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2014

Summary of the discussions at the December ITCG meeting

16 Dec 2014

The IASB's IFRS Taxonomy Consultative Group (ITCG) held its meeting on 11 December 2014. The IASB has now published on its website meeting notes from that meeting.

Topics discussed were:

  • Staff proposal for the IASB to approve IFRS Taxonomy common practice (‘CP’)
    ITCG members agreed with the staff’s presentation on the benefits of CP. In addition, some members believe that a clear definition of the scope of the IASB’s involvement is needed to reduce risks where the IFRS Taxonomy may be perceived as authoritative.
  • ITCG reviews in progress or upcoming
    The staff summarised the ITCG with the status of the Proposed Interim Release 3 and the upcoming publication of the disclosure initiative exposure draft.
  • Outstanding actions from the October ITCG face-to-face meeting
    The ITCG were updated on the status of (1) the completion of the review of the EBA and EIOPA data model for credit risk disclosures, (2) integration of the ITCG review comments for the ‘Draft Regulator’s Guide to Using the IFRS Taxonomy’, and (3) the potential research paper on entity-specific disclosures.

Please click for access to the meeting notes on the IASB website.

The Bruce Column — New Year's resolution

16 Dec 2014

As 2014 comes to a close our regular resident columnist Robert Bruce, takes an overview of IFRS around the world and the expectations for 2015.

The year-end is a time for taking stock. The world of IFRS is steadily developing, as events in Washington, London, and the Far East, have recently shown.

What Ian Mackintosh, the IASB’s deputy-chairman, recently called ‘the maturing of IFRS’ came as a bit of a surprise. Those close to the process tend to see it as more of a constant technical give-and-take, a world of roundtables, of exchanges of views, as long-running arguments around contentious points. But a series of speeches, by Mackintosh in London and by Michel Prada, chairman of the trustees of the IFRS foundation, around the cities of eastern Asia, put things into context.

At the turn of the new year it will be a decade since the EU adopted IFRS. ‘Perhaps’, suggested Mackintosh, ‘we are moving from the build-out phase of global standards, to a period where the focus is on the maintenance of those standards and working with others to encourage their consistent implementation’. Certainly that is where the work of the future lies. The Financial Stability Board, as one of Prada’s speeches emphasised, summed up the global view in its consistent mantra of ‘the continuing relevance of a single set of high quality global accounting standards’.

And that is what continues to happen around the world. As Prada pointed out in Tokyo, support for global accounting standards there is part of the government’s growth strategy. The speed with which domestic Japanese companies are voluntarily transitioning to IFRS and the reasons they gave for doing so of comparability with global competitors, spreading the shareholder base, and management efficiency, are far from narrow domestic concerns. The same goes for China, as Prada made clear in Shanghai. The modernised Chinese accounting standards are close to those of IFRS and are being updated in step with the new standards produced by the IASB. And as Prada said: ‘It is often overlooked that Chinese companies representing more than 30% of the total domestic market capitalisation in China also report using full IFRS for the purpose of their dual listings in Hong Kong, while Hong Kong has itself been fully on board with IFRS since the beginning’. So China has modernised its accounting standards, and is a few modifications away from full IFRS, and Hong Kong, its international financial centre, has adopted IFRS, as Prada put it ‘in full and without modification’.

Onward to Seoul in Korea, one of the major beneficiaries of economic globalisation, and here Prada extolled the virtues of Korea having switched to IFRS. ‘As a result of that decision’, he said, ‘investors around the world are entirely familiar with the financial statements of Korean companies. Korean multinational conglomerates such as Hyundai, LG, POSCO, and Samsung are now able to use the same reporting framework across tens if not hundreds of international subsidiaries and joint ventures’.

The broader world is shifting. IFRS has become the overwhelming language of financial statements and investors’ choice around the world. As Prada said in Tokyo the use of IFRS in the US is far more advanced than many realise. ‘US investors are already prolific users of IFRS financial statements’, he said, ‘holding more than eight trillion dollars of foreign holdings, most of which are denominated in IFRS’. And, if that was not enough evidence of how IFRS has crept in, he pointed out that ‘the SEC oversees the IFRS-compliant financial statements of nearly 500 international companies listed in the US’.  It is the simple, and inevitable, effect of the demand-side of globalisation and international business being satisfied by the supply-side of IFRS.

So all eyes were on Washington in December when James Schnurr, the recently appointed Chief Accountant at the US regulatory body, the SEC, was due to speak at the annual AICPA gathering. Earlier in the year the SEC Chair, Mary Jo White, had put IFRS back into play. In May she had reiterated the SEC’s view from back in 2010 that ‘a single set of high-quality globally accepted accounting standards will benefit US investors and that this goal is consistent with our mission’. She had then said that it was a priority for the SEC to make a further statement on ‘this very important subject’.

