January

Agenda for January 2013 IASB meeting

22 Jan, 2013

The International Accounting Standards Board has released the agenda for its meeting to be held on 29-31 January 2013, which includes education sessions and a joint meeting with the FASB. Topics to be discussed include the beginning of deliberations on an interim standard on rate-regulation, consideration of identified issues with the Conceptual Framework, an education session on integrated reporting, consideration of issues in finalising the general hedge accounting chapter of IFRS 9, comments on the post-implementation review of IFRS 9, and continuing discussion on many major projects (revenue recognition, leases and insurance contracts).

The full agenda for the meeting, as of 21 January 2013, 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.

ESMA report shows room for improvement regarding disclosures related to goodwill impairment

21 Jan, 2013

The European Securities and Markets Authority (ESMA) has published a review of 2011 IFRS financial statements related to impairment testing of goodwill. The report shows that significant impairment losses of goodwill were limited to a handful of issuers. According to ESMA, this raises the question as to whether the level of impairment disclosed in 2011 financial reports appropriately reflects the difficult economic operating environment for companies. ESMA also finds that although the major disclosures related to goodwill impairment testing were generally provided, in many cases these were boilerplate and not entity-specific. ESMA expects issuers and their auditors to consider the findings of the review when preparing and auditing the 2012 IFRS financial statements.

ESMA decided to conduct the review of accounting practices related to the impairment of goodwill and other intangible assets because in connection with the financial crisis many market participants had expressed concerns about the reliability of goodwill impairment tests. Even Hans Hoogervorst, Chairman of the IASB, admitted in a speech given in June 2012: "In practice, these impairment tests do not always seem to be done with sufficient rigour. Often, share prices reflect the impairment before the company records it on the balance sheet. In other words, the impairment test comes too late."

ESMA itself found some common shortcomings in relation to the impairment testing of goodwill as evidenced in the twelfth extract of enforcement decisions published in October 2012, and has made impairment testing one of the enforcement priorities for 2012 financial statements.

The main objective of the review, which looked into the accounting practices of a sample of 235 European issuers with significant amounts of goodwill from 23 countries, was to provide an overview of the accounting practices related to the impairment of goodwill and other intangible assets, and evaluate the sufficiency of the related disclosures in the 2011 financial statements prepared in accordance with International Financial Reporting Standards (IFRSs).

The review showed that significant impairment losses of goodwill were limited to a handful of issuers with 5% of the issuers in the sample accounting for almost 75% of the goodwill impairment and again roughly three quarters of these 75% were reported by just three issuers. The review also showed that most of the issuers that disclosed the events and circumstances leading to recognition of impairment loss provided boilerplate explanations referring to "worsening economic outlook", "slowdown of the demand" or "competitive environment". Very few issuers provided specific information.

As a result of the review five areas of concern emerged:

  • Key assumptions of the management - ESMA found that approximately 70% of the issuers focus insufficiently on disclosing the key assumptions used for cash flow forecasts other than discount rate and growth rate used in the impairment testing in detail and in a way useful to investors. ESMA urges issuers to disclose all key assumptions and discuss the approach management has adopted in determining them for impairment testing.
  • Sensitivity analysis - ESMA has identified different practices with regard to disclosures on sensitivity analysis. ESMA also found that for issuers where the book value of their net assets exceeded their market capitalisation, only half presented a sensitivity analysis. ESMA would expect those issuers to be more transparent and disclose the sensitivity of the impairment calculation to changes in key assumptions.
  • Determination of recoverable amount - ESMA would expect more weight to be given to external sources of information rather than entity-specific assumptions when determining fair value less costs to sell using discounted cash flows.
  • Determination of growth rates - More than 15% of issuers disclosed a terminal growth rate in excess of 3%. In the current economic environment, using a long-term rate exceeding 3% seems ambitious and optimistic to ESMA and could lead to an overstated long-term growth rate.
  • Disclosure of an average discount rate - Approximately 25% of issuers in the sample disclosed an average discount rate, rather than a specific discount rate on each material cash generating unit. ESMA urges issuers to use, and disclose, separate discount rates because by disclosing just a single average discount rate, issuers potentially obscure information that may be relevant to financial statement users.

