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FASB reverses decision on accounting for interests in other investment companies

Aug 30, 2012

The FASB reversed its position on a joint decision made recently with the IASB on the measurement requirements for an investment company’s interest in another investment company.

The FASB decided that rather than requiring an investment company to account for its interest in another investment company at fair value, it would not provide guidance on the measurement of such interests and would instead allow investment companies to continue current industry practice. Although this decision diverges from its recent joint decision with the IASB, the Board highlighted that (1) users are not opposed to current industry practice and (2) its project on applying asset- or entity-based guidance to nonfinancial assets held in an entity may provide additional insight on how to address this issue. The FASB's decision is documented in the corresponding Action Alert (link to the FASB's Web site).

FASB begins deliberations on alternative impairment model

Aug 24, 2012

The FASB began deliberating an alternative to the “three-bucket” impairment model jointly developed with the IASB.

Note: At its August 1, 2012, board meeting, the FASB directed its staff to explore an alternative model to address significant concerns expressed by constituents about the three-bucket approach. See our earlier story for additional information.

The Board tentatively decided that:

  • The measurement objective of the alternative model would be expected credit losses (i.e., an entity’s current estimate of contractual cash flows not expected to be collected). Therefore, as of each reporting date, an entity would recognise a credit impairment allowance equal to its current estimate of expected credit losses. Furthermore, the measurement of expected credit losses would (1) be an expected value (i.e., a probability-weighted average of at least two possible outcomes) and not the most likely outcome and (2) incorporate the time value of money.
  • The alternative model would not include a recognition threshold (e.g., probable), and interest income would continue to be “decoupled” from credit losses (i.e., interest income would be based on contractual cash flows).
  • The information to be considered in estimating expected credit losses would include “all supportable internally and externally available information considered relevant in making the forward-looking estimate, including information about past events, current conditions, and reasonable and supportable forecasts and their implications for expected credit losses.”
  • The alternative model would not prescribe a unit of account (e.g., an individual asset or a group of financial assets) to be used in the measurement of credit impairment.
  • The recognition of impairment for purchased credit-impaired (PCI) financial assets would also follow the expected-credit-loss concept. Accordingly, upon acquisition, an entity would recognise an allowance for credit impairment equal to the estimate of the contractual cash flows not expected to be collected (measured in a manner consistent with the guidance on calculating expected credit losses discussed above). In subsequent periods, any changes in the impairment allowance — whether favorable or unfavorable — would be recognised immediately through earnings. Interest income recognition for PCI assets would include a yield adjustment for the noncredit premium or discount to par embedded in the purchase price but would exclude any discount to par embedded in the purchase price attributable to expected credit losses (i.e., the nonaccretable yield).
  • For financial assets measured at amortised cost, any unrealised loss (i.e., the difference between the fair value and the net carrying amount — that is, amortised cost net of any credit impairment allowance — of the asset) would be recognised through earnings when the entity determines that it intends to sell the financial asset. In contrast, for financial assets measured at fair value through other comprehensive income (FV-OCI), unrealised losses would only be recognised in earnings when the entity sells the financial asset.
  • Credit impairment should be recognised as an allowance — or contra-asset — rather than as a direct write down of the amortised cost basis of a financial asset.
  • For financial assets measured at FV-OCI, reporting entities would be required to disclose within the statement of financial position (i.e., parenthetically) the amortized cost net of the credit impairment allowance. Entities would disclose the information they use to reconcile the amortised cost of such assets with their fair value in the notes to the financial statements.

The tentative decisions reached about the alternative model would apply to all financial assets measured at either amortised cost or FV-OCI. However, the Board noted that its tentative decisions may change after it discusses the following open items:

  • The application of the model to debt securities.
  • Nonaccrual accounting.
  • The application of the alternative model to trade receivables, lease receivables, and off-balance-sheet items.
  • Disclosure requirements.
  • Transition guidance.

SEC finalizes rules on disclosure of payments to governments

Aug 23, 2012

The SEC has adopted rules, mandated by the Dodd-Frank Act, requiring resource companies to disclose certain payments made to the U.S. government or foreign governments (including subnational governments). The rules require "resource extraction issuers" to disclose payments that are made to further the commercial development of oil, natural gas, or minerals, and are generally consistent with the types of payments that the Extractive Industries Transparency Initiative (EITI) suggests should be disclosed.

