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ESMA comment letter on the IFRS Foundation Due Process Handbook

20 Nov 2012

The European Securities and Markets Authority (ESMA) has published to its website a comment letter to the IFRS Foundation regarding its draft 'Due Process Handbook'.

The comment letter is dated 23 October 2012, but was only made available by ESMA now.

In the comment letter, the ESMA believes that the due process objectives and how to achieve these objectives should be more clearly stated in the Due Process Handbook and related to the objectives of the IFRS Foundation (ie to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles).

In addition, the ESMA states:

As a result of the importance ESMA attaches to the independence of the IASB, and while fully agreeing that all stakeholders should be consulted, we believe that, as a general rule, the IASB should drive its own agenda and perform its own activities. We acknowledge that in some instances the Board may feel the need to work jointly with other standard-setters.  In those cases we believe that the Board should always ensure that the output of these projects meet the objectives and high quality standards that the Board has set for its own projects.

The ESMA also believes the role of the Due Process Oversight Committee (DPOC) should be focused on substance and not only on the process. The DPOC should also consider whether the Due Process Handbook objectives are met.

Please click for:

IASB publishes proposals arising from its 2011-2013 annual improvements cycle

20 Nov 2012

The International Accounting Standards Board (IASB) has released Exposure Draft ED/2012/2 'Annual Improvements to IFRSs 2011–2013 Cycle', containing the latest proposals for minor corrections and edits to IFRS.

The IASB's annual improvements project provides a streamlined process for dealing efficiently with a collection of amendments to IFRSs. The primary objective of the process is to enhance the quality of standards, by amending existing IFRSs to clarify guidance and wording, or to correct for relatively minor unintended consequences, conflicts or oversights. Amendments are made through the annual improvements process when the amendment is considered non-urgent but necessary.

The Exposure Draft proposes changes to the following pronouncements:

Pronouncement Amendments proposed
IFRS 1 First-time Adoption of International Financial Reporting Standards (changes to the Basis for Conclusions only) Meaning of effective IFRSs
Clarifies that an entity, in its first IFRS financial statements, has the choice between applying an existing and currently effective IFRS or applying early a new or revised IFRS that is not yet mandatorily effective, provided that the new or revised IFRS permits early application. An entity is required to apply the same version of the IFRS throughout the periods covered by those first IFRS financial statements.
IFRS 3 Business Combinations Scope of exception for joint ventures
Clarifies that:
  • IFRS 3 excludes from its scope the accounting for the formation of all types of joint arrangements as defined in IFRS 11 Joint Arrangements
  • the scope exception in paragraph 2(a) of IFRS 3 only applies to the financial statements of the joint venture or the joint operation itself.
IFRS 13 Fair Value Measurement Scope of of paragraph 52 (portfolio exception)
Clarifies that the scope of the portfolio exception defined in paragraph 52 of IFRS 13 includes all contracts accounted for within the scope of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments, regardless of whether they meet the definition of financial assets or financial liabilities as defined in IAS 32 Financial Instruments: Presentation.
IAS 40 Investment Property Clarifying the interrelationship of IFRS 3 and IAS 40
Clarifies that IFRS 3 and IAS 40 are not mutually exclusive when classifying property as investment property or owner-occupied property. Determining whether a specific transaction meets the definition of both a business combination as defined in IFRS 3 and investment property as defined in IAS 40 requires the separate application of both standards independently of each other.

The proposed effective date for the amendments is for annual periods beginning on or after 1 January 2014, although entities are permitted to adopt them earlier.

The Exposure Draft does not include proposals in relation to the use of the revenue-based depreciation and amortisation under IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets, as the IASB decided at its October 2012 meeting to separately expose these proposals.

The proposals follow on from the proposals for the 2010-2012 annual improvements cycle, where an Exposure Draft was issued in May 2012, with finalised amendments from that cycle expected in the second quarter of 2013.

The Exposure Draft is open for comment for 90 days, with comments closing on 18 February 2013.

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EDTF will present findings regarding the risk disclosure of banks to the IASB

20 Nov 2012

On 30 October 2012, the Enhanced Disclosure Task Force (EDTF) published a report a report to the Financial Stability Board (FSB) recommending key enhancements to the risk disclosures made by banks. During the current IASB meeting, the EDTF will present the findings and recommendations from the report to the IASB. A slide deck for the presentation has now been made available on the IASB website.

The report identifies seven fundamental principles for enhancing risk disclosure which underpin the recommendations made and are considered to provide a framework for future work on risk disclosures and a benchmark by which banks can judge the quality of their current and future disclosures.

