June

IASB issues Exposure Draft of proposed amendments to IAS 16 and IAS 41

26 Jun, 2013

The International Accounting Standards Board (IASB) has published an Exposure Draft (ED) of proposed amendments to IAS 16 ‘Property, Plant and Equipment’ and IAS 41 ‘Agriculture’ to include bearer plants within the scope of IAS 16. Currently, IAS 41 requires that all biological assets that are related to agricultural activity must be measured at fair value less costs to sell. The amendments issued today would bring bearer plants which no longer undergo significant biological transformation into the scope of IAS 16 so that they would be accounted for in the same way as property, plant and equipment. Comments on ED/2013/8 ‘Agriculture: Bearer Plants’ are requested by 28 October 2013.

 

Background

Concerns had been repeatedly raised about the relevance and usefulness of information provided to users for certain biological assets accounted for at fair value. Specifically, an ‘Issues Paper’ produced by the Asian-Oceanian Standard Setters Group (AOSSG) and the IASB's Emerging Economies Group (EEG), which included a survey performed by the Malaysian Accounting Standards Board (MASB) in 2010, found that a group of analysts specialising in plantation did not find fair value information for bearer biological assets useful, particularly the presentation of changes in fair value within the profit or loss. Respondents to the IASB's agenda consultation also considered a project on bearer plants to be important.

 

Motivation for the amendments

When bearer plants reach their full maturity, they no longer undergo significant biological transformation but are used to grow produce until the end of their productive life, after which they are usually disposed of. Hence it is argued that they are more akin to property plant and equipment for which the accounting treatment is prescribed in IAS 16.

 

Scope

The scope of the proposed amendments is restricted to bearer plants which are defined as plants that are used in the production or supply of agricultural produce, are expected to bear produce for more than one period, and are not intended to be sold as a living plant or harvested as agricultural produce. Plants that are grown both to bear produce and for sale as living plants or agricultural produce remain in the scope of IAS 41 (for example, trees that are cultivated for their lumber as well as their fruit). Equally, the produce on the bearer plants would continue to be accounted for under IAS 41.

 

Application of the IAS 16 requirements to bearer plants

The IASB proposes that before bearer plants are placed into production (ie before they reach maturity and bear fruit) they should be measured at accumulated cost. After they reach maturity, bearer plants would be accounted for either under the cost model or a revaluation model.

 

Cost model

Unlike property, plant and equipment, life transformation of agriculture assets is a continuous process where older plants are replaced on a continual basis. Therefore, the IASB deliberated the unit of account and the aggregation of these. The IASB at last decided that accounting for an aggregation of plants would be no different from accounting for a large quantity of equipment that is acquired or constructed in batches and therefore the requirements of IAS 16 could be applied without modification.

The IASB also discussed (a) how to assess what is an abnormal amounts of wastage/mortality during the growth phase of the bearer plants; and (b) how to determine when bearer plants are in the condition necessary for them to be capable of operating in the manner intended by management. The IASB concluded that (a) would be akin to a case in which an entity constructs a large number of fragile items of machinery for use within the business and (b) would be similar to a factory requiring an initial run-in period. Consequently, the IASB concluded that the current requirements of IAS 16 are sufficient without further guidance.

For the same reasons the IASB concluded that the disclosure requirements under the cost model in IAS 16 can be applied to bearer plants without modification. 

 

Revaluation model

Entities would also be permitted to choose the revaluation model for mature bearer plants subject to the requirements in IAS 16. The IASB believes that the revaluation recognition and measurement requirements of IAS 16 can be applied to bearer plants without modification since the revaluation model is a fair value measurement model and akin to the current measurement requirements for biological assets.

 

Transition requirements and effective date

For cost-benefits reasons, the proposed amendments to IAS 16 permit the use of fair value as deemed cost for items of bearer plants at the start of the earliest comparative period presented in the financial statements. Consistent with the reasoning for accounting for bearer plants in the same way as for property, plant and equipment, the deemed cost exemptions provided for property, plant and equipment in IFRS 1 First-time Adoption of International Financial Reporting Standards would also be available for items of bearer plants.

