March

IFRS 2013 'Red Book' now available

11 Mar, 2013

The International Accounting Standards Board (IASB) has announced that the 2013 edition of the Bound Volume of International Financial Reporting Standards (the 'Red Book') is now available.

The 'Red Book' contains all official pronouncements issued at 1 January 2013, including all pronouncements with an effective date after 1 January 2013, but not the pronouncements they will be replaced or superseded. Accordingly, the 2013 edition contains pronouncements as a result of amendments from Government Loans (Amendments to IFRS 1); Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12); Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27); and Annual Improvements to IFRSs 2009–2011 Cycle (which contained separate amendments to IFRS 1, IAS 1, IAS 16, IAS 32 and IAS 34).

eIFRS and Comprehensive subscribers can now access the electronic files of the 2013 IFRS (Red Book) via the Latest Additions section of eIFRS (you will be required to provide your login details).

The Red Book is also available through the IASB's Web Shop. Copies are priced at £65 each, plus shipping. Discounts are available for multiple copies, academics/students and residents of middle and low-income countries.

Additional IASB information on ED/2013/3

08 Mar, 2013

The IASB has posted to its website a new issue of the 'Investor Perspectives' dealing with the ED on Impairment the IASB issued yesterday. Also, the IASB has announced a forthcoming webcast that will explain the proposals in the ED.

In Of "Great Expectations"—Accounting for Expected Credit Losses in Financial Instruments IASB member Patrick Finnegan explains why the IASB believes investors will benefit from the suggested new impairment model. He shows how the proposals differ from current IFRSs, summarises the proposals and gives three examples showing how the concepts would be applied to financial instruments such as loans or debt securities. Please click for the newest issue of the Investor Perspectives on the IASB's website.

On 13 March 2013, IASB staff will give a live web presentation on proposals included in the Exposure Draft Financial Instruments: Expected Credit Losses including a question and answer session. For the convenience of those in different time zones, the presentation will be held twice – once in the morning (10:00h London time) and once in the afternoon (14:00h London time). Each presentation, including the question and answer session, will last approximately forty minutes. Please click for more information and for registering on the IASB's website.

IASB proposes new impairment model

07 Mar, 2013

The International Accounting Standards Board (IASB) has published its long-awaited proposal for a new accounting model for impairments of financial assets. In the Exposure Draft (ED) the Board proposes a model according to which credit losses are no longer recognised if incurred; rather, entities would recognise expected credit losses on financial assets and on commitments to extend credit based upon current estimates of expected shortfalls in contractual cash flows as at the reporting date. Comments are due 5 July 2013.

Background

Exposure Draft ED/2013/3 Financial Instruments: Expected Credit Losses contains a revised approach as regards the impairment of financial assets. Since 2009 the Board has been developing a new approach for recognising impairments. During the global financial crisis, the IASB came under pressure to change its requirements, which were perceived as being complex and inconsistent, and to provide for a more timely recognition of dawning credit losses. Under the current rule set in IAS 39 Financial Instruments: Recognition and Measurement, a financial instrument is impaired and impairment losses are incurred if a loss event occurred and this loss event had a reliably measurable impact on the future cash flows (so-called Incurred Loss Model, ILM).

In November 2009 the IASB published its first proposal in which it suggested measuring expected credit losses through adjusting the effective interest rate of a financial instrument (ED/2009/12 Amortised Cost and Impairment). This approach was based on the fact that expected credit losses of a financial asset are usually priced into the interested rate to be charged. Hence, expected credit losses should ideally be reflected in the yield on the financial asset, whereas changes in credit loss expectations should be recognised when incurred as those changes are not priced into the asset. This original approach was hailed as being conceptually sound, however, it was also deemed impracticable given that the tracking that is needed to follow changes in credit for the individual instrument is seldom done.

