January

IASB updates work plan

14 Jan, 2016

Following the issuance of IFRS 16 yesterday, the IASB has updated its work plan.

Removing the leases project from the work plan and adding IFRS 16 Leases under completed standards is the only obvious change the Board notes. As always, in all other projects the next project steps may or may not have been pushed back by one month since the last work plan update. The revised IASB work plan is available on the IASB's website.

IPSASB publishes proposed changes to IPSAS 25 'Employee Benefits'

14 Jan, 2016

The International Public Sector Accounting Standards Board (IPSASB) has released for comment Exposure Draft ED 59 'Amendments to IPSAS 25, Employee Benefits'.

IPSAS 25 is based on IAS 19 Employee Benefits, which was later revised. The main changes that the IPSASB has proposed to IPSAS 25, so that convergence with IAS 19 is maintained to the extent appropriate, are:

  • Remove an option that allows an entity to defer the recognition of changes in the net defined benefit liability (the “corridor approach”);
  • Introduce the net interest approach for defined benefit plans;
  • Amend certain disclosure requirements for defined benefit plans and multi-employer plans; and
  • Simplify the requirements for contributions from employees or third parties to a defined benefit plan when those contributions are applied to a simple contributory plan that is linked to service.

Please click to access the press release and ED 59 on the IPSASB website. Comments are requested by 30 April 2016.

The Bruce Column — Bringing clarity to leases: The new standard

13 Jan, 2016

IFRS 16, the long-awaited standard on leasing, is published. Now the task of implementing it begins. Our resident, regular columnist, Robert Bruce, takes a look at what is involved.

Leasing has been a long haul of a flight. It was first on the agenda in the early days of the IASB and since then has been through many stages: a joint project with the US standard-setters, FASB, followed by a joint discussion paper, and two joint exposure drafts. And it has been hit, through all that time, by vociferous and determined opposition. But, after a few twists and turns, the IASB has come to an answer and we have a standard. IFRS 16 is finally open for business and comes into force for reporting periods beginning on or after 1 January 2019. And the IASB is happy. Chatting with its Chairman, Hans Hoogervorst, the other day he told me that by their reckoning 85% of leases are held off-balance sheet at present. And, once IFRS 16 comes into force, that figure will drop, as he put it, ‘to zero’.

In the short term there are going to have to be some tricky decisions to be made. There will be more judgment and a steep learning curve, though there are three years of lead-in. And there are peculiarities. For example, the way in which the standard-setters have extricated themselves from the potentially time-consuming and cost-consuming issue of what should be done about small-ticket items, like office furniture, has been described by Hoogervorst as ‘not conceptually very beautiful’. The USD 5,000 indicative threshold is arbitrary but useful. Certainly it will bring the cost of implementing the standard down.

But the whole issue of leases, as ever, is riddled with complexities and quirks. The issue of leases versus contracts for services is a good example. If a construction company hires another company to dig out a building site using the provider’s equipment then that is a service. If the company hired the equipment and then used its own team to do it that would be a lease. The whole area of what is a lease and what is a contract for services may prove to be the most challenging of the practical aspects of the standard.

But overall the standard gets the work done and for the standard-setters the important thing is achieving something that provides greater transparency and comparability. Some airlines own most of their fleet. Some lease most of their fleet. IFRS 16 will take away the difference. Balance sheets will show the assets. Investors and analysts will no longer have to make their own basic adjustments. The standard will do it for them.

Hoogervorst also thinks that the changes which the standard brings about will be ‘eye-opening’ for management and that CEOs may be surprised at how many leases they have on the balance sheet and the knock-on effect that has in terms of finance. It certainly means they will also have to take a look at any contracts they have which rely on IFRS statements. And they will then have to make plans to explain to the people concerned, like lenders, how the financial statements will change when the new leases requirements take effect. The risks will not have grown, but they may, on paper, appear to have done so.

There is, as ever, much to be done, not only in understanding but also communicating the impacts. But the final result should be clearer for both preparers and, in particular, investors since a very obvious part of financing will become explicit rather than remaining implicit or hidden in the notes as before.

IASB issues new leasing standard

13 Jan, 2016

The International Accounting Standards Board (IASB) has published a new standard, IFRS 16 'Leases'. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 supersedes IAS 17 'Leases' and related interpretations and is effective for periods beginning on or after 1 January 2019, with earlier adoption permitted if IFRS 15 'Revenue from Contracts with Customers' has also been applied (subject to EU endorsement).

 

Background

In July 2006 a project to revise lease accounting was added to the IASB’s agenda. The project was undertaken as a joint project with the US Financial Accounting Standards Board (FASB), with both standard-setters looking to develop an approach requiring lessees to recognise assets and liabilities for the rights and obligations arising under leases. In the years that followed, a discussion paper and two exposure drafts were published, with both boards undertaking significant outreach activities. The IASB has now issued a final standard with a single lessee accounting model, whereas the FASB has decided to have a dual lessee accounting model in their forthcoming standard – both however require assets and liabilities to be recognised (with limited exceptions)

 

Identifying a lease

A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use.

 

Overview of the new accounting model in IFRS 16

Under IFRS 16 a lessee recognises a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly and the liability accrues interest. This will typically produce a front-loaded expense profile (whereas operating leases under IAS 17 would typically have had straight-line expenses) as an assumed linear depreciation of the right-of-use asset and the decreasing interest on the liability will lead to an overall decrease of expense over the reporting period.

The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate.

As with IFRS 16’s predecessor, IAS 17, lessors classify leases as operating or finance in nature. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Otherwise a lease is classified as an operating lease.