The IASB will decide on the effective date and full transition details only upon completion of its redeliberations. As the amendment addresses an urgent accounting issue, the IASB proposes that the amendments to IAS 16 and IAS 41 should be available for early adoption.

 

Alternative views

Two Board members voted against the publication of the ED because they believe that the proposal will eliminate information about the fair value changes in bearer plants and the underlying assumptions used to estimate those changes. They come to the conclusion that the IASB proposals are no improvement to IFRSs and do not adequately address the needs of users of financial statements.

 

Comment deadline and next steps

Comments on ED/2013/8 Agriculture: Bearer Plants close on 28 October 2013.

The IASB will consider the comments it receives on the proposals and will then decide whether to proceed with amendments to IAS 16 and IAS 41.

 

Additional Information

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UK FRC publishes feedback statement regarding its paper on disclosure

26 Jun, 2013

In October 2012, the United Kingdom Financial Reporting Council (FRC) published a discussion paper on enhancing disclosure in financial reporting. The paper stated that one of its aims is to influence the IASB before it commences its disclosure framework project, and it identified a number of action points for the IASB.

The feedback on the discussion paper Thinking about disclosures in a broader context summarised in the feedback statement published today showed broad support for FRC‘s suggestions that:

  • Improving disclosure should be a shared responsibility between preparers, regulators, auditors and users.
  • The main end-users of reports are investors and disclosures should be framed with that in mind, having regard to communication, relevance and materiality.
  • There should be a move away from piecemeal approach to disclosures by standard setters and regulators and that a framework would provide a benchmark for measuring suggested disclosures.

When the FRC published its discussion paper in October 2012, the IASB did not have an official project on disclosures on its agenda. In December 2012, the IASB formally added a short-term initiative on disclosure to its work programme in December 2012 as part of its response to the Agenda Consultation 2011.  The objective of the initiative was to explore opportunities to see how those applying IFRS can improve and simplify disclosures within existing disclosure requirements.

In implementing this initiative, the IASB undertook a constituent survey on disclosure and held a disclosure forum designed to bring together securities regulators, auditors, investors and preparers. The IASB subsequently issued Feedback Statement Discussion Forum – Financial Reporting Disclosure on 28 May 2013, which outlined the IASB's intention to consider a number of further initiatives.

The FRC welcomes that the IASB has initiated its own project on disclosures and believes that the ideas from the discussion paper, together with the feedback received on them, will be helpful in setting the agenda for the IASB’s project.

Please click for access to the FRC feedback statement on the FRC website.

Bank of England report recommends major banks and building societies implement EDTF recommendations in their 2013 annual reports

26 Jun, 2013

The Bank of England has issued its Financial Stability Report covering the Financial Policy Committee’s (FPC’s) view of the current stability of the UK financial system, an assessment of the strengths and weaknesses of the system and risks to stability of the UK banking system. The report makes a number of recommendations to improve the stability in the UK financial system, some of which it expects to be implemented in the 2013 annual reports of all major banks and building societies.

The Financial Stability Report (link to Bank of England website) discusses “developments in the Global financial environment since the November 2012 Financial Stability Report, short-term and medium-term risks to the UK financial system, the activity of the FPC and progress on previous recommendations and the policies and actions that the FPC advises to reduce risks to the financial system”. 

Among a number of recommendations aimed at “enhancing capital adequacy of the banking system”, the report also recommends improvements to disclosures by banks in their 2013 annual reports.  The report highlights: 

The PRA should ensure that all major UK banks and building societies comply fully with the October 2012 recommendations of the Enhanced Disclosure Task Force (EDTF) upon publication of their 2013 annual reports

The EDTF was formed in May 2012 at the initiative of the FSB and had wide geographic representation with participants from asset management firms, investors and analysts, global banks, credit rating agencies and external auditors.  The task force also liaised with regulators and standard setters in undertaking its work.