ESMA and national competent authorities responsible for IFRS enforcement will use the review’s findings as areas to focus their assessments on when reviewing 2012 IFRS financial statements. ESMA hopes this will lead to an improved rigour applied by issuers in the impairment test of goodwill and a better compliance with the requirements regarding impairment in IAS 36 Impairment of Assets.

In his June 2012 speech cited above, Hans Hoogervorst also indicated that the IASB might take "another look at goodwill" in the context of the post-implementation review of IFRS 3 Business Combinations.

Please click for access to the following documents on the ESMA website:

Results of EFRAG field-test on the IASB's general hedge accounting review draft

21 Jan, 2013

The European Financial Reporting Advisory Group (EFRAG) has publicly released a letter it has sent to the International Accounting Standards Board (IASB) commenting on the IASB's review draft of the forthcoming hedge accounting chapter of IFRS 9 'Financial Instruments'. The letter outlines the findings from a field-test of the review draft conducted by EFRAG involving 44 companies across various industry sectors.

The IASB published the review draft in September 2012 in order to enable constituents to familiarise themselves with the document and to detect potential inconsistencies (fatal flaw review).

The EFRAG letter follows on from an analysis of the review draft by the IFRS Committee of the Accounting Standards Committee of Germany (ASCG).  The field testing and was conducted in conjunction with the ASCG, together with the UK Financial Reporting Council (UK FRC, which also endorsed the ASCG analysis), Autorité des Normes Comptables (ANC) and Organismo Italiano di Contabilità (OIC).

The letter includes the following high-level themes:

  • Confirmation of important improvements to the hedge accounting model, such as improvements to hedge effectiveness testing, designation of risk components as eligible hedged items, and the ability to rebalance hedge relationships
  • Continuing complexity in the general hedge accounting model "because of the number of exceptions, restrictions and options"
  • Concerns about the readability of hedge accounting standard as a standalone document due to cross references to the existing requirements of IFRS 9 and the macro hedge accounting requirements in IAS 39 Financial Instruments: Recognition and Measurement
  • Implications of the review draft on current macro hedging practices, including possible unexpected changes to macro hedge accounting.

In addition, the letter contains appendices outlining fatal flaws, implementation difficulties, requests for additional guidance, and input into the IASB's effect analysis.  Some highlights from this analysis include:

Fatal flaws

  • Hedged items: aggregated exposures and net positions - clarification that a net position could consist of several risks that on a net basis amount to a nil position
  • Hedge ratio and effectiveness - rewording of additional guidance to address "tensions existing between economic hedges and hedge accounting", potential cross-cutting issues between the general and macro hedge accounting projects, and the interaction of the hedge ratio and its potential rebalancing

Implementation difficulties

  • Treatment of basis risk in cross currency interest rate swaps - whether synthetic cross currency swaps can be used to measure hedge effectiveness, and recommendations that basis spreads should be treated in the same way as the time value of options or forward points
  • Time value and forward points - the requirements are considered operationally complex, and recommendations that the change in fair value of basis risk should be recognised in other comprehensive income (OCI) to more closely align with risk management strategies
  • Own use exception - interaction with net agreements and net positions covering both recognised and unrecognised contracts

Requests for additional guidance

  • Hedge ratio and rebalancing - additional guidance to address concerns that the application of the rebalancing concept is not entirely clear and that insufficient guidance is provided for non-finance sectors
  • Eligible hedged items - clarifying whether non-financial items could qualify as hedged items, and whether foreign currency risk on highly probable transactions involving non-controlling interests can be designation as hedged items
  • Open and closed portfolios - which requirements can be applied to closed portfolios
  • Other - including eligible hedging instruments, presentation of forward points, and various other matters.

