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Public and private sector accounting standard differences highlighted

18 Sep 2012

The New Zealand Accounting Standard Board (NZASB) has recently released an exposure draft which explores the practical difficulties in dealing with differences between public sector and private sector accounting standards being set by the IASB and IPSASB. The NZASB acknowledges "there is a risk that the two Boards will develop separate standards that treat like transactions in similar circumstances in quite different ways", which is a significant challenge in maintaining a credible differential reporting framework for various entities.

New Zealand's proposed revised differential reporting regime is being progressively exposed for comment and proposes a 'multi-GAAP' approach.  This includes standards based on IFRS for the for-profit sector (permitting a statement of compliance with IFRS), and standards International Public Sector Accounting Standards (IPSAS) for the public benefit entities (PBEs) in the public sector.

The commentary provided in the exposure draft explores why differences might arise between IFRS and IPSAS, including:

  • Likely differences in the conceptual frameworks used by the IASB and IPSASB reflecting different user needs (see also our earlier article on this topic)
  • Transaction classes which are more prevalent in one sector or the other
  • Lack of clarity about the IPSASB future intentions on convergence with IFRS, particularly in light of significant projects being undertaken by the IASB in areas such as financial instruments and leases
  • The possibility that the IPSASB may prioritise more urgent public sector projects ahead of considering new standards and amendments issued by the IASB.

The New Zealand situation offers an interesting insight into the practical issues arising due to differences between IFRS and IPSAS, particularly as divergence potentially arises over time.

Because of the likely existence of so-called 'mixed groups' containing both for-profit and PBEs, the NZASB exposure draft seeks to address this issue in the New Zealand context.  Ultimately, the exposure draft proposes that the NZASB may depart from IPSAS requirements where necessary to eliminate any "significant unnecessary differences" with IFRS and retain similar requirements across sectors.

With many countries considering the adoption of IPSAS standards, the NZ approach reveals the tensions that can arise.  It provides a strong incentive for the IASB and IPSASB to continue to work towards convergence, with the IPSASB not unnecessarily departing from IFRS - a sentiment echoed by IPSASB board member Ken Warren.  In the longer term, these tensions may potentially raise the question of the most appropriate standard-setting structure for all sectors.

Click for access to the exposure draft (link to New Zealand External Reporting Board website).

Post-implementation review of IFRS 8 - upcoming roundtables and discussions

17 Sep 2012

National standard setters around the world are offering discussion forums in order to collect feedback from stakeholders on the International Accounting Standards Board’s (IASB) Post-implementation Review of IFRS 8. The roundtables are intended to help the standard setters provide input to the IASB's deliberations. We have compiled a new up-to-date overview of roundtables coming up in the near future.

The post-implementation review process for IFRS 8 Operating Segments was initiated in the first quarter of 2012.  A Request for Information Post-implementation Review: IFRS 8 Operating Segments was issued in July 2012, with comments closing on 16 November 2012.  The IASB expects to consider comments received on the Request for Information in the first quarter of 2013.

Upcoming roundtables are offered in:

Some of the roundtables will be conducted in cooperation with staff members of the IASB. The questions in the IASB’s Request for Information (link to IASB website) will provide the structure for all discussion forums.

Agenda for the IASB September education session meeting

13 Sep 2012

The International Accounting Standards Board will be meeting in London on 20 September 2012 for an education session to discuss revenue recognition, insurance contracts and leases.

The agenda, dated 13 September 2012, has been released.

The full agenda for the meeting can be found here.

Incoming Office Director of the IFRS Foundation liaison office in Tokyo appointed

13 Sep 2012

The Trustees of the IFRS Foundation have announced the appointment of the incoming Office Director of the Foundation's Asia-Oceania liaison office.

The IFRS Foundation announced the establishment of the Tokyo office in February 2011 in order to expand opportunities for direct contact between the IFRS Foundation and its stakeholders in the region.

