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Spanish and US regulators enter into cooperative agreement

19 Jul 2012

The Accounting and Auditing Institute (Instituto de Contabilidad y Auditoría de Cuentas (ICAC)) of Spain and the Public Company Accounting Oversight Board of the United States (PCAOB) have entered a cooperative agreement on the oversight of audit firms subject to the regulatory jurisdictions of both regulators.

The Statement of Protocol (SoP) agreement allows the exchange of confidential information of firms performing in both jurisdictions. This agreement should enhances the supervisory oversight, inspections and investigations of those firms. The SoP is effective immediately.

The two regulators have also signed a data protection agreement. This agreement will ensure that national data protection requirements are performed during any transfer of information.

Click to view:

EFRAG draft comment letter on the proposed IFRS Foundation Due Process Handbook

19 Jul 2012

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the proposed IFRS Foundation Due Process Handbook that was published for public comment in May 2012. EFRAG emphasises that the overarching principle of bringing improvement to financial reporting at an acceptable cost should be the sole driver for new or changed standards and interpretations.

In order to achieve this overarching aim, EFRAG formulates eight comments and recommendations for the standard setting process and two for the due process oversight.

Standard setting process:

  • EFRAG welcomes the introduction of a research programme into the IASB due process as this will allow for evidence based agenda setting. EFRAG also suggests concluding the research programme phase by a public consultation phase on the issue and the possible approaches before deciding to add a project to the agenda.
  • EFRAG promotes a shared due process between the IASB and regional and national accounting standards bodies as an effective way to improve transparency and efficiency.
  • EFRAG believes that the Due Process Handbook should contain guiding principles for identifying and analysing users’ needs to establish the link with the objective as defined in the IASB’s Conceptual Framework.
  • EFRAG believes that results of public fatal flaw reviews should be assessed, in a public meeting, by the IASB and only by the staff as they are essential in the identification of potential implementation difficulties or undue costs.
  • EFRAG warns that the IASB staff should support the IASB, never try to guide it. The staff should be allowed to make recommendations, but only after having prepared a fair and balanced representation of various views.
  • As EFRAG observes that no discussion arises at the IASB level when an interpretation is presented for approval, EFRAG recommends that IFRS Interpretations Committee members' dissenting views should be explained publicly.
  • EFRAG urges the Trustees to clearly stipulate that the IFRS Interpretations Committee should not issue any rejection notice that would be akin to an interpretation as some preparers and regulators operate in the expectation that rejection notices are part of the IFRS literature to which preparers should refer.
  • EFRAG believes that every decision made in the standard setting process should be subject to the super majority required for the whole standard.

Due process oversight:

  • EFRAG believes that the focus of the due process oversight should be on substance, and not on form to ensure that the objectives set for the IASB’s due process are indeed met.
  • EFRAG warns of adding too much detail into the Due Process Handbook as that would undermine the principles based character of the standard setting process and leave no room for any flexibility in the due process.

Comments on EFRAG's draft comment letter are invited by 5 September 2012.

Please click for:

  • EFRAG press release with link to the draft comment letter (link to EFRAG website)
  • A summary of the main suggestions of the updated IFRS Foundation Due Process Handbook in our earlier story on the publication of the Trustees' proposals.

IVSC explores extractive industry valuations

19 Jul 2012

The International Valuation Standards Council (IVSC) has formally launched a new project designed to provide greater valuation guidance to the mining, oil and gas industries. In a Discussion Paper being distributed to industry participants, the IVSC is seeking input on the form and scope of valuation guidance needed in the extractive industries, and consults on current practice on the types of assets being recognised and valued, valuation methodologies employed, and the recognition of intangible assets and goodwill in practice.

The IVSC had previously issued Guidance Note 14 The Valuation of Properties in the Extractive Industries (GN 14).  However, this guidance was not included in the revamped valuation standards issued in July 2011 on the basis of the outdated IFRS standards referenced in the guidance, the IASB's project on extractive activities and a number of valuation issues that were causing difficulty in the sector that were not referenced in GN14.

