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EFRAG draft comment letter on acceptable methods of depreciation and amortisation

14 Dec 2012

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB's Exposure Draft ED/2012/5 'Clarification of Acceptable Methods of Depreciation and Amortisation (Proposed Amendments to IAS 16 and IAS 38)' which was published on 4 December 2012.

EFRAG supports efforts to clarify current requirements on using revenue-based methods of depreciation and amortisation. However, EFRAG noted a contradiction to be addressed by the IASB:

[W]e believe that the IASB should remove the seeming contradiction between the standard and the Basis for Conclusions by reflecting the reasoning — that there are circumstances where revenue might be an appropriate proxy for the use of an asset — presented in paragraphs BC3 to BC5 in the body of the standard.

Click for:

  • EFRAG press release with link to the draft comment letter (link to EFRAG website).
  • Our previous story on the Exposure Draft ED/2012/5 Clarification of Acceptable Methods of Depreciation and Amortisation (Proposed Amendments to IAS 16 and IAS 38).

Comments on the letter are invited by 11 March 2013.

New EFRAG TEG composition as of April 2013 announced

14 Dec 2012

The European Financial Reporting Advisory Group (EFRAG) has announced the composition of the EFRAG Technical Expert Group (TEG) to take effect as of April 2013. Among the three newly appointed members is Andreas Barckow, leader of Deloitte Germany's IFRS Centre of Excellence and member of Deloitte's Global IFRS Leadership Team (GILT).

It is through the TEG that the EFRAG operates. TEG makes its decisions independently of the EFRAG Supervisory Board and all other interests. The 12 voting members are selected from a range of professional and geographical backgrounds from throughout Europe. Members of the EFRAG Technical Expert Group are required to act in the public interest and not to consider themselves as representing sectoral or national interests.

EFRAG's goals pursued through the TEG are:

  • to provide technical expertise to the European Commission concerning the use of IAS/IFRS within Europe,
  • to participate in IASB's standard setting process,
  • to coordinate within the EU the development of views concerning international accounting standards.

In addition to Andreas Barckow, Marios Cosma (Cyprus) and Bill Hicks (UK) were appointed. The existing EFRAG TEG members Gabi Ebbers and Araceli Mora were reappointed. Françoise Flores was reappointed as the EFRAG Chairman.

Please click for the EFRAG press release announcing the appointments and offering comments by Hans van Damme, Acting Chair of the Nominating Committee of the EFRAG Supervisory Board, and Françoise Flores (link to EFRAG website).

    Canada provides guidance on timing of disclosures on new and revised IFRSs

    14 Dec 2012

    The Accounting Standards Board of Canada (AcSB) has issued proposed amendments to the Preface to the CICA Handbook to clarify the authority for financial reporting requirements in Canada and the basis for adopting IFRSs into Canadian GAAP. The proposals discuss whether entities can adopt pronouncements issued by the IASB before incorporation into Canadian GAAP, and how the disclosure requirements of IAS 8 should be applied in the context of an endorsement regime. As such, the observations in the proposals may be relevant for other regimes adopting an 'endorsement' regime for IFRS.

    The proposed amendments would clarify that new, amended or revised International Financial Reporting Standards issued by the IASB are part of Canadian generally accepted accounting principles only after they are approved by the Accounting Standards Board in accordance with its due process.  This means that  entities reporting under Canadian GAAP cannot adopt any IASB pronouncement until such time as this process has occurred.

    The explanatory material accompanying the proposals note that paragraph 30 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is already part of Canadian GAAP. Read literally, this paragraph requires disclosure of new or amended IFRSs issued by the IASB but not yet applied, regardless of whether the AcSB has incorporated the changes in the Handbook.

    Accordingly, in order for Canadian entities to make an unreserved statement of compliance with IFRSs (required under paragraph 16 of IAS 1 Presentation of Financial Statements, which is also part of Canadian GAAP), they would need to include disclosures under IAS 8 about pronouncements made by the IASB which had not yet been adopted by the AcSB and incorporated into Canadian GAAP.

