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Notes from the January 2013 IASB meeting

31 Jan 2013

The IASB's January meeting was held in London on 29-31 January 2013, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from several sessions.

Click through for direct access to the notes:

Wednesday, 30 January 2013

Thursday, 31 January 2013

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

IASB and FASB make progress on joint leases project

31 Jan 2013

At their joint meeting yesterday, the IASB and US Financial Accounting Standards Board (FASB) tentatively agreed on three topics related to the classification of lease components in an arrangement.

First, the boards tentatively decided that an entity should analyse the lease components in an agreement separately when the lessee can benefit from the use of the separately identifiable assets in the arrangement. For example, if a lease arrangement includes both a manufacturing plant and removable machinery, the contract would be evaluated as two separate lease components. In determining whether an arrangement should be separated into its components, the entity would consider whether the use of the asset depends on other assets that are readily available to the entity and whether the use of the asset is interrelated with other assets identifiable under the contract.

Second, the boards tentatively agreed that the classification of a lease component should be based on the primary asset of the lease component. According to the boards’ agenda paper for the meeting, the “primary asset would be the predominant asset for which the lessee has contracted for the right to use — the main purpose of leasing other assets that form part of the overall lease component might be to facilitate the lessee obtaining benefits from use of the primary asset.” For example, if a lease arrangement includes both a turbine and a building that is directly tied to the life of the turbine, the entire lease component would be considered “other than property” for classification purposes.

Finally, the boards decided not to require land and building elements of a property lease to be assessed separately for classification purposes. The economic life of the building would be considered the economic life of the property in the determination of lease classification.

The boards expect to issue a revised exposure draft on leases during the first quarter of 2013.

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UK FRC consults on the implementation of the Sharman Panel recommendations

31 Jan 2013

In June 2012, the United Kingdom Sharman Panel of Inquiry, established at the invitation of the UK Financial Reporting Council (FRC) to consider going concern and liquidity risks, published its final report and recommendations. The FRC has now issued for consultation guidance for directors, and related standards for auditors, to implement the recommendations.

The Panel was commissioned in March 2011 to identify lessons from the financial crisis and recessionary environment for companies and auditors regarding going concern and liquidity risks and to recommend measures necessary to improve the existing reporting regime and related guidance in relation to these matters.

The report published in June 2012 called for "a common international understanding of the purposes of the going concern assessment and financial statement disclosures about going concern, and of the related thresholds and descriptions of a going concern" as the inquiry had raised questions about the quality of information provided on companies’ financial health and their ability to withstand economic and financial stresses in the short, medium and longer term.

The FRC has concluded that to improve the robustness and reporting of the going concern assessment, the boards of companies should:

  • consider the threats to the company’s business model and capital adequacy, over a period longer than twelve months, looking through the economic cycle and the company’s own business cycle;
  • develop a high level of confidence that solvency and liquidity risks can be managed effectively during the period of at least twelve months from approval of the financial statements;
  • always disclose the significant risks to the company’s solvency and liquidity and how they are being managed, as part of its discussion of principal risks in the business review; and
  • confirm that it has undertaken a robust going concern assessment.

In addition, the FRC recommends that auditors should consider the board’s report on the robustness of its assessment and the resulting disclosures in the annual report and confirm in their report that they have nothing to add or to draw attention to.

Disclosure requirements about an assessment of going concern are a topic of much international debate and are currently also discussed by the IFRS Interpretations Committee.

The consultation paper is available on the FRC website. The closing date is 28 April 2013.

IFRS Foundation publishes Education Initiative's teaching material

30 Jan 2013

The IFRS Foundation has published the first part of its Education Initiative’s comprehensive Framework-based IFRS teaching material. The free-to-download teaching material was designed to assist educators in teaching IFRS more effectively.

The material was developed to support those teaching IFRS, helping them to progressively develop students' abilities to make the necessary estimates and judgements when applying IFRS and IFRS for SMEs. The material is presented in three stages, to accommodate students at different levels in their learning process:

  • Stage 1 — A student’s first financial reporting course
  • Stage 2 — A financial reporting course mid way to qualifying as a CA or CPA
  • Stage 3 — A course immediately before qualifying as a CA or CPA.

Because Stage 3 requires students to make estimates and other judgements that are necessary when accounting for economic phenomena (transactions, conditions and events), it is critical that the teaching guide for Stage 3 lessons not be distributed to future students. The teaching notes that supplement Stage 3 are only available via application to the Education Initiative staff.

