November

FRC publishes document of all editorial amendments and clarification statements to FRS 102

13 Nov, 2013

The Financial Reporting Council (FRC) has issued a document detailing all editorial amendments and clarification statements in relation to FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.

The areas of FRS 102 affected are: 

Section 1 ‘Scope’.  In line with paragraph 1.14 of FRS 102 an entity within the scope of a Statement of Recommended Practice (SORP) may only apply FRS 102 early if early application does not conflict with the requirements of the SORP or a legal requirement.  The FRC have clarified that although not all SORPS have been updated to reflect the requirements of FRS 102, applying the requirements of current SORPS “may not necessarily conflict with FRS 102”.  The FRC clarify that where a SORP is silent on a topic, applying FRS 102 accounting policies “should not conflict with the current SORP”.  Similarly, where SORPS and FRS 102 use different terminology to express the same recognition and measurement concepts as in FRS 102, compliance with FRS 102 “should not automatically lead to non-compliance with the SORP”.     

Section 12 ‘Other Financial Instruments Issues’.  The FRC have clarified that in relation to net investment hedges in foreign operations, FRS 102 paragraph 12.17 and paragraph 62 of the Accounting Council’s Advice to the FRC are consistent in allowing net investment hedges of foreign operations that are branches in the separate financial statements of a parent.  They clarify that the Accounting Council’s Advice in paragraph 62 was referring to foreign operations that are separate legal entities (e.g. subsidiaries) only and did not intend to imply that entities could not use net investment hedge accounting for foreign branches in the separate financial statements of the parent.  

Section 29 ‘Income Tax’.  The FRC has sought to clarify the meaning of the phrase “the amount that can be deducted for tax” in relation to the recognition of deferred tax assets or deferred tax liabilities arising on assets (other than goodwill) acquired in a business combination. 

The full document of all editorial amendments and clarification statements to FRS 102 can be found on the FRC website.

EU Transparency Directive published, disclosure on non-financial information moving along

13 Nov, 2013

The new European Transparency Directive has been published in the Official Journal and enters into force on the twentieth day following its publication. Additionally, a draft report on the proposal for disclosure of non-financial and diversity information by certain large companies and groups was presented to the European Parliament committee on legal affairs (JURI).

The new Transparency Directive closes an existing gap in the notification requirements by requiring disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies. A second major change is the fact that the requirement to publish quarterly financial information was abolished. This aims at reducing the administrative burden and encouraging long term investment. Finally country-by-country reporting disclosure requirements have been incorporated in the new Transparency Directive. Please click for access to the full text of the Directive in the Official Journal.  The amended Transparency Directive must be transposed into Member State law within two years of publication in the Official Journal.

The draft report on amendments to the European accounting legislation proposed by the European Commission (EC) in order to require certain large companies to provide additional information on social and environmental matters shows the amendments proposed by the EC next to suggested additional changes suggested by JURI. Also available is the draft opinion of the Committee on Economic and Monetary Affairs (ECON) commending the EC in seeking to improve transparency in the information provided by large companies in the EU and suggesting further improvements to the Commission's text. Please click for the drafts on the European Parliament website:

Commissioner Barnier comments on the publication of the Maystadt report

13 Nov, 2013

EU Commissioner Michel Barnier has commented on the publication of the report regarding preliminary recommendations for enhancing the EU’s role in promoting high quality accounting standards that his special advisor, Mr Philippe Maystadt, compiled on his behalf.

The final report had become available on 11 November and will be presented at a meeting of the European Union's Economic and Financial Affairs Council (ECOFIN) on 15 November 2013.

In a press release published on the EU Commission website, Commissioner Barnier states that he is well pleased with the report and concludes:

I am particularly keen that Mr Maystadt's recommendations should be implemented swiftly so that our undertakings and the users of their financial statements can as soon as possible benefit from high-quality international accounting standards. This work will allow the EU to better organise itself to ensure that the needs of its markets are fully taken into account in the international accounting debate.

Please click for access to the full press release.

IASB publishes additional editorial corrections

12 Nov, 2013

The International Accounting Standards Board (IASB) has published its next scheduled batch of editorial corrections for 2013. The corrections impact the IASB's “A Guide Through IFRS 2013”, “2013 IFRS (Blue Book)”, and “2013 IFRS (Red Book)”.

The editorial corrections affect the following individual pronouncements:

  • IFRS 1 First-time Adoption of International Financial Reporting Standards
  • IFRS 2 Share-based Payment
  • IFRS 9 Financial Instruments
  • IAS 1 Presentation of Financial Statements
  • IAS 24 Related Party Disclosures
  • IAS 33 Earnings per Share
  • IAS 36 Impairment of Assets
  • IAS 39 Financial Instruments: Recognition and Measurement

Editorial corrections do not change the meaning or application of pronouncements, but instead correct inadvertent errors.  Full details of the editorial corrections are available on the IASB website.

