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EFRAG issues feedback statement on IASB's Exposure Draft ED/2013/6 Leases

19 Nov 2013

The European Financial Reporting Advisory Group (EFRAG) has published a feedback statement summarising the main comments received from constituents invited to respond to their draft comment letter in relation to the International Accounting Standards Board’s (IASB’s) Exposure Draft ED/2013/6 Leases.

In May 2013 the IASB published Exposure Draft ED/2013/6 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. 

EFRAG published their draft comment letter in July 2013 and the final comment letter was published in October 2013. 

The feedback statement (link to EFRAG website) provides an analysis of the EFRAG tentative position expressed in the draft comment letter, describes the comments received from constituents and then highlight how these comments were considered by the EFRAG Technical Group (EFRAG TEG) in reaching their final position on the IASB ED set out in their final comment letter to the International Accounting Standards Board (IASB).  The feedback statement also provides an overview of the results of the field test, on the ED conducted by EFRAG together with the National Standard Setters of France, Germany, UK and Italy.

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We comment on new draft SORP for Further and Higher Education.

19 Nov 2013

We have published our comment letter on the Further and Higher Education SORP Board’s Exposure Draft (ED) on a revised Statement of Recommended Practice (SORP) setting out proposals for accounting for Further and Higher Education institutions in the UK (“the Further and Higher Education SORP”). We support the proposed revisions contained within the draft Further and Higher Education SORP but also highlight a number of ways in which it can be improved.

Our key comments include:  

  • We would like to see guidance around whether entities must adopt the Further and Higher Education SORP if they are able to early adopt Financial Reporting Standard 102 (FRS 102) or whether they can continue to apply the requirements of the existing SORP.
  • We suggest that the Operating and Financial Review (OFR) should be renamed as the “Strategic Report” to bring it in line with the new strategic report required for large and medium-sized charitable companies and that the contents and headings of the proposed OFR are aligned with the strategic report where possible.
  • We disagree that in all cases, sabbatical leave should be accounted for as a long-term employee benefit where the liability would be recognised over the relevant period of service.  We highlight that in some situations, sabbatical leave may be accounted for as a short-term employee benefit.  We would like clarification over this point.
  • Although we agree with the proposal to not permit the accrual model for government grants we note that this approach “will result in significant changes, potentially changing previously recognised surpluses into deficits, and reducing the comparability with prior year financial statements”.  We note “this could encourage the presentation of non-GAAP measures where the non-GAAP measures would revert back to the accruals model”.    
  • We challenge whether disclosure of one total remuneration figure for the senior management team as a whole provides much useful information to users of the financial statements, given that remuneration bandings are already disclosed and that senior management teams within different higher education institutions can differ significantly in size.

A number of further improvements are highlighted in our comment letter such as aligning the terminology used within the SORP to that used within FRS 102 and recommending an explicit reference to the FRC guidance on going concern within the SORP. 

Further comments and a full response to all questions raised in the invitation to comment are contained within the full comment letter.

IASB finalises IFRS 9 chapter on general hedge accounting

19 Nov 2013

The International Accounting Standards Board (IASB) has published an amendment to IFRS 9 'Financial Instruments' incorporating its new general hedge accounting model. This represents a significant milestone as it completes another phase of the IASB’s project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. The new general hedge accounting model will allow reporters to reflect risk management activities in the financial statements more closely as it provides more opportunities to apply hedge accounting.


In developing a new model the IASB comprehensively reviewed the hedge accounting requirements of IAS 39. IAS 39 had long been criticised as being too rules-based and viewed by many as unnecessarily preventing hedge accounting from being applied in reasonable circumstances. This has led to more volatility in profit or loss from risk management activities.

In overhauling the hedge accounting requirements, the IASB chose to deal with portfolio (or “macro”) hedge accounting of open portfolios separately from general hedge accounting. The idea behind this was to first set the principles of a general hedge accounting model before considering how this might apply for a macro hedging.

In December 2010, the IASB published the Exposure Draft ED/2010/13 Hedge Accounting (the 'ED') proposing a new general hedge accounting model. That ED contained an objective to align hedge accounting more closely with risk management. To meet this objective the ED proposed to increase the scope of eligible hedged items and hedging instruments. It proposed an objective-based hedge effectiveness assessment starkly different to IAS 39’s 80-125 per cent hedge effectiveness threshold. To accompany these changes to eligibility and qualification, it also proposed changes to the mechanics of cash flow and fair value hedge accounting, as well as revised hedge accounting presentation and disclosure requirements.