    The AcSB discusses the difficulties facing certain entities in meeting these requirements.  For instance, the AcSB is required to make any changes to the Handbook in both official Canadian languages (English and French) and the AcSB acknowledges that "new or amended IFRSs that have not been translated are inaccessible to francophone stakeholders, who would be unable to develop the disclosures required".

    However, the AcSB notes there are "no compliance problems with any of the applicable requirements if an entity chose to make the IAS 8 disclosure before the new or amended IFRS is incorporated into the Handbook".

    The proposals in effect provide guidance on the issue of when disclosure is required under paragraph 30 of IAS 8, and so are of interest to all regimes that adopt an 'endorsement' approach to IFRSs.

    The proposals are open for comment until 28 February 2013. Click for access to the proposals (link to the AcSB website).

    Notes from the December 2012 IASB meeting

    13 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 conceptual framework.

    Click through for direct access to the notes:

    Thursday, 13 December 2012

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

    IASB proposes clarifications on when unrealised profits are eliminated when equity accounting

    13 Dec 2012

    The International Accounting Standards Board has published ED/2012/6 'Sale or Contribution of Assets Between and Investor and its Associate or Joint Venture (Proposed Amendments to IFRS 10 and IAS 28)'. The Exposure Draft proposes to clarify when unrealised profits and losses on transactions between an investor and an associate should be fully recognised: requiring full recognition in relation to transactions involving businesses, but requiring partial elimination in the case of asset sales.

    The Exposure Draft proposes amendments to both IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011). No amendments are proposed to IAS 27 Consolidated and Separate Financial Statements and IAS 28 Investments in Associates as these pronouncements will be superseded from 1 January 2013, i.e. before the amendments proposed in the Exposure Draft can be finalised.

    The matter dealt with in the proposed limited scope amendment initially arose from a request to the IFRS Interpretations Committee to clarify the meaning of 'non-monetary asset' used in SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers and IAS 28 (2011) (the requirements of SIC-13 were incorporated into this standard).

    The Committee's consideration of this issue subsequently broadened to the apparent conflict between the requirements of SIC-13, which requires the elimination of unrealised profits on the contribution of assets to a joint venture, and IFRS 10/IAS 27 (2008) which require the full recognition of a gain/loss on loss of control of a subsidiary.

    In developing the proposed amendment, the Committee and IASB focused on the conceptual basis considered when developing the requirements of IFRS 3 Business Combinations, which considers the gaining or losing of control as a significant economic event that triggers remeasurement and gain/loss recognition.

    Because those requirements were developed in the context of transactions involving businesses, the proposed amendments in the Exposure Draft propose to require full gain or loss recognition for transactions between investors and associates only where a sale of contribution of assets constitutes a business.

    The requirement to fully recognise gains/losses in transactions involving businesses would apply regardless of the legal form of the transaction in which such a business was transferred, e.g. through the sale of a group of assets and liabilities, through the sale and purchase of an investment in a subsidiary, or in some other manner.  Existing guidance on 'linked transactions' in IFRS 10 would be explicitly extended to these types of transactions as well.

    The Basis for Conclusions accompanying the proposed amendments notes that consideration was given as to whether all sales and contributions between an investor and an associate should give rise to fully recognised gains and losses as "the most robust [alternative] from a conceptual point of view".

    However, because the premise behind the proposals for full recognition noted above are linked to the existence of a business and the IASB's considerations in the business combinations project, this proposal was considered too broad for a narrow scope amendment as it would involve multiple cross-cutting issues.  These issues might include the conceptual basis of the equity method, i.e. whether it is considered a 'one line consolidation' or a 'measurement basis'.

    Accordingly, the exposure draft would retain and clarify the existing requirements for partial gain recognition for sales or contributions of assets that do not constitute a business.

