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IASB publishes staff draft of the hedge accounting section of IFRS 9

07 Sep 2012

The International Accounting Standards Board (IASB) has published on its website a staff draft of the general hedge accounting section of IFRS 9 'Financial Instruments'. The staff draft is based on the proposals in Exposure Draft ED/2010/13 'Hedge Accounting' published in December 2010 and the tentative decisions the IASB has made during its redeliberations of the Exposure Draft.

The staff draft published today is the result of the re-deliberations of the IASB. The purpose of a staff draft, which is not an official due process document, is to illustrate the IASB's position while at the same time enabling constituents to familiarise themselves with the document.

When finalised, the proposals will become part of IFRS 9 Financial Instruments and will form the section on hedge accounting. They will replace the corresponding requirements in IAS 39 Financial Instruments: Recognition and Measurement, except for the section on portfolio hedge accounting for interest rate risk as noted below.

The related topic of macro hedge accounting does not form part of the staff draft. The IASB has decided to publish a separate Discussion Paper on macro hedge accounting (expected in the third or fourth quarter of 2012). Therefore, the current requirements in IAS 39 on portfolio fair value hedges of interest rate risk remain applicable.

The key areas of change are:

  • Closer alignment of the hedge accounting model with risk management
  • Increased eligibility of hedged items
  • Increased eligibility of hedging instruments
  • A revocable fair value option when hedging particular credit risks
  • New qualification and effectiveness requirements
  • New concept of rebalancing hedging relationships
  • New rules for discontinuing hedging relationships
  • Increased disclosures

The intended effective date of the hedge accounting chapter are annual periods beginning on or after 1 January 2015 with earlier application permitted. The requirements are to be applied prospectively (with some 'grandfathering' allowed) but not to items that have already been derecognised at the date of initial application.

The following documents are available on the IASB website:

Click for more analysis:

The Bruce Column — Agreeing the framework: Paul Druckman

06 Sep 2012

The journey towards an agreed framework for a system of integrated reporting around the world is gathering pace. Here Robert Bruce, our regular, resident columnist, interviews Paul Druckman, CEO of the International Integrated Reporting Council, (IIRC), about progress, the growing support of investors and analysts, the attitudes of stock exchanges around the world and what it means to provide ‘more than the financials’.

Paul DruckmanThe definition of integrated reporting is disarmingly reasonable and logical. This is how it is defined by the IIRC: ‘Integrated Reporting is a new approach to corporate reporting that demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, Integrated Reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organization is really performing’.

But if you look at the summary of responses, published in June[1], relating to last year’s discussion paper on integrated reporting you find that the simple concept has spawned many different ideas. ‘It was apparent from the responses that there is a diversity of views, and even a degree of confusion, about the definition of Integrated Reporting; about what Integrated Reporting is, or is intended to become; and how Integrated Reporting should relate to existing reporting strands (e.g. financial, management commentary, governance and remuneration, and sustainability reporting)’, it says. And it then goes on to say that: ‘Some respondents also questioned whether the work of the IIRC should relate to the broader concept of how integrated thinking is embedded in an organization and how this affects all facets of reporting, rather than focusing only on the features of a single integrated report’.

These are busy times for the IIRC. The process of moving towards an agreed integrated framework continues. Pilot programmes are underway to test ideas. A full consultation document is due next year. Efforts to create a regulatory framework are being worked upon. It is a remarkable experiment. Nothing is hard or fast. But the feeling that this is an idea whose time has come is strong. Research[2] published last month showed strong support from investors and analysts for the value of providing information on an integrated reporting basis. ‘Over 80% of our research sample believe that extra-financial information is very relevant or relevant to their investment decision-making or analysis’, was one of its findings.

