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2018

IASB issues podcast on latest Board developments

31 Jan 2018

The IASB has released a podcast featuring Chair Hans Hoogervorst, Vice-Chair Sue Lloyd, and education director Matt Tilling to discuss the deliberations at the January 2018 IASB meeting.

The 14-minute podcast features discussions of the following topics:

  • Primary financial statements 
  • Conceptual Framework
  • Financial instruments with characteristics of equity
  • Two IFRS Interpretations Committee issues
  • Feedback from the IFRS 13 post-implementation review
  • Goodwill and impairment

The podcast can be accessed through the press release on the IASB website. More information on the topics discussed is available through our comprehensive notes taken by Deloitte observers of the January 2018 meeting.

The Bruce Column — The encouraging future for integrated reporting and integrated thinking

31 Jan 2018

It is a year since the Chief Executive of the International Integrated Reporting Council, Richard Howitt, took up that role. Here Robert Bruce assesses Howitt’s progress during that year, what has been achieved and what lies ahead.

In a video interview he talks about progress with our regular columnist Robert Bruce. 

Richard Howitt is confident about the future.  And he has, he says, good reason to be so. Just as it took a while for the concept of integrated reporting to take hold around the world there are now clear signs that integrated thinking, the key concept that underlies integrated reporting, is equally taking hold, the two concepts ‘go hand in hand’ he said. He points to, for example, the global professional accounting body, IFAC.

It described integrated reporting as ‘the future of company reporting’. He points to the High Level Experts’ Group on Sustainable Finance. It described integrated reporting as ‘the ultimate ambition’. For Howitt it is recognition that the journey of the concept of integrated reporting is still on course.

1600 global companies in 62 different countries use the system. And he hopes that the result is that people have: ‘A holistic, more connected, more long-term, more forward-looking, more strategic view of their business and that the reporting system that supports that is very well advanced in companies across the globe’. It is, as he says, ‘very encouraging’. 

And Howitt was also encouraged by the IASB’s recent decision to revise its Management Commentary practice statement so that it was ever more closely aligned to integrated reporting. ‘That was’, he said, a very, very significant decision’. 

Change is also coming to Europe with the introduction of the European Directive on non-financial information this year. It is the first year that companies will have to produce reports under that directive. ‘The EC guidelines say that if companies use integrated reporting that will suffice’, said Howitt. ‘I hope that a good cadre of companies will choose to apply the directive by referring to the integrated reporting framework’. 

And this progress brings other issues into play. The issue of investor protection now becomes more critical. A global feedback exercise carried out by the IIRC last year indicated that the concepts of integrated reporting are now fully understood. And that has led to investor groupings insisting on its use. ‘There are increasing numbers of investors wanting this’, he said. Last year a group of global investors, representing some $2 trillion of assets, was formed. ‘They combined to ask companies to do integrated reporting and to state that they were using integrated reporting in their day-to-day decision-making’, he said. And that leads to calls for assurance and audit. In the early days the idea that integrated reports should undergo some form of assurance was downplayed, no one wanting the initial progress to be tripped up by issues that could be dealt with further down the line. But that time has now come. ‘There was a hesitation to confront assurance’, he said, ‘but there is a shift in emphasis now’. The system is robust enough and well-grounded internationally. Howitt’s view is that traditional reports are audited and so integrated reports should be as well. ‘How soon and which way are questions, but we are definitely moving in that direction’, he said. ‘There is a real sense of direction now that this will be a core part of the audit function and profession’. 

He also looked to the international success and cited the reasons why companies in Asia, and particularly Japan, have been perhaps the most enthusiastic. The Indian financial regulators have asked the top five hundred companies to introduce integrated reporting. The top thirty companies in Malaysia have all committed to use it. And in Japan 300 companies, with an increase to the top 500 this year, all take part in integrated reporting. And, in part driven by this progress, the annual conference of the IIRC takes place in Tokyo at the end of February. The progress is influenced by cultural differences. ‘There is a deeper culturally embedded approach to the long-term and there is a tradition of the social responsibility of business’ he said. Integrated reporting and integrated thinking underpin and emphasise this. And there were, he thought, lessons for the wider world. ‘We need to move the debate on from the old philanthropic corporate social responsibility mindset, honorable as that is, and I would never criticise it’, he said, ‘but for companies to understand it is not just an add-on after they have done the business, but it is about how they do their business. Integrated reporting is about how you do business more successfully because the value creation is value for the company and the stakeholders at the same time’. 