In January 2011, the IASB and the U.S. Financial Accounting Standards Board (FASB) issued a supplement in which they proposed to de-couple interest recognition from the recognition of impairments (ED/2011/1 Supplementary Document). Financial instruments would have been allocated to a ‘good book’ and a ‘bad book’, whereby the former would comprise those financial assets for which there had been no loss as at the reporting date. All other instruments would be allocated to the ‘bad book’. While for financial assets in the ‘bad book’ an allowance equal to the credit losses expected over the remaining life of the instruments would be recognised —which is not that different to what used to be done for instruments under the ILM—, the allowance booked for assets allocated to the ‘good book’ would be a time-proportionate allocation of credit losses expected over their life. If an entity expected a higher amount for the foreseeable future, it would then book that higher amount instead of the time-proportionate amount.

Since 2011 the IASB and FASB have worked on fine-tuning this approach, which is still the basis of the current proposal. Two questions were of special concern to the Boards: (1) What amount should be recognised for assets in the ’good book’? (2) When and how should assets move between ‘good book’ and ‘bad book’ if their credit significantly deteriorated or improved? Although the FASB had decided in July 2012 not to pursue the jointly developed approach any further and to issue its own impairment model instead, the IASB continued the work.

If finalised the proposals now published in the ED would be integrated into IFRS 9 Financial Instruments as a separate section.

 

Summary of key proposals

Objective. The objective is to recognise expected credit losses for all financial instruments within the scope of the requirements. Expected credit losses are defined as the expected shortfall in contractual cash flows. An entity should estimate expected credit losses considering past events, current conditions and reasonable and supportable forecasts.

Scope. The following instruments are within the scope of the proposed requirements:

  • all financial assets measured at amortised cost;
  • all debt instruments measured at fair value through other comprehensive income under the new proposal issued in December 2012;
  • all trade and lease receivables; and
  • other financial instruments subject to credit risk, such as written loan commitments and written financial guarantee contracts as long as they are not measured at fair value through profit or loss.

Impairment – Amount. The impairment amount to be recognised on these financial instruments depends on whether or not they have significantly deteriorated since their initial recognition. Three stages are being distinguished:

  • Stage 1: Financial instruments whose credit quality has not significantly deteriorated since their initial recognition;
  • Stage 2: Financial instruments whose credit quality has significantly deteriorated since their initial recognition; and
  • Stage 3: Financial instruments for which there is objective evidence of an impairment as at the reporting date.

For stage 1 financial instruments, the present value of 12-month expected credit losses are recognised which are the expected shortfalls in contractual cash flows over the life of a financial instrument that will result if a default occurs in the 12 months after the reporting date (12 months expected credit losses); in contrast, an impairment is recognised for financial instruments classified as stage 2 or 3 at the present value of expected credit shortfalls over their remaining life (lifetime expected credit loss).

Impairment – Recognition. For financial assets entities would recognise a loss allowance whereas for commitments to extend credit a provision would be set up to recognise expected credit losses.

Interest. For stage 1 and 2 instruments interest revenue would be calculated on their gross carrying amounts, whereas interest revenue for stage 3 financial instruments would be recognised on a net basis (i.e. after deducting expected credit losses from their carrying amount).

Purchased or originated credit-impaired financial assets. Rather than apply the two-stage approach, changes in lifetime expected credit losses in the estimate of lifetime losses since initial recognition are recognised directly in profit or loss.

Simplified approach for trade and lease receivables. Entities will have an accounting policy choice to always measure the impairment at the present value of expected cash shortfalls over the remaining life of the receivables instead of applying the two-class model.

New disclosures. The proposed approach comes with new disclosure requirements, including a reconciliation, a description of inputs and assumptions used to measure expected credit losses, and information about the effects of the deterioration and improvement in the credit risk of financial instruments.

Effective date. The IASB will decide on the effective date only upon completion of its redeliberations.

