February

EFRAG final comment letter and feedback statement on DI/2015/2

10 Feb, 2016

The European Financial Reporting Advisory Group (EFRAG) has issued its final comment letter on the IFRS Interpretations Committee exposure draft DI/2015/2 'Foreign Currency Transactions and Advance Consideration'. EFRAG has also issued the related feedback statement summarising the main comments received from constituents invited to respond to its draft comment letter.

In its comment letter, EFRAG welcomes the guidance proposed in the draft interpretation, as it will “clarify the accounting for foreign currency transactions in which consideration was received or paid in advance of the recognition of the related asset, expense or income".  EFRAG also agrees with the proposed consensus and believes the guidance is consistent with the underlying principles in IAS 21 The Effects of Changes in Foreign Exchange Rates.

The press release, comment letter and feedback statement are available on the EFRAG website. 

FRC comments on the IASB’s proposed amendments to IFRS 4

10 Feb, 2016

The Financial Reporting Council (FRC) has responded to the IASB's Exposure Draft, 'Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Proposed amendments to IFRS 4)'.

The amendments were published by the International Accounting Standards Board (IASB) in December 2015 and propose to amend IFRS 4 Insurance Contracts to address the concerns expressed about the different effective dates of IFRS 9 Financial Instruments and the new insurance contracts standard.  The amendments are intended to provide two options for entities that issue insurance contracts within the scope of IFRS 4:

  • an option that would permit entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so-called overlay approach; and
  • an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral approach.

The FRC “appreciates the IASB’s work in addressing concerns raised by the insurance industry about the misalignment of the effective dates of IFRS 9 and the new insurance contracts standard” and “commends” the IASB in proposing the solutions it has.  However, the FRC believes that “further amendments are required to ensure that the temporary exemption from the application of IFRS 9 is a pragmatic and effective solution”.

The FRC comments:

In summary, we consider the ED requirements – the application of the temporary exemption at the reporting entity level only, together with the eligibility condition – create too blunt an instrument to achieve the intended objective of the deferral approach.

In its comment letter the FRC recommends that the IASB amends the predominance assessment for the temporary exemption such that:

  • The predominant activity is primarily determined by reference to a liability ratio test with some adjustments required to “ensure the test is effective”.
  • Whilst the liability ratio should be the primary test for the application of the exemption its conclusion should be rebuttable, if there are clear contrary indicators providing strong evidence that the predominant activity is that of an insurer and vice versa.
  • The application of the predominance criteria should be permitted at the reporting entity level or below at sub-group levels.

Additionally the FRC “fully support the proposal that IFRS 9 be mandatory for all companies for years commencing on or after 1 January 2021” and would not support any extension of the deferral period. 

Further comments are contained in the full comment letter which is available on the FRC website.

Video on the mission behind IFRSs

10 Feb, 2016

The IFRS Foundation has published on its website a short video explaining the role IFRSs play in the wider economy.

The video follows on from the publication last year of the organisation’s Mission Statement, which sets out what the IFRS Foundation aims to achieve. The video is currently available in English and Spanish and can be accessed on the IASB website.

ESMA comments on the IASB’s proposed amendments to IFRS 4

10 Feb, 2016

The European Securities and Markets Authority (ESMA) has responded to the IASB's Exposure Draft, 'Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Proposed amendments to IFRS 4)'.

The amendments were published by the International Accounting Standards Board (IASB) in December 2015 and propose to amend IFRS 4 Insurance Contracts to address the concerns expressed about the different effective dates of IFRS 9 Financial Instruments and the new insurance contracts standard.  The amendments are intended to provide two options for entities that issue insurance contracts within the scope of IFRS 4:

  • an option that would permit entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so-called overlay approach; and
  • an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral (temporary exemption from applying IFRS 9) approach.

ESMA “appreciates the efforts of the IASB to address any concerns and possible difficulties caused by the different effective dates of IFRS 9 and the new insurance contracts standard”.  It supports both the overlay approach and the temporary exemption from applying IFRS 9 and feels that both approaches should be available on an optional basis.  

Considering the overlay approach, ESMA comments that “the IASB should provide additional guidance on which assets are ‘related to contracts that are in the scope of IFRS 4’ and mandate additional disclosures in this respect”.  ESMA is also of the view that the IASB should limit the amount of presentation options allowed for the overlay approach and should require “the presentation on the face of the statement of profit or loss in accordance with IFRS 9 with a subsequent overlay adjustment from profit or loss to other comprehensive income”. 

