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2013

IFRS Foundation publishes its comments on the Maystadt Report

05 Dec 2013

The IFRS Foundation has posted to its website comments on the final report of the special advisor to EU Commissioner Michel Barnier, Mr Philippe Maystadt, setting out his preliminary recommendations for enhancing the EU’s role in promoting high quality accounting standards.

In its response to the final report, the IFRS Foundation acknowledges the fact each jurisdiction determines how its contribution is organised and operated. However, the Foundation expresses concerns that the suggested transformation of EFRAG might lead to "the further lengthening of what are already very lengthy procedures". The comment of the IFRS Foundation extends to the participation in the standard-setting process as well as the endorsement of IFRSs for use in the European Union.

The IFRS Foundation is pleased that feedback obtained by Mr Maystadt's shows clear support for the maintenance of a standard-by-standard adoption procedure among European constituents. At the same time, the IFRS Foundation does not believe that additional endorsement criteria regarding financial stability and economic development of a region are needed and comments that "we remain concerned that there continues to be a misunderstanding as to the purpose of general financial reporting, and about its limitations, and how it interacts with financial stability".

The IFRS Foundation does not share the view that the EU's regulatory sovereignty in accounting was "renounced" and also believes that the US American influence on the standard-setting process is overstated in the report. Although convergence between IFRSs and US GAAP was a goal pursued under the Norwalk Agreement, the IFRS Foundation states that "the IASB has maintained its independent voice".

In response to the claim in the Maystadt report that the IASB is aiming to "promote international convergence and the search for new members, to the detriment of those [...] states that already apply IFRS" in its agenda setting process, the IFRS Foundation points out that the IASB has determined its agenda with the help of an agenda consultation in 2011 and that going forward the IFRS Foundation's Due Process Handbook requires the IASB to undertake a public consultation on its work programme every three years.

Finally, the IFRS Foundation comments that the presentation of the question whether fair value accounting contributed to the financial crisis seems to be one-sided in the report, as it does not mention that most of the academic evidence available shows that the claim that fair value accounting exacerbated the financial crisis appears to be largely unfounded.

Please click for access to the full comments of the IFRS Foundation on the IASB's website.

IVSC draft guidance on counterparty and own credit risk in valuations

05 Dec 2013

The International Valuation Standards Council (IVSC) has published an exposure draft which would provide guidance on the determination of fair value under IFRS 13 'Fair Value Measurement', and for other purposes. The draft paper focuses on how counterparty credit risk and own credit risk are taken into account in the measurement of certain financial assets and financial liabilities measured at fair value.

The exposure draft, Credit and Debit Valuation Adjustments, if finalised, would result in the issue of an IVSC Technical Information Paper (TIP). Such papers are designed to provide guidance on approaches that may be suitable but will not prescribe or mandate the use of a particular approach in any specific situation.

IFRS 13 requires that the fair value of a liability reflect the effect of non-performance risk, which includes, but may not be limited to, an entity's own credit risk, which is referred to as a 'Debt Valuation Adjustment' (DVA) in the exposure draft. In addition, consideration of counterparty credit risk is relevant to the measurement of derivative financial instruments measured at fair value under IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement, and the paper refers to this as a 'Credit Valuation Adjustment' (CVA).

The exposure draft is designed to provide clarification on the terminology used in regards to CVA and DVA and the underlying concepts, insights on how complex valuation challenges related to CVA and DVA are addressed by entities with larger or more complex derivative portfolios, and generally accepted practice suggestions for entities with smaller and less complex derivative portfolios.

In relation to CVA, the paper explores the key differences between loan arrangements and derivatives, which include:

  • derivatives tend to have a very small credit risk at inception
  • credit risk exposure can switch between counterparties over the life of the derivative
  • potential variability of cash flows can be much greater due to being linked to a much larger notional amount and the underlying which can be volatile
  • the impact of netting in the event of a default, and identifying when a default event has occurred.

