February

FASB diverges from the insurance project

20 Feb, 2014

At its meeting yesterday, the Financial Accounting Standards Board (FASB) tentatively decided to abandon its convergence efforts with the International Accounting Standards Board (IASB) on insurance contracts.

The FASB tentatively decided to focus its future efforts on making targeted improvements to the existing U.S. GAAP insurance accounting model instead. Factors the Board considered in this decision included constituent feedback, implementation costs, and the likelihood that the FASB and IASB would be unable to agree on a converged accounting model. For short-duration contracts, the FASB tentatively decided that its targeted improvements should focus only on disclosure requirements; for long-duration contracts, the targeted improvements will take into account the requirements for recognition, measurement, and disclosure.

This decision would result in a U.S. insurance accounting model that would diverge significantly from the insurance accounting model proposed by the IASB. Several FASB members indicated that its targeted improvement efforts could possibly result in a long-duration accounting model similar to the building block approach being pursued by the IASB; however, such an outcome is not the primary objective of such improvements.

A recording of the session and minutes from the meeting reached during the meeting are available on the FASB website.

CDSB seeks views on updated environmental reporting framework

20 Feb, 2014

The Climate Disclosure Standards Board (CDSB) has published a consultation draft of the second edition of its 'CDSB Framework', which is designed to assist in the preparation and presentation of specific environmental information for the benefit of investors. Compared to the existing framework, the consultation draft proposes to extend the scope of environmental reporting beyond climate change to include natural capital information about water and forest commodities.

The draft framework outlines the preparation and disclosure of environmental information included in, or in conjunction with, 'mainstream reports'.  These are annual reporting packages prepared under jurisdictional laws and include financial statements and explanatory notes prepared in accordance with a financial reporting framework such as International Financial Reporting Standards (IFRSs). Other financial reporting, such as management commentary (often termed 'management discussion and analysis') are also included where relevant, and the framework is also considered suitable for small and medium sized entities.

Environmental information covered by the draft framework includes information about the following 'environmental elements': greenhouse gases, forest risk commodities (biofuels, cattle products, palm oil, soy and timber), water and fossil fuel energy resources. In summary terms, the framework is to require disclosure of environmental information that enable users of mainstream reports to assess:

  • How the organisation manages, uses and relies on the environmental elements
  • Which environmental elements are owned, used and consumed as inputs, together with their providence and measures of consumption
  • Outputs of or to environmental elements, including greenhouse gas emissions and discharge of water
  • The availability, quality, price of, and access to, environmental elements
  • Business risks and opportunities associated with each of the items above
  • The response to environmental challenges, e.g. degradation or depletion of environmental elements, climate change, regulatory restrictions and societal expectations.

The framework is structured into a number of sections, focusing on the identification and determination of information to report, an organisation's environmental information reporting practices, and guidance on how to report to ensure the quality of environmental information to investors. Each of these sections contain a number of requirements which have to be met in order to claim compliance with the framework. A separate section contains guidance on associated matters such as disclosure tools, standards and methodologies representing current practice.

The proposed framework notes that it has been developed to enhance and complement rather than to duplicate existing corporate reporting approaches that support disclosure of environmental information. This includes:

  • financial reporting pronouncements issued by the International Accounting Standards Board (including IFRS Practice Statement Management Commentary) and other bodies
  • legislation and guidance issued by regulators, such as the Australian Water Accounting Standard, and United Kingdom environmental reporting requirements on greenhouse gas emissions
  • developing and final voluntary frameworks such as the International Integrated Reporting Council (IIRC) International <IR> Framework, Global Reporting Initiative (GRI) G4 guidelines, OECD guidelines for multinational enterprises, United Nations Global Compact principles, and others
  • various other sources of specific guidance, such as the The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD).

Consistent with the IIRC <IR> Framework, the proposed CDSB framework focuses on the needs of investors as the primary users of information. The consultation document notes that "organizations rely on continuing inputs of 'capital' from different sources including the financial system and the environment, which provides natural capital" and that the framework "enables investors to exercise their duty of stewardship in relation to both types of capital".

The proposed framework would apply on a voluntary basis. The consultation draft is open for comment until 19 May 2014. Click for more information (link to CDSB website).

IPSASB policy paper on reducing differences between IPSAS and government statistics

20 Feb, 2014

The International Public Sector Accounting Standards Board (IPSASB) has released a policy paper outlining how Government Finance Statistics (GFS) will be considered in the further development of International Public Sector Accounting Standards (IPSASs). The paper sets an objective of eliminating unnecessary differences between GFS and IPSASs whilst remaining consistent with the IPSASB Conceptual Framework and International Financial Reporting Standards (IFRSs).

