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November

ESMA announces enforcement priorities for 2012 financial statements

12 Nov 2012

The European Securities and Markets Authority (ESMA) has announced the priority issues that the assessment of listed companies' 2012 financial statements will focus on.

ESMA considers the following financial reporting topics to be of particular importance for European listed companies in light of the current economic situation:

  • financial assets;
  • impairment of non-financial assets;
  • defined benefit obligations; and
  • provisions, contingent liabilities, and contingent assets.

ESMA will collect data on how European listed entities have applied the IFRS requirements in relation to these topics and will publish the results.

Please click for (links to ESMA website):

EFRAG endorsement status report 9 November 2012

09 Nov 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 updated report reflects that the Accounting Regulatory Committee (ARC) has voted in favour of the adoption of the Amendments to IFRS 10, IFRS 11 and IFRS 12 Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (issued 28 June 2012 by the IASB). Also, the EFRAG has updated the report for the Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities (issued 31 October 2012 by the IASB).

Click to download the Endorsement Status Report as of 9 November 2012.

You can find all past endorsement status reports here.

The Bruce Column — Valuing the pieces of eight

09 Nov 2012

Segmental reporting is about to undergo the first of the IASB’s post-implementation reviews. Robert Bruce, our regular columnist, looks at the Deloitte survey of the segmental disclosure practice.

In mid-November the deadline for comments in the first of the IASB’s planned post-implementation reviews closes. Under scrutiny is IFRS 8 on Operating Segments, segmental reporting. For the first time the IASB will have gathered the evidence to assess whether the standard it introduced is producing the effects and improvements in disclosure that it had planned for and hoped for.

So the Deloitte survey: “Pieces of Eight: Surveying IFRS 8 Disclosures” provides a timely insight into IFRS 8 practices in the UK. It is based on the mass of information and analysis produced from the disclosures of 100 listed companies which feature in the main survey of annual reports produced by Deloitte.

What this survey shows, for example, is that there has been no change to the average number of reportable segments under IFRS 8 compared to its predecessor standard IAS 14. The average was three under both standards. And it also shows that the number of companies with only a single reportable segment has fallen from 18 under IAS 14 to 11 under IFRS 8.

At a time when the consistency and connection of narrative reporting with the figures is uppermost in peoples’ minds it is encouraging to see that 85% of companies were deemed to provide consistent segmentation in their narrative reporting when compared against their IFRS 8 disclosures. You would expect and hope this to be so, after all the underlying principle of IFRS 8 is based on information reported to management. But nevertheless it is a refreshing example of the theory appearing to hold true in practice, at least for most.

Click here for the full detail of the survey.

New Zealand follows Australia on investment entities

09 Nov 2012

The New Zealand Accounting Standards Board (NZASB) has tentatively decided to adopt the same strategy as the Australian Accounting Standards Board (AASB), and delay adoption of the IASB's investment entities amendments in the New Zealand context until an exposure draft can be issued proposing additional disclosures.

The NZASB met in Wellington on 7 November 2012 where the investment entity amendments were discussed.  Consistent with the circumstances surrounding the AASB's tentative decision, the NZASB noted concerns about the loss of consolidated information that would result from the IFRS amendments in some circumstances.

In addition, the Board considered New Zealand External Reporting Board (XRB) strategies of adopting IFRS so that the financial statements of for-profit entities can assert compliance with IFRS, and the goal of trans-Tasman harmonisation with Australian accounting requirements.

Consistent with the AASB's approach, the proposed additional disclosures to be contained in a forthcoming NZ exposure draft are likely to comprise the three primary financial statements that would be produced under full consolidation.

The NZASB is expected to consider the exposure draft at its December 2012 meeting.

For more information, see NZASB Communique 2012 - 16 issued as a result of the NZASB's meeting (link to XRB website).