One of the obstacles that companies cite as a barrier is the absence of a global Standard for metrics, outside the mainstream financial numbers. There are many frameworks and standard-setting bodies in the this field and Howitt sees the Corporate Reporting Dialogue, which sits in the IIRC structure as a means of removing this obstacle. Within the membership of the CRD you have many different organisations, from global standard-setters in the form of the IASB and the US standard-setter, FASB, but also SASB, the Sustainable Accounting Standards Board, GRI, the Global Reporting Initiative, and the Climate Disclosure Standards Board, amongst others. And the Corporate Reporting Dialogue has been working on a plan to align the different frameworks. ‘It is not about competition, but about collaboration’, he said. They have used the recent recommendations of the Task Force on Climate-related Financial Disclosures as the catalyst. ‘It very clearly said that it wanted an integrated approach to risk management’, he said. So the Corporate Reporting Dialogue is instigating a major project for all the major frameworks to align to the TCFD recommendations. It hasn’t quite happened yet. But Howitt is confident. ‘It will send such a strong signal to the world that this whole integration of financial and non-financial reporting with an alignment between the two is actually happening’. 

There will be many a bump along the road ahead. The concept of integrated thinking as the ultimate transformative goal needs more emphasis. But progress is being made.

FRC reminds Boards of companies in the construction and business support services sectors of their reporting obligations

30 Jan 2018

The Financial Reporting Council (FRC) has published reminders to Boards of companies in the construction and business support services sectors of their reporting obligations. Although the FRC guidance is directed at one sector, in the light of the collapse of Carillion, the FRC states it is also relevant to other companies.

The FRC comments:

The annual report and accounts must provide sufficient, clear and relevant information, segmented between business lines where necessary.  Users must be able to:

  • understand the company’s performance, financial position and prospects;
  • assess its going concern status; and
  • assess its longer term viability.

The accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss. The analysis presented in the strategic report must be fair, balanced and comprehensive. Boards of companies applying the UK Corporate Governance Code must ensure the annual report and accounts are fair, balanced and understandable. These requirements require careful consideration of the content and clarity of the disclosures provided.

The guidance covers the following areas: 