Effects analysis

  • The document outlines a number of areas where EFRAG believes the field testing reveals that the objective of reflecting the result of an entity's risk management activities is not fully achieved.  Matters are noted in relation to credit risk, sub-LIBOR, open and closed portfolios, the treatment of foreign currency risk compared to other risk components and disclosures.

Refer to the full report for the complete listing of matters raised.  Click for EFRAG press release (link to EFRAG website).

    IASB proposes tweaks to impairment disclosures

    18 Jan, 2013

    The International Accounting Standards Board has published ED/2013/1 'Recoverable Amount Disclosures for Non-Financial Assets (Proposed amendments to IAS 36)'. The Exposure Draft 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.

    Narrowing of recoverable amount disclosures

    The genesis of the proposed changes to the recoverable amount disclosures lies in the consequential amendments to IAS 36 Impairment of Assets made by IFRS 13 Fair Value Measurement.

    This consequential amendment introduced the requirement to disclose the recoverable amount of each cash-generating unit (or units) to which a significant portion of the overall carrying amount of goodwill or intangible assets with indefinite useful lives has been allocated (in paragraph 134).  The requirement to disclose recoverable amount of any such cash generating units therefore applies whether or not an impairment loss has been recognised in respect of that unit in the current period.

    The proposed amendments would remove this requirement for all cash-generating units, and instead require the disclosure of the determined recoverable amount only where an impairment loss was recognised during the reporting period.  This would be achieved by moving the requirement to paragraph 130 of IAS 36, which applies where an impairment loss has been recognised.

    Clarification of disclosures where an asset is impaired

    In addition to moving the requirement to disclose recoverable amount to paragraph 130 as noted above, the exposure draft proposes to amend and clarify the disclosures required when an asset is impaired and recoverable amount has been determined on the basis of the asset's fair value less costs of disposal.

    The proposed amendments would retain the existing exemption from the disclosure requirements of IFRS 13, but would require the provision of the following information:

    • the valuation techniques used and any changes in that valuation technique
    • the level of the 'fair value hierarchy' (from IFRS 13) within which the fair value measurement of the asset has been determined
    • for items in Levels 2 and 3 of the fair value hierarchy, key assumptions used in the measurement of fair value, including an explicit requirement to include the discount rate used if a present value technique has been used.

    The explicit requirement to disclose the discount rate has already been proposed by the IASB in Exposure Draft ED/2012/1 Annual Improvements to IFRSs arising from the 2010-2012 cycle of annual improvements.  Because this requirement has already been exposed, the IASB is not requesting comment on this aspect, but will not proceed with the annual improvement amendment in favour of one combined amendment as proposed in the exposure draft.

    The proposed changes to the disclosures above will align them with those required where an asset is impaired and recoverable amount has been determined on the basis of value in use.  This would complete the alignment of disclosures between value in use and fair vale less disposal costs, which originally began in the 2006-2008 cycle of annual improvements though the issue of Improvements to IFRSs in 2008.

    The proposed amendments would apply retrospectively.

    ED/2013/1 is open for comment until 19 March 2013.

    Click for (links to IASB website):

    IASB publishes proposal for IFRS Taxonomy 2013

    18 Jan, 2013

    The IFRS Foundation has published an exposure draft on the 'IFRS Taxonomy 2013' for public comment.

    The IFRS Taxonomy 2013 is a translation of IFRSs as issued at 1 January 2013 into XBRL and consolidates all IFRS Taxonomy interim releases that were published in 2012 for the use of early adopters. The proposed IFRS Taxonomy 2013 also includes concepts reflecting some industry practices derived from an analysis of financial statements prepared by companies' representatives from the banking, insurance and extractive industries.

    The proposed IFRS Taxonomy 2013 is open for comment until 18 March 2013.

    Click for (links to IASB website):

    New PAIB report on effective business reporting processes

    18 Jan, 2013

    The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC) has released an International Good Practice Guidance document providing guidance on implementing effective reporting processes within organisations.