The 32 recommendations of the Financial Stability Board’s Enhanced Disclosure Task Force (EDTF), published in October 2012 in their report ‘Enhancing the Risk Disclosures of banks’ (link to Financial Stability Board website) were aimed at improving the risk disclosures by banks to their shareholders.  The EDTF report identifies seven fundamental principles for enhanced disclosure each of which has its own separate disclosure recommendations: 

1. Disclosures should be clear, balanced and understandable.

2. Disclosures should be comprehensive and include all of the bank’s key activities and risks.

3. Disclosures should present relevant information.

4. Disclosures should reflect how the bank manages its risks.

5. Disclosures should be consistent over time.

6. Disclosures should be comparable among banks.

7. Disclosures should be provided on a timely basis.  

The recommendations capture existing good practices from banks around the world and include proforma tables illustrating the EDTF recommendations.  The objective of the Enhanced Disclosure Task Force recommendations is to enable users to better understand: 

A bank’s business models, the key risks that arise from them and how those risks are measured;

A bank’s liquidity position, its sources of funding and the extent to which its assets are not available for potential funding needs;

The calculation of a bank’s risk-weighted assets (RWAs) and the drivers of changes in both RWAs and the bank’s regulatory capital;

The relationship between a bank’s market risk measures and its balance sheet, as well as risks that may be outside those measures; and

The nature and extent of a bank’s loan forbearance and modification practices and how they may affect the reported level of impaired or non-performing loans     

The Parliamentary Commission on Banking Standards has also commented on disclosure, wanting to see more information provided to regulators on “the true extent of expected credit and other losses and how they are derived, the quality of a bank’s earnings and the extent and nature of accounting uncertainty (including the use of prudent valuations)”. 

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New directors’ remuneration report regulations laid before Parliament

26 Jun, 2013

New directors’ remuneration report regulations issued by the United Kingdom Department for Business, Innovation and Skills (BIS) have now been finalised and laid before the UK Parliament for approval. The regulations, which apply for quoted companies, completely change the requirements for the contents of the directors’ remuneration report and include some significant new disclosures, particularly a ‘single figure’ for the remuneration of each director. They come into effect for periods ending on or after 30 September 2013.

Under the regulations (link to draft regulations) and related changes to the Companies Act 2006:

  • The directors’ remuneration report will be split into a policy report (not subject to audit) and an annual report on remuneration (some elements of which are subject to audit).  The directors’ remuneration report will also include an annual statement from the chairman of the remuneration committee which should summarise the major decisions on directors’ remuneration and substantial changes made to directors’ remuneration in the year;
  • The policy report will include details of the remuneration policy.  The regulations introduce new disclosures including the policy on recruitment, the policy on loss of office payments, scenario charts which show the level of remuneration each director may receive under different performance scenarios, a statement of how employment conditions elsewhere in the company have been taken into account and a statement of whether, and if so how, the views of shareholders have been taken into account.  The policy report will be subject to a binding shareholder vote which must take place in the first financial year beginning on or after 1 October 2013.  Once the binding policy is in force, all future remuneration and loss of office payments must be consistent with it and all directors will be liable if the company breaches this policy.  After the first vote, shareholders must vote on pay policy every three years or sooner if the company wants to make changes to the policy;
  • The annual report on remuneration must provide details on remuneration in the period and some information for the following year and will be subject to an annual advisory shareholder vote; and
  • The contents of the annual report on remuneration are substantially different from existing requirements and include a ‘single figure’ for each director and a number of new requirements such as an explanation of the link between pay and performance and payments for loss of office.  This ‘single figure’ must include all elements of remuneration including salaries, fees, benefits, bonuses, share schemes and pension benefits. 

The regulations are based on proposals published in June 2012 by BIS.  They have been developed in order to give shareholders more power through binding votes, so they can hold companies and directors to account and to boost transparency so that what people are paid is more clearly and easily understood. 