The ED was well received in many respects since it addressed many concerns relating to hedge accounting restrictions in IAS 39. The IASB also received feedback on areas where the proposed new requirements were not well understood, overly complex or contained restrictions on the application of hedge accounting that constituents did not agree with. This resulted in changes that were included in the IASB’s review draft of its proposals that were posted on the IASB's website in September 2012.

The IASB received comments on its review draft which lead to further changes, the most significant of which introduced an accounting policy choice under IFRS 9 to continue to apply the hedge accounting requirements of IAS 39. This policy choice was introduced to alleviate concerns that the proposed general hedge accounting model could not accommodate macro cash flow hedging of interest rate risk in the same way as IAS 39. Also since the macro hedge accounting project is not yet complete, some preparers did not want to change their hedge accounting processes twice (ie once to accommodate the general hedge accounting model and then again to accommodate the macro hedge accounting model). 


Summary of key requirements

Increased eligibility of hedged items

IFRS 9 increases the scope of hedged items eligible for hedge accounting. For example:

  • Risk components of non-financial items may be designated provided they are separately identifiable and reliably measurable
  • Derivatives may be included as part of the hedged item
  • Groups and net positions may be designated hedged items


Increased eligibility of hedging instruments

The new model allows financial instruments at fair value through profit or loss to be designated as hedging instruments. It also introduces a new way to account for the change in time value of an option when the intrinsic value is designated, resulting in less volatility in profit or loss. The alternative accounting treatment for forward points and currency basis (when excluded from the designated hedge) can also result in less volatility in profit or loss.


New hedge effectiveness requirements

A fundamental difference to the IAS 39 hedge accounting model is the lack of the 80-125 per cent bright line threshold for effective hedges and the requirement to perform retrospective hedge effectiveness testing. Under the IFRS 9 model, it is necessary for there to be an economic relationship between the hedged item and hedging instrument, with no quantitative threshold. This will allow flexibility in how an economic relationship is demonstrated and for qualifying hedges actual hedge ineffectiveness will be reported.


Increased hedge accounting disclosures

The trade off to increased hedge accounting possibilities is increased disclosures about an entity’s risk management strategy, cash flows from hedging activities and the impact of hedge accounting on the financial statements.


Alternatives to hedge accounting

As part of developing the new model, the IASB introduced some alternatives to hedge accounting as a means to reflect risk management activities in the financial statements. For example:

  • IFRS 9 includes an option to designate a credit exposure as measured at fair value through profit or loss if the credit risk is managed using a credit derivative
  • IAS 39, as amended for application with IFRS 9, includes an option to designate at fair value through profit or loss “own use contracts” if doing so eliminates or significantly reduces an accounting mismatch


Policy options to continue applying hedge accounting under IAS 39

The newly developed general hedge accounting model does not deal with the accounting for hedges of open portfolios (portfolio/macro hedge accounting). To alleviate concerns of preparers having to change their policies twice within a relatively short period of time, the IASB introduced two policy options in the final version of the hedge accounting chapter of IFRS 9:

  • Those entities that currently apply the requirements in IAS 39.81A (the application of fair value hedge accounting to portfolio hedges of interest rate risk) may continue doing so under the new requirements. In that case, the requirements in IFRS 9 would apply to hedges in general, whereas portfolio hedges would continue to be accounted for according to IAS 39.
  • Additionally, entities would be given an accounting policy choice to account for all hedges under either IAS 39 or IFRS 9. That option would be all inclusive, i.e. entities could not pick and choose (e.g., entities wishes to continue applying IAS 39 would have to continue testing effectiveness in the narrow 80-125 per cent corridor, could not benefit from the increased eligibility of hedge items and hedging instruments, etc.).


Effective date and transition

The IFRS 9 amendment to introduce the new hedge accounting model removed the mandatory effective date for IFRS 9 which will be set once the standard is complete with a new impairment model and finalisation of any limited amendments to classification and measurement, both of which are due to be finalised in 2014. The standard is available for early adoption (subject to local endorsement requirements), but if an entity elects to apply it it must apply all of the requirements in the standard at the same time. On transition the hedge accounting requirements are generally applied prospectively with some limited retrospective application.

