The Annual Improvements to IFRSs 2010-2012 Cycle incorporate eight amendments to seven standards being IFRS 2 Share-based Payment, IFRS 3 Business Combinations, IFRS 8 Operating Segments, IFRS 13 Fair Value Measurement, IAS 16 Property, Plant and Equipment, IAS 24 Related Party Disclosures and IAS 38 Intangible Assets. 

The Annual Improvements to IFRSs 2011-2013 Cycle incorporate four amendments to four standards being IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 3 Business Combinations, IFRS 13 Fair Value Measurement and IAS 40 Investment Property. 

The majority of the amendments are in the nature of clarifications rather than substantive changes to existing requirements. 

EFRAG supports the adoption of the Annual improvements for both cycles and recommends their endorsement.  EFRAG’s initial assessment is that the Annual Improvements for both cycles 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’s conclusion is supported by an Effects Study Report which considers the costs and benefits of implementing the Annual Improvements. EFRAG’s assessment is that the benefits for preparers and users in implementing the Annual Improvements for both cycles outweigh the costs.

Comments are requested by 3 March 2014. 

Click for (all links to EFRAG website):

• Press release for Annual Improvements to IFRSs 2010 – 2012 Cycle.
• Draft endorsement advice for Annual Improvements to IFRSs 2010 – 2012 Cycle.
• Press release for Annual Improvements to IFRSs 2011 – 2013 Cycle.
• Draft endorsement advice for Annual Improvements to IFRSs 2011 – 2013 Cycle.

Annual Improvements to IFRSs 2010–2012 Cycle affects seven standards (IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38), Annual Improvements to IFRSs 2011–2013 Cycle affects four standards (IFRS 1, IFRS 3, IFRS 13, IAS 40). EFRAG's initial assessment is that all of the amendments satisfy the technical criteria for EU endorsement and EFRAG should therefore recommend their endorsement.

The endorsement status report, dated 31 January 2014, is available here.

The IFAC / ICAS paper, Do We Need a Roadmap for Financial Reporting: Developing the IASB’s Conceptual Framework, discusses the role conceptual framework serves in (1) the standard-setting process and (2) practical use in financial reporting. It also explores whether the scope of the IASB’s conceptual framework covers today’s evolving financial reporting landscape and whether a single framework is globally feasible.

In addition, the paper examines the potential core building blocks and characteristics of the conceptual framework. These core building blocks include:

• Scope of financial reporting.
• Stewardship.
• Business model.
• Entity versus proprietary perspectives.
• Prudence.
• Unit of account.
• Concept of capital.

The IFAC and ICAS have prepared this paper to encourage discussion between stakeholders as they provide feedback to the IASB’s Discussion Paper, A Review of the Conceptual Framework for Financial Reporting.

For more information, see:

• Press release and IFAC/ICAS paper (links to IFAC website).
• UK Accounting Plus project page on the Conceptual Framework project.

Overall we support the proposed amendments to the Financial Reporting Standard for Smaller Entities (FRSSE).  However we have some specific comments on the implementation of the amendments.  We comment: 

we are concerned that preparers of micro-entity accounts may find it difficult to identify those requirements that are applicable to them, and suggest that these may be presented in a more user-friendly format; and

we recommend that transitional provisions are implemented in respect of the proposed amendments which require micro-entities to apply historical cost accounting for tangible fixed assets, fixed asset investments and investment properties.

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

EFRAG supports the amendments to IAS 19, which clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service and permit a practical expedient if the amount of the contributions is independent of the number of years of service. The EFRAG’s assessment is that benefits for preparers and users implementing the amendments to IAS 19 outweigh the costs and therefore EFRAG recommends that the European Commission (EC) endorses the amendments.

Click for the following information on the EFRAG website:

• Press release
• Effects Study Report
• Endorsement Advice Letter to the EC

The FRC draft guidance, published in November 2013, seeks to integrate the FRC current guidance on going concern and risk management and internal control (often referred to as the “Turnbull Guidance”) and also makes some consequential revisions to the UK Corporate Governance Code and auditing standards.  The FRC has taken this approach “to encourage boards, as part of the same on-going process, to consider risk identification and management, including the assessment of solvency and liquidity risks, and to determine whether the company is able to adopt the going concern basis of accounting”.  

The FRC draft guidance also seeks to support the principles underlying the recommendations advocated by Lord Sharman in his report “Going Concern and Liquidity Risks: Lessons For Companies and Auditors” (link to FRC website).  

The main concern of the ACCA is that they feel the draft guidance will “steer” directors to a certain approach to risk management and that using the approach directors may feel that they have identified a complete list of risks which are the only ones they feel they should be managing.  They highlight that “the main danger, or risk, is that the guidance could foster a misplaced complacency about risk and the resilience of the risk model”.  They comment: 

the draft guidance implies that there is one way to do risk management by assessing the principal risks to the company’s business model and ability to deliver its strategy.  While this may be an important component of managing risk for most companies it should not be the only one.  This approach tends to assume that all significant risks can be foreseen and accurately assessed 

Company resilience, not risk assessment, should be the principal aim for boards when considering risk 

The ACCA would like further guidance as to how companies and their boards can be resilient to risks that have not been identified and provide some suggested steps to ensure this in their comment letter such as scenario planning and analysis.  

In relation to the section on guidance to identify material uncertainties to the going concern basis of accounting, the ACCA comment that they “broadly agree” with the proposals but would like the FRC to be clearer on the purpose of the exercise. 

Click for:

• Press release (link to ACCA website).
• Full comment letter (link to ACCA website).
• Our previous UK Accounting Plus story on the FRC consultation on risk management.

