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"The Stage, the Audience and the Players" - SEC Commissioner speaks on disclosure

Jun 29, 2013

Commissioner Elisse B. Walter of the US Securities and Exchange Commission (SEC) spoke at the 19th annual Stanford Directors College about disclosure. As IASB Chairman Hans Hoogervorst had done earlier this week, she reminded her audience that disclosure is not merely an obligation - it needs to be an honest dialogue.

In his speech given at the IFRS Foundation conference in Amsterdam, Mr. Hoogervorst had spoken of the necessity to "break the boilerplate"; Ms. Walter called disclosures "a chance to tell your story." She focused mainly on disclosure in the management’s discussion and analysis and did so by taking the audience into the world of the playwright William Shakespeare, whose plays were and still are successful because he knew three things: the stage, the audience, and the players.


The Stage

Commissioner Walter introduced her audience to the idea that regulations set the stage for an entity's disclosures but they do not tell the story. They form the backdrop and the floor and maybe the wings through which the player enters, but depending on them to tell the story would make them do more than they are intended for. It is on this stage that the company needs to tell its story and identify the objects and props that will help it to bring the story across. She also admitted that "a good story may not always be a happy story. Shakespeare was a master of both tragedy and comedy. But the real story — and by that I mean the whole story — is the one that needs to be told."


The Audience

To Commissioner Walter, the audience in the case of disclosures should always be the investors. This would give the company two responsibilities: knowing the audience and accepting them as equals. Knowing the audience will help an entity to identify the questions that will be asked and should not go unanswered. As Commissioner Walter reminded her audience: "Disclosure isn’t driven by what the company wants to disclose but by what the investors want to know." She also believes the audience needs to be accepted as business partners, the paying guests that determine not only the success of the play but also of the company in the long run. This, Commissioner Walter believes, should set the tone for the communication with the investors: "You wouldn’t address a business partner with boilerplate. Your investors deserve the same respect. They also deserve the whole story."


The Players

Carrying her analogy on to the players involved, Commissioner Walter encouraged directors to get know the people and the processes involved in putting disclosures together, including behind the scene. Only then they would see the full picture and could understand the music the disclosures play to. "I believe directors can influence that tone by being engaged, by reading the disclosure with a critical eye and by holding management’s feet to the fire when they believe there is more to the story that ought to be told."


The full text of the speech is available on the SEC's Web site.

Wang Haoyu appointed to the IFRS Advisory Council

Jun 28, 2013

The Trustees of the IFRS Foundation have announced the appointment of Wang Haoyu as a representative of the International Organisation of Securities Commissions (IOSCO) on the IFRS Advisory Council. She replaces Alexsandro Broedel Lopes as IOSCO representative of an emerging economy, effective immediately.

Ms. Haoyu is an officer in the Accounting Regulatory Department of the Chinese Securities Regulatory Commission (CSRC). Before joining the CSRC, she worked as an auditor in Hua Ming. Ms. Haoyu is a CPA and holds a master’s degree in management from Peking University.

Click for the announcement on the IASB's Web site and for more information on the work of the IFRS Advisory Council on IAS Plus.

FASB issues proposal addressing insurance contracts

Jun 27, 2013

The FASB has issued proposed Accounting Standards Update (ASU), "Insurance Contracts (Topic 834)." The proposed ASU is intended to improve the financial reporting of insurance contracts, including measurement of insurance liabilities and the related effect of the statement of comprehensive income.

The main provisions provided in this proposed ASU are the requirement for an entity to measure its insurance contracts under either the "building block" approach or the "premium allocation" approach. In addition, an entity will be required to present the following in net income:

1. Insurance contract revenue:

a. For the building block approach—over the coverage and settlement periods as the obligation to provide coverage and other services is satisfied.

b. For the premium allocation approach—over the coverage period on the basis of the expected timing of incurred claims.

2. Claims and expenses as they are incurred, and for contracts measured using the building block approach, changes in assumptions regarding expected cash flows.

3. Interest expense using the discount rates determined when the contract was initially recognized. Those rates would be periodically reset for insurance contracts with discretionary participation features that change the expected cash flows.

