October

FRC responds to the IASB's Discussion Paper ‘Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging’

15 Oct, 2014

The FRC has published its response to the IASB Discussion Paper ‘Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging’. The FRC believe that the paper is a welcome contribution to the debate around accounting for dynamic risk management. However, they do not agree with the IASB's proposed approach.

This letter sets out the FRC's response to the IASB' discussion paper, which was published in April 2014.

The FRC believes that the paper is a helpful step in the IASB's macro hedge accounting project, as it clearly articulates the risk management approach adopted by some banks in practice and considers the difficult accounting issues raised by this. However, overall they believe that the IASB's proposed Portfolio Revaluation Approach is a step too far in aligning accounting requirements with an entity’s risk management activities.

The FRC encourages the IASB to continue to develop an improved macro hedge accounting model, as this is one of the weaknesses of IAS 39. However, they believe that the approach taken by the IASB is not the most appropriate one. Rather than developing a generally applicable model for macro hedge accounting in isolation from existing accounting principles, they believe that the IASB should identify the barriers that exist in the current framework that prevent more meaningful and flexible macro-hedge accounting. The Board could then consider which of these can be removed, whilst still retaining the overall integrity of the IFRS accounting framework and building on the principles in IFRS 9's general hedge accounting model.

The full comment letter can be downloaded from the FRC website.

EFRAG reports on the additional public consultation and outreach on leases

15 Oct, 2014

In July and August 2014, EFRAG and the National Standard Setters from France, Germany, Italy and the UK performed additional public consultations on the two different approaches for lessees proposed by the IASB and FASB. The consultations were complemented by an outreach event in September 2015. Reports with the insights from the consultations and the outreach event are now available.

The objective of the two consultations (one focused on preparers and one focused on users) was to obtain constituents' views on examples of transactions that would qualify as leases under the proposals, but that in the constituents view are in substance services, and the two alternative approaches proposed by the IASB and the FASB (particularly which is more appropriate and/or less costly to apply). The preliminary results of the consultations were discussed at the outreach event.

The main findings of the survey were:

  • Respondents provided several examples of transactions that would qualify as leases under the 2013 ED proposals, but in the constituents' view should not be recognised on a lessee's balance sheet.
  • Constituents noted that more work had to be done on the scope of application and/or on the definition of a lease.
  • Of the two approaches that surfaced during the March 2014 joint meeting where the IASB and FASB did not reach a consensus regarding lessee accounting, users preferred the IASB approach while preparers' views were mixed and only a slight majority preferred the IASB model.

Please click for access to the reports on the EFRAG website:

IFRS Foundation revamps eIFRS portal

15 Oct, 2014

The IFRS Foundation has updated its eIFRS suite of online resources and now includes three levels of subscription: basic, professional and comprehensive. The updated eIFRS website features a new, easier-to-navigate user interface and offers better search functionality.

The new website was developed as a result of user feedback. The three-tiered subscription levels include:

  • eIFRS Professional — Provides access to authoritative, annotated versions of IFRS and supporting materials. A new "standards comparison tool" allows users to view changes to a Standard between current, prior and subsequent years. Existing subscribers to eIFRS will automatically be upgraded to eIFRS Professional.
  • eIFRS Comprehensive — Includes a subscription to eIFRS Professional as well as offline, print editions of the Standards and other materials.
  • eIFRS Basic — Provides users with limited access to the basic IFRS Standards.

More information is available in the IASB's press release and on the eIFRS website.

Updated EFRAG endorsement status report for draft endorsement advice letter on IFRS 15

15 Oct, 2014

The European Financial Reporting Advisory Group (EFRAG) has updated its Endorsement Status Report to include its draft endorsement advice letter on IFRS 15 'Revenue from Contracts with Customers'.

Final endorsement of IFRS 15 is currently expected in the second quarter of 2015.

The report also reflects that vote of the Accounting Regulatory Committee (ARC) on three amendments to standards (bearer plants, acceptable methods of depreciation, and acquisitions of interests in joint operations) has been postponed to the first quarter of 2015.

The endorsement status report, dated 15 October 2014, is available here.

IFRSs 'reduce friction' in the global financial system

15 Oct, 2014

At the thirty-first session of the United Nations Conference on Trade and Development (UNCTAD) Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) that is currently being held in Geneva, the Chairman of the IFRS Foundation, Michel Prada, spoke this morning about the importance of global accounting standards, how they are applied around the world, and what the IFRS Foundation, with the help of other organisations, is doing to ensure that they are implemented rigorously and consistently.

