FEE comments on the European Commission’s Green Paper concerning long-term financing

29 Jun, 2013

The European Federation of Accountants (Fédération des Experts Comptables Européens, FEE) has submitted a letter of comment to the European Commission (EC) concerning its Green Paper, ‘Long-term financing of the European economy’. One of the five topics addressed by FEE in its comment letter are accounting principles.

Much of the debate around the Green Paper has been focused on the question whether it is fair value accounting that leads to short-termism in investor behaviour. FEE admits that the accounting basis, whether fair value or historical cost, has an impact on investment choices. However, it also stresses "that financial information at current valuation is always useful, including for long-term investors. Even long-term investors cannot afford to ignore short-term fluctuations," thus picking up a main point IASB Chairman Hans Hoogervorst made in his April 2013 speech entitled Accounting and long term investment – 'Buy and hold' should not mean 'buy and hope'.

FEE therefore concludes that current value information of long-term investments should be provided. FEE also reminds the European Commission that "the current use of fair value is already limited to instances where it provides more useful information than historical cost".

In connection with stability and long-term financing, FEE explicitly responds to some points raised in the Green Paper:

  • On the Green Paper's claim that the introduction of fair value accounting causes a shift from equity to bonds by institutional investors, FEE "is not aware of any convincing empirical evidence supporting this statement".
  • On the Green Paper's claim that fair value accounting encourages an increase in risk exposure by long-term investors, if the volatility is recognised outside their profit and loss accounts, FEE "is also not aware of any empirical research underlying this assumption".

FEE generally suggests being very careful on conclusions drawn on the possible influences of the use of fair value on stability and long-term financing and to have due regard for empirical evidence. Looking back on the financial crisis and the debate around fair value accounting in that connection, FEE reminds the European Commission that research has not identified a negative role played by fair value in the financial crisis, especially in connection with instability - the majority of academic research concluded fair value accounting was not a major cause of volatility, rather, it contributed to identifying and assessing the situation early.

FEE concludes that the use of fair value accounting should not be restricted any further as applying fair value accounting can make financial information more transparent and does reflect current market conditions.

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The European Financial Reporting Advisory Group (EFRAG) will hold a roundtable meeting on 8 July 2013 in Brussels to facilitate a discussion with European constituents regarding “the financial reporting aspects of long-term investing business models and financial reporting issues raised in the EC Green Paper on the long-term financing, more particularly on the use of fair value accounting for long-term investments.”

Wang Haoyu appointed to the IFRS Advisory Council

28 Jun, 2013

The Trustees of the IFRS Foundation have announced the appointment of Wang Haoyu as a representative of the International Organisation of Securities Commissions (IOSCO) on the IFRS Advisory Council. She replaces Alexsandro Broedel Lopes as IOSCO representative of an emerging economy with immediate effect.

Ms Haoyu is an officer in the Accounting Regulatory Department of the Chinese Securities Regulatory Commission (CSRC). Before joining the CSRC, she worked as an auditor in Hua Ming. Ms Haoyu is a CPA and holds a master’s degree in management from Peking University.

Please click for the announcement on the IASB website and more information on the work of the IFRS Advisory Council on IAS Plus.

Updated EFRAG endorsement status report

28 Jun, 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 includes 'Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)' issued by the IASB yesterday.

On 27 June 2013, the International Accounting Standards Board (IASB) issued Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39 'Financial Instruments: Recognition and Measurement'). Under the amendments there would be no need to discontinue hedge accounting if a hedging derivative was novated, provided certain criteria are met. The amendments are effective for annual periods beginning on or after 1 January 2014, with earlier application being permitted.

Endorsement of the amendments for application in Europe might be expected in the first quarter of 2014.

Please click for the EFRAG Endorsement Status Report as of 27 June 2013.

ICAEW publishes guidance on the audit exemption by parent guarantee

28 Jun, 2013

The Institute of Chartered Accountants in England and Wales (ICAEW) has issued guidance on the exemption from audit under s479A-479C of the Companies Act 2006 for companies. The guidance addresses a number of common questions raised and provides some practical solutions.

For accounting periods ending on or after 1 October 2012, the Companies Act 2006 was amended to offer a new exemption from audit for subsidiaries with an EEA parent that is willing to guarantee all of the subsidiaries’ outstanding liabilities (until they are satisfied in full), provided that certain conditions are met.  The guarantee is enforceable against the parent by any person to whom the subsidiary is liable in respect of those liabilities and once given, the guarantee remains with the parent until all liabilities of the subsidiary included within the guarantee have been satisfied in full.  Dormant subsidiaries with such a guarantee are additionally exempt from preparing and filing financial statements. 

