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IASB issues investment entities amendments

Oct 31, 2012

The IASB has published "Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)," which provides an exemption from consolidation of subsidiaries under IFRS 10, "Consolidated Financial Statements," for entities that meet the definition of an "investment entity," such as certain investment funds. Instead, such entities would measure their investment in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9, "Financial Instruments," or IAS 39, "Financial Instruments: Recognition and Measurement."

The amendments define an "investment entity" as an entity that:

  • Obtains funds from one or more investor for the purpose of providing those investor(s) with investment management services.
  • Commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both.
  • Measures and evaluates the performance of substantially all of its investments on a fair value basis.

An entity is required to consider all facts and circumstances when assessing whether it is an investment entity, including its purpose and design. The amendments provide that an investment entity should have the following typical characteristics:

  • More than one investment.
  • More than one investor.
  • Investors that are not related to the entity or other members of the group containing the entity.
  • Ownership interests, typically in the form of equity or similar interests (e.g., partnership interests), to which proportionate shares of the net assets of the investment entity are attributed.

If an entity does not meet one or more of these typical characteristics, it is required to justify and disclose how its activities continue to be consistent with that of an investment entity. Additional guidance is provided on detailed specifics in determining whether an entity is an investment entity, such as the impact of being involved in the day-to-day management of an investee or providing investment-related services to third parties, the nature of the entity, and how the entity measures and manages its financial liabilities.

The types of entities that may meet the definition of an investment entity may include private equity organizations, venture capital organizations, pension funds, sovereign wealth funds, and other investment funds.

When an entity meets the definition of an investment entity, it is not permitted to consolidate its subsidiaries and is required to measure its investments in those subsidiaries at fair value through profit or loss. However, an investment entity is still required to consolidate a subsidiary when that subsidiary provides services that relate to the investment entity’s investment activities.

The amendments also:

  • Introduce new disclosure requirements related to investment entities in IFRS 12, Disclosure of Interests in Other Entities, and IAS 27, Separate Financial Statements.
  • Provide a scope exemption for investment entities from IFRS 3, Business Combinations (meaning such entities do not need to apply business combination accounting to the acquisition of subsidiaries).
  • Include various consequential amendments to numerous standards.

The amendments do not introduce any new accounting requirements for investments in associates or joint ventures. IAS 28, Investments in Associates and Joint Ventures, already permits a venture capital organization, mutual funds, unit trusts, and similar entities including investment-linked insurance funds to elect to measure investments in associates and joint ventures at fair value through profit or loss in accordance with IFRS 9 or IAS 39, and the IASB expects that investment entities would apply these requirements.

The new requirements are applicable, on a modified retrospective basis to annual periods beginning on or after January 1, 2014, a year later than IFRS 10, which is applicable to annual periods beginning on or after January 1, 2013. The amendments can be applied early, and accordingly, entities can elect to apply them from when they first apply IFRS 10, avoiding the need for investment entities to consolidate subsidiaries only in the first year of applying IFRS 10.

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Enhancing the risk disclosure of banks

Oct 30, 2012

The Enhanced Disclosure Task Force (EDTF) has presented a report to the Financial Stability Board (FSB) that recommends key enhancements to the risk disclosures made by banks. The report identifies seven fundamental principles for enhancing risk disclosure that underpin the recommendations made and are considered to provide a framework for future work on risk disclosures and a benchmark by which banks can judge the quality of their current and future disclosures.

The EDTF was formed in May 2012 at the initiative of the FSB and had wide geographic representation with participants from asset management firms, investors and analysts, global banks, credit rating agencies, and external auditors. The task force also liaised with regulators and standard setters in undertaking its work.

The task force established six work streams reflecting banks’ primary risk areas: (1) risk governance and risk management strategies/business model, (2) capital adequacy and risk-weighted assets, (3) liquidity and funding, (4) market risk, (5) credit risk, and (6) other risks. Each work stream analyzed current disclosures in its risk area by reviewing a sample of banks’ recent annual and interim reports, "Pillar 3" reports (under Basel), and other publicly available information, such as media releases and presentations to investors, and developed recommendations for enhancing disclosures for that risk area. The recommendations from each work stream were then analyzed by the task force as a whole and discussed with various international and other bodies.

The seven fundamental principles for enhanced risk disclosures identified in the report are:

  1. Disclosures should be clear, balanced, and understandable.
  2. Disclosures should be comprehensive and include all the bank’s key activities and risks.
  3. Disclosures should present relevant information.
  4. Disclosures should reflect how the bank manages its risks.
  5. Disclosures should be consistent over time.
  6. Disclosures should be comparable among banks.
  7. Disclosures should be provided on a timely basis.

Each of the principles is further elucidated through the use of guidelines and examples of how it should be met. The report then outlines 32 specific recommendations for enhancing risk disclosures that are based on the application of the principles, providing general recommendations for each of the work streams. These recommendations include both broad objectives, such as presenting all risk information in one place and providing narrative discussion about the nature of risks, and detailed specific requirements, such as flow statements of each tier of regulatory capital and risk-weighted assets and a tabulated summary of credit risk in the banking book.

