June

June 2013 IASB meeting notes — Part 2 (concluded)

20 Jun, 2013

The IASB's meeting was held in London on 18-19 June 2013, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from Wednesday's sessions on Comprehensive review of IFRS for SMEs, the IFRIC update, and Annual improvements (cycles 2010-2012 and 2011-2013).

Click through for direct access to the notes:

Wednesday, 19 June 2013

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

The Bruce Column — Bringing long-term order to insurance reporting

20 Jun, 2013

The new exposure draft on insurance contracts from the IASB has been long and painstaking in the making. But, as our resident columnist Robert Bruce explains, it will help bring long-needed consistency and transparency to the industry.

The world of insurance has always been a difficult one for financial reporting. It is often said that financial reporting in the insurance business is largely lost inside what has become popularly referred to as a black box. No one quite knows what is inside and comparability is in short supply. 

Why so? It is because, 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.

This is why trying to enable transparency in both profit reporting and the estimation of the inherent uncertainty of insurance cash flows was never likely to be easy. Regulators have warned that in an era of low interest rates some of the insurance industry may still be working off estimations of a return on assets which will not be achieved. But, under the current system of financial reporting, it may not be obvious.

At its heart this new exposure draft introduces change in limited areas with the IASB sticking with its previously exposed ‘building blocks’ approach, which deals with the measurement of the insurance contract. By requiring the measurement of the liability using current interest rates the proposed new standard will give investors and policy holders a much clearer and more reliable view of what is happening. It is fundamental. But of course it is not just about measurement. Matching assets and liabilities is a key feature of an insurance business and a faithful representation of the extent to which an insurer achieved that is obviously very important.

The new model will be a big change to implement and it will all take time to make this work. Extensive new data will be required for the transition, and for measurement in the future. Investment in technology is likely to be required as the result of the need for actuarial and accounting systems to be enhanced or developed to cope with the new financial reporting demands.

This is why the IASB is planning to give everyone around three years leeway from the publication of the final standard to get their implementation straight. But wiser souls may find that early planning for what is to come will make life easier in the long-term. Not that different from the basis of insurance itself.

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IASB re-exposes proposals for insurance contracts

20 Jun, 2013

The International Accounting Standards Board (IASB) has issued a revised exposure draft (ED) on insurance contracts. The ED does not contain a proposed effective date as the IASB will decide on the effective date only upon completion of its redeliberations. The expectation is currently that the standard will become effective approximately three years after being published in its finalised form. The revised ED seeks constituent comment on five key areas. Comments on the ED close on 25 October 2013.

 

Background

The IASB originally issued Exposure Draft ED/2010/8 on 30 July 2010 in an effort to create a single standard that could apply to all insurance contract types on a consistent basis, addressing recognition, measurement, presentation and disclosure requirements for insurance contracts.

The objective of the original as well as the revised ED is establishing the principles that insurers should apply to report the nature, amount, timing and uncertainty of cash flows from insurance contracts. The scope of both EDs extended to all insurance contracts that an insurer issues and all reinsurance contracts that it holds as well as to investment contracts with a discretionary participation features that an insurer issues. However, the revised ED also contains list of contracts to which it does not apply.

According to the ED, a building blocks approach is used for measuring Insurance contracts. Insurance contract liabilities are determined as the sum of a probability-weighted estimates of cash flows plus risk adjustment liability that measures the uncertainty in the amount and timing of the cash flows plus a contractual service margin liability that represents unearned profit in a contract.

 

Specific Areas for comment

Based on the feedback received on ED/2010/8, the IASB and FASB have redeliberated the proposals and developed a revised exposure draft focussing on five key aspects of insurance contract accounting:

  1. Adjusting the unearned profit from insurance contracts
  2. Accounting for contracts that specify a link to the returns on underlying items that the entity is required to hold
  3. Presentation of insurance contract revenue and expenses
  4. Presentation of interest expense between profit or loss and the other comprehensive income
  5. Full retrospective approach to transition

I. Adjusting the unearned profit from insurance contracts 

At initial recognition, the contractual service margin is calculated at an amount equal and opposite to the sum of:  (a) the amount of the fulfilment cash flows for the insurance contract at initial recognition; and (b) any cash flows that are paid (received) before the insurance contract is initially recognised.