While the IASB and FASB have made progress in bridging their differing views over the past two years of deliberations, the proposals are distinct documents and the boards’ proposed accounting models are not fully converged. Unlike the IASB’s exposure draft, the proposed ASU seeks constituents’ views on all aspects of the proposed accounting model for insurance contracts.

The proposed ASU has a comment deadline of October 25, 2013.

For more information, see the Deloitte's Heads Up on this topic. Also, click for (links to the FASB's Web site):

IASB issues amendments to IAS 39 regarding novations of derivatives

Jun 27, 2013

On June 27, 2013, the IASB issued "Novation of Derivatives and Continuation of Hedge Accounting" (amendments to IAS 39, "Financial Instruments: Recognition and Measurement"). Under the amendments there would be no need to discontinue hedge accounting if a hedging derivative was novated, provided certain criteria are met. The amendments are effective for annual periods beginning on or after January 1, 2014, with earlier application permitted.

A novation indicates an event for which the original parties to a derivative agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. To benefit from the amended guidance, novation to a central counterparty (CCP) must happen as a consequence of laws or regulations or the introduction of laws or regulations.

The IASB saw an urgent need for the amendment because the G20 had committed themselves to improve transparency and regulatory oversight of over-the-counter (OTC) derivatives in an internationally consistent and nondiscriminatory way. Consequently, all OTC derivatives should be cleared centrally going forward. This includes OTC derivatives that are within the scope of the European Market Infrastructure Regulation (EMIR) or the Dodd-Frank Act, respectively. The objective of the amendments is to avoid any impact on an entity’s hedge accounting from derecognizing the derivative, following its novation. Specifically, the IASB was concerned that the effectiveness for cash flow hedges might not be sufficient to maintain the designation or to designate the novated derivative as a hedging instrument.

To benefit from the changes to IAS 39, an entity must meet all the following criteria:

  1. Novation to a central counterparty (CCP) must happen as a consequence of laws or regulations or the introduction of laws or regulations.
    This constitutes a significant change to the requirements proposed in the Exposure Draft, as the novation need not be required by law or regulation: A novation might equally occur because of existing or newly introduced laws or regulations. However, the mere possibility of laws or regulations being introduced would not be sufficient.

  2. Following the novation, a central counterparty would become the new counterparty to each of the original parties to the derivative.
    In this context, it would also be possible to introduce a party that is acting as a counterparty in order to effect the clearing with a CCP. This could be a clearing member or a clearing organisation that is contracted because the party does not have direct access to a CCP. In some jurisdictions, a novation will be effected with clients of clearing members of a CCP (so-called indirect clearing). The IASB reasoned that such novations should also be in the scope of the amendments because they are consistent with the objective of the proposed amendments. Further, intragroup novations would also be in the scope if these were in order to access a CCP. In cases in which a novation is not effected directly with the CCP, an entity must ensure that each of the parties to the hedging instrument effects clearing with the same CCP.

  3. Any changes to the hedging instrument are limited to those that are necessary to effect such a replacement of the counterparty.
    Such changes include changes in the collateral requirements, rights to offset receivables and payables balances, and charges levied. However, this does not include changes to the maturity, the payment dates, or the contractual cash flows or their basis of their calculation.

The amendments to IAS 39 are effective for annual periods beginning on or after January 1, 2014. Earlier application is permitted but requires corresponding disclosures. In accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, the amendments are to be applied retrospectively.

In addition to amending IAS 39, the IASB decided to make equivalent amendments to forthcoming chapter 6 on hedge accounting in IFRS 9, Financial Instruments, which is expected to be issued during the third quarter of 2013.

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IASB chairman announces 10-point plan in relation to disclosures

Jun 27, 2013

At the IFRS Foundation conference held in Amsterdam, IASB Chairman Hans Hoogervorst spoke about the adoption of IFRSs around the world, the current work program of the IASB, and necessary changes in relation to financial disclosures.


