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The future for public sector accounting standards

13 Sep 2012

Ken Warren, a board member of the International Public Sector Accounting Standards Board (IPSASB) and the New Zealand External Reporting Board (XRB), has written an article providing some insights into the future direction of International Public Sector Accounting Standards (IPSAS). The article, entitled 'IPSASs through the looking glass' and recently published on the website of the New Zealand Institute of Chartered Accountants (NZICA), discusses conceptual differences between IFRS and IPSAS and likely developments in public sector accounting.

The article is couched in terms of  the IPSASB's current project to rewrite its conceptual framework to better reflect public sector needs.  The article draws out conceptual differences between the IASB and IPSASB due to underlying differences between for-profit private sector entities and public sector entities, and provides Mr Warren's insights into what those differences might mean in terms of IPSAS set on the basis of decisions reached to date in the IPSASB's project.

Mr Warren discusses how the wider group of users of public sector financial statements extends beyond the focus of the IASB's framework on resource allocation decision making by capital providers.  This then leads to likelihood, in Mr Warren's view, of matters such as a stronger focus on 'flows' rather than 'stocks' in financial reporting, emphases on budgets/forecasts and longer term sustainability, a move to service reporting, and guidance on public sector specific issues such as non-exchange revenues, controlled and regulated assets.

However, Mr Warren also notes that where public sector specific issues do not arise, then IASB requirements can be used:

... if the identified key characteristics are not in play, my speculation is that there is no reason for the IPASAB to amend the IASB requirements on a particular topic. Not only does the use of the IASB approach in such circumstances significantly free up IPSASB time to focus on the more critical expectations of its constituents, but also there are positive benefits in terms of understandability and cost-reduction if similar transactions and events have similar measurement and recognition requirements in IPSAS and IFRS.

The future direction of IPSAS is of critical importance in the New Zealand context, as New Zealand's evolving differential reporting framework proposes to use IPSAS as the basis for public sector accounting standards.  Exposure drafts proposing to implement IPSAS-based requirements were released in June 2012 and are open for consultation until mid-December 2012.

Click for access to the article (link to NZICA website).

EFRAG Update with a summary of the August and September 2012 EFRAG meetings

12 Sep 2012

The European Financial Reporting Advisory Group (EFRAG) has released the September 2012 issue of its EFRAG Update newsletter.

The newsletter contains a summary from the EFRAG meetings held in in August and September 2012. Highlights were the finalisation of endorsement advices in relation to the amendments to IFRS 10 (transition guidance) and the annual improvements 2009-2011 and the finalisation two comment letters to the IFRS Interpretations Committee (on levies) and the IASB (on annual improvements 2010-2012).

Click for the EFRAG Update (link to EFRAG website).

Agenda for September 2012 IFRS Interpretations Committee meeting

11 Sep 2012

The IFRS Interpretations Committee will meet at the IASB's offices in London on Tuesday and Wednesday 18-19 September 2012. The meeting is open to the public and will be webcast.

The tentative agenda is available on our meeting page for the meeting.

Deloitte IFRS podcast – IASB's draft IFRS on general hedge accounting

07 Sep 2012

In this podcast, Andrew Spooner, lead global IFRS financial instruments partner, and Kush Patel, director in the UK IFRS Centre of Excellence, discuss the changes introduced in the staff draft of the hedge accounting section of IFRS 9 and how they compare to the previous exposure draft as well as provide insight into the likely effect they will have in practice.

The Bruce Column — Towards a better understanding of risk

07 Sep 2012

The IASB has released the draft of its hedge accounting proposals and it contains much to cheer for those in favour of transparency and a greater understanding of risk. Robert Bruce, our resident columnist, explains.

Hedge accounting is there to show the effect of the financial instruments which a company uses to manage its exposure to market risks. Investors need to understand this. They need to know what risk management efforts have been employed and how they may affect future cash flows.

And until now this has not been easy. But the publication of the IASB’s draft on the subject brings us closer. We are moving towards a process of thinking in terms of the business model. The existing rules-based IAS 39 doesn’t work for all situations. Under those rules there are many cases where companies cannot meet the hedge accounting requirements laid down in the standard and so cannot effectively represent the risk management benefits which they are achieving. What treasurers, for example, are doing to manage risks can be very different from what the accounting is showing. It doesn’t mean the treasurers are not taking measures to deal with the risks that the company faces. They may well be, but the accounts don’t necessarily show what they have done.

