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October

New EFRAG governance structure becomes effective, EFRAG Board members announced

31 Oct 2014

The EFRAG General Assembly convened today, first in its old composition, then in its new composition thus rendering the new EFRAG structure effective. Part of the meeting of the new General Assembly was devoted to the appointment of EFRAG Board members (including an acting President).

In June 2014, the EFRAG General Assembly approved the new EFRAG Statutes and EFRAG Internal Rules with an effective date of 31 October and established a temporary Nominating Committee to select and recommend candidates for the new EFRAG Board.

According to the revised EFRAG Internal Rules, the EFRAG Board would be responsible for all technical positions of EFRAG, after having considered the technical advice provided by EFRAG TEG and reflecting the results of EFRAG's due process and must ensure that EFRAG follows open and transparent processes. The EFRAG Board is composed of members belonging to two pillars - eight members each from European Stakeholder Organisations and National Standard Setters.

The Nominating Committee submitted a report to the General Assembly with a proposed composition of the Board. The General Assembly accepted the proposed composition and appointed the following Board members:

  • European Stakeholder Organisations:
    • Patrice Marteau, Industrial and trading companies
    • Claes Norberg, Industrial and trading companies
    • Jorge Gil Lozano, Banks
    • Gerard Gil, Banks
    • Benoît Jaspar, Insurance companies
    • Laurence Rivat, Accountancy profession
    • Mark Vaessen, Accountancy profession
    • Hans Buysse, User
  • National Standards Setters:
    • Chairman ANC (until the appointment: Michel Barbet-Massin) (France)
    • Liesel Knorr, Chairman ASCG (Germany)
    • Angelo Caso, Chairman OIC (Italy)
    • Roger Marshall, Chairman FRC AC (UK)
    • Stig Enevoldsen, Member DASC (Denmark)
    • Peter Sampers, Incoming Chairman DASB (Netherlands)
    • Erlend Kvaal, Chairman NASB (Norway)
    • Anders Ullberg, Chairman SFRB (Sweden)

The Maystadt report had also recommended including the European Supervisory Authorities and the ECB as members, however, these have declined full membership and will be observers on the new Board.

The General Assembly also appointed Roger Marshall as acting President of the Board until a President is a elected.

Deloitte is pleased that Laurence Rivat has been appointed to the Board. Laurence is Head of the Paris IFRS Centre of Excellence of Deloitte and member of Deloitte's Global IFRS Leadership Team (GILT). She is also a member of the IFRS Interpretations Committee. Deloitte also notes with pleasure, that Stig Enevoldsen, former Deloitte partner, will represent the Danish standard-setter on the new EFRAG Board.

Please click for the press release announcing the appointments on the EFRAG website. The IASB has issued a press release welcoming the appointments.

Second and final draft of the CDSB's environmental reporting framework

31 Oct 2014

The final draft builds on the feedback received during the first consultation held in spring 2014. The completed CDSB Framework will be available in March 2015.

The Climate Disclosure Standards Board (CDSB) is updating the existing CDSB Climate Change Reporting Framework, originally released in September 2010, to take account of recent developments in corporate non-financial reporting. As the first consultation draft already demonstrated, the scope of the updated CDSB Framework now encompasses environmental information, in particular natural capital. The updated Framework provides specific guidance on the characterisation, measurement and reporting for GHG emissions, forest risk commodities and water.

The new consultation draft is open for comment until 14 December 2014. Click for more information (link to CDSB website).

The CDSB has also recording a briefing video providing an introduction to the updated CDSB Framework and outlining how to respond to the consultation

European Commission adopts report assessing the economic consequences of CBCR

30 Oct 2014

The European Commission has today adopted a report assessing the economic consequences of country-by-country reporting (CBCR) by banks and investment firms.

CBCR was introduced into EU law in June 2013 and implemented in the UK in December 2013.  It requires certain financial institutions to report each year on a variety of measures (including turnover, profits, tax paid and subsidies received) for each country where they have an establishment.

