of November IASB meeting

19 Nov, 2010

The International Accounting Standards Board (IASB) is holding its regular November meeting in Norwalk, United States.

Day 3 of the meeting, held on 18 November 2010, was joint meeting with the United States Financial Accounting Standards Board (FASB). We have also posted the notes from the late session of Day 2 of the meeting where the conceptual framework was discussed.

The topics discussed were as follows (click through for Deloitte observer notes on each topic):

  • Conceptual Framework — the Reporting Entity
    • Entity versus proprietary perspective
    • Requirement for combined financial statements
    • Revised project timeline
  • Emission Trading Schemes
    • Recognition of a liability for excess emissions in excess of initial allocation and measurement of liabilities in an emission trading scheme
    • Initial and subsequent measurement of purchased allowances (assets) (cap and trade scheme)
    • Balance sheet presentation of assets and liabilities in a cap and trade scheme
  • Fair Value Measurement
    • Premiums and discounts in a fair value measurement (including blockage factors)
    • Measurement uncertainty analysis disclosure
    • Portfolios of financial instruments
    • Measuring the fair value of own equity

Click here to go to the preliminary and unofficial Notes Taken by Deloitte Observers for the entire meeting.

Notes from Day 2 of November IASB meeting

18 Nov, 2010

The International Accounting Standards Board (IASB) is holding its regular November meeting in Norwalk, United States.

Day 2 of the meeting, held on 17 November 2010, was joint meeting with the United States Financial Accounting Standards Board (FASB). We have also posted the notes from the late session of Day 1 of the meeting (IASB-only) on post-employment benefits.

The topics discussed were as follows (click through for Deloitte observer notes on each topic):

The Board also discussed the conceptual framework (reporting entity phase). We will post notes from this additional topic on Friday 19 November.

Click here to go to the preliminary and unofficial Notes Taken by Deloitte Observers for the entire meeting.

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