The draft changes all of this. It builds on the proposals published by the IASB in 2010. Many of the obstacles to achieving hedge accounting when derivatives are used to hedge market risks are removed. The 80-125% effectiveness test requirements are gone. Hedging with options produces less volatile profit or loss accounting than under the current requirements. And risk components of non-financial items can be hedged.

All of this helps, and in particular it helps the non-financial corporates who currently struggle with the results produced by IAS 39.

As it is intended as a fatal flaw review rather than an exposure draft, the new draft brings us one step closer to a final standard and it could come into force for accounting years beginning on or after 1 January 2015. The one snag may be endorsement in Europe. Hedge accounting is but one part of the jigsaw of reforming IAS 39. And the EU had previously stated that it wants to see the whole package endorsed at the same time. So this could delay the hedge accounting reforms for companies within Europe. But the pressure will come because companies that want to use the new system as soon as possible will feel disadvantaged by companies outside Europe which would be able to use the new rules as soon as they are finalised.

In a nutshell the proposals are a good move. They provide greater transparency. Accounts should show what is being done to manage risks and under the proposals they should do just that.

Click for more analysis:

IASB publishes staff draft of the hedge accounting section of IFRS 9

07 Sep 2012

The International Accounting Standards Board (IASB) has published on its website a staff draft of the general hedge accounting section of IFRS 9 'Financial Instruments'. The staff draft is based on the proposals in Exposure Draft ED/2010/13 'Hedge Accounting' published in December 2010 and the tentative decisions the IASB has made during its redeliberations of the Exposure Draft.

The staff draft published today is the result of the re-deliberations of the IASB. The purpose of a staff draft, which is not an official due process document, is to illustrate the IASB's position while at the same time enabling constituents to familiarise themselves with the document.

When finalised, the proposals will become part of IFRS 9 Financial Instruments and will form the section on hedge accounting. They will replace the corresponding requirements in IAS 39 Financial Instruments: Recognition and Measurement, except for the section on portfolio hedge accounting for interest rate risk as noted below.

The related topic of macro hedge accounting does not form part of the staff draft. The IASB has decided to publish a separate Discussion Paper on macro hedge accounting (expected in the third or fourth quarter of 2012). Therefore, the current requirements in IAS 39 on portfolio fair value hedges of interest rate risk remain applicable.

The key areas of change are:

  • Closer alignment of the hedge accounting model with risk management
  • Increased eligibility of hedged items
  • Increased eligibility of hedging instruments
  • A revocable fair value option when hedging particular credit risks
  • New qualification and effectiveness requirements
  • New concept of rebalancing hedging relationships
  • New rules for discontinuing hedging relationships
  • Increased disclosures

The intended effective date of the hedge accounting chapter are annual periods beginning on or after 1 January 2015 with earlier application permitted. The requirements are to be applied prospectively (with some 'grandfathering' allowed) but not to items that have already been derecognised at the date of initial application.

The following documents are available on the IASB website:

Click for more analysis:

The Bruce Column — Agreeing the framework: Paul Druckman

06 Sep 2012

The journey towards an agreed framework for a system of integrated reporting around the world is gathering pace. Here Robert Bruce, our regular, resident columnist, interviews Paul Druckman, CEO of the International Integrated Reporting Council, (IIRC), about progress, the growing support of investors and analysts, the attitudes of stock exchanges around the world and what it means to provide ‘more than the financials’.

Paul DruckmanThe definition of integrated reporting is disarmingly reasonable and logical. This is how it is defined by the IIRC: ‘Integrated Reporting is a new approach to corporate reporting that demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, Integrated Reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organization is really performing’.

But if you look at the summary of responses, published in June[1], relating to last year’s discussion paper on integrated reporting you find that the simple concept has spawned many different ideas. ‘It was apparent from the responses that there is a diversity of views, and even a degree of confusion, about the definition of Integrated Reporting; about what Integrated Reporting is, or is intended to become; and how Integrated Reporting should relate to existing reporting strands (e.g. financial, management commentary, governance and remuneration, and sustainability reporting)’, it says. And it then goes on to say that: ‘Some respondents also questioned whether the work of the IIRC should relate to the broader concept of how integrated thinking is embedded in an organization and how this affects all facets of reporting, rather than focusing only on the features of a single integrated report’.