ESMA “agrees that eligibility for the temporary exemption from applying IFRS 9 should be based on whether the entity’s predominant activity is the issuance of contracts within the scope of IFRS 4”.  ESMA is of the view that the predominant activity criterion “reflects most appropriately the objective to address the misalignment between the effective dates between IFRS 9 and the new insurance contracts standard” and will provide the most relevant information for the users of the financial statements.

ESMA does not support the assessment of the predominance criterion (for the temporary exemption from IFRS 9) at a level below the reporting entity level and comments that the predominance criterion should be amended “to capture all types of liabilities an insurer is expected to carry for its insurance activities linked to issuance of insurance contracts within the scope of IFRS 4”.  ESMA comments that where the temporary exemption is used, there should be sufficient disclosure about its effects.  

Additionally ESMA “agrees that the temporary exemption from applying IFRS 9 should have an expiry date no later than reporting periods beginning on or after 1 January 2021” and urges the IASB to finalise the new insurance contracts standard in time to meet this deadline.

The full comment letter is available on the ESMA website.

Pre-meeting summaries for the February IASB meeting

09 Feb, 2016

The International Accounting Standards Board (IASB) will meet at its offices in London on 16–17 February 2016. We have posted our pre-meeting summaries for the meeting that allow you to follow the IASB’s decision making more closely. For each topic to be discussed we summarise the agenda papers made available by the IASB staff and point out the main issues to be discussed by the IASB and the staff recommendations.

Check out the summaries for the forth­com­ing dis­cus­sions on insurance contracts, goodwill and impairment, IFRS implementation issues, and financial instruments with characteristics of equity. We have added them to our meeting note page and will sup­ple­ment them with our popular meeting notes after the meeting.

We comment on FRED 62 — Draft amendments to FRS 102 – Fair value hierarchy disclosures

09 Feb, 2016

We have published our comment letter on the Financial Reporting Council’s (FRC’s) Financial Reporting Exposure Draft (FRED) 62 ‘Draft amendments to FRS 102 – Fair value hierarchy disclosures’.

FRED 62 proposes to amend paragraphs 34.22 and 34.42 of FRS 102 to require disclosure of financial instruments held at fair value on the basis of a fair value hierarchy consistent with EU-adopted IFRS as follows:

A fair value measurement is categorised in its entirety on the basis of the lowest level input that is significant to the fair value measurement in its entirety.

Level 1: The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

Level 2: Inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly.

Level 3: Inputs are unobservable (ie for which market data is unavailable) for the asset or liability.

Overall we support the proposals.  Our key comments are as follows:

  • the proposals will reduce the costs of complying with FRS 102 for many financial institutions and enable them to present information on a basis consistent with International Financial Reporting Standards (IFRSs); and
  • it is important that the amendments are issued in final form as early as possible in 2016 and in particular in time for financial institutions with 31 December 2015 year ends to approve their accounts and meet regulatory filing deadlines without having to incur unnecessary costs in complying with the existing FRS 102 requirements for only one year.

Further comments and a full response to all questions raised in the invitation to comment are contained within the full comment letter.

2016 IFRS 'Red Book' coming in March

09 Feb, 2016

The International Accounting Standards Board (IASB) has announced that the 2016 edition of the Bound Volume of International Financial Reporting Standards (the 'Red Book') is expected to be available in March.

Copies will be priced at £72 each before discounts, plus shipping. More information is available on the IASB's 'register my interest' webpage (link to IASB website).

Reactions to the proposed amendments intended to address concerns about the different effective dates of IFRS 9 and the forthcoming new insurance contracts standard

08 Feb, 2016

On 9 December 2015, the IASB published ED/2015/11 'Applying IFRS 9 'Financial Instruments' with IFRS 4 'Insurance Contracts' (Proposed amendments to IFRS 4)'. The comment deadline for this ED has now ended.

ED/2015/11 proposed two options for entities that issue insurance contracts within the scope of IFRS 4:

  • an option that would permit entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so-called overlay approach;
  • an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral approach.

The comment letters on the ED made available on the IASB website seem to focus on two questions:

  1. Is one of the two approaches preferable?/ Can one or the other be dropped altogether?
  2. How can predominance best be determined for the deferral approach?/ What is the appropriate level for assessing predominance?

On the first question, the vast majority of respondents state that both approaches are needed. They claim that both the overlay approach and the temporary exemption from applying IFRS 9 are needed as these address different issues depending on the type of business activities and group structures. On the ends of the spectrum are the insurance industry on the one side, and user organisations on the other side. The insurance industry is asking for a deferral of IFRS 9 until the insurance standard is completed; they mostly cite cost reasons. Some user groups are asking for the overlay approach only, some very few even argue that it is best to do nothing; these respondents mainly cite lack of comparability if multiple options exist.

