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 comment: 

• That their field testing with The European Financial Reporting Advisory Group (EFRAG) and the International Accounting Standards Board (IASB) has indicated that “the ED’s insurance accounting model is difficult to implement for preparers and the results for life insurance business, in particular, are complex to understand”.  The FRC highlights that this “complexity” arises from the mandatory use of OCI, the “mirroring approach”, “whether, and to what extent, the CSM should be unlocked” and the interest accretion methodology in the ED.  They further comment that “we do not believe that that a solution for accounting for insurance contracts can be finalised before these issues are addressed”, noting that the current proposals are creating “new and additional complexity”.
• That the IASB should seek “to narrow the range of accounting practice but recognising that a one size fits all approach is not likely to prove timely or pragmatic”.  The FRC comment that a narrower range of options of accounting for insurance contracts “will constitute a significant step forward in terms of bringing consistency to the reporting of insurance contracts under IFRS”.
• That the standard on insurance contracts should focus “on reflecting the business model and the risks in that model in both the statements of financial position and performance”.
• They 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 and reporting by the insurance industry”.  The FRC further comment that this will “create extensive accounting mismatches where economically matched assets are classified differently” and “will lead to an 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 only 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”. 
• That “the ED does not consider presentational and disclosure issues of relevance to the long term and regulated nature of much insurance businesses”.  The FRC recommend “that reconciliation between the accounting capital and the capital required under the relevant regulatory regime should be included as a separate disclosure requirement”.
• 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.  

If the IASB does not intend to issue further EDs on insurance, the FRC comment that “it places a review draft on its website for a time period to allow implementation issues to be ironed out prior to the finalisation of the standard”.  The FRC also recommends “more field testing” once the proposals are finalised and the setting up of an “Expert Advisory Group” that can help with implementation issues. 

Please click for the final comment letter, including full responses to the questions raised in the ED, on the FRC’s website

The discussion paper focused on enhancing disclosure in financial reporting.  The paper reiterated the 'disclosure problem', which it described in terms of both quantity and quality issues, which result in disclosures that are "more about compliance than communication".  The paper viewed a disclosure framework as a coherent framework that draws together all the various strands of financial reporting that relate to disclosures, within which standard setters and other regulators can set disclosure requirements and preparers and auditors can apply them.       

Based upon the feedback received, to improve the quality of disclosures in annual reports, the FRC recommends that:

Disclosures should focus on communication of relevant information to investors.

Core information that is relevant for investors is separated from supplementary information that only meets the needs of a wider stakeholder group.

Placement of information outside the annual report may be more appropriate for supplementary information, where the law permits this.

Immaterial information should be excluded.

Boilerplate language should be avoided with a focus on entity specific disclosures.

Related information is linked to tell the story of a company.

As well as the above ‘calls to action’ the FRC has also issued some recommendations to the International Accounting standards Board (IASB) for it to consider during their disclosure framework project, some of which were outlined in the “Thinking about disclosures in a broader context: A road map for a disclosure framework” discussion paper.  The IASB chairman, Hans Hoogervorst, has recognised the need to “break the boilerplate” and in June 2013, announced a ten point plan to deliver tangible improvements to disclosures in financial reporting. 

In addition to those points raised by Hans Hoogervorst, the FRC recommends that the IASB:

Develops a disclosure framework that considers disclosures in the financial report as a whole.

Defines the boundaries of financial reporting.

Develops placement criteria.

Reduces and defines the “magnitude” terms used in IFRSs, such as significant, key and critical.

Click for the press release on the FRC website.