These are busy times for the IIRC. The process of moving towards an agreed integrated framework continues. Pilot programmes are underway to test ideas. A full consultation document is due next year. Efforts to create a regulatory framework are being worked upon. It is a remarkable experiment. Nothing is hard or fast. But the feeling that this is an idea whose time has come is strong. Research[2] published last month showed strong support from investors and analysts for the value of providing information on an integrated reporting basis. ‘Over 80% of our research sample believe that extra-financial information is very relevant or relevant to their investment decision-making or analysis’, was one of its findings.

Paul Druckman is CEO of the IIRC. He has a careful path to tread. He knows the momentum for change is there. But he also recognises the complexity of providing a framework which would garner wide acceptance. ‘I would describe the phase that we are in at the moment as creation and awareness raising’, he says. ‘So we are very busy creating the technical framework itself and we are very busy trying to explain globally what integrated reporting is, and it is not necessarily what people think it is. It is a tough ask’. But that is offset by the enthusiasm being shown around the world. ‘What is remarkable is the momentum continues to grow rather than calm down a little’, he says. And he refers to a meeting he had earlier on the day we spoke. ‘This morning I was talking to people from some of the Asian Stock Markets’, he says. ‘They are desperate to get on with it.  If we had a framework they would already be busy implementing it, so it’s great’.

But he knows that such is the wide range of views around that it needs to be approached slowly and steadily. A draft prototype of the integrated reporting framework will be made available in September. It will then be modified and presented to the IIRC in Tokyo in November and in April next year the Consultation Draft will be published. And in the meantime the pilot programmes are up and running in 75 companies spread around the world. A conference in Amsterdam in September will discuss preliminary findings. Many of the companies involved are well on the way down the path to integrated reporting. Others are still assessing where the information required would best come from. ‘There are many companies that are well on the way and we are just a way of helping them move their ideas forward’, he says. On the other hand ‘very few of the companies have actually got on with the reporting and most of them have been investigating the silos in the business and where the data comes from and just how is this all going to happen’.

The task now is bringing all this together into a comprehensive consultation draft next year. The work so far shows that many companies are moving towards integrated reporting but they are all doing it in many different ways. Looking back over the first year of the work Druckman makes the point that while there are big differences there is also common ground. ‘I think what it’s done is confirm that we have to be more flexible’, he says. ‘So, let’s get away from the jargon of principles and rules and let’s talk about flexibility.  I think we’re going to have to be possibly even more flexible than we expected. Different companies actually come at strategy from different points in the organisation.  You’d think it would be common but it isn’t necessarily.  And the drivers in different companies are different.  We have to make sure that the framework doesn’t put people in a straightjacket which means that they can’t express themselves’. It is a lesson learned. ‘I think that we talked about flexibility right at the beginning’, he says, ‘but I don’t think we really understood why and I think we truly understand why now’.

Another lesson learned is that while the research shows that investors and analysts are enthusiastic about the value of the information provided by integrated reporting there are marked cultural differences and these do represent a big divide. It is what you might describe loosely as the emerging economies which are enthusiastic. The old world of long-established stock markets and investment patterns are less so. ‘It does depend on where you are’, says Druckman. ‘If you are sitting in New York or Toronto it is quite markedly different from sitting in Sao Paulo or Seoul’.

It is also a question of attitudinal differences. ‘We are now more aware than ever that our target audience for integrated reporting is the long term investor’, he says. ‘I would categorise it, actually, as the long term global investor. If you are a short term trader, somebody playing the market, well fine, you do what you do but we can’t help you. That’s not our role’. But he feels there is an overall understanding which is clearly apparent right around the world that financial statements alone tell far from the full story, or provide anything like the full information that management or investor requires.

‘I use the words ‘more than financials’ rather than ‘non-financial’ or ‘extra-financial’’, says.  ‘Everybody has their own term.  When I say ‘more than financials’ I think there is an understanding that the value of the business intrinsically is more than just what is in the financial statements, and I don’t think anybody denies that.  How you capture that is the challenge, which I think is both cultural and regional’.

And one part of this is in the field of long-established regulation. The way integrated reporting works contrasts with much of the highly regulated detailed content-oriented securities legislation that exists now, especially in the US.  The IIRC wants to get companies to focus on what’s important but in a future orientated manner. Druckman’s view is that the two approaches have to co-exist and gradually they will evolve. ‘We are not there to replace the existing compliance legislation’, he says. ‘Whether that existing compliance legislation and regulation actually evolve over time is not my place to discuss.  I think the likes of FASB and IASB with the concept of management commentary and other measures are looking at that anyway, that’s their part of the world.  I would say that integrated reporting is part of this reporting evolution and I could almost imagine a management commentary or an MD&A taking over from integrating reporting one day, but it’s not going to do it in the timescales that we will want’.

