September

EFRAG to hold a Board meeting in September 2015

18 Sep, 2015

The European Financial Reporting Advisory Group (EFRAG) will hold a Board meeting on 21 September 2015 in Brussels.

An agenda with supporting papers and details on how to register for the public meeting can be found on the EFRAG website.

SEC Chief Accountant speaks on convergence

18 Sep, 2015

At a conference of the American Institute of Certified Public Accountants (AICPA) in Washington, D.C., the Chief Accountant of the Securities and Exchange Commission (SEC), James Schnurr, discussed convergence and explained that he was "optimistic that I will be able to provide more clarity on the path forward in the next few months".

Mr Schnurr began his speech by discussing the IASB and FASB's converged standards on revenue recognition and the similar yet not converged requirements on credit impairment. In both cases he stressed the benefits of cooperation and of learning from each other and from the implementation of the new standards. He then turned to the topic of IFRSs and convergence itself. He reiterated his assessment of the situation and reminded the audience of the findings he had presented at a financial reporting conference at Baruch College in New York City in May this year. He also stated that he was still discussing the "fourth option" (allow, but not require, domestic issuers to provide supplementary IFRS based information), which he had first introduced in December 2014, with the SEC Commissioners. For the time being, however, he believed that continued collaboration was the only realistic path to further the objective of a single set of high-quality, global accounting standards:

In my opinion, in the near term, the FASB and IASB should continue to focus on converging the standards. The boards should renew their commitment to cooperate and develop standards that eliminate differences between IFRS and U.S. GAAP whenever it meets the needs of its constituents and improves the quality of financial reporting. I recognize the boards will not always be able to eliminate differences during the standard-setting process, primarily because they serve different constituents that have different needs. However, when differences in standards arise, the boards should monitor the implementation of those standards with the objective of learning from the implementation and re-engaging with each other with the goal of converging to the standard with the highest quality financial reporting outcome.

Please click to access the full text of Mr Schnurr's speech on the SEC website.

Seventh instalment of the IASB's Conceptual Framework webcast series

17 Sep, 2015

In August 2015, the IASB launched a webcast series on the proposed changes to its Conceptual Framework. Eight pre-recorded webcasts will be posted to the IASB's website weekly. The seventh instalment was posted today.

The on-demand webcasts provide detailed discussions of each part of the IASB's May 2015 Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting.

The webcast on Chapters 1 and 2 — Objectives and Qualitative characteristics is available today. For information about the upcoming webcasts and a complete archive, see the webcast page on the IASB's website.

AOSSG has doubts the 'overlay approach' is the best way to address the different effective dates of IFRS 9 and the new insurance standard

17 Sep, 2015

The Asian-Oceanian Standard-Setters Group (AOSSG) has commented on the IASB's recent discussion in addressing the consequences arising from different effective dates of IFRS 9 'Financial Instruments' and the upcoming insurance standard.

In July 2015, the IASB tentatively decided to amend IFRS 4 Insurance Contracts to address the consequences of different effective dates of IFRS 9 and the new insurance contracts standard. The approach developed has become known as the "overlay approach" and involves excluding from profit or loss and recognising in other comprehensive income the difference between the amounts that would be recognised in profit or loss in accordance with IFRS 9 Financial Instruments and the amounts recognised in profit or loss in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

AOSSG members are not fully convinced that this approach is the best to take. They believe this solution would not cater well for insurers that are a part of a larger finance entity, and would not cater for insurance activities that are a part of a group that has already applied IFRS 9. They also fear that it could complicate the insurers’ presentation of performance reporting and may escalate the view that the amounts flowing through OCI would not be a source of useful information.

In its letter, the AOSSG therefore suggests that aligning the effective date of IFRS 9 and the forthcoming standards on insurance contracts might be a better solution. Views on how this might best be implemented differ between AOSSG members. Some suggest an option for insurers to continue to apply IAS 39, some believe local regulators should determine the scope of such an option, some believe the option to apply IFRS 9 twice would be the best way forward.

The AOSSG letter is well timed. At its upcoming meeting next week, the IASB will discuss a "deferral approach" in addition to the "overlay approach" that could lead to a potential IFRS 9 deferral.

Please click to access the full letter on the AOSSG website.

The Bruce Column — Materiality and judgement the route to financial reporting clarity

16 Sep, 2015

In the first of a new series of ‘Thinking Allowed’ Deloitte turns its attention to the issue of materiality. Our resident, regular columnist, Robert Bruce reports.

The amount of paper, time and thought which has been taken up in efforts to declutter financial reporting disclosures is possibly, by now, immeasurable. It seems eminently obvious that we need a measure of common-sense, to step back from the mass of minutiae disclosure and concentrate on what is really important. The old propaganda slogan of the Second World War: ‘Is your journey really necessary?’ comes to mind. 