Mr Prada made the case for global reporting standards by stressing that these liberate companies from the burden of complying with different, and often incompatible, national accounting requirements, give investors access to revenue and profit numbers all calculated on the same basis regardless of the country they are calculated in, and provide market supervisors and government leaders around the world with a standardised set of performance metrics on which to build globally consistent regulatory initiatives. He noted: "[I]t is in everyone's interest to reduce friction in the global system. That is what IFRS does."

However, Mr Prada also warned that these benefits can only fully be realised when IFRSs are adopted as issued by the IASB:

Of course, global standards only function properly if everyone adheres to them. As tempting as it may be for jurisdictions to pick and choose those standards that appeal and omit those that do not, doing so would undermine the very essence of what we are aiming to achieve. The reality is that if you want to reap the benefits of global standards, then everyone must commit themselves to adopt the same, single set of high quality standards.

Turning to the ISAR meeting's overall topic of monitoring of compliance and enforcement of international corporate reporting standards and codes he admitted that although IFRSs are a success story, adoption of them can only be part of the package. As a next step, it must ensure that the standards are being used correctly and consistently within a strong regulatory and legal framework. In this connection he mentioned that the IASB does not have the mandate nor the resources to enforce and monitor application of the standards that it creates. That would be up to governments, financial regulators, and auditors in individual jurisdictions.

Nevertheless, as Mr Prada pointed out, the IFRS Foundation has undertaken a number of initiatives aimed at promoting the correct use and application of IFRSs. In September 2013 for example, the IFRS Foundation and the International Organization of Securities Commissions (IOSCO) announced that the two organisations will deepen their cooperation in the development and implementation of IFRS on a globally consistent basis. And in July 2014 this was followed by similar agreement with the European Securities and Markets Authority (ESMA). Mr Prada also highlighted the efforts of the IFRS Foundation Education Initiative that produces freely available training material that is also translated into all of the world's most widely spoken languages and offers regional multi-day IFRS teaching workshops, especially in the emerging markets.

Summing up the initiatives of the IFRS Foundation, Mr Prada expressed the hope that these efforts should bring great long-term benefits to the global financial reporting community:

By improving the quality of accounting in every jurisdiction, we are not only working to the benefit of those individual countries. We are also contributing to the overall health of the global financial system.

Please click for access to the full text of Mr Prada's speech on the UNCTAD website.

Today's morning session also saw a keynote adress by Gonzalo Ramos, Secretary-General of the Public Interest Oversight Board (PIOB), and presentations by Richard Thorpe, Head of Accounting and Auditing Issues and Policy of the  Financial Stability Board (FSB), Gert Luiting, Advisor at the International Forum of Independent Audit Regulators (IFIAR), Mike Hathorn, Board Member of the International Federation of Accountants (IFAC), Teresa Fogelberg, Deputy Chief Executive of the Global Reporting Initiative (GRI), and Neil Stevenson, Brand Director of the International Integrated Reporting Council (IIRC). All speeches are available on the general homepage of the thirty-first ISAR meeting (under the tab "Presentations").

November meeting of the ICAEW FRDG

15 Oct, 2014

The next Institute of Chartered Accountants in England and Wales (ICAEW) Financial Reporting Discussion Group (FRDG) meeting will be held on 03 November 2014 in London.

The meeting will consider the recently published Financial Reporting Council (FRC) consultation document, 'Accounting standards for small entities - implementation of the EU Accounting Directive'.

Click for more information, including registration details on the ICAEW website.

FRC publishes Corporate Reporting Review Annual Report 2014

14 Oct, 2014

The Financial Reporting Council (FRC) has today published its Corporate Reporting Review Annual Report 2014 ("the report"). This report provides an overview of the FRC's corporate reporting review activities for the year ended 31 March 2014. It includes the FRC's assessment of the current state of corporate reporting in the UK, as well as identifying areas likely to pose future challenges for preparers.