Subsequently, the contractual service margin will be released to profit or loss over the coverage period as the insurer fulfils its obligations. The contractual service margin will also be adjusted prospectively for changes in future expected cash flows relating to future coverage. No limit has been imposed on the amount by which the contractual service margin can increase as a results of these changes. However, if the changes are so adverse that would cause the contractual service margin to become negative, the contract becomes onerous.  In this case, any changes in the excess of the carrying amount of the contractual service margin at the date of change should be recognised immediately in profit or loss.

The insurer is not permitted to adjust the contractual service margin for changes in estimates of incurred claims, that is, if coverage has already expired and for changes in risk adjustment.

II. Accounting for contracts that specify a link to the returns on underlying items that the entity is required to hold

For participating contracts where the contractual cash flows are linked to the returns of an underlying pool of assets, the insurer is required to measure and present those cash flows in the same way the assets backing those liability are measured and presented.

Three possible cash flow behaviour in a participating contracts and related accounting treatment:

  1. Where the contractual cash flows vary directly with the underlying items
    •  Measure and present these cash flows by reference to the assets’ carrying amount
    •  No adjustment made to contractual service margin
  2. Where the contractual cash flows vary indirectly with the underlying items
    •  Measure these cash flows using the general building blocks model, discounted at a current discount rate
    •  Adjustment to contractual service margin will be made prospectively
    •  Interest-related changes are always recognised in the profit or loss
  3. Where the contractual cash flows do not vary with the underlying items
    •  Measure these cash flows using the general building blocks model as required by the draft Standard

In all three cash flow behaviour scenarios, the insurer is required to recognise changes in the risk adjustment liability in profit or loss.

III. Presentation of insurance contract revenue and expenses

The insurer is required to recognise revenue to each period in proportion to the reduction in liability over the remaining coverage period.

To get to the new revenue amount an insurer needs to split cash outflows into those relating to future coverage from those associated with past claims yet to be settled. The amounts of cash outflows associated with the coverage that are expected in a particular period are added to the margin amounts described above to get the insurance revenue amount. The actual cash outflows, for example, actual benefits and expenses, are reported as insurance expenses.

These revenue and expense amounts need to have one final adjustment. If they include cash flows that would have been paid to policyholders in any event, such amounts must be disaggregated from the insurance revenue and expense lines because they represent deposit components.

IV. Presentation of interest expense between profit or loss and the other comprehensive income

The insurer is required to split the insurance contract interest expense into two components:  the component that is based on historical discount rates that were market consistent when the contract was sold will be recognised in profit or loss while the interest expense derived from current interest rates will be presented in the other comprehensive income.

For participating contracts, the presentation determined under the mirroring approach will always take precedence over the OCI solution.

V. Full retrospective approach to transition  

Insurers are required to apply the requirements of the proposed standard as if they have always been effective.

The revised ED has provided some practical expedience and simplifications:

  • Where a full restatement of the contractual service margin is impracticable, the insurer is allowed to estimate the contractual service margin using all the objective information that is reasonably available. In addition, insurers are required to make use of hindsight and are not required to identify all changes in estimates of cash flows that occurred between initial recognition and transition date.
  • As a starting point, insurers are required to determine the locked-in discount rates retrospectively based on adjusting a market-observable interest rate yield curve for at least the past three years. If there is no market-observable yield, the discount rates can be determined using the closest market-observable yield curve. The same market-observable reference point must be used to determine the locked-in discount yield-curve for each of the years in the retrospective period.
  • The revised ED also requires reduced disclosure requirements. Insurers are not required to  disclose previously unpublished information about claims development information that occurred five years before the end of the first financial year in which the standard is applied, which would normally be required for ten years. Also, insurers are not required to disclose the amount of the adjustment for each financial statement line items that is affected, as required by IAS 8.