    The amendments, if finalised as proposed, would be applied on a prospective basis only, on the basis of the discrete and non-recurring nature of affected transactions and associated cost-benefit grounds.

    ED/2012/6 is open for comment until 23 April 2013.  Click for IASB press release (link to IASB website).

    IASB publishes limited scope amendment proposals for IFRS 11

    13 Dec 2012

    The International Accounting Standards Board has published ED/2012/7 'Acquisition of an Interest in a Joint Operation (Proposed Amendment to IFRS 11)', the latest in a series of proposed narrow scope amendments to IFRSs. The Exposure Draft proposes to amend IFRS 11 'Joint Arrangements' to clarify that a joint operator accounts for the acquisition of an interest in a joint operation which is a business by applying IFRS 3 'Business Combinations' and other relevant standards.

    IFRS 11, and IAS 31 Interests in Joint Ventures which it replaces from 1 January 2013, currently do not provide specific guidance on how a joint operator should account for the acquisition of an interest in a joint operation where the activity of the joint operation constitutes a business.

    As a result, diversity in practice has arisen, with accounting outcomes depending on whether the transactions is considered a business combinations or acquisition of groups of assets.  The differences in treatment between the two approach include the recognition or non-recognition of goodwill and deferred taxes, and the capitalisation or expensing of acquisition-related costs.

    The issue was initially considered by the IFRS Interpretations Committee, which considered proposing an annual improvements to IFRS 3 or developing application guidance, before deciding on proposed amendments to IFRS 11.

    The amendments would clarify that IFRS 3 and other relevant standards would be applied to acquisitions of interests in joint operations that are businesses.  Accordingly, such acquisitions would be accounted for using the acquisition method under IFRS 3, to the extent of the joint operator's interest in the joint operation, resulting in:

    • measuring most identifiable assets and liabilities at fair value
    • expensing acquisition-related costs (other than debt or equity issuance costs)
    • recognising deferred taxes
    • recognising any goodwill or bargain purchase gain.

    The amendments would apply to the acquisition of an interest in an existing joint operation and also to the acquisition of an interest in a joint operation on its formation, unless the formation of the joint operation coincides with the formation of the business.  No specific guidance is provided in relation to the acquisition of an additional interest in a joint operation in which the acquirer already has an interest.

    The ED also proposes a consequential amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards to extend and clarify the operation of the business combination exemptions in Appendix C, so that they include past acquisitions of interests in joint operations in which the activity of the joint operation constitutes a business.

    The amendments, if finalised as proposed, would be applied on a prospective basis only, in order to avoid the use of hindsight.

    ED/2012/7 is open for comment until 23 April 2012.  Click for IASB press release (link to IASB website).

    ESMA comment letter on IFRS for SMEs

    13 Dec 2012

    The European Securities and Markets Authority (ESMA) has published to its website a comment letter to the IASB on its comprehensive review of IFRS for SMEs.

    In the comment letter, the ESMA noted its serious concern about permitting the use of IFRS for SMEs for financial institutions. The letter asks that the current requirements not be changed and for the IASB to continue to prohibit all financial institutions from using IFRS for SMEs. The ESMA expressed its belief that every financial institutions should be publicly accountable, regardless of size.

    We cannot support an approach that permits financial institutions to use simplified accounting standards, which cannot appropriately reflect their business. . . . [W]e feel there is no room for an adequate application of IFRS for SMEs to financial institutions without compromising the objectives of financial reporting, in particular the objectives to provide decision-useful information.

    Please click for:

    Outcomes from the fourth AOSSG meeting

    13 Dec 2012

    The Asian-Oceanian Standard-Setters Group (AOSSG) has released a communiqué from its meeting held in Kathmandu, Nepal on 28 and 29 November 2012. Highlights include plans for an ‘IFRS Centre of Excellence for a Developing Country’ (IFRS COEDC) in Nepal that would help Nepal to build its standard-setting capacity, the need for rapid finalisation of the IASB's project on 'bearer biological assets', and discussion on Islamic finance accounting issues.

