November

German Accounting Standards Committee publishes analysis of the IASB's review draft on hedge accounting, findings endorsed by UK FRC

13 Nov, 2012

The IFRS committee of the Accounting Standards Committee of Germany (ASCG) has analysed the IASB Review Draft 'Hedge Accounting' published in September 2012. The analysis was conducted in co-operation with the ASCG’s Financial Instruments Working Group. It revealed several issues that need further clarification or amendment. One of the findings suggests that the EU carve-out is likely to be imposed on IFRS 9 as well. The results of the analysis have been submitted to the IASB.

The IASB published the review draft on 7 September 2012 in order to enable constituents to familiarise themselves with the document, but also to detect potential inconsistencies (so-called fatal flaw review). This encouraged the IFRS committee to conduct a near-term analysis and to bring the results to the IASB's attention as well as making them publicly available on the ASCG's website. Among the results are four issues the IFRS committee considers to be major issues*:

 

Accounting for Credit Risk. The hedge accounting ED published in December 2012 prohibited hedge accounting for credit risk. However, as respondents to the ED commented that hedging credit risk is a common risk management strategy and, therefore, a solution was needed, the IASB now permits hedge accounting for credit risk using the fair value option in the review draft. As the now proposed method (using a modified fair value option) adds extra complexity, is inconsistent with the general requirements surrounding that option and does not lead to an answer that is conceptually superior, the ASCG can't see why entities should not be allowed to rely on the general fair value hedge accounting model instead of tweaking the fair value option. Hence, the ASCG argues that the IASB should discard its proposed alternative and make credit risk an eligible risk factor just as any other risk factor.

Accounting for Sub-LIBOR-hedges. Hedge accounting is not permitted for sub-LIBOR risk although this is a common risk management strategy applied by banks in practice. The ASCG does not believe that prohibiting hedge accounting for sub-LIBOR issues is consistent with the overall principle in the general hedge accounting model which is to better align hedge accounting with an entity’s risk management strategy. This is especially true in current times when entities seek to invest more in less risky and high quality financial instruments, esp. AAArated government bonds. Given that many entities are currently engaging in sub-LIBOR hedging, the EU has placed a carve-out on the respective requirements in IAS 39 which, should the prohibition survive in the final standard, is likely to be imposed on the relevant paragraph in IFRS 9, too. When the IASB started developing new requirements for hedge accounting, one of the expectations of the European constituents was that the IFRS 9 requirements would be capable of being applied without an EU carve-out. The ASGC does not believe that such an outcome would be necessary, if the IASB acknowledged that entities do hedge sub-LIBOR risks.

Effectiveness when hedging basis risks. The ASCG points out that there are situations where hedge accounting may lead to inappropriately presenting ineffectiveness. The example cited concerns FX hedges that include the "basis risk". They lead to recognising ineffectiveness that is not considered as such from an economic perspective.

Co-existence of hedge accounting requirements in IFRS 9 and IAS 39. The ASCG sees major conflicts between the new hedge accounting requirements to become part of IFRS 9 and those hedge accounting requirements of IAS 39 that will not be replaced yet. The ASCG wonders when and how those remaining paragraphs would apply. The examples cited concern inter alia the qualifying criteria and groups as hedged item. Would "old" (IAS 39) portfolio fair value hedges go with the "old" hedge accounting criteria and "new" (IFRS 9) hedges go with the "new" hedge accounting criteria? Furthermore the ASCG points out that the review draft does cover some macro hedging strategies (closed portfolio strategies) that are also covered by the IAS 39 requirements that will continue to exist. The ASCG concludes that this seems to offer an arbitrary accounting choice.

*) The summary of the issues is largely based on extracts from the ASCG's letter to the IASB.

In addition to the major issues identified in the ASCG's letter, several other issues are mentioned. Although not having the same impact as the major issues, the ASCG recommends that these other issues are also considered.

Please click for the full ASCG analysis of the IASB's review draft (link to ASCG website).

The ASCG findings were endorsed by the United Kingdom Financial Reporting Council (FRC) and published as a joint document to the FRC website on 22 November 2012. Please click for the ASCG/FRC joint document.