The revised ED also provides for the redesignation of financial assets at transition. At the beginning of the earliest period presented, an insurer is permitted but not required to re-designate financial assets to be measured at FVTPL if to do so would eliminate or significantly reduce an accounting mismatch. An insurer is required to revoke previous designations at FVTPL if the accounting mismatch that led to the previous designation is now eliminated.

 

Effective date

The ED does not contain a proposed effective date as the IASB will decide on the effective date only upon completion of its redeliberations. The expectation is currently that the standard will become effective approximately three years after being published in its finalised form.

 

Comment deadline

Comments on the five specific areas close on 25 October 2013.

 

Additional information

Note: On 23 July 2013, the IASB released an error note (link to IASB website) which included a number of corrections to ED/2013/7.  The PDF versions of the ED have been updated on the IASB's website, but printed versions of the exposure draft have not been updated.

June 2013 IASB meeting notes — Part 1

19 Jun, 2013

The IASB's meeting was held in London on 18-19 June 2013, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from Tuesday's joint session on classification and measurement.

Click through for direct access to the notes:

Tuesday, 18 June 2013

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

G8 stress the need for transparency in the use of natural resources

19 Jun, 2013

Meeting in Lough Erne in Northern Ireland on 17-18 June 2013, the Group of Eight (G8) finance ministers discussed the themes of 'Tax, Trade and Transparency' and agreed to make sure the world’s poorest people benefit from the natural resources of their various countries by improving the transparency of their extractive industries and land rights.

The final communiqué promotes transparency as a means of empowering people to hold governments and companies to account and states:

We have agreed a transformative Open Data Charter to make budget data and other government information public in an easily accessible way. We will make progress towards common global reporting standards to make extractive industry payments more transparent.

The Open Data Charter published as an appendix to the communiqué explains:

Open data can increase transparency about what government and business are doing. Open data also increase awareness about how countries’ natural resources are used, how extractives revenues are spent, and how land is transacted and managed. All of which promotes accountability and good governance, enhances public debate, and helps to combat corruption. Transparent data on G8 development assistance are also essential for accountability.

Improved transparency in the extractive industries and country-by-country reporting have also been the focus recent of legislative acts and announcements.

The European Parliament has voted last week to approve the new Accounting and Transparency Directives responding to international developments in this field, in particular the inclusion of a requirement to report payments to governments in the Dodd Frank Act in the United States. (However, the EU disclosure requirements are more comprehensive including also the logging industry and large unlisted companies.)

Last week, Canadian Prime Minister Stephen Harper announced on his website that the Canadian government will be establishing new mandatory reporting standards for Canadian mining companies to enhance the transparency of the payments they make to local, state and national governments. His website also contains an announcement of the formation of partnerships with Peru and Tanzania to further strengthen transparency in their extractive industries. (Similar partnerships were formed at the G8 summit between Burkina Faso and France, Colombia and the EU, Ghana and the United Kingdom, Guinea and the United States, Mongolia and Germany as well as Myanmar and the United States.

Please click for further information on the UK G8 Presidency website:

Parliamentary Commission on Banking Standards Final report issued

19 Jun, 2013

The Parliamentary Commission on Banking Standards (PCBS), appointed by both Houses of Parliament last year to investigate and provide recommendations for legislative and other action to improve professional standards and culture in the UK banking sector, published its long-awaited Final Report today.

The Final Report 'Changing banking for good' is the fifth report of the PCBS to consider professional standards and conduct in the UK banking sector.  The recommendations contained within the report are made with the objective “to enable trust to be restored in banking” in light of past banking scandals.

The report makes recommendations in five areas: i) making individual responsibility in banking a reality for senior management; ii) reforming governance within banks to reinforce each bank’s responsibility for its own soundness and standards; iii) creating better functioning and more diverse banking markets; iv) reinforcing the responsibilities of regulators in the exercise of judgment; and v) specifying the responsibilities of this and future Governments.