The guidance covers which companies are exempt from the requirements for an audit under s479A and also those that cannot make use of the audit exemption such as those that were quoted at any time during the financial year. 

The guidance addresses other questions such as: 

  • When does the new exemption become available?
  • What are the conditions for exemption?
  • What are the formalities for members agreeing to use the exemption?
  • What are the requirements in relation to the parent?
  • What are the requirements for filing the written notice of agreement?
  • How is the guarantee given?
  • What are the requirements for the statement referred to in s479C?
  • What is the effect of the guarantee?
  • What is the effect of a change in ownership of the company after a guarantee has been given? 

Subsidiary companies making use of the exemption should include a statement in their balance sheet disclosing that they are entitled to the exemption from audit under s479A of the Companies Act 2006.  Example wording is provided in the Companies House guidance booklet GP2 (link to Companies House website). 

The ICAEW note that the scope of the ‘outstanding liabilities’ covered by the guarantee is a matter of law.  It is currently unclear how far the law would enforce the repayment of all of the liabilities of the subsidiary on the parent.  Due to this uncertainty, the ICAEW highlight that it would be prudent for the parent to consider all of the liabilities of the subsidiary (including contingent and prospective liabilities) when weighing up the benefits of using the audit exemption against the cost of providing the guarantee. 

Click for:

ICAEW Technical Release (Tech07/13BL) (Link to ICAEW website)

Amendments to Companies Act 2006 (link to legislation)

IASB issues amendments to IAS 39 regarding novations of derivatives

27 Jun, 2013

On 27 June 2013 the International Accounting Standards Board (IASB) issued 'Novation of Derivatives and Continuation of Hedge Accounting' (Amendments to IAS 39 'Financial Instruments: Recognition and Measurement'). Under the amendments there would be no need to discontinue hedge accounting if a hedging derivative was novated, provided certain criteria are met. The amendments are effective for annual periods beginning on or after 1 January 2014, with earlier application being permitted.

A novation indicates an event where the original parties to a derivative agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. In order to benefit from the amended guidance, novation to a central counterparty (CCP) must happen as a consequence of laws or regulations or the introduction of laws or regulations.

The IASB saw an urgent need for the amendment, as the G20 had committed themselves to improve transparency and regulatory oversight of over-the-counter (OTC) derivatives in an internationally consistent and non-discriminatory way. Consequently, all OTC derivatives should be cleared centrally going forward. This includes OTC derivatives that are within the scope of the European Market Infrastructure Regulation (EMIR), or the Dodd-Frank Act in the USA, respectively. The objective of the amendments is to avoid any impact on an entity’s hedge accounting from derecognising the derivative, following its novation. Specifically, the IASB was concerned that the effectiveness for cash flow hedges might not be sufficient to maintain the designation or to designate the novated derivative as a hedging instrument.

In order to benefit from the changes to IAS 39 an entity must meet all of the following criteria:

  1. Novation to a central counterparty (CCP) must happen as a consequence of laws or regulations or the introduction of laws or regulations.
    This constitutes a significant change to the requirements proposed in the Exposure Draft, as the novation need not be required by law or regulation: A novation might equally occur because of existing or newly introduced laws or regulations. However, the mere possibility of laws or regulations being introduced would not be sufficient.

  2. Following the novation, a central counterparty would become the new counterparty to each of the original parties to the derivative.
    In this context, it would also be possible to introduce a party that is acting as a counterparty in order to effect the clearing with a CCP. This could be a clearing member or a clearing organisation that is contracted because the party does not have direct access to a CCP. In some jurisdictions, a novation will be effected with clients of clearing members of a CCP (so-called indirect clearing). The IASB reasoned that such novations should also be in the scope of the amendments because they are consistent with the objective of the proposed amendments. Further, intragroup novations would also be in the scope if these were in order to access a CCP. In cases in which a novation is not effected directly with the CCP, an entity must ensure that each of the parties to the hedging instrument effects clearing with the same CCP.

  3. Any changes to the hedging instrument are limited to those that are necessary to effect such a replacement of the counterparty.
    Such changes include changes in the collateral requirements, rights to offset receivables and payables balances, and charges levied. However, this does not include changes to the maturity, the payment dates, or the contractual cash flows or their basis of their calculation.

The amendments to IAS 39 are effective for annual periods beginning on or after 1 January 2014. Earlier application is permitted but requires corresponding disclosures. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the amendments are to be applied retrospectively.

In addition to amending IAS 39, the IASB decided to make equivalent amendments to forthcoming chapter 6 on hedge accounting in IFRS 9 Financial Instruments, which is expected to be issued during the third quarter of 2013.