CCAB launches survey into international financial reporting practices in the not-for-profit sector.

12 Nov, 2013

The Consultative Committee of Accountancy Bodies (CCAB) has today launched an online survey in order to understand international accounting practices in the not-for-profit sector. This survey is part of a wider research project undertaken by CCAB to establish whether there is a demand for the development of an international financial reporting framework, guidance or standards in the not-for-profit-sector. Responses to the survey are requested by 9 December 2013.

CCAB comprises of; The Institute of Chartered Accountants in England and Wales (ICAEW), The Institute of Chartered Accountants of Scotland (ICAS), The Institute of Chartered Accountants in Ireland (ICAI), The Association of Chartered Certified Accountants (ACCA) and The Chartered Institute of Public Finance and Accountancy (CIPFA). 

CCAB recognise that every country has a not-for-profit sector but many countries “appear to use for profit business standards when accounting for not-for-profit entities”.  They also recognise other countries, such as the UK have developed their own national guidance, such as Statements of Recommended Practice (SORPS) to deal with the accounting in not-for-profit entities.  With these divergent practices and international accounting standards not addressing the unique issues present in the not-for-profit sector, they are seeking views as to whether there is support for a set of internationally recognised standards to be developed which do specifically address these unique requirements.   

The findings of the survey will be published in the first quarter of 2014. 

Click for press release with links to the survey on the CCAB website.

EFRAG issues feedback statement on their draft comment paper on accounting for Emission Trading Schemes

12 Nov, 2013

The European Financial Reporting Advisory Group (EFRAG) has released a feedback statement on their draft comment paper on accounting for Emission Trading Schemes. Eleven comment letters were received with most respondents agreeing that specific accounting guidance is needed for emission trading schemes.

The EFRAG draft comment paper, issued in December 2012, recognised that since the withdrawal of IFRIC 3 Emission Rights, this has resulted in diverging practices on the accounting of assets and liabilities arising from participation in an Emission Trading Scheme.  The expected result of the draft comment paper was to help shape an EFRAG recommendation to the International Accounting Standard Board (IASB) on specific accounting guidance for emission rights.  

The key points from the responses to the draft comment paper are: 

  • Almost all respondents agreed that specific accounting guidance for Emission Trading Schemes was required.  Many of the respondents agreed that although Emission Trading Schemes exhibit similar characteristics to inventory and intangible assets, “no perfect analogy can be drawn from existing IFRSs”.  Many agreed that due to the existence of diverging accounting practices, reducing comparability of information disclosed, specific guidance would be required.
  • Other respondents noted that the practices currently being applied, are considered “best practice” and “robust” and have already been “accepted by users” so questioned the requirement for additional guidance.
  • Most respondents agreed that any accounting guidance should consider the way in which emission rights are being consumed (either through sale or to discharge the entity’s obligation).
  • Most respondents agreed that any rights held for trading should be measured at fair value.
  • There were split views on the initial measurement of rights allocated for free.  Some respondents favoured initial measurement at fair value based upon a market price at the date of acquisition, some disagreed and others believed that there should be an initial recognition value of nil. 
  • For those who agreed with initial recognition at fair value some respondents supported crediting the other side of the entry to deferred income rather than other comprehensive income (OCI) and some favoured OCI.
  • Views were also split about whether an entity should present separately its emission rights and its obligation or present the balance net. 

At the same time as the EFRAG draft comment paper, the IASB reactivated its project on emission trading schemes as an IASB-only research project.  EFRAG does not consider that a research project is required and this is supported by some respondents who feel that the IASB should just develop a standard. 

Click for:

Chairman Michel Prada speaks in Japan on globally consistent standards

12 Nov, 2013

The Chairman of the Trustees, Michel Prada, gave a speech in Tokyo during the Financial Accounting Standards Foundation conference to discuss the importance of a single set of global accounting standards.

In his speech, Mr Prada expressed his concerns with jurisdictions using the ‘à la carte’ approach when adopting IFRS. He explained the ‘à la carte’ approach as jurisdictions choosing certain aspects of an IFRS standard and altering others to meet local preferences. It is his belief that everyone should fully adopt a single set of global standards in order to offer ‘true international comparability’ to investors.