Some of the topics discussed in the Discussion Paper include:

  • Whether combined standards and guidance for extractive industries are appropriate, or whether separate pronouncements for mining and for oil and gas should be produced
  • Whether the project should focus just on the valuation of reserves and resources or should it extend to other assets employed in the industry and to entire businesses in the sector (noting the interdependence of a) reserves and resources, b) capital
    equipment for extraction, c) infrastructure for extraction and, d) intangible assets employed in extraction)
  • Identifying the valuation methods most commonly used for valuing producing reserves, reserves undergoing development and reserves or resources subject to exploration, and the inputs and approaches used in each of the market approach, discounted cash flow approach and cost approach
  • Identifying intangible assets that are customarily separately identified and valued for acquisition accounting under IFRS 3 Business Combinations (or any similar accounting requirement) or in transactions between entities in the extractive industries  - including what value (if any) is attributed to components of goodwill, and whether intellectual property is separately recognised and measured.

The IVSC is seeking comments on the Discussion Paper by 20 October 2012.  Click for:

Notes from the July IASB meeting

18 Jul 2012

The IASB's July meeting was held in London on 16-20 July 2012, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from the sessions on investment entities, due process, financial instruments: macro hedging, leases, IAS 28: Application of equity method when an associate/joint venture’s equity changes outside of comprehensive income, and an education session on revenue recognition.

Click through for direct access to the notes:

Monday, 16 July 2012

Tuesday, 17 July 2012

Wednesday, 18 July 2012

Meeting notes from the other sessions during the meeting will be posted soon.

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

IASB and EFRAG issue high level summary of their July 2012 meeting

18 Jul 2012

The International Accounting Standards Board (IASB) and the European Financial Reporting Advisory Group (EFRAG) met on 16 July 2012. During the meeting, the IASB and EFRAG discussed ongoing projects related to the IASB's current work programme, proposed revisions to the IASB's Due Process handbook, post-implementation reviews of IFRS 8 and IFRS 3, and future cooperation between the two organisations.

A high level summary of the meeting is available on the EFRAG's web site. Also, an audio recording of the meeting is available on the IASB web site.

EFRAG and ASB publish position paper and feedback statement on the effects of accounting standards

17 Jul 2012

The European Financial Reporting Advisory Group (EFRAG) and the Accounting Standards Board (the ASB) of the FRC have jointly published Position Paper ‘Considering the Effects of Accounting Standards’ and its related Feedback Statement. The Position Paper signifies the final positions of the EFRAG and ASB following the consultation period of Discussion Paper 'Considering the Effects of Accounting Standards'.

The Position paper is geared towards helping standard setters implement 'effect analysis' in the standard setting process. The goal is to enhance the transparency of due process and to increase the accountability and credibility of the standard setter. The Position paper recommends four steps to use when performing effect analysis. The four steps are:

Step 1:
Formulate the entire plan of effect analysis, explaining the intended outcomes at the agenda setting stage;

Step 2:
Encourage input on anticipated effects when due process documents are issued;

Step 3:
Document a summary of inputs from stakeholders by collecting all evidence received, and make the document publicly available; and

Step 4:
Measure actual effects during the process of post-implementation reviews.

The related Feedback Statement provides a summary of the main issues respondents had from the January 2011 Discussion Paper 'Considering the Effects of Accounting Standards.'

Click to view (links to EFRAG web site):

Updated EFRAG 'endorsement status report'

17 Jul 2012

The European Financial Reporting Advisory Group (EFRAG) has updated its report showing the status of endorsement, under the EU Accounting Regulation, of each IFRS, including standards, interpretations, and amendments.

The update reflects the fact that EFRAG has issued a draft endorsement advice regarding the Amendments to IFRS 10, IFRS 11 and IFRS 12 issued on 28 June 2012. Currently, final endorsement of the amendments might be expected in the first quarter of 2013.