IPSASB issues exposure drafts in two phases of its conceptual framework project

09 Nov 2012

The International Public Sector Accounting Standards Board (IPSASB) has published two exposure drafts as part of its project to develop a Conceptual Framework for the general purpose financial reporting of public sector entities. The exposure drafts cover the elements and recognition in financial statements, and the measurement of assets and liabilities in financial statements. In contrast to the IASB's Conceptual Framework, the IPSASB's framework proposes additional elements of financial statements including 'deferred inflows', 'deferred outflows', 'ownership contributions', and 'ownership distributions', but does not include a definition of 'ownership interests'.

The exposure drafts follow on from earlier consultation papers issued in December 2010, and have the following titles:

  • Conceptual Framework Exposure Draft (ED) 2, Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: Elements and Recognition in Financial Statements (ED 2)
  • Conceptual Framework Exposure Draft (ED) 3, Measurement of Assets and Liabilities in Financial Statements (ED 3).

'Deferred' inflows and outflows

ED 2 proposes to define 'deferred inflows' and 'deferred outflows' as follows:

"A deferred inflow is an inflow of service potential or economic benefits provided to the entity for use in a specified future reporting period that results from a non-exchange transaction and increases net assets."

"A deferred outflow is an outflow of service potential or economic benefits provided to another entity or party for use in a specified future reporting period that results from a non-exchange transaction and decreases net assets"

Examples of deferred inflows may include items such as specific multi-year grants that do not meet the definition of a liability.   Examples of deferred outflows may include multi-year grants that stipulate they must be used over future reporting periods.  These items would be recognised as revenues or expenses as the future time periods expire.

The Basis of Conclusions accompanying ED 2 notes the prevalence of non-exchange transactions of public sector entities, particularly taxation and grants.  The IPSASB argues that it is "important to be able to show separately flows that relate to specified future reporting periods" and considered a number of different approaches in meeting this objective, including changing the definitions of 'assets' and 'liabilities', introducing an 'other comprehensive income' notion, and requiring disclosure in the notes.

The Basis of Conclusions documents the IPSASB's decision to introduce new elements of financial statements as follows:

The IPSASB... concluded that the most transparent approach is to define deferred inflows and deferred outflows as separate elements. In coming to this view the IPSASB considered it likely that, if separate elements are not defined, the treatment of flows that are considered applicable to future reporting periods is likely to be addressed on an issue-by-issue basis at the standards level, using ambiguous and potentially conflicting principles.

The practical effect of the definition of these elements may in some cases result in outcomes similar to the requirements for government grant received under IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.  However, the IPSASB notes the deferred inflow and outflow approach is "not the same as the matching concept  used in earlier private sector frameworks".

Comparison of element definitions with the IASB

Because of the introduction of the additional elements, the definitions of other elements are different in some cases from those used under IFRS.  The table below compares the definitions between the IPSASB proposals and the IASB Conceptual Framework:

IPSASB proposalIASB Framework
An asset is a resource, with the ability to provide an inflow of service potential or economic benefits that an entity presently controls, and which arises from a past event. An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Revenue is:
  1. Inflows during the current reporting period, which increase the net assets of an entity, other than:
    1. Ownership contributions; and
    2. Increases in deferred inflows; and
  2. Inflows during the current reporting period that result from decreases in deferred inflows.
Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants*
Expenses are:
  1. Outflows during the current reporting period which decrease the net assets of an entity, other than:
    1. Ownership distributions; and
    2. Increases in deferred outflows; and
  2. Outflows during the current reporting period that result from decreases in deferred outflows.
Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants
Ownership contributions are inflows of resources to an entity, contributed by external parties that establish or increase an interest in the net assets of the entity.
Ownership distributions are outflows of resources from the entity, distributed to external parties that return or reduce an interest in the net assets of the entity
Ownership interests are not defined
Equity is the residual interest in the assets of the entity after deducting all its liabilities

* Under the IASB's Framework, income encompasses both 'revenue' and 'gains'.  The Framework notes that gains "represent increases in economic benefits and as such are no different in nature from revenue" and so are not considered a separate element.