The report is agnostic on when the disclosures should be made, noting "banks should retain flexibility in what they choose to disclose in their annual reports and other filings." Reference is made to existing requirements, which in the case of IFRSs, include IFRS 7, Financial Instruments: Disclosures, and IFRS 13, Fair Value Measurement.

The report notes that the EDTF believes that many of the recommendations can be adopted in 2012 or 2013, particularly when existing disclosure simply needs to be presented differently or when information is already available. Other recommendations may require system changes or require regulatory change and may take longer to implement.

Click for press release (link to the FSB's Web site). Deloitte participated in the EDTF and has endorsed the recommendations in the report.

On November 2, 2012, the IASB published a press release welcoming the report saying that it "complements our own efforts to enhance transparency and the usefulness and comparability of financial statements." The IASB has also announced that it will consider the EDTF recommendations as it develops new financial reporting disclosure principles in the conceptual framework project. Click for access to the press release on the IASB's Web site.

IVSC and IFAC renew their Memorandum of Understanding

Oct 26, 2012

The International Valuation Standards Council (IVSC) and the International Federation of Accountants (IFAC) have renewed their Memorandum of Understanding (MoU), which will further strengthen the collaborative efforts of both organizations in areas of common interest.

Under the MoU, several areas of common interest identified are:

  • "For valuers and auditors to obtain a better mutual understanding of standards relevant to the role of both in relation to financial statements,
  • To promote the additional credibility and acceptability of valuations prepared in accordance with IVS."

The MoU will remain effective until December 31, 2015.

Click to view the IVSC press release (link to the IVSC's Web site).

IASB tweaks its work plan

Oct 26, 2012

The IASB has released a slightly revised work plan making two minor changes to the previous version dated October 19, 2012. The updated plan drops the "development of strategy" for the Agenda Consultation process and clarifies that the next project milestone in the project on "bearer biological assets" under IAS 41 will be an exposure draft rather than a discussion paper.

The IASB took out the reference to the development of a strategy because it implied that a strategy would be developed over the next six months; this work has already been completed and most of it discussed in public. The details of the strategy for the next three years will be included in the feedback statement on the agenda consultation.

The clarification in relation to the IAS 41 project is consistent with the IASB's discussions at the September 2012 meeting when it was decided that a discussion paper is not required because of the existing research that had already been undertaken in the area.

Click for IASB work plan as of October 25, 2012 (link to the IASB's Web site). We have updated our project pages to reflect the updated work plan and other known developments.

Summary of the October 2012 DPOC meeting

Oct 24, 2012

The IASB has posted a summary of the October 10, 2012, Due Process Oversight Committee (DPOC) meeting.

The DPOC is responsible for approving due process and overseeing the IASB’s compliance with due process and reviewing the Trustees’ fulfilment of their oversight function in accordance with the Constitution of the IFRS Foundation.

Please click for a summary of the meeting (link to the IASB's Web site).

IIRC announces "integrated reporting examples database"

Oct 24, 2012

The International Integrated Reporting Council (IIRC) has launched an "Integrated Reporting Emerging Practice Examples Database," which contains integrated reporting examples from businesses around the world.

The database brings together extracts of reports that illustrate emerging practices in the integrated reporting principles and content elements. The examples have been chosen from publicly available reports, including those produced by the IIRC’s Pilot Programme organizations.

Each example is accompanied by a short description of relevant features aligned with the international integrated reporting framework being developed by the IIRC. The IIRC has indicated the examples database will continue to be developed as integrated reporting evolves.

Click for (links to the IIRC's Web site):

IFRS Advisory Council membership update

Oct 23, 2012

The Trustees of the IFRS Foundation have announced the appointments of six new members to the IFRS Advisory Council.

The new Advisory Council members are:

  1. Gavin Francis, deputy group chief accounting officer, HSBC Holdings plc (representing the Institute of International Finance).
  2. Ernesto López Mozo, chief financial officer, Ferrovial S.A.
  3. Ricardo Piña Gutierrez, general director of market supervision, Comision Nacional Bancaria y de Valores, Mexico.
  4. Dr. Ghiath Shabsigh, assistant director, Monetary and Capital Markets Department, International Monetary Fund.
  5. Zinga Venner, manager of the Financial Reporting and Analysis Unit, World Bank.
  6. René van Wyk, head of bank supervision and registrar of banks, South African Reserve Bank (representing the Basel Committee on Banking Supervision).

The new members will replace retiring members Simon Bradbury, Judith Downes, Patrice Marteau, Sylvie Matherat, Kenneth Sullivan, and Will Widdowson as of January 1, 2013.

In addition, Dr. Christoph Hütten has been appointed as vice chairman of the Advisory Council, replacing Patrice Marteau.

In accordance with the IFRS Foundation Constitution, Advisory Council members are appointed for an initial term of three years and, depending upon the need to maintain a proper balance and for continuity, may be asked to remain for a further period of up to three years. A maximum period of service of six years is permitted.