 

Comparison with FASB proposal

In December 2012 the FASB published its proposed model on Current Expected Credit Losses (CECL). The key difference between the IASB’s proposals above and the FASB’s approach is that the FASB would not distinguish between instruments that have deteriorated since their initial recognition and those that have not. Instead, the FASB would require a single measurement model for all financial instruments when determining the impairment allowance: At initial recognition entities would recognise a charge equalling the present value of lifetime expected credit losses.

Comments on the IASB’s proposal are due 5 July; the comment period for the FASB’s ED will already end 30 April.

 

Additional information

The ED will be discussed in the upcoming Dbriefs webcast — IFRS: Important developments on 27 March.

Sixth edition of IFAC survey reveals sovereign debt issues and confidence in international standards as key concerns

07 Mar, 2013

The International Federation of Accountants (IFAC) has published its Sixth Annual Global Leadership Survey. IFAC received 113 responses to its questions regarding respondents’ opinions about perceptions of the profession and the most significant issues facing global accountancy in 2013. Over one third of the responses came from Europe.

As in the fifth edition of the survey, respondents' highest priorities continue to be "increasing the confidence in international standards, increasing their adoption, enhancing their implementation, and new standards and revision of existing standards."

International Financial Reporting Standards (IFRS) were viewed as being most important for global adoption, implementation and enforcement, with International Standards on Auditing (ISAs) being ranked second, then followed by the Code of Ethics for Professional Accountants, International Education Standards (IESs) and International Public Sector Accounting Standards (IPSASs).

The volatile environment continues to be another big area of concern. Aspects include the difficult global financial climate, public sector financial management and sovereign debt issues. This is connected with concerns regarding the reputation and credibility of the profession.

Please click for the IFAC press release and  access to the survey on the IFAC website.

Eurostat report on the suitability of IPSAS for EU Member States

07 Mar, 2013

The European Commission has issued a report assessing the suitability of the International Public Sector Accounting Standards (IPSAS) for the Member States of the EU. The report concludes that, “even if IPSAS cannot easily be implemented in EU Member States as it stands currently, the IPSAS standards represent an indisputable reference for potential development of European Public Sector Accounting Standards (EPSAS), based on a strong EU governance system.”

The report used information from the feedback received on the public consultation on the suitability of  IPSAS for application in the EU. Overall, two conclusions were made: (1) it seemed that IPSAS cannot easily be implemented in EU Member States as it stands currently and (2) the IPSAS standards represent a suitable framework for the future development of EPSAS.

Additionally, the report describes steps that will need to be taken in the development of EPSAS, including the establishment of EU governance that will clarify the conceptual framework and aim for common EU public sector accounting.  The report also makes the following points about the relationship between ESPAS and other frameworks:

EPSAS would need to establish and maintain close links to the IPSAS Board in order to inform its agenda and decision-making and because EPSAS standards may need to differ in some cases from IPSAS standards. It would be important not to create unnecessary divergence between EPSAS and IPSAS, and between EPSAS and IFRS, given that government-controlled entities may already be required to report on an IFRS basis or according to national commercial accounting standards.

The development of EPSAS will be discussed further at a conference held on 29-30 May 2013 in Brussels.

Click for (links to European Commission website):

Agenda for March 2013 IFRS Interpretations Committee meeting

06 Mar, 2013

The IFRS Interpretations Committee will meet at the IASB's offices in London on Tuesday and Wednesday 12-13 March 2013. The meeting is open to the public and will be webcast.

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

The Bruce Column — Effective disclosure: More or less

06 Mar, 2013

Everyone agrees that something should be done about the levels of disclosure in financial reporting. It is just, as our resident columnist Robert Bruce reports, that no one agrees on what that something might be.

The issue of disclosure unites everyone. And it divides everyone. Everyone agrees that useful and effective disclosure is at the heart of financial reporting. Everyone agrees that we need less boilerplate and more clarity and a story better and more clearly told. But at the same time everyone has different ideas of what precisely constitutes useful and effective.