Every year, the FRC's Conduct Committee ("the Committee") reviews the reports and accounts of a sample of public and large private companies to determine whether they comply with the Companies Act 2006 and other reporting requirements. Where it appears that those requirements have not been complied with, the Conduct Committee investigates the position and determines the action to be taken to address any non-compliance.  Since FTSE 350 companies represent the major part of investment in UK listed companies, the Committee reviews their reports on a regular basis, with FTSE 100 companies reviewed every three years and FTSE 250 companies every four years.

This year, the Committee reviewed 271 sets of reports and accounts, with 100 of these reviews resulting in the opening of correspondence with the company. The committee also closed four long-standing Review Groups set up in 2013, three involving interests held by pension funds in Scottish Limited Partnerships and on in relation to revenue recognition.

 

Key messages

The key messages from this year's report are as follows:

  • Overall the level of corporate reporting by large public companies, particularly FTSE 350 companies, has been good, with the issues raised by the Committee usually involving unusual or complex transactions rather than straightforward issues.
  • A higher number of poorer quality accounts continue to be produced by smaller listed and AIM companies. In response to this the FRC has set up a project aimed at improving the quality of these companies.
  • In the light of the FRC's 'Clear & Concise' initiative, the Committee emphasises that their letters of enquiry discourage boards from including immaterial matters in their reports and explain that only disclosures that are material or relevant should be included. The Financial Reporting Lab's report 'Towards Clear & Concise Reporting' provides information on the practical steps that companies can take to make their reports clearer and more concise.

The report includes some advice for companies on how they should respond to communication from the Committee, with a number of good practices that they believe tend to result in earlier closure of the matters under review.

 

Emerging issues

The report identifies four emerging issues, prompted either by recent changes to legislation or accounting standards or where the Committee has had an early indication that they will be particularly relevant in the near future. These are:

  • Pensions - this is an area of change, with the introduction of the revised IAS 19 and the requirement for disclosures in relation to the governance of pension plans and the impact of the applicable regulatory framework, such as the level of any minimum funding requirement. The Committee has not yet identified any substantive issues with the application of revised accounting policies in this area, however they have seen variable practice regarding disclosures around minimum funding requirements.
  • De facto control of subsidiaries - with the majority of UK companies applying IFRS 10 for the first time in 2014, companies must now consider whether they exert 'de facto control' over an entity and, if so, include it in their consolidated results. As this is a substantive change from the previous standard, the Committee encourages boards to consider this area carefully.
  • Acquired intangibles - with an improving economic outlook in the UK, the Committee expects to see more merger and acquisition activity. They would expect most business combinations to result in the recognition of some separate intangible assets and will look to challenge companies where business combinations result in the recognition of material goodwill but few or no intangible assets.
  • Other legislation or regulation - although the Committee does not have a statutory remit to monitor compliance with legislation or regulations beyond the financial reporting requirements of the Companies Act, they will draw failures to comply with other regulations to the attention of companies. An example of this is the requirements of the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 in relation to disparities between the remuneration of senior executives and other employees of a company.

 

Common areas of challenge in 2013/14

The report identifies 10 areas that were commonly raised with companies during the year:

  • Business reviews / Strategic Reports - particularly where this focussed only on good news or where non-recurring items were not adequately explained;
  • Pensions - in particular where there was a lack of clarity around whether a pension fund surplus results in a recognisable asset, whether a company should recognise a liability for its minimum funding requirements and where pension schemes were structured to achieve a particular accounting effect;
  • Exceptional and other similar items - in particular the use of additional columns or lines on the face of the income statement, poor description or inconsistent application of policies for identifying exceptional items, identification of recurring items as exceptional, lack of symmetry in the treatment of debits and credits and lack of comparative information;
  • Critical judgements - where the precise nature of the judgement was insufficiently clear, for example where it simply repeated the relevant accounting policy, and where disclosures did not sufficiently differentiate between critical judgements and areas of estimation uncertainty;
  • Clear & Concise (Cutting Clutter) - for example inclusion of immaterial accounting policies, presentation of income statement lines that were nil or clearly trivial, unnecessary repetition of disclosures and unnecessary detail about new accounting standards that would not have a significant impact on the company;
  • Principal risks and uncertainties - in particular where companies present a voluminous list of possible risks without emphasising those they believe are most important;
  • Accounting policies (particularly revenue) - where these are 'boiler plate' and not tailored to the facts and circumstances of the company's business. This is something that the Financial Reporting Lab produced a report on in July 2014.
  • Impairment - where disclosures were of poor quality or apparently inconsistent with other areas of the report, or where the assumptions supporting a lack of impairment appeared to be overly aggressive;
  • Taxation - including failure to recognise deferred tax on business combinations, failure to disclose the basis for recoverability of deferred tax assets and unclear tax reconciliations; and
  • Cash flow statements - although these continue to improve, the Committee nevertheless still identified misclassified cash flows, inappropriately netted cash flows and non-cash movements reported as cash flows.

