EFRAG issues final endorsement advice and effects study report on IFRIC Interpretation 21 Levies

13 Sep, 2013

The European Financial Reporting Advisory Group (EFRAG) has submitted to the European Commission its endorsement advice letter and effects study report on IFRIC Interpretation 21 'Levies' (IFRIC 21).

IFRIC 21 provides guidance on when to recognise a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain. IFRIC 21 identifies the obligating event for the recognition of a liability as the activity that triggers the payment of the levy in accordance with the relevant legislation. The Interpretation clarifies that 'economic compulsion' and the going concern principle do not create or imply that an obligating event has occurred. 

EFRAG supports the adoption of IFRIC 21 and recommends its endorsement.  EFRAG has concluded that IFRIC 21 meets the technical requirements of the Regulation (EC) No 1606/2002 of the European Parliament and of the Council on the application of international accounting standards.     

EFRAG’s conclusion is supported by an Effects Study Report which considered the costs and benefits of implementing IFRIC 21. EFRAG’s assessment is that the benefits for preparers and users in implementing IFRIC 21 outweigh the costs.

The endorsement advice was passed by the EFRAG's Technical Experts Group (TEG) with two dissenting opinions.

Concurrently, EFRAG has updated its endorsement status report to reflect the final EFRAG endorsement advice on IFRIC 21. 

Click for (all links to EFRAG website):

FRC draft comment letter on Insurance Contracts

13 Sep, 2013

The Financial Reporting Council (FRC) has issued a draft comment letter on the IASB's revised Exposure Draft (ED) ED/2013/7 “Insurance Contracts”. The revised ED was published on 20 June 2013 and originally issued in July 2010.

The revised ED retains key features of the insurance contracts accounting model that was exposed by the IASB in 2010.  However, to address constituent’s concerns, a large number of modifications were made to the 2010 ED which the IASB sought feedback on in June 2013. 

The FRC appreciates the work that the IASB and their staff have carried out in addressing constituent’s concerns with the 2010 ED.  However the FRC are of the view that “certain aspects of the new proposals need further work”. 

  • The FRC are concerned that “the introduction of the requirement in the 2013 ED to measure and present insurance liabilities in the Other Comprehensive Income (OCI) will have implications for current business practices in the industry”.  They further comment that this will “create extensive accounting mismatches and likely lead to asset liability measurement mismatch being hardcoded into accounting for insurance contracts”.  This increased complexity, the FRC feel, will reduce understandability of the financial statements for users. 
  • Continuing the theme of accounting mismatch, the FRC comment that this will “incentivise insurers to hold assets that can be held at FV-OCI rather than those compulsorily required to be FV-PL”.  The FRC would like the requirements for classification and measurement of insurance contracts to be consistent with those applied for financial assets.
  • The FRC believe that the mirroring approach proposed in the ED will likely be “complicated to apply and understand in practice”. 
  • The FRC do not agree with the proposal in the ED to accrete interest on the contractual margin at locked-in rates.  Along with conceptual concerns with this proposal they comment that there will be a cost not least in “maintenance and tracking of cohorts for this purpose”.  The FRC would like the IASB to consider the costs and benefits of this proposal. 

Recognising the constituent’s concerns regarding implementation costs and transitioning systems and processes to comply with the new standard, the FRC recommend that there is “sufficient implementation time” after the final standard is published.  The FRC also recommend that early adoption should be permitted where companies feel that they are already ready. 

Please click for the draft comment letter on the FRC’s website.  Comments on the draft comment letter are requested by 10 October 2013.

Maystadt releases draft report with preliminary recommendations

13 Sep, 2013

On 5 September 2013, the special advisor to EU Commissioner Michel Barnier, Mr Philippe Maystadt, released a draft report setting out his preliminary recommendations for enhancing the EU’s role in promoting high quality accounting standards. Mr Maystadt consulted extensively with many European stakeholder groups before reaching his preliminary conclusions. These stakeholder groups now have until the end of the month to comment on the proposals.

Philippe Maystadt was appointed by EU Commissioner Barnier as a special advisor on 19 March 2013 to set out recommendations to “reinforce the EU's contribution to International Financial Reporting Standards (IFRS), and to improve the governance of the institutions developing these standards.” The key focus of his advisory role was to carry out a review of the governance of EU bodies in the field of financial reporting and accounting (the European Financial Reporting Advisory Group (EFRAG) and the Accounting Regulatory Committee (ARC)).