So it was helpful, a few weeks ago, to have a forum where all strands of opinion could be heard; ideas mooted and objections raised. And it helped to have it pulled together by the International Accounting Standards Board, (IASB), which itself is no stranger to piling up the complexity of what is disclosed.

Perhaps not surprisingly the main conclusion that the IASB drew after the event was that there ‘was no clear agreement on what the disclosure problem is’. In the IASB’s view, ‘the objectives of the IASB, the auditors and regulators, are appropriate and beneficial’. But the perceptions remained that the standards were seen to compel more than to guide and auditors and regulators were seen as emphasising compliance more than communication. Perceptions are that the problem is behavioural. And that takes a long time to change, and, as was noted at the forum, the incentives for such change were not right.

So it was felt that there are two ways forward. A long-term strategy needs to be put into place. And some quick fixes need to be sorted out which can act as a catalyst to bring people into a mode of thinking which encourages the focus on disclosures that matter, that are key to telling a clear story.

A short-term route to help disclosure become clearer would be for the IASB to make some changes to IAS 1. That says specifically that you don’t have to disclose something if it is not material. But people still do. The IASB needs to highlight that as much as it can. It should try to nudge the mindset into change. Stick a line in saying specifically that you should not disclose something if not material. Another paragraph says that the notes ‘should be produced in the following order’. This stands in the way of thoughtful preparers trying to put the less important stuff in the back of the book and allow the really important stuff to stand out. The wording needs to change. The IASB has to lighten it all up and emphasise that not only it is perfectly all right to use judgement but it is something that they encourage.

The IASB also needs to pull back on taking the easy way out when there have been huge arguments over two differing treatments in the creation of a standard. Too often they suggest that the results under the losing treatment can be disclosed in the notes. It may cheer up the protagonists but it simply creates more disclosure.

But the IASB cannot force a preparer to be brave and less compliance driven. It can only nudge and encourage.  And that goes for everyone else in this dance of the data. Recognising that it is everyone’s problem and getting everyone to act accordingly would be a start.

The really long-term changes are going to be those in the work the IASB is doing on the conceptual framework and the work on a disclosure framework. That would create more clarity.

Another process which is on the horizon is integrated reporting, the reorganising of all information, non-financial as well as financial, which impacts on corporate strategy. The IASB has just signed a memorandum of understanding with the International Integrated Reporting Council, (IIRC), which: ‘demonstrates the common interest of both organisations in improving the quality and consistency of global corporate reporting to deliver value to investors and the wider economy’. An ebullient Paul Druckman, CEO of the IIRC, said: ‘creating a new corporate reporting language that better serves business and investors, and contributes to a more sustainable global economy will be the ultimate prize’.

EFRAG Update - February 2013 issue

06 Mar, 2013

The European Financial Reporting Advisory Group (EFRAG) has released the February 2013 issue of its EFRAG Update newsletter summarising the discussions held at the EFRAG TEG meeting of 28 February to 1 March 2013 and EFRAG TEG conference calls held on 29 January and 12 February 2013.

EFRAG endorsement status report

05 Mar, 2013

The European Financial Reporting Advisory Group (EFRAG) has updated its report showing the status of endorsement, under the EU Accounting Regulation, of each IFRS, including standards, interpretations, and amendments. The latest report reflects the endorsement by the European Commission of the amendments to IFRS 1 for government loans.

On 4 March 2013, the European Union issued a commission regulation which resulted in the endorsement of Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards — Government Loans. The amendments to IFRS 1 are now incorporated into European law. The EFRAG has updated its endorsement status report to reflect the EU's decision.

Please click for the EFRAG Endorsement Status Report as of 5 March 2013.

Agenda for the March 2013 meeting of IASB representatives with the Global Preparers Forum

05 Mar, 2013

The tentative agenda is now available for the meeting of IASB representatives with the Global Preparers Forum, which is being hosted by the IASB in London on 11 March 2013.

The agenda is summarised below.

Monday, 11 March 2013 (09:30-17:00)

Agenda papers from this meeting are available on the IASB's website.

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