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The Bruce Column — Focusing on year-end priorities

19 Dec 2012

ESMA, the European investor protection authority, has made clear the areas which it expects companies and auditors to look upon as priorities in the current round of year-end financial reporting. Our regular columnist Robert Bruce takes a look at how it is laying down the enforcement law.

Stephen Maijoor’s warning was blunt. On the day the European Securities and Markets Authority, (ESMA)—the European investor protection authority which he chairs—issued the details of the enforcement priorities which it would be pursuing in 2013 it also issued a blunt reminder. Maijoor made it clear that ESMA had ‘deliberately issued the European common enforcement priorities before the year-end so that companies and their auditors could – and should – take due consideration of them when preparing and auditing the IFRS financial statements for the year ending December 2012’. And these priorities are just as relevant all around the world.

‘Auditors’, he said, ‘ have an important role to play in assuring investors about a company’s financial position and performance, which is more important than ever for all companies, and especially financial institutions’.

He made it clear he was connecting two important strands. Strong credible financial reporting provides investor protection. But to provide proper comparability around the world you have to have strong and effective enforcement.

‘We strongly believe that financial reporting with strong measurement principles along with entity-specific and relevant disclosures reflecting economic substance are important in underpinning market discipline’ he said. This contributed toward proper investor protection and stability. ‘Market discipline can only be achieved through the development and application of high quality accounting standards’, he said.

Worldwide adoption of IFRS was necessary but was not enough, on its own, to provide global comparability. In order to achieve true global comparability the standards had to be enforced. Research showed that adoption of IFRS resulted in reduced capital costs in the immediate mandatory adoption period and that, in turn, reflected increased disclosure and enhanced information comparability. But, said Maijoor: ‘This is only really the case in countries with strong legal enforcement frameworks’, hence the importance of consistent application across the EU, and ESMA’s efforts to enforce this.

He highlighted several areas of concern. ‘Since the beginning of the financial crisis transparency related to financial instruments is a top priority’, he said. ‘Issuers should provide disaggregated and expanded disclosures on material exposures  to all financial instruments – not only sovereign debt exposures – that are exposed to risk’.

And he emphasised other areas where greater disclosure would be expected.

‘A significant or prolonged decline in fair value triggers the recognition of an impairment loss for equity instruments held in the available-for-sale portfolio’, he pointed out. ‘EU enforcers have observed diverging practices in the application of the relevant criteria and think investors would benefit from more transparency’.  His advice? ‘Please tell them and us what is considered to be a significant or prolonged decline in value’.

He turned to the impairment of non-financial assets. ‘The current economic situation increases the likelihood that the carrying amounts of assets might be higher than their recoverable amounts’, he said. ‘The market value of many listed companies has fallen below their book value, a situation potentially indicating impairment and thus the need for an impairment test. ESMA considers that particular attention has to be paid to the valuation of goodwill and intangible assets with indefinite life spans, whenever significant amounts are recognised in the financial statements’.

He warned on defined benefit obligations. ‘In some countries there is no, or no longer, a deep market in high quality corporate bonds whilst discounted post-employment benefit obligations should be determined with reference to such market’, he said. ‘The crisis and economic downturn resulted in significant swings in market yields for some sovereign and corporate debt. The question could arise whether entities should change their approach when determining discount rates for their post-employment benefit obligations. ESMA would expect issuers to disclose the yields used and provide a description of how they determined them’. ESMA are not just looking at the disclosure. They are looking at how an appropriate discount rate is determined. ESMA’s statement on enforcement priorities makes clear that they do not expect to see companies changing their approach to this determination.

And finally Maijoor looked at provisions within the scope of IAS 37. ‘The measurement of provisions involves significant management judgement and could in the current market circumstances be subject to more uncertainty’, he warned. ‘The strong link between provisions and the risks an issuer is subject to, makes a case for high-quality disclosures’. But he voiced his disappointment at the effectiveness of current disclosure practices. ‘European enforcers often find that only aggregated and boilerplate information is provided. Issuers should disclose for each class of provision the nature of the obligation, the expected timing of the outflows of economic benefits, uncertainties related to the amount and timing of those outflows as well as, if relevant, major assumptions regarding future events’. And that too is relevant all around the world, as observations by the US regulator, the SEC, show.

All of these are well-trodden enforcement priorities. But they have a double importance. They are important as areas which need to be focussed on. But at the same time it provides an example of how global enforcement could develop.