The paper notes that accounting requirements and higher capital requirements proposed by Basel III have led to market participants incorporating counterparty credit risk into trade pricing. However, in practice a wide range of derivative quotes are evident in the market, which the paper suggests result from other exposures to a counterparty, non-representative CVA being charged and differences in valuation techniques. The paper concludes that "CVA charges are based on many assumptions and unobservable parameters and as a result may not correctly capture the full credit risk of a counterparty", and may not "consider scenarios where unexpected losses may occur".

The paper outlines a technical analysis of how expected exposures, master netting agreements and collateral, and CVA hedging arrangements (e.g. credit default swaps and contingent credit default swaps) impact valuation.  It then outlines a valuation methodology which references key inputs (e.g. default probabilities, expected exposures, and loss given default assumptions), modelling approaches to calculate CVA (which may depend on the type of exposure), reconciliations to calibrate to market value, and scenario analyses (often using Monte Carlo valuation techniques). In terms of DVA (own credit risk), the paper outlines the difficulties of 'monetisation' of DVA, which may be determined by considering termination, default or hedging. The practical application of the various methods and models in various situations are also provided.

The paper also outlines a number of topics where continuing debate between academics and practitioners means that generally accepted principles or procedures have not developed, including the cost of funding used in the Funding Valuation Adjustment (FVA) (used to adjust the measurement of derivatives to reflect an entity's funding cost), links and interactions between CVA, DVA and FVA, and the impact of the bilateral nature of derivatives on valuations (where the default of one counterparty can impact the risk of default of the other).

In relation to the requirements of IFRS 13, the paper notes:

While fair value as defined in IFRS 13 is based on the assumption of a market transaction and therefore is generally consistent with the definition of market value in the [International Valuation Standards], it is intended as an accounting measure that can be applied consistently across different accounting standards, is compatible with requirements in other standards and that can be applied by a wide range of different types of entity. IFRS 13 fair value does therefore require some assumptions and hypotheses that might not be applicable when estimating market value for a purpose other than financial reporting

The exposure draft is open for comment until 28 February 2014. Click for access to the exposure draft (link to IVSC website).

Agreement on the EU financing of IFRS Foundation, EFRAG, and PIOB

04 Dec 2013

Trilogue agreement has been reached by the three parties involved (the European Parliament, the Council and the Commission) on the EU co-financing of the International Financial Reporting Standards (IFRS) Foundation, the European Financial Reporting Advisory Group (EFRAG), and the Public Interest Oversight Board (PIOB).

This agreement follows a recent vote of the Committee on Economic and Monetary Affairs (ECON) of the European Parliament on the Report on the proposal for a regulation of the European Parliament and of the Council on establishing a Union programme to support specific activities in the field of financial reporting and auditing for the period of 2014-2020. ECON had proposed that the programme should be used to ensure that money contributed is spent responding to European Union needs. Especially, ECON had recommended moving from giving six years of funding in one go to an annual assessment of whether certain criteria are fulfilled.

The proposed regulation now agreed on will form the legal basis for the continuation of financing the IFRS Foundation and PIOB for the period 2014-2020 and of EFRAG for the period 2014-2016. The agreement limits the financing period of EFRAG to three years in view of prospective reforms that might arise from the Maystadt Report.

In financial terms, the regulation proposes to contribute annually approximately the following sums:

  • 4.3 million euro to the IFRS Foundation (17% of its budget),
  • 3.4 million euro to EFRAG (43% of its budget), and
  • 0.3 million euro to PIOB (22% of its budget).

Next step in the process will now be a Parliament first reading / single reading expected 13 January 2014.

Please click for additional information on the European Commission website:

Notes from the joint FEE/ACCA conference on the Maystadt Review

04 Dec 2013

On 2 December 2013, the Federation of European Accountants (Fédération des Experts-comptables Européens, FEE) and the Association of Chartered Certified Accountants (ACCA) offered a joint roundtable to discuss the report on EU influence over global financial reporting standards with Philippe Maystadt. Deloitte observers at the conference have taken notes of the discussions.

At the conference, Mr Maystadt presented his recommendations and a panel of experts and the audience debated issues such as how European influence is best ensured and revising the European Financial Reporting Advisory Group (EFRAG) as the recommended option to ensure EU influence. Panellists included representatives from EFRAG, national standard-setters, the preparers/businesses and investors communities and from the accounting profession. Please find our notes below.