The report, which draws on the results of a public consultation, an external study and a roundtable discussion, explains that the expectation of stakeholders is that CBCR will have a positive impact on transparency and accountability. However, it is suggested that the transparency benefit would be enhanced by additional guidance to ensure consistency across the EU.

According to the report, expected positive effects of CBCR include:

  • a greater ability for investors to make informed investment decisions and hold banks to account;
  • better risk management by reporting institutions;
  • a reduction in the cost of equity capital;
  • reduced ability for reporting institutions to mask their true performance; and
  • increased accounting quality, which could lead to greater levels of competitiveness and financial stability.

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

EFRAG final comment letter on macro hedging

30 Oct 2014

The European Financial Reporting Advisory Group (EFRAG) has issued its final comment letter on the IASB’s Discussion Paper DP/2014/1 ‘Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging’.

EFRAG commends the IASB’s effort in comprehensively analysing banks’ risk management practices and developing new thinking in how to best reflect the effects of such practices on an entity’s financial position and performance. EFRAG supports the view that a new hedge accounting model for open portfolios, which are managed on a net risk basis, is needed.

EFRAG notes that companies in other industries, such as insurance and utilities, face similar difficulties to banks in using current hedge accounting requirements. As a result they are also interested in the development of a macro hedge accounting solution covering a variety of risks, such as commodity price risk and liquidity risk. EFRAG acknowledges the needs of these companies and encourages the IASB to undertake further analysis in order to conclude whether it is possible to develop a one-size-fits-all solution or whether 'a family' of macro hedging models is required.

EFRAG disagrees with the widening scope of this project, evidenced in the discussion paper, which is in contrast to the original objective when the project was decoupled from the project on general hedge accounting. The focus of the IASB is no longer on finding a hedge accounting solution for open portfolios but on the revaluation of all portfolios that are dynamically managed. EFRAG does not believe that revaluing all portfolios that are dynamically managed, regardless of whether or not they have been risk-mitigated through hedging, will lead to decision-useful information.

EFRAG recommends that the IASB develops a model for hedge accounting in accordance with the original objective of the project. Such a hedge accounting solution would mitigate the accounting mismatch inherent in a mixed measurement model where hedged items are measured at amortised cost and hedging instruments are measured at fair value. At the same time, such a solution would not override the measurement requirement in IFRS 9 Financial Instruments that amortised cost measurement is appropriate for some financial instruments (which the proposed scope in the discussion paper would).

EFRAG also notes that many banks manage their interest rate risk on a cash flow basis rather than a fair value basis and that many of the concepts in the discussion paper would fit more comfortably with a cash flow hedge model rather than a fair value model. They encourage the IASB to consider such a cash flow hedge model as part of the further work on the project.

For more information, see:

We respond to FRED 55: Draft Amendments to FRS 102 - Pension Obligations

30 Oct 2014

We have published our response to FRED 55: Draft Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Pension Obligations.

We support the proposed amendments to FRS 102 for the reasons set out in the FRED.

Click for:

IFRS Foundation and Monitoring Board update their Memorandum of Understanding

30 Oct 2014

The IFRS Foundation and the Monitoring Board have agreed an update to their Memorandum of Understanding (MoU) to reflect the increase in membership of the Monitoring Board.

The first two new permanent members (the Comissão de Valores Mobiliários (CVM) of Brazil and the Financial Services Commission (FSC) of Korea) were announced in January 2014 and the Monitoring Board may in the future include representatives of other capital markets authorities as long as they fulfil the membership criteria.

Please click for additional information on the IASB website:

BIS publishes progress report on the implementation of the recommendations of the Kay review

30 Oct 2014

The Department for Business, Innovation and Skills (BIS) has published a report (“the progress report”) detailing the progress made in implementing each of the 17 recommendations outlined by Professor Kay in his review of the UK Equity market in 2012 (the “Kay Review”). The progress report highlights that “good progress” has been made but that “more needs to be done”.

Professor Kay’s review ‘Kay Review of UK Equity markets and long-term decision making’ (link to BIS website), published in July 2012, sought to address the issue of short-termism in the equity market.  The aim of the report was to “set out principles that are designed to provide a foundation for a long-term perspective in UK equity markets and describe the directions in which regulatory policy and market practice should move”.  