As Maijoor made clear a few days later: ‘A principles-based environment can only survive if clear and entity-specific disclosures, re-assessed at the end of each reporting period, bring useful decision-making information to investors’, he said. ‘If not, detailed prescriptive requirements would need to be developed and we all know that what is important today will not necessarily be so in the next financial year. The only way to avoid this is for issuers to stop providing boilerplate information directly mimicking the standards’.

Click for our previous stories on:

EFRAG draft comment letter on the proposed annual improvements to IFRSs 2011–2013

19 Dec 2012

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB's Exposure Draft ED/2012/2 'Annual Improvements to IFRSs 2011–2013 Cycle' which was published on 20 November 2012.

EFRAG agrees with most proposals in the ED but it believes that the proposed amendment to IFRS 1 regarding the meaning of effective IFRSs is unnecessary as the standard is already sufficiently clear.

EFRAG also warns against amending the bases of conclusions of standards, which are not part of the core text of the standard:

In addition, EFRAG believes that the IASB should refrain from making amendments to the bases for conclusions of standards, unless it wishes to correct outright errors. In our view, amendments to bases for conclusions cannot take the place of actual standard setting. Furthermore, we would like to note that such amendments do not form part of the standards themselves and hence do not affect IFRSs as endorsed in the European Union.

Click for:

  • EFRAG press release with link to the draft comment letter (link to EFRAG website).
  • Our previous story on the Exposure Draft ED/2012/2 Annual Improvements to IFRSs 2011–2013 Cycle.
  • Deloitte's IFRS in Focus newsletter on the Annual Improvements exposure draft.

Comments on the letter are invited by 1 February 2013.

IASB concludes agenda consultation by releasing a feedback statement

18 Dec 2012

In February 2010, the Trustees of the IFRS Foundation, the IASB's oversight body, announced enhancements to their governance arrangements, including the decision to undertake a three-yearly public consultation on the IASB's future technical agenda, in addition to consulting the Trustees and the IFRS Advisory Council annually on the existing and future agenda. On 20 June 2011, the IASB formally announced that it would be undertaking for the first time a public agenda consultation on its future work plan. A Request for Views was published on 26 July 2011. Today, the IASB rounded off its consultation by releasing a feedback statement that maps out future priorities.

The IASB set out on the agenda consultation identifying five key aspects that should be reflected in the strategic approach towards a future agenda:

  • the IFRS community has become more diverse
  • the market environment has become more complex
  • there are a number of changes that require implementation
  • the quality and relevance of the standards needs to demonstrated
  • the risk that practices related to implementation and adoption will diverge.

The Request for Views: Agenda Consultation 2011 published in July 2011 and opening up the agenda to all received general attention and the impressive amount of 243 comment letters. Five broad themes emerged in the responses:

  • First, respondents asked that a decade of almost continuous change in financial reporting should be followed by a period of relative calm.
  • Second, there was almost unanimous support for the IASB to prioritise work on the Conceptual Framework, which would provide a consistent and practical basis for standard setting.
  • Third, the IASB was asked to make some targeted improvements that respond to the needs of new adopters of IFRSs.
  • Fourth, the IASB was asked to pay greater attention to the implementation and maintenance of the Standards.
  • Finally, the IASB was asked to improve the way in which the IASB develops new Standards, by conducting more rigorous cost-benefit analysis and problem definition earlier on in the standard-setting process.

As a result, the IASB’s future technical programme will focus on three areas: implementation and maintenance (including post-implementation reviews), the Conceptual Framework, and a small number of major IFRS projects. Among the latter are the four current major projects (financial instruments, leases, revenue recognition, and insurance) as well as three new or revived projects: Agriculture, in particular, bearer biological assets, rate-regulated activities, and separate financial statements: use of the equity method.

Concurrently with the announcement of the agenda, the IASB also announced a revised process for developing standards. The current usual process of proposal -> agenda decision -> discussion paper -> exposure draft -> standard -> post implementation review will now include a research phase, thus starting the process with research, then a discussion paper, then a proposal, before an agenda decision is made. This means a project to develop a new IFRS will only be considered after the research has been published in a discussion paper, which would be open for public comment. Not all research will lead to a standards-level project.

The feedback statements identifies the following issues for the research phase:

In addition, the feedback statement identifies three "long term" topics that, because of their nature and complexity, cover matters for which the IASB does not plan to issue a Discussion Paper or research document within the next three years but where it encourages other standard-setters to investigate these topics on its behalf: income taxes, post-employment benefits, and share-based payments.