Measurement

ED 3 identifies the measurement concepts intended to guide the IPSASB in the selection of measurement bases for International Public Sector Accounting Standards (IPSAS). The ED focuses on selecting measurement bases that meet the objectives of financial reporting-decision making and accountability. As many assets in the public sector are held for their operational capacity, the ED argues the cost basis is will often be appropriate.

Comments on the exposure drafts close on 30 April 2013.  Click for IPSASB press release (link to IFAC website).

Deloitte releases new IFRS e-learning modules

08 Nov 2012

Deloitte’s Global Audit Learning group has released two new e-learning modules on derecognition under IFRS 9 'Financial Instruments' and offsetting under IFRS 32 'Financial Instruments: Presentation'. These modules are additions to the extensive catalog of IFRS e-learning content made freely available by Deloitte.

Details of the two new modules are:

  • IFRS 9 Financial Instruments: Derecognition — covering the background, scope and principles relating to the derecognition of financial instruments under IFRS 9.
  • IAS 32 Financial Instruments: Presentation — covering the key presentation requirements for financial instruments under IAS 32, as revised by the IASB in December 2011, to include additional guidance and disclosures as a result of the joint offsetting project with the FASB.

(Note: You may be asked to register to access each module - no personally identifying information is requested in the registration process.)

The release of these modules follows three new modules on IFRS 9, IFRS 10 and IFRS 11 released a number of weeks ago.  There are now 42 modules are available, tackling the key extant and new standards issues by the IASB. The IFRS e-learning modules are available free of charge and may be used and distributed freely, without alteration from the original form and subject to the terms of the Deloitte copyright over the material.

For details on the full range of e-learning modules go to Deloitte’s IFRS e-learning. A listing of available e-learning modules is also available on our IAS Plus IFRS e-learning page.

Accounting for Islamic finance

08 Nov 2012

The Malaysian Accounting Standards Board (MASB) has published a two-part staff-prepared paper discussing Islamic finance, accounting treatments for various Islamic finance instruments, and the reasons why the MASB chose to require Islamic financial institutions to follow Malaysian Financial Reporting Standards, which are equivalent to IFRS. The paper concludes with a call for the IASB to consider Islamic accounting issues.

The two part paper, prepared by the MASB staff and which contains views that "do not necessarily represent the official views of the MASB", provides an overview of Islamic finance and its origins in the modern global economy before exploring various accounting issues.

The first part of the paper explains the background to many Islamic finance transactions, describing them as characterised by the use of trade contracts instead of loans, and that the subject of trade must usually be a tangible item or a permitted intangible.  Sharia'a law matters such as not charging interest on loans, prohibited items of trade and related considerations are also discussed.

The paper then goes on to compare and contrast the treatment of Islamic finance under standards produced by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and IFRS.  The paper observes that "historically, AAOIFI has been less welcoming to two key concepts in IFRS: substance over form and time value of money".

In relation to substance over form, the paper notes that "[a]lthough Islamic and conventional finance greatly differ in philosophy and in legal form, the former is often structured to provide the same economic effect as the latter" and provides examples of accounting for the same instrument under AAOIFI and IFRS.

The first part of the paper concludes on the issue of using IFRS as follows:

In MASB’s opinion, information on the economic effect is as valuable as, if not more than, information on the legal contractual form. Despite their contractual differences, many Islamic finance products are meant to replicate the economic effect of conventional products. Thus the MASB is more congenial to IFRS recognition and measurement bases which emphasise the economic substance of transactions. The MASB understands that the form of contract is also important from an Islamic perspective, and hence also encourages appropriate disclosures (which may include disclosures recommended by AAOIFI) to highlight adherence or departure from Shariah and to differentiate between Shariah-compliant and conventional contracts that are recognised and measured in a similar manner.