 

Maystadt Review: ensuring EU influence over global financial reporting standards

The Fédération des Experts comptables Européens and the ACCA held a conference at the European Parliament in Brussels to discuss Philippe Maystadt’s report, which was presented to the ECOFIN Council meeting on 15 November 2013. Wolf Klinz, MEP acted as host for the event and opened the conference.

Presentation by Mr Maystadt

Mr Maystadt presented his recommendations against the background of the acknowledged widespread support for global accounting standards, noting that in the EU there was a very broad consensus that IFRSs were, at present, the best solution to achieve such global standards. He noted also that the report reflected the differing views held within the Union on how IFRSs should be endorsed and the degree of flexibility that endorsement might involve. He had concluded that the present standard-by-standard approach remained appropriate and that this approach balanced EU sovereignty with a commitment to maximum harmonisation in financial reporting standards. He noted that, should the European Commission determine that it was desirable to have the possibility of a carve-in/carve-out, his view was that the bar should be set high and require a qualified majority vote in the Council. He noted the proposed additional/ alternative endorsement criteria: that an IFRS ‘should not endanger financial stability’ and that it ‘must not hinder the economic development of the Union.’

Mr Maystadt went on to outline his recommendations for the reform of EFRAG. He noted that, during the ECOFIN meeting, the balance of standard-setters was among the recommendations criticised, with a preference for at least one more standard-setter from a smaller EU Member State.

Finally, he touched on his proposals affecting the Accounting Regulatory Committee (representing Member States at a political level) and the role of the European Parliament. Both institutions should be involved earlier than at present and specifically be engaged by EFRAG regularly throughout an IFRS-related project.

Mr Maystadt said that the ECOFIN had given his proposals a ‘green light’, with some specific tasks given to the Commission for clarification. While many of the proposals can be implemented without legislative measures, any alternation of the IAS Regulation’s endorsement criteria would need legislative time. [This might prove a challenge in 2014, given the hiatus caused by Parliamentary elections in May 2014 and a new College of Commissioners to be appointed later in the year.]

Richard Martin, ACCA Head of Corporate Reporting, moderated the discussion that followed, noting that the conference would focus on implementing the report.

Global standards and flexible endorsement

Jella Benner-Heinacher (Vice-President, Eurofinuse, representing users) spoke strongly against any flexibility in endorsement and for the current binary approach. She noted that such flexibility would make it harder to reach truly ‘global’ standards and would reduce comparability within the EU and among EU listed entities and their global peers. This, she said, was contrary to the goal of global standards.

Hans Van Damme (Acting Chair, Supervisory Board, EFRAG) noted that the endorsement criteria had already been amended in 2012 to add a condition of ‘respecting the EU public good’.  He went on to express concern about placing more stress on ‘prudence and the respect for the public good’, noting that there were differing views on what ‘prudence’ meant and how it should be applied in practice. It was also not clear to him whether the proposed additional endorsement criteria could be made operational. He welcomed the suggestions for more and better cooperation between EFRAG and the ARC and EP.

Agnes Lepinay (Directrice, Economie Finance, MEDEF, representing preparers) supported flexible adoption, noting that other jurisdictions had the option to add or remove requirements (see Maystadt Report, Annex 3).

Mark Vaessen (Chair, Corporate Reporting Policy Group, FEE, representing auditors) responded that FEE does not support flexible endorsement and noted that all jurisdictions with the possibility to add or remove requirements on adoption of an IFRS had made an explicit commitment not to do so.

A participant expressed concern that the proposed additional endorsement criteria were not based on concepts in the IASB’s Framework, and that if these criteria were implemented there was a danger that EU-IFRS would deviate from IFRS ‘as issued by the IASB.’ Mr Maystadt agreed, but noted that he had tried to reflect faithfully the views he had heard. His view was that standard-by-standard endorsement with a binary decision was the preferred solution, but he was bound to present the alternative view.

Another participant spoke strongly in favour of endorsing IFRSs as issued, suggesting that EFRAG’s most fundamental role was to ensure that the development of a new or amended IFRS reflected the best views of the EU Member States.

