June

IASB proposes amendments regarding the application of the investment entities exemption

11 Jun, 2014

The International Accounting Standards Board (IASB) has published an Exposure Draft (ED) of proposed amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures'. The proposed amendments aim at addressing issues that have arisen in relation to the exemption from consolidation for investment entities. Comments are requested by 15 September 2014.

 

Background

In October 2012, the IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) providing an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities which meet the definition of an 'investment entity'. Subsequently, the IFRS Interpretations Committee received several submissions regarding the implementation of the exemption. The Committee recommended to the IASB to address the issues in a narrow-scope project, and in March 2014 the IASB formally added a project on IFRS 10/IAS 28 — Investment entity amendments to its work programme.

 

Suggested changes

The IASB proposes in ED/2014/2 Investment Entities: Applying the Consolidation Exception (Proposed amendments to IFRS 10 and IAS 28) amendments aimed at clarifying the following aspects:

  • Exemption from preparing consolidated financial statements. The suggested amendments confirm that an entity can apply the consolidation exemption even if its parent entity measures its subsidiaries at fair value in accordance with IFRS 10.
  • A subsidiary providing services that relate to the parent's investment activities. A subsidiary that provides services related to the parent's investment activities should not be consolidated if the subsidiary itself is an investment entity.
  • Application of the equity method by a non-investment entity investor to an investment entity investee. When applying the equity method, a non-investment entity investor in an investment entity retains the fair value measurement applied by the associate to its interests in subsidiaries, unless the non-investment entity investor is a joint venturer where the joint venture is an investment entity.

 

Transition requirements and effective date

The ED does not contain a proposed effective date. Also, no specific transition provisions are included in the ED.

 

Additional information

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IASB Chairman continues to believe that investors need globally comparable financial information

11 Jun, 2014

IASB Chairman Hans Hoogervorst has reacted to statements that the opportunity for the adoption of IFRSs in the United States has been lost.

During a speech at an SEC conference in California last week, former SEC chairman Christopher Cox opined that IFRSs wouldn't be adopted in the United States anymore as the enthusiasm for IFRSs had noticeably receded. As part of the reason he made out that the IASB had been neglecting U.S. views by appearing at U.S. roundtables and meetings but rarely and, if doing so, being demonstrably aloof. Mr Cox claimed the IASB did not fully understand the way the FASB interacted with its stakeholders.

In a statement reacting to the speech, Mr Hoogervorst commented:

Former Chairman Cox has shifted his focus from a single set of high quality global standards to maintaining a national standard setter that is 'supple' when responding to domestic priorities and concerns. We continue to believe that investors are best served by high quality globally comparable information, and that includes US investors. As former Chairman Cox noted, US investors have trillions of dollars invested in entities reporting under IFRS. We never forget the importance of these stakeholders and are expanding our efforts to reach out and consult with them on all of our projects.

I believe that we are on the right track with leases, and have disagreed before with former Chairman Cox about this. Both the IASB and the FASB have reaffirmed the heart of our proposals – that lessees need to put this missing obligation on their balance sheet. This is what the SEC staff itself suggested in a 2005 report under Sarbanes-Oxley. At the same time, they cautioned that these reforms would be highly controversial and meet strong resistance. I’m sorry to say that they were right.

We are grateful to the IASB for allowing us to make Mr Hoogervorst's full statement available on IAS Plus. Mr Cox full speech is available on the conference website.

Philippe Danjou remarks on long-term investment

10 Jun, 2014

On 4 June 2014, at a roundtable event hosted by the OECD and the Ministry of Finance of Singapore, IASB member Philippe Danjou provided his views on the importance of long-term investing, the misconception of fair value, and the IASB’s goals for its accounting standards financial instruments and insurance contracts.

In his remarks, Mr Danjou focused on four points:

  1. Long-term investment provides a key source of funding for companies; therefore, it is important the IASB “develop financial reporting standards that help investors make sound capital allocation decisions.”
  2. There is little evidence that measurement tools, such as fair value, have contributed to short-termism in financial markets.
  3. There is limited use of fair value outside of the financial services sector and that “[f]air value accounting, where it is a relevant measure, enables transparent and timely reporting of the ‘bad news’, which is essential for sound investment decisions.”
  4. The upcoming Standards on financial instruments and insurance contracts are aimed to be more closely aligned with business models of the banking industry and improve transparency. The IASB does not expect an increased use of fair value accounting.