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EBA publishes response to draft Maystadt report

19 Nov 2013

Following the publication of the final Maystadt report, the European Banking Authority (EBA) has made available its response to the draft of the report. As with the ESMA response to the draft report published last week, the core points remain applicable even though the final Maystadt report has undergone some changes vis-à-vis the draft version.

EBA believes that financial stability and prudence considerations should be given appropriate weight in standard-setting and that a wider engagement of prudential and financial stability authorities in the standard-setting process would therefore be advisable. (The suggestion to make EBA one of the contributing actors was taken up in the final version of the report.)

The main three points EBA raises in the comment letter concern endorsement advice, member states and stakeholders, and independence.

On endorsement advice, EBA believes that this "should be provided with the objective to respect the public interest according to the IAS Regulation and, therefore, the body entrusted with this mission should serve the needs of the public interest". EBA is not convinced that the recommended transformation of EFRAG with a Supervisory Board composed of both, members representing public and private interest, will achieve this objective. EBA is especially sceptical regarding the ability of such a body to make decisions on a consensus basis and has concerns that situations might arise where the public authorities are outvoted by the other members. Therefore, EBA suggests either leaving decisions on the endorsement advice to the public authorities represented in the body alone or to install a separate independent body responsible for providing the endorsement advice (which would be a public authority).

On member states and stakeholders EBA requests that "the body representing the EU voice should have the capacity to encompass all member states' interest and should also be able to consider the view of all stakeholders with an interest in financial reporting", and on independence the response simply states that "the independence of the members of this body should be ensured".

Please click for access to the full letter on the EBA website. (Please keep in mind that this is a response to the draft report and some of the concerns were addressed in the final report.)

November IFRS Interpretations Committee meeting notes

18 Nov 2013

We've posted the Deloitte observer notes from the IFRS Interpretations Committee meeting which was held on 12-13 November 2013.

The topics discussed were as follows (click through to access detailed Deloitte observer notes for each topic):

Tuesday, 12 November 2013

Items for continuing consideration

Tentative agenda decisions to finalise

New Issues

Wednesday, 13 November 2013

New Issues

Items for continuing consideration

Administrative session

Click here to go to the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

EFRAG expresses concerns on insurance contracts standard

18 Nov 2013

The European Financial Reporting Advisory Group (EFRAG) has issued their final 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. EFRAG “appreciates the effort” that the International Accounting Standard Board (IASB) has taken to address the concerns with the 2010 ED but comment that they still have some “remaining concerns” with the revised ED.

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.   

EFRAG provide the following comments in their final comment letter, many of which are shared by the Financial Reporting Council (FRC), The Association of British Insurers (ABI), and Deloitte:

  • EFRAG does not support the mandatory use of other comprehensive income (OCI) to measure and present insurance liabilities.  Instead EFRAG recommends that the IASB “identify a third ‘liability-driven’ long-term investment business model” which would provide entities with an accounting policy choice “whether to report the impact of changes in the discount rate of the insurance liabilities in the statement of profit or loss or the statement of other comprehensive income”.  EFRAG comment that this flexibility will help to eliminate accounting mismatches “to an acceptable extent”.
  • EFRAG does not support the ‘mirroring approach’ in the revised ED.  Among other comments, EFRAG note that this approach “increases the complexity” and will “make financial statements difficult to understand and would impair comparability of contracts with similar economic features”.  Instead, EFRAG recommends that an insurance industry alternative approach would address some of their concerns with the mirroring approach.  EFRAG highlight that any new approach would “need sufficient time for testing”.
  • EFRAG does not support the IASB presentation proposals when the simplified approach is not used.  For companies not applying the simplified approach, “EFRAG is supportive of a summarised margin presentation with volume information disclosed in the notes to the financial statements”.

Against these concerns, EFRAG does express support for “the IASB’s proposal to adjust the contractual service margin” and comment that they believe the contractual service margin “shall represent the unearned profit in an insurance contract”.  EFRAG also agrees with “the proposed modified retrospective approach” for transition.    

EFRAG “continues to request the alignment of the effective dates of IFRS 9 and the new standard on insurance contracts, with early adoption possibilities for both standards, and full redesignation and reclassification of the investment portfolios should this alignment be rejected”.  They also recommend a three year implementation period “from the date of publication of the new insurance contracts standard”.