On 2 November 2012, the IASB published a press release welcoming the report saying that it "complements our own efforts to enhance transparency and the usefulness and comparability of financial statements". The IASB has also announced that it will consider the EDTF recommendations as it develops new financial reporting disclosure principles in the conceptual framework project.

During the session with the IASB (Wednesday, 21 November, 11.00-12.00 GMT), the EDTF will therefore focus on areas of particular interest to the IASB. The following points are mentioned in the presentation (quoted from the slide deck):

  • EDTF consistent with paragraphs 7 and 31 of IFRS 7
  • Disclosure can be made in audited accounts, MD&A or Pillar 3
  • Principles and recommendations build on existing GAAP and other disclosure requirements
  • Reflects current risk issues focussed on banks
  • Recommendation to describe the policy for identifying impaired loans, including how the bank defines impaired, restructured and cured loans as well as explanation of the loan forbearance policies
  • Reconciliation of movement in impaired loans
  • Maturity analysis of assets and liabilities on a residual contractual maturity basis
  • Encumbered assets table
  • Package of liquidity and funding recommendations and usefulness of consolidated cashflow statement

Please click for access to the full slide deck on the IASB website. Registration for the webcast of this session is possible through the IASB page for the November IASB meeting.

IOSCO report calls for further work on securitisation vehicles

19 Nov 2012

The International Organization of Securities Commissions (IOSCO) has released a report 'Global Developments in Securitisation Regulation', which includes in its recommendations that the Financial Stability Board, International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) should work toward further harmonisation of approaches to consolidation of securitisation special purpose vehicles (SPVs).

As part of its ongoing work into the 'shadow banking' sector, the Financial Stability Board (FSB) is undertaking a process of reviewing reforms of securitisation markets, an important alternative source of funding for the banking sector which can play a role in supporting economic growth. As part of this process, the FSB requested that IOSCO conduct a stock-taking exercise on certain aspects of securitisation and develop policy recommendations as necessary.

The report covers a broad range of topics and recommendations focused on the core topic of securitisation markets, such as information provided to investors, standardisation and convergence of regulation and terminology, and the prudential treatment of securitisation arrangements.

In discussing accounting issues, the report notes the current deleveraging occurring in the banking sector, and the contrast with the need for consolidation "to avoid any form of shadow financing".  In developing the recommendations around accounting, the report goes on to say:

Besides in a context where Basel III is going to phase in the introduction of a mandatory leverage ratio requirement for all Basel Committee on Banking Supervision member jurisdictions in the midterm, accounting, and differentiated impacts that may result from differences in accounting regimes, balance sheet presentation, and domestic regulatory adjustments can have significant impact. Accounting regimes and in particular, the use of International Financial Reporting Standards and the use of U.S. generally accepted accounting Principles can lead to large variations if a level playing field is not maintained. Thus IOSCO would urge standard setters and authorities to work closely together to ensure that from accounting and prudential perspectives that the combination of rules for consolidation of SPVs shown on the balance sheet and subsequent prudential treatment applied on this basis achieve consistent and similar outcomes.

Click for access to the full report (link to IOSCO website).

IVSC exposes proposed guidance on valuation uncertainty, forest valuation

19 Nov 2012

The International Valuation Standards Council (IVSC) has released two new Exposure Drafts of proposed 'Technical Information Papers' dealing with valuation uncertainty and the valuation of forests.

The IVSC's International Valuation Standards (IVS), last comprehensively updated in July 2011, contain the principles of valuation rather than prescriptive requirements.

IVSC Technical Information Papers (TIPs) are designed to provide technical guidance for valuation professionals on generally accepted best practice, but do not provide valuation training or instruction or direct that a particular approach or method should or should not be used in any specific situation.

Valuation uncertainty

The exposure draft on valuation uncertainty looks at how valuation uncertainty can be identified, explained and disclosed in a way that is informative to those relying on valuations, and responds to calls from the G20 and financial regulators around the world for improved standards of transparency and disclosure of valuation uncertainty factors.

The Exposure Draft proposes to define 'valuation uncertainty' as follows:

The possibility that the estimated value may differ from the price that could be obtained in a transfer of the same asset or liability taking place at the same time under the same terms and within the same market environment.

The Exposure draft also notes that material uncertainty can be caused by various factors, including:

  • market uncertainty - arises when a market is disrupted at the valuation date by current or very recent events such as sudden economic or political crises
  • model uncertainty - arises from characteristics of either the valuation model, or method, used
  • input uncertainty - arises where there are a number of equally reasonable or feasible inputs or assumptions that can be used from the degree of veracity that can be attached to the data inputs used in the valuation and their impact on the outcome.

