The first comment letter agrees with the decision not to take onto the IFRIC’s agenda a request for clarification of the accounting for transactions in which the former shareholders of a non-listed operating entity become the majority shareholders of the combined entity by exchanging their shares for new shares of a listed non-operating entity which does not constitute a business. More information and the full Deloitte comment letter can be found here.

The second comment letter agrees with the decision not to take onto the IFRIC’s agenda a request for clarification of the application of the residual method of valuation to biological assets that are physically attached to land. More information and the full Deloitte comment letter can be found here.

The EFRAG draft comment letter notes that in its field test of the RD, many participants reported that it was unclear whether the requirements would change the way they deal with macro hedge relationships.

EFRAG supports the IASB's goal of of maintaining the status quo of macro hedge accounting, and believes that the IASB decision to make the general hedge accounting requirements effective before it completes its work on macro hedging of open portfolios should not result in piecemeal changes to current macro hedge accounting practices.

However, as EFRAG explains, "the revised wording of paragraph 71 of IAS 39 does not allow the IASB to achieve the goal of maintaining the status quo of macro hedge accounting" as the requirements of the RD would apply to cash flow hedges of open and closed portfolios and only fair value hedges of the interest rate exposures would continue to fall under the requirements of IAS 39. Therefore, EFRAG recommends changing the wording of paragraph 71 of IAS 39 to allow current hedge accounting requirements for open portfolios to be maintained under what remains of IAS 39.

In an agenda paper prepared for the IASB's discussion next week at its regular January 2013 meeting, the staff of the IASB concedes that the current requirements regarding hedge accounting would not be "grandfathered" as this would not agree with the new hedge accounting model. The staff takes the position that "[t]hose commentators who advocate grandfathering disagree with the model design". They also warn of possible unintended consequences in connection with grandfathering.

Comments on the EFRAG draft comment letter are invited by 21 February 2013.

Click for:

• EFRAG press release with link to the draft comment letter (link to EFRAG website).
• Our September 2012 story on the Review Draft of IFRS 9.
• Our January 2013 story on the results of EFRAG field-test on the IASB's general hedge accounting review draft.
• Access to the agenda paper on the IASB website (ZIP file, please refer to Agenda Paper 4B)

The objective of the Request for Information was to seek public views on whether there is a need to make any amendments to the IFRS for SMEs , and, if so, what amendments should be made.  The papers note that the IASB received 89 comment letters on the Request for Information from a broad range of constituents across the globe (these submissions are available on the IASB website).

Feedback received

Agenda Paper 2 (link to IASB website) to be discussed at the meeting presents the issues in the Request for Information, summarises the main comments received from respondents to the RFI on those issues, sets out the questions that IASB staff would like the SMEIG to develop recommendations for, and provides the IASB staff recommendation for each question asked.

Highlights of the staff recommendations include:

• It may be beneficial for entities with public accountability (as currently defined) to apply the IFRS for SMEs
• Changes to full IFRS s should only be considered for incorporation in the IFRS for SMEs after they have become established under full IFRSs and implementation experience has been assessed, e.g. after the post-implementation review has been performed, where appropriate
• The IFRS for SMEs should not be revised to permit the revaluation model for property, plant and equipment or introduce an option to allow the capitalisation of borrowing costs
• The 'fall back' to IAS 39 Financial Instruments: Recognition and Measurement currently in the IFRS for SMEs should be retained until IFRS 9 is considered, with the possibility of removing the 'fall back' altogether
• The IFRS for SMEs should be revised to conform it to IAS 12 Income Taxes, modified as appropriate to reflect the needs of users of SME financial statements

Agenda Paper 3 (link to IASB website) to be discussed at the meeting describes 16 additional issues raised by respondents, sets out the questions that IASB staff would like the SMEIG to provide recommendations for, and provides the IASB staff recommendation for each question asked.

This paper considers issues such as whether amendments should be made to conform the IFRS for SMEs with the Conceptual Framework, whether to eliminate the 'other comprehensive income' concept from the IFRS for SMEs, a broad range of specific topic issues (e.g. a recommendation to allow foreign currency loans to be measured on the amortised cost basis) and various other general issues.  Of interest is consideration of whether the IASB should consider a potential project, outside the IFRS for SMEs, to develop a international reduced disclosure framework for subsidiaries of listed groups.

