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February

IASB proposes urgent amendments to hedge accounting to respond to G20 OTC initiatives

Feb 28, 2013

The IASB has issued ED/2013/2, "Novation of Derivatives and Continuation of Hedge Accounting." The exposure draft proposes changes to IAS 39 and the forthcoming hedge accounting chapter of IFRS 9 to permit the continuation of hedge accounting where hedging instruments are novated to a central counterparty in accordance with laws or regulations introduced by jurisdictions to implement the G20's agreed reforms of over-the-counter (OTC) derivatives. Since a number of jurisdictions are currently considering implementing these laws, the IASB is proposing an urgent amendment and has set a 30-day comment period.


Background

This project arose out of a request to the IFRS Interpretations Committee about a European Regulation on OTC derivatives, central counterparties, and trade repositories (the so-called European Market Infrastructure Regulation (EMIR)), which implemented central clearing for certain classes of OTC derivatives.

The legislation in Europe that prompted the Committee request arose out of a commitment from the G20, in response to the global financial crisis, to implement new requirements for  centralized clearing for standardized OTC derivative contracts. Specifically, in September 2009, the G20 leaders agreed that:

All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. We ask the FSB [Financial Stability Board] and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.

The original request to the Committee concerned the impact on hedge accounting from when an OTC derivative is novated to a central counterparty (CCP) in accordance with EMIR. Specifically, the Committee considered whether the novation of OTC derivatives in these circumstances would result in the discontinuing of hedge accounting and recommended a limited scope amendment to provide relief so that hedge accounting could be continued.

The IASB considered the issue and agreed to add this project to its active agenda at its January 2013 meeting, determining that without an amendment, the novation of an existing OTC derivatives in these circumstances would lead to its derecognition and the discontinuation of hedge accounting.


Overview of the proposed amendments

ED/2013/2 proposes that the novation of a hedging instrument should not be considered an expiration or termination giving rise to the prospective discontinuation of hedge accounting if all of the following (summarized) criteria are met:

  • The novation is required by laws or regulations.
  • The novation results in a central counterparty becoming the new counterparty to each of the parties to the novated derivative.
  • The changes in terms of the novated derivative are limited to those necessary to effect the terms of the novated derivative.

As such, the amendment is narrowly focused on the specific fact pattern introduced by the G20's OTC derivative reforms. The IASB's view is that accounting for the  hedging relationship that existed before the novation as a continuing hedging relationship in these circumstances provides more useful information to financial statement users. However, given its limited scope, the amendment would not grandfather continuation of hedge accounting for any voluntarily novated derivative that the two original parties to the contract agreed to (e.g., if the entities agreed to novation as a preemptive measure knowing that the change in legislation was coming). This represents a difference to U.S. GAAP in which similar requirements to the EMIR Regulation are included in the Dodd-Frank Act. In the United States, the SEC has opined that hedging relationships in which the hedging derivative was novated to a central counterparty would be continued even if the exchange of counterparties took place before the effective date of the Act.

The exposure draft notes that since the forthcoming hedge accounting chapter of IFRS 9, Financial Instruments, will require the discontinuation of hedge accounting in which novation occurs, the exposure draft proposes amendments to be incorporated into IFRS 9 in addition to IAS 39, Financial Instruments: Recognition and Measurement.

Given that many jurisdictions are in the process of finalizing legislation to introduce the G20's OTC reforms, the proposed amendments are being expedited and the exposure draft was open for a short comment period of only 30 days, which closed on April 2, 2013.

Click for:

The ED was discussed at the March 27 Dbriefs webcast — IFRS: Important developments.

    FAF approves change to FASB/GASB agenda-setting process and reappointment of Marc Siegel

    Feb 27, 2013

    The board of trustees of the Financial Accounting Foundation (FAF), which oversees the FASB and the GASB, approved a key change to the two boards’ agenda-setting process. Decisions about project plans, agenda setting, and the priority of projects must now be approved by a majority vote of the respective boards at a public meeting instead of being made independently by each board’s chairman.

    The FAF trustees and the board chairmen believe that this change will improve the transparency of the standard-setting process.

    In addition, the FAF board of trustees reappointed Marc A. Siegel to a second five-year term as a member of the FASB, beginning July 1, 2013.

    The press release on the FAF new agenda-setting process and the reappointment of Mr Siegel are available on the FASB website.

    IASB updates work plan

    Feb 27, 2013

    The International Accounting Standards Board (IASB) has updated its work plan. The timing of a number of due process steps have been clarified or extended, and a new project on IAS 19 introduced.


    Summary of changes

    Details of the changes are:

    • IAS 19 — Employee contributions to defined benefit plans — A new project is added to the IASB's agenda after discussions at the February 2013 meeting. An exposure draft is expected in the first quarter of 2013.
    • Insurance contracts — Target date for the publication of an exposure draft is now clarified as the second quarter of 2013 (previously first half of 2013).
    • Rate-regulated activities — The expected timing of an exposure draft for an interim IFRS on rate regulation is now clarified as the second quarter of 2013 (previously first half of 2013). In addition, the discussion paper to be issued as a result of the comprehensive project is now expected in the fourth quarter of 2013 (previously third or fourth quarter of 2013).
    • Annual improvements 2010–2012 cycle — Finalized amendments to be issued as a result of this cycle of annual improvements are now expected in the third quarter of 2013 (previously second quarter).
    • IAS 41 — Bearer biological assets — An exposure draft is now expected in the second or third quarter of 2013 (previously second quarter).
    • IAS 27 — Equity method in separate financial statements — Timing of the issuance of an exposure draft is now the second or third quarter of 2013 (previously second quarter).
    • Post-implementation review of IFRS 3 — Initiation of the review is now scheduled to commence in the second or third quarter of 2013 (previously first or second quarter).
    • Conceptual Framework project — The work plan notes that a feedback statement from the recently held disclosure forum is expected to be published in the second quarter of 2013.