The Exposure Draft makes a clear distinction between market risk, which is both generally understood and acknowledged by investors and reflected in the pricing, and uncertainty caused by disruption or dislocation in the market place.

The Exposure Draft also discusses many IFRS concepts and their interaction with IVS, including the Level 1/2/3 hierarchy in IFRS 13 Fair Value Measurement.

The Exposure Draft notes a simplistic expression of valuation uncertainty might be to provide a range within which the value is considered to fall, but concludes this "is not recommended" for various reasons, including the use of amounts usually requires a single valuation figure, the possibility of unrealistic extremes of a range, and the possibility that users may assume all outcomes within the range are equally likely of occurring, or assume there is no possibility of a valuation falling outside a range.

Valuation of forests

The second Exposure Draft deals wit the way in which valuations of forestry assets are prepared and presented, particularly in light of IAS 41 Agriculture, which requires the fair value of the biological asset (tree crop) to be estimated.

The Exposure Draft:

  • proposes that all three approaches described in the IVS Framework (market approach, income approach, and cost approach) are applicable to the valuation of forests, and includes some of the strengths and weaknesses of methods under each approach in the context of valuing forestry interests
  • points out significant diversity in the length of the explicit forecast period that is used when using a discounted cash flow model to value a forestry interest, and seeks constituent feedback on this issue
  • discusses the discount rate used in a discounted cash flow model noting "evidence that in some parts of the world inappropriate reliance is being based on models such as the Capital Asset Pricing Model or the Weighted Average Cost of Capital"
  • notes the use of the cost approach is mostly applicable to recently planted forests because the physical and possible economic changes that occur as a forest matures mean that other methods become more reliable
  • explores difficulties with one suggested valuation approach in IAS 41 which is that the value of the “raw land” be deducted from the value of the combined asset,  with the residual representing the value of the biological asset, and discusses the specific question of how to measure a biological asset when the 'highest and best use' of the land is not forestry (this issue was also recently considered by the IFRS Interpretations Committee).

Comment period

Both exposure drafts are open for comment until 15 February 2013.  Click for (links to IVSC website):

New editorial corrections from the IASB

19 Nov 2012

The IASB has posted a new batch of editorial corrections to its website ahead of the publication of the IFRS 'Blue Book' in the coming weeks.

This batch makes corrections to:

  • Corrections to stand-alone Standards:
    • IFRS 10 Consolidated Financial Statements (issued May 2011)
    • Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) (issued December 2011)
    • Annual Improvements 2009–2011 Cycle (issued May 2012)
  • Corrections to IFRS 2012 (Blue Book), IFRS 2012 (Red Book), A Guide through IFRS 2012
  • Corrections to the Glossary (issued in IFRS 2012 (Red Book) and A Guide through IFRS 2012)

In accordance with its newly established procedures, editorial corrections are issued three times a year - before the issue of IFRS (Blue Book), IFRS (Red Book) and A Guide through IFRS.  The IASB recently announced the IFRS 2012 (Blue Book) will be published in December 2012.

Access the editorial corrections on the IASB website.

Deloitte comment letter on IFRS 8 post-implementation review

16 Nov 2012

Deloitte’s IFRS Global Office has submitted a letter of comment to the International Accounting Standards Board (IASB) regarding its Request for Information on the post-implementation review of IFRS 8 'Operating Segments'.

We support the IASB decision to include the post-implementation review programme to its due process. We anticipate that the programme will increase the quality and consistency in financial reporting. However, we believe the process could benefit from the following:

  • Clarity that it is intended to identify whether the objectives of the Standard have been fulfilled, rather than to re-assess whether those objectives were correctly identified, as any need for a fundamental re-appraisal of the principles behind a Standard could instead be identified as part of the Board’s periodic agenda consultation process.
  • Setting the public consultation phase of a post-implementation review within a clearly defined process would be beneficial both to the Board in determining the detailed questions to be asked and to constituents in framing their responses to those questions.
  • The Request for Information, which focuses primarily on investors and preparers, could give further consideration to feedback by other constituents such as auditors and securities regulators.
  • The Financial Accounting Foundation is currently conducting a post-implementation review on its standard on segment reporting, we encourage the IASB and FASB to co-ordinate any amendments to their respective guidance in order to maintain a consistent application.

Click to access our comment letter.

See our previous article on IASB post-implementation review.

EFRAG draft comment letter on the IFRS Foundation’s proposal to establish an accounting standards advisory forum

16 Nov 2012

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IFRS Foundation’s proposal to establish an accounting standards advisory forum. EFRAG supports the main ideas of the proposal and indicates that it is willing to become a member of the new forum.