Process for finalisation

The SMEIG will review the responses to the Request for Information at the February meeting and a report will be drafted of the SMEIG recommendations arising from those discussions.  The report will be circulated to SMEIG members for approval before the report is provided to the IASB for consideration in developing an exposure draft of proposed changes to the IFRS for SMEs.

The exposure draft is expected to be released in mid 2013, and the SMEIG is expected to consider responses to the ED later in 2013 before the IASB finalises amendments to the IFRS for SMEs in the first half of 2014.

The revisions to the IFRS for SMEs arising from this process are expected to be effective from 2015.

Click for access to the meeting papers (link to IASB website).

Update: The agenda for the SMEIG meeting was subsequently issued and is available on the IASB's website.

The full agenda for the meeting, as of 21 January 2013, can be found here.  We will post any updates to the agenda, and our Deloitte observer notes from the meeting, on this page as they are available.

ESMA decided to conduct the review of accounting practices related to the impairment of goodwill and other intangible assets because in connection with the financial crisis many market participants had expressed concerns about the reliability of goodwill impairment tests. Even Hans Hoogervorst, Chairman of the IASB, admitted in a speech given in June 2012: "In practice, these impairment tests do not always seem to be done with sufficient rigour. Often, share prices reflect the impairment before the company records it on the balance sheet. In other words, the impairment test comes too late."

ESMA itself found some common shortcomings in relation to the impairment testing of goodwill as evidenced in the twelfth extract of enforcement decisions published in October 2012, and has made impairment testing one of the enforcement priorities for 2012 financial statements.

The main objective of the review, which looked into the accounting practices of a sample of 235 European issuers with significant amounts of goodwill from 23 countries, was to provide an overview of the accounting practices related to the impairment of goodwill and other intangible assets, and evaluate the sufficiency of the related disclosures in the 2011 financial statements prepared in accordance with International Financial Reporting Standards (IFRSs).

The review showed that significant impairment losses of goodwill were limited to a handful of issuers with 5% of the issuers in the sample accounting for almost 75% of the goodwill impairment and again roughly three quarters of these 75% were reported by just three issuers. The review also showed that most of the issuers that disclosed the events and circumstances leading to recognition of impairment loss provided boilerplate explanations referring to "worsening economic outlook", "slowdown of the demand" or "competitive environment". Very few issuers provided specific information.

As a result of the review five areas of concern emerged:

• Key assumptions of the management - ESMA found that approximately 70% of the issuers focus insufficiently on disclosing the key assumptions used for cash flow forecasts other than discount rate and growth rate used in the impairment testing in detail and in a way useful to investors. ESMA urges issuers to disclose all key assumptions and discuss the approach management has adopted in determining them for impairment testing.
• Sensitivity analysis - ESMA has identified different practices with regard to disclosures on sensitivity analysis. ESMA also found that for issuers where the book value of their net assets exceeded their market capitalisation, only half presented a sensitivity analysis. ESMA would expect those issuers to be more transparent and disclose the sensitivity of the impairment calculation to changes in key assumptions.
• Determination of recoverable amount - ESMA would expect more weight to be given to external sources of information rather than entity-specific assumptions when determining fair value less costs to sell using discounted cash flows.
• Determination of growth rates - More than 15% of issuers disclosed a terminal growth rate in excess of 3%. In the current economic environment, using a long-term rate exceeding 3% seems ambitious and optimistic to ESMA and could lead to an overstated long-term growth rate.
• Disclosure of an average discount rate - Approximately 25% of issuers in the sample disclosed an average discount rate, rather than a specific discount rate on each material cash generating unit. ESMA urges issuers to use, and disclose, separate discount rates because by disclosing just a single average discount rate, issuers potentially obscure information that may be relevant to financial statement users.

ESMA and national competent authorities responsible for IFRS enforcement will use the review’s findings as areas to focus their assessments on when reviewing 2012 IFRS financial statements. ESMA hopes this will lead to an improved rigour applied by issuers in the impairment test of goodwill and a better compliance with the requirements regarding impairment in IAS 36 Impairment of Assets.

In his June 2012 speech cited above, Hans Hoogervorst also indicated that the IASB might take "another look at goodwill" in the context of the post-implementation review of IFRS 3 Business Combinations.

Please click for access to the