Government Finance Statistics (GFS) reporting guidelines include the International Monetary Fund (IMF) Government Finance Statistics Manual (GFSM) and the European System of Accounts (ESA). Such frameworks aim to be consistent with the overarching standards in the United Nations System of National Accounts (SNA), which is an internationally agreed standard set of recommendations on how to compile measures of economic activity.

The policy paper, Process for Considering GFS Reporting Guidelines during Development of IPSASs, notes that the IPSASB, in pursuing its objective of developing high-quality accounting standards for use by public sector entities in preparing general purpose financial reports, "supports the convergence of... accounting and statistical bases of financial reporting where appropriate". The paper further notes that both IPSAS and GFS reporting guidelines have significant overlap in being concerned with financial information, the assets, liabilities, revenues and expenses of governments, and information about cash flows. However, the paper notes that GFS reports have different uses to general purpose financial reports, as GFS reports have a focus on government policy and evaluating the impact of government on the economy, notwithstanding that many countries adopt GFS reporting for their fiscal reporting.

The policy paper expresses the impact of these differences as follows:

GFS reporting guidelines and IPSASs have different objectives. Although the two sets of financial information necessary to meet these different objectives have many similarities, the different objectives do result in some fundamental differences on how, what and where information is reported. In considering scope to reduce differences the IPSASB will remain true to the objectives of financial reporting. Where differences appear to warrant referral to the statistical community for its consideration, the IPSASB recognizes that the statistical community’s consideration of issues will be in light of the objectives of the GFS reporting framework.

Accordingly, the paper envisages that amendments to both IPSASs and the GFS reporting guidelines may need to be considered as part of the harmonisation process. In the event the GFS reporting guidelines are identified as requiring revision, the paper notes that consistency with the SNA may be problematic, and that whilst "a major endeavor", that "revisions to the SNA may be possible in the longer term".

Some of the steps outlined in the paper that the IPSASB intends to follow in seeking to eliminate differences between IPSASs and GFS reporting guidelines include:

  • A table of the main differences between IPSASs and GFS reporting guidelines will be maintained, including assessments of whether differences should be resolved through changes in IPSASs or changes in the GFS guidelines
  • IPSASB observers at the International Monetary Fund (IMF) and Eurostat will provide input
  • Differences that can be resolved through relatively minor revisions to IPSASs may be included in the IPSASB biennial improvements process, but only where they are minor, consistent with the IPSASB Framework and do not conflict with existing IPSASs (including those converged with IFRSs)
  • The process for each IPSASB project will consider addressing differences relevant to that project, and projects will seek to avoid introducing new differences, and explicitly consider such differences are part of deliberations
  • Issues may be referred to the statistical community for resolution, after input is sought from the IPSASB IMF and Eurostat observers

The paper notes that "fundamental differences" arising from underlying conceptual differences will not be able to be eliminated, but instead "are expected to continue and will need to be managed". Additionally, in some cases, non-fundamental differences may be able to be addressed through accounting policy choices, guidance on application of existing requirements, and the design of information systems to allow preparation of both IPSAS and GFS information.

In relation to the impacts on the ongoing convergence efforts between IPSASs and IFRSs, the paper notes the following:

The IPSASB’s “Process for Reviewing and Modifying IASB Documents” sets out the process that the IPSASB follows when considering International Accounting Standards Board (IASB) documents for convergence, including determining whether public sector issues warrant departures from the IASB document. Step 1 of that process includes consistency with the statistical bases as one factor for consideration when making decisions. This document is intended to complement and support that process, rather than conflict with it in any way.

Click for access to the policy paper (link to IFAC website).

New framework on audit quality

19 Feb, 2014

The International Auditing and Assurance Standards Board (IAASB) has published a framework on audit quality, which aims to raise awareness of the key elements of audit quality, encourage key stakeholders to do more to increase audit quality, and facilitate greater dialogue between key stakeholders on the topic.

The publication, A Framework for Audit Quality: Key Elements that Create an Environment for Audit Quality, notes that there is no definition of "audit quality" that has been universally recognised.  Reasons for this posited in the paper include the judgemental nature of aspects of underlying financial statements, together with other factors such financial statements only providing partial insight into audit quality, the varying nature of audits, differences in perspectives among stakeholders, and limited transparency about audit work and audit findings.

The framework does not include a definition of 'audit quality', but instead notes that the term "encompasses the key elements that create an environment which maximizes the likelihood that quality audits are performed on a consistent basis". Accordingly, in establishing the audit quality framework, the publication seeks to describe the inputs, processes and outputs factors that contribute to audit quality across a broad spectrum: at the engagement level, the audit firm, and national levels.  However, the framework does not seek to provide guidance on the measurement of audit quality.