But to get to the point where common-sense and practicality becomes the go-to response is hard. It is not the way that the motivations behind the disclosure of financial reporting traditionally work. And one major part of the decision over what is really necessary is materiality. It seems to be an area on which people find hard to get a grip. 

Part of this is simply the way it has been handled in the past. The assumption behind the wording that the IASB used in IAS 1 became for many people the idea that, frankly, stuff should not be left out. It took an amendment last year which made it clear that even something which was defined as a minimum requirement didn’t have to be included if it was not material. 

But it goes against the cultural grain. All the way through the financial reporting supply chain the culture encourages further bits of immaterial encrustations to become attached. In the first place some of the standards themselves are not very clear about disclosures. Then preparers tend to stick to whatever their procedures were the previous year. And they are acutely aware that the penalties they may suffer for failing to disclose something are much greater than any criticism for leaving too much in. So culturally their procedures are skewed towards more stuff. 

But the problem does not just sit with the preparers.  It is not helpful if their auditors, and then the securities regulators, confront them with disclosure checklists and take a compliance approach to reviewing disclosures.  The users of financial reporting can make it equally hard. The tendency amongst analysts to argue that they would like everything to be available and to leave the sifting to them is rife.  No wonder preparers defend themselves with detail. 

If we are to cut clutter all this needs to stop. And a proper understanding of materiality is a good place to start.  Materiality should be common sense. If a prospective employee, for example, had punched his previous employer on the nose then you would need to know that up front in a cv, and not omitted or be told with hindsight that it is, in fact, disclosed in the equivalent of note 47 in the appendix.  Similarly, an employer does not need a full rundown of every year in the prospective employee’s life.  

Everyone understands materiality in this broad sense. It is about something that is essential to your understanding and to your ability to take a decision. Now everyone across the financial reporting world needs to apply it in the same way. ‘Something’, as Alan Teixeira points out in the first in a new series of thoughts about financial reporting matters, ‘is material to a person if it influences the decisions they make’. And in the financial reporting arena: ‘the question is whether a particular piece of information would influence the decision a person is making, when included in or omitted from a financial report’. 

And the material information needs to be presented properly and not simply included somewhere. It needs to be made clear that a particular piece of information is material and is important. 

All this needs bravery. It needs common sense. But the criteria are relatively simple. People need to stand back and seriously think about the information being presented. Then they can use their judgement and information can be retained or left out. What would then be left would be clear and useful or, as the rules in the UK say these days, fair, balanced and understandable. 

Thinking Allowed — New publication series

16 Sep, 2015

Deloitte has launched a new publication that focuses on financial reporting matters. 'Thinking Allowed' will be a regular series that provides insights into everyday matters that affect those preparing general purpose financial reports as well as commenting on broader financial reporting issues. The series editor is Alan Teixeira, the recently appointed Global Director of IFRS Research of Deloitte and former Senior Technical Director of the IASB.

The first paper in this series focuses on materiality. Those responsible for preparing, or approving for release, a general purpose financial report need to make judgements about what information to include in the report and how to present it. This publication is designed to help those with this responsibility think about matters such as:

  • how to identify who the primary users of your report are;
  • how to identify what information those users want, or expect to be, included in the report;
  • what factors should be considered in deciding whether information material, including what qualitative factors can make small amounts material;
  • how to reduce the amount of immaterial information in your report, ensuring that material information is not obscured.

This publication is particularly relevant to directors, CEOs and CFOs. Please click to download the first issue of Thinking Allowed.

Robert Bruce, our resident, regular columnist, reports on the new publication series in his column Materiality and judgement are the route to financial reporting clarity.

IASB to consider potential IFRS 9 deferral at next meeting

15 Sep, 2015

The agenda papers for the discussion of the interaction between IFRS 9 'Financial Instruments' and the forthcoming standard on accounting for insurance contracts at the IASB meeting next week have been made available. At the July IASB meeting the Board directed the staff to continue exploring possible approaches to resolve the concerns arising from that interaction. Among the alternatives explored is a possible deferral of IFRS 9 for entities that issue contracts within the scope of IFRS 4 'Insurance Contracts' until the new insurance contracts standard is applied.

As it has become obvious that the effective date of the forthcoming IFRS on insurance contracts can no longer be aligned with the effective date of IFRS 9 there have been calls for the IASB to delay application of IFRS 9 for insurance activities and align the effective date of IFRS 9 for those activities with the effective date of the new insurance contracts standard. In July 2015, the IASB tentatively decided to amend IFRS 4 to address the consequences of different effective dates of IFRS 9 and the new insurance contracts standard.

