One of the agenda items is to discuss the feedback received on EFRAG's draft comment letter on the IASB's Exposure Draft ED/2013/6 'Leases' and to discuss EFRAG's final comment letter response. 

The other agenda item is to approve a letter to the IASB on the subject of long-term investment.

Interested listeners have the ability to dial into the conference call.  Please click links for details of the registration and the full agenda.

The term ‘stewardship’, the International Accounting Standards Board told us, does not translate well in languages across the world. So it dropped it from the current version of its conceptual framework. Then the debate started up and it is showing little sign of ceasing. Over and over again at investor forums and similar events it is stewardship to which investors and analysts return.

But there may be an opportunity to reinstate it. The latest bulletin from the main European standard setters, including the UK Financial Reporting Council and EFRAG, is timely and is published as the IASB is consulting on the conceptual framework and is asking in its discussion paper issued in July whether stewardship should be reinstated. The bulletin points out that there is ‘considerable controversy about whether accountability, or stewardship, should also be explicitly included’.  The IASB points out that in the original, pre-2010, framework the word stewardship was not used in describing the objective of general purpose financial reporting, but although the chapter concerned does not use the phrase stewardship, ‘it was not the intention of the IASB to remove the concept of stewardship from the objectives of financial reporting’.

Stewardship is all about directors’ duties and how they discharge them. Current investors are interested in cash, the management of resources and so on. For investors looking to the future it could be seen as less important. But the long-term relies on the current stewards not wrecking and wasting current resources. So ultimately it is equally important for future and current investors.

So the framework needs to stress both ideas, that of holding management to account and producing ‘decision-useful’ information. ‘There is’, as the bulletin points out, ‘a very significant overlap between accountability and decision-usefulness’. That hasn’t stopped some arguing that an accountability objective and decision-usefulness are incompatible.

But if an overlap exists should it be recognised explicitly in the conceptual framework? The final conclusion in the bulletin is a resounding ‘Yes’. ‘EFRAG and the FRC believe the provision of information on accountability/stewardship is a primary objective of financial reporting’, it says, ‘not merely a part of or ancillary to another objective, and should be reinstated as such’.

Click for:

• UK Accounting Plus project page on the IASB's Conceptual Framework project
• Conceptual Framework Bulletins
• Our news story on the IASB discussion paper on the Conceptual Framework.

CRD IV (consisting of the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD)) is the EU package of rules and regulations which implements Basel III, the international regulatory framework for banks. The package is binding on all EU member states. It aims to address the problems that caused the financial crisis by increasing the level and quality of capital held by banks, enhancing risk coverage, expanding disclosure requirements and reducing procyclicality. CRD IV provides a basis for EU liquidity standards and introduces leverage disclosure requirements. 

CRD IV was agreed by the European Council on 20 June 2013 and the legislation was published in the Official Journal on 27 June 2013.  CRD IV is intended to apply from 1 January 2014.  The UK is required to transpose CRD IV into national law. 

CRD IV (Article 89) requires, among other things, all “credit institutions” and “investment firms” to report on a country-by-country basis from 1 July 2014.  This will include a requirement to disclose annually: 

• Their name;
• Nature of activities and geographic location;
• Number of employees; and
• Turnover on a consolidated basis by country where they have an establishment. 

Certain “important institutions” will be required to disclose additional information such as their pre-tax profit or loss, their taxes paid and any public subsidies received by 1 July 2014.  Should this disclosure not be deemed to be prejudicial all credit institutions and investment firms will have to disclose this information from 1 January 2015.  

The objective of the country-by-country reporting requirements is to restore trust in financial institutions by making their operations, profits and taxes paid more transparent to investors. 

The key areas addressed in the consultation; “Capital Requirements Directive 4: consultation on country-by-country reporting” are:

• Institutions to which the country-by-country reporting requirements will apply to.  The consultation proposes that the requirements are applicable to all credit institutions and investment firms “with a presence in the UK, be it an entity headquartered in the UK, or UK subsidiaries or branches of institutions established in a third country”.  The consultation proposes that the “important institutions” will be those “identified by the Financial Stability Board to be globally systematically important banks”.
• Basis of consolidation.  The consultation proposes that “if a top parent company in the EU is itself publishing the information on a consolidated basis for its UK institutions, those institutions should not be required to make their own duplicate disclosures but should explain where the information published by the parent company can be found”.  However if the parent is not disclosing the relevant information, the UK institution will be required to do so”  The consultation also asks whether the term “consolidated basis” should be taken to have the same meaning as that in International Financial Reporting Standards (IFRSs) and disclosure made on the same basis.
• The proposed definition of establishment.
• Reporting formats and whether the government should provide a template for disclosure.  The consultation proposes that disclosure is made in “an annex to companies’ annual financial statements, or where applicable, companies’ consolidated financial statements” and where this is not possible “on the institutions website”.
• Auditing requirements and the concept of materiality. 

HM Treasury has stated that the responses to the consultation will “inform the legislation which is intended to apply from 1 January 2014”. 

