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2012

Mary Tokar appointed as member of the IASB

15 Nov 2012

The Trustees of the IFRS Foundation announced the appointment of Mary Tokar as a member of the IASB for an initial term ending 30 June 2017. The term is renewable for a further three years. Ms Tokar will join the IASB in January 2013.

For more than 10 years, Ms Tokar has been the global leader for KPMG’s International Financial Reporting Group, leading the firm's dialogue with the global accounting regulatory and standard-setting communities. Having worked with engagement teams and clients around the world in their transition to and application of IFRS, she has gained extensive experience in the application of IFRSs in both developed and emerging economies. Previously, Ms Tokar worked at the US Securities and Exchange Commission (SEC) as the Senior Associate Chief Accountant, International, in the Chief Accountant’s Office. Ms Tokar was a member of the IFRS Interpretations Committee between 2001 and 2007.

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

IFRS Foundation opens regional Asia-Oceania office

15 Nov 2012

The IFRS Foundation has officially opened an office in Tokyo for enhanced liaison in the Asia-Oceania region - it is the first regional office of the IASB. The opening of the office reflects the commitment of the IFRS Foundation to become a truly international accounting standard-setter and is intended to support greater regional outreach and participation in the IASB’s standard-setting activities.

The IFRS Foundation announced the establishment of the Tokyo office in February 2011 in order to expand opportunities for direct contact between the IFRS Foundation and its stakeholders in the region. An Office Director was appointed in September 2012.

The reasons for locating the first international office the Asia-Oceania region were many as Michel Prada, the Chairman of the Trustees of the IFRS Foundation, pointed out in his opening remarks: "The Asia-Oceania region is home to some of the largest capital markets and fastest growing economies in the world" and there is "a great deal of support for IFRS across the entire region". However, the region is also diverse, so it is hoped that the opening of a local presence will "ensure that views across the region are heard and considered as part of the standard-setting process".

Mr Prada also pointed out that the office will provide an interface with the Asia-Oceania Standard-Setters Group (AOSSG), the platform of regional national standard-setters for discussing problems and sharing experiences in the convergence process, for participating in the development of IFRSs, and for making contributions to a single set of high quality global accounting standards. Mr Prada commended the AOSSG for its work and expressed the hope that it would become a member of the new Accounting Standards Advisory Forum (ASAF) the IASB has undertaken to set up.

Please click for the press release on th IASB's website which also offers access to the transcript of Mr. Prada's openings remarks and a transcript of the opening remarks spoken by Hans Hoogervorst, the IASB Chairman, as well as more information on the Asia-Oceania office in English, Chinese, Hindi, Japanese, and Korean.

EFRAG Update with a summary of the October and November 2012 EFRAG conference calls and meetings

15 Nov 2012

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

The newsletter contains a summary from the EFRAG TEG conference call held in October 2012 and the EFRAG TEG meeting held in November 2012 . Highlights were the finalisation of a comment letter on put options written on non-controlling interests and discussions of the major projects of the IASB and of current discussion papers (EFRAG/ASB on income tax, CICA on a measurement framework, ANC on accounting for emission rights).

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

The Bruce Column — Hoogervorst makes his case for leasing reform

13 Nov 2012

At a speech to an audience at the London School of Economics IASB Chairman Hans Hoogervorst made his resolve for further reform plain. Robert Bruce, our regular columnist, was there to listen to the arguments.

There was a sense of great anticipation at the London School of Economics. The audience was the broadest of groupings. There was a large number of young students and a wide range of academics and practitioners, right down to Ian Hay Davison, Arthur Andersen’s UK managing partner from the days when they first set up in the country.

They had gathered to hear Hans Hoogervorst, Chairman of the IASB, set the current thinking on IFRS into context. The day before he had been before the European Parliament where an aside about how waiting for the US to decide whether or not it was going to join the IFRS family was now resembling the Samuel Beckett play ‘Waiting for Godot’ had charmed his audience.