The incoming Office Director, Mr Mitsuhiro Takemura, will be responsible for all operations of the liaison office. Expectations are that the office will develop into a regional research hub that will support the research and fact-finding activities of the IASB. Mr Takemura is intended to be the first point of contact for Asia-Oceania region stakeholders and will be a means of forwarding contributions from that region to the IASB’s standard-setting activities.

Mr Takemura is currently a Partner at Deloitte and is a former visiting fellow of the International Accounting Standards Board (IASB) and a former member of the technical staff of the Accounting Standards Board in Japan.

The Asia-Oceania liaison office will be opened in October this year.

Please click for the IFRS Foundation press release (link to IASB website).

The future for public sector accounting standards

13 Sep 2012

Ken Warren, a board member of the International Public Sector Accounting Standards Board (IPSASB) and the New Zealand External Reporting Board (XRB), has written an article providing some insights into the future direction of International Public Sector Accounting Standards (IPSAS). The article, entitled 'IPSASs through the looking glass' and recently published on the website of the New Zealand Institute of Chartered Accountants (NZICA), discusses conceptual differences between IFRS and IPSAS and likely developments in public sector accounting.

The article is couched in terms of  the IPSASB's current project to rewrite its conceptual framework to better reflect public sector needs.  The article draws out conceptual differences between the IASB and IPSASB due to underlying differences between for-profit private sector entities and public sector entities, and provides Mr Warren's insights into what those differences might mean in terms of IPSAS set on the basis of decisions reached to date in the IPSASB's project.

Mr Warren discusses how the wider group of users of public sector financial statements extends beyond the focus of the IASB's framework on resource allocation decision making by capital providers.  This then leads to likelihood, in Mr Warren's view, of matters such as a stronger focus on 'flows' rather than 'stocks' in financial reporting, emphases on budgets/forecasts and longer term sustainability, a move to service reporting, and guidance on public sector specific issues such as non-exchange revenues, controlled and regulated assets.

However, Mr Warren also notes that where public sector specific issues do not arise, then IASB requirements can be used:

... if the identified key characteristics are not in play, my speculation is that there is no reason for the IPASAB to amend the IASB requirements on a particular topic. Not only does the use of the IASB approach in such circumstances significantly free up IPSASB time to focus on the more critical expectations of its constituents, but also there are positive benefits in terms of understandability and cost-reduction if similar transactions and events have similar measurement and recognition requirements in IPSAS and IFRS.

The future direction of IPSAS is of critical importance in the New Zealand context, as New Zealand's evolving differential reporting framework proposes to use IPSAS as the basis for public sector accounting standards.  Exposure drafts proposing to implement IPSAS-based requirements were released in June 2012 and are open for consultation until mid-December 2012.

Click for access to the article (link to NZICA website).

EFRAG Update with a summary of the August and September 2012 EFRAG meetings

12 Sep 2012

The European Financial Reporting Advisory Group (EFRAG) has released the September 2012 issue of its EFRAG Update newsletter.

The newsletter contains a summary from the EFRAG meetings held in in August and September 2012. Highlights were the finalisation of endorsement advices in relation to the amendments to IFRS 10 (transition guidance) and the annual improvements 2009-2011 and the finalisation two comment letters to the IFRS Interpretations Committee (on levies) and the IASB (on annual improvements 2010-2012).

Click for the EFRAG Update (link to EFRAG website).

AcSB reflects on Canadian IFRS adoption strategy

12 Sep 2012

The Canadian Accounting Standards Board (AcSB) has released its annual report for the 2011-2012 year, which includes reflection on AcSB's strategy of adopting IFRSs for Canadian publicly accountable enterprises and permitting their use by other entities.

The annual report, publicly released earlier this month, includes a lengthy section on the AcSB's IFRS adoption strategy.  The report notes recent feedback reveals "generally lower level of satisfaction" with IFRS and that "some stakeholders question, or disagree with, the adoption of IFRSs but vocal opponents of the strategy are relatively few."

Criticisms noted by the AcSB include costs of transition (particularly for smaller entities), industry-specific issues and Canada choice of moving to IFRS in light of recent developments in the United States.