Paul Druckman is CEO of the IIRC. He has a careful path to tread. He knows the momentum for change is there. But he also recognises the complexity of providing a framework which would garner wide acceptance. ‘I would describe the phase that we are in at the moment as creation and awareness raising’, he says. ‘So we are very busy creating the technical framework itself and we are very busy trying to explain globally what integrated reporting is, and it is not necessarily what people think it is. It is a tough ask’. But that is offset by the enthusiasm being shown around the world. ‘What is remarkable is the momentum continues to grow rather than calm down a little’, he says. And he refers to a meeting he had earlier on the day we spoke. ‘This morning I was talking to people from some of the Asian Stock Markets’, he says. ‘They are desperate to get on with it.  If we had a framework they would already be busy implementing it, so it’s great’.

But he knows that such is the wide range of views around that it needs to be approached slowly and steadily. A draft prototype of the integrated reporting framework will be made available in September. It will then be modified and presented to the IIRC in Tokyo in November and in April next year the Consultation Draft will be published. And in the meantime the pilot programmes are up and running in 75 companies spread around the world. A conference in Amsterdam in September will discuss preliminary findings. Many of the companies involved are well on the way down the path to integrated reporting. Others are still assessing where the information required would best come from. ‘There are many companies that are well on the way and we are just a way of helping them move their ideas forward’, he says. On the other hand ‘very few of the companies have actually got on with the reporting and most of them have been investigating the silos in the business and where the data comes from and just how is this all going to happen’.

The task now is bringing all this together into a comprehensive consultation draft next year. The work so far shows that many companies are moving towards integrated reporting but they are all doing it in many different ways. Looking back over the first year of the work Druckman makes the point that while there are big differences there is also common ground. ‘I think what it’s done is confirm that we have to be more flexible’, he says. ‘So, let’s get away from the jargon of principles and rules and let’s talk about flexibility.  I think we’re going to have to be possibly even more flexible than we expected. Different companies actually come at strategy from different points in the organisation.  You’d think it would be common but it isn’t necessarily.  And the drivers in different companies are different.  We have to make sure that the framework doesn’t put people in a straightjacket which means that they can’t express themselves’. It is a lesson learned. ‘I think that we talked about flexibility right at the beginning’, he says, ‘but I don’t think we really understood why and I think we truly understand why now’.

Another lesson learned is that while the research shows that investors and analysts are enthusiastic about the value of the information provided by integrated reporting there are marked cultural differences and these do represent a big divide. It is what you might describe loosely as the emerging economies which are enthusiastic. The old world of long-established stock markets and investment patterns are less so. ‘It does depend on where you are’, says Druckman. ‘If you are sitting in New York or Toronto it is quite markedly different from sitting in Sao Paulo or Seoul’.

It is also a question of attitudinal differences. ‘We are now more aware than ever that our target audience for integrated reporting is the long term investor’, he says. ‘I would categorise it, actually, as the long term global investor. If you are a short term trader, somebody playing the market, well fine, you do what you do but we can’t help you. That’s not our role’. But he feels there is an overall understanding which is clearly apparent right around the world that financial statements alone tell far from the full story, or provide anything like the full information that management or investor requires.

‘I use the words ‘more than financials’ rather than ‘non-financial’ or ‘extra-financial’’, says.  ‘Everybody has their own term.  When I say ‘more than financials’ I think there is an understanding that the value of the business intrinsically is more than just what is in the financial statements, and I don’t think anybody denies that.  How you capture that is the challenge, which I think is both cultural and regional’.

And one part of this is in the field of long-established regulation. The way integrated reporting works contrasts with much of the highly regulated detailed content-oriented securities legislation that exists now, especially in the US.  The IIRC wants to get companies to focus on what’s important but in a future orientated manner. Druckman’s view is that the two approaches have to co-exist and gradually they will evolve. ‘We are not there to replace the existing compliance legislation’, he says. ‘Whether that existing compliance legislation and regulation actually evolve over time is not my place to discuss.  I think the likes of FASB and IASB with the concept of management commentary and other measures are looking at that anyway, that’s their part of the world.  I would say that integrated reporting is part of this reporting evolution and I could almost imagine a management commentary or an MD&A taking over from integrating reporting one day, but it’s not going to do it in the timescales that we will want’.