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IASB Chairman announces 10-point plan in relation to disclosures

27 Jun, 2013

At the IFRS Foundation conference currently held in Amsterdam, Hans Hoogervorst, the IASB Chairman, spoke about the adoption of IFRSs around the world, the current work programme of the IASB and necessary changes in relation to financial disclosures.


Global standards

On global accounting standards Hoogervorst first pointed at the recently posted collection of 66 'jurisdiction profiles' detailing information about the adoption of International Financial Reporting Standards (IFRSs) and the IFRS for SMEs in all of the G20 jurisdictions and 46 other jurisdictions. He reiterated many of the conclusions he had already drawn in his Hong Kong speech entitled "Are we there yet?" He also mentioned the recent developments in Japan where the Business Accounting Council (BAC) in its final report recommended a greater use of IFRSs in Japan as a positive signal.


Current work programme

Regarding the current work programme of the IASB, Hoogervorst shared his thoughts on impairment, insurance accounting and the conceptual framework. 

He pointed at the Exposure Draft ED/2013/3 Financial Instruments: Expected Credit Losses published on 7 March 2013. He believes that the proposed new model will faithfully reflect the economics of the underlying transactions. However, he also admitted that it was unfortunate that the FASB has developed another variant of an expected loss approach but expressed hope that convergence or at least more convergence was still possible.

On insurance contract accounting he mentioned the Exposure Draft ED/2013/7 Insurance Contracts published on 20 June 2013. At present, the industry operates under a patchwork quilt of accounting practices, some of which date back to the days before IFRSs were introduced and which were, in effect, stitched together and grandfathered when IFRS 4 was introduced as an interim measure. Hoogervorst called this "unacceptable" and concluded: "Fortunately, the end to this unacceptable situation is in sight."

Lastly, Hoogervorst also spoke about the conceptual framework project, where a discussion paper is due to be released in July 2013. It will address those areas in the Framework that the IASB thinks are critical and need attention. As the project is no longer a phase-by-phase project, the DP will present all chapters. However, Hoogervorst warned that discussion paper will not "give a definitive answer to all accounting problems."


Financial disclosures

The final topic of Hoogervorst's speech were disclosures. He spoke of the necessity to "break the boilerplate" as there was a risk is that annual reports become simply compliance documents, rather than instruments of communication. The IASB itself has decided to give a good example - the size of the IFRS Foundation Annual Report 2012 was reduced by 25 per cent while increasing the amount of useful information and making it easier to read.

Nevertheless, as already announced in the feedback statement on disclosure that was released in May 2013, the IASB will react to the perceived disclosure problem with certain measures. Hoogervorst set out a ten-point plan to deliver tangible improvements to disclosures in financial reporting:

  1. Clarify in IAS 1 that the materiality principle does not only mean that material items should be included, but also that it can be better to exclude non-material disclosures;
  2. Clarify that a materiality assessment applies to the whole of the financial statements, including the notes;
  3. Clarify that if a Standard is relevant to the financial statements of an entity, it does not automatically follow that every disclosure requirement in that Standard will provide material information;
  4. Remove language from IAS 1 that has been interpreted as prescribing the order of the notes to the financial statements;
  5. Make sure that IAS1 gives companies flexibility about where they disclose accounting policies in the financial statements;
  6. Consider adding a net-debt reconciliation requirement;
  7. Look into the creation of either general application guidance or educational material on materiality;
  8. Seek to use less prescriptive wordings for disclosure requirements when developing new standards;
  9. Begin a research project to undertake a more fundamental review of IAS 1, IAS 7 and IAS 8 with the goal to replace those standards, in essence creating a new disclosure framework;
  10. Undertake a general review of disclosure requirements in existing Standards.

These measures, Hoogervorst said, should "remove most excuses for boilerplate disclosures. They will certainly help to ignite the much‑needed change in mind set of preparers, auditors and regulators that is so sorely needed."

The full text of the speech is available on the IASB website. A video recording of the speech is also available.

IASB publishes guidance for micro entities

27 Jun, 2013

The International Accounting Standards Board (IASB) today issued guidance to help micro-sized entities apply the IFRS for Small and Medium-sized Entities (IFRS for SMEs). The Guide accompanies, but is not part of, the IFRS for SMEs.

As many requirements of the IFRS for SMEs are not relevant to micro-sized entities, the IASB has developed, with input from the SME Implementation Group (SMEIG), a guide that extracts from the IFRS for SMEs only those requirements that are likely to be necessary for a typical micro-sized entity, without modifying any of the principles for recognising and measuring assets, liabilities, income and expenses. (Some wording changes were necessary to improve the flow of the drafting or for other editorial reasons.) It thus helps these entities to identify more easily the requirements of the IFRS for SMEs that are relevant to them.