Reforming EFRAG

Mark Vaessen stated that FEE wanted to build on the quality already in EFRAG, while retaining its distinctive public/ private partnership. FEE supported the proposals to transform the present supervisory board into an executive Board, but was concerned that the proposed membership was skewed towards the public sector, with only five of the 17 seats allocated to the private sector. He also criticised the under-representation of users (1/17) and the accounting profession (1/17).

There was a need for a clear profile for Board members, who should have a high level of understanding of financial reporting and respect for the independent standard-setting process. The Board should have an ‘EU mind set’ rather than a nationalistic or sectorial one. He agreed that the Board should decide the key messages and strategic direction, with the Technical Expert Group doing much of the detailed work. He suggested that a nominating committee (perhaps drawn from the EFRAG General Assembly) was necessary to ensure appropriate balance of skills was reflected on the Board.

Melanie McLaren (Executive Director, Codes & Standards, Financial Reporting Council (UK standard-setter)) addressed decision-making by consensus, saying that EFRAG had an important role in supporting active EU capital markets, and that IFRS was central to that success. She endorsed Mr Vaessen’s comments, and noted that consensus was present more often than it seemed to be. Standard-setters often expressed differences of view with greater passion than those views on which they agreed. Ultimately, she reminded the gathering that EFRAG was an advisory body and that EFRAG should be able to communicate areas in which there was unanimity and where views differed.

Ms McLaren also expressed concerns about the under-representation of users.

Ana Martinez-Pina (Chair, Spanish Accounting and Auditing Institute (ICAC – Spanish standard-setter)) addressed the proposed role of the Technical Expert Group (TEG) and in particular how it fitted in with the executive role envisaged for the Board. She also mentioned the need to define the status of the national standard-setters sitting on TEG, which should also be given voting rights.

Agnes Lepinay addressed the funding options proposed in the Report. She noted that MEDEF welcomed the Report and supported many of its recommendations. EFRAG was, she said ‘a special animal in the EU’ and that it was important to preserve this distinctive role in building consensus among EU-level stakeholders. The level and sources of funding would be influenced by the nature and scope of EFRAG’s responsibilities. There was no miracle solution for EFRAG’s funding, but it should be proportionate and commitments must be for a pre-determined period of time.

Question period

In response to a question whether the need to build consensus would slow down even further the time taken by EFRAG to endorse an IFRS, Mr Maystadt suggested that Ms McLaren’s comments showed the way forward — noting the fundamental advisory nature of EFRAG. Another questioner noted that real-world time pressures might make consensus-building more difficult. In that case, Mr Mystadt suggested, the Board’s Chairman would ‘just have to work harder’ bringing the consensus.

There was a brief discussion that EFRAG might also take SME financial reporting under its wing, especially in light of the 2013 Accounting Directive, which provided a reporting framework for such entities.

Closing remarks

Olivier Boutellis-Taft (CEO, FEE) noted that making EFRAG more influential as a voice in developing global accounting standards was in the EU public interest: it should not be allowed to become a political arena for national standard-setters.

He reiterated FEE’s support for global standards, without carve-ins/-outs, noting that those who want flexible endorsement ignored the experience of the Accounting Directives: even the 2013 Directive has over 100 options available.  He said that EU companies think European and global, and that EFRAG should, too.

He criticised the proposed composition of the EFRAG Board, suggesting that it was appropriate for a political planned economy, but not for a dynamic, market-driven capital market.

While noting that disagreement was ‘a European speciality’, the EU needed a way to have a strong voice in IFRS debates. Reflecting the views of all market participants would be the best way to safeguard the EU public interest in financial reporting.  He challenged the EU to grasp again the public interest vision of the EFRAG Founding Fathers and put aside national and sectorial interests and work towards an EU that is strong, with dynamic capital markets.

After the conference, FEE/ACCA sent around notes to the participants. We are grateful for the permission to offer these notes on IAS Plus as a supplement to our own notes.

