August

IASB changes IAS 27 to again allow application of the equity method in separate financial statements

12 Aug, 2014

The International Accounting Standards Board (IASB) has published 'Equity Method in Separate Financial Statements (Amendments to IAS 27)'. The amendments reinstate the equity method as an accounting option for investments in subsidiaries, joint ventures and associates in an entity's separate financial statements. The amendments are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.

 

Background

The option to apply the equity method had been removed during the 2003 revision of IAS 27 Consolidated and Separate Financial Statements as the IASB noted at that time that the information provided by the equity method is reflected in the investor's economic entity financial statements and that there was no need to provide the same information in the separate financial statements. The decision was carried forward to IAS 27 Separate Financial Statements in 2011. Constituent feedback to the Agenda consultation 2011, however, 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.

Separate financial statements are not required by IFRSs. In general, separate financial statements are required by local regulation or other financial statement users. In some jurisdictions, corporate law does also require 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 currently be prepared to meet the requirements of both IAS 27 and local laws.

 

Amendments

The amendments allow an entity to account for investments in subsidiaries, joint ventures and associates in its separate financial statements

  • at cost,
  • in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement for entities that have not yet adopted IFRS 9), or
  • using the equity method as decribed in IAS 28 Investments in Associates and Joint Ventures.

The accounting option must be applied by category of investments.

The amendments also clarify that when a parent ceases to be an investment entity, or becomes an investment entity, it shall account for the change from the date when the change in status occurred.

In addition to the amendments to IAS 27, there are consequential amendments to IAS 28 to avoid a potential conflict with IFRS 10 Consolidated Financial Statements and to IFRS 1 First-time Adoption of International Financial Reporting Standards.

 

Other considerations

Given that the definition of sperate financial statements has long been an area of confusion, the IASB has made changes to confirm that separate financial statements are those presented in addition to consolidated financial statements or in addition to the financial statements of an investor that does not have investments in subsidiaries but has investments in associates or joint ventures in which the investments in associates or joint ventures are required by IAS 28 Investments in Associates and Joint Ventures to be accounted for using the equity method.

The IASB refrained from providing transitional relief as entities should be able to use the information that is used for the consolidation of subsidiaries in their consolidated financial statements without performing any additional procedures. Also, the IASB concluded that information in the financial statements of ultimate, or intermediate, parents could be used on the initial application of the amendments. Finally, the IASB points out in its Basis for Conclusions, that the application of the equity method in separate financial statements is optional and not mandatory.

 

Effective date

The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted. The amendments are to be applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

 

Additional information

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IFRS Foundation publishes update on leases project

08 Aug, 2014

The IFRS Foundation staff has published a document setting out the key tentative decisions reached on the leases project during the first half of 2014. The document also explains the IASB’s reasons for reaching those tentative decisions and explains the remaining work to be done in completing the project.

The leases project is a joint IASB-Financial Accounting Standards Board (FASB) project that seeks to improve the accounting for leases by developing an approach that is more consistent with the conceptual framework definitions of assets and liabilities. The project would result in a replacement of IAS 17 Leases.

ED/2013/6 Leases (“the Exposure Draft”) was published on 16 May 2013.  Extensive feedback has been received on the proposals contained within the Exposure Draft and during the first half of 2014 the boards of the IASB and FASB (“the Boards”) have redeliberated and reached tentative decisions on many aspects of the project.  During the second half of 2014, the Boards will continue their joint deliberations.

It is expected that the new leases standard will be issued in 2015.  

Alongside the document, an accompanying podcast is provided.  Both the podcast and the document can be accessed on the IASB website.

Deloitte has followed the redeliberations of the Boards and all tentative decisions to date; see our leases project page for details.

European Commission consults on the impact of IFRSs in the EU

07 Aug, 2014

The European Commission (EC) has launched a public consultation on the impact of International Financial Reporting Standards (IFRSs) in the EU. Responses are requested by 31 October 2014 after which the results will summarised into a technical report that will feed into a larger evaluation report to be presented by the EC to the EU Council of Ministers and the European Parliament.

The 'IAS Regulation' (Regulation 1606/2002) (link to EUR-Lex website) requires EU companies with securities admitted to trading on a regulated market at their year-end to prepare their consolidated financial statements in accordance with IFRSs as adopted by the EU. The IAS Regulation also gives member states an option to permit or require the use of IFRSs as adopted in the EU in other cases such as within individual financial statements of listed companies and the consolidated and individual financial statements of unlisted companies.