    The participating standard-setters were from Australia, Brunei, China, Hong Kong, India, Indonesia, Iraq, Japan, Korea, Macao, Malaysia, Nepal, New Zealand, Pakistan, Saudi Arabia, Singapore, Sri Lanka, Thailand and Vietnam.  The IASB was represented by Hans Hoogervorst (IASB Chair), and Board members, Mr. Wei-guo Zhang and Mr. Prabhakar Kalavacherla, along with Wayne Upton, IASB Director of International Activities and Chairman of the IFRS Interpretations Committee, and IASB staff.

    The planned IFRS COEDC is designed to help build Nepal’s standard-setting capacity and was given unanimous support by the AOSSG members.  Initial planned steps were agreed and nine jurisdictions agreed to become the Working Party, to be chaired by Australia, that facilitates the establishment of the IFRS COEDC.  (Nepal currently has standards that a based on older versions of IFRSs and is currently in the process of updating these to be compliant with later versions of standards as promulgated by the IASB.)

    Other developments at the meeting include:

    • The AOSSG welcomed the IASB's project to amend IAS 41 Agriculture in relation to 'bearer biological assets', emphasising its willingness to assist the IASB in its deliberations, and expressed "the hope that the IASB would finalise the limited scope project as soon as possible"
    • The AOSSG discussed issues arising from recent IASB tentative decisions and their impact on Islamic finance transactions, including in relation to sales-based financing, which is commonly used in such transactions.  The IASB staff also briefed members on plans for an IASB consultative group on Islamic Finance, which was welcomed
    • The expression of strong support for the IASB's proposed Accounting Standards Advisory Forum
    • Discussion on issues arising from the IASB's projects on insurance contracts, revenue recognition, financial instruments, leases, the post-implementation review of IFRS 8 Operating Segments and the review of the IFRS for SMEs
    • Approval of proposed AOSSG protocols and the admission of the Association of Syrian Certified Accountants as an AOSSG member.

    The fifth annual AOSSG meeting will be held towards the end of 2013.

    Click for the comminiqué from the meeting (link to AOSSG website)

    IOSCO Secretary General calls for new global regulatory framework

    13 Dec 2012

    In a speech to The Atlantic Council, Mr David Wright, Secretary General of International Organization of Securities Commissions (IOSCO) has given a frank assessment of the issues surrounding the future of global financial regulation. Mr Wright proffered the option of a "global institutional framework, probably established by International Treaty" and chastised "isolationists" in the United States for "19th century logic" in denying the impacts of globalisation, including indirectly in relation to International Financial Reporting Standards.

    In the speech, given in his personal capacity, Mr Wright explores the future structure of the global economy, outlining the likelihood of a "major global expansion of market based financing and securities markets" because "they are needed for economic development which is powering ahead in Asia, parts of Latin America and beginning also in Africa".  He cited as examples Brazil, India, China, Indonesia, Singapore, Hong Kong, Russia, Turkey and Mexico, all of which which are expected to have substantially bigger markets in the near future than today.

    Noting that whereas in the current global environment there may "only a few big capital markets, with varying levels of compliance and interpretations of global rules", Mr Wright continued that "[adding] in another 10 big capital markets, or more, in the near future so that the matrix of big markets and interpretations is 15 by 15, or more" means a serious need to "change our global regulatory institutions".

    Mr Wright suggests three alternatives on how to handle these challenges:

    • "law of the jungle and survival of the fittest"
    • the "status quo" of today which involves "loose forms of cooperation, hope for the best, best efforts and of course prayer"
    • global institutional framework, probably established by International Treaty, that has some enforcement authority, binding disputes settlement and sanctioning possibilities

    In the context of these options, Mr Wright perhaps unsurprisingly suggests a global institutional framework is the best solution.  He explained the role of such an arrangement "would not be to try to enforce a one-size-fits-all harmonized set of rules – but rather to ensure and, if necessary legally require, that the basic globally agreed policy principles are properly implemented by all jurisdictions who are signatories to the Treaty arrangements".