Companies are already changing, ahead of the regulators and standard-setters. ‘The detailed factual regulatory information and data that is already there is just not going to go away’, he says, ‘but companies are going to have to be more transparent, not just for investors but for society and their staff’. So the answer is to approach the issue from two angles. Firstly, integrated reporting does not replace existing standards or regulation. ‘The second angle is that we are there to help to provide a fresh look at how a business creates and preserves value’.

And this pushes at another boundary in existing regulatory framework – the vexed question of forward-looking disclosure. Lawyers tend to draw a deep breath. Company directors see it as a hostage to fortune. Auditors are uneasy, to say the least. ‘It’s why you can’t implement integrated reporting today to some extent’, he says. ‘I believe that one of the big barriers for integrated reporting is that the companies haven’t got that flexibility that they need.  They may well be doing integrated reporting but they are not doing it in the way that they want to, many of them, because of legal issues and forward disclosure issues’.

For Druckman the answer is a change in regulatory culture. ‘You create a regulatory environment that understands that this is based on planning and guesswork’, he says and then hesitates. ‘Perhaps guesswork is the wrong word but I’ve been in business long enough to know that quite a lot of it is guesswork, guesswork based on lots of planning and other information, but it’s still not something you can guarantee.  And a sophisticated investor needs to understand that that’s where that information comes from.  I actually don’t think it’s very difficult, I just think it needs to be addressed’.

In part Druckman thinks that the solution to this lies in the different cultures around the world. ‘How we overcome the challenge is tough but it doesn’t mean that we shouldn’t create the opportunity’, he says. ‘What we have got to recognise is that there isn’t one route’.  He gives an example: ‘What is so noticeable is the difference between the North Americans and the South Americans. There is a completely different mindset. The South American Exchanges are talking about how they can make a difference, how they can make change happen in their nations and with their companies and with their investors’.  This, Druckman feels, was in sharp contrast with the North Americans. ‘Their attitude was “We maintain a stance of independence to the issues – we deal with transactions”.  I’m not knocking them. There is a big competitive environment there and they are in a situation where there are big competitive tensions. If one exchange creates something that companies don’t want, another will pick up the business and the only way that they can see a way forward is if it’s done on a global basis, through the World Federation of Exchanges’.

‘At the moment we look down straight lines’, he says. ‘It may be that pressures come from the outside so that stock exchanges or regulators or governments say “hang on a minute, this landscaping is changing, we need to evolve”.  If we just carry on down the straight line we’ll never get there, we have to find the pressures from outside’.

Druckman expects the process to develop faster than it might have done in the past. It took somewhere around twenty years for what have now become IFRS to reach a level of maturity to the point where they are taken seriously by the market and the market regulators. ‘It has got to come through a lot quicker than that’, he says, ‘but although we want it to be done quickly we realise that it is not going to be quite as quick as we hoped’. The framework will be developed by the end of 2013. But he expects that this, and he draws on his career in software here, will be version 1.0. ‘It doesn’t mean that it will be the complete answer’, he says. ‘I would be devastated if it wasn’t a very good answer but it won’t be the whole picture’. But he thinks that progress will be rapid. ‘I just think that things are more dynamic and I think people are ready. There is nothing so strong as an idea whose time has come’.

Meanwhile, a Sustainability Accounting Standards Board has been set up in the US. Intended to partner, though independent of, the existing Financial Accounting Standards Board, (FASB), the SASB aims to standardise the way that non-financial risk and broad sustainability data for US companies is reported. The aim is to ensure that the information, which currently doesn’t make it into the reported data, will be filed in each company’s primary disclosure form, the 10K, which has to be filed with the main US regulator, the SEC. This will provide the basis for wider disclosure than currently happens in the US market. ‘What the SASB is doing is trying to get data into the 10K’, says Druckman. ‘There’s nothing around the strategy of the business, the value of the business, all of that sort of stuff. It’s just saying let’s get some environmental and social data into a 10K.  So, it’s adding to the information set and there’s nothing wrong with that and, in fact, if they create data standards and information standards - that actually supports the work of the IIRC’.