The material published today covers non-financial assets with a particular focus on property, plant and equipment. The education staff are currently working on similar material on the following topics: liabilities, business combinations and consolidations, with other topics to follow. The next batch of material is tentatively scheduled for posting on the IASB’s website in the second half of 2013.

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IASB calls for nominations for new rate-regulated activities consultative group

30 Jan 2013

The IASB is seeking nominations for a group that is being established to consult for its recently reactivated rate-regulated activities project. The aim of this new consultative group is to provide specialist analysis of accounting issues within this field of interest.

The IASB expects that group will consist of 12-20 members, made up of senior financial executives who are participants in the financial reporting process of entities subject to rate regulation, in addition to members of the IASB. The IASB is seeking to include participants from a variety of preparer, user and other relevant backgrounds to incorporate different geographic areas and rate-regulated industries. Members will serve on a voluntary basis for up to three years.

The deadline for nominations and applications is 4 March 2013. For more information, including details on how to apply for the rate-regulated activities consultative group, please see the press release on the IASB's website. For more information on the recently reactivated project, see our rate-regulated activities project page.

Additional outreach on the scope exception for 'macro fair value hedge accounting'

30 Jan 2013

During discussions at its January meeting today, the IASB decided to postpone a decision on a question of the staff on whether to retain the drafting in the Review Draft of the hedge accounting section of IFRS 9 regarding what requirements apply if an entity uses the scope exception for ‘macro fair value hedge accounting’.

The staff argued that the review draft published in September 2012 is clear that an entity that uses the scope exception for ‘macro fair value hedge accounting’ applies all (applicable) hedge accounting requirements in IAS 39 and not only paragraphs 81A, 89A and AG114-AG132.

During the discussion it became clear, however that while some Board members believe that the standard is clear others believe that it should permit entities to extend current practice until the macro hedging project is finalised if the current practice constitutes some sort of macro hedging. The Board finally decided against a general grandfathering of current practice, however, some further limited outreach will be conducted.

The European Financial Reporting Advisory Group (EFRAG) conducted some field-testing of the review draft and has already started an additional consultation on existing macro hedge relationships under IAS 39.

EFRAG draft comment letter on ED/2012/6

30 Jan 2013

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB Exposure Draft ED/2012/6 'Sale or Contribution of Assets Between and Investor and its Associate or Joint Venture'.

The Exposure Draft, issued by the IASB on 13 December 2012, proposes to clarify when unrealised profits and losses on transactions between an investor and an associate should be fully recognised: requiring full recognition in relation to transactions involving businesses, but requiring partial elimination in the case of asset sales. The Exposure Draft proposes amendments to both IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011).

EFRAG supports the conclusion that there is an inconsistency between IAS 28 and IFRS 10 and therefore supports amendments as a short-term pragmatic solution to address diversity in practice.

However, EFRAG is concerned that the proposed amendments in the ED would require an entity to determine whether the asset being sold or contributed meets the definition of a business under IFRS 3 Business Combinations. EFRAG warns that applying the definition of a business in IFRS 3 often requires considerable judgement, particularly in the case of transactions with related parties. EFRAG also believes that "the ED puts considerable stress on the definition of a business". Therefore, EFRAG suggests that the IASB should consider the definition of a business as part of the post implementation review of IFRS 3.

Comments on the letter are invited by 20 March 2013. Click for access to the draft comment letter on ED/2012/6 (link to EFRAG website).

ESMA comment letter on the proposed ASAF

30 Jan 2013

The European Securities and Markets Authority (ESMA) has submitted a letter of comment to the IFRS Foundation on its Invitation to Comment 'Proposal to Establish an Accounting Standards Advisory Forum'. ESMA believes that the focus of the proposed ASAF should not be detailed standard-setting discussions but endorsement and enforcement.

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.

ESMA supports the creation of such a forum that would offer a platform for working with national accounting standard-setting bodies and regional bodies involved with accounting standard-setting. However, ESMA believes the focus of the forum should not be discussing technical questions in detail and expressly warns of the ASAF becoming a "shadow board". ESMA believes the ASAF should advise the IASB on questions of IFRS endorsement:

We believe that the Foundation should clarify whether the purpose is to liaise with national standard-setters or with the bodies that bear the ultimate responsibility for the endorsement of IFRSs into national or regional law. ESMA is of the opinion that the focus should be on bodies with the ultimate responsibility for endorsement. In this way, the ASAF’s membership should consist of the national and regional bodies representing the public interest and that are ultimately responsible for the endorsement of IFRS.