Click to download the Endorsement Status Report as of 17 July 2012.

You can find all past endorsement status reports here.

SEC staff report on IFRS — summary and reactions

17 Jul 2012

We've posted our summary of the SEC final staff report 'Work Plan for the Consideration of Incorporating IFRSs into the Financial Reporting System for U.S. Issuers', together with an overview of reactions to the report.

Deloitte summary

On July 13, 2012, the SEC issued the final staff report Work Plan for the Consideration of Incorporating IFRSs into the Financial Reporting System for U.S. Issuers. The report marks the culmination of the work the SEC directed the staff to perform in relation to the work plan that the SEC initiated in February 2010. The purpose of the work plan was to consider specific areas and factors that would be relevant to the SEC as to whether, when and how to incorporate IFRS into the U.S. financial reporting system. The SEC staff published a number of reports over the last few years that provide insights on progress, observations and findings pursuant to the work plan. The final Staff report summarises observations and findings and brings them together into a single document.

In completing its analysis, the staff identified the following significant themes:

  • Development of IFRSs – Globally, IFRSs are generally perceived to be high quality standards. While both U.S. GAAP and IFRSs contain areas that are underdeveloped, the perception among U.S. constituents is that the “gap” under IFRSs is greater (e.g., the accounting for extractive industries, insurance, and rate-regulated industries). Progress has been made as it relates to the FASB’s and IASB’s current convergence projects.
  • Interpretive Process – The IFRS Interpretations Committee should do more to address application issues on a timely basis to reduce diversity in practice in the application of IFRSs. Although recent changes to the Committee’s process may address this concern, it is not yet known if the changes will be effective.
  • IASB’s Use of National Standard Setters – The IASB needs to understand different domestic reporting and regulatory frameworks and should consider relying more on national standard setters, e.g., assistance in areas where they have expertise, outreach activities, identifying diversity in practice, and post-implementation reviews. The IASB is in the process of developing a plan to formalise its relationships with National Standard Setters as it contemplates its future agenda.
  • Global Application and Enforcement – Although the financial statements that the SEC staff analysed largely appeared to comply with IFRSs, there is diversity in application of IFRSs globally. Regulators in various jurisdictions would need to work cooperatively to foster consistent application and enforcement of IFRSs.
  • Governance of the IASB – The governance structure of the IFRS Foundation “appears to strike a reasonable balance of providing oversight of the IASB while simultaneously recognising and supporting the IASB’s independence.” Mechanisms may be necessary to consider and protect the U.S. capital market, e.g., by allowing the FASB to endorse IFRSs in the U.S.
  • Status of fundingWhile there has been progress in developing a funding mechanism for the IFRS Foundation, the staff expressed concern about existing funding sources, including the reliance on large accounting firms to provide funding. Currently the funding is provided by “businesses, not-for-profits, and governments in fewer than 30 countries.”  The IFRS Foundation has been unsuccessful in raising sufficient funds for the U.S. portion of the budget.
  • Investor understandingInvestors do not have “uniform” education on accounting issues. Irrespective of any ultimate decision made by the SEC, the staff plans to further explore how investor engagement and education can be improved.

What may be most interesting is not what the final staff report is, but rather what it isn’t. The final staff report does not include a staff recommendation nor does it provide a sense as to what the Commissions’ next steps may be in relation to IFRS.  The final staff report does indicate that the report has not been approved by the SEC and does not necessarily reflect its views and that its publication “does not imply — and should not be construed to imply — that the Commission has made any policy decision as to whether International Financial Reporting Standards should be incorporated into the financial reporting system for U.S. issuers, or how any such incorporation, if it were to occur, should be implemented.” The work plan also “did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically.”

Although the work plan is now completed, the final staff report acknowledges that “additional analysis and consideration of this threshold policy question is necessary before any decision by the Commission concerning the incorporation of IFRS into the financial reporting system for U.S. issuers can occur.” Although the completion of the work plan is an important step for the U.S., many questions remain unanswered.