The 'Feedback Statement' accompanying the Framework provides more background to this approach:

The IAASB concluded that describing audit quality in a holistic way, including qualitative factors with respect to inputs, processes and outputs, as well as interactions and contextual factors, is in and of itself an important contribution to the debate on audit quality. Such an approach reflects that, while the primary responsibility for performing quality audits rests with auditors, audit quality is best achieved in an environment where there is support from other participants in the financial reporting supply chain. However, the holistic approach lends itself less to direct measurement.

The IAASB believes the publication of the framework is in the public interest for many reasons, including assisting in the setting of auditing standards. The IAASB itself intends to use the framework in future revisions to International Standard on Quality Control ISQC 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements, and the International Standards on Auditing (ISAs).

Click for IAASB press release (link to IFAC website).

ACCA survey highlights that companies are adopting a ‘wait and see’ approach to integrated reporting

18 Feb, 2014

The Association of Chartered Certified Accountants (ACCA) has issued a report: ‘Understanding investors: the changing corporate perspective which is the last in a four-part series examining what investors want from corporate reporting. The report has a particular emphasis on respondent’s views on real-time reporting and moving to an integrated reporting model and also considers the relationships between Chief Financial Officers (CFOs) and their auditors.

The report which is based on a survey of 200 CFOs and “other senior finance professionals” (“CFOs”) indicates that CFOs see benefits to an integrated reporting model including enabling them to “align the company’s risks with its opportunities, adopt a more holistic view of the true drivers of corporate performance, and build better relationships with external stakeholders”.  Past research by the ACCA in their report:‘Understanding investors: direction for corporate reporting’ also indicated “strong support for integrated reporting among investors” with 93 per-cent of those investors surveyed supporting the concept of integrated reporting.  

However, despite the benefits and investor appetite, the majority of companies (48 per-cent) surveyed are choosing to adopt a ‘wait and see’ approach to integrated reporting and 10 per-cent of those surveyed “have no intention” of moving towards an integrated reporting model unless it becomes compulsory.  Only 38 per-cent of those surveyed are taking active steps to move towards an integrated reporting model in the next three years and only 5 per-cent have already implemented one and published an integrated report.  

The report also shows “cautious support” from CFOs for the adoption of real-time reporting even though there is “genuine demand” from investors as highlighted in an earlier ACCA report Understanding investors: the road to real-time reporting’ published in September 2013.  This showed that “70 per-cent of investors said that companies reporting in real time would have an advantage in attracting investment” and “73 per-cent would consider companies that report in real-time to have more robust corporate governance”.  

Many CFOs (two-thirds) would “welcome” a move to real-time reporting but fear that this “could compromise competition-sensitive information and lead to misstatements”.  A number of CFOs also indicated that there were obstacles to implementing an effective real-time reporting system such as “the difficulty in instituting effective controls to ensure accuracy” (45 per-cent) and 60 per-cent of CFOs “see auditors as the biggest barrier to real-time reporting”. 

To support a real-time reporting approach the report highlights that CFOs have the challenge to speed up their reporting processes and that many companies have made the effort to take the necessary steps to achieve this.  The findings show that CFOs believe that there are benefits of a faster close process with 63 per-cent indicating that “a key benefit of a faster close is that external stakeholders see it as a sign of good management”.     

With regards to the relationships with external auditors, CFOs indicated that although relationships are good, there were certain areas in the audit profession where they would like to see improvements.  Key highlights are that 60 per-cent of respondents would like lower audit fees, 47 per-cent would like more competition between audit firms and 45 per-cent would like to see more frequent communication with their auditors.

The full report can be obtained from the ACCA website.

The other three reports in the series are:

  • Understanding investors: direction for corporate reporting and Understanding investors: the changing landscape were published in June 2013
  • Understanding investors: the road to real-time reporting published in September 2013 

Not part of the series but also investor focused is the ACCA survey What do investors expect from non-financial reporting? published in July 2013.

2014 IFRS 'Red Book' coming in March

18 Feb, 2014

The International Accounting Standards Board (IASB) has announced that the 2014 edition of the Bound Volume of International Financial Reporting Standards (the 'Red Book') is expected to be available in March.

The 'Red Book' contains all official pronouncements issued at 1 January 2014, including all pronouncements with an effective date after 1 January 2014, but not the pronouncements that will be replaced or superseded. Accordingly, the 2014 edition contains pronouncements as a result of amendments from IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39), amendments to IAS 19, IAS 36, and IAS 39, two sets of Annual Improvements to IFRSs (2011-2013 and 2010-2012), one new Interpretation (IFRIC 21 Levies), and the IFRS Foundation Constitution and Due Process Handbook.