The EC is currently evaluating whether the initial objectives of the IAS Regulation are still relevant and to identify areas for improvement in the functioning of the IAS Regulation, if needed. This review is required to be completed by 31 December 2014 by Article 9.2 of Regulation 258/2014.

In June 2014, the EC announced the membership of an informal 'Expert Group on the evaluation of the IAS Regulation' that is intended to advise and assist the EC in conducting the retrospective evaluation of the IAS Regulation. The public consultation will contribute to part of the EC's evaluation process.

The evaluation of the IAS Regulation is also intended to integrate the recommendations of the special advisor Mr. Maystadt on how the EU's contribution to International Financial Reporting Standards can be reinforced and how the governance of the European bodies involved in developing these standards can be improved. The evaluation is designed to complement Mr. Maystadt's recommendations by providing factual data about the IFRS experience in Europe so far.

The public consultation seeks views from "all citizens and organisations" but especially "capital market participants and companies preparing financial statements or using them for investment purposes (whether or not they use IFRS)". Respondents are asked to complete a questionnaire giving their views on aspects such as:

  • The continued relevance of the initial objectives of the IAS Regulation;
  • The scope of the IAS Regulation;
  • Costs and benefits of the IAS Regulation;
  • The current EU endorsement mechanism and criteria;
  • The quality of IFRS financial statements; and
  • Enforcement of IFRSs.

The press release and the full consultation are available on the European Commission website. 

On 28 October 2014, the European Commission announced that the deadline for responding to this consultation has been extended to 7 November 2014.  Please see the updated information on the EC website.

CFA Institute issues part 2 of its study on financial crisis insights on bank performance reporting

07 Aug, 2014

The CFA Institute, a global association of investment professionals, has published part 2 of its study 'Financial Crisis Insights on Bank Performance Reporting'. The second part focuses on the relationship between disclosed loan fair values, impairments, and the risk profile of banks.

This report reveals systematic differences in how large and complex banks in 16 countries disclose fair values of loans and write off bad or “impaired” debt across countries. The report suggests that enhancing disclosures is necessary for comparing bank balance sheets. The study also provides a breakdown of credit default swap spreads which reflects bank-specific risks from a capital markets perspective.

The report is available for download on the CFA Institute website. Part 1 of the CFA Institute's study, which discussed the assessment of key factors influencing price-to-book ratios, was published in July 2014.

Charity commission reminds charities with net current liabilities of the need for adequate disclosures in the Trustees’ Annual Report

06 Aug, 2014

The Charity Commission has published the results of a review (“the review”) it carried out of the accounts of charities with net current liabilities. The review focused on the charities’ Trustees’ Annual Report and accounts and sought to assess disclosures made regarding the risks associated with the net current liability position and trustees’ responses to address them.

The Charity Commission identified 1,348 charities whose accounts reported a net current liability position and then randomly selected 98 of those for a more detailed follow up.  

The review identified that of the 98 accounts reviewed, 42 charities did not discuss the net current liabilities issue in the Trustees’ Annual Report.  The charity commission comments that these charities “missed the opportunity to explain their funding model, how the risk was being managed and how they planned to continue to operate”.

The Charity Commission has used the results of the review to remind trustees of charities with net current liabilities that “they should have a good understanding of their charity’s activities and its financial position, so that the financial risks can be identified and managed”.  It further comments that “trustees should use their Trustees’ Annual Report and accounts as an opportunity to reassure their funders, supporters and beneficiaries that they are actively managing the situation” and also reminds trustees that “communicating the financial position of a charity is a key requirement of the SORP”.

The press release and full report can be obtained from the Charity Commission website.

IPSASB proposes to align IPSASs with recent IASB pronouncements

05 Aug, 2014

The International Public Sector Accounting Standards Board (IPSASB) has released an exposure draft of proposed improvements to International Public Sector Accounting Standards (IPSASs). The proposals incorporate relevant amendments made by the International Accounting Standards Board (IASB) in the 2009-2011 and 2010-2012 cycles of annual improvements, and the changes made by 'Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)'.

The proposals are contained in IPSASB Exposure Draft 55 Improvements to IPSASs 2014 and would see amendments made to four IPSASs:

  • IPSAS 1, Presentation of Financial Statements - clarification of comparative information requirements
  • IPSAS 17, Property, Plant and Equipment - classification of servicing equipment, clarification of the revaluation methodology, acceptable methods of depreciating assets
  • IPSAS 28, Financial Instruments: Presentation - tax effects of distributions to holders of equity instruments
  • IPSAS 31, Intangible Assets - clarification of the revaluation methodology, clarification of acceptable methods of amortising assets.