But the danger is that it will also add to the potential confusion between the different guardians of the corporate information. ‘The danger’, he says, ‘is that we’ll have a Global Reporting Initiative and an IFRS and a SASB and US GAAP and never the twain shall meet.  GRI and SASB are not the same. For example, GRI is very stakeholder focused, SASB is very investor focused and compliance focused’.

Reporting on a global stage will require common information and methods of defining and recording it. ‘The fact that we don’t have really strong sustainable environmental and social indicators that are globally accepted is a weakness for integrated reporting’, says Druckman, ‘but it all supports integrated reporting, because we are not trying to recreate the 10K or add data to it.  We’re saying that the 10K is fine, you can have your 10K. The real questions are: What’s this business trying to do and how’s it going to create value?  It’s a totally different question. The 10K data is used to measure the past performance and indicate future performance in integrated reports, but it underpins it, it isn’t what an integrated report is, so in many ways the stronger sustainability reporting and financial reporting is, the stronger integrated reporting is’.

So where will integrated reporting be in five years time? ‘We will be implementing integrated reporting globally’, he says. ‘And financial reporting will be starting to evolve because it will no longer be seen as the core-only report of the business.’

And how will it evolve? ‘By its own nature it will change’, he says. ‘Nobody will force it.  The prime annual report of corporations will be an integrated report and the financial statements will back that up rather than being the principal report.  I would say that in five years’ time that starts and that process really starts to have real energy. I would see most listed companies around the world having an integrated report as their primary report’, he says. ‘That may be ambitious, but that is the aim’.

1 ‘Towards Integrated Reporting – Communicating Value in the 21st Century’. Summary of responses to the September 2011 Discussion Paper and Next Steps.

2 ‘What Investors and Analysts Said’ – Research commissioned by the Global Reporting Initiative, (GRI), HRH The Prince’s Accounting for Sustainability Project, (A4S), and undertaken by Radley Yeldar.

Post-implementation review of IFRS 8 - roundtables and discussions

06 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.

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.

The European Financial Reporting Advisory Group (EFRAG) also plans to offer outreach events in cooperation with the national standard setters in Europe.

Deloitte comment letter on written put options

05 Sep 2012

Deloitte's IFRS Global Office has submitted a letter of comment to the International Accounting Standards Board (IASB) on Draft IFRIC Interpretation DI/2012/2 'Put Options Written on Non-controlling Interests'.

Whilst we agree that the draft Interpretation provides an appropriate analysis of the IFRS literature, we believe the IASB should consider standard-setting activity in this area to ensure that financial statements present relevant information about such transactions.

The comment letter notes the following:

Specifically, we believe that the Board should reconsider its decision to reject the Committee’s recommendation to remove NCI puts from the scope of IAS 32 Financial Instruments: Presentation and to account for them as derivatives in accordance with IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments.

Please click for access to our comment letter.

Deloitte comment letter on levies

05 Sep 2012

Deloitte's IFRS Global Office has submitted a letter of comment to the International Accounting Standards Board (IASB) on Draft IFRIC Interpretation DI/2012/1 — 'Levies Charged by Public Authorities on Entities that Operate in a Specific Market'.

In the comment letter, we agree that the consensus in the draft Interpretation appropriately (1) analyses the treatment of levies within its scope under current IFRSs and (2) applies the IAS 37 definition of a liability to levies. However, we go on to raise concern that the draft Interpretation does not deal with levies that are (1) due only if a minimum revenue threshold is achieved, (2) calculated as a fixed amount or (3) based on a graduated rate calculation.

Expressing similar concerns to those raised by the UK Financial Reporting Council (FRC), the comment letter also notes:

[W]e would still encourage the Board to consider whether non-reciprocal transactions in general, and government levies in particular, are best dealt with by IAS 37 and whether an approach similar to the current tax requirements of IAS 12 could be developed to reflect better the nature of government levies.

Please click for full summary and access to our comment letter.