  • the going concern basis of accounting. The FRC draws attention to its guidance Risk Management, Internal Control and Related Financial and Business Reporting and notes that where the directors decide that no material uncertainties relating to application of the going concern basis need to be disclosed, but that decision involved significant judgement, the Board should consider whether further disclosure is necessary to meet the requirements of IAS 1 Presentation of Financial Statements para 122 in relation to key judgements;
  • the Strategic Report, risk and viability reporting. The FRC draws attention to its 2017 Annual Review of Corporate Reporting that highlighted the need for all companies to provide clear and detailed descriptions of their principal risks and uncertainties, and the judgements made by directors in their identification of these. It indicates that in the construction and business service support sectors, the strategic report will likely require an explanation of the factors that are most important to the outcome of key contracts and thereby the continued success of the company.  It also attention to the Financial Reporting Lab’s report on risk and viability reporting which highlights that companies should consider how the principal risks link to other parts of the annual report and accounts, indicates the need to provide a good understanding of how management is addressing these risks and encourages Boards to enhance their disclosures supporting the viability statement;
  • judgements and estimates applied in preparing the financial statements. The FRC observes that measurement of revenue and recognition of profits over time is dependent on reliable estimates of contract outcomes. They also note that the impact of a company’s judgements as to which costs can be spread over the life of a contract and which costs should be expensed as incurred can be material. The FRC draws attention to its recent thematic report on judgements and estimates that sets out clear expectations of the disclosures required in this area. It also indicates that companies should consider the impact of IFRS 15 Revenue from Contracts with Customers and where known or reasonably estimable, should provide detailed quantitative disclosures of the effects of adopting the standard along with explanations of how accounting policies will change in the last accounts before first time adoption. The FRC also indicates that boiler plate and generic disclosures should be avoided;
  • cash flow and net debt indicators. The FRC draws attention to its recent letter to Audit Committee Chairs and Financial Directors which indicated the importance of clear information on the levels of debt, cash flows and the conversion of operating profits into cash. The FRC also draws attention to the amendments to IAS 7 Statement of Cash Flows which require an explanation of changes in a company’s financing obligations over the period and provide an opportunity for improved disclosure in this area.  The FRC observes that it is sometimes unclear whether operating cash flows recorded represent cash receipts from customers and payments to suppliers or cash flows with third party finance providers. The FRC notes that the new disclosure requirements provide an opportunity to improve the clarity of their disclosures, e.g. around financing facilities such as invoice discounting and reverse factoring. The FRC also comments that lack of disclosure around non-recourse arrangements may hide reliance on such facilities and they strongly encourage companies to explain their reliance on these facilities;
  • complex employee pension arrangements. The FRC observes that the complexity of defined benefit obligations in the business services support sector can make it difficult for users to fully assess associated risks and the company’s ability to meet its obligations. The FRC reminds Boards of the disclosure requirements under IAS 19 Employee Benefits and the need to explain, in the strategic report, any principal risks and uncertainties identified with respect to pension arrangements;
  • the role of auditors in particular in relation to the going concern basis and the need to remain alert to any events or conditions that may cast significant doubt on the company’s ability to adopt the going concern basis of accounting throughout the audit; and
  • the role of Audit Committees including their role in challenging accounting policies, judgements and estimates, principal risks and uncertainties and management’s assessment on going concern.

The FRC’s full guidance is available on the FRC website.

IFRS Foundation adds 17 new jurisdiction profiles on the use of IFRS around the world

29 Jan 2018

The IFRS Foundation has added 17 new jurisdiction profiles on the use of IFRS, bringing the total number of profiles completed to 166 jurisdictions. The new jurisdictions are members of the Organisation for the Harmonization of Corporate Law in Africa and will begin using IFRS Standards on 1 January 2019.

The new jurisdiction profiles are for the following nations: Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Comoros, Côte d’Ivoire, Democratic Republic of Congo, Equatorial Guinea, Gabon, Guinea, Guinea-Bissau, Mali, Niger, Republic of the Congo, Senegal and Togo.

For more information, see the press release on the IASB's website.

ESMA issues statement on income tax consequences of the US tax reform under IFRS

29 Jan 2018

The European Securities and Markets Authority (ESMA) has issued a public statement, “Accounting for Income Tax Consequences of the United States Tax Cuts and Jobs Act under IFRS,” which clarifies certain accounting requirements in IAS 12, “Income Taxes” and the impact the tax reform may have on year-end financial reporting.

On 22 December 2017, the United States Tax Cuts and Jobs Act of 2017 was signed into law. ESMA issued this public statement to ease the concerns of some issuers and auditors regarding “their ability to complete fully the accounting under IAS 12 Income Taxes for the effects of the Act in their 2017 annual financial statements due to the short time available to assess the accounting consequences of the Act and the lack of information on their tax position.” In addition, the public statement notes that IAS 12 does not provide for any easing requirements with regard to changes in tax law enacted shortly before the year-end.

For more information, see the following:

We comment on three IFRS Interpretations Committee tentative agenda decisions

29 Jan 2018

We have published our comment letters on IFRS Interpretations Committee tentative agenda decisions related to IFRS 15 and IFRS 9, as published in the November 2017 IFRIC Update.

More in­for­ma­tion about the issues is set out below:

Issue

Agenda decision supported?

More in­for­ma­tion

IFRS 9 — Presentation of interest revenue for particular financial instruments 

Yes.

IFRS 15 — Right to payment for performance completed to date

Yes; however, we recommend the analysis in the tentative agenda decision be expanded to specify that the entity is not acting as agent for its customer in any future resale of the unit to a third party. 