The exposure draft contains an appendix which outlines all of the items the IPSASB considered including in the document, and the rationale as to why changes equivalent to those made by the IASB in recent narrow scope amendment projects have not been proposed by the IPSASB. Reasons include where:

  • IASB amendments relate to IFRSs without an equivalent IPSAS, e.g. first-time adoption, business combinations , share-based payments and interim financial reporting (in some cases, the IPSASB has projects underway in these topic areas)
  • the existing IPSAS is not fully converged with IFRSs, e.g. borrowing costs, related parties, employee benefits, segment reporting, financial instruments
  • minor amendments are not considered relevant.

The exposure draft does not indicate a proposed effective date for the amendments if they are finalised. The comment period on the exposure draft closes on 30 September 2014. Click for access to the exposure draft (link to the IFAC website).

July 2014 IFRS Interpretations Committee meeting notes

04 Aug, 2014

The IFRS Interpretations Committee met in London on 15–16 July 2014. We've posted the Deloitte observer notes from the meeting. The Committee (1) continued discussions on a number of issues related to IFRS 11, IAS 12, IAS 16, IAS 19 and IFRIC 14, (2) considered finalising tentative agenda decisions on IAS 1, IAS 39, IAS 34, IFRS 2 and IAS 12, and (3) considered new issues on IFRS 12, IAS 16, IAS 39 and IAS 21.

We provide comments to the FRC on the IAASB’s Exposure Draft on proposed changes to various International Standards on Auditing (ISAs) to better deal with disclosures in financial statement audits

04 Aug, 2014

We have published our comment letter to the Financial Reporting Council (FRC) on the International Auditing and Assurance Standards Board’s (IAASB’s) recently issued Exposure Draft (ED) ‘Addressing Disclosures in the Audit of Financial Statements’ that was published in May 2014.

The FRC issued a call for comments in June 2014 with the intention of using such comments received to assist it in developing its own response to the IAASB  and to assist it in developing proposals for the adoption into the UK equivalent ISAs (UK and Ireland) when the changes to the ISAs are finalised.

The IAASB ED, which follows an earlier discussion paper, proposes changes to various International Standards on Auditing (ISAs) to better deal with disclosures in financial statement audits. The ED seeks to achieve an appropriate focus by auditors on disclosures and encourage earlier auditor attention on them during the audit process, including disclosures where the information is not derived from the accounting system.

We agree with the need for the IAASB’s project, given the increasing relevance of disclosures to users of financial statements, and indicate our broad support for the IAASB’s proposals. The IAASB is proposing only minimal changes to the requirements of the standards, but extensive additions to the application material. 

We note the IAASB’s plans to change the assertions underlying the audit, which, whilst only in the application material, are fundamental to many firms’ methodologies. We note that whilst integrating “and related disclosures” into the underlying assertions relating to valuation, existence, completeness etc. will make auditors think in a joined up way, there is possibility that this might deemphasise the importance of disclosures which had previously had their own assertions. Linked to this proposal, the IAASB also needs to consider how these integrated assertions will cover disclosures that are not tied to specific balances, classes of transactions and events.

The application material offers auditors the chance to use different assertions as long as they can be shown to cover the same issues.  We suggest that the IAASB’s proposed Staff Publication could usefully indicate that where firms use this as a way of continuing to use the old assertions they will nevertheless need to be able to demonstrate a mapping to the new ones, including any necessary supplementation to policies and procedures to comply with the other changes in the application material.

The IAASB is proposing to change “adequate disclosures” to “appropriate disclosures” throughout the ISAs. This is welcome, because it recognises that the test of good disclosure should not just be “adequacy”; in some circumstances more disclosure can obscure an issue and be inappropriate. We ask that the IAASB co-ordinate finalisation of this project with the IASB’s ED/2014/1 Disclosure Initiative (Proposed amendments to IAS 1) which covers similar ground for preparers of financial statements.

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

CMAC call for members

04 Aug, 2014

The IASB's Capital Markets Advisory Committee (CMAC) is currently seeking applications for membership after the terms of a number of members expire at the end of 2014.

The CMAC is a group of professional financial analysts who meet three times a year with  members of the IASB to provide the views of professional investors on financial reporting issues.

Please click for more information about the CMAC and the call for members on the IASB's website.

July 2014 IASB meeting notes — Part 3

03 Aug, 2014

The IASB's meeting was held on 22–24 July 2014, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from Wednesday's session on the conceptual framework and the research programme.

Click through for direct access to the notes:

Wednesday, 23 July 2014

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting. Notes from the remaining sessions will be posted in due course.

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