January

Heads Up on IASB ED 10 on consolidation

23 Jan 2009

Deloitte (United States) has published a special edition of the Heads Up newsletter titled IASB Issues an Exposure Draft on Consolidation.

The newsletter discusses the IASB's Exposure Draft 10 Consolidated Financial Statements. ED 10, if finalised, would replace IAS 27 Consolidated and Separate Financial Statements and SIC 12 Consolidation - Special Purpose Entities.
Click for:  Heads Up newsletter (PDF 149k).

 

We comment on proposed IFRIC 9 amendment

23 Jan 2009

Deloitte has submitted a Letter of Comment on the IASB's exposure draft of Embedded Derivatives – Proposed amendments to IFRIC 9 and IAS 39.

We are supportive of the proposed amendments.

We believe however, that the interaction between the amended IAS 39.12 and the retained IAS 39.13 should be clarified. Specifically, it should be clearer whether an entity may reclassify a financial asset even though it cannot reliably measure the embedded derivative but can reliably measure the entire financial instrument and the financial host contract.

Click for: Letter of Comment (PDF 117k)
All of our past letters of comment are Here.

 

Newsletter on IASB's consolidation proposals

23 Jan 2009

Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter Proposals for a New Standard on Consolidation. The newsletter explains IASB Exposure Draft 10 Consolidated Financial Statements, which proposes a new Standard to replace the requirements of IAS 27 Consolidated and Separate Financial Statements and SIC 12 Consolidation - Special Purpose Entities. Comments on ED 10 are requested by 20 March 2009.

ED 10 proposes a new definition of control of an entity that would apply to a wide range of situations and be more difficult to evade by special structuring. The proposals also include enhanced disclosure requirements that would enable an investor to assess the extent to which a reporting entity has been involved in setting up special structures and the risks to which these special structures expose the entity. The proposed definition:

A reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity.

Under IAS 27, the definition is 'power to govern the financial and operating policies'. 'Power to direct the activities' is broader than 'power to govern the financial and operating policies' and, therefore, would broaden the scope of consolidation. For example, under the proposals, a reporting entity could have the power to direct the activities of another entity despite holding less than half of the voting rights.

Click for: IAS Plus Update Newsletter Proposals for a New Standard on Consolidation (PDF 124k).

Here are Links to Past IAS Plus Newsletters.

HKFRS presentation/disclosure checklist 2008

23 Jan 2009

Deloitte's Asia-Pacific IFRS Centre of Excellence in Hong Kong published a presentation and disclosure checklist for HKFRSs at 31 December 2008. This checklist is intended to aid users in determining whether or not the presentation and disclosure requirements of HKFRSs and the Hong Kong Companies Ordinance have been met and to assist the users to ensure that information required by the The Stock Exchange of Hong Kong has been included in the annual report of a listed entity for the year ended 31 December 2008.

The checklist complements HKFRS Illustrative Financial Statements 2008 (See our News Story of 15 January 2009). The checklist covers the presentation and disclosure requirements effective for the year ended 31 December 2008. It does not address the requirements of HKFRS as regards to recognition and measurement. Click to download the HKFRS Presentation and Disclosure Checklist 2008 (PDF 1,727k).

 

We comment on discontinued operations proposals

23 Jan 2009

Deloitte has submitted a Letter of Comment on the IASB's exposure draft of Discontinued Operations – Proposed Amendments to IFRS 5. The proposals are to revise the definition of discontinued operations in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and require additional disclosure about components of an entity that have been disposed of or are classified as held for sale.

Our letter expresses support the Board's joint project with the FASB to develop a common definition of and disclosure requirements for discontinued operations. However, we point out that even if this exposure draft is adopted, convergence will not be achieved:

While we support the convergence objective of this proposed amendment, because of scope differences between IFRS 5 and FASB Statement 144 Accounting for Impairment of Disposal of Long Lived Assets, there will continue to be differences in reporting discontinued operations. For example, FASB Statement 144 excludes equity method investments from its scope whereas IFRS 5 does not. As such, a disposal of an equity method investment cannot be presented as a discontinued operation under US GAAP but could qualify under IFRS. While these differences are not included in the scope of this project, we believe the Boards should consider the scope differences in further convergence projects.

You'll find all of our past letters of comment Here.

 

EU formally adopts 'puttable instrument' amendments

23 Jan 2009

The European Union has published the Commission Regulation (EC) No 53/2009 endorsing the amendments, adopted by the IASB on 14 February 2008, to IAS 32 and IAS 1 titled 'Puttable Financial Instruments and Obligations Arising on Liquidation'.

Here is the Announcement in the Official Journal (PDF 100k). All of the IAS Plus news about IFRSs in Europe can be found Here.

Notes from day 2 of the IASB's January meeting

22 Jan 2009

The International Accounting Standards Board is holding its January 2009 meeting at its offices in London on Monday to Friday, 19-23 January 2009.

Click here to go to the preliminary and unofficial Notes Taken by Deloitte Observers at the Meeting.

Notes from day 3 of the IASB's January meeting

22 Jan 2009

The International Accounting Standards Board is holding its January 2009 meeting at its offices in London on Monday to Friday, 19-23 January 2009.

Click here to go to the preliminary and unofficial Notes Taken by Deloitte Observers at the Meeting.

SEC updates its oil and gas disclosure rules

21 Jan 2009

In our News Story of 5 January 2009, we reported that the US SEC has made major changes to its requirements for disclosures of oil and gas reserves. The old rules had been in place for more than 25 years. The revisions permit the use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about volumes (quantities) of reserves.