The review concluded: 

Short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain.

The Kay Review established 17 recommendations which were intended for the government, regulatory authorities and “key players in the investment chain” to provide “the first steps towards the re-establishment of equity markets that work well for their users”. 

The government actions to address the recommendations of the Kay Review were initially detailed in their response to a Business, Innovation and Skills Select Committee (BISC) report in November 2013 which called on the government to set “clear, measureable and achievable targets” for implementing each of the recommendations set out in the Kay Review.  That response included an appendix which summarised initial progress to date and set forward looking objectives upon which progress was to be assessed in 2014.

The progress report is split thematically into three parts.  Each part highlights the specific recommendations made in the Kay Review and notes progress made.  The three parts are:

Part A

  • This part outlines the progress made in encouraging effective shareholder engagement and stewardship investing.   
  • Key areas of progress include: the Financial Reporting Council’s (FRC’s) updated 2012 Stewardship Code (link to FRC website), the Investment Management Association’s (IMA’s) May 2014 survey of adherence to that code, the National Association of Pension Fund’s (NAPF’s) proposed Stewardship Disclosure Framework, the creation of the Investor Forum and the FRC’s work on board nominations including succession planning.  

Part B

  • This part outlines the progress made on improving the quality of reporting and dialogue in the investment chain to ensure that information meets long-term investor needs. 
  • Key areas of progress include: the imminent amendment to the Disclosure and Transparency Rules to remove the requirement for mandatory quarterly reporting, the government’s reforms to corporate narrative reporting with the new Strategic Report regulations for periods ending on or after 30 September 2013 (and related June 2014 FRC Guidance on narrative reporting) and the publication of new government commissioned research (link to BIS website) on metrics and models to assess company and investment performance by long-term investors. This research covers a wide range of topics, including a recommendation that companies provide guidance on future earnings using fan charts rather than point estimates and have an annual meeting with investments focussed on forward looking strategy separate from the reporting cycle and Annual General Meeting. 

Part C

  • This part outlines the progress made in building trust-based relationships and aligning incentives through the investment chain.
  • Key areas of progress include:  the government’s reforms to the governance of company directors’ remuneration with the revised law on directors’ remuneration policy including strengthening the accountability of shareholders through a binding vote and disclosure applicable from September 2013 and the FRC’s latest revisions to the UK Corporate Governance Code which seek to encourage longer-term remuneration structures.

The progress report highlights that there has been a “significant contribution to the necessary shift in the culture of equity markets advocated by Professor Kay”.  However, it highlights that further progress is still needed and sets out a number of areas that the government, market participants and regulatory authorities will continue to focus on.  Key areas of focus include:

  • The FRC commitment to focus on encouraging and monitoring signatories to the Stewardship Code to “ensure they are delivering on the commitment they have given”.
  • The Government continued support of the development of the Investor Forum which it considers “has the potential to deliver a step change in effective collective investor engagement on the part of investors in UK companies”.  At the same time as the progress report was published, the Investor Forum announced the appointment of a new board (link to IMA website) and published a discussion paper  (link to IMA website) on its key principles and approach to engagement.
  • A Government roundtable in January 2015 to consult senior stakeholders from business and the investment industry on their views of progress to date on shareholder engagement and stewardship, and on what further steps the Government, FRC and industry can take to encourage better engagement and long-term stewardship engagement.
  • A continued focus by the government on ensuring the executive remuneration is aligned with long-term sustainable company performance.  It is due to publish shortly a summary of key findings and policy conclusions from a study of how the new directors’ remuneration regime operated during the 2014 reporting and AGM season. 

The full progress report, which expands upon progress in these key areas and others, can be downloaded from the BIS website below.

Click for:

IFRS Foundation appoints Trustee

30 Oct 2014

The IFRS Foundation has announced the appointment of Takafumi Sato as Trustee of the IFRS Foundation. The appointment will begin on 1 November 2014 and will expire on 31 December 2017. Dr Sato's appointment follows the retirement of Tsuguoki (Aki) Fujinuma, Vice-Chairman of the Trustees.