For more information, see the press release and the full transcript on the IASB’s website.

We comment on a number of tentative agenda decisions of the IFRS Interpretations Committee

10 Jun, 2014

We have published our comment letters on IFRS Interpretations Committee agenda decisions on IAS 1, IAS 12, IAS 34, and IAS 39, as published in the March IFRIC Update.

More information about the issues is set out below:

IssueMore information
IAS 1 Presentation of Financial Statements — Disclosure requirements relating to assessment of going concern
IAS 12 Income Taxes — Recognition of deferred tax for a single asset in a corporate wrapper
IAS 34 Condensed Financial Statements — Condensed statement of cash flows
IAS 39 Financial Instruments: Recognition and Measurement — Classification of a hybrid financial instrument by the holder

You can access all our comment letters to the IASB, IFRS Foundation, and IFRS Interpretations Committee here.

FRC publishes Guidance on the Strategic Report

09 Jun, 2014

As a first step in the Financial Reporting Council’s (FRC) new programme of work to promote clear and concise reporting, it has published Guidance on the Strategic Report, a comprehensive publication designed to help companies prepare a strategic report that meets both the requirements of the law and the needs of shareholders "the Guidance").

There is a general recognition that the lack of structure in some annual reports makes it harder for investors (the primary users of the annual report) to draw out the most critical content required to get an insight into the way the business is run and, its strategic direction and its performance in the year. The FRC’s ‘clear and concise programme’ will comprise of a series of initiatives over the coming year and beyond to encourage clearer reporting, focusing on what is material. Other initiatives will include publishing Financial Reporting Lab case studies setting out investor feedback on how well companies have addressed clarity and conciseness and reporting by the Corporate Reporting Review team on reports where it commonly observes ‘clutter’.

The FRC was asked by the Department for Business, Innovation and Skills (BIS) to prepare guidance on the strategic report in the wake of the introduction of the revised legal framework for narrative reporting, which came into force for periods ending on or after 30 September 2013.  An Exposure Draft of guidance to assist directors of listed companies apply such guidance was issued in August 2013 with a comment period ending November 2013.

The Guidance is a best practice statement rather than a mandatory reporting framework.  As well as advice on the structure of the strategic report, the document also sets out the FRC’s vision of the annual report and brings together into one document previously separate elements introduced by the FRC and BIS.

Although aimed mostly at quoted companies, for which the new regulations contain additional requirements, the Guidance is still useful for unquoted companies as a source of best practice recommendations.

The document provides high level guidance on the following topics:

  • The purpose of the strategic report
  • The application of materiality in the context of the strategic report
  • Communication principles for the strategic report

It also discusses in detail the strategic report's content elements, setting out the FRC's view on what information companies should present in order to comply with the legal requirements, and ideas on how this could be presented.

The press release and final Guidance document can be downloaded from the FRC website.

Other useful links:

UK and Japanese audit regulators agree to co-operate on cross-border supervision

09 Jun, 2014

The Financial Reporting Council (FRC) has announced that it has entered into a co-operation agreement with the Certified Public Accountants and Auditing Oversight Board (CPAAOB) and the Financial Services Agency of Japan (JFSA) to facilitate the exchange of information related to the oversight of auditors and mutual cooperation in the area of public oversight, registration, inspections and investigations of auditors of companies that are subject to the regulatory jurisdictions of both parties.

The Companies Act and supporting regulations implementing the Statutory Audit Directive require that third country auditors (those outside the EEA) are registered with the FRC. The degree of oversight by the FRC depends on the local regulatory environment. The European Commission has recently ruled that the Japanese regime is “equivalent”, allowing mutual reliance on inspection, and these mutual co-operation agreements give effect to this in the UK, allowing the exchange of regulatory information between UK and Japanese audit regulators. 

A copy of the FRC press release, including links to the exchange of letters, can be found on the FRC website.

We comment on revised guidance on impairment of social housing assets

06 Jun, 2014

We have published our comment letter on the revised guidance relating to impairment of social housing assets published by the National Housing Federation’s (NHF) and the SORP Working Party. We are generally supportive of the revised guidance but have highlighted a number of areas that need to be addressed before a final Housing Statement of Recommended Practice (SORP) can be published.