Please click for the press release and final response, including full responses to the questions raised in the ED, on EFRAG’s website.

ESMA reviews disclosures of financial statements by financial institutions

18 Nov 2013

The European Securities and Markets Authority (ESMA) has issued a report, “Review of Accounting Practices: Comparability of IFRS Financial Statements of Financial Institutions in Europe”, which provides an overview of financial institutions’ accounting practices in selected areas of financial instruments. In particular, it assessed the comparability and quality of the disclosures in 2012 IFRS financial statements from 39 major European financial institutions. The report also provides recommendations to enhance transparency of financial information.

The report focused on five key areas of financial statements when evaluating comparability and quality of disclosures: (1) structure and content of income statements, (2) liquidity and funding, (3) hedging and the use of derivatives, (4) credit risk, and (5) criteria used to assess impairment of equity securities classified as available-for-sale.

Overall, the report concluded that there are improvements needed to the disclosures provided by financial institutions. The report uncovered instances when there was insufficient information provided or not structured properly to allow comparability between financial institutions. Key findings from the review included:

  • “[D]ifficult to compare the income statements of the financial institutions, due to differences in their structure, the line items content and lack of comprehensive accounting policy disclosures.”
  • “[F]inancial statements did not include sufficient information on the use of derivatives.”
  • “[S]ignificant divergence in the application of the significant or prolonged criteria when assessing impairment of the equity securities classified as available-for-sale.”

Based on these findings, the ESMA recommends:

  • Additional guidance in IFRS on individual income statement line items would be beneficial.
  • Financial institutions should further develop their disclosure on contingent funding needs and assess potential impacts.
  • The quality of financial information should be improved by providing qualitative information on the use of derivatives for different purposes and clearly linking them with their classification in the financial statements.
  • Financial institutions should adapt their disclosures concerning credit risk so users can identify significant changes of the credit risk profile over time.
  • Financial institutions should provide additional granular quantitative information on the effects of forbearance.
  • More transparency on the risk of impairment by preparing separate disclosure of the amount of positive and negative available-for-sale reserve related to equity instruments is needed.

ESMA will discuss its recommendations with the IASB in areas where the ESMA believes additional guidance is needed to improve quality and transparency.

For additional information, please see (links to ESMA website):

EBITDA definition clarified for Higher Education sector

17 Nov 2013

A note clarifying how Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) should be calculated by entities in the Higher Education (HE) Sector has been issued by members of the British Universities Finance Directors Group (BUFDG).

The note explains that a standard definition is required in the higher education sector due to "unique features which are different from those faced in the corporate sector".

The reason for the clarification is because "the previous definition (May 2012) created some confusion, due to the fact that its starting point was ‘historic cost’ surplus but it ignored some historic cost adjustments such as release of revaluation reserves".  The revised definition starts with operating surplus for the year reported on the face of the Income and Expenditure account and will allow EBITDA to be reported on a consistent basis on the new ASSUR return, part of the new Margin for Institutional Sustainability metric.

BUDFG has commented that the definition of EBITDA will again be reviewed in light of FRS 102 and the new further and higher education SORP.

Click here to access this note (link to BUFDG website)

We comment on FRED 50

17 Nov 2013

We have published our comment letter on Financial Reporting Exposure Draft (FRED) 50: Draft FRC Abstract 1 Residential Management Companies’ Financial Statements and Consequential Amendments to the Financial Reporting Standard for Smaller Entities (FRSSE) (“FRED 50”).

We support the proposals “which we believe appropriately reflect the opinion of legal counsel which has been obtained in accounting for the transactions within RMCs”. 

Further comments and a full response to all questions raised in the invitation to comment are contained within the full comment letter.

2014 IFRS Blue Book — Coming soon

15 Nov 2013

The IFRS Foundation has announced that the 2014 IFRS Consolidated without early application will be published in December 2013. This volume (nicknamed the "Blue Book") will contain all official pronouncements that are mandatory on 1 January 2014. It does not include IFRSs with an effective date after 1 January 2014. The Blue Book differs from the traditional BV (the "Red Book"), which includes all pronouncements issued at the publication date, including those that do not become mandatory until a future date.

The Blue Book will sell for £68 plus shipping (academic, developing country, and volume discounts apply). You will find more information and ordering details here.

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