This reasoning, together with concerns about the AAOIFI standards being "designed for specific uses of limited types of contracts" and that "having separate Islamic standards could create undesirable opportunities for arbitrage and abuse", led the MASB to provide no exemption for Islamic financial institutions under MFRS.

The second part of the paper provides an analysis of some of the current topics in applying IFRS to Islamic transactions.  It covers:

  • Islamic leasing (ijarah), both under IAS 17 Leases and the IASB's project on leases, noting the current approach of usually classifying such arrangements as 'operating leases' will rarely achieve off balance sheet treatment
  • Islamic deposits (based on mudarabah and wakalah), which are commonly presented as a liabilities (effectively a deposit), but which the Malaysian central bank, Bank Negara Malaysia, is encouraging to be treated as an 'investment account', which may be treated off balance sheet, but may potentially be consolidated under IAS 27 or IFRS 10 in some cases
  • Islamic insurance (takaful), where the issue arises of how to account for qard, an interest-free loan that a takaful operator extends to its participants’ funds, as to whether it should be accounted for under IAS 39, treated as akin to an investment in a subsidiary under IAS 27, or simply expensed.

The second part of the paper concludes that it is "cause for concern" that these issues are being dealt with within the Malaysian context with little IASB involvement and that "MASB staff believe it is high time that the IASB itself tackle Islamic financial reporting issues".

Click for (links to MASB website):

Agenda for November 2012 IFRS Interpretations Committee meeting

07 Nov 2012

The IFRS Interpretations Committee will meet at the IASB's offices in London on Tuesday and Wednesday 13-14 November 2012. The meeting is open to the public and will be webcast.

The tentative agenda is available on our meeting page for the meeting.

Hoogervorst outlines thoughts on leases, US convergence and more

07 Nov 2012

IASB Chairman Hans Hoogervorst has discussed a broad range of issues over recent days. Key themes emerging include challenges in some of the IASB projects such as leases with its lobbying efforts against the proposals, global adoption of IFRS including in the United States, accountability arrangements for standard setting and future priorities, including the possibility of revisiting the accounting for goodwill.

The IASB has published a transcript of a public lecture Mr Hoogervorst gave the London School of Economics on 6 November 2012.  The speech, entitled 'Accounting Harmonisation and Global Economic Consequences', covered a number of topics.  Many of these topics mirror discussion from a meeting of the European Parliament Committee on Economic and Monetary Affairs (ECON) held a day earlier on 5 November 2012, where Mr Hoogervorst participated in an exchange of views with the members of the committee.

Leases

In the lecture, Mr Hoogervorst focused on the challenges facing the leasing project in particular, where he stated that the "vast majority of lease contracts are not recorded on the balance sheet, even though they usually contain a heavy element of financing".    He went on to note that "companies tend to love off-balance sheet financing, as it masks the true extent of their leverage and many of those that make extensive use of leasing for this purpose are not happy", and outlined some of the lobbying efforts going on, including claims in the United States that "leases on balance sheet will lead to 190,000 jobs being lost in the US alone".

Noting such lobbying efforts should not be surprising, Mr Hoogervorst compared the current controversy around leases with past projects such as the expensing of share options under IFRS 2 Share-based Payment and the changes to pension accounting under IAS 19 Employee Benefits, outlining the "uphill battle" the IASB faced.  He concluded that the IASB needs "all of the help we can get, to ensure that we do not get lobbied off course" and "to counter what is a well-funded and well-resourced lobbying campaign".

The lecture echoed his comments to the ECON committee members where he warned committee members about being approached by the leasing industry as they want to "take the bite out of [the] upcoming leasing standard" and hoped he could "count on your sympathy" to support the leasing proposals.