At the LSE there was no talk of playwrights or delays. Hoogervorst wanted to emphasise the IASB’s firmness of purpose and its determination. He recalled the past. He talked of the time when the IASB and the FASB ‘had the mother of all battles against vested interests to record the granting of stock options as an expense’. He recalled the pressure brought to bear. He talked of the ‘huge lobbying campaign led in part by the technology sector’. He talked about the legendary investor Warren Buffett’s 1998 criticism of widespread opposition to ‘FASB’s attempts to replace option fiction with truth’ with virtually none having spoken out in support of FASB. Its opponents, Buffett had complained, ‘even enlisted Congress in the fight, pushing the case that inflated figures were in the national interest’. Back then, Hoogervorst pointed out, lobbyists spent $70m in their efforts to stop the standard-setters’ efforts. And ultimately the standard-setters had won. ‘It was the IASB, and I am really proud of that’, he said, ‘that led the way, paving the way for the FASB to follow suit’.

This was the heart of Hoogervorst’s thesis. There was a pattern. Enormous amounts of money and lobbying were brought to bear. The standard-setters, more concerned with recording economic realities, finally won. And now, years later, no one can understand what all the fuss had been about. ‘Almost ten years on’, he said of the stock option fracas, ‘and very few people question the logic of recording stock options as an expense. It is simply regarded as a good business practice’.

The same, he argued, had been true of the battle to bring pensions and other post-employment benefits onto the balance sheet. ‘Many years ago’, as Hoogervorst pointed out, ‘companies were able to keep the information related to these liabilities off the balance sheet’. And without their clear and visible presence strategies, unsurprisingly, could go disastrously awry. ‘As a result’, said Hoogervorst, ‘the management of some companies were able to literally give away the value of the company without shareholders knowing anything about it’.

Reform was, understandably, painful to companies. ‘At the time’, he said, ‘bringing pension liabilities on balance sheet was hugely controversial. And to some degree it still is. However such liabilities are now routinely discussed in the boardroom and with investors. This is especially true as many pension schemes are in trouble and the company is on the hook if things go wrong’.

This brought Hoogervorst to the third of his examples. And this one is still playing in realtime. ‘Today we have a similar battle with leasing’, he said. And the ingredients are the same.

‘The vast majority of lease contracts are not recorded on the balance sheet’ said Hoogervorst, ‘even though they usually contain a heavy element of financing. For many companies, such as airlines and railway companies, the off-balance sheet financing numbers can be quite substantial. What’s more, the companies providing the financing are more often than not banks or subsidiaries of banks. If this financing were in the form of a loan to purchase an asset, then it would be recorded. Call it a lease and miraculously it does not show up in your books’.

And this, he argued, caused real problems for users of financial reporting. ‘Right now’, he said, ‘most analysts take an educated guess on what the real but hidden leverage of leasing is by using the basic information that is disclosed and by applying a rule-of-thumb multiple. It seems odd to expect an analyst to guess the liabilities associated with leases when management already has this information at its fingertips. That is why it is urgent the IASB creates a new standard on leasing and that is exactly what we are doing, in close cooperation with the FASB’.

And the lobbyists are again arguing that the standard-setters’ proposals, like stock options and pensions before them, will in Hoogervorst’s words, mean ‘that the end of the world is nigh’. ‘I seem to remember similar claims being made when the IASB and the FASB required stock options to be expensed’, he said. And it is not as though regulators have not provided the same warnings. Hoogervorst quoted from what the staff of the US regulator, the SEC, had to say on the leasing issue back in 2005. “The fact that lease structuring based on the accounting guidance has become so prevalent will likely mean that there will be strong resistance to significant changes to the leasing guidance, both from preparers who have become accustomed to designing leases that achieve various reporting goals, and from other parties that assist those preparers”, it said.

But Hoogervorst is making a wider point. We have all learned, very painfully, what the effect of hiding debt has upon the global economy. ‘As the financial crisis was caused by excessive leverage’, he said, ‘our efforts to shed light on hidden leverage should be warmly welcomed around the world. The fact is that we are still facing an uphill battle. We will need all of the help we can get, to ensure that we do not get lobbied off course. We need national accounting standard-setters, regulators such as the SEC, investors and others to stand by their beliefs and help us to bring much-needed transparency to this important area’.

Click for our previous story on Chairman Hoogervorst's speech to the London School of Economics.

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):

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.