IAS Plus has learned from sources close to the process that Mr Maystadt’s draft report, which is not publicly available, contains a brief review of the status quo before submitting three options. Reportedly, the document shows a broad consensus amongst European constituents for a commitment towards globally accepted, high-quality accounting standards and for maintaining the current endorsement process as such, without opening it up to allow for changes to the pronouncements to be endorsed.

When investigating means to improve the current process though, Mr Maystadt proposes three options to consider:

  • Under the first option EFRAG would be transformed such that the public policy voice was embedded into the decision-making process already before recommendations are made to the Commission. EFRAG’s current Supervisory Board would be replaced with a Board comprised of representatives from EU institutions, the private sector, and national standard setters. Its role would be to approve comment letters to the IASB and cast opinions on whether to endorse a particular pronouncement. The current Technical Experts Group (TEG) would be transformed such that it would continue to work as a technical group, but its ultimate voting power would be transferred to the new Board.
  • Option 2 suggests making EFRAG a part of the European Securities and Market Authority (ESMA). The blueprint for this option would be the U.S. Securities and Exchange Commission (SEC), thus combining the endorsement and the enforcement activities in Europe.
  • The third option would be to set up a separate European agency to replace EFRAG.

In his draft report, Mr Maystadt recommends pursuing the first alternative, without indicating any timeline.

As far as the governance of the ARC is concerned, reportedly, the document contains a few observations where improvements may be made. The report does not go into much detail though, as the comitology process had come to an end under the Treaty of Lisbon.

We will inform our readers of any further developments that we become aware of.

ESMA agrees with EFRAG on rate regulation

13 Sep, 2013

The European Securities and Markets Authority (ESMA) has published its final comment letter on the IASB's exposure draft ED/2013/5 'Regulatory Deferral Accounts'. The comment letter makes clear that ESMA, like the European Financial Reporting Advisory Group (EFRAG), does not support the pursuance of this interim standard which they feel will “jeopardise the IASB's objective to provide users of financial statements with high quality financial information that is understandable, comparable, enforceable and globally accepted”

The IASBs Exposure Draft (ED) Regulatory Deferral Accounts is intended to allow entities that currently recognise regulatory assets and regulatory liabilities in accordance with their previous GAAP to continue to recognise the effects of rate regulation under IFRSs until the longer term rate-regulated activities project is completed.  The proposed interim standard is only applicable upon the initial adoption of IFRSs. 

ESMA does not agree with the interim standard because: 

  • It will create an interim standard which increases diversity in practice as deferral accounts “do not meet the definitions of assets and liabilities as set out in the IASB's Conceptual Framework.  ESMA comment that whether regulatory deferral accounts meet the definitions of assets and liabilities is one of the issues to be resolved in the comprehensive project of rate-regulated activities and until this project is finalised, the “IASB should not allow recognition of deferral accounts in IFRS financial statements”.
  • Interim standards IFRS 4 Insurance Contracts and IFRS 6 Exploration for and Evaluation of Mineral Resources have demonstrated that “an interim standard is not a guarantee for a quick solution”.
  • It will “seriously impair comparability among preparers depending on their timing of adoption to IFRS”. 
  • It “will not contribute to better understandability of financial information as it will allow entities to recognise, measure and impair deferral accounts in their financial statements according to principles, policies and basis of preparation that are defined according to local GAAP which may not be in compliance with the principles, policies and basis of preparation that are set out in IFRS”.  ESMA believes that this will “impair investor confidence in IFRS”.
  • There may be implications of applying the principles from the interim standard on other standards that are currently in place such as IFRS 3 Business Combinations and IAS 36 Impairment of Assets

Please click for access to the final comment letter on the ESMA website.

Agenda for IFRS Advisory Council meeting now available

13 Sep, 2013

The IFRS Advisory Council is meeting in London on 14-15 October 2013. The agenda for the meeting has been released, noting a broad range of topics to be discussed. In addition to the traditional updates from the IASB, IFRS Foundation Trustees and Monitoring Board, the meeting will consider topics such as the implementation and maintenance of accounting standards, a draft report from the Effects Analysis Consultative Group, the use of IFRS around the world, and building the IFRS network. Particular attention will also be given to the IASB's projects on leases, the conceptual framework and the post-implementation review of IFRS 3 'Business Combinations'.