In addition, Mr Prada commented on the progress towards IFRSs as global standards, which included an increase of 25 nations that required IFRS for all or most listed companies in the past five years. However, he mentioned that additional work still needs to be done concerning the adoption of a single set of standards for several large economies, such as:

  • United States — no decision by SEC on endorsing the adoption of IFRS.
  • China — convergence efforts to make its standards comparable to IFRS.
  • Japan — no mandate to full transition to IFRS.

Regarding Japan, Mr Prada noticed the positive signals of the recent months, including the final BAC report recommending a wider use of IFRS in Japan and the ordinances that were published as a result, the strong backing for IFRS by the Liberal Democratic Party, and the the new equity index the stock exchange of Tokyo and the Nikkei announced. He expressed a hope that these might lead to the adoption of full IFRSs in Japan:

We are of course, delighted to see such a number of positive steps being made to increase the number of companies using IFRS in Japan. We still hope, however, that these are seen in Japan as steps towards a full transition to IFRS as the single set of global accounting standards.

Further, Mr Prada noted the important role Japan has in the development of IFRS. Japanese officials hold important positions within the IFRS Foundation. Japan also has a voice in the Accounting Standards Advisory Forum (ASAF), where standard-setting activities are discussed with the IASB and other national standard setters.

Lastly, he emphasised the key role the IASB’s Asia-Oceania office had in linking the region into the global accounting standard-setting process.

Full text of the speech is available on the IASB website.

The Bruce Column — Making risk-reporting more robust

12 Nov, 2013

The Financial Reporting Council is bundling all its risk reporting guidance together and trying to make it more rigorous. Robert Bruce, our regular resident columnist, takes a look at the consultation paper.

It is a risky business, risk. Recent years have seen a steady escalation of measures to ensure that risk management is dealt with effectively within companies and the detail and nature of those processes made clearly known to investors.

It has become a risk in itself. As the latest consultation paper on the topic from the Financial Reporting Council says - ‘the ability of the board to understand and address the risk facing the company is itself a major risk factor.’ It is one of those areas where the risks have outrun the guidance on how to deal with them.

But now the FRC is bundling up its different sources of guidance and aiming by doing so ‘to raise the bar’. The result will be more responsibilities for boards, auditors and investors. And the hope is that, by shifting the process away from reporting on procedures and towards explanatory narrative, mindsets will gradually be changed.

In the past the FRC has been less successful. The consultation paper looks back at its 2005 recommendation that companies should confirm action was being taken to remedy any failings or weaknesses that a risk review might have shown. The idea, as the FRC points out, was to encourage greater transparency. Instead: ‘Many companies have simply cut and pasted the sentence from the guidance into their internal control statements. On its own, this does not indicate whether or not any significant failings or weaknesses have been identified’. As a result the new proposed guidance says that a board should ‘explain what actions have been or are being taken to remedy any significant failings or weaknesses identified from that review’.

All of this re-thinking on the part of the FRC has come about since the publication of the Sharman report on the lessons which should be learned from the way the concept of going concern and liquidity risk was applied during the financial crisis. And now they are pulling that work together with the 2005 and 2009 guidance on other broad aspects of risk. The result will be more coherent and also more rigorous. But it should be. Risk-reporting has inevitably moved up the priority list in recent times. And, as the FRC says: ‘For investors, as providers of risk capital, knowing how the board is managing and mitigating risks is an important indicator when judging whether the company will be able to deliver the value that investors seek’.

It is in the terminology used that the different emphasis and intent shows through most clearly. The previous guidance suggested that: ‘The board should, at least annually, conduct a review of the effectiveness of the company’s risk management and internal control systems and should report to shareholders that they have done so’.

That was about cajoling. The proposed new guidance is much more emphatic. ‘The board should carry out a robust assessment of the principal risks facing the company, including those that would threaten its solvency or liquidity. In the annual report the directors should confirm that they have carried out such an assessment and explain how the principal risks are being managed or mitigated. They should indicate which, if any, are material uncertainties in relation to the company’s ability to continue to adopt the going concern basis of accounting’.

This is all about getting to grips with risk and bringing about changes in behaviours. The old boilerplate is going to have to go.

ACCA supports IASB's proposals to amend accounting for bearer plants

11 Nov, 2013

The IASB’s proposals to amend the accounting methods used to recognise a plant or tree used to generate produce (a ‘bearer plant’), have been welcomed by ACCA’s (the Association of Chartered Certified Accountants) Global Forum for Corporate Reporting.

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.

ACCA agrees with much of what the IASB proposes, such as applying the principles of IAS 16 to bearer plants, including the option of adopting either a cost or revaluation model once the plants are mature and bearing produce. Whilst bearer plants reach maturity, they will be measured at accumulated cost, like a self-constructed manufacturing plant.