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BIS press release (link to BIS website)

Regulations laid before parliament (link to draft regulations)

Deloitte ‘Need to Know’ on the new directors’ remuneration report regulations

Deloitte 'Governance in brief' newsletter on the new directors' remuneration report regulations.

 

EFRAG Update detailing May and June EFRAG developments

25 Jun, 2013

The European Financial Reporting Advisory Group (EFRAG) has released a new issue of its EFRAG Update newsletter summarising the discussions held at the EFRAG TEG meeting of 12-14 June 2013, which was partly held with the EFRAG CFSS, and EFRAG TEG conference calls held on 21 and 31 May 2013.

Highlighted was the publication of a draft comment letter to the IASB responding to Exposure Draft Regulatory Deferral Accounts.

In addition, the newsletter contains discussion on the following topics:

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

FRC comment letter on the IASB’s Exposure Draft ED/2013/3 ‘Financial Instruments: Expected Credit Losses’

25 Jun, 2013

Following a consultation period on its draft comment letter, the Financial Reporting Council (FRC) has issued their final comment letter responding to the International Accounting Standard Board’s (IASBs) Exposure Draft ED/2013/3 ‘Financial Instruments: Expected Credit Losses’.

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.

The final comment letter supports the majority of the proposals within the Exposure Draft (ED) and mirrors many of the messages contained within the draft comment letter.  However, following the consultation period, which ended on 14 June 2013, the FRC have included some additional comments in their final comment letter.  The final comment letter: 

  • Highlights that the FRC do not support the Financial Accounting Standards Board (FASB) alternative impairment model which requires entities to provide for full lifetime expected credit losses within the “foreseeable future” at the reporting date.  The FRC comment that they “do not believe that such a model is based on the underlying economics or reflects the risk management practices for financial institutions”.  The FRC then go onto say: “this model does not provide information to users on the credit deterioration of financial assets and the impact on the income statement”.  Where a uniform approach to expected credit losses is to be adopted, the FRC advise that the FASB and IASB converge to agree on the approach proposed by the IASB. 
  • Recommends that due to the ED allowing the use of a range of different discount rates, the IASB should determine an agreed approach to discounting using the results of its own field-testing exercise and that conducted by EFRAG and the European National Standard Setters. 
  • Recommends that the proposals include an example of how to calculate 12 month and lifetime expected credit losses on a bullet loan when no payments are due within 12 months. 
  • Recommends including clearer guidance on what is meant by “default” in the context of the proposed standard in the ED.  The FRC comment that this will “ensure that a consistent approach to moving assets along to stage 3 is adopted by all entities within the scope of the final standard”. 

Subsequent to the final comment letter being issued by the Financial Reporting Council, the European Financial Reporting Advisory Group (EFRAG) and European Securities and Markets Authority (ESMA) also issued their comment letters to the IASB.  Their comments are largely consistent with those of the FRC and support the belief that the IASB proposed approach is a pragmatic solution in the absence of a better model and overcome a number of operational challenges highlighted by constituents commenting on the 2009 ED.  However, despite the IASB’s attempts at reducing operational challenges, the EFRAG comment letter highlights that field testing had identified a number of operational difficulties to the proposed model.  In particular field test results highlighted that there would be high compliance costs in meeting the disclosure requirements and EFRAG would like to see the IASB revisit the proposals so that cost and benefit are balanced appropriately.  EFRAG also commented that “the current proposals do not allow entities to leverage existing risk management and regulatory practices and that not all necessary data are available”.  EFRAG would like the IASB to “reconsider how the model could be implemented in such a way that entities are able to leverage their existing practices and hence limit the costs and increase the reliability of their estimates”.  ESMA also commented that they do not fully support all of the proposed operational simplifications such as the introduction of an investment grade exception and commented that they would like the IASB to explicitly address forbearance practices as part of the final standard.     

EFRAG and ESMA make further suggestions which are contained in their respective comment letters.  Both the FRC and EFRAG strongly encourage the IASB to consider the field testing work carried out by EFRAG in finalising their proposals.  