Notwithstanding these concerns, the AcSB has concluded that are "no new arguments or evidence that, in its view, would call the strategy into question" and that although IFRSs require improvement, they represent the only practical route to achieving the goal of a single set of high quality, globally accepted financial reporting standards contributing to the improved functioning of global capital markets.

The report also notes "undesirable divergence in practice" on some IFRS interpretative issues and the AcSB's lack of satisfaction with the IFRS Interpretations Committee over the past few years because of its failure to provide much helpful guidance in the application of IFRSs.  Some of the AcSB's concerns have been at least partially addressed by the reviews by the Monitoring Board and IFRS Foundation Trustees.

In relation to industry-specific matters, the report focuses on the lack of specific guidance on accounting for the effects of rate regulation and the AcSB's view the IASB should restart its project on this topic as a key response to its agenda consultation process.  However, the AcSB's reiterates that "the greater good is served by not introducing carve-outs or interpretive add-ons to IFRSs on this issue", in spite of the divergent accounting treatments resulting from the deferral of IFRS adoption for affected entities and Canadian securities regulators’ actions that allow those entities to adopt US GAAP in place of IFRSs for 2012-2014.

Click for access to the annual report (link to AcSB website).

Agenda for September 2012 IFRS Interpretations Committee meeting

11 Sep 2012

The IFRS Interpretations Committee will meet at the IASB's offices in London on Tuesday and Wednesday 18-19 September 2012. The meeting is open to the public and will be webcast.

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

Deloitte IFRS podcast – IASB's draft IFRS on general hedge accounting

07 Sep 2012

In this podcast, Andrew Spooner, lead global IFRS financial instruments partner, and Kush Patel, director in the UK IFRS Centre of Excellence, discuss the changes introduced in the staff draft of the hedge accounting section of IFRS 9 and how they compare to the previous exposure draft as well as provide insight into the likely effect they will have in practice.

The Bruce Column — Towards a better understanding of risk

07 Sep 2012

The IASB has released the draft of its hedge accounting proposals and it contains much to cheer for those in favour of transparency and a greater understanding of risk. Robert Bruce, our resident columnist, explains.

Hedge accounting is there to show the effect of the financial instruments which a company uses to manage its exposure to market risks. Investors need to understand this. They need to know what risk management efforts have been employed and how they may affect future cash flows.

And until now this has not been easy. But the publication of the IASB’s draft on the subject brings us closer. We are moving towards a process of thinking in terms of the business model. The existing rules-based IAS 39 doesn’t work for all situations. Under those rules there are many cases where companies cannot meet the hedge accounting requirements laid down in the standard and so cannot effectively represent the risk management benefits which they are achieving. What treasurers, for example, are doing to manage risks can be very different from what the accounting is showing. It doesn’t mean the treasurers are not taking measures to deal with the risks that the company faces. They may well be, but the accounts don’t necessarily show what they have done.

The draft changes all of this. It builds on the proposals published by the IASB in 2010. Many of the obstacles to achieving hedge accounting when derivatives are used to hedge market risks are removed. The 80-125% effectiveness test requirements are gone. Hedging with options produces less volatile profit or loss accounting than under the current requirements. And risk components of non-financial items can be hedged.

All of this helps, and in particular it helps the non-financial corporates who currently struggle with the results produced by IAS 39.

As it is intended as a fatal flaw review rather than an exposure draft, the new draft brings us one step closer to a final standard and it could come into force for accounting years beginning on or after 1 January 2015. The one snag may be endorsement in Europe. Hedge accounting is but one part of the jigsaw of reforming IAS 39. And the EU had previously stated that it wants to see the whole package endorsed at the same time. So this could delay the hedge accounting reforms for companies within Europe. But the pressure will come because companies that want to use the new system as soon as possible will feel disadvantaged by companies outside Europe which would be able to use the new rules as soon as they are finalised.

In a nutshell the proposals are a good move. They provide greater transparency. Accounts should show what is being done to manage risks and under the proposals they should do just that.

Click for more analysis:

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