We agree with the principal reasoning provided by the IASB that bearer plants, once mature, no longer undergo significant biological transformation and therefore are similar to, and should be subject to, the same measurement requirements as manufacturing. However, we believe this same approach may also be equally applied to livestock, and note this would eliminate volatility in reported income arising from changes in fair value when the holder of the assets has no intention to change the use of its assets other than by sale for ancillary use at the end of its useful life:

We believe that the IASB should further consider the scope of this amendment and specifically that further consideration be given to whether the proposed amendments be extended to livestock that is held for production rather than for its own carcass, for example sheep for wool, chicken and ducks for eggs and dairy cattle for milk. The existence of an active market for bearer livestock that provides a reliable fair value does not alter the nature of these types of biological asset and hence we see no reason in principle why the rationale underlying the proposed amendment to the measurement of bearer plants should not also apply to bearer livestock. We do not see any immediately compelling reason to distinguish between these two types of biological assets.

Notwithstanding our recommendations around bearer livestock, the comment letter notes that we would not object to the IASB finalising the proposed amendment on bearer plants and then undertaking a second phase of the project to consider bearer livestock.

Other observations made in the comment letter include:

• We agree that bearer plants should be measured at accumulated cost before being placed in production, in the same way as self-constructed items of machinery
• We do not concur with the IASB’s comment that in most cases the impact of accounting separately for the roots of perennial plants would not be material and request additional guidance on applying the concepts in IAS 16 to these plants
• We recommend additional guidance be included in any finalised amendment as to when bearer plants are considered to be 'mature' and hence that cost capitalisation ceases, and for the treatment of costs associated with a plant's growth stage through to maturity
• We do not see bearer plants as being sufficiently different in nature to other classes of property, plant and equipment to warrant incremental disclosures, and consider possible additional disclosures identified in the exposure draft as non-financial in nature and not required in general purpose financial statements, e.g. disclosures about productivity, age profiles, physical quantities.
• We agree with the proposed transitional provisions and first-time adoption considerations, but note a number of consequential and other matters that should be considered in finalising the amendments, including around classification, reclassification and impairment.

Click for access to the full comment letter.

The IASB Exposure Draft (ED) proposes 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 would bring bearer plants (e.g. fruit trees and grape vines) 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.   

Bearer plants 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.  The IASB proposes that before bearer plants are placed into production (i.e. 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.  

EFRAG “supports the use of the accumulated cost measurement model for immature plants”.  They note that “the growing phase of bearer plants differs” and recommend, “as a practical expedient, to define the maturity date as the date of the first harvest of commercial value”.  The proposed transitional provisions and deemed cost exemption in IFRS 1 First-time Adoption of International Financial Reporting Standards are also supported.    

However, EFRAG recommends that the IASB should consider “broadening the scope of the amendments” in order to include other biological assets rather than just bearer plants.  EFRAG comment: 

Business models for bearer biological assets are economically similar (regardless of whether they use bearer plants or other biological assets) in that the bearer assets do not undergo further significant biological transformation and that the entity only sells the produce.  Introducing a different accounting treatment for bearer plants reduces comparability of financial information. 

EFRAG highlight that a broader scope would “improve the quality of financial reporting” and feel that the scope “should rely on the predominant use of the biological assets as this would allow entities to better reflect the economic substance of their activities”. 

EFRAG does not consider any additional guidance is necessary to apply the accounting models of IAS 16 to bearer plants although EFRAG would like the IASB to “verify” that “the accounting models of IAS 16 can be applied to bearer plants”.  EFRAG also comment that that “no additional fair value disclosures should be required for bearer plants” and there should be no need for additional non-financial disclosure in the financial statements. 

The comments of EFRAG are consistent with those of the Financial Reporting Council (FRC) who feel that the amendments are “too narrow” and should include other “biological assets which could also be more usefully valued in accordance with IAS 16” such as livestock. 

Click for the press release and final comment letter on the EFRAG website.