Global standards

On global accounting standards, Mr. Hoogervorst first pointed at the recently posted collection of 66 "jurisdiction profiles" detailing information about the adoption of IFRSs and the IFRS for SMEs in all the G20 jurisdictions and 46 other jurisdictions. He reiterated many of the conclusions he had already drawn in his Hong Kong speech "Are we there yet?" He also mentioned the recent developments in Japan where the Business Accounting Council (BAC) in its final report recommended a greater use of IFRSs in Japan as a positive signal.


Current work program

Regarding the current work program of the IASB, Mr. Hoogervorst shared his thoughts on impairment, insurance accounting, and the conceptual framework. 

He pointed at Exposure Draft ED/2013/3, Financial Instruments: Expected Credit Losses, published on March 7, 2013. He believes that the proposed new model will faithfully reflect the economics of the underlying transactions. However, he also admitted that it was unfortunate that the FASB has developed another variant of an expected loss approach but expressed hope that convergence or at least more convergence was still possible.

On insurance contract accounting, he mentioned Exposure Draft ED/2013/7, Insurance Contracts, published on June 20, 2013. At present, the industry operates under a patchwork quilt of accounting practices, some of which date back to the days before IFRSs were introduced and that were, in effect, stitched together and grandfathered when IFRS 4 was introduced as an interim measure. Mr. Hoogervorst called this "unacceptable" and concluded: "Fortunately, the end to this unacceptable situation is in sight."

Lastly, Mr. Hoogervorst spoke about the conceptual framework project, on which a discussion paper is scheduled to be released in July 2013. It will address those areas in the Framework that the IASB thinks are critical and needs attention. As the project is no longer a phase-by-phase project, the DP will present all chapters. However, Mr. Hoogervorst warned that the discussion paper will not "give a definitive answer to all accounting problems."


Financial disclosures

The final topic of Mr. Hoogervorst's speech was disclosures. He spoke of the necessity to "break the boilerplate" because there was a risk that annual reports would become simply compliance documents rather than instruments of communication. The IASB itself has decided to give a good example: the size of the IFRS Foundation Annual Report 2012 was reduced by 25 percent while the amount of useful information was increased and the report was made easier to read.

Nevertheless, as already announced in the feedback statement on disclosure that was released in May 2013, the IASB will react to the perceived disclosure problem with certain measures. Mr. Hoogervorst set out a 10-point plan to deliver tangible improvements to disclosures in financial reporting:

  1. Clarify in IAS 1 that the materiality principle does not only mean that material items should be included, but also that it can be better to exclude non-material disclosures;
  2. Clarify that a materiality assessment applies to the whole of the financial statements, including the notes;
  3. Clarify that if a Standard is relevant to the financial statements of an entity, it does not automatically follow that every disclosure requirement in that Standard will provide material information;
  4. Remove language from IAS 1 that has been interpreted as prescribing the order of the notes to the financial statements;
  5. Make sure that IAS1 gives companies flexibility about where they disclose accounting policies in the financial statements;
  6. Consider adding a net-debt reconciliation requirement;
  7. Look into the creation of either general application guidance or educational material on materiality;
  8. Seek to use less prescriptive wordings for disclosure requirements when developing new standards;
  9. Begin a research project to undertake a more fundamental review of IAS 1, IAS 7 and IAS 8 with the goal to replace those standards, in essence creating a new disclosure framework;
  10. Undertake a general review of disclosure requirements in existing Standards.

These measures, Mr. Hoogervorst said, should "remove most excuses for boilerplate disclosures. They will certainly help to ignite the much-needed change in mind set of preparers, auditors and regulators that is so sorely needed."

The full text of the speech is available on the IASB's Web site. A video recording of the speech is also available.

IASB publishes guidance for micro entities

Jun 27, 2013

The IASB issued guidance to help micro-sized entities apply the IFRS for Small- and Medium-sized Entities (IFRS for SMEs). The Guide accompanies, but is not part of, the IFRS for SMEs.

Since many requirements of the IFRS for SMEs are not relevant to micro-sized entities, the IASB has developed, with input from the SME Implementation Group (SMEIG), a guide that extracts from the IFRS for SMEs only those requirements that are likely to be necessary for a typical micro-sized entity, without modifying any of the principles for recognizing and measuring assets, liabilities, income, and expenses. (Some wording changes were necessary to improve the flow of the drafting or for other editorial reasons.) It thus helps these entities to identify more easily the requirements of the IFRS for SMEs that are relevant to them.