Hence the keen anticipation of Schnurr’s views. What he said was that he was open-minded, but there were legal difficulties. While full adoption for domestic issuers appeared impractical he said that: ‘We understand that some domestic issuers may, now or in the near future, prepare IFRS-based financial information in addition to the U.S. GAAP based information that they use for purposes of SEC filings’. So a voluntary filing of IFRS information by those US companies who wished to could become a reality. But, as Ian Mackintosh pointed out later in the conference, there could be some doubt over how many companies would volunteer.

But as Schnurr concluded: ‘Based on the progress of our collective efforts, I am hopeful to be in a position in the coming months to commence discussions with the Chair and the Commissioners about the different alternatives for potential further incorporation of IFRS and the related issues and concerns of each alternative with the objective of reaching a recommendation on what, if any, further incorporation or use of IFRS by US registrants would be permitted or required’. It is slow, but encouraging, progress.

EFRAG draft comment letter on the IASB's Exposure Draft of amendments to IFRS 2

16 Dec 2014

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB Exposure Draft (ED) proposing amendments that would clarify the classification and measurement of share-based payment transactions.

ED/2014/5 Classification and measurement of share-based payment transactions considers the following the issues:

  • accounting for cash-settled share-based payment transactions that include a performance condition;
  • classification of share-based payment transactions with net settlement features; and
  • accounting for modifications of share-based payment transactions from cash-settled to equity-settled.

In its draft comment letter, EFRAG generally agrees with the IASB's assessment of the issues and with its proposed amendments to address them, although EFRAG believes that in relation to the second amendment, the proposed classification reflects the economic substance of the plan, and therefore should not be characterised as an exception.

On a broader note, EFRAG is concerned that addressing more and more specific terms and conditions of different share-based plans is resulting in ever-increasing complexity in the requirements of IFRS 2. EFRAG believes that the IASB should envisage a more general review of IFRS 2 to consider all implementation issues in a principle-based way.

Comments on the draft comment letter were originally due by 30 January 2015; but has been extended to 9 March 2015. It is available on the EFRAG website.

EPRA issues latest Best Practices Recommendations

15 Dec 2014

The European Public Real Estate Association (EPRA) has today released its latest set of Best Practices Recommendations (BPR). These recommendations, which represent the first comprehensive update of the BPR since 2011, set out additional performance measures and supplementary information to be presented in the annual reports of public real estate companies, with the aim of making the financial statements of these companies clearer, more transparent and comparable across Europe.

The EPRA BPR sets out a number of recommendations for public real estate companies, all of which are designed to enhance the comparability of their annual reports. It recommends that:

  • Companies should present a summary table showing standard 'EPRA Performance Measures', as well as detailed supporting calculations for these measures. The location of this summary table should be clearly indicated within the annual report and companies are encouraged to refer to the reported EPRA measures throughout the annual report. The EPRA Performance Measures in the BPR now include the “EPRA Cost Ratios”, guidance on which was issued in July 2013.
  • Companies should apply the IAS 40 fair value model in accounting for their investment properties, using external valuers to obtain these values at least annually and in accordance with International Valuation Standards. The basis for the valuer’s fees should also be disclosed.
  • Companies should disclose extensive information on the nature of their property portfolios, including significant properties owned, development properties, like-for-like rental growth and capital expenditure.

These recommendations are effective for accounting periods ending on or after 31 December 2014.

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EFRAG appoints new TEG members under the new governance structure

15 Dec 2014

The Board of the European Financial Reporting Advisory Group (EFRAG) has announced the appointment of six new members of its Technical Experts Group (TEG). The appointments are a consequence of EFRAG's new governance structure and of three current TEG members stepping down from their roles.

Under the new structure, EFRAG TEG consists of a maximum of 16 members of which at least four members are nominated by the standard-setters of France, Germany, Italy and the UK. Its new role is to provide technical advice to the EFRAG Board who will be responsible for all EFRAG positions.

The standard-setter representatives will provide a direct liaison with, and the facility of obtaining input from, the standard-setters and their constituents in four main countries in Europe. So far Anthony Appleton (FRC, UK), Tommaso Fabi (OIC, Italy) and  Sven Morich (ASCG, Germany) have been appointed.

The other three newly appointed members (Phil Aspin (UK), Geert Ewalts (Netherlands), Prof. Dr. Günther Gebhardt (Germany)) will replace three TEG members who are stepping down from their role - among them Deloitte Partner Prof. Dr. Andreas Barckow who has been appointed as future President of the Accounting Standards Committee of Germany (ASCG).

Please click for the press release on the EFRAG website.

We comment on the proposed amendments regarding the recognition of deferred tax assets for unrealised losses

15 Dec 2014

We have published our comment letter on the International Accounting Standards Board’s (IASB) Exposure Draft ED/2014/3 'Recognition of Deferred Tax Assets for Unrealised Losses'.