The full agenda for the meeting is summarised below:

Monday, 14 October 2013 (09:15-17:30)

  • Welcome and Chairman's preview
  • Overview of the last four months
    • IASB activities
    • Trustee activities - including the European Commission's draft Regulation on funding of the IFRS Foundation
    • Monitoring Board update
  • Update on IFRS application in Japan
  • Role and composition of the IFRS Advisory Council
  • Implementation and maintenance activities
    • What post-publication implementation support should the IASB provide?
    • Striking the right balance between being responsive to implementation needs and imposing changes in IFRSs
    • Maintaining convergence of jointly developed standards
    • Mutual Statement of Cooperation with IOSCO
  • Conceptual framework - purpose, other strategic issues and interaction between IASB and International Public Sector Accounting Standards Board (IPSASB)

Tuesday, 15 October 2013 (08:00-16:00)

  • Closed sessions - meetings with investor and emerging markets representatives
  • Building the IFRS network - interaction of International Valuation Standards and IFRS
  • Effects analysis - draft report of the Effects Analysis Consultative Group
  • Post-implementation review - IFRS 3 Business Combinations
  • Use of IFRSs around the world
  • Leases - finalising the standard
  • Sum up discussions

Agenda papers from this meeting are not yet available but will be made available on the IASB's website in due course.

Two new Conceptual Framework bulletins

12 Sep, 2013

The European Financial Reporting Advisory Group (EFRAG) and the National Standard Setters of France, Germany, Italy and the United Kingdom have published two more issues of their joint publication series on the IASB's Conceptual Framework project. The new publications are dedicated to accountability and the role of financial reporting as well as the asset/liability approach.

The Conceptual Framework Bulletins are intended to promote discussion and to inform about European views on the IASB's Conceptual Framework project. They are also designed to elicit feedback on these views therefore come with specific questions at the end of each issue.

Please click for access to the two new bulletins:

Constituents wishing to comment on the views in the bulletins are invited to do so by 15 November 2013.

We have also created an archive of all bulletins available. We are grateful to EFRAG and the National Standard Setters for giving us permission to host them on IAS Plus.

GC100 and Investor Group issues guidance on Directors’ Remuneration

12 Sep, 2013

The GC100 and Investor Group has today published guidance (the ‘guidance’) to assist directors of listed companies to apply the directors’ remuneration report requirements set out in The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the “regulations”).

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. 

The guidance entitled ‘Directors’ Remuneration Reporting Guidance’ considers itself as “best practice” and has been developed after consultation with a number of interested parties.  The GC100 and Investor Group acknowledge that “the guidance is not intended to be exhaustive or definitive” and would expect companies not to adopt a “boilerplate” approach but instead be innovative in reporting to suit their specific company requirements. 

The guidance, which is in the same order as the regulations, is structured to include: 

  • Each requirement from the regulations, by paragraph, which are then supplemented with guidance;
  • Mandatory disclosures which a company would need to include to ensure compliance with regulations; and
  • Other disclosures which, although not required by the regulations, would promote “effective engagement between investors and companies”. 

The GC100 and Investor Group notes that flexibility needs to be provided for in drafting the remuneration policy.  They highlight that “once the framework of remuneration has been approved by the shareholders; each year the remuneration committee will need flexibility to determine pay, short-term incentives and the terms of long-term incentives”.     

Note.  The guidance was updated on 14 October 2013 to reflect minor amendments including a clarification when the new requirements are applicable from. 

*Update 18 August 2016 - a revised version of the guidance was issued.  The revised guidance largely follows the previous version, but also includes a number of detailed changes which will need to be considered by companies in preparing their next policy and report including; the disclosure of the maximum level of each component of remuneration for each executive director and that the maximum salary that might be paid must be explained in monetary terms or any other way appropriate to the company (e.g. percentage of salary); the exercise of discretion and judgement in determining directors' pay; how the disclosure of commercially sensitive performance measures or targets should be approached; and the linkage between the directors' remuneration report and strategic report*

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ASAF meeting agenda released

12 Sep, 2013

The International Accounting Standards Board (IASB) has released the tentative agenda for the meeting of the Accounting Standards Advisory Forum (ASAF), which is to be held at the IASB's offices in London on 25-26 September 2013. The meeting will discuss a number of the IASB's projects, including disclosure, insurance contracts, financial instruments, leases and the conceptual framework.