An original Exposure Draft (“the original ED”) of a SORP for registered social housing providers was issued by the NHF in December 2013 with a comment period which closed on 14 February 2014.  The impact assessment performed by the NHF, along with the responses to the original ED indicated that that “the sector was deeply concerned about proposals on the impairment of social housing assets”.

Following consideration of responses to the original ED, the NHF, along with the SORP Working Party, published a further ED in April 2014 that significantly revised the proposed guidance relating to impairment of social housing assets.

Our key comments on the revised guidance relating to impairment of social housing assets are:  

  • We do not believe a purely cash flow based estimate (i.e. value in use) in determining the recoverable amount of social properties would provide more relevant and reliable information to users.     
  • We recommend that the SORP includes some more guidance on how depreciated replacement cost should be calculated in respect of social housing properties. In addition, we also believe there are other methods for determining the value of assets held for service potential such as fair value less cost to sell, but the use of different methods may increase diversity in practice. Therefore, we suggested the SORP use one method to encourage consistency.
  • We do not see additional benefits in requiring social landlords to disclose the value in use of a cash generating unit if it chooses to use the VIU-SP estimation technique in performing an impairment assessment.  

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

ESMA comment letters on IFRIC Interpretations Committee tentative agenda decisions on IAS 12 and IAS 34

06 Jun, 2014

The European Securities and Markets Authority (ESMA) has published two comment letters referring to tentative agenda decisions taken by the IFRS Interpretations Committee (IFRS IC).

The first comment letter refers to the IFRS IC’s tentative agenda decision on IAS 34 Interim Financial Reporting.   The IFRIC IC took the tentative decision not to add to its agenda the request for clarification it received on the application of the requirements regarding the presentation and content of the condensed statement of cash flows in the interim financial statements. 

ESMA agrees that an explicit prohibition of a three-line presentation of statement of cash flows in IAS 34 “would be inconsistent with the principles-based nature of IFRSs”.  However, due to “existing diversity in practice” ESMA believes that “a clarification of paragraphs 10 and 15 of IAS 34 would enhance the enforceability of IFRSs”.  ESMA also believes that the threshold for including additional line items or notes in the interim financial statements in paragraph 10 of IAS 34 “could be lowered”.  ESMA comments that “these suggested amendments to IAS 34 would contribute to consistency in application and enhance enforceability of IAS 34 requirements”.

The second comment letter refers to the IFRIC IC’s tentative agenda decision on IAS 12 Income Taxes.  The IFRIC IC took the tentative agenda decision not to add to its agenda the request for clarification it received on the accounting for deferred tax in the consolidated financial statements of the parent, when a subsidiary has only one asset and the parent expects to recover the carrying amount of this asset by selling all the shares in that subsidiary.

ESMA believes that this project should be dealt with by the International Accounting Standard Board (IASB) as a narrow scope project and “urges the IFRIC IC to refer this matter to the IASB”.

Both the IAS 34 and IAS 12 comment letters can be found on the ESMA website.

Agenda for June 2014 IASB meeting

06 Jun, 2014

The International Accounting Standards Board (IASB) will meet at its offices in London on 17–19 June 2014. Part of the meeting will be held jointly with the Financial Accounting Standards Board (FASB) to discuss the leases project. Additionally, the IASB will discuss insurance contracts, annual improvements (2012-2014 cycle), issues from the IFRS Interpretations Committee, the conceptual framework, business combinations under common control, and its research project on discount rates.

The full agenda for the meeting, dated 6 June 2014, 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.

ACCA response to the IASB’s request for information on the Post-Implementation Review of IFRS 3

06 Jun, 2014

The Association of Chartered Certified Accountants (ACCA) has published a comment letter responding to the International Accounting Standard Board’s (IASB’s) request for information on the Post-Implementation Review (PIR) of IFRS 3 Business Combinations.

The IASB issued a Request for Information (RFI) in January 2014 seeking comments from stakeholders to identify whether IFRS 3 'Business Combinations' provides information that is useful to users of financial statements; whether there are areas of IFRS 3 that are difficult to implement and may prevent the consistent implementation of the standard; and whether unexpected costs have arisen in connection with applying or enforcing the standard.

The ACCA indicate that it is “very supportive of the PIR as an essential element of the due process of developing global accounting standards” and comments that as a result of the PIR, “some fundamental aspects of IFRS 3 and related standards need to be considered”.