Among other things, the report recommends “a new framework for individuals” to replace the Approved Persons Regime, changing remuneration standards and heightening expectations on, and sanctions for, the failures of individuals and increasing the competitiveness within banks.  Aside from these, the report also makes a number of recommendations in the areas of corporate governance, auditing and accounting. 

Corporate Governance recommendations

The Final Report comments “the financial crisis, and multiple conduct failures, have exposed serious flaws in governance”.  The report then goes on to say:

Poor governance and controls are illustrated by the rarity of whistle-blowing, either within or beyond the firm, even where, such as in the case of Libor manipulation, prolonged and blatant misconduct has been evident.

 The major recommendations in the area of corporate governance are: 

  • Each individual director should have a personal responsibility for the “safety and soundness" of the firm and the Companies Act 2006 (section 172) should be amended to prioritise financial safety over shareholder interest in the case of banks.  The report highlights that the Financial Reporting Council (FRC) should amend the UK Corporate Governance Code in this respect.
  • The Chairman of the Board should be personally responsible for the effective operation of the board, with the Senior Independent Director being responsible for making sure that this happens. A named non-executive director should be responsible for overseeing fair and effective whistle-blowing procedures. 

Auditing and Accounting recommendations

The Final report comments:

While we recognise the risk of ever more complex and burdensome accounting requirements, flaws in IFRS mean that the current system is not fit for regulators’ purposes. 

The major recommendations in the areas of auditing and accounting are:

  • Banks should prepare a separate set of accounts for regulators on the basis of specified prudent principles set by the Prudential Regulation Authority (PRA).  These accounts will be externally audited and a statutory duty to regulators will be placed upon auditors.  Where there is a public interest for these accounts to be published the PRA will have the power to require that these prudential accounts, or an abbreviated form, may be included in the annual report with a reconciliation to the IFRS numbers.
  • Audit reports on banks should include specific commentary on valuation, risk and remuneration, amongst other key judgement areas.
  • Auditors of banks should meet regularly with the PRA and the Financial Conduct Authority (FCA) – and more often than the once a year required by current Codes of Practice. Representatives of the audit profession should also have the opportunity to discuss emergent issues that have arisen from their work with banks, the PRA, the Financial Reporting Council (FRC) and HMRC.
  • The PCBS recommends that the FRC should push for an early decision on the introduction of the expected loss model for loan loss provisioning.  The PCBS noted that they were concerned about the length of time that the profession was taking to move the basis for valuing debt assets to an expected loss model.

The FRC supports the recommendations of the PCBS.  However they raised concerns over the recommendation to amend the Companies Act 2006 to prioritise financial safety over shareholder interest in the case of banks and comment that this may not be the correct solution.  The FRC comment:

The UK and Europe will be at a competitive disadvantage if its regulatory arrangements are too heavily swayed toward safety at the expense of capital attraction.

The FRC also note:

An amendment to the Companies Act to remove shareholder primacy could have a profound bearing on investors’ willingness to commit capital and might set precedents for other sectors.  It should only be undertaken after detailed and rigorous consultation so that we can assess and understand the impact this might have on the operation of the UK equity markets. It should be remembered that the concept of enlightened shareholder value which is enshrined in the Act was introduced on the basis of a consensus reached after wide public debate. Any changes to the Act should be equally well thought through.   

In relation to the recommended separate set of externally audited regulatory accounts, the FRC commented that it expects to be involved together with the PRA and FCA in the setting and implementing of standards and guidance.  The FRC also note that it has recently revised UK and Ireland auditing standards for auditors of companies who are required to comply with the UK Corporate Governance Code (including banks) which partially addresses the recommendation regarding disclosure of risk in the auditors’ report. 

The UK government has endorsed the principal findings and has stated that it intends to implement the Parliamentary Commission's main recommendations to address the failings that the Parliamentary Commission identified on individual accountability, corporate governance, competition and long-term financial stability.

Click for:

Full report (link to UK Parliament website)

FRC press release (link to FRC website)

Government response (link to government response)

Public Conference of the EFRAG technical group (EFRAG TEG)

19 Jun, 2013

On June 26, 2013, the Technical Expert Group (TEG) of the European Financial Reporting Advisory Group, (EFRAG) will hold a public conference call.