Companies are already changing, ahead of the regulators and standard-setters. ‘The detailed factual regulatory information and data that is already there is just not going to go away’, he says, ‘but companies are going to have to be more transparent, not just for investors but for society and their staff’. So the answer is to approach the issue from two angles. Firstly, integrated reporting does not replace existing standards or regulation. ‘The second angle is that we are there to help to provide a fresh look at how a business creates and preserves value’.

And this pushes at another boundary in existing regulatory framework – the vexed question of forward-looking disclosure. Lawyers tend to draw a deep breath. Company directors see it as a hostage to fortune. Auditors are uneasy, to say the least. ‘It’s why you can’t implement integrated reporting today to some extent’, he says. ‘I believe that one of the big barriers for integrated reporting is that the companies haven’t got that flexibility that they need.  They may well be doing integrated reporting but they are not doing it in the way that they want to, many of them, because of legal issues and forward disclosure issues’.

For Druckman the answer is a change in regulatory culture. ‘You create a regulatory environment that understands that this is based on planning and guesswork’, he says and then hesitates. ‘Perhaps guesswork is the wrong word but I’ve been in business long enough to know that quite a lot of it is guesswork, guesswork based on lots of planning and other information, but it’s still not something you can guarantee.  And a sophisticated investor needs to understand that that’s where that information comes from.  I actually don’t think it’s very difficult, I just think it needs to be addressed’.

In part Druckman thinks that the solution to this lies in the different cultures around the world. ‘How we overcome the challenge is tough but it doesn’t mean that we shouldn’t create the opportunity’, he says. ‘What we have got to recognise is that there isn’t one route’.  He gives an example: ‘What is so noticeable is the difference between the North Americans and the South Americans. There is a completely different mindset. The South American Exchanges are talking about how they can make a difference, how they can make change happen in their nations and with their companies and with their investors’.  This, Druckman feels, was in sharp contrast with the North Americans. ‘Their attitude was “We maintain a stance of independence to the issues – we deal with transactions”.  I’m not knocking them. There is a big competitive environment there and they are in a situation where there are big competitive tensions. If one exchange creates something that companies don’t want, another will pick up the business and the only way that they can see a way forward is if it’s done on a global basis, through the World Federation of Exchanges’.

‘At the moment we look down straight lines’, he says. ‘It may be that pressures come from the outside so that stock exchanges or regulators or governments say “hang on a minute, this landscaping is changing, we need to evolve”.  If we just carry on down the straight line we’ll never get there, we have to find the pressures from outside’.

Druckman expects the process to develop faster than it might have done in the past. It took somewhere around twenty years for what have now become IFRS to reach a level of maturity to the point where they are taken seriously by the market and the market regulators. ‘It has got to come through a lot quicker than that’, he says, ‘but although we want it to be done quickly we realise that it is not going to be quite as quick as we hoped’. The framework will be developed by the end of 2013. But he expects that this, and he draws on his career in software here, will be version 1.0. ‘It doesn’t mean that it will be the complete answer’, he says. ‘I would be devastated if it wasn’t a very good answer but it won’t be the whole picture’. But he thinks that progress will be rapid. ‘I just think that things are more dynamic and I think people are ready. There is nothing so strong as an idea whose time has come’.

Meanwhile, a Sustainability Accounting Standards Board has been set up in the US. Intended to partner, though independent of, the existing Financial Accounting Standards Board, (FASB), the SASB aims to standardise the way that non-financial risk and broad sustainability data for US companies is reported. The aim is to ensure that the information, which currently doesn’t make it into the reported data, will be filed in each company’s primary disclosure form, the 10K, which has to be filed with the main US regulator, the SEC. This will provide the basis for wider disclosure than currently happens in the US market. ‘What the SASB is doing is trying to get data into the 10K’, says Druckman. ‘There’s nothing around the strategy of the business, the value of the business, all of that sort of stuff. It’s just saying let’s get some environmental and social data into a 10K.  So, it’s adding to the information set and there’s nothing wrong with that and, in fact, if they create data standards and information standards - that actually supports the work of the IIRC’.

But the danger is that it will also add to the potential confusion between the different guardians of the corporate information. ‘The danger’, he says, ‘is that we’ll have a Global Reporting Initiative and an IFRS and a SASB and US GAAP and never the twain shall meet.  GRI and SASB are not the same. For example, GRI is very stakeholder focused, SASB is very investor focused and compliance focused’.