Global adoption of IFRS

In the lecture, Mr Hoogervorst outlined how IFRS has been an important response to "globally interconnected nature of today’s financial markets" and emphasised how "repeated G20 communiqués have supported the work of the IASB and called for a rapid move towards global accounting standards".  He went on to outline his view that "momentum for IFRS becoming global standards has now become unstoppable" with so many countries adopting IFRS, reiterating his comments to the ECON committee that the "use of IFRS has reached critical mass" and he doesn't "think it can be stopped".

Turning to the specific issue of whether, and if so how, the United States will adopt IFRS, in the lecture Mr Hoogervorst stated "it is important that progress is made soon" and hoped for news in 2013.  In more candid comments to the ECON committee, he discussed Canada and Mexico's adoption of IFRS and the "country in between which is still hesitating".  He later went on to comment that it was like "waiting for Godot" and it was "really disappointing" that a U.S. decision had not yet been made, but that once "the presidential elections are out of the way" he hoped that the United States' 'big stake' in IFRS would continue.  Additionally, he stated that the "absence of a U.S. decision is not reason to stall" the IASB's work.

Accountability

In the ECON committee meeting, Mr Hoogervorst discussed how the IFRS Foundation was making efforts to be 'more inclusive and responsive to constituents'. He later commented that he'd "never before worked in an environment that is so transparent" as that at the IASB.

At a technical level, he noted that the bilateral arrangement between the IASB and FASB was effectively coming to an end, to be replaced with a new multi-lateral arrangement through the proposed Accounting Standards Advisory Forum (ASAF).  Lamenting that IASB-FASB convergence 'had not ended as hoped' and that it is difficult to reach agreement when there are two separate boards, Mr Hoogervorst wondered whether outcomes may have been different in key areas where "convergence was lost" such as financial instrument impairment and offsetting if the Boards were operating in an environment where the U.S. was committed to adopting IFRS.

Responding to committee questions about the IASB's independent status and the importance of standard setting, Mr Hoogervorst noted the 'true devotion' to the public interest embodied in the IASB, governance improvements implemented with initiatives such as the Monitoring Board,  and the endorsement mechanisms that most countries adopting IFRS use.  He reiterated the IASB's extensive due process, which can result in "five to ten years to get a standard done" and affirmed the need to "listen carefully to what constituents have to say", highlighting the important role the Accounting Standards Advisory Forum (ASAF) will have in this process.

Future directions

In both the lecture and committee meeting, Mr Hoogervorst outlined the future direction of the IASB's work plan, focusing on projects such as the restarted Conceptual Framework project, and addressing specific constituent concerns, while maintaining a 'period of calm'.

There was also much discussion at the committee meeting about the IASB's project on financial instrument impairment, including the suitability of the expected loss model and questions why an "unexpected loss" model is unsuitable.

Responding to committee questions about 'country-by-country reporting' for the resources industry, Mr Hoogervorst noted that constituents had not raised this as a priority issue in the Agenda Consultation process and that it was a matter better dealt with by regulation.

Several times during the committee meeting, Mr Hoogervorst raised the question of whether accounting for goodwill needs to be revisited. Contrasting the situation where leases were 'not enough' on the balance sheet, he commented that goodwill might be "too much on the balance sheet" and that this was something he was personally worried about, particularly in relation to banks and prudential reporting.  Whilst not calling for an immediate write off or an 'arbitrary' amortisation of goodwill, Mr Hoogervorst commented that he 'wondered whether standards are strict enough'.

Click for:

2013 IFRS Blue Book – Coming Soon

06 Nov 2012

The IFRS Foundation has announced that the 2013 IFRS Consolidated without early application will be published in December 2012. This volume (nicknamed the "Blue Book") will contain all official pronouncements that are mandatory on 1 January 2013. It does not include IFRSs with an effective date after 1 January 2013. The Blue Book differs from the traditional BV (the "Red Book"), which includes all pronouncements issued at the publication date, including those that do not become mandatory until a future date.

The Blue Book will sell for £65 plus shipping (academic, developing country, and volume discounts apply). You will find more information and ordering details here.

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