One level down, it is especially the deferral approach that triggers suggestions for refinement. While most respondents agree that assessing predominance is the right approach, the IASB's proposal to assess predominance "at the reporting entity level" causes confusion. Most respondents seem to believe that the IASB sees the group level as the reporting entity level. Others believe that "reporting entity level" is an empty phrase that could also mean lower levels than the group level. The question of how to treat conglomerates is important in both cases. Therefore, respondents assuming that the IASB intends testing at the group level often argue that a testing "below the reporting entity level" is needed; respondents assuming an assessment at a lower level often wonder of the implications for the group. The two possibilities that seem to emerge are:

  • Assessment is at the group level and results are cascaded down - this would leave pure insurance companies that are subsidiaries of conglomerates without the option of deferral while companies that are not subsidiaries of conglomerates would have the option.
  • Assessment is at a lower level than the group level, however, there is the question of roll-up - this could either mean that groups need to consolidate IFRS 9 and IAS 39 numbers or that qualifying subsidiaries would need to keep two sets of books - an IAS 39 one for reporting to their users and an IFRS 9 one for reporting within the group.

Expectations are currently (as communicated at the October 2015 IASB meeting) that the IASB will begin re-deliberation of the exposure draft in the second quarter of 2016. Final amendments are expected in the third quarter of 2016.

We comment on the IASB’s proposed amendments to IFRS 4

08 Feb, 2016

We have responded to the IASB's Exposure Draft, 'Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Proposed amendments to IFRS 4)', that was IASB published in December 2015.

As stated in the comment letter, we agree:

  • The exposure draft has identified valid reasons to introduce a temporary solution to issues arising from transitioning to two major and interrelated new standards at different times.
  • An option to defer IFRS 9 should be available for insurance activities and that a predominance criterion based on the carrying amount of liabilities is appropriate means to determine when that option should be available. However, we have concerns over the methodology for measuring that criterion and also disagree that it should be assessed only at the reporting entity level.
  • The proposed expiry date for the deferral approach is appropriate, but recommend that the IASB conclude its deliberations on the new insurance contracts standard taking into account the inputs received from comment letters and outreach activities, so that the effective date of the new standard is within this timescale.

In addition, we do not believe that a clearly defined insurance business should be excluded from the deferral approach only because it is part of a larger group and recommend the predominance test be permitted at the reporting entity level or each level below the parent entity (“waterfall” approach). Further, we provided some suggestions on how the predominance test could be modified to ensure that the temporary deferral can be applied by an appropriate population of entities.

FRC publishes report into engagement quality control reviews

08 Feb, 2016

The Financial Reporting Council (FRC) has today published the results of its thematic review in respect of firms’ engagement quality control reviews (EQCR). Specifically the thematic review “considers the work performed by the engagement quality control reviewer (EQCR) in the audit of financial statements”. The FRC comments that the report is intended to “promote a better understanding of the role of the EQCR and how this can support and enhance confidence in audit”.

The FRC’s AQR team visited nine audit firms “to review their audit methodology, guidance and training provided to partners and staff in respect of the engagement quality control review (EQC review) process”.  Meetings were also held with a selection of EQCRs “to understand how they perform this role and the challenges they face”.

The review follows other thematic reviews conducted in January 2016, January 2014 and December 2013.  Thematic reviews analyse further aspects of auditing which are not considered in detail during the FRC’s routine audit inspections of individual firms.  Thematic reviews seek to identify both good practice and areas of common weakness among audit firms.

Overall the FRC indicates that “all firms have established EQC review procedures for financial statement audits”.  However it does indicate that whilst there were instances where the EQC review “had directly contributed to improving the quality of the audit”, for a tenth of audits the review “identified weaknesses in the audit work performed which the EQC review process had not identified”.

The review provides a number of areas where firms should consider making improvements to their procedures and the application of these procedures in practice.  The key messages from the review are that audit firms should consider whether:

their EQCR eligibility criteria include adequate levels of technical expertise, experience and authority for audits of listed entities and/or in specialist sectors, consistent with that required by the individual signing the audit report;

their processes can be improved for the EQCR to evaluate whether they have maintained their objectivity throughout the audit so that any potential threats are identified, considered and safeguarded. It should be clear to the Audit Committee that the EQCR is not a member of the audit team but part of the firm’s quality control processes;

actions are needed to ensure that on all audits the EQCR’s involvement is timely and effective in maintaining audit quality and that matters identified by the EQCR are appropriately addressed; and

the evidence of the EQCR’s review and challenge requires improvement to meet the increased requirements of the EU Audit Regulation and Directive.

The FRC comments that it “expects to see improvements in the areas identified by [the] report in future inspections of individual firms”.

The press release and full report are available on the FRC website.

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