The new rules also will allow companies to disclose their probable and possible reserves to investors. The Commission's current rules limit disclosure to only proved reserves. Deloitte (United States) has published a special edition of the Heads Up newsletter titled SEC Modernizes Oil and Gas Company Reporting (PDF 130k) describing the SEC's new disclosure requirements.
Click for: 5 January 2009 News Story

 

Financial Crisis Advisory Group meeting

21 Jan 2009

The Financial Crisis Advisory Group (FCAG) was established by the IASB and US FASB in response to the recent global financial crisis. Its purpose is to advise both boards about the role of accounting during the crisis and potential changes.

The FCAG held its first meeting yesterday. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting.

IASB-FASB Financial Crisis Advisory Group Meeting - 20 January 2009

The chairman reminded participants in his introductory remarks about the reasons why fair value gained so much attention recently, particularly where it was applied to instruments in 'frozen' markets. He continued to explain that the fair value concept was applied more broadly after the 'savings-and-loan crisis' in the US and that it was still a 'work in progress'. He said that the two main questions asked were:

  • Where did financial reporting help to identify issues?
  • Where did financial reporting not help?

The chairmen of the US FASB and IASB gave a brief update on the actions taken by both boards. They reported that there were pressures to do more fundamental changes to financial reporting and that regulatory reforms could potentially affect financial reporting. They identified five major issues that emerged during the crisis:

  • Fair value
  • Off-balance sheet activities (consolidation)
  • Securitisations (derecognition)
  • Impairment
  • Risk reporting (users didn't see the risks in entities)
Both chairmen emphasised that the actions taken and planned focussed on those issues.

Staff from both boards gave a detailed update on the ongoing responses so far. It was highlighted that several proposed amendments to IFRS and US GAAP had been published and will be redeliberated as soon as possible. Further, the IASB expects to issue proposals on derecognition and fair value measurement in Q1/2009. Both boards will continue to accelerate work on a comprehensive review of financial instruments accounting.

The acting chief accountant of the SEC presented a summary of the recently published SEC report on the impact of fair value accounting on the financial crisis in the US. He noted that the majority of assets were not measured at fair value in the financial statements of financial institutions in the US and that only a fraction of those was measured with changes in fair value going through profit or loss. The report concluded that fair value did not play a meaningful role in the crisis. The SEC report noted that fair value was considered by investors as useful and that many alternatives presented lacked this degree of usefulness. Further, the report highlights that the FASB process was appropriate. The acting chief accountant noted that the report contained several recommendations, including the proposal not to suspend fair value accounting (see our news of 5 January 2009).

FCAG members then expressed their views. The main themes of participants' views are summarised below.

Did fair value accelerate or worsen the financial crisis?

Many participants expressed the view that fair value played 'some' role during the financial crisis, particularly with regard to the effect of procyclicality. This was seen as having been increased by the use of financial reporting numbers for regulatory purposes. However, the majority was of the view that it did not play a major role and none of the participants proposed to abandon it – it was the business risks financial institutions have taken on and did not appropriately manage.

It was highlighted that entities would need more guidance on how to determine fair value under specific circumstances, particularly in inactive market. The work of the IASB's Expert Advisory Panel and its final document was referred to as a step in the right direction. Other FCAG members were concerned that it was the valuation process itself was not transparent and this was also an issue to be tackled.

Many FCAG members highlighted that off-balance sheet activities and hence consolidation rules allowed the development of a shadow accounting system where risks were not presented in any financial statement. It was noted that management must explain in its financial reports why entities are consolidated or not.

One member noted that the incentives systems for executives aggravated the situation and that those systems were not reported appropriately in any company reports. Some commented that accounting would not avoid future crises.

Due process in standard-setting

Many emphasised the importance of adhering to due process, possibly accelerated in difficult times, even under pressure. One member noted that the period of September/October 2008 marked a low in international financial reporting standard-setting. Shortcuts to due process could undermine investors' confidence in financial reporting. In this regard it was noted that standards must be enforceable: if standards were not applied appropriately the best accounting framework would not help. Some members emphasised the need for a single global set of standards.

Investors' confidence

A further main theme was that investors' confidence in financial reporting is key to improving the market situation – investors were interested in financial reporting that depicts economic reality. Standard-setters were urged to bear that in mind when pursuing further steps. This was linked to reducing complexity in financial reporting and avoiding information overload. One of the IASB members present said that there was a lot of cynicism in the market about financial reporting and any next steps must not further this cynicism, but instead restore credibility of financial reporting. This member noted that many of the requests by politicians to changes in accounting would provide tools for earnings management and, hence, would undermine investors' confidence.

Impairment

Many FCAG members were concerned over the complex rules on impairment and the differences between IFRSs and US GAAP. Some of the participants expressed concerns over the missing possibility to establish provisions in good times that could be used in bad times, that is provide for expected losses, not only incurred losses as under current impairment models in IFRS and US GAAP. Others responded this is a regulatory issue and could be resolved by appropriate reserve allocation to restrict the profits that could be distributed.

Objectives of financial reporting

It was noted that before concluding on any issues, the purpose of financial reporting must be clear. It was highlighted that the current frameworks would not identify regulators as primary users of financial statements and hence, financial stability was not an objective of financial reporting.

This summary is based on notes taken by observers at the FCAG meeting and should not be regarded as an official or final summary.

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.