The agenda for the meeting (as at 9 September 2013) is summarised below:

Wednesday, 25 September 2013 (10:10-16:45)

  • Disclosure
    • feedback on possible short-term narrow scope amendments
    • IASB plans for researching matters related to materiality and replacing IAS 1, IAS 7 and IAS 8
  • Insurance contracts

Thursday, 26 September 2013 (09:00-16:45)

  • Leases
  • Financial instruments - macro hedge accounting
  • Financial instruments - impairment
  • Conceptual framework
  • Forward planning, other business and summary

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

Agenda for upcoming WSS meeting

12 Sep, 2013

The International Accounting Standards Board (IASB) has released the agenda for the World Standard-Setters (WSS) meeting, which is being hosted by the IASB in London on 23-24 September 2013. The first day of the meeting will be largely devoted to the conceptual framework, whereas the second day will discuss a broad array of topics, including how the IASB should work with national standard-setters, numerous sessions on the IASB's various projects, and jurisdiction and IFRS Advisory Council updates.

The agenda for the meeting is summarised below:

Monday, 23 September 2013 (09:00-17:00)

  • Welcome and IASB update
  • Conceptual Framework project
    • Asset and liability definitions and recognition
    • Measurement and other comprehensive income

Tuesday, 24 September 2013 (08:00-16:15)

  • Optional sessions
    • Revenue recognition (education session)
    • Hedging (education session)
    • IFRS adoption and translation issues
    • Post-implementation review - IFRS 3 Business Combinations
  • Working with national standard-setters
  • Smaller group sessions
    • IFRS for SMEs
    • Insurance contracts
    • Leases
    • Narrow scope amendments and interpretations
    • Disclosure
  • Smaller group discussions
    • Financial instruments
    • Rate regulated activities
    • Leases
    • Conceptual framework - liability equity split
    • Agriculture
  • IFRS Advisory Council update
  • Jurisdiction updates

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

ESMA comment on IASB’s Exposure Draft on leases

12 Sep, 2013

The European Securities and Markets Authority (ESMA) has published their response to the IASB’s exposure draft ED/2013/6 Leases (“the ED”). ESMA has welcomed the IASB’s efforts to improve the accounting for both lessees and lessors commenting that “the model and principles proposed under the ED will result in a more faithful representation of the financial position of entities that enter into lease contracts” compared to the current standard, IAS 17 Leases.

For lessees, the Exposure Draft ED/2013/6 Leases proposes the recognition of a liability and a right-of-use asset for all leases with a profit or loss impact dependent on the classification of a lease. The lessor model in the ED is similar to current lease accounting with some nuances for the recognition of revenue and discounting of the residual asset. The proposals are only applicable for leases with a lease term of more than 12 months.  

ESMA agrees that IAS 17 Leases, which does not require a lessee to recognise assets and liabilities arising from operating leases, “fails to provide complete and useful information regarding the financial position of lessees”.  They also agree with the improvements in lessor accounting proposed by the IASB. 

ESMA comment: 

By requiring the recognition of assets and liabilities arising from all lease contracts except for short term leases, we believe that financial statements will serve as a better basis for determining financial ratios, thus contributing to increased transparency for users of financial statements 

Commenting on the proposed dual model, ESMA feel that this “better reflects the significant differences in the economics of leases depending on the substance of the contract” and is an improvement on the 2010 ED

However, there are a number of areas where ESMA feels that the IASB should make improvements to the ED.  Their key concerns are: 

  • Additional guidance should be provided to “assist preparers in assessing whether they have the right to control the use of an identified asset” and “for determining when protective rights are deemed to be substantive and prevent a lessee from controlling the use of the asset”.  ESMA feel that this will “promote consistent application and limit the potential issues of enforceability that may arise”.
  • Additional clarification and guidance should be provided on “how to determine whether variable lease payments are “in-substance fixed payments”” as ESMA are of the view that the guidance in the ED may not cover all types of variable lease payments that might qualify as “in-substance fixed payments” and lack of guidance may lead to inconsistent application.
  • Clarification should be provided as to the meaning of the concepts of “substantially all”, “major part” and “insignificant” used in the ED.
  • That the application of paragraph 23(c) of the ED may “result in accounting for a contract as a lease when the lease component in the contract is significant”.
  • That “structuring opportunities and issues of enforceability may occur in relation to leases of non-property assets”.  ESMA are concerned that companies may structure contracts to benefit from the different presentation requirements between Type A and Type B leases.

The full comment letter, including detailed responses can be found here (link to ESMA website).

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