The Guide is not a stand-alone standard for micro entities. It contains cross-references to the IFRS for SMEs for matters not covered by the guidance and micro entities that encounter these matters are required by the Guide to refer to the applicable requirements in the IFRS for SMEs. Therefore, compliance with this Guide will result in compliance with the IFRS for SMEs. (For easy identification, transactions, other events, or conditions covered in the IFRS for SMEs but not in the Guide are identified in a seperate box at the beginning of the relevant sections in the guidance.)

Click for further information on the IASB's Web site:

FASB issues proposals on financial reporting of going concern uncertainties

Jun 26, 2013

The FASB has issued proposed Accounting Standards Update (ASU), "Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption." The proposed ASU is intended to improve disclosures of uncertainties related to an organization’s ability to continue as a going concern.

The main provisions provided in this proposed ASU will place the responsibility on management to evaluate an entity’s going concern uncertainities and the timing and content of related footnote disclosures. In addition, an entity that is an SEC filer will be required to evaluate and disclose if there is significant doubt in its ability to continue as a going concern within 24 months of issuing its financial statement.

On convergence with IFRSs, the proposed ASU guidance is similar to the IASB guidance as they both place emphasis on management to evaluate uncertainties concerning an entity’s ability to continue as a going concern and to provide disclosures of those uncertainties. However, the guidance differs when an organization does not prepare its financial statements on a going concern basis. In addition, IFRSs have one threshold for disclosures of going concern uncertainties, while the FASB’s proposals have two thresholds under U.S. GAAP. Those two thresholds are (1) for all organizations that indicate the start of going concern uncertainties and (2) for SEC filers with significant doubt in their ability to continue as going concern. Lastly, IFRSs provide a consideration period of at least 12 months after the financial statement date with no cap afterwards, while the FASB guidance will be capped at 24 months after the financial statement date.

The proposed ASU has a comment deadline of September 24, 2013.

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

IASB issues exposure draft of proposed amendments to IAS 16 and IAS 41

Jun 26, 2013

The IASB has published an exposure draft (ED) of proposed amendments to IAS 16, "Property, Plant and Equipment," and IAS 41, "Agriculture," to include bearer plants within the scope of IAS 16. Currently, IAS 41 requires that all biological assets that are related to agricultural activity must be measured at fair value less costs to sell. The amendments would bring bearer plants that no longer undergo significant biological transformation into the scope of IAS 16 so that they would be accounted for in the same way as property, plant, and equipment. Comments on ED/2013/8, "Agriculture: Bearer Plants," are requested by October 28, 2013.



There have been repeated concerns about the relevance and usefulness of information provided to users for certain biological assets accounted for at fair value. Specifically, an "Issues Paper" produced by the Asian-Oceanian Standard Setters Group (AOSSG) and the IASB's Emerging Economies Group (EEG), which included a survey performed by the Malaysian Accounting Standards Board (MASB) in 2010, found that a group of analysts specializing in plantation did not find fair value information for bearer biological assets useful, particularly the presentation of changes in fair value within the profit or loss. Respondents to the IASB's agenda consultation also considered a project on bearer plants to be important.


Motivation for the amendments

When bearer plants reach their full maturity, they no longer undergo significant biological transformation but are used to grow produce until the end of their productive life, after which they are usually disposed of. Hence it is argued that they are more akin to property, plant, and equipment for which the accounting treatment is prescribed in IAS 16.



The scope of the proposed amendments is restricted to bearer plants that are defined as plants that are used in the production or supply of agricultural produce, are expected to bear produce for more than one period, and are not intended to be sold as a living plant or harvested as agricultural produce. Plants that are grown both to bear produce and for sale as living plants or agricultural produce remain in the scope of IAS 41 (for example, trees that are cultivated for their lumber as well as their fruit). Equally, the produce on the bearer plants would continue to be accounted for under IAS 41.