More information is available on the IASB's 'register my interest' webpage (link to IASB website).

IASB and ICAEW to host financial reporting disclosure web presentation

18 Feb, 2014

On 26 February 2014, the International Accounting Standards Board (IASB) and the Institute of Chartered Accountants in England and Wales (ICAEW) will give a live web presentation on financial reporting disclosure.

The presentation will be delivered by Kristy Robinson, IASB technical principal, and Brian Singleton-Green, ICAEW financial reporting faculty. The presentation, which will include a question and answer session, will discuss the following:

  • The overwhelming amount of information in financial reporting.
  • Issues enforcing disclosures.
  • Changes that need to occur.
  • Future IASB’s plans for disclosure.

For the convenience of participants in different time zones, two slots have been scheduled:

  • 09.00 (London time),
  • 16.00 (London time).

Registration for the different slots is available through the ICAEW website.

PRA issues consultation on a draft supervisory statement setting out deferred tax asset recognition under Solvency II

18 Feb, 2014

The Prudential Regulation Authority (PRA) has issued for consultation a draft supervisory statement setting out their expectations of insurance firms within the scope of Solvency II in relation to the recognition of deferred tax assets on the Solvency II balance sheet. The consultation ‘CP3/14 Solvency II: recognition of deferred tax’ is open for response until 19 March 2014.

Solvency II is the new solvency regime for all EU insurers and reinsurers, which also covers the insurance operation of bancassurers. Due to come into effect on 1 January 2016, Solvency II aims to implement solvency requirements that better reflect the risks that companies face.

The purpose of the draft supervisory statement is to highlight to firms the areas they need to pay particular attention to when considering whether they can recognise a deferred tax asset on their Solvency II balance sheet and to also clarify the PRA’s expectations in relation to evidence supporting the credibility of profit projections to support deferred tax asset recognition. 

The full consultation paper and draft supervisory statement can be accessed from the PRA website.

IFRS conference in Singapore announced

18 Feb, 2014

The IFRS Foundation has announced that its upcoming conference will be held in Singapore on 29-30 May 2014. The conference will include discussions on the future of financial reporting, as well as the latest IASB updates on the major IFRSs, implementation issues, conceptual framework and research projects.

The conference will feature presentations by IASB Chairman Hans Hoogervorst and IASB members (Stephen Cooper, Sue Lloyd, Patricia McConnell, and Chungwoo Suh).

Some of the topics to be covered at the conference include:

  • The future of financial reporting
  • IASB update:
    • Major IFRSs
    • Implementation
    • Conceptual framework
    • Research projects
  • Panel discussions on IFRS disclosures and IFRS 9

The conference will also have break-out sessions featuring:

Morning break-out sessions Afternoon break-out sessions
  1. Financial instruments: macro hedge accounting
  2. Insurance contracts
  3. Leases (lessee)
  4. Conceptual Framework (Part 1): elements and recognition
  1. Financial instruments: impairment
  2. Leases (lessor)
  3. Business combinations under common control
  4. Conceptual Framework (Part 2): measurement

More details, including registration information, are available on the IASB website.

We comment on new draft SORP for registered social housing providers

17 Feb, 2014

We have published our comment letter on the National Housing Federation’s (NHF’s) Exposure Draft (ED) on a revised Housing Statement of Recommended Practice (SORP) setting out revised proposals for accounting for registered social housing providers in the UK (“the Housing SORP”). We are generally supportive of the proposals in the Housing SORP but have highlighted a number of areas that need to be addressed before a final SORP can be published.

The ED updates the previous Housing SORP to include the requirements of Financial Reporting Standard (FRS) 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland'.

 Our key comments include:  

  • We believe that further guidance is required for the measurement of the recoverable amount of properties held for social housing in the context of testing for impairment.  Under FRS 102, recoverable amount is the higher of fair value less costs to sell and value in use.  The Housing SORP suggests that existing use value for social housing (EUV-SH) based on the information obtained from the sector’s valuers is the best indicator of recoverable amount. We believe that the adoption of the EUV-SH method to calculate recoverable amount “would lead to frequent impairment write downs in circumstances when this would not be appropriate”.     
  • We recommend that the SORP includes “some general guidance on where certain balances should be presented in the Statement of Comprehensive Income, for example the amount of grant that has been recognised or amortised”.  We also comment that the SORP should only include those requirements of FRS 102, that are relevant to the housing sector.
  • We disagree that the recycling of grants should be treated as provisions.  We believe that “they should be disclosed in a manner that is consistent with when they are repayable if repayable, i.e. a long-term liability when due after more than one year and a current liability when due in less than one year”.

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

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