      Due process documents expected before the end of the first quarter 2013

      According to the plan, the following due process documents are expected to be issued by the end of the March 2013 (this includes those items already noted above in some cases):

      Exposure drafts

      Discussion papers

      Click for the IASB work plan dated February 25, 2013 (link to the IASB's Web site). We have updated our project pages to reflect the updated work plan and other known developments.

      Notes from day 2 of the February 2013 IFRS Advisory Council meeting

      Feb 26, 2013

      The IFRS Advisory Council met in London on February 25 and 26, 2013. Deloitte observer notes are posted from the second day of the meeting. The discussions included a review of the Due Process handbook, an outlining of the IASB's XBRL initiative, a high-level summary of the preliminary results of a survey on the use of IFRSs globally, an EFRAG presentation of the preliminary feedback analysis of the comments received on the discussion paper on disclosure framework, recent IASB activities in disclosure framework, and limited amendments to IFRS 9.

      The IFRS Advisory Council also expressed its concerns about the state of the impairment project. There were mixed opinions on which direction the IASB should take in the development of its standard. Some council members were in favor of a converged solution with the FASB, while others wanted an IFRS issued to avoid further delay and have convergence efforts continue in parallel.

      Click to access the preliminary and unofficial notes taken by Deloitte observers during the first day of the meeting.

      The next IFRS Advisory Council meeting is in London on June 10 and 11, 2013.

      Final notes from the February 2013 IASB meeting

      Feb 26, 2013

      The IASB's monthly meeting was held in London on February 18–22, 2013; some of it was a joint meeting with the FASB. Deloitte observer notes are posted from Wednesday's session on conceptual framework (recognition and derecognition), Thursday's sessions on conceptual framework (measurement principles, initial and subsequent measurement, and elements of financial statements — definition of equity and distinction between liabilities and equity instruments), and Friday's sessions on bearer biological assets (IAS 41) and rate-regulated activities.

      Click for direct access to the notes:

      Wednesday, February 20, 2013

      Thursday, February 21, 2013

      Friday, February 22, 2013

      You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

      Notes from day 1 of the February 2013 IFRS Advisory Council meeting

      Feb 26, 2013

      The IFRS Advisory Council met in London on February 25 and 26, 2013. Deloitte observer notes are posted from the first day of the meeting. The discussions included the impact of the newly created Accounting Standards Advisory Forum (ASAF) on the IFRS Advisory Council and the question of the membership criteria for the ASAF.

      Yael Almog, executive director of the IFRS Foundation, explained in an extended session on the ASAF the background of the proposal and the results of the consultation. Ms. Almog also stated that the Memorandum of Understanding and Terms of Reference would be amended to clarify that membership of the forum would be open to jurisdictions that had not adopted IFRSs but were otherwise qualified (i.e., had the technical capacity and infrastructure to make a significant contribution to the ASAF).

      Click to access the preliminary and unofficial notes taken by Deloitte observers during the first day of the meeting.

      Continued notes from the February 2013 IASB meeting

      Feb 22, 2013

      The IASB's monthly meeting was held in London on February 18–22, 2013; some of it was a joint meeting with the FASB. Deloitte observer notes are posted from Thursday's sessions on conceptual framework and IFRIC issues (IAS 19) and Friday's sessions on the guide for micro entities applying "IFRS for SMEs" and IFRIC issues (IFRS 7).

      Click for direct access to the notes:

      Thursday, February 21, 2013

      Friday, February 22, 2013

      You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

      Gary Kabureck appointed to the IASB

      Feb 22, 2013

      The IFRS Foundation Trustees have announced the appointment of Gary Kabureck to serve as a member of the IASB. Mr. Kabureck will join the IASB in April 2013 for an initial term ending June 30, 2017, which will be renewable for a further three years. With the appointment of Mr. Kabureck, the IASB reaches its full size of 16 members for the first time.

      Since 2001, Mr. Kabureck has served as the chief accounting officer, and since 2003 as a corporate vice president, for Xerox Corporation, a Fortune Global 500 company. He is also an active member of Financial Executives International (FEI) and has served on a wide range of other advisory boards, including currently on the PCAOB and previously on the FASB.

      Click for the IASB press release (link to the IASB's Web site).

      More notes from the February 2013 IASB meeting

      Feb 21, 2013

      The February IASB meeting was held in London on February 18–22, 2013; some of it was a joint meeting with the FASB. Deloitte observer notes are posted from Tuesday's and Wednesday's sessions on insurance contracts, revenue recognition, and leases.

      Click for direct access to the notes:

      Tuesday, February 19, 2013

      Wednesday, February 20, 2013

      You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

      English translation of online paper on 10 misconceptions regarding IFRSs

      Feb 21, 2013

      The IASB has made available an English translation of Philippe Danjou's online paper "An Update on International Financial Reporting Standards (IFRSs)." The online paper was originally available in French only.

      As mentioned in our previous article, the paper answers the 10 frequent criticisms concerning IFRSs. The views expressed in this paper are the personal views of Mr. Danjou and not the official views of the IASB.

      The English and French versions of the paper are available on the IASB's Web site.

      Correction list for hyphenation

      These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.