Lastly, the IASB points to "other activities" where it is aware that work needs to be done: The IASB is establishing a consultative group to assess the relationship between Shariah-compliant transactions and instruments and IFRS and to help educate the IASB, mainly through public education sessions. The IASB is also undertaking a short-term initiative to explore opportunities to see how those applying IFRS can improve and simplify disclosures within the existing disclosure requirements. Sustainability reporting is not considered in the feedback statement or on the future agenda of the IASB. The IASB is convinced that there are other standard-setters well capable of handling this topic, so that the IASB can focus on accounting and financial reporting.

The IASB also points out that it is putting increased efforts into developing a network of national accounting standard-setting and regional bodies that are involved with accounting standard-setting.

Please click for the following documents on the IASB website:


Summary of projects included in the Feedback Statement

Standards-levels projects Research projects

MoU and joint projects with FASB

New projects

Priority projects

Longer term projects

    Priority project Other activities

    Summary of EFRAG joint outreach events on the post-implementation review of IFRS 8 across Europe

    18 Dec 2012

    EFRAG outreach events on the post-implementation review of IFRS 8 were offered in several European cities throughout autumn 2012.

    The objective of these joint outreach events—which were held together with various national standard setters and user organisations—was to gather evidence from European constituents on their experiences preparing and/or using information under IFRS 8 Operating Segments as a contribution to EFRAG’s response to the IASB Request for Information. Click for the feedback statements on each event (all links to the EFRAG website):

    A consolidated feedback statement for all sessions on IFRS 8 has also be published on the EFRAG website. The consolidated feedback statement also includes feedback from a meeting of the EUMEDION Audit Committee in Amsterdam and a meeting of the EFFAS Financial Accounting Commission in Brussels.

    For more information on this series of European outreach events, please see the Autumn 2012 Outreach Events page on the EFRAG website.

    Results of the Eurostat consultation on the suitability of IPSAS for the EU Member States

    18 Dec 2012

    In February 2012, the Statistical Office of the European Union (Eurostat) issued a public consultation on the assessment of suitability of the International Public Sector Accounting Standards (IPSAS) for the Member States of the EU. The results of the survey show mixed views.

    In total 68 submissions were received on the consultation, 82% of which were received from EU countries and 18% from non-EU countries and international institutions and organisations.

    Among the EU respondents, Germany was the most vociferous: 16 of the total of 56 EU submissions came from Germany. Germany was also the most reluctant respondent: Concerning the countries of origin of the 19 "No" responses to the question whether IPSAS were suitable for adoption in the EU, 10 were received from Germany, 4 from France, 3 from Austria and 1 each from the Netherlands and Poland.

    Over all, the impression was more balanced. Roughly one third of respondents each answered the question regarding suitability with "Yes", "Partly", and "No" respectively, with "Yes" taking a slight lead (38%).

    Supporters of IPSAS stressed the need to improve the accountability, transparency and comparability of public sector accounts, especially in the light of the sovereign debt crisis. They were considered important in order to improve government financial management and to increase the confidence of citizens and the capital markets.

    The main arguments against the implementation of IPSAS concerned their incompleteness with respect to public sector accounting requirements (e.g. with regard to taxation, social benefits), their complexity, the heaviness of rules on disclosure, the conceptual framework (which is currently under review by the IPSAS Board and might lead to a complete revision of existing standards), the strong link to IFRS, and the IPSAS governance arrangements.

    Please click for the full summary of responses on the Eurostat website.

    IFRS compliance, presentation and disclosure checklist for 2012

    17 Dec 2012

    Deloitte's IFRS Global Office has published the IFRS Compliance, Presentation and Disclosure Checklist for 2012. The checklist summarises the recognition, measurement, presentation and disclosure requirements set out in IFRSs in issue as of 30 June 2012.

    IFRSs include Standards as issued by the International Accounting Standards Board (IASB) and the former International Accounting Standards Committee and Interpretations as issued by the IFRS Interpretations Committee and the former Standing Interpretations Committee. It may be used as a guide to assist in considering compliance with the requirements of the IFRSs. It is not a substitute for understanding such pronouncements and seeking the advice of a qualified professional adviser.

    Click for:

    Deloitte comment letter on the proposal to establish an Accounting Standards Advisory Forum

    17 Dec 2012

    Deloitte’s IFRS Global Office has submitted a letter of comment to the IFRS Foundation on its Invitation to Comment 'Proposal to Establish an Accounting Standards Advisory Forum'.

    We support the proposal to establish an Accounting Standards Advisory Forum as being an appropriate means to utilise the technical skills and experience that exist in national and regional standard-setting bodies in the development and implementation of IFRSs. We encourage the Trustees to establish the Forum as quickly as possible.