An agenda for the meeting was not announced.  Interested listeners have the ability to dial into the Conference call.  For details, see the EFRAG website.

EFRAG consideration of comments received

19 Jun, 2013

The European Financial Reporting Advisory Group (EFRAG) has published feedback statements summarising the main comments received from constituents invited to respond to their draft comment letters in relation to the International Accounting Standards Board (IASB) draft ED/2012/3, ED/2012/6 and ED/2012/07.

The feedback statements provide an analysis of the EFRAG tentative position expressed in the draft comment letters, describe the comments received from constituents and then highlight how these comments were considered by the EFRAG Technical Group (EFRAG TEG) in reaching their final position on the IASB EDs. 

ED/2012/3 Equity Method: Share of Other Net Asset Changes (Proposed Amendments to IAS 28)

This Exposure Draft proposed limited scope amendments to IAS 28 to include guidance on how an investor accounts for its share of the changes in net assets of an associate or joint venture that are not recognised in profit or loss or other comprehensive income of the investee ('other net asset changes'). 

ED/2012/6 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Proposed Amendments to IFRS 10 and IAS 28)

This Exposure Draft proposed to clarify when unrealised profits and losses on transactions between an investor and an associate should be fully recognised: requiring full recognition in relation to transactions involving businesses, but requiring partial elimination in the case of asset sales. 

ED/2012/07 Acquisition of an Interest in a Joint Operation (Proposed amendment to IFRS 11)

This Exposure Draft proposed to amend IFRS 11 'Joint Arrangements' to clarify that a joint operator accounts for the acquisition of an interest in a joint operation which is a business by applying IFRS 3 'Business Combinations' and other relevant standards.

Click for:

EFRAG press release (link to EFRAG website)

Telcommunications sector survey on revenue recognition

18 Jun, 2013

A survey of telecommunications operators has shown a wide variation of readiness for the forthcoming standard on revenue, and revealed a number of concerns in relation to its adoption.

The survey, undertaken by Deloitte's Technology, Media and Telecommunications group, gathered the thoughts of over 40 operators in relation to key questions on the understanding of the proposals in the IASB-FASB joint project on revenue recognition, and their concerns from an operational, commercial and accounting methodology perspective.

Key findings from the survey include:

  • The most significant concerns expressed by respondents were meeting the data and information requirements that the proposed accounting will require, closely followed by the impact that this will have on IT systems
  • Concerns also exist over the level of awareness of the proposals amongst the analyst and investor community
  • The implementation of a portfolio approach to revenue recognition is desired but is likely to be very challenging
  • There is a wide variation of readiness and work undertaken to date amongst operators.

Click to access the full survey.

EFRAG field-test results on proposals to IFRS 9

17 Jun, 2013

The European Financial Reporting Group (EFRAG) has issued a report containing the results of the field test conducted by the EFRAG and National Standard Setters (NSS) ANC, ASCG, FRC and the OIC, on how the new requirements in IFRS 9, as amended by Exposure Draft (ED) ‘Classification and Measurement: Limited Amendments to IFRS 9’, would affect the current classification and measurement of financial assets.

The focus of the field test was to (1) identify when the application of the new classification and measurement requirements in IFRS 9 would lead to changes in the current measurement of financial assets under IAS 39 and (2) gather facts and objective data from participants rather than views and opinions.

In general, the results of the field test indicated that:

More financial assets would be measured at FV-PL under IFRS 9 because they fail the contractual cash flow characteristics assessment.

Bifurcation of financial assets is currently used only to a limited extent.

Investment strategies and/or the level at which the business model test is performed could change when implementing IFRS 9 to achieve a particular accounting measurement.

The field-test results will be used as input to the European Commission’s endorsement process. Additionally, the EFRAG and NSS will use the feedback received to develop their views on the impacts of the proposals.

More information on the results of the field test are available on the EFRAG website.

 

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.