December

FASB and IASB chairs discuss global accounting standards

04 Dec, 2012

At the 2012 AICPA National Conference on Current SEC and PCAOB Developments, FASB Chairman Leslie Seidman and IASB Chairman Hans Hoogervorst discussed global accounting standards and the future of IFRS in America and around the world.

Ms Seidman spoke first, making it clear that she was summarising her personal views, rather than the official position of the FASB or the FAF. She discussed the unique needs of US stakeholders, noting that short time frames and heavy regulation require clear, unambiguous standards. "I don't believe our system can function over the long run with only broad principles", Ms Seidman noted.

On the topic of convergence, the FASB Chairman stated that "a goal of 100 percent comparability (such as a single set) is not achievable in the near term, for very legitimate reasons, in some of the world's largest capital markets." She suggests that the FASB and IASB should complete the MOU projects, and going forward, the Boards should continue to have discussions with other standard setters to improve accounting standards and make IFRS, US GAAP, and other global accounting standards more comparable. Ms Seidman advocated for a "less formal approach to convergence", similar to what the IASB and FASB had done in the past, noting that "even though the relationship is bound to change, that does not mean we think convergence is over or that divergence will occur".

In his straight-talking speech, Mr Hoogervorst noted that IFRS has enjoyed a strong global impact for many years, and that the success of IFRS does not depend on US convergence. He said that the IASB and the world are looking to the US for a clear sign of their intentions with IFRS and that the US's current position for the need of "greater comparability" between the standards will not suffice. He (and the world) expected that the SEC would have made a decision on transition by now. Mr Hoogervorst made it clear that, in the future, US influence on IFRS will be "commensurate with its commitment to our standards". He discussed the results of the IFRS Foundation staff analysis which concluded that transition to IFRS in the United States would be successful.

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Latest exposure draft from IASB seeks to clarify depreciation and amortisation

04 Dec, 2012

The International Accounting Standards Board (IASB) has published ED/2012/5 'Clarification of Acceptable Methods of Depreciation and Amortisation (Proposed Amendments to IAS 16 and IAS 38)'. The proposals would provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated, precluding the use of revenue-based methods.

The proposed amendments would introduce additional paragraphs into IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets to clarify the interpretation of the largely equivalent concepts of 'depreciation' and 'amortisation'.

IAS 16 and IAS 38 require the depreciation or amortisation method to reflect the pattern in which an asset's future economic benefits are expected to be consumed.  A variety of methods may be used in meeting this requirement, and an entity is required to select the method that most closely reflects the expectation pattern of consumption of the future economic benefits embodied in the asset.  Common methods include the straight-line method, the diminishing balance method and the units of production method.

The proposed amendments would clarify that revenue-based methods of depreciation and amortisation cannot be used in meeting the requirements of IAS 16 and IAS 38.  This is because such methods reflects a pattern of generation of economic benefits that arise from the operation of the business of which an asset is part, rather than the pattern of consumption of an asset’s expected future economic benefits.

The premise behind the proposed amendment sees revenue as an interaction of two factors: quantity and price.  Unlike quantity (units), price is generally not directly linked to the consumption of the underlying asset, but instead reflects the market dynamics surrounding the goods and services the entity produces.

Previous IASB discussions on this matter included the consideration of research showing revenue-based depreciation or amortisation methods are sometimes used in two particular industries: service concession arrangements (which triggered the initial request for clarification on this matter to the IFRS Interpretations Committee) and in the media business (where revenue may be utilised as a 'surrogate' for viewer numbers when depreciating film and similar rights).  The Basis for Conclusions accompanying the proposals notes the limited circumstance when revenue could be used is when the use of a revenue-based method gives the same result as the use of a units of production method.

The proposed amendments also provide some further guidance in the application of the diminishing balance method, noting that information about technical or commercial obsolescence of the product or service output is relevant for estimating the pattern of consumption of future economic benefits of the asset and the useful life of the asset.

The amendments proposed in the exposure draft were original proposed to be included in the 2011-2013 cycle of annual improvements, which were published on 20 November 2012.  The IASB decided on separate exposure at its October 2012 meeting, partially on the basis of concerns noted by the Due Process Oversight Committee that the proposed amendments may not meet the annual improvements criteria.

The exposure draft is open for comment for a period of 120 days which closes on 2 April 2013.  The amendments are expected to be finalised in the third quarter of 2013.

Click for IASB press release (link to IASB website).

ESMA Chair discusses U.S. IFRS adoption, global consistency in IFRS

03 Dec, 2012

The European Securities and Markets Authority (ESMA) has released the text of a speech given by Steven Maijoor (ESMA Chair) to a recent Audit Quality Symposium held by the Canadian Public Accountability Board. In the speech, Mr Maijoor reiterated many of his previous comments, including disappointment at a lack of a decision on IFRS in the United States, and consistency in application of IFRS on a global basis.

Consistent with his earlier remarks, Mr Maijoor noted "disappointment that there is no progress or clear sign of political will to keep IFRS adoption high on the agenda in the US" and that it would be a "shame to miss the opportunity" by the United States "walking away from IFRS".