    The report, Principles for Effective Business Reporting Processes (link to IFAC website), provides an explanation of why business reporting processes are important, noting that "high-quality business reports lie at the heart of strong and sustainable organizations", enabling stakeholder decision making, better internal decision making, and contributing to the successful management of businesses.

    The report provides 11 key principles for evaluating and improving business reporting processes, together with practical guidance designed to outline the critical arrangements that need to be in place for effective business reporting.

    These principles are summarised as follows:

    • Committing to effective reporting processes at the senior management and governing body levels
    • Determining roles and responsibilities of people involved the reporting process, across a broad range of functions, including the governing body, audit committee, senior management, legal counsel, information technology, investor relations and others
    • Planning and controlling the reporting processes, including implementing risk management and internal control over processes
    • Engaging stakeholders, including entering a dialogue with stakeholders to identify material financial and non-financial matters when designing the organisation’s reporting strategy
    • Defining the reporting content by identifying the content to be included in reports and also deciding on the audience, layout, and timing of reports
    • Selecting frameworks and standards, not just ensuring compliance with relevant laws, but also being familiar with other frameworks such as the IASB Practice Statement Management Commentary and the International Integrated Reporting Framework being developed by the International Integrated Reporting Council (IIRC)
    • Determining reporting processes by identifying information needs, information processes and related systems
    • Using reporting technology by establishing a process that evaluates and improves the presentation of information by taking advantage of the possibilities of new technologies such as eXtensible Business Markup Language (XBRL)
    • Analysing and interpreting reported information sufficiently before providing it to internal and external stakeholders
    • Obtaining assurance and providing for accountability, not only from a compliance perspective, but also considering voluntary internal or external assurance on reports and reporting processes
    • Evaluating and improving reporting processes on a regular basis to maintain reporting effectiveness.

    Click for IFAC press release (link to IFAC website).

      IASB submission to the UK PCBS

      17 Jan, 2013

      On 16 January 2013, IASB Chairman Hans Hoogervorst addressed the UK Parliamentary Commission on Banking Standards' Panel on tax, audit and accounting.

      The parliamentary commission, a joint committee of the House of Commons and the House of Lords, is preparing a report on how banks' governance and ethics need to change after the financial crisis and had issued a call for evidence on 4 December 2012. The IASB's position can be summed up by the quote "In sum, we do not support the notion that accounting standards led to a systemic bias to overly favourable financial statements in the banking industry." A written submission setting out the response of the IASB to all questions posed by the Committee's Panel on tax, audit and accounting can be downloaded from the IASB's website.

      IASB Disclosure Forum — Agenda

      17 Jan, 2013

      On 28 January 2013, the IASB is hosting a public discussion forum on disclosures in financial reporting to foster dialogue between preparers, auditors, regulators, users of financial statements and standard-setters. An agenda for the forum has now been made available.

      As the main objective of the forum is to get a clearer picture of the ‘disclosure problem’ and its causes, the agenda has been drawn up as follows:

       

      Monday, 28 January 2013 (08:30-15:00)

      Welcome and introduction

      IASB and others

      • The objective of the Forum and the desired outcomes
      • Where are we now?
      • Discussion with others about the work they have done

      User response — how disclosures can better meet users’ needs

      • The problem identified from a user’s perspective
      • Practical suggestions for improving the usefulness of financial reporting

      Preparer response — how disclosures can be improved in practice

      • The problem identified from a preparer’s perspective
      • An example of a ‘real life’ response

      Panel discussion

      • Each panel member represents a group in the financial reporting process.
      • What part of the problem does the group they represent own?
      • What can the group they represent do to facilitate improvement?

      Open Forum

      • Questions and comments from audience members
      • Questions from the moderator to participants in the audience

      Summary

      • Summarise the debate
      • Next steps

      More information on the forum is available on the IASB's website. Our IAS Plus project page on the disclosure framework project offers more information about recent developments around disclosures.