Click for:

• Press release (link to HM Treasury website).
• Capital Requirements Directive 4: consultation on country-by-country reporting (link to HM Treasury website).
• Capital Requirements Regulation (link to European Union website)
• Capital Requirements Directive (link to European Union website).

Highlights were the publication of:

• final endorsement advice and effects study on IFRIC Interpretation 21 Levies
• draft comment letter on IASB ED Insurance Contracts
• final comment letter on IASB ED Regulatory Deferral Accounts

Additional topics discussed in the newsletter are:

• IASB Discussion Paper on the Conceptual Framework
• Rate-regulation in Europe
• Macro hedging
• Accounting Standards Advisory Forum (ASAF)
• EFRAG/OIC/ICAC/DASB Proactive Project Separate Financial Statements prepared under IFRS
  
• Post-implementation review of IFRS 3 Business Combinations
• IAS 28 Accounting for Associates and Joint Ventures
• Revenue project
• EFRAG proactive project: Capital Providers’ use of financial statements — Consequences for standard setting
• Annual Improvements projects 2012 and 2013
• IASB ED on regulatory deferral accounts
• EFRAG Draft Comment Paper Emission Trading Schemes
• IASB Exposure Draft on leases

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

Mr Hoogervorst opened his speech reflecting on the early years of the national standard setter meetings; the goal of that era being to simply to reduce the differences in their respective sets of accounting standards. Now, more than 20 years later, the goal has evolved to achieving a single set of high quality, global accounting standards. He emphasised that "a single set of standards does not mean a single accounting standard-setter. IFRS has long been a joint effort by the worldwide standard-setting community".

After a brief discussion of the recently-released jurisdictional profiles, Mr Hoogervorst described cooperative efforts between the International Organization of Securities Commissions (IOSCO) and IFRS Foundation, noting the importance of consistency in the implementation of IFRS globally. He also mentioned the creation of the Accounting Standards Advisory Forum (ASAF) and highlighted its benefits: (1) the ability to give multilateral feedback, (2) allowing members to engage with each other and (3) participants having a better understanding of competing views. The increased quality of feedback has a positive impact on IASB deliberations as well.

Mr Hoogervorst then spoke about the 'paradox of standard-setting', which is making improvements to transparency and protecting investors while considering legitimate technical or practical concerns of constituents, and standing up to lobbyists with vested interests.

Please click for access to the full text of the speech on the IASB website.

The ACCA report, ‘Understanding investors: the road to real-time reporting’, explains that, for internal management teams, “real-time” data analysis is “becoming a reality” but notes that, for an investor, they are still only able to access “periodic” corporate reporting information in line with the defined reporting cycles of companies. The report comments that this periodic information is not enough to satisfy the needs of the investors who “want companies to provide greater transparency and a faster flow of information”. The report identifies that companies are already coming under pressure from regulators and investors to speed up the reporting process.

Results of the survey of 300 investors and “leading figures from the investment community” highlight that there is a demand for companies to disseminate information “in a continuous manner, rather than at set time intervals, as at present”. The report comments:

A move towards real-time reporting would increase investor returns and enhance the level of confidence in corporate reporting. Companies that provide information on an “as needed” basis would be perceived as having better corporate governance and would attract investment more easily.

The key findings of the survey were:

However, against these benefits to investors, the report also notes a number of investor concerns with “real-time” reporting. Two-thirds of investors believed that real-time reporting “would create further financial instability and lead to an increased tendency to short-termism in financial markets” and the majority of those surveyed believed that it would “lead to an increase in market volatility”.

Additional concerns are raised in the report that “real-time” information may not be as reliable and accurate as it will be “raw” and will not have gone through “lengthy review” and other assurance processes. The report comments that as information is required at a faster rate it will impact upon the assurance processes that can be carried out which, by their nature, are provided to instil confidence that the information being reported is [materially] accurate and in accordance with accounting standards. Results suggest that investors require different levels of assurance depending upon the type of information commenting that “investors are more likely to express a strong preference for assurance over speed when it comes to general financial information over liquidity” but faster information “when it comes to emerging opportunities and, to a lesser extent, profit warnings”.

The ACCA comment that “a trend to faster closing will be difficult to resist” but there are a number of challenges that must be met, not least the debate of speed versus accuracy, before it becomes a reality and the gap between internal operational reporting and external investor reporting shortens.

Click for the press release and ACCA survey ‘Understanding investors: the road to real-time reporting’ (links to ACCA website).

The two earlier report in the series, Understanding investors: direction for corporate reporting and Understanding investors: the changing landscape were published in June 2013. Not part of the series but also investor focused is the ACCA survey What do investors expect from non-financial reporting? published in July 2013.

Click through for direct access to the notes:

Wednesday, 18 September 2013

• Financial instruments — Limited reconsideration of IFRS 9 (classification and measurement)(IASB-FASB)
  • Definition of principal
  • De minimis
  • Components of interest
  • Time value of money
  • Contingent features
  • Contingent features resulting in cash flows that are not solely principal and interest
  • Nature of the contingent trigger event
  • Prepayment features resulting in cash flows that are not solely principal and interest

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