Please click for the following documents on the IASB's website:

• Video recording and full text of Mr Prada's speech The bumpy path towards global accounting standards
• Video recording of the panel discussion The Future of Global Financial Reporting

Additional information on IAS Plus:

• Short summary of Mr Prada's speech
• Observer notes from the IFRS Foundation Trustees meeting

Points made in the comment letter include:

• We are generally supportive of the Boards’ approach to unlocking of the Contractual Service Margin (CSM), the presentational split of interest expense from insurance contracts between profit or loss and other comprehensive income (the “OCI solution”) and the new transition provisions. However, we believe that the proposals around the unlocking of the Contractual Service Margin (CSM) requires substantial improvements to allow for the faithful representation of the impact that insurance and participating contracts will have on insurers’ performance. We also believe an entity should be able to make an irrevocable election at initial recognition of insurance contracts to recognise the change in carrying value associated with changes in discount rates to profit or loss
• Although we are supportive of the objective of reducing accounting mismatches, we are not supportive of the proposed “mirroring approach” for participating contracts due to its complexity, cost and departure from the pricing and product design that insurers apply and that should be represented faithfully in their financial statements
• We believe that the proposed measure of insurance revenue is not the most relevant amount for presenting long-coverage insurance contracts’ contribution to an insurer’s performance because it is not consistent with the measurement of insurance portfolios, we are not aware it is the metric sought by investors and it is not used by key management personnel for assessing performance and allocating resources of an insurer
• We recommend the Board consider the timing of any new IFRS for insurance contracts noting the delays in finalising IFRS 9 Financial Instruments as different effective dates for these standards would unduly penalise those entities for which the parallel adoption of both standards is the only reasonable transition strategy.

We also express a note of caution regarding the practical implications surrounding adoption of any new standard on insurance:

Given the diverse approaches currently used in measuring insurance contracts and the complexity of the contracts it addresses, the new IFRS for insurance will present a challenge for preparers, auditors and regulators and we expect there will be a high volume of interpretation issues in advance of the effective date. We would urge the IASB to address interpretations issues quickly and in advance of the effective date to maximise consistent application. The IASB may wish to consider continuing its outreach efforts with preparers and other stakeholders beyond the finalisation of the standard up to the effective date so that issues are captured quickly and addressed by the IFRS Interpretations Committee expeditiously.

Click for access to the full comment letter.

The main result of the consultation was the identification of two business models: the 'liability-driven' business model and the 'asset-driven' business model.

According to EFRAG, the liability-driven business model is especially found with insurers, pension funds and others entities with long-term commitments. The model is characterised by entering into a long-term liability first and then having to find appropriate assets for generating returns to match it. The asset-driven business model EFRAG found with long-term development banks and other entities with public-interest objectives as these are usually granted easy and cheap access to stable financing sources to meet their public policy objectives.

EFRAG has not yet formed a view on whether the asset-driven business model, which is not necessarily seen as as long-term as the liability-driven model, should have effects on the accounting requirements for financial and other assets and financing liabilities. However, EFRAG believes that the liability-driven model is not properly reflected in IFRS 9 Financial Instruments (and other standards).

One of the measures EFRAG is suggesting in the letter concerns extending the use of other comprehensive income (OCI) to a broader set of asset classes by introducing an option of reporting of short-term changes that are not a relevant primary measure of performance outside profit or loss. EFRAG acknowledges, however, that a decision to extend the use of OCI would require the development of an appropriate impairment model.

Please click for access to the full letter on the EFRAG website. EFRAG has also outlined these findings in its letter of comment to the European Commission concerning the Green Paper Long-term financing of the European economy.

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.

Although EFRAG does not deny that fair value accounting may contribute to a limited degree to short-termism in investor behaviour, it comments that it "does not make any sense to ban fair value as such". EFRAG states that when selecting the measurement basis for a particular item, the IASB should consider carefully what information that measurement will produce and then propose the most suitable measurement basis. According to EFRAG it is then also the constituents' responsibility to "ensure that fair value measurements are mandated only when they support high quality financial reporting".

EFRAG also looks at the relationship between prudence and the use of fair value and concludes:

Exercising prudence does not, in itself, rule out measurement at fair value (or any other form of current value). If estimates provided have the appropriate level of reliability, and the use of current values provides the best representation of how assets and liabilities contribute to the entity's financial position and performance, then the use of fair value should be required.

A large part of the comment letter is also dedicated to EFRAG's consultation on a "long-term investment" business model and the recommendations made to the IASB as a result of the consultation.