The ACCA highlight three main “fundamental” areas for reconsideration by the IASB in their comment letter:

  • Whilst supporting the principle that goodwill acquired in a business combination is assessed for impairment on an annual basis, the ACCA also “recognise that there are arguments for an amortisation approach”.  The ACCA comment that “if an impairment-only model is retained then some reconsideration of IAS 36 may be needed” in relation to its disclosure requirements and also the more “subjective elements of the standard” which may be “allowing for impairments to be avoided”.
  • Consistent with the views of the Financial Reporting Council (FRC), the ACCA would like the IASB to “reconsider the cost/benefit assessment of whether certain intangible assets should continue to be separately recognised from goodwill”.  The ACCA highlights that “intangibles, such as brands and customer relationships may be difficult to separate from the business and the goodwill attached to it” and are also hard to value.  It mentions that “it is not clear that the requirement for separate recognition and valuation yields useful information to readers of the accounts”.
  • The ACCA highlights that there are “difficult borderline cases” in determining whether there has been an asset purchase or a business and comments that “differences in treatment may be influencing the categorisation”.  It would like the IASB to review such differences “and assess whether they are merited in the light of the pressure that they put on the categorisation of transactions and the consequent risk of manipulation of the financial statements”.

Alongside the comment letter, the ACCA has also published the results of a research report ‘Worldwide application of IFRS 3, IAS 38 and IAS 36, related disclosures and determinants of noncompliance’.  This had a similar scope to the IASB RFI and looked at the accounting for, and the information disclosed under, IAS 36 Impairment of Assets, IAS 38 Intangible Assets and IFRS 3 Business Combinations and the levels of compliance with disclosures required by the standards.   The report looked at a sample of 544 large non-financial companies across the world preparing IFRS financial statements.  The research report highlights “significant disparities” in the levels of disclosure provided by companies about business combinations, intangible assets and impairment testing.  The research report also highlights differences in the levels of compliance with the mandatory requirements of the standards.  Some of the key findings related to each of the standards were as follows:

Disclosures about business combinations (IFRS 3)

  • For 280 companies that had business combinations some of the companies only disclosed “selected information” that was mandated by IFRS 3.  Some reported actual price/consideration transferred for completing the business combinations but not all.
  • Only 101 companies of the 280 disclosed acquisition-related expenses incurred and expensed in the income statement.
  • 258 out of 280 companies disclosed that they recognise goodwill but only 61 disclosed a qualitative description of the factors that made up the goodwill.  The research report indicates that this could be due to “a lack of guidance” on what is expected.
  • A number of companies where the acquisitions involved between 50% and 99% remained silent on how the non-controlling interest was measured.

The ACCA comment that “without specific guidance on when and how items should be disclosed, companies provide significantly disparate information about business combinations, resulting in a lack of comparability”.  The ACCA indicate that it is unclear whether the disparity is because “firms do not view their acquisitions as material, do not understand the mandated requirements and/or simply do not follow the standard to the letter”.

Application of IAS 38 and related disclosures

  • Although “other intangibles” were highlighted as a separate class of intangible assets in the statement of financial position for 453 of 517 companies that had at least one type of intangible asset other than goodwill, disclosure regarding these assets was varied.
  • A “large proportion of the sample” did not disclose whether the useful lives of intangible assets were indefinite or finite and, if finite, the useful lives or the amortisation rates used.  Many did not disclose the line item(s) in the income statement in which the amortisation of intangible assets was included.
  • Out of 151 companies that had intangible assets with an indefinite useful economic life, only 58 per cent disclosed the reasons supporting that assessment.

Application of IAS 36 and related disclosures

  • A large number (92) of the companies used post-tax discount rates during the impairment testing process although IAS 36 requires the use of pre-tax discount rates.  The ACCA highlights that this is an area that requires improvement.
  • Approximately 102 companies (out of 485 that disclosed some information about cash flow estimations) did not disclose the growth rate used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts as is required by IAS 36.
  • The ACCA comment that their analysis “illustrates disparities between companies in the amounts and types of information actually provided”.  It would like the ACCA to review “the disclosures mandated by IAS 36” and provide “specific guidance on when this information is expected”.

The findings of the research report have been used to inform the detailed responses to the IASB which can be found in the full comment letter on the ACCA website.

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