Deloitte comment letter on annual improvements to IFRSs

05 Sep 2012

Deloitte's IFRS Global Office has submitted a letter of comment to the International Accounting Standards Board (IASB) on its Exposure Draft ED/2012/1 — 'Annual improvements to IFRSs 2010–2012 cycle'.

In the comment letter, we express our agreement with most of the proposed amendments in the 2010–2012 cycle of annual improvements, but also note that there are more effective ways in which the issues could be resolved. Examples include:

  • [T]he proposed amendments to IAS 1 and IAS 12 are interpretative issues that the Board should consider addressing primarily through the addition of examples rather than by introducing changes to the standards that may have unintended consequences and give rise to further interpretative issues.
  • [W]e do not believe that changes to, or clarifications of, requirements should be expressed only in a standard’s basis of conclusions (as is the case for the exposure draft’s proposals in respect of IFRS 13 and, to some extent, IFRS 2).

Please click for full summary and access to our comment letter.

Deloitte comment letter on the IFRS Foundation Due Process Handbook

05 Sep 2012

Deloitte's IFRS Global Office has submitted a letter of comment to the IFRS Foundation on the proposed IFRS Foundation Due Process Handbook that was published for public comment in May 2012.

In the comment letter, we agree with much of the content of the proposed Due Process Handbook. However, we disagree with incorporating into the Due Process Handbook amendments that have not been incorporated into the IFRS Foundation’s Constitution or the IASB’s Conceptual Framework, we disagree with reducing the time period for re-exposure of proposed IFRSs or Interpretations, and we are concerned that the Due Process Handbook is not entirely clear in relation to the roles, the responsibilities and the competences of the Trustees’ Due Process Oversight Committee and the IASB staff.

Please click for full summary and access to our comment letter.

New Zealand regulatory update on non-GAAP measures and differential reporting

04 Sep 2012

The New Zealand Financial Markets Authority (FMA) has issued its final guidance note on disclosing non-GAAP financial information (including 'underlying profit'). This follows the recent introduction of a Bill into the New Zealand Parliament which proposes significant changes to New Zealand’s financial reporting framework.

FMA guidance on non-GAAP financial information

The FMA issued its guidance note Disclosing non-GAAP financial information on 3 September 2012.    The guidance note is available on the FMA website.  The FMA has announced they will assess non-GAAP financial information disclosures against the guidance from 1 January 2013.

The finalised guidance note is largely consistent with the FMA's May 2012 proposals and mirrors similar guidance issued by the Australian regulator, the Australian Securities and Investments Commission (ASIC).

The guidance note sets out principles for presenting non-GAAP financial information in investor communications (other than in financial statements and transaction documents), including:

  • outline why the information is useful
  • consider prominence
  • ensure an appropriate label is used
  • explain the calculation
  • provide a reconciliation of non-GAAP financial information to GAAP financial information
  • apply a consistent approach period to period
  • ensure adjustments are consistent with comparatives
  • ensure the measure is unbiased
  • take care referring to 'one-off' items
  • explain if the information is audited or reviewed.

The most recent annual survey of 100 listed and other large companies with publicly available information by Deloitte (New Zealand) showed 89 referred to alternative profit measures in addition to “bottom line” statutory profit in their 2011 annual reports, and that many of these entities will need to change the way they disclose this information in the future to comply with the FMA guidance.

The FMA issued a separate response to constituent feedback, outlining its views on the more controversial elements of its original proposals.  In particular, the FMA provided an analysis of the proposal for the reconciliation of non-GAAP financial information to GAAP financial information to be included in every document where non-GAAP financial information is disclosed.  Many constituents felt that the reconciliation should not necessarily be provided in the document, but could be made available on an entity's web site.

FMA’s view is that reconciliations should be included in every document where non-GAAP financial information is disclosed.  The feedback statement notes:

In FMA’s opinion reconciliations should not generally be overly complex. If they are quite complex, it would suggest an even greater need for them to be readily available. Readily available information will increase the transparency between users and providers of financial information. Media will become more informed about GAAP measures vs. non-GAAP measures and this will flow through into their communications.