      Report from recent IFASS meeting released

      17 Jan, 2013

      A report has been issued summarising the discussions at a meeting of the International Forum of Accounting Standard Setters (IFASS, formerly the NSS) held in Zurich on 22-23 October 2012. The meeting covered a broad range of topics, including the future relationships between the IASB and regional and national standard setters, topical issues in financial reporting, reports from regional groups and administrative matters.

      The meeting was attended by representatives of standard setters from Australia, Austria, Belgium, Brazil, Canada, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Lebanon, Malaysia, Mexico, Netherlands, New Zealand, Norway, Pakistan, Peoples Republic of China, Republic of Korea, Saudi Arabia, Sierra Leone, Singapore, South Africa, Spain, Sweden, Switzerland, Syria, Taiwan, the United Kingdom, and the United States. Representatives of the European Financial Reporting Advisory Group (EFRAG), IFRS Foundation, International Accounting Standards Board and International Public Sector Accounting Standards Board (IPSASB) also attended.

      Highlights from the meeting included:

      • There was much discussion on the relationship between the IASB and national and regional standard setters, and the (then) forthcoming proposals for the creation of an Accounting Standards Advisory Forum (ASAF).  There were mixed views, but overall widespread support, for  the creation of the ASAF among the participants
      • Notwithstanding the ASAF proposals, there appeared to be consensus that the IFASS should continue "at least in the near term" but that IFASS's future role would be considered at the next meeting
      • In relation to technical issues discussed:
        • There was general consensus that a complete overhaul of IAS 12 Income Taxes was not an immediate requirement
        • There was a clear interest that work should continue on the issue of business combinations under common control
        • Various views were expressed on the IPSASB Consultation Paper on public sector combinations
        • It was agreed that the group's project on unit of account should continue
        • Various topics related to disclosures were discussed, with views expressed such as "preparers and users are unhappy with the state of affairs regarding disclosure"
        • Reports on standard-setter led projects on intangible assets acquired in a business combination, goodwill amortisation and impairment, accounting for greenhouse gas emission rights, investment tax credits, and the discount rate to be applied in IAS 19 Employee Benefits, were received and debated
      • Ian Mackintosh (IASB Vice-Chairman) gave a summary of the IASB's work plan and participated in various discussions about the projects and priorities going forward.  Many of the matters discussed are similar to the matters noted in the IASB's Feedback Statement on its Agenda Consultation 2011
      • Reports from the various regional groups (AOSSG, EFRAG, GLASS and PAFA) were received
      • Various administrative matters were discussed.

      The next meeting of the IFASS will be held in Sao Paulo, Brazil on 17-18 April 2013.

      Click for the full report (link to Australian Accounting Standards Board website).

      CFA Institute issues second study on user perspectives on IFRS 7 disclosures

      15 Jan, 2013

      The CFA Institute, a global association of investment professionals, has published a report entitled 'User Perspectives on Financial Instrument Risk Disclosures Under IFRS (Volume 2)', providing user insights on the disclosures of derivatives and hedging activities under IFRS 7 'Financial Instruments: Disclosures'.

      The CFA Institute undertook a study regarding the quality of existing financial instruments risk disclosures, addressing credit, liquidity, market and hedging activities risk disclosures under IFRS 7. Volume 1 of the report was issued in November 2011. The newly issued Volume 2 proposes general and specific recommendations for improving these risk disclosures, including:

      • Holistic disclosures that focus on communication and not ‘mere compliance’ should be provided.
      • Materiality assessment of derivatives should be based on loss potential of derivatives and not on reported fair values.
      • Improved presentation, location, and integration of derivatives and hedging disclosures with other key risk disclosures.
      • Improved quantitative risk exposure disclosure.
      • Improved communication of derivatives use and hedging strategies.
      • Enhancement of disclosures related to effects of hedge activities on financial statements.

      Click to view the full report User Perspectives on Financial Instrument Risk Disclosures Under IFRS (Volume 2) on the CFA Institute website.

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