IFRS 15 — Revenue recognition in a real estate contract that includes the transfer of land

Yes; however, we recommend a change to the wording related to ‘transformative relationship’. 

Click to access all our comment letters to the IASB, IFRS Foun­da­tion, and IFRS In­ter­pre­ta­tions Committee.

January 2018 IASB meeting notes posted

29 Jan 2018

The IASB met at its offices in London on 24 and 25 January 2018. We have posted our comprehensive Deloitte observer notes for all projects discussed during the meeting.

The Board discussed the following topics:

Wednesday 24 January

Primary Financial Statements

The Board discussed the presentation of management performance measures and the presentation of the results of associates and joint ventures. The Board decided that (a) all entities be required to specify their key performance measure(s) in the financial statements; identify such measures as MPMs if they are not IFRS-defined measures; and the key performance measures identified in the financial statements must include, as a minimum, those that are communicated in the annual report; (b) the reconciliation between the MPM and IFRS-defined measure be presented in the notes; (c) no specific constraints should be imposed on the MPMs; (d) did not agree to require a five year summary of the MPM; (e) will allow MPM information in the segment note; (f) and not to specify that MPMs are not an IFRS-defined measure (as they relate to regulatory requirements). In relation to associates and joint ventures, the Board decided to propose that entities be required to present the results of ‘integral’ associates and joint ventures separately from ‘non-integral’ associates and joint ventures.

Financial Instruments with Characteristics of Equity

The Board considered the appropriate accounting for non-derivative instruments with equity hosts with complex payoffs. This type of instruments has not been discussed by the Board before and was identified during the review of a pre-ballot draft of the Financial Instruments with Characteristics of Equity Discussion Paper. The instruments under consideration give rise to claims against the entity that are limited to the entity’s available economic resource, but the claims are also affected by other variables such as a commodity index. The Board decided to seek feedback in the DP on whether the embedded derivative should be separated and whether and how the attribution requirements may help provide information about the alternative settlement features.

Thursday 25 January

Conceptual Framework

The Board was updated on the project. The final document is expected to be published in March 2018.

Goodwill

The Board decided to remove the requirements in IAS 36 to (a) use pre-tax inputs when calculating value in use and (b) consider whether to remove the requirement to exclude cash flows relating to uncommitted future restructurings and asset enhancements when calculating value in use.

IFRS Implementation Issues

The Board considered two issues referred to it by the IFRS Interpretations Committee. The first is a possible research project on commodity loans and related transactions, including cryptocurrencies. The Board had mixed views about whether they should take on this project. Several Board members questioned whether there is diversity in practice to such an extent that users have made ill-informed decisions that would justify the Board spending resources on it. But others thought the Board should not be dismissive. One approach would be to assess whether the scope of some existing Standards could be amended to cater for commodities and digital currencies as opposed to creating new Standards for them. This might expedite the Standard-setting process and cover a wider range of transactions. The Board also decided to propose an annual improvement to remove the requirement in IAS 41 to use pre-tax cash flows when fair valuing a biological asset.

Post-implementation review of IFRS 13 Fair Value Measurement

The Board started considering the feedback from its review of IFRS 13. They discussed a review of academic literature, feedback from the request for information and a summary of other research conducted by the staff.  Overall, given that there is general consensus that IFRS 13 is working well, the Chair asked that the Staff propose only changes that are absolutely necessary and not to waste time on nice-to-have improvements.

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.

Summary report and video of EFRAG's fair value conference

28 Jan 2018

On 5 December 2017, the European Financial Reporting Advisory Group (EFRAG) hosted a half-day event on the use of fair value in financial reporting in Brussels. EFRAG has now published a summary report and a video from the event.

During the event, the discussion was focused on the theory and the practice of fair value. In his keynote speech to the EFRAG event, Sir David Tweedie, Chairman of the International Valuation Standards Council (IVSC) emphasised that valuation, "is crucial for economic stability and for financial reporting under IFRS."