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Notes from the October 2012 IFRS Advisory Council meeting

Oct 23, 2012

The IFRS Advisory Council meeting was held in London on October 22 and 23, 2012. Deloitte observer notes are posted from the meeting.

Highlights from the meeting include discussions on:

  • The preliminary proposal to establish an Accounting Standards Forum.
  • Rate-regulated activities and how IFRSs should reflect the effects of rate regulation.
  • The SEC representative's comments on the current situation the SEC is in regarding the adoption of IFRSs in the United States.
  • The consistent application of IFRSs and whether the IASB current policy is sufficient.

Click to access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

IASB podcast on insurance contracts

Oct 23, 2012

The IASB has made available a podcast on the current state of debate in the IASB/FASB joint project on insurance contracts. The podcast, by Darrel Scott (IASB member) and Andrea Pryde (Technical Principal), reports on developments in the project as a result of the October 2012 joint IASB/FASB meeting.

This podcast focuses on the presentation of premiums and claims in the statement of comprehensive income (the "earned premium approach"), participating contracts, transitional requirements, and the time value of money in the premium allocation approach.

To listen to the podcast, please click here (mp3, 14.3 MB; link to the IASB's Web site).

Trustees publish IFRS Foundation Staff Analysis of SEC Final Staff Report on IFRS

Oct 23, 2012

The Trustees of the IFRS Foundation today published a staff analysis of the SEC Final Staff Report on IFRSs. Shortly after the SEC Staff Report was published, the Trustees asked the IFRS Foundation staff to conduct an analysis of the SEC Staff Report for the benefit of both the IASB and the international community.

The staff analysis summarizes the IFRS Foundation staff’s assessment of the observations included in the SEC final staff report Work Plan for the Consideration of Incorporating IFRSs into the Financial Reporting System for U.S. Issuers, published on July 13, 2012.

The Trustees had asked especially that:

  • To maximize the benefit of the analysis to both the IASB and the international community, the IFRS Foundation staff should evaluate the U.S. research within an international context.
  • The staff should draw upon other credible sources of information, which should include academic research as well as relevant documentation and experience from other jurisdictions that have already completed their own transitions to IFRSs.
  • The staff should identify opportunities to further enhance the activities of the IFRS Foundation and the IASB on the basis of the findings of both the SEC staff report and the other studies.

While acknowledging that many points in the SEC report are correct and welcoming the comments made, the IFRS Foundation staff makes additional points that supplement, or in some cases, even contradict the findings by the SEC staff. Among these points are following:

Funding: At least 69 jurisdictions provide financial support for the work of the IFRS Foundation, not "fewer than 30 jurisdictions," as maintained in the SEC report. Furthermore, the staff of the IFRS Foundation points out that the United States contribution to the operational budget of the IFRS Foundation seems to be calculated too favorably and should be corrected down. Ultimately, the lack of public funding in the United States, which is made out in the SEC report, would be something that can only be resolved by the U.S. authorities, directly or indirectly, and should not be laid at the IFRS Foundation's door.

Comprehensiveness: In response to the SEC staff's belief that industry guidance should not be removed from U.S. GAAP until the IASB has had the ability to fully evaluate such guidance and address any voids in IFRS, the staff of the IFRS Foundation points out that the IASB has always advocated financial reporting requirements that account for transactions and activities across industries, rather than developing industry-specific guidance. It is also pointed out that, in 2008, the SEC published the findings of the Pozen Report, which recommended that industry guidance should be eliminated from U.S. GAAP to reduce avoidable complexity.

National standard setters: In response to the SEC staff's recommendation that the IASB should extend and formalize its involvement with national standard setters, the staff of the IFRS Foundation points out that the IASB has begun preparatory work to establish an Accounting Standards Forum (the Forum) comprised of national standard setters and other regional bodies as envisaged in the IFRSF Trustees’ Strategy Review Report.

Issues related to adoption, endorsement, and transition: In response to various issues related to incorporating IFRSs into U.S. GAAP included in the SEC staff report, the staff of the IFRS Foundation points out that many IFRS jurisdictions have dealt with different issues while adopting IFRSs and have shown that there are that there are no insurmountable obstacles for adoption of IFRSs by individual jurisdictions and the experience of the international community of making the transition to IFRSs would provide the provide SEC with an important resource to draw upon.

Although the IFRS Foundation staff's report makes the above comments on the findings in the SEC staff's report, it also agrees with many other findings and welcomes the contribution the SEC staff has made to ensuring the continued success of the IFRS Foundations work:

In conducting this analysis, the IFRS Foundation staff have concluded that the SEC Staff Report provides a valuable contribution to the already extensive body of research and information on IFRS. It not only informs the discussion in the US on whether, and if so, how IFRS could be incorporated into the US financial reporting system, but it makes an important contribution to the IFRS Foundation’s evaluation of its own strategy, governance and activities.

Please click for the following documents on the IASB's Web site:

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