Please click for access to the comment letter on the EFRAG website. Other reactions to the Green Paper (e.g. by the IASB, FEE, Deloitte) had taken a similar view and concluded that fair value accounting principles have of themselves not led to short-termism in investment behaviour.

The roundtable discussions focussed on four out of the seven questions re-exposed by the revised ED, namely:

• the presentation of changes in the discount rates of insurance liability in OCI (the ‘OCI solution’);
• the ‘mirroring approach’ proposed for participating contracts;
• the role of the risk adjustment in the unlocking of the contractual service margin (CSM); and
• the revised revenue presentation proposals. 

Several arguments were raised to suggest that mandatory application of the ‘OCI solution’ would result in accounting mismatches for many UK preparers and that a non-mandatory application would be better. A few different views were discussed around the conditions necessary to justify reflecting the changes in insurance liability discount rates through profit or loss. 

In discussing participating contracts it was noted that choosing not to reflect the changes in discount rates in OCI by itself would not address the accounting mismatches between measurement of insurance contracts and underlying items. Concerns were raised over the ED requirement to treat differently, for measurement purposes, the cash flows relating to options and guarantees embedded in the participating contracts.  Additionally arguments were put forward to include in the recalibration of the CSM the return on the underlying items attributable to the equity holders but not yet declared for distribution.  This was suggested in order to better reflect the economic nature of participating contracts and the insurer’s obligation to provide a participation in the long term return to both current and future policyholders.  

In discussing the role of the risk adjustment in the recalibration of the CSM, there was no clear consensus on whether the period’s changes in the risk adjustment should be reflected in the CSM.  Some queried the role of the risk adjustment compared to the role of the CSM and whether the two should be released on the same basis or whether different patterns of release are justified. 

Finally the discussion around the revenue presentation resulted in some alternative suggestions to the one proposed in the ED, including going back to the summarised margin approach in profit or loss with further disclosure presented in the notes. 

The roundtable event was held to generate discussion in advance of the 25 October 2013 deadline for submission of comments to the IASB on the proposals in the ED.

Click for (all links to FRC website):

• Full summary of the roundtable discussion.
• Slide pack from the roundtable.

The report, which was first presented yesterday at the Audit Committee members annual seminar 2013 (link to FRC website), is centered around the three areas of Audit Committee reporting under the revised (2012) UK Corporate Governance Code: 

• Addressing significant financial statement reporting issues;
• Assessing external audit effectiveness; and
• Appointing the auditor and safeguards on non-audit services. 

The report highlights that participants in the project considered that Audit Committee reporting of significant financial statement issues “has the most scope for improvement”.  The Financial Report Lab comments: 

Investors identify a sense of urgency for ACs to describe frankly the significant issues, including the difficult judgements and what they have done to address them. 

Six key themes are highlighted for Audit Committee Chairman: 

• Demonstrate ownership and accountability by personalising your reporting;
• Be specific to your company and to the current year;
• Say what you did (not just what you do): depict the specific activities during the year and their purpose, using active, descriptive language;
• Disclose judgement calls made for the year, and the sources of assurance and other evidence drawn upon to satisfy yourselves of the appropriateness of the conclusion;
• Consider your audience in describing issues and their context, policies, processes, conclusions and their consequences for the company and its reporting; and
• Consider where in the annual report information is best included and avoid repetition.

Example disclosures are provided in the three Audit Committee reporting areas with specific observations as to what investors’ value most from those disclosures.  Whilst not definitive they do provide an indication as to what approaches to Audit Committee reporting companies are currently taking. 

The report acknowledges that "further developments in AC reporting will be influenced by the Competition Commission's final decision on remedies for the audit market" which include the proposal for a shareholders’ vote at the AGM on whether “Audit Committee Reports in company annual reports are satisfactory”.

Click for (all links to FRC website):

• Press release.
• Full report by the Financial Reporting Lab.
• Slide pack from the Audit Committee members annual seminar.
• Transcript and proceedings from the Audit Committee members annual seminar