Click for FMA press release (link to FMA website).

Changes to New Zealand financial reporting framework

The Financial Reporting Bill (link to New Zealand parliament website) was introduced into New Zealand Parliament in August 2012, proposing significant changes to New Zealand’s financial reporting framework.  The Bill currently proposes commencement by 1 April 2015.

The proposals are largely consistent with the New Zealand Government’s previous announcements, such as the removal of financial statement preparation requirements for most small and medium companies, and the clarification of reporting requirements for registered charities. However there are a number of other changes which will affect a wide range of entities such as the removal of the requirement to prepare parent financial statements when group financial statements are already provided, and alignment of the penalties regime.


Deloitte (New Zealand) has published an September 2012 edition of its Accounting alert series exploring both of these developments in more detail.

UK FRC questions draft IFRIC Interpretation on levies

03 Sep 2012

The UK Financial Reporting Council (FRC) has responded to the International Accounting Standards Board (IASB) regarding the draft IFRIC Interpretation 'Levies Charged by Public Authorities on Entities that Operate in a Specific Market'. The FRC does not believe that the draft interpretation always leads to decision useful information for users.

The FRC agrees that the interpretation is a technically correct analysis of how IAS 37 Provisions, Contingent Liabilities and Contingent Assets should be applied to levies. However, the FRC argues, it does not always result in the substance of the transaction being reported. (The example presented in the comment letter is the UK bank levy.) The lack of faithful representation of the effects of transactions, other events and conditions is a contradiction to IAS 1 Presentation of Financial Statements which requires that financial statements should always present the position and performance of an entity fairly.

The fact that a technically correct interpretation leads to conclusions that do not reflect the substance of the underlying transaction prompts the FRC to suggest that the underlying principle in IAS 37 is wrong or in conflict with IAS 1 and should be revisited. The FRC concludes in its comment letter:


We are concerned that accounting and reporting that diverges so significantly from the underlying substance of the transaction has the potential for bringing accounting into disrepute. As a result, we would recommend that rather than issuing this IFRIC in final form the underlying principle in IAS 37 should be referred to the IASB for review.

In issuing this comment letter, the FRC also contradicts the preliminary EFRAG view that the consensus in the draft IFRIC Interpretation will lead to decision useful information for users of financial statements.

Please click for (both links to FRC website):

Singapore defers mandatory application date of consolidation and joint venture standards, cites implementation challenges

03 Sep 2012

The Singapore Accounting Standards Council (ASC) has announced that it will allow stakeholders more time to implement the Singaporean equivalents to the 'package of five' standards addressing accounting for consolidation, involvements in joint arrangements and disclosure of involvements with other entities. The mandatory effective date of the standards has been deferred for a year and they now apply to annual periods beginning on or after 1 January 2014. Entities can elect to early adopt the standards.

The five standards, FRS 110 Consolidated Financial Statements (equivalent to IFRS 10), FRS 111 Joint Arrangements(equivalent to IFRS 11), FRS 112 Disclosure of Interests in Other Entities (equivalent to IFRS 12), FRS 27 Separate Financial Statements (equivalent to IAS 27)and FRS 28 Investments in Associates and Joint Ventures (equivalent to IAS 28) (which the ASC refers to as the 'Relevant Standards') were originally scheduled to be applied to annual periods beginning on or after 1 January 2013.

In outlining its decision to defer the mandatory date, the ASC noted:

In its ensuing engagement with stakeholders after the Relevant Standards were issued, the ASC has been apprised that the challenges faced by stakeholders in implementing the Relevant Standards were more significant than the stakeholders had anticipated and accordingly, more time would be required to effect the implementation plans that they had put together for the Relevant Standards...  Taking into consideration this development, the ASC concluded that it is in the best interest of stakeholders to allow more time for the implementation of the Relevant Standards.

There have been other calls for deferral of these standards at a global level, including earlier calls by the European Financial Reporting Advisory Group (EFRAG).

Click for ASC press release (link to ASC website).

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