Payments including the following are required to be disclosed when they are made to governments to further the commercial development of oil, natural gas, or minerals and exceed an "de minimus" amount ($100,000 by payment category per fiscal year):

  • Taxes.
  • Royalties.
  • Fees (including license fees).
  • Production entitlements.
  • Bonuses.
  • Dividends.
  • Infrastructure improvements.

The following information about the payments must be provided to the SEC by (1) filling in a new form and (2) providing the information in XBRL-tagged electronic format:

  • Type and total amount of payments made for each "project" (which is undefined to allow flexibility in applying the term to different business contexts).
  • Type and total amount of payments made to each government.
  • Total amounts of the payments by category.
  • Currency used to make the payments.
  • Financial period in which the payments were made.
  • Business segment of the resource extraction issuer that made the payments.
  • The government that received the payments and the country in which the government is located.
  • The project of the resource extraction issuer to which the payments relate.

One of the ideas behind the rule is that if U.S. registered "resource extraction issuers" make the disclosures required, the governments that receive resource-related payments will also, to that extent at least, be more accountable to the people they govern. Similar disclosures are also being considered by the European Union and were in the IASB's Discussion Paper on Extractive Industries published in April 2010, which included the "Publish What You Pay" (PWYP) proposals calling for country-by-country reporting.

In finalizing the rules, the SEC responded to responses received on its initial proposals, including addressing concerns about compliance costs and considering the effects of the rule on efficiency, competition, and capital formation. However, not all SEC commissioners were in support of the proposed rules — for example, Commissioner Daniel M. Gallagher noted constituent concerns about making competitively significant information available to competitors, the costs that may be incurred in collating the information, and the potential impacts on economic outcomes.

The new rules apply for fiscal years ending after September 30, 2013. Click for press release (link to the SEC's Web site).

The SEC also concurrently issued new a new rule requiring companies to publicly disclose their use of "conflict minerals" that originate in the Democratic Republic of the Congo (DRC) or an adjoining country.

IFRSs in your pocket 2012

Aug 22, 2012

The eleventh edition of our popular guide, "IFRSs In Your Pocket 2012," is now available. This publication provides an update of developments in IFRSs through the second quarter of 2012.

This 136-page guide includes information about:

  • The IASB organization — its structure, membership, due process, contact information, and a chronology.
  • Use of IFRSs around the world, including updates on Europe, the United States, Canada and elsewhere in the Americas, and Asia-Pacific.
  • Recent pronouncements — those which are effective and those which can be early adopted.
  • Summaries of current standards and related interpretations as well as the Conceptual Framework for Financial Reporting and the Preface to IFRSs.
  • IASB agenda projects and active research topics.
  • IFRS Interpretations Committee current agenda topics.
  • Other useful IASB-related information.

Please contact your local Deloitte practice office to request a printed copy.

Click to view IFRSs in your pocket 2012.

GRI releases further elements of proposed next generation sustainability reporting guidelines

Aug 17, 2012

The Global Reporting Initiative (GRI) has released two additional exposure drafts (EDs) related to its next generation of Sustainability Reporting Guidelines ("G4"). The EDs seek to improve the way companies report on anti-corruption and greenhouse gas (GHG) emissions in their overall sustainability reporting.

The release of the two additional EDs follows an earlier exposure draft that outlines the G4 project development process and the proposed significant changes to the current "G3" guidelines. The two topics covered by the new EDs were signalled in the original draft.

The ED on anti-corruption is designed to enable companies to report information on their policy, their publicly stated commitment to zero tolerance of corruption, their training of employees, governance bodies and business partners on anti-corruption, and their collective action initiatives toward combating corruption.

The ED on GHG proposes new content for the G4 guidelines that are designed to more closely align GRI’s guidance with (1) the GHG Protocol set of standards, which was jointly released by the World Resources Institute and the World Business Council for Sustainable Development, and (2) the ISO 14064 standard produced by the International Standards Organization for Standardization.

Comments on the two new EDs close on November 12, 2012. Click for the press release (link to the GRI Web site).

CFA Institute critiques SEC IFRS report

Aug 11, 2012

The Chartered Financial Analysts Institute (CFA Institute) has published a brief summary of issues arising from the SEC staff report on the possible incorporation of IFRSs into the U.S. financial reporting system. The summary provides a critique of the report, pointing out a number of areas where the CFA Institute believes more analysis and evaluation are required.

The report, Does the SEC have the will to find a way towards IFRS? notes that the final report is "comprehensive and organized" around a number of key themes, such as the costs and obstacles issuers would face in making a change from U.S. GAAP to IFRSs and the degree to which existing U.S. GAAP is entrenched in U.S. regulatory regimes.