The IASB's proposed amendments aim at clarifying the following aspects:

  • Unrealised losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument's holder expects to recover the carrying amount of the debt instrument by sale or by use.
  • The carrying amount of an asset does not limit the estimation of probable future taxable profits.
  • Estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences.
  • An entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilisation of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type.

In general, we agree with the proposed amendments; however, we suggest some enhancements to the wording to better clarify the proposals.

Click for the full comment letter.       

FRC publishes FRED 57: Draft amendments to FRS 101 Reduced Disclosure Framework (2014/15 cycle)

15 Dec 2014

The UK Financial Reporting Council (FRC) has today published an exposure draft of its second set of annual amendments to FRS 101, the Reduced Disclosure Framework available to UK qualifying entities that wish to apply the recognition and measurement requirements of IFRSs in their financial statements.

FRS 101 Reduced Disclosure Framework was originally published in November 2012 as part of the FRC's project to replace current UK GAAP with a new suite of standards, which also includes FRS 100 Application of Financial Reporting, FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and FRS 103 Insurance Contracts.

FRS 101 was published in recognition of the fact that many UK groups prepare their consolidated financial statements in accordance with IFRSs rather than UK GAAP. For subsidiary entities, application of IFRSs is attractive because it would produce numbers consistent with those used to prepare the group accounts. However, many companies are put off using IFRSs for their subsidiaries by the extensive disclosure requirements.  In recognition of this, the FRC identified a number of disclosures that were, in their view, of limited usefulness in a set of subsidiary accounts. FRS 101 allows entities, in their entity only accounts, to apply the recognition and measurement requirements of IFRSs but take advantage of exemptions from these disclosures.

When FRS 101 was originally published, the FRC committed to review the standard on an annual basis and update it to ensure that it maintains consistency with IFRS and remains cost-effective for groups. FRED 57 Draft Amendments to FRS 101 Reduced Disclosure Framework (2014/15) is the second of these proposed annual updates.

The main changes proposed by the FRC are to allow exemptions from the disclosure requirements of:

In its Advice to the FRC, the Accounting Council explained that it has considered whether any exemptions should be introduced in respect of IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments. As neither of these standards will be effective for some time, it decided that no disclosure exemptions should be permitted at this stage in respect of either Standard.

The comment period for this exposure draft closes on 20 March 2015.

Click here for a link to the press release on the FRC website and here for a copy of the exposure draft itself.

FRC publishes year-end advice to preparers

12 Dec 2014

The Financial Reporting Council (FRC) has published a letter containing year-end reminders for preparers of financial statements. It summarises recent changes to reporting requirements and some of the best practice guidance issued by the FRC during 2014.

The topics covered are:

  • The FRC's "Clear and Concise" initiative, launched in 2014 as the successor to the Cutting Clutter project.  Two items have been published under the aegis of this initiative in 2014: the FRC's Guidance on the Strategic Report, which gives best practice guidance on strategic report preparation; and Towards Clear & Concise Reporting, a report by the Financial Reporting Lab on practical steps taken by companies to improve the quality of their annual reports.
  • The September 2014 revisions to the UK Corporate Governance Code. Although these are only effective for years commencing on or after 1 October 2014, the FRC suggests that in the interests of good governance companies may wish to early-adopt some or all of the changes.
  • A message encouraging directors, management and auditors to consider the reasons for non-alignment between issues identified in the audit committee report in relation to the financial statements and risks of material misstatement discussed in the enhanced audit report.
  • The recently published Corporate Reporting Review Annual Report, which identifies common areas of challenge raised by the FRC's Conduct Committee and the areas that they think may be significant for next year-end.  It also highlights the fact that IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers have been recently published by the IASB and encourages companies to consider making appropriate disclosures on their likely impact (as required by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors) at the earliest possible stage.
  • The recently published Press Notice urging clarity in reporting of unusually complex arrangements with customers or suppliers.
  • The recently published Financial Reporting Lab reminders for the 2014 reporting season, which covers key findings from reports produced by the Financial Reporting Lab which companies should consider addressing during the 2014 reporting season.  It also notes that the Lab has an on-going project "Disclosure of Dividend Policy and Capacity" and suggests that companies may wish to look at the clarity of disclosures in this area, in the light of the letter written by investors to FTSE 100 Audit Committee chairs on this subject in October 2014.

The press release and full letter can be obtained from the FRC website.

Short survey on accounting changes

12 Dec 2014

The Italian standard-setter Organismo Italiano di Contabilità (OIC) is helping the IASB to understand investor views on accounting changes by conducting a short survey.