ESMA also believes that the suggested commitment regarding the use of IFRSs should be supplemented by a commitment regarding consistent application and a corresponding enforcement. Regarding the suggested size of the forum, ESMA sees no need for an increase in size and, in the light of the shift in focus ESMA is suggesting, ESMA also believes that there is no necessity for ASAF members to send a technical expert to stand in for them or to bring a technical expert along.

ESMA has also submitted a letter of comment arguing along the same lines to the European Financial Reporting Advisory Group (EFRAG) regarding its draft comment letter on creating the forum.

Please click for access to the two letters on the ESMA website:

Two new EFRAG draft comment letters published

29 Jan 2013

The European Financial Reporting Advisory Group (EFRAG) has issued draft comment letters on two IASB Exposure Drafts: ED/2012/7 'Acquisition of an Interest in a Joint Operation' and ED/2013/1 'Recoverable Amount Disclosures for Non-Financial Assets (Proposed Amendments to IAS 36)'.

IASB ED/2012/7

This Exposure Draft, issued by the IASB on 13 December 2012, proposes to amend IFRS 11 Joint Arrangements to clarify that a joint operator accounts for the acquisition of an interest in a joint operation which is a business by applying IFRS 3 Business Combinations and other relevant standards.

EFRAG supports the amendments to IFRS 11 because they addresses diversity in the practice of accounting for acquisitions of interests in a joint operation whose activities constitute a business. However, EFRAG is concerned that considerable judgement is required in practice to distinguish a joint operation from a joint venture.

EFRAG notes that acquisitions of interests in joint operations might often involve (i) contributions of assets, businesses or (parts of) subsidiaries, (ii) loss of control over those, and/or (iii) increasing the joint operator interest in the joint operation.

    EFRAG believes that both of the following should be addressed to avoid uncertainty:

    • The accounting for the loss of control over a business that is contributed to a joint operation, in exchange for an interest in that joint operation.
    • The acquisition of an additional interest in the same joint operation.

    Comments on the letter are invited by 20 March 2013. Click for access to the draft comment letter on ED/2012/7 (link to EFRAG website).

    IASB ED/2013/1

    This Exposure Draft, issued by the IASB on 18 January 2013, proposes to narrow the application of the requirement to disclose the recoverable amount of an asset, and clarify the disclosures when an asset has been impaired.

    In its draft comment letter, EFRAG agrees with the proposal because it "removes burdensome disclosures without reducing the relevance and understandability of the financial information".

    Comments on the letter are invited by 11 March 2013. Click for access to the draft comment letter on ED/2013/1 (link to EFRAG website).

    Research paper on IFRS compliance across Europe shows inconsistencies

    28 Jan 2013

    A recent research report by the Centre for Financial Analysis and Reporting Research (CeFARR) at the Cass Business School entitled 'Accounting for asset impairment: a test for IFRS compliance across Europe' shows inconsistencies in IFRS compliance reflected in European listed companies' impairment reporting practices.

    The authors, Hami Amiraslani, George E. Iatridis, and Peter F. Pope, investigate the degree of compliance with International Financial Reporting Standards by analysing impairment disclosures related to non-financial assets within a sample of over 4,000 listed companies from the European Union plus Norway and Switzerland during 2010-11.

    The key findings of the research are:

    • Compliance with some impairment disclosure requirements varies quite considerably. This might also point at differences in applying IFRSs
    • Impairment disclosure requirements that require more effort are less often followed than those that require less effort or can be dealt with by boilerplate disclosures
    • Reporting environments with stronger regulatory and institutional infrastructure will see more high-quality impairment reporting
    • Reporting environments with a strong regulatory infrastructure and strict enforcement will see more timely recognition of impairment losses.

    Accounting for asset impairment: a test for IFRS compliance across Europe can be downloaded from the Cass Business School website.

    The IASB chairman Hans Hoogervorst commented on the results of the research and the responsibilities of the IASB regarding compliance in a speech given at the Cass Business School.

    The CeFARR results support the finding of the European Securities and Markets Authority (ESMA) review of 2011 IFRS financial statements related to impairment testing of goodwill.

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