'Why the financial industry is different'

03 Dec 2013

Hans Hoogervorst, Chairman of the IASB, spoke at the joint ICAEW and IFRS Foundation Financial Institutions IFRS Conference in London today. In his speech he observed that the inherent complexity of the topic and the fact that the financial industry is extremely sensitive to changes in accounting rules have made it very difficult for the IASB (and the FASB) to come to the right solution regarding the accounting for financial instruments but that IFRS 9 will be finished very soon.

Mr Hoogervorst opened his speech by admitting that the work on replacing IAS 39 has taken a long time as financial instruments are such difficult terrain but he also added: "IFRS 9 will get done and it will get done soon."

In explaining why the financial industry is a case apart from other sectors of the economy when it comes to accounting, he contrasted non-financial entities and banks and insurance companies with respect to the focus on the balance sheet and current value. Mr Hoogervorst pointed at the fact that banks and insurance companies have huge balance sheets where even relatively small changes can have an enormous impact on earnings and future cash flows depend very much on the financial instruments on the balance sheets.

Mr Hoogervorst then walked his audience through the different phases of the project aimed at replacing IAS 39 showing how the IASB had dealt with the special accounting needs of the financial sector.

  • The claim that fair value accounting strengthened pro-cyclicality and created artificial volatility during the financial crisis, he showed to be unfounded but also explained how one instance where fair value accounting could lead to counterintuitive results (the issue of 'own credit risk') had been fixed in IFRS 9 and made available as part of the general hedge accounting changes.
  • The current impairment model, which was shown by the financial crisis not to work well, will be replaced with an expected loss model making masking of inevitable shortfalls in future cash flows much more difficult. Finalised requirements on impairment are currently expected in the first or second quarter of 2014.
  • The IASB is continuing with a mixed measurement approach but in the context of the limited reconsideration of IFRS 9 has tried to put the criteria for classification and measurement on a more objective footing and has also introduced a 'fair value through other comprehensive income' (FVOCI) measurement category for particular financial assets.
  • As the existing hedge accounting requirements deal with some hedge relationships, but not others, (on the basis of rather arbitrary criteria) and as current hedge accounting is not capable of properly reflecting the management of net positions in open portfolios, the IASB has begun developing a Discussion Paper on a new macro hedging model as part of its project on macro hedge accounting.

Thus Mr Hoogervorst showed that with the exception of the proposals on macro hedge accounting, which were separated out from the general financial instruments project as they will take significant time to finalise, the major phases of developing IFRS 9 are finished or will be finished soon and will address the special needs and characteristics of the financial sector. Mr Hoogervorst concluded:

 

IFRS 9 is practically finished and will soon be ready to be endorsed. Because of the significant improvements that IFRS 9 makes in classification and measurement, and also in general hedging and impairment, I have no doubt that it will be endorsed around the world.

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

EFRAG updates endorsement status report for recent releases and expected timings

03 Dec 2013

The European Financial Reporting Advisory Group (EFRAG) has updated its endorsement status report to reflect the release by the IASB of amendments to IAS 19, the general hedge accounting amendments to IFRS 9, and to reflect changes in the expected timing of the Accounting Regulatory Committee’s opinion on IFRIC 21.

The endorsement status report notes the following changes:

  • The issue of Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) on 21 November 2013, which is effective for annual periods beginning on or after 1 July 2014.  The report indicates the endorsement is currently expected in the third quarter of 2014*
  • The issue of Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) on 19 November 2013, which introduced the general hedge accounting requirements to IFRS 9 and removed the mandatory effective date. Accordingly, the effective date of IFRS 9 was taken out of the report
  • The fact that the Accounting Regulatory Committee’s opinion on IFRIC 21 Levies will be voted in a future meeting.  The report notes that endorsement is expected in the second quarter of 2014.

* These amendments were already included in the endorsement status report dated 27 November 2013.

The endorsement status report, dated 2 December 2013, is available here.

Approval of new requirements for micro-companies

02 Dec 2013

The Small Companies (Micro-Entities’ Accounts) Regulations 2013 (SI 2013/3008) (“the Regulations”), which introduce a number of deregulatory measures for micro-companies have now been approved. For periods ending on or after 30 September 2013 (provided that accounts for such periods have not yet been filed), companies eligible to follow the new Regulations are able to prepare and file ‘abridged’ accounts.