For more information, see Heads Up — SEC issues final report on incorporation of IFRSs.

Reactions to the report

Note: This section of the article is updated periodically to reflect further reactions.

The American Institute of CPAs (AICPA) has commended the SEC staff report but "urge[s] the Commissioners to consider the staff report with expediency because the world’s capital markets know no borders". Barry C. Melancon, AICPA president and CEO also stated "We urge the Commissioners to allow U.S. public companies the option to adopt IFRS".

Financial Executives International (FEI) also commended the report but noted "there may be various paths" to achieving a move to global accounting standards.  The response also reiterates earlier views that completion of the IASB-FASB convergence process is paramount and should not be subject to "artificial deadlines".  Accordingly, the FEI argues, "we do not feel the SEC should feel compelled to act... until such time as the Commissioners feel they have conducted sufficient outreach and study to make a well-informed decision that will stand the test of time".

Stephen Haddril, Chief Executive of the UK Financial Reporting Council said: "It is disappointing that transition is not yet clearly recommended.  It is imperative that this is not allowed to affect the continued development of high quality global standards."

Dr Nigel Sleigh-Johnson, Head of the Financial Reporting Faculty of the Institute of Chartered Accountants of England and Wales (ICAEW) noted continued support from the G20 for global accounting standards (further noting the IASB is the "prime contender" to be the global standard setter).  He further stated: "The fact that the US is still hesitant about a radical shift away from its own high quality standards should not be taken as any reflection on the suitability of IFRS reporting for other markets".

The CFA Institute has issued a critique of the report, pointing out a number of areas where the CFA Institute believes more analysis and evaluation is required.  The report notes "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".  We provide more analysis of the CFA Institute report in our separate article.

Our summary of the reaction of the IFRS Foundation Trustees and IASB Chairman can be found in our earlier article.

IFRS Foundation Trustees respond to SEC staff IFRS report

15 Jul 2012

The Trustees of the IFRS Foundation have issued a statement on the publication of a staff report representing the final element of the Work Plan developed by the staff of the US Securities and Exchange Commission (SEC). The statement notes 'regret' that the report is not accompanied by a recommended action plan for the SEC.

In the statement (link to IASB website), Michel Prada, Chairman of the Trustees, noted:

For the benefit of both US and international stakeholders, the Trustees look forward to the SEC resolving the continued uncertainty regarding the US’s commitment to global accounting standards.

Mr Prada acknowledges the challenges IFRS transition may present to United States constituents, but also notes these represent challenges "that other jurisdictions have successfully overcome when completing their own transition to IFRSs".

The SEC staff report notes a number of matters in relation to the governance and activities of the IASB, e.g.:

  • There are a number of areas where IFRS are underdeveloped, e.g. accounting for extractive industries, insurance and rate-regulated industries
  • The IFRS Interpretations Committee could do more to address issues on a timely basis
  • The IASB should consider greater reliance on national standard setters
  • Global application of IFRS could be improved to narrow diversity
  • Continued reliance on the large public accounting firms to provide funds to the IASB.

The SEC staff report acknowledges that the IFRS Foundation has recently undertaken recent reforms in many of these areas.  In the Trustee's statement, Mr Prada states:

The Trustees will carefully study the report in detail and take further steps as necessary. Our initial assessment is that many of the findings are broadly consistent with the conclusions of the Monitoring Board and Trustees’ respective Governance and Strategy Reviews completed earlier in the year, and are already addressed in the work plan for 2012.

The statement also includes comments from Hans Hoogervorst, Chairman of the IASB.  Consistent with recent speeches made by Mr Hoogervorst, he notes the broad adoption of IFRS already evident on a global basis, the calls by the G20 for global accounting standards, and the new agenda for the IASB going forward "as the era of convergence is coming to an end".

Click for IFRS Foundation Trustees statement (link to IASB website).

We will make a more detailed summary of the SEC report available soon on IAS Plus.

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