ESMA Chair discusses enforcement of IFRS, United States adoption

13 Nov, 2012

In a speech recently posted to the European Securities and Markets Authority's (ESMA's) website, Mr Steven Maijoor (ESMA Chair) has outlined his views on a number of topics, including consistent application of IFRS and the possible adoption of IFRS in the United States. On the latter point, Mr Maijoor lamented he is "personally disappointed with the lack of ambition regarding IFRS on the other side of the Atlantic".

In introducing the topic of consistent application of IFRS, Mr Maijoor noted the that "financial reporting with strong measurement principles along with entity-specific and relevant disclosures reflecting economic substance are important in underpinning market discipline" which "can only be achieved through the development and application of high quality accounting standards".

Moving onto the specific implications for IFRS, Mr Maijoor went on to say that "in order to achieve true global comparability the standards have to be enforced", and cited research showing benefits of IFRS adoption being best achieved in countries with strong legal enforcement frameworks.

In this context, Mr Maijoor discussed the European regulatory response to consistency in IFRS, and discussed the recently announced ESMA enforcement priorities which he noted is the "first time EU enforcers have agreed on common enforcement priorities highlighting the areas on which all EU enforcers will focus when reviewing 2012’s financial statements".

In discussing the "SEC non-decision on IFRS", Mr Maijoor noted the considerable patience and facilitation efforts made in supporting the United States and went on to say:

Some of the efforts to facilitate US IFRS adoption were difficult topics for the IASB’s constituents to accept, especially in Europe, but they were willing to pay the price to get the US on board. Today I cannot avoid the feeling that all these efforts do not seem to be enough which suggests that it will never be enough. I believe many people feel as I do, which is disappointment that there is no progress or clear sign of political will to keep IFRS adoption high on the agenda in the US. We have made so many far-reaching mutual decisions over the last years that it would be a shame to miss the opportunity by walking away from IFRS.

Notwithstanding this expression of hope that the United States might adopt IFRS, Mr Maijoor noted that the United State's influence in IFRS "cannot continue" and that awaiting a U.S. decision should not slow down progress with the IASB's agenda.

Whilst acknowledging convergence "will no longer drive the IASB's agenda", on the specific issue of the convergence on financial instruments impairment, Mr Maijoor held out hope for agreement between the IASB and FASB, stating "I can only say that I truly believe that where there is a will, there is a way".

Click for full transcript of the speech (links to ESMA website).

Agenda for November 2012 IASB meeting

12 Nov, 2012

The IASB will meet in London on 19-21 November 2012. Topics to be discussed include impairments, revenue recognition, conceptual framework, insurance contracts, offsetting update, due process, and FSB enchanced disclosure forum. A number of sessions will be held jointly with the FASB.

The full agenda for the meeting, as of 12 November 2012, can be found here.  We will post any updates to the agenda, and our Deloitte observer notes from the meeting, on this page as they are available.

IASB forum on disclosure overload

12 Nov, 2012

The International Accounting Standards Board (IASB) will host a public forum in London on 28 January 2013 to discuss the topic of disclosure. Specifically, participates will discuss ways to improve the usefulness and clarity of financial disclosures.

The discussion topics will include:

  • The current state of financial report disclosures;
  • Identifying and understanding the main concerns preparers, auditors, regulators and users have about disclosures in financial reports, and their possible causes;
  • Identifying potential ways that entities can improve the clarity of financial reports within the context of the current IFRS requirements; and
  • Providing input into the disclosure and presentation sections of the IASB’s Conceptual Framework project.

More information on the forum is available on the IASB website.

In addition, discussion papers have been issued by other organisation, such as the UK Financial Reporting Council (FRC), the European Financial Reporting Advisory Group (EFRAG), the Autorité des Normes Comptables (ANC), and the Financial Accounting Standards Board (FASB), to address the disclosure framework project.

Click to view our previous stories on disclosure framework discussion papers:

Updated IAS 34 compliance checklist

12 Nov, 2012

Deloitte's IFRS Global Office has published an updated checklist of the requirements of IAS 34 Interim Financial Reporting, formatted to allow the recording of a review of interim financial statements, with a place to indicate yes/no/not-applicable for each item.

The checklist addresses the requirements of IAS 34 at 30 June 2012.

Click for:

ESMA announces enforcement priorities for 2012 financial statements

12 Nov, 2012

The European Securities and Markets Authority (ESMA) has announced the priority issues that the assessment of listed companies' 2012 financial statements will focus on.