In discussing the need for consistent application of IFRS around the globe, Mr Maijoor noted this is the "prime responsibility of issuers and their auditors, securities regulators can intervene when there are violations of IFRS in published financial statements" and discussed the recent European-wide initiative to outline consistent enforcement priorities.

Broadening the theme to global enforcement, Mr Maijoor noted ESMA efforts to improve liaison with regulatory and enforcement bodies and reiterated a need for "further deepening of our international co-operation".

Highlighting outcomes from enforcement activities, Mr Maijoor noted a need for improved disclosure as it "allows issuers to provide investors with high-quality information within a principles-based environment".  He went on to comment on the importance of entities making relevant disclosure in accordance with objective-based disclosure requirements (such as found in IFRS 7 Financial Instruments: Disclosures):

However, a principles-based environment can only survive if clear and entity-specific disclosures, re-assessed at the end of each reporting period, bring useful decision-making information to investors. If not, detailed prescriptive requirements would need to be developed and we all know that what is important today will not necessarily be so in the next financial year. The only way to avoid this is for issuers to stop providing boilerplate information directly mimicking the standards.

Click for the full text of the speech (link to ESMA website).

IVSC consults on valuation of investment property and public sector assets

03 Dec, 2012

The International Valuation Standards Council (IVSC) has issued two due process documents seeking feedback on valuation topics. A discussion paper has been released on the valuation of investment property (particularly in meeting the requirements of IAS 40 'Investment Property'), and an exposure draft on the valuation of specialised assets used by public sector entities for service delivery.

Investment property

The Discussion Paper Investment Property seeks views on the valuation of investment property, both in the context of IAS 40 Investment Property and more broadly.

The IVSC has promulgated two standards that relate to investment property, namely IVS 233 Investment Property under Construction and IVS 230 Real Property Interests.

IVS 233 was made in response to constituent concerns about inappropriate techniques being adopted following the amendment to IAS 40 made in 2008 (arising from the 2006-2008 cycle of annual improvements) to require investment property under construction to be measured at fair value rather than cost, provided fair value can be reliably determined.  Some constituents argue that IVS 230 obviates the need for a separate IVS on investment property.

The Discussion Paper seeks views on issues such as the following:

  • Whether the definition of 'investment property' used in IVS 233 should remain consistent with that used in IAS 40, or whether the definition may not be optimal for non-financial reporting purposes such as transactions or asset management, as it is too specific to accounting rather than valuation purposes
  • How certain items attached to or associated with a property should be reflected in valuations of investment property, particularly whether, and if so when, the value of an intangible asset (such as rights) should be included in the value of a property interest
  • How any additional guidance should be promulgated by the IVSC, e.g. amendments to IVS 233 and/or IVS 230, the issuance of guidance in the form of a Techincal Information Paper (TIP), or in some other manner
  • Whether additional guidance is needed on applying the 'highest and best use' concept in the IVS Framework and IFRS 13 to investment property
  • Whether guidance should be given in areas where valuation problems arise in relation to investment properties, e.g. no or limited sales transactions, completed buildings remaining unleased, and the construction of discount rates
  • Whether the IVSC should attempt to set benchmarks that indicate whether inputs and valuations should include or exclude different types of tax or other costs
  • Whether a valuation report for investment property should state which level of the 'fair value hierarchy' in IFRS 13 the valuation of an investment property be placed. Furthermore, if the inputs fall within Level 3, whether the sensitivity analysis required by IFRS 13 should also be provided in the valuation report
  • Whether the IVSC should provide guidance on when it might not be possible to reliably determine the value of an investment property.

Comments on the paper close on 1 March 2013.

Click for (links to IVSC website):

Specialised public service assets

Specialised public service assets include buildings, structures, equipment and land used to provide transport, utilities and social, cultural and recreational services.

The IVSC's exposure draft Valuations of Specialised Public Service Assets responds to concerns that different approaches are being adopted by public sector entities for the valuation of specialised assets used for service delivery.  Issues arising include whether valuations should reflect the value the asset gives to society, taking sub-optimal uses in to account, reproduction or replacement cost as a basis for valuation, and how obsolescence should be reflected.

The exposure draft proposes a new Technical Information Paper (TIP) to provide guidance on these issues.  Topics discussed in the exposure draft include:

  • Whether the status of the owner of an asset as for-profit or not-for-profit should impact its valuation
  • The distinction between 'market value' (which should give the same outcome as 'fair value' under IFRS 13) and 'investment value' (an owner-specific value which may include measures relating to the public benefit created by or accruing to the asset)
  • Distinguishing between measuring the value of the asset and measuring the social value, ie the impact of that asset on either other assets or the wider community
  • Whether or not specialised public service assets such as roads, town squares, footpaths, public parks and gardens, informal recreational areas, etc are assets for which public users make no direct payment for access or us can be reliably measured
  • Proposing four principal categories of specialised public service assets, and providing examples of types of asset that fall within each of these categories.

The exposure draft also notes that the IVSC is also aware of a project being undertaken by the International Public Sector Accounting Standards Board (IPSASB) to introduce a Conceptual Framework which includes a review of measurement and valuation concepts for publicly owned assets.  However, given the long time frames involved in finalising the IPSASB's project, the IVSC has decided to propose guidance on the valuation of specialised assets.

Comments on the exposure draft close on 1 March 2013.  Click for (links to the IVSC website):

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