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European field-test of the proposed accounting guidance for insurance contracts

24 Jun, 2013

The European Financial Reporting Advisory Group (EFRAG) and the national standard-setters of France (ANC), Germany (ASCG), Italy (OIC) and the United Kingdom (FRC) are performing a field-test in order to evaluate how the proposals contained in the IASB's Exposure Draft ED/2013/7 'Insurance Contracts' would affect European companies applying IFRS.

The ED, published on 20 June 2013, proposes a comprehensive accounting model for insurance contracts.  It establishes principles to report the nature, amount, timing and uncertainty of cash flows from insurance contracts.

The field-test initiated by EFRAG and the major national standard-setters in Europe is meant to assist in the understanding of the implementation, impact, and costs and benefits of applying the proposed guidance. The field-test will also assess the understandability and usefulness of the information, including the proposed disclosures that will result from applying the requirements.

The field-test is accompanied with a questionnaire. It will start on 10 July 2013 and completed questionnaires should be returned by 11 October 2013. Entities wishing to participate in the field-test are asked to contact their national standard-setters (where applicable) or EFRAG. Copies of the questionnaire will be sent to them.

Further information is available through the press release on the EFRAG website.

Latest IASB work plan shows extended deliberation phases for financial instruments projects

24 Jun, 2013

Following its recent meeting, the International Accounting Standards Board (IASB) has updated its work plan. The expected timing in the classification and measurement, impairment, and macro hedge accounting projects has been pushed back; general hedge accounting, however, is still expected in the third quarter of 2013. Additionally, the timing of some narrow scope projects has been clarified.

Summary of changes

Details of the changes are:

Updates to major projects

Updates to narrow-scope projects

Projects where due process documents are expected in the second quarter include a discussion paper on the conceptual framework project, a published report on the post-implementation review of IFRS 8 and finalised amendments on the novation of derivatives.  In addition, an exposure draft of proposed amendments to IAS 41 Agriculture on bearer plants is expected to be issued in the second or third quarter of 2013.

Click for IASB work plan dated 21 June 2013 (link to IASB website). We have updated our project pages to reflect the updated work plan and other known developments.

Call for tender to take stock of the effects of using IFRSs in the EU

23 Jun, 2013

The European Commission has published a call for tender to take stock of and to assess the effects of using international financial reporting standards (IFRS) in the EU.

The subject matter of the contract is to provide the European Commission with a general analysis of the impacts of 8 years of use of international financial reporting standards (IFRSs) in the EU for preparers and users of financial statements from the private sector. The study will include an overall assessment of whether the Regulation 1606/2002 of the European Parliament and the Council ('IAS Regulation') has met the two-fold initial objectives of ensuring a high degree of transparency and comparability of the financial statements of European companies and an efficient functioning of the market, in comparison with the situation before IFRS implementation in 2005.

It will also include a cost-benefit analysis and an assessment and analysis of the benefits and drawbacks brought by the IAS Regulation for different stakeholder groups.The study will support the Directorate General Internal Market and Services' objective to proceed with the evaluation of the IAS Regulation, to assess whether the implementation of the IFRSs in the EU has provided the expected benefits. It will determine whether the initial objectives of the IAS Regulation are still relevant and it will identify areas for improvement, if needed.

Please click for more information on the EU Comission website (available in all official languages of the EU).

Updated EFRAG endorsement status report

21 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 reflects the Accounting Regulatory Committee (ARC) adoption of the 'Amendments to IFRS 10, IFRS 12 and IAS 27: Investment Entities', which was issued by the IASB on 31 October 2012.

On 31 October 2012, the IASB published Amendments to IFRS 10, IFRS 12 and IAS 27: Investment Entities which provided an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities which meet the definition of an 'investment entity', such as certain investment funds. With the ARC voting in favour of adopting the amendments, the EFRAG has updated its endorsement status report. Endorsement of these of the amendments for application in Europe might be expected in the fourth quarter of 2013.

Please click for the EFRAG Endorsement Status Report as of 21 June 2013.

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