Please click to access the following items on the EFRAG website and on YouTube:

Updated IASB work plan — Analysis

27 Jan 2018

Following the IASB's January 2018 meeting, we have analysed the IASB work plan to see what changes have resulted from the meeting and other developments in January. Changes mostly relate to pronouncements having been published, comment letter deadlines having ended, and clarifications of upcoming dates of issuing pronouncements.

Below is an analysis of all changes made to the work plan since our last analysis on 18 December 2017.

Maintenance projects

  • Availability of a refund (amendments to IFRIC 14) — The next milestone is an IFRS amendment but the expected date has been removed. The Board plans to perform further work on the possible effects of the amendments before proceeding.
  • Definition of a business (amendments to IFRS 3) — An IFRS amendment is now expected in Q2 2018 (updated from H1 2018).
  • Improvements to IFRS 8 Operating Segments (amendments to IFRS 8 and IAS 34) — The IASB will now decide the project’s direction in March 2018 (previously set to January 2018).
  • Plan amendment, curtailment or settlement (amendment to IAS 19) — An IFRS amendment is expected in February 2018 (previously set to January 2018).

Standard-setting projects

  • Definition of material (amendments to IAS 1 and IAS 8) — Discussions on feedback of the exposure draft are now expected April 2018 (previously set to March 2018).
  • Rate-regulated activities — A discussion paper or exposure draft is expected in H1 2019 (previously set to 2019).

Research projects

  • Discount rates — Research summary is expected in Q2 2018 (updated from H1 2018).
  • Dynamic risk management — The next milestone has been changed from discus-sion paper to core model. It is expected in H1 2019 (previously set to just 2019).
  • Financial instruments with characteristics of equity — a discussion paper is expected in Q2 2018 (updated from H1 2018).
  • Goodwill and impairment — A discussion paper or exposure draft is expected in H2 2018 (previously set to H1 2018).
  • Post-implementation review of IFRS 13 Fair Value Measurement — The next milestone is a request for information feedback. The IASB discussed this topic at its January meeting.
  • Primary financial statements — A discussion paper or exposure draft is expected in H1 2019 (pushed back from H1 2018).
  • Principles of disclosure — Discussions on feedback of the discussion paper are now expected February 2018 (moved up from March 2018).
  • Share-based payment — A research summary is expected in Q2 2018 (updated from H1 2018).

Other projects

  • IFRS Taxonomy Update— IFRS 17 Insurance Contracts — The final update was removed from the IASB’s work plan, as the update was published on 11 January 2018.
  • IFRS Taxonomy Update — common practice (IFRS 13) — A proposed update is expected in Q2 2018 (updated from H1 2018).

The above is a faithful comparison of the IASB work plan at 18 December 2017 and at 26 January 2018. For access to the current IASB work plan at any time, please click here.

EFRAG issues draft endorsement advice on Annual Improvements to IFRS Standards 2015-2017 Cycle

26 Jan 2018

The European Financial Advisory Group (EFRAG) has issued for comment its draft endorsement advice for the use of the Annual Improvements to IFRS Standards 2015-2017 Cycle in the European Union (EU).

The Amendments, issued in December 2017 make amendments to the following three Standards as result of the IASB's annual improvements project.

  • IFRS 3 Business Combinations and IFRS 11 Joint Arrangements - The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business.
  • IAS 12 Income Taxes - The amendments clarify that all income tax consequences of dividends (i.e. distribution of profits) should be recognised in profit or loss, regardless of how the tax arises.
  • IAS 23 Borrowing Costs - The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings.

EFRAG recommends the endorsement of the Amendments. EFRAG’s initial assessment is that the Amendments meet the technical requirements of the Regulation (EC) No 1606/2002 of the European Parliament and of the Council on the application of international accounting standards.
 
EFRAG also considers that the overall benefits of the Amendments are likely to outweigh the associated costs to implement them.

Comments are requested by 26 February 2018.

For more information, see the press release, draft endorsement advice letter and the invitation to comment on the EFRAG’s website. EFRAG has also updated its endorsement status report that is available here.

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