ESMA considers the following financial reporting topics to be of particular importance for European listed companies in light of the current economic situation:

  • financial assets;
  • impairment of non-financial assets;
  • defined benefit obligations; and
  • provisions, contingent liabilities, and contingent assets.

ESMA will collect data on how European listed entities have applied the IFRS requirements in relation to these topics and will publish the results.

Please click for (links to ESMA website):

EFRAG endorsement status report 9 November 2012

09 Nov, 2012

The European Financial Reporting Advisory Group (EFRAG) has updated its report showing the status of endorsement, under the EU Accounting Regulation, of each IFRS, including standards, interpretations, and amendments.

The updated report reflects that the Accounting Regulatory Committee (ARC) has voted in favour of the adoption of the Amendments to IFRS 10, IFRS 11 and IFRS 12 Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (issued 28 June 2012 by the IASB). Also, the EFRAG has updated the report for the Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities (issued 31 October 2012 by the IASB).

Click to download the Endorsement Status Report as of 9 November 2012.

You can find all past endorsement status reports here.

The Bruce Column — Valuing the pieces of eight

09 Nov, 2012

Segmental reporting is about to undergo the first of the IASB’s post-implementation reviews. Robert Bruce, our regular columnist, looks at the Deloitte survey of the segmental disclosure practice.

In mid-November the deadline for comments in the first of the IASB’s planned post-implementation reviews closes. Under scrutiny is IFRS 8 on Operating Segments, segmental reporting. For the first time the IASB will have gathered the evidence to assess whether the standard it introduced is producing the effects and improvements in disclosure that it had planned for and hoped for.

So the Deloitte survey: “Pieces of Eight: Surveying IFRS 8 Disclosures” provides a timely insight into IFRS 8 practices in the UK. It is based on the mass of information and analysis produced from the disclosures of 100 listed companies which feature in the main survey of annual reports produced by Deloitte.

What this survey shows, for example, is that there has been no change to the average number of reportable segments under IFRS 8 compared to its predecessor standard IAS 14. The average was three under both standards. And it also shows that the number of companies with only a single reportable segment has fallen from 18 under IAS 14 to 11 under IFRS 8.

At a time when the consistency and connection of narrative reporting with the figures is uppermost in peoples’ minds it is encouraging to see that 85% of companies were deemed to provide consistent segmentation in their narrative reporting when compared against their IFRS 8 disclosures. You would expect and hope this to be so, after all the underlying principle of IFRS 8 is based on information reported to management. But nevertheless it is a refreshing example of the theory appearing to hold true in practice, at least for most.

Click here for the full detail of the survey.

IPSASB issues exposure drafts in two phases of its conceptual framework project

09 Nov, 2012

The International Public Sector Accounting Standards Board (IPSASB) has published two exposure drafts as part of its project to develop a Conceptual Framework for the general purpose financial reporting of public sector entities. The exposure drafts cover the elements and recognition in financial statements, and the measurement of assets and liabilities in financial statements. In contrast to the IASB's Conceptual Framework, the IPSASB's framework proposes additional elements of financial statements including 'deferred inflows', 'deferred outflows', 'ownership contributions', and 'ownership distributions', but does not include a definition of 'ownership interests'.

The exposure drafts follow on from earlier consultation papers issued in December 2010, and have the following titles:

  • Conceptual Framework Exposure Draft (ED) 2, Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: Elements and Recognition in Financial Statements (ED 2)
  • Conceptual Framework Exposure Draft (ED) 3, Measurement of Assets and Liabilities in Financial Statements (ED 3).

'Deferred' inflows and outflows

ED 2 proposes to define 'deferred inflows' and 'deferred outflows' as follows:

"A deferred inflow is an inflow of service potential or economic benefits provided to the entity for use in a specified future reporting period that results from a non-exchange transaction and increases net assets."

"A deferred outflow is an outflow of service potential or economic benefits provided to another entity or party for use in a specified future reporting period that results from a non-exchange transaction and decreases net assets"

Examples of deferred inflows may include items such as specific multi-year grants that do not meet the definition of a liability.   Examples of deferred outflows may include multi-year grants that stipulate they must be used over future reporting periods.  These items would be recognised as revenues or expenses as the future time periods expire.