Our key comments include:

• In our view, there is a need to define some of the terms used throughout the draft LLP SORP to ensure consistency of interpretation. In particular definitions of ‘clearly identifiable return on amounts subscribed’ and ‘members’ services’ would be helpful.
• Instead of the SORP’s requirement for LLPs to produce a separate Member’s report, currently not required by FRS 102 or legislation, we recommend moving the relevant disclosures to form part of the financial statements, where they provide necessary context for the other information presented.
• While we generally agree with the proposed business combinations accounting guidance, we have a concern about the application of the group reconstruction criteria to LLPs with no interests accounted for as equity. We believe that, in the context of LLPs with no capital accounted for as equity, the reference to ‘equity holders’ should include LLP members and the ‘rights of each equity holder’ should extend to include member profit sharing rights.
• Overall, we believe the revised guidance on contractual or constructive obligations and annuities adequately reflects the requirements of FRS 102 and FRS 103 in relation to accounting for members’ post-retirement benefits. However the introduction of some additional clarifications and definitions would be useful. In particular we believe further clarification is required of the interaction of the FRS 102 definition of ‘puttable instruments’ and the LLP SORP definition of ‘post-retirement payments to members’ to avoid a potential conflict in application of the accounting guidelines to some situations.

In addition, the CCAB have asked a specific question on the need to retain the FRS 25 application flowcharts in the appendix to the LLP SORP. We agree with the CCAB that the flowcharts were always intended only as an illustrative guidance and to the extent they are not used by preparers their continued inclusion within the SORP is not warranted. We therefore agree with the removal of the flowcharts provided that the body of the SORP reflects all the principles necessary for accounting analysis.

While we agree with the CCAB that in many instances the basic accounting remains unchanged, there is one specific scenario where we envisage the application of the FRS 102 requirements to result in a different classification of members’ interests, in relation to the application of the ‘puttables exception’. For example, LLPs where members provide services, have automatic division of all profits and have their interest puttable on retirement would previously have had no equity, but would now be required to classify capital as equity under FRS 102. We therefore recommend providing an example illustrating the new treatment and highlighting the change from the old accounting requirements.

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

Background

In September 2012, the IASB started a comprehensive rate-regulated activities project, starting with a research phase to develop a Discussion Paper.  In December 2012, the IASB decided to add an additional phase to the rate-regulated activities project to develop this limited-scope Standard.

In April 2013, the IASB published the Exposure Draft ED/2013/5 Regulatory Deferral Accounts (the ‘ED’), with comments due by 4 September 2013. 

The IASB received comments on the ED which lead to some clarifications and edits, including additional disclosure requirements; however, the main proposals in the ED were not changed substantially in the final Standard.

Scope

Initial application of IFRS 14 must coincide with the application of IFRS 1 First-time Adoption of International Financial Reporting Standards. This means, IFRS 14 cannot be applied by entities that have previously adopted IFRSs. Entities applying this interim standard must also meet specified eligibility criteria. Specifically, the entity has to conduct 'rate-regulated activities' (as defined by IFRS 14), and it must have recognised amounts that qualify as regulatory deferral account balances in its financial statements in accordance with its previous GAAP.

Overview of the key requirements

• IFRS 14 requires the balances reflecting the effects of rate regulation to be described as “regulatory deferral account debit balances” and “regulatory deferral account credit balances” (collectively they are referred to as “regulatory deferral account balances”) and these balances cannot be referred to as, or presented with, assets and/or liabilities because  the determination of whether these balances meet the definition of assets or liabilities in the Conceptual Framework must be addressed as part of the IASB's comprehensive conceptual framework project
• The effects of rate regulation must be separately presented in the statement of financial position and statement(s) of profit or loss and other comprehensive income, and the Standard provides illustrative examples of these presentation requirements
• All assets and liabilities, balances and transactions have to comply with all other IFRS standards so the regulatory deferral account balances represent the effects of rate regulation only after the requirements of other IFRS standards have been met
• IFRS 14 includes some specific guidance on how other Standards such as IAS 10 Events After the Reporting Period, IAS 12 Income Taxes, IAS 33 Earnings Per Share, IAS 36 Impairment of Assets, IFRS 3 Business Combinations and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations should be applied to regulatory deferral balances and/or movements in such balances
• There are specific disclosure requirements to (a) enable users to evaluate the nature of, and the risks associated with, the specific rate regulation regime and (b) enable users to understand how the regulatory deferral account balances are recognised and measured both initially and subsequently.

Effective date and transition

The Standard can be applied in an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2016.  Earlier application is permitted. Application of the standard is voluntary. However, an entity that elects to apply the standard in its first IFRS financial statements continues to apply it in all its subsequent financial statements.

Click for:

• IASB press release (link to IASB website)
• IASB Project summary and Feedback statement (link to IASB website)
• Our summary of IFRS 14

Practice Note 14 ‘The audit of housing associations in the United Kingdom’ updates the 2006 version to reflect recent regulatory developments and changes to the environment in which housing associations operate and for the issuance of the clarified ISAs (UK and Ireland) in 2010.  The Practice Note consists of four sections including a section on the business risks and audit risks in the housing sector. 

Along with revised Practice Note 14, the FRC has also published a summary of the feedback received from their consultation on the proposed changes.  The FRC comment that “all of the comment letters expressed strong support for the proposed structure and content of the Practice Note and agreed that the proposed Practice Note was suitable for publication”. 

Click for:

• Press release (link to FRC website).
• Practice Note 14 (Revised January 2014) ‘The audit of housing associations in the United Kingdom’ (link to FRC website).
• Our previous UK Accounting Plus story