How well plants will bear produce can vary over their life cycle, and ACCA believes that this can be reflected in a limited amount of fair value disclosures in the financial statements, whilst adopting the cost model for recognition of the bearer plant. 

ACCA also agrees with IASB’s proposals that roots, such as sugar cane or rhubarb, should be accounted for in the same way as trees that produce fruit, as they can bear produce in more than one season, compared to annual crops where seeds need to be sown each time.

However, ACCA believes that more guidance is needed on the treatment of certain costs such as the rent of land where the bearer plant is growing, and even the impact of the condition of that land.

Read ACCA’s press release here and their full consultation response here (links to ACCA website).

Final Maystadt report available

11 Nov, 2013

In preparation for a meeting of the European Union's Economic and Financial Affairs Council (ECOFIN) next Friday where the special advisor to EU Commissioner Michel Barnier, Mr Philippe Maystadt, will present his report setting out his preliminary recommendations for enhancing the EU’s role in promoting high quality accounting standards, the report has been made available on the website of the Council of the European Union. The report is at a very high level, and many implementation issues will have to be resolved when and if the proposals are implemented.

As in the draft report released in September 2013 Mr Maystadt proposes three options to consider of which he recommends the first: Transforming EFRAG with the aims of reinforcing its structure and giving it a legitimate voice to represent European positions to the IASB when the IASB's standards are being developed. Details of the recommendations in this connection are:

  • Remit: EFRAG should focus on its remit regarding the IFRS standards, in accordance with the IAS Regulation.
  • Funding: Analyse the legal possibility of establishing a system of compulsory contributions/ levies paid by listed companies that use and benefit from IFRS.
  • Structure:
    • General Assembly: Extend the current General Assembly membership (Business Europe, FEE, Insurance Europe, EBF, ESBG, EACB, EFAA) to include National Funding Mechanisms and other private and/or public organisations that are contributing financially or in kind and invite the European Commission to attend the meetings of the General Assembly.
    • Supervisory Board: Replace the current Supervisory Board with a high-level Board, which would approve the comment letters addressed to the IASB and the endorsement advice letters to the Commission, relying on the work of a technical group.
    • TEG: Change the role of the Technical Experts Group (TEG) to preparing the projects submitted for the approval of the Board while receiving more guidance and feedback from the Board turning it into an advisor to the Board instead of having full authority to determine the positions of EFRAG.

The role and the composition of the high-level board is intended to embed the public policy voice into the decision-making process already before recommendations are made to the Commission. According to Mr Maystadt's recommendations, it would be composed of 16 members belonging to three pillars plus a president:

  • European public institutions (4 members proposed by ESMA, EBA, EIOPA and ECB, respectively),
  • Stakeholders (5 members: industrial and trading companies; financial institutions; accounting professionals; users)
    • Industrial and trading companies: one member proposed by Business Europe.
    • Banks: one member proposed jointly (or, failing that, in turns) by the European Banking Federation, the European Association of Cooperative Banks, the European Group of Savings Banks, the European Association of Public Banks.
    • Insurance companies: one member proposed by Insurance Europe
    • Accounting professionals: one member proposed jointly by the FEE ("Federation of European Accountants") and the EFAA ("European Federation of Accountants and Auditors")
    • Users: one member proposed jointly by the associations representing private investors (“end users") and financial analysts.
  • National Standards Setters (NSS) (7 members, with the implicit agreement that the NSS of the four largest Member States will always be represented, as is also the case for the Executive Board of the ECB or the Management Committee of the EIB).

Besides the internal management functions of the current Supervisory Board, the new Board would approve letters prepared by TEG, in particular, comment letters addressed to the IASB and endorsement advice letters addressed to the Commission. The Board is expected to act by consensus. Mr Maystadt also suggests that the role of President, who would be the public spokesperson of EFRAG, could be separated out from the role of a Chief Executive Officer, who would be responsible for the daily management of the organisation, including the chairmanship of the TEG.

Of note is the also the timescale: "The European Union needs an effective structure, capable of offering the Commission pertinent advice on the endorsement of the important standards that will be finalised in the short term by the IASB, as soon as possible."

Apart from recommending the changes concerning EFRAG, the report states that IFRSs remain the ‘best choice’ at present for financial reporting in public capital markets. It also advises that the current ‘standard-by-standard’ endorsement process remains appropriate. And it cautions that any change to the current binary 'yes/no' endorsement decision must be considered very carefully; Maystadt does not make any recommendation, but makes a strong statement that 'caution is essential' before considering any possibility of 'carve outs' or 'carve ins'.

Please click for access to the full report on the website of the Council of the European Union.

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