At the meeting next week the IASB staff will introduce the possibility of a possible deferral in addition to the "overlay" tentatively decided on in July and transition reliefs on initial application of the new insurance contracts standard. The deferral could either be at reporting entity level or below reporting entity level. It could also be optional or mandatory.

If the IASB decides to propose a deferral approach in addition to the overlay approach, the staff recommends that

  • deferral of the effective date of IFRS 9 would be permitted for an entity that issues contracts in the scope of IFRS 4 if that activity is predominant for the reporting entity, and would apply to all financial assets held by that reporting entity;
  • an entity that has applied IFRS 9 is not permitted to stop applying IFRS 9 and revert to applying IAS 39;
  • an entity that applies the deferral should be required to disclose the fact and make additional disclosures about the effect of this decision; and
  • an entity that applies the deferral would be permitted to stop applying the deferral and apply IFRS 9 at the beginning of any annual reporting period before the new insurance contracts standard is applied.

The papers for the meeting are available on the IASB website. Of special relevance are:

IASB Chairman speaks on IFRS 9

15 Sep, 2015

IASB Chairman Hans Hoogervorst discussed IFRS 9 impairment requirements at today's Financial Institutions IFRS Conference.

In his speech, Mr Hoogervorst stated that said the forward-looking expected loss model in IFRS 9 Financial Instruments should provide investors with better insight on loan loss risks. He defended the standard against claims that it was not tough enough and that banks should be required to recognise full expected lifetime losses on all loans as soon as the loan has been made. Mr Hoogervorst explained that such a requirement would seriously distort the actual performance of a bank and would probably have highly undesirable side-effects as it would not reflect economic reality, would probabaly prove to be pro-cyclical, and would lead to earnings management. He concluded:

The expected loss model in IFRS 9 will lead to much more timely recognition of inevitable losses, but it avoids the pitfalls of recognising highly uncertain lifetime losses prematurely.

Mr Hoogervorst also commented on the interaction of IFRS 9 and the forthcoming standards on insurance contracts. He indicated that the IASB is working hard to find a pragmatic solution to the problem so that the benefits from the new financial instruments standard can be reaped as soon as possible. Mr Hoogervorst admitted, that a possible deferral of IFRS 9 for certain companies is among the solutions currently considered.

Please click to access the full text of Mr Hoogervorst's speech on the IASB website.

Regulations made prohibiting the reversal of goodwill impairment

15 Sep, 2015

The Companies, Partnerships and Groups (Accounts and Reports) (No. 2) Regulations 2015 (SI 2015/1672) (“the Regulations”) come into force on 1 October 2015.

The Regulations transpose into UK law the prohibition on upwards revaluations of goodwill in the EU Accounting Directive 2013/34/EU where its value had been previously impaired in a company’s accounts.  The effect of the amendments is that, where provision for diminution in value has been made in respect of goodwill and the reasons for which that provision was made have ceased to apply to any extent, the provision must not be written back to any extent. 

The July 2015 amendments to section 27 of Financial Reporting Standard (FRS) 102 are consistent with this change in law. However, prior to adopting the amendment to the law, the previous requirements of FRS 102 (which allowed reversals of impairment of goodwill “if and only if the reasons for the impairment loss have ceased to apply”) continue to apply.

These amendments apply for financial years beginning on or after 1 January 2016.  However a company that has chosen to early adopt the amendments made by ‘The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 (SI/2015/980)’ must also adopt these amendments as well.

The Regulations are available here (link to statutory instrument).

EFRAG recommends endorsement of IFRS 9, but withholds comments on insurance industry

15 Sep, 2015

The European Financial Reporting Advisory Group (EFRAG) has finalised the long-awaited endorsement advice on IFRS 9 ‘Financial Instruments’. EFRAG states that 'overall IFRS 9 is conducive to the European public good, except for the impact on the insurance industry of applying IFRS 9 before the finalisation of the forthcoming insurance contracts standard'.

EFRAG points out that the IASB is working currently working on one or more solutions for the insurance industry. In fact, the IASB's meeting next week will see four hours of discussion around 'Insurance Contracts: IFRS 9 and IFRS 4' and first agenda papers have been made available indicating that two approaches (the "overlay approach" and the "deferral approach") are will be considered. EFRAG states that it will advise the European Commission of its views as the IASB’s work develops and on that basis will provide further advice relevant for the insurance industry.

Over all, EFRAG recommends that all businesses in the European Union other than those carrying out insurance activities should be required to account for their financial instruments in compliance with IFRS 9 as off 2018. And even businesses carrying out insurance activities should be permitted to aplly IFRS 9 from the same date.

Please click to access the press release and the 97 page endorsement advice on the EFRAG website as well as the updated EFRAG endorsement status report.

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