The IFRS Foundation issued the proposals for the creation of the Accounting Standards Advisory Forum (ASAF) on 1 November 2012. Creation of such a forum was recommended by the Trustees' strategy review to provide technical advice and feedback to the IASB from the standard-setting community.

In the draft comment letter, EFRAG supports the IFRS Foundation’s view that the size of the ASAF should be limited to allow for efficient and effective technical discussions. EFRAG also supports allocating seats to organisations rather than to individuals, however, EFRAG also believes that the IFRS Foundation should give those organisations the possibility to decide which individual is to represent the organisation at specific stages of a project. EFRAG also suggests a certain flexibility regarding the commitments the participants are asked to make in order not to preclude certain jurisdictions from participating.

In the draft comment letter EFRAG also suggests becoming a member of the ASAF itself. EFRAG argues that its close collaboration with all national standard-setters in Europe combined with its mandate from the European Commission makes it well placed to represent Europe in the technical financial reporting debate.

Please click for the following documents on the EFRAG website:

Comments on the letter are invited by 7 December 2012.

ACCA report on IFRS in the US

16 Nov 2012

The Association of Chartered Certified Accountants (ACCA) has released a research report 'IFRS in the US: An investor's perspective' that outlines the outcome of a survey of nearly 500 US-based investors (professional investment managers, asset managers and fund managers) which asked whether they believe the US Securities and Exchange Commission (SEC) will eventually adopt IFRS. The survey resulted in 57 percent of investors surveyed expecting the adoption of IFRS in the US to occur 'one-day', with the long term benefits outweighing the costs.

According to Sue Almond, Technical Director at ACCA, "More investors believe the eventual adoption of IFRS in the USA will result in a net benefit to the American economy than not. In ACCA's view, US adoption of IFRS would give a tremendous boost to the cause of globally comparable financial reporting, and more importantly, the US and world economies. ACCA has repeatedly called for putting investors at the heart of the standard-setting process globally, and this is why we commissioned this research, to understand what American investors thought about the future of IFRS in the USA."

Chairman Hans Hoogervorst also weighed in with his thoughts on the ACCA results, "The ACCA's findings are consistent with anecdotal feedback we hear from the US investor community. They also lend further credence to the argument that the USA is well prepared for a successful transition to IFRS."

The report also identified several key findings investors have noted in regards to the adoption of IFRS, as follows:

  • The most informed investors polled believe it will take US corporates some four and a half years to be ready for IFRS. They ask that convergence plans aim for full convergence, allowing adequate time for investors and industry to adjust.
  • Awareness of IFRS among US-based investors is modest: when asked, only 34% of investors felt able to cite specific differences between US GAAP and IFRS.
  • However, 38% of investors said they were comfortable comparing statements prepared under IFRS with statements prepared under US GAAP.
  • Investors saw marginal differences between IFRS and US GAAP, with 22% of investors claiming that the quality of disclosures under IFRS is higher, versus 25% who favoured US GAAP.
  • Among investors with a solid understanding of IFRS, however, the balance shifts to 40% to 21% in favour of IFRS.

Further, the report identified the main concerns US investors' have towards a move to IFRS. According to the report, these concerns are:

  • Will IFRS adoption lead to reduced complexity for US corporates?
  • Is IFRS adoption going to lead to a dangerous loss of US influence over the standard-setting process?
  • Are US corporates likely to see cost savings and synergies emerging as a result of IFRS adoption?
  • Will IFRS adoption make it easier to compare the performance of US corporates with that of other companies overseas?
  • Are US auditors likely to second-guess management more frequently as a result of IFRS adoption?

Click to view the ACCA's press release and the research report, "IFRS in the US: An investor's perspective" (links to ACCA website).

Notes from the November 2012 IFRS Interpretations Committee meeting

15 Nov 2012

IFRS Interpretations Committee held its meeting in London on 13-14 November 2012. Deloitte observer notes for the meeting are now available.

A full listing of all of the topics discussed at the meeting follows (click through to access detailed Deloitte observer notes for each topic):

Tuesday, 13 November 2012 (10:00-17:45)


Active Committee Projects

Review of Tentative Agenda Decisions published in July IFRIC Update

Items for continuing consideration

Administrative session

Due Process Documents

Annual Improvements

  • IFRS 8 — Aggregation of operating segments
  • IFRS 8 — Reconciliation of the reportable segments' assets to the entity's assets
  • IFRS 13 — Short-term receivables and payables
  • IAS 12 — Recognition of deferred tax assets for unrealised losses

New Items for initial consideration

Wednesday, 14 November 2012 (09:00-15:25)

Due Process Documents

New items for initial consideration

Click here to go to the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.