Dr Sato is currently President of Japan Exchange Regulation. He served as Commissioner of the Financial Services Agency (FSA) from 2007 to 2009 and during his tenure directed the agency in drawing its roadmap towards the application of IFRS in Japan, which included allowing domestic corporations to voluntarily apply IFRS. Dr Sato also served as a founding member of the IFRS Foundation Monitoring Board.

For more information, see the press release on the IASB's website.

EFRAG draft comment letter on the IASB's Exposure Draft regarding the unit of account

30 Oct 2014

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB Exposure Draft (ED) proposing amendments to six standards regarding the unit of account for investments in subsidiaries, joint ventures and associates.

The amendments would confirm that the unit of account for investments in subsidiaries, joint ventures and associates is the investment as a whole, but that the fair value measurement of quoted investments in subsidiaries, joint ventures and associates should be the product of the quoted price multiplied by the quantity of financial instruments held, without adjustments.

EFRAG is concerned that these proposals will not always result in relevant information because where the unit of account is the investment in a subsidiary, joint venture or associate, the price paid may include control premiums or discounts and consequently differ from the mathematical product price × quantity. EFRAG believes that the resulting financial information would lack relevance, impair the assessment of management stewardship and would not faithfully represent the substance of the transaction. EFRAG states that it would only  - reluctantly - accept the IASB's proposals should further research by the IASB demonstrate that there is no better way than price × quantity to measure the fair value of an investment in a subsidiary, joint venture or associate quoted in an active market.

Comments on the draft comment letter are due by 31 December 2014. It is available on the EFRAG website.

Summary of the September ASAF meeting now available

30 Oct 2014

The staff of the International Accounting Standards Board (IASB) have made available a summary of the discussions of the Accounting Standards Advisory Forum (ASAF) meeting held in London on 25-26 September 2014. The meeting saw discussion on leases, discount rates, post-implementation review of IFRS 3 'Business Combinations', conceptual framework, disclosure initiative, insurance contracts, financial instruments with the characteristics of equity, IFRS taxonomy, and the IASB's agenda.

The topics covered during the meeting included:

  • Leases. The meeting considered an update on the IASB's leases project, an overview of the feedback received from an additional consultation undertaken by the European Financial Reporting Advisory Group (EFRAG). ASAF members had mixed views on the EFRAG paper and the definition of a lease (including defining a lease as a financing arrangement) and noted the importance of achieving convergence between the IASB and FASB
  • Discount rates. The ASAF members generally supported the IASB's intended scope and research approach in this project, made a number of suggestions on topics to be considered, and emphasised the importance of the interaction of this project with the IASB's projects on the conceptual framework and insurance contracts
  • Post-implementation review of IFRS 3. The meeting received a number of updates and reports and highlighted the critical issues of the subsequent accounting for goodwill (where mixed views were expressed) and the definition of a business
  • Conceptual framework. The meeting received an update on the IASB's progress in this project and expressed support for the direction being taken, whilst noting a number of concerns. The meeting also considered the tentative decisions made by the IASB on measurement and the implications of long-term investment for the conceptual framework
  • Disclosure initiative. The meeting discussed the purpose of notes to the financial statements, the ordering of notes to the financial statements, the role of materiality in addressing the disclosure problem, and the nature of significant accounting policies and improving accounting policy disclosures
  • Insurance contracts. The IASB sought feedback from the ASAF members on accounting for contracts with participating features and transition (most preferring retrospective application at the date of transition)
  • Financial instruments with characteristics of equity. The meeting discussed whether the project could proceed as a fundamental review of IAS 32 Financial Instruments: Presentation, or whether IAS 32 should be maintained with improvements to presentation and disclosure requirements. Many ASAF members noted the necessity of a fundamental review to provide a better foundation focused on identifying the objectives of the distinction between liabilities and equity, but considered that the IASB "should not necessarily start from an entirely blank sheet of paper".

A full report of the meeting is available on the IASB's website.

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