The Guide is not a stand-alone standard for micro entities. It contains cross-references to the IFRS for SMEs for matters not covered by the guidance and micro entities that encounter these matters are required by the Guide to refer to the applicable requirements in the IFRS for SMEs. Therefore, compliance with this Guide will result in compliance with the IFRS for SMEs. (For easy identification, transactions, other events or conditions covered in the IFRS for SMEs but not in the Guide are identified in a seperate box at the beginning of the relevant sections in the guidance.)

Please click for further information on the IASB website:

UK FRC announces several new appointments to its Accounting Council

27 Jun, 2013

The UK Financial Reporting Council (FRC) has announced several new appointments to its Accounting Council. Among the new members is Veronica Poole, Deloitte's Global IFRS Leader – Technical.

The Accounting Council is responsible for advising the FRC Board on financial reporting standards, monitoring international financial reporting developments and providing strategic input and thought leadership in the field of financial reporting.

The FRC has also announced the establishment of a UK GAAP technical advisory group, which will provide advice to the Accounting Council for entities applying UK accounting standards, principally small and medium-sized entities.

Please click for the corresponding press release on the FRC website.

BIS issues call for views on corporate responsibility

27 Jun, 2013

The Department for Business, Innovation and Skills (BIS) has published a call for views on corporate responsibility. BIS intends to publish a framework for action on corporate responsibility by the end of 2013 and intend to incorporate the views received in shaping their final framework. Views are requested by 27 September 2013.

The call for views defines corporate responsibility as: 

The responsibility of an organisation for the impacts of its decisions and activities on society and the environment through transparent and ethical behaviour above and beyond its statutory requirements: 

One area that the call for views covers is the voluntary reporting and disclosure by companies of their environmental and social impacts and the diversity in practice. 

The new narrative reporting regulations which come into force for accounting periods ending on or after 30 September 2013 will legally require quoted companies to provide certain disclosures on areas such as their greenhouse gas emissions.  The call for views acknowledges that such quoted companies are already voluntarily disclosing their impact on the environment and society.  

However, where there are no statutory requirements to provide disclosures on their impact on the environment and society BIS highlight that there are still a large number of companies who do not voluntarily provide such disclosures.  BIS would encourage that all companies present environmental and social disclosures regardless of whether they are legally obliged to do so.  BIS note that: 

Many businesses see voluntary, non-financial reporting as an important way of engaging stakeholders and, in gathering data for reporting, a useful way to identify risks, particularly in supply chains. 

The call for views also notes that where such voluntary disclosure is made, it is presented in a number of ways often meaning that it is difficult to compare one company’s non-financial metrics with another.  BIS recommends that there is a single set of voluntary metrics which would enable non-financial metrics of one company to be able to be compared with those of another.  BIS comments: 

There must be a level of consistency in the metrics being used and, wherever possible, such metrics should be verifiable

 The call for views asks whether: 

  • Comparable, voluntary metrics on social and environmental aspects are desirable.
  • What might be the costs and benefits?
  • What role the government should play in determining what the metrics might be
  • How businesses may be encouraged to adopt them 

Aside from covering voluntary reporting and disclosure, the call for views also seeks to capture respondents’ views on other aspects of corporate responsibility such as responsible supply chain management and corporate responsibility in small and medium sized enterprises.  

The comments received will contribute to the framework for action on corporate responsibility which is expected to be published by the end of 2013.  

Views are requested by 27 September 2013. 

Click for: 

BIS press release (link to BIS website)

Corporate responsibility: a call for views (link to BIS website)

Deloitte views on European Commission’s Green Paper concerning long-term financing

26 Jun, 2013

Deloitte Touche Tohmatsu Limited’s European Economic Area member firms have submitted a letter of comment to the European Commission (EC) concerning its Green Paper, ‘Long-term financing of the European economy’. The comment letter provides Deloitte’s perspective to questions concerning the role of banks, cumulative impacts of prudential reforms on long-term investments, fair value accounting principles, and the integration of financial and non-financial information.

Regarding fair value accounting principles, we believe that "it would be inappropriate to say that it is fair value accounting that leads to short-termism in investor behaviour. No evidence has been provided so far for such a statement. This would also suggest that, in the absence of fair value accounting, investors would necessarily adopt a long term view. [...] It would be more appropriate to consider that fair value accounting may contribute, albeit to a limited degree only, to short-termism in investor behaviour."

As a response to this, we believe the following elements should be considered when fair value is used in the measurement of assets and liabilities on the balance sheet, in the measurement of performance, or as supplemental information in the notes to the financial statements:

  • the role of the business model;
  • alternative measures to fair value; and
  • ensuring that the information delivered does not create further uncertainty.

Click for a full summary and access to the comment letter.

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