However, the report opines that "observations on investor preparedness, regulatory impact, issuer impacts, and human capital readiness offer commentary on the current state of affairs which, in our view, will evolve once a decision to adopt IFRS is made." The report concludes that in the CFA Institute's view "readers of the Final Report are left with data and observations but without an indication of how they will be weighed and evaluated." The report laments the lack of analysis of whether IFRSs is "so sufficiently flawed" that it is not in the interests of investors. The report discusses what exact modifications to IFRSs would be needed to incorporate them into the U.S. reporting regime and whether issues of lack of comparability in IFRSs is a greater obstacle than exists with multiple accounting languages.

The report outlines a number of analytical or evaluative questions that the SEC staff report does not answer, such as:

  • Which of the dimensions of the SEC IFRS Work Plan are most critical to a recommendation?
  • Which, if any, of the challenges are considered to be insurmountable and why?
  • What, if any, actions can or should be taken (and by whom) to address the challenges or obstacles, and over what time period?
  • To what degree should "regulatory capture" of U.S. GAAP serve as an obstacle or deterrent to adopting accounting standards that are meant to serve investors rather than regulators?

The report concludes with the following observation:

Requiring most immediate attention, the Final Report leaves stakeholders wondering: What are the SEC’s next steps? Will there be a recommendation and what might be its timing? We believe it is imperative for the SEC to define the way forward, as failure to act or provide clear direction is, in substance, a decision not to incorporate IFRS. Rather than continued evaluation and delay, we believe investors would prefer the SEC to provide a path forward with an affirmative or negative decision.

Click for access to the CFA Institute report (link to the CFA Institute's Web site).

Additional resources related to the SEC report:

ACCA research report discusses effects of integrated reporting

Aug 08, 2012

A report from the Association of Chartered Certified Accountants (ACCA) provides insights into the impact of integrated reporting on companies' corporate reporting. The ACCA report is based on an academic study of recent experiences in South Africa and contains a number of specific recommendations that could be taken into account by those developing the international integrated reporting framework under the auspices of the International Integrated Reporting Council (IIRC) or otherwise.

The ACCA's report, presented as a discussion paper, Reporting pre- and post-King III: what’s the difference?, summarizes the findings of a full academic report called Integrated reporting: the new face of social, ethical and environmental reporting in South Africa? written for the ACCA by Jill Solomon (King’s College, London) and Warren Maroun (University of the Witwatersrand, Johannesburg).

Integrated reporting has been mandatory for entities listed on the Johannesburg Stock Exchange in South Africa since 2010–11. The research analyzed the corporate reports of 10 major South African companies, including a number of resources companies, immediately before (2009) and after (2010–11) the introduction of mandatory integrated reporting.

Some of the research findings include:

  • Integrated reporting sees significantly more social, environmental, and ethical information included in corporate reports, and in more places throughout the report — although this sometimes leads to repetition that is seen as a significant weakness.
  • The impact of integrated reporting on the way that social, environmental, and ethical information is disclosed can be characterised by the following themes: the crucial importance of materiality; an evolving discourse of risk and risk management; an increasing tendency toward quantification; the emergence of new reporting items; the emergence of new sections in the reports; and the increasing integration of social, environmental and ethical considerations into corporate governance structures.
  • Companies have shifted from reporting that is aimed exclusively at their shareholders to reporting that expounds the directors’ claimed belief in stakeholder accountability and stakeholder engagement.

ACCA’s analysis offers five recommendations for the development of integrated reporting, which are based on the academic findings:

  1. The way in which information is set out could be more concise to avoid repetition.
  2. The form of reporting could be extended to incorporate more feedback from consultation with stakeholders regarding social and environmental issues and corporate responsiveness to feedback.
  3. Organizations should solicit the views of their major stakeholders about the social, environmental, and ethical information (and underlying policies and practices) that they report and include these views within integrated reports.
  4. Academics can and should play a significant role in researching the integrated reporting framework and its applicability.
  5. Academics should, can, and do play an important role in educating potential managers and users in integrated reporting through university and professional education in which they are involved.

Click for more information (link to the ACCA's Web site).

IFRS Foundation publishes Formula Linkbase 2012

Aug 07, 2012

The IFRS Formula Linkbase 2012 is now available for download on the IASB's Web site. The formula linkbase was developed to (1) improve the data quality of IFRS taxonomy filings and (2) provide additional guidance to better understand the IFRS concepts and their meaning from a financial reporting and a technical perspective. This version of the formula linkbase is updated from the formula prototype released in October 2011. The 2012 formulae are designed to work with the IFRS Taxonomy 2012. Most of the improvements from the previous version are related to the content.