This means that they can use simplified formats for the balance sheet and profit and loss account and are only required to provide notes to the financial statements concerning guarantees and other financial commitments and certain transactions with directors. A set of accounts will still need to be filed at Companies House, but the profit and loss account may be excluded. A key change is that the same ‘abridged’ accounts must be provided to the shareholders and filed at Companies House, making the old option to file ‘abbreviated accounts’ redundant for micro-entities. 

The Regulations are only relevant to companies that qualify as ‘micro-entities’. The definition of a micro-entity under the Regulations is a company (or group) that satisfies at least two of the following three requirements in relation to a financial year: 

  • Turnover: Not more than £632,000 (pro-rated appropriately where a company’s year is shorter or longer than a calendar year);
  • Balance sheet total (i.e. gross assets): Not more than £316,000; and
  • Average number of employees: Not more than 10. 

A company must meet at least two of these limits in two consecutive years to qualify as a micro-entity and, once qualified, must exceed at least two of these limits for two consecutive years to cease to qualify.  

The Regulations exclude certain types of company, such as charitable companies and parent companies that are required or choose to prepare consolidated financial statements, from the micro-entity regime. 

When the proposals were originally issued, respondents expressed concern around the impact of the changes on the “true and fair” principle, most notably the relationship between accounting standards and the exemptions for micro companies. The amended law provides that the limited information required for micro companies is deemed to give a true and fair view and so there is no need to consider whether any additional notes beyond those specified are necessary for this purpose.  

Now the Regulations have been approved, it is likely that amendments to the Financial Reporting Standard for Smaller Entities (FRSSE) will be required, not least to allow micro-entities the ability to state compliance with the FRSSE whilst taking advantage of the reduced disclosures enabled by the Regulations. 

Click for:

  • Approved Regulations ‘The Small Companies (Micro-Entities’ Accounts) Regulations 2013 (link to approved Regulations).
  • UK Accounting Plus earlier story on the Regulations.

IASB proposes reinstating the equity method in seperate financial statements

02 Dec 2013

The International Accounting Standards Board (IASB) has published an Exposure Draft (ED) of proposed amendments to IAS 27. With the 2003 revision of IAS 27 'Consolidated and Separate Financial Statements' the equity method was removed as an accounting option for investments in subsidiaries and associates in an entity's separate financial statements and the decision was carried forward to IAS 27 'Separate Financial Statements' in 2011. Constituent feedback to the Agenda consultation 2011 led the IASB to reconsider the option and to publish ED/2013/10 'Equity Method in Separate Financial Statements (Amendments to IAS 27)' with the proposal to reinstate the option. Comments are requested by 3 February 2014.

 

Background

In some jurisdictions, corporate law requires the use of the equity method in separate financial statements to measure investments in subsidiaries, joint ventures and associates. Accordingly, in jurisdictions that apply IFRSs and have the equity method requirement, two sets of financial statements need to be prepared to meet the requirements of both IAS 27 and local laws. Similarly, if a jurisdiction has not yet moved to IFRSs but has an equity method requirement, the preparation of two sets of financial statements would become necessary after IFRS transition. This might in some cases be regarded as a disincentive for adopting IFRSs.

 

Suggested changes

The IASB proposes to change IAS 27 Separate Financial Statements as follows:

  • permit the equity method as one of the options to account for an entity's investments in subsidiaries, joint ventures and associates in the entity's separate financial statements,
  • require applying the change retrospectively when an entity elects to change to the equity method.

If finalised, the proposals would allow investments in subsidiaries, joint ventures and associates to be measured at cost, in accordance with IAS 39 or IFRS 9, or using the equity method as described in IAS 28.

IFRS 1 First-time Adoption of International Financial Reporting Standards would be amended to note that IAS 27 permits an entity to choose the equity method in separate financial statements, but would not provide any special relief for first-time adopters who choose to do so.

The IASB also proposes amending IAS 28 Investments in Associates and Joint Ventures in order to avoid a conflict with the principles of IFRS 10 Consolidated Financial Statements in situations where an entity loses control of a subsidiary but retains an ownership interest that gives the entity significant influence or joint control, and the entity elects to use the equity method to account for the investments in its separate financial statements.