The requirements in IFRSs, in particular in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, make a distinction between how an entity should present and disclose different types of accounting changes in its financial statements. Changes in accounting policies must be applied retrospectively while changes in accounting estimates are accounted for prospectively. Companies sometimes struggle to apply changes in accounting policies retrospectively and also find it sometimes difficult to distinguish between accounting policies and accounting estimates.

The OIC is now conducting a survey to help the IASB understand investor views on the following aspects:

  • the type of financial statement information that is needed when a company makes an accounting change;
  • whether the type of the change affects information needs; and
  • whether there is more than one way companies could provide information about accounting changes that would still satisfy all needs.

More information about the online survey is available on the OIC website. It should take approximately 15 minutes to complete and can be completed until 15 February 2015.

Reports on Payments to Government Regulations 2014 come into force

10 Dec 2014

On 1 December 2014 the Reports on Payments to Government Regulations 2014 (the Regulations) came into force. The Regulations, which are applicable in the UK for accounting periods beginning on or after 1 January 2015, bring into UK law Chapter 10 of the EU Accounting Directive (2013/34/EU) and apply to UK incorporated companies that are involved in the exploration, prospection, discovery, development, and extraction of minerals, oil, natural gas deposits or other materials, or the logging of primary forests. Such companies will be required to report publicly payments made to governments in the countries where they undertake extractive and logging operations (also described as ‘country-by-country reporting’). Reports must be filed electronically within eleven months of their year end.

The Department for Business, Innovation and Skills (BIS) went through a formal consultation process earlier this year, receiving written comments from affected companies, civil society groups, industry bodies, and professional firms. The Government published a response to the consultation with revised draft regulations on 21 August 2014. On 25 November 2014 BIS issued draft guidance on public transparency reporting for the extractive industries, which is open for consultation until 17 December 2014.  

Under the Regulations, an entity will be required to prepare and deliver a report to Companies House if it is a UK registered company or partnership and meets the test to be either a large undertaking or a public interest entity (PIE), and is engaged in mining, oil and gas or primary forestry logging activities. In this context a large undertaking is defined as fulfilling two of the following three criteria:

  • Balance sheet total in excess of £18m;
  • Net turnover in excess of £36m; and
  • Average number of employees for the period in excess of 250.

In this context a PIE is an entity whose transferable securities are admitted to trading on a UK regulated market (irrespective of where the entity is registered), a credit institution or an insurance entities. Subsidiaries are exempt from preparing a report if their payments to governments are included in a consolidated report prepared by another company in the UK or another EEA member state. Parent companies are required to prepare a consolidated report disclosing payments made by subsidiaries engaged in extractive or logging activities (regardless of whether the parent itself undertakes such activities) unless they are in turn part of a larger UK or EEA group preparing a report on payments to governments. 

The report will need to include:

  1. the total amount per type of payment;
  2. the government (which includes national, regional or local authority of a country and includes departments, agencies, or state controlled enterprises) to which each payment has been made, including the relevant country of regional or local authorities, departments or state controlled enterprises;
  3. the total amount of payments to each government; and
  4. where those payments have been attributed to a specific project, the total amount per type of payment, made for each such project and the total amount of payments for each such project. Payments to be reported include production entitlements; taxes levied on income, production or profits (excluding VAT); royalties; dividends (unless paid by an undertaking to a government as an ordinary shareholder); signature, discovery and production bonuses; licence fees, rental fees or entry fees; and payments for infrastructure improvements. Any payment, or series of related payments, need not be taken into account for the purposes of the report if it is less than £86k.

The report must be delivered to Companies House by electronic means.

An exemption will be available where a company is required to report under another transparency regime that the European Commission has assessed as equivalent to the requirements of the Accounting Directive and the report is filed at Companies House. However to date, no other regimes have been assessed as equivalent.

The Financial Conduct Authority is also expected to publish the outcome of its consultation paper, CP 14/17, in early 2015. CP 14/17 addresses implementation of the equivalent requirements of the revised Transparency Directive (Directive 2004/109/EC) (TD) as amended by the Transparency Directive Amending Directive (Directive 2013/50/EU) (link to the European Commission website)) and extends the requirements to companies with securities admitted to trading on an EEA regulated market within whose home state is the UK (primarily those incorporated in the UK and those incorporated outside the EEA whose only or first EEA listing is London). It is expected that companies reporting under the TD will have to file their report electronically with the Financial Conduct Authority within six months of the period end.

Update 30/11/2015 - amendments to the Regulations have been made.  The amending Regulations rectify errors in the original Regulations. The most significant correction is to amend the definition of undertaking to ensure that the subsidiary undertakings whose payments to governments are to be included in the consolidated reports of a UK parent undertaking include overseas subsidiary undertakings. The amending Regulations (link to statutory instrument) come into force on 18 December 2015.  

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Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.