The FRC has also published a slide deck of technical findings (see link below) from the Conduct Committee's Financial Reporting Review Panel during the year, which gives more detail on the areas challenged by the Panel.

We have produced a need to know publication discussing the report and technical findings. In addition, the following resources can be found on the FRC's website:

EFRAG comments on IOSCO's proposed statement on non-GAAP Financial Measures

14 Oct, 2014

The European Financial Reporting Advisory Group (EFRAG) has published its comment letter on the International Organisation of Securities Commissions (IOSCO)'s Proposed Statement on non GAAP Financial Measures. EFRAG supports the idea that non-GAAP measures should be clearly defined and explained by preparers, and presented consistently over time. However, it recommends that the scope of the requirements be supported by an underlying principle so as to target the requirements more narrowly.

EFRAG's comment letter on the IOSCO proposals is based on the consultation process that it undertook to develop its response to ESMA’s Consultation Paper - Guidelines on Alternative Performance Measures.

In its response letter, EFRAG notes that, in its view, non-GAAP measures can provide useful information to users when properly used and presented, and can assist investors in gaining a better understanding of a company's financial performance and position. It therefore supports the idea that non-GAAP financial measures should be clearly defined and explained by preparers, unbiased and presented consistently over time to improve the understanding of the performance by users of financial statements.

However, EFRAG does not believe that the proposed statement articulates clearly enough the underlying principle behind its proposals, and that this could result in lengthy disclosures that contain relatively little valuable information. While it welcomes the fact that the proposed statement would not apply to non-GAAP measures reported in the financial statements, it believes that the scope of the proposed statement should exclude further items, including:

  • measures which are derived from the primary financial statements but presented outside those statements and either:
  • the definition of which is self-evident from the name used; or
  • are merely totals or subtotals of measures contained directly within the financial statements;
  • the contents of prospectuses; and
  • other documents containing regulated information required by a regulator other than a securities regulator, for example a bank or insurance regulator.

While IOSCO proposes that non-GAAP measures should be given 'equal or less' prominence than GAAP measures, EFRAG believes that this may effectively impose a 'ceiling' on the amount of voluntary information that an entity may disclose, regardless of whether such information is useful to users. EFRAG recommends that instead the final statement should focus on ensuring that non-GAAP measures are not given undue prominence.

 

Proposed disclosures

In relation to the disclosure requirements that are proposed by IOSCO, EFRAG welcomes the fact that the proposals are not overly prescriptive, in particular that they allow incorporation of disclosures by reference, helping to avoid unnecessary repetition. However, they are concerned by the proposed requirement that a quantitative reconciliation must be given from each non-GAAP measure to the most directly comparable GAAP measure, as some non-GAAP measures are based on sources other than conventional accounting, or may be forward-looking. In these situations EFRAG does not believe that it will be practicable to provide a quantitative reconciliation and that a qualitative disclosure may be more appropriate.

The full comment letter can be downloaded from the EFRAG website.

EFRAG Update detailing September/October developments

14 Oct, 2014

The European Financial Reporting Advisory Group (EFRAG) has released a new issue of its 'EFRAG Update' newsletter, summarising the discussions held at the EFRAG CFSS meeting of 18 September 2014, the EFRAG TEG conference calls of 16 September and 1 October 2014 and the EFRAG TEG meeting of 8 and 9 October 2014.

Highlights included approval of the following documents by EFRAG TEG:

Additional topics discussed in the newsletter are:

Please click for the new issue of the EFRAG Update (link to EFRAG website).

Agenda for October 2014 IASB meeting

13 Oct, 2014

The International Accounting Standards Board (IASB) will meet at its offices in London on 22–24 October 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 the research programme, the disclosure initiative, issues from the IFRS Interpretations Committee, investment entities, the IFRS for SMEs, the conceptual framework, and insurance contracts.

The full agenda for the meeting, dated 13 October 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.

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