    In implementing such a change in global regulatory arrangements, Mr Wright pointed out the importance of involving emerging economies before focusing on the special ability of the United States to "lead a movement" in a window of 5-10 years before "the U.S.’ relative share of global financial markets is set to decline significantly, and naturally its influence as well".

    Explaining this concept further, Mr Wright alluded to IFRS in explaining:

    I believe most of the world would be prepared to consider work on such a project – and I believe, with or without the U.S – it will eventually happen like with the International Financial Reporting Standards or IFRS. Isolationists will no doubt plead what they always plead. They will argue, with their 19th century logic, that the U.S. will be better off alone, not sharing any sovereignty. Perhaps they will continue to believe that in 15-20 years’ time the world will be composed of disconnected, independent islands – the biggest of which can project its views on others. But surely that is the past and a denial of globalization. To repeat the new emerging world will have very soon many big, interconnected capital markets. There will be many more sharks in the pond with far more influence.

    Mr Wrights comments have also been echoed by other regulators and observers.  For instance, Steven Maijoor (Chair, European Securities and Markets Authority, ESMA) has recently commented on need for consistent application of IFRS around the globe.  Mr Maijoor noted in a more recent speech (link to ESMA website) that "IOSCO will play an increasing role in... global co-ordination and convergence".

    Click for full text of Mr Wright's speech (link to IOSCO website).

    ICAEW issues report on the future of IFRS

    12 Dec 2012

    The Institute of Chartered Accountants in England and Wales (ICAEW) has published a report 'The Future of IFRS' urging the IASB to end its convergence project with the United States' Financial Accounting Standards Board (FASB) and refocus its attention on the jurisdictions that have already adopted IFRS.

    The 28-page report discusses the benefits of a global set of standards and assesses the state of IFRS now, ten years after launching the project. The report also controversially calls for an end to the formal convergence projects between the IASB and FASB within months, not years.

    Convergence has served its purpose, and there is little desire on either side to continue with it. For existing projects, the IASB should only proceed to a converged solution where that is attainable in the short term, and without jeopardising the quality of the outcome. . . . In our view, it is much better henceforth that the two boards go ahead and issue their own separate, distinct standards — aligned where possible — rather than muddle through and issue a weakened compromise solution, or simply do nothing.

    The ICAEW believes that the IASB should continue to work with the FASB — ensuring that the US is still represented on the Monitoring Board, as Trustees and as IASB Board members — but the IASB should not put reaching an agreement with the United States ahead of developing timely, quality solutions and improvements to international standards that are "urgently needed" for the many other jurisdictions that have already adopted IFRS.

    Perhaps now is the time for the IASB to focus its attention squarely on the needs of the 100 plus jurisdictions that to some degree have officially adopted its standards, and who currently do not always feel that their voices are adequately heard, and on working to encourage those countries that have moved their standards close to IFRS — notably China — to take the final steps towards full IFRS reporting.

    The ICAEW report also presents many recommendations for the future success of the IASB and IFRS, including:

    • Calling on the G20 to (1) adopt IFRS or align their domestic standards as closely as possible, (2) allow optional use of IFRS in their capital markets by all listed companies, and (3) take on their proportionate shares of funding the IFRS Foundation.
    • Establishing a dedicated research capacity and an effective feedback mechanism to issue standards that are widely accepted and can cope with the different and evolving business models and economic systems that exist around the world.
    • Develop a strategy for enforcing standards — calling on regulators around the world to work more closely together to ensure enforcement is consistent.

    The ICAEW's full report, The Future of IFRS, is available on the ICAEW website.

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