 

Transition requirements and effective date

An effective date for the amendments will be determined after the redeliberations of the IASB. The amendments would be applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Earlier application would be permitted.

 

Additional information

Please click for:

European consultation on public sector standard setting

02 Dec 2013

The European Commission and its directorate-general Eurostat, have released a public consultation paper dealing with the possible future implementation of 'European Public Sector Accounting Standards' (EPSAS) in European Union (EU) member states. The report focuses on the issue of governance, and outlines views about the future governance arrangements and underlying key principles that might apply in the development of EPSAS.

The report follows an earlier consultation on the suitability of International Public Sector Accounting Standards (IPSAS) for EU member states, which lead to the publication of a report in March 2013. This report found that whilst IPSAS as they stood could not be implemented in EU member states, they could form a strong starting reference for EU harmonised European Public Sector Accounting Standards (EPSAS), to be applied by all general government public entities.

Following the release of the IPSAS report, Eurostat organised a conference in Brussels in May 2013 to discuss the EPSAS project, and one of the key issues identified for follow up was that of governance. The IPSAS report noted that the governance of IPSAS "suffers from the insufficient participation in practice of EU public-sector accounting authorities".

The consultation paper outlines the key principles related to the EPSAS governance structure and process, including professional independence, impartiality, legitimacy, transparency, competence and capacity, cost effectiveness and accountability. In terms of the EPSAS standards themselves, the paper posits the following principles: reliability, relevance, coherence and comparability, and accessibility and clarity.

The proposed implementation of EPSAS would be rooted in a legal basis for EPSAS through a EPSAS Framework Regulation that would:

  • Define EPSAS governance and establish an 'EPSAS Committee'
  • Define the due process to adoption EPSAS standards, the central element of which would be newly established EPSAS Committee
  • Define the principles underlying EPSAS governance, including providing a basis to ensure direct participation of national standard-setters and government accounting authorities in the standard setting process, and providing oversight by the European Commission, as well as by the Council, the European Parliament and the European Court of Auditors
  • Set core requirements of EPSAS, e.g. based on accrual accounting and using double-entry
  • Confirm IPSAS as the starting point for the development of EPSAS.

The EPSAS Committee would be chaired and represented by the European Commission and be comprised of high-level member state representatives, with a limited number of non-voting observers. The committee would put in place a work programme for the development of EPSAS and would be directly involved in the decision making process. EPSAS Standards Working Groups would also be established to support the committee's work, and involve technical accounting experts from public sector standard setters and government accounting authorities - these working groups would be involved in the drafting of EPSAS standards and also resolve interpretation requests in an authoritative manner.

The report also entertains two optional components of any EPSAS governance structure, namely a 'EPSAS Governance Advisory Board' (EPSAS GAB) which might be entrusted with specific EPSAS oversight tasks, and an 'EPSAS Technical Advisory Group', which could liaise with a wide range of stakeholders including the International Public Sector Accounting Standards Board (IPSASB), government finance statisticians, supreme audit institutions, public and private accounting experts, academics and end users.

The consultation paper is open for comment until 17 February 2014, and comments are requested to be submitted in the form of questionnaire. The questionnaire asks specific questions on the relevance of the key governance principles, the institutional arrangements proposed for governance oversight, the desirability of the possible EPSAS GAB and EPSAS Technical Advisory Group and how these might be structured, and whether, and if so how, an interpretation function should be considered.

Click for:

Agenda for December 2013 IASB meeting

29 Nov 2013

The International Accounting Standards Board (IASB) is meeting at its offices in London on 12 December 2013. The IASB will receive an update from the Interpretations Committee and will consider the post-implementation review of IFRS 3, amendments to IAS 28, IAS 16/IAS 38 and IAS 19), possible amendments to IFRS 1 (short-term exemptions) and financial instruments impairment, the due process followed as well as impairment and classification and measurement.

The full agenda for the meeting, dated 29 November 2013, can be found here.  We will post any updates to the agenda, and our Deloitte observer notes from the meeting, on this page as they are available.

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