For finance leases a lessor recognises finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on the net investment. A lessor recognises operating lease payments as income on a straight-line basis or, if more representative of the pattern in which benefit from use of the underlying asset is diminished, another systematic basis.

 

Recognition exemptions

Instead of applying the recognition requirements of IFRS 16 described above, a lessee may elect to account for lease payments as an expense on a straight-line basis over the lease term or another systematic basis for the following two types of leases:

  • leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset; and
  • leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture) – this election can be made on a lease-by-lease basis.

 

Effective date

IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019 (subject to EU endorsement). Earlier application is permitted if IFRS 15 Revenue from Contracts with Customers has also been applied.

 

Additional information

IASB website

UK Accounting Plus

EFRAG publishes summary report for its Conceptual Framework outreach event in Brussels

12 Jan, 2016

On 23 September 2015, the European Financial Reporting Advisory Group (EFRAG) will hosted a conference on 'Conceptual Framework for Financial Reporting - will it meet European expectations?' in Brussels. A summary report related to this outreach event has now been provided.

Specifically, participants and a panel consisting of representatives from national standard-setters, the European Parliament, users of financial statements, the IASB, EFRAG, and academics discussed the IASB's proposed Conceptual Framework and the results of an academic study, sponsored by EFRAG and the ICAS, on professional investors’ financial information usage. The press release on the EFRAG's website offers a summary of the main observations and access to the full report.

IASB changes to technical leadership

12 Jan, 2016

IASB has made some changes to its technical leadership, effective 1 January 2016.

The following responsibilities have been determined:

  • Henry Rees has become Director of Implementation and Adoption Activities and will be supported by Patrina Buchanan as deputy.
  • Andrea Pryde will be leading the IASB’s standard-setting staff work with the exception of the financial instruments work, which will be continue to led by Kumar Dasgupta.
  • Michael Stewart will be responsible for all post implementation reviews and will also lead certain research projects.
  • Peter Clark will continue to lead the IASB's overall research programme.
  • Wayne Upton will continue to chair the IFRS Interpretations Committee.

Please click for the announcement of these new responsibilities on the IASB website.

EFRAG TEG meeting January 2016

12 Jan, 2016

The European Financial Reporting Advisory Group (EFRAG) will hold a TEG meeting on 27 and 28 January 2016 in Brussels.

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

Hoogervorst discusses major IASB projects at European Parliament meeting

11 Jan, 2016

Today, IASB Chairman Hans Hoogervorst spoke with the Committee on Economic and Monetary Affairs (ECON) of the European Parliament at its meeting in Brussels. Mr Hoogervorst discussed four high-priority projects for the IASB in 2016: IFRS 9, the leases standard, insurance contracts and the Conceptual Framework.

Mr Hoogervorst began by discussing IFRS 9 and noted that the introduction of an expected loss model for credit losses is the most important change to the standard. He noted the positive reception the standard has gotten throughout Europe.

The IASB's long-awaited leases standard will be published on Wednesday, 13 January. Mr Hoogervorst promoted the comparability and "economic reality" that IFRS 16 will bring to listed companies around the world. He admitted that it wouldn't be popular with everyone and that half of all listed companies would be affected by changes to leases guidance. However, he affirmed that the IASB had "looked at all the possible risks very carefully" and concluded that the risks and costs associated with the new standard are "manageable".

Moving on to insurance, Mr Hoogervorst said that the IASB expects to (1) finish its deliberations "soon" and (2) publish a new standard "around the end of 2016". He noted the importance of the insurance project:

Today’s accounting Standards for the insurance contracts are highly defective. There is no real global standard and there is a wide variety of practices around the world. Some of these standards provide information that is clearly wrong.

Mr Hoogervorst noted that the IASB's new standard would be based on current measurement, but that the complexity of the insurance industry is making it difficult to resolve all the accounting issues involved. He said that the effective date of the new insurance contracts standard would be later than that of IFRS 9, but understands that this will be problematic to the insurance industry:

We have recently exposed a possible solution to this problem, which includes the option of a deferral of IFRS 9 for pure insurance companies. For conglomerates that combine insurance with banking activities, we will make it possible to adjust Profit or Loss for the effects of IFRS 9 through what we have called the overlay approach. We will evaluate the feedback we get on our proposals in the spring and expect to finalise our decisions well before the summer.

During the following question and answer session, Mr Hoogervorst was again asked by several ECON members about the different effective dates of IFRS 9 and the new insurance standard. He stressed: "We believe there is something of an issue," however, he also stated: "That does not mean that we will want to go all the way in adressing this issue." Again, Mr Hoogervorst highlighted the overlay approach. Asked after the deferral approach and a possible application below the reporting entity level he commented: "That is taking flexibility a bit too far."

Regarding the conceptual framework, Mr Hoogervorst said that the IASB expects to publish a new version in 2016, which will include the issues of prudence and stewardship.

For more information, see Mr Hoogervorst's full remarks on the IASB's website or a video recording of the entire ECON meeting, which also features a Q&A session with the Chairman of the IFRS Foundation Trustees, Michel Prada. (Please note that the recording, including Mr Hoogervorst's introductory remarks, can be watched in any of the EU's official languages).

Summary of the December 2015 ITCG conference call

11 Jan, 2016

The IASB has published notes from the IFRS Taxonomy Consultative Group (ITCG) conference call held on 9 December 2015.

The ITCG discussed:

  • IFRS Taxonomy deprecation schema - update and element labels;
  • Management of entity-specific disclosures.

For more information, see the meeting notes on the IASB website.

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