The Basis of Conclusions accompanying ED 2 notes the prevalence of non-exchange transactions of public sector entities, particularly taxation and grants.  The IPSASB argues that it is "important to be able to show separately flows that relate to specified future reporting periods" and considered a number of different approaches in meeting this objective, including changing the definitions of 'assets' and 'liabilities', introducing an 'other comprehensive income' notion, and requiring disclosure in the notes.

The Basis of Conclusions documents the IPSASB's decision to introduce new elements of financial statements as follows:

The IPSASB... concluded that the most transparent approach is to define deferred inflows and deferred outflows as separate elements. In coming to this view the IPSASB considered it likely that, if separate elements are not defined, the treatment of flows that are considered applicable to future reporting periods is likely to be addressed on an issue-by-issue basis at the standards level, using ambiguous and potentially conflicting principles.

The practical effect of the definition of these elements may in some cases result in outcomes similar to the requirements for government grant received under IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.  However, the IPSASB notes the deferred inflow and outflow approach is "not the same as the matching concept  used in earlier private sector frameworks".

Comparison of element definitions with the IASB

Because of the introduction of the additional elements, the definitions of other elements are different in some cases from those used under IFRS.  The table below compares the definitions between the IPSASB proposals and the IASB Conceptual Framework:

IPSASB proposalIASB Framework
An asset is a resource, with the ability to provide an inflow of service potential or economic benefits that an entity presently controls, and which arises from a past event. An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Revenue is:
  1. Inflows during the current reporting period, which increase the net assets of an entity, other than:
    1. Ownership contributions; and
    2. Increases in deferred inflows; and
  2. Inflows during the current reporting period that result from decreases in deferred inflows.
Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants*
Expenses are:
  1. Outflows during the current reporting period which decrease the net assets of an entity, other than:
    1. Ownership distributions; and
    2. Increases in deferred outflows; and
  2. Outflows during the current reporting period that result from decreases in deferred outflows.
Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants
Ownership contributions are inflows of resources to an entity, contributed by external parties that establish or increase an interest in the net assets of the entity.
Ownership distributions are outflows of resources from the entity, distributed to external parties that return or reduce an interest in the net assets of the entity
Ownership interests are not defined
Equity is the residual interest in the assets of the entity after deducting all its liabilities

* Under the IASB's Framework, income encompasses both 'revenue' and 'gains'.  The Framework notes that gains "represent increases in economic benefits and as such are no different in nature from revenue" and so are not considered a separate element.

Measurement

ED 3 identifies the measurement concepts intended to guide the IPSASB in the selection of measurement bases for International Public Sector Accounting Standards (IPSAS). The ED focuses on selecting measurement bases that meet the objectives of financial reporting-decision making and accountability. As many assets in the public sector are held for their operational capacity, the ED argues the cost basis is will often be appropriate.

Comments on the exposure drafts close on 30 April 2013.  Click for IPSASB press release (link to IFAC website).

Deloitte releases new IFRS e-learning modules

08 Nov, 2012

Deloitte’s Global Audit Learning group has released two new e-learning modules on derecognition under IFRS 9 'Financial Instruments' and offsetting under IFRS 32 'Financial Instruments: Presentation'. These modules are additions to the extensive catalog of IFRS e-learning content made freely available by Deloitte.

Details of the two new modules are:

  • IFRS 9 Financial Instruments: Derecognition — covering the background, scope and principles relating to the derecognition of financial instruments under IFRS 9.
  • IAS 32 Financial Instruments: Presentation — covering the key presentation requirements for financial instruments under IAS 32, as revised by the IASB in December 2011, to include additional guidance and disclosures as a result of the joint offsetting project with the FASB.

(Note: You may be asked to register to access each module - no personally identifying information is requested in the registration process.)

The release of these modules follows three new modules on IFRS 9, IFRS 10 and IFRS 11 released a number of weeks ago.  There are now 42 modules are available, tackling the key extant and new standards issues by the IASB. The IFRS e-learning modules are available free of charge and may be used and distributed freely, without alteration from the original form and subject to the terms of the Deloitte copyright over the material.

For details on the full range of e-learning modules go to Deloitte’s IFRS e-learning. A listing of available e-learning modules is also available on our IAS Plus IFRS e-learning page.

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