Application of the IAS 16 requirements to bearer plants

The IASB proposes that before bearer plants are placed into production (i.e., before they reach maturity and bear fruit) they should be measured at accumulated cost. After they reach maturity, bearer plants would be accounted for either under the cost model or a revaluation model.


Cost model

Unlike property, plant, and equipment, life transformation of agriculture assets is a continuous process in which older plants are replaced on a continual basis. Therefore, the IASB deliberated the unit of account and the aggregation of these. The IASB at last decided that accounting for an aggregation of plants would be no different from accounting for a large quantity of equipment that is acquired or constructed in batches, and therefore, the requirements of IAS 16 could be applied without modification.

The IASB also discussed (1) how to assess what is an abnormal amounts of wastage/mortality during the growth phase of the bearer plants and (2) how to determine when bearer plants are in the condition necessary for them to be capable of operating in the manner intended by management. The IASB concluded that (1) would be akin to a case in which an entity constructs a large number of fragile items of machinery for use within the business and (2) would be similar to a factory requiring an initial run-in period. Consequently, the IASB concluded that the current requirements of IAS 16 are sufficient without further guidance.

For the same reasons the IASB concluded that the disclosure requirements under the cost model in IAS 16 can be applied to bearer plants without modification. 


Revaluation model

Entities would also be permitted to choose the revaluation model for mature bearer plants subject to the requirements in IAS 16. The IASB believes that the revaluation recognition and measurement requirements of IAS 16 can be applied to bearer plants without modification since the revaluation model is a fair value measurement model and akin to the current measurement requirements for biological assets.


Transition requirements and effective date

For cost-benefits reasons, the proposed amendments to IAS 16 permit the use of fair value as deemed cost for items of bearer plants at the start of the earliest comparative period presented in the financial statements. Consistent with the reasoning for accounting for bearer plants in the same way as for property, plant, and equipment, the deemed cost exemptions provided for property, plant, and equipment in IFRS 1, First-time Adoption of International Financial Reporting Standards, would also be available for items of bearer plants.

The IASB will decide on the effective date and full transition details only upon completion of its redeliberations. Because the amendment addresses an urgent accounting issue, the IASB proposes that the amendments to IAS 16 and IAS 41 should be available for early adoption.


Alternative views

Two Board members voted against the publication of the ED because they believe that the proposal will eliminate information about the fair value changes in bearer plants and the underlying assumptions used to estimate those changes. They come to the conclusion that the IASB proposals are no improvement to IFRSs and do not adequately address the needs of users of financial statements.


Comment deadline and next steps

Comments on ED/2013/8, Agriculture: Bearer Plants, close on October 28, 2013.

The IASB will consider the comments it receives on the proposals and will then decide whether to proceed with amendments to IAS 16 and IAS 41.


Additional Information

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Latest IASB work plan shows extended deliberation phases for financial instruments projects

Jun 24, 2013

Following its recent meeting, the IASB has updated its work plan. The expected timing of the classification and measurement, impairment, and macro hedge accounting projects has been pushed back; general hedge accounting, however, is still expected in the third quarter of 2013. In addition, the timing of some narrow scope projects has been clarified.

Summary of changes

Details of the changes are:

Updates to major projects

Updates to narrow-scope projects

Projects in which due process documents are expected in the second quarter include a discussion paper on the conceptual framework project, a published report on the post-implementation review of IFRS 8, and finalized amendments on the novation of derivatives. In addition, an exposure draft of proposed amendments to IAS 41, Agriculture, on bearer plants is expected to be issued in the second or third quarter of 2013.

Click for the IASB work plan dated June 21, 2013 (link to the IASB's Web site). We have updated our project pages to reflect the updated work plan and other known developments.

June 2013 IASB meeting notes — Part 2 (concluded)

Jun 20, 2013

The IASB's meeting was held in London on June 18 and 19, 2013; some of it was a joint meeting with the FASB. Deloitte observer notes are posted from Wednesday's sessions on Comprehensive review of IFRS for SMEs, the IFRIC update, and Annual Improvements to IFRS (Cycles 2010–2012 and 2011–2013).

Click for direct access to the notes:

Wednesday, June 19, 2013

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

Correction list for hyphenation

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