    We see the Forum as assisting the IASB to accomplish two distinct but related aims: the development of high-quality financial reporting standards; and assist in facilitating the incorporation/ endorsement of such standards without modification in the financial reporting framework of individual jurisdictions. We suggest establishing an objective for the Forum that clearly identifies these two aims.

    For the composition of the ASAF we suggest engaging a network of national standard-setters, regional groups of standard-setters and bodies involved with standard-setting from those jurisdictions that have incorporated IFRSs into their financial reporting framework and those considering such an action. However, we do not fully agree with the form the ASAF is designed to have:

    Whilst we recognise the desire of the IFRS Foundation to make the Forum an efficient body, we think that it is possible to achieve efficiency with a body of more than 12 members. As such, we do not support the explicit size and distribution of seats proposed in the Invitation to Comment, which we see as overly mechanistic and promoting (wittingly or unwittingly) a perception of exclusivity—something we see as undesirable.

    Also, we suggest appointing co-chairs (one from the IASB and one from the other Forum members) as it would be a visible indicator of the collaborative nature of the Forum. We also think that Forum member organisations should be allowed to send other representatives than the designated representative if this seems helpful for particular technical discussions of the Forum.

    We also point out that it is unclear who will appoint the Forum. The Invitation to Comment was issued by the IFRS Foundation Trustees, but is silent on whether the Trustees or the IASB will appoint members.

    Click for access to the comment letter.

    Emerging Economies Group meeting focuses on common control transactions

    17 Dec 2012

    The IASB has publicly released a communiqué from a meeting of the Emerging Economies Group (EEG) held in Sao Paulo, Brazil on 4-5 December 2012. The main topic discussed at the meeting was transactions under common control, and the meeting also included brief discussions on hybrid financial instruments and impairment of financial assets.

    Delegates attended the meeting from Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia and South Africa.  The IASB was represented by Mr. Ian Mackintosh (IASB vice-chair), Mr. Amaro Gomes (IASB board member) and Mr. Wayne Upton (IASB Director of International Activities and Chair of the IFRS Interpretations Committee).

    The EGG is designed to enhance the voice of emerging economies in the process of setting IFRSs, including discussing specific accounting issues from emerging economies’ perspectives.

    Whilst the communiqué does not provide a lot of detail on the discussions around the various issues, the following papers have also been made available on the IASB's website, and provide additional background information (bolded links are to the IASB's website):

    • Transactions under common control - an in-depth paper prepared by the Korean Accounting Standards Board (KASB) discussing various accounting issues arising from both business combinations and other transactions involving parties under common control, including the definition and boundaries of common control transactions, types of common control transactions, and accounting for such transactions in consolidated and separate financial statements
    • Hybrid/compound financial instruments - a paper prepared by the Brazilian Accounting Standards Board outlining issues identified in classifying particular types of hybrid financial instruments commonly issued in Brazil and other emerging economies under IAS 32 Financial Instruments: Presentation
    • Impairment of financial instruments - another paper prepared by the Brazilian Accounting Standards Board outlining developments  in the IASB's project on financial instrument impairment, including general and specific issues arising in emerging economies of adopting the proposed 'three bucket' model.

    The meeting also included general discussion on activities of the EEG and other matters.

    The next EEG meeting will be held in Korea in May 2013.  Click for EEG Communiqué (link to IASB website).

    Latest IASB 'Investor Perspectives' published

    16 Dec 2012

    The International Accounting Standards Board (IASB) has released another edition in its 'Investor Perspectives' series. In this edition, Patrick Finnegan (member of the IASB) discusses the proposed limited amendments to the classification and measurement requirements in IFRS 9 'Financial Instruments'.

    The following topics are discussed:

    • The IASB's rationale for replacing IAS 39 Financial Instruments: Recognition and Measurement
    • The current classification and measurement requirements of IFRS 9
    • The reasons for proposing changes to IFRS 9
    • Details of the proposed limited scope amendments to IFRS 9 outlined in ED/2012/4 Classification and Measurement: Limited Amendments to IFRS 9, including the proposed 'fair value through other comprehensive income' (FVOCI) category

    Click to view Patrick Finnegan: IFRS 9—Limited Amendments, Significant Improvements (link to IASB website). All Investor Perspectives are archived on the IASB's website.

    Additional notes from the December 2012 IASB meeting

    14 Dec 2012

    The IASB's December meeting is being held in London on 13-17 December 2012, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from Thursday's sessions on IAS 12 and IFRIC update and Friday's sessions on Macro hedge accouting and Impairments.

    Click through for direct access to the notes:

    Thursday, 13 December 2012

    Friday, 14 December 2012

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

    Correction list for hyphenation

    These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.