The formula linkbase can be used with software packages supporting the XBRL formula specification 1.0 and allows for additional validations of the reported facts. Developed in a generic manner, the IFRS Formula Linkbase 2012 can be used directly on the filings created, which are based on the IFRS Taxonomy (instance documents) or the company-specific extensions to the IFRS Taxonomy (filer extension taxonomy and instance document). Guidance documentation for the formula linkbase is also available.

Technical changes in the 2012 version include (1) positive and negative formula validation is placed in separate files, (2) redundant members in the filter for the Dimension aggregation formulae are removed, and (3) precondition expressions in the validation are simplified (earnings per share formulae).

Click for the press release to access the Formula Linkbase 2012 on the IASB's Web site.

New research on the value of 'extra-financial' disclosure to investors and analysts

Aug 06, 2012

A new research report has been issued exploring how investors and analysts source, use, and are influenced by so-called "extra-financial information," which includes environmental, social, and governance (ESG) information and other nonfinancial information. The report shows that for the majority of investors and analysts surveyed, extra-financial information is very relevant or relevant to investment decision-making or analysis.

The report, The value of extra-financial disclosure — What investors and analysts said, is the result of a survey commissioned by the Global Reporting Initiative (GRI) and The Prince’s Accounting for Sustainability Project (A4S), and conducted by Radley Yeldar. The survey involved a relatively small sample of investors and analysts but is considered "a useful snapshot of investor and analyst sentiment towards extra-financial disclosure at the present time."

Some of the survey findings include:

  • Over 80 percent of the research sample believes that extra-financial information is very relevant or relevant to their investment decision-making or analysis.
  • Investors and analysts use multiple sources to gather relevant financial and extra-financial information but show a strong preference for sources that are more comprehensive and specialized — with direct engagement with board-level representatives, followed by formal reporting channels such as the sustainability report, annual report, or integrated report are most influential.
  • Over 80 percent of investors and analysts surveyed believes that integrated reporting will deliver benefits to their analysis and company assessments — seeing integrated reporting as useful or very useful for increasing the reliability, accessibility, relevance, and comparability of extra-financial information as well as improving assessments of future company performance.
  • A majority of respondents were not familiar with eXtensible Business Reporting Language (XBRL), with less than 10 percent of those surveyed indicating they use XBRL and that it affects how they receive financial information.

Click for more information (link to the GRI's Web site).

Impairment of financial instruments — FASB tentatively decides to develop alternative model

Aug 03, 2012

In response to significant concerns expressed by constituents about the “three-bucket” impairment model jointly developed with the IASB, the FASB directed its staff to explore an alternative model that (1) does not use a dual-measurement approach and (2) reflects all credit risk in the portfolio.

In its Summary of Board Decisions for the August 1, 2012, meeting, the FASB stated that this “approach would allow the Board to leverage several key concepts that have been jointly deliberated and agreed upon with the IASB, while at the same time creating an impairment model that is more understandable, operable, and auditable. . . . The FASB has [also] invited the IASB to monitor the deliberations on the alternative model [being developed by the FASB staff] and the FASB has committed to sharing their progress with the IASB early this fall.”
In describing the concerns that led to this decision, the FASB noted that “attempting to clarify the transfer notion1 and the Bucket 1 measurement concept2 may still result in a credit impairment allowance that is difficult for users to understand as a result of the dual-measurement approach in the three-bucket model.”


1 The joint model being developed by the FASB and IASB for the impairment of financial assets that are debt instruments requires entities to first place such assets (other than loans purchased with the explicit expectation of credit loss at initial recognition) into Bucket 1. Entities transfer these assets into either Bucket 2 or 3 when there is (1) a more than insignificant deterioration in the counterparty’s creditworthiness since initial recognition and (2) it is at least reasonably possible that some or all of the contractual cash flows may not be collected.

2 For financial assets in Bucket 1, an entity would use the joint impairment model to calculate an allowance that is equal to lifetime expected credit losses related to events expected to occur within the 12-month period after a reporting date that would give rise to the transfer conditions described in footnote 1. The entity measures the allowance for assets in Bucket 2 or Bucket 3 by using lifetime expected credit losses without the 12-month limitation.

Correction list for hyphenation

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