Reporting on a global stage will require common information and methods of defining and recording it. ‘The fact that we don’t have really strong sustainable environmental and social indicators that are globally accepted is a weakness for integrated reporting’, says Druckman, ‘but it all supports integrated reporting, because we are not trying to recreate the 10K or add data to it.  We’re saying that the 10K is fine, you can have your 10K. The real questions are: What’s this business trying to do and how’s it going to create value?  It’s a totally different question. The 10K data is used to measure the past performance and indicate future performance in integrated reports, but it underpins it, it isn’t what an integrated report is, so in many ways the stronger sustainability reporting and financial reporting is, the stronger integrated reporting is’.

So where will integrated reporting be in five years time? ‘We will be implementing integrated reporting globally’, he says. ‘And financial reporting will be starting to evolve because it will no longer be seen as the core-only report of the business.’

And how will it evolve? ‘By its own nature it will change’, he says. ‘Nobody will force it.  The prime annual report of corporations will be an integrated report and the financial statements will back that up rather than being the principal report.  I would say that in five years’ time that starts and that process really starts to have real energy. I would see most listed companies around the world having an integrated report as their primary report’, he says. ‘That may be ambitious, but that is the aim’.


1 ‘Towards Integrated Reporting – Communicating Value in the 21st Century’. Summary of responses to the September 2011 Discussion Paper and Next Steps.

2 ‘What Investors and Analysts Said’ – Research commissioned by the Global Reporting Initiative, (GRI), HRH The Prince’s Accounting for Sustainability Project, (A4S), and undertaken by Radley Yeldar.

Post-implementation review of IFRS 8 - roundtables and discussions

06 Sep 2012

National standard setters around the world are offering discussion forums in order to collect feedback from stakeholders on the International Accounting Standards Board’s (IASB) Post-implementation Review of IFRS 8. The roundtables are intended to help the standard setters provide input to the IASB's deliberations.

The post-implementation review process for IFRS 8 Operating Segments was initiated in the first quarter of 2012.  A Request for Information Post-implementation Review: IFRS 8 Operating Segments was issued in July 2012, with comments closing on 16 November 2012.  The IASB expects to consider comments received on the Request for Information in the first quarter of 2013.

Upcoming roundtables are offered in:

Some of the roundtables will be conducted in cooperation with staff members of the IASB. The questions in the IASB’s Request for Information (link to IASB website) will provide the structure for all discussion forums.

The European Financial Reporting Advisory Group (EFRAG) also plans to offer outreach events in cooperation with the national standard setters in Europe.

Deloitte comment letter on written put options

05 Sep 2012

Deloitte's IFRS Global Office has submitted a letter of comment to the International Accounting Standards Board (IASB) on Draft IFRIC Interpretation DI/2012/2 'Put Options Written on Non-controlling Interests'.

Whilst we agree that the draft Interpretation provides an appropriate analysis of the IFRS literature, we believe the IASB should consider standard-setting activity in this area to ensure that financial statements present relevant information about such transactions.

The comment letter notes the following:

Specifically, we believe that the Board should reconsider its decision to reject the Committee’s recommendation to remove NCI puts from the scope of IAS 32 Financial Instruments: Presentation and to account for them as derivatives in accordance with IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments.

Please click for access to our comment letter.

Deloitte comment letter on levies

05 Sep 2012

Deloitte's IFRS Global Office has submitted a letter of comment to the International Accounting Standards Board (IASB) on Draft IFRIC Interpretation DI/2012/1 — 'Levies Charged by Public Authorities on Entities that Operate in a Specific Market'.

In the comment letter, we agree that the consensus in the draft Interpretation appropriately (1) analyses the treatment of levies within its scope under current IFRSs and (2) applies the IAS 37 definition of a liability to levies. However, we go on to raise concern that the draft Interpretation does not deal with levies that are (1) due only if a minimum revenue threshold is achieved, (2) calculated as a fixed amount or (3) based on a graduated rate calculation.

Expressing similar concerns to those raised by the UK Financial Reporting Council (FRC), the comment letter also notes:

[W]e would still encourage the Board to consider whether non-reciprocal transactions in general, and government levies in particular, are best dealt with by IAS 37 and whether an approach similar to the current tax requirements of IAS 12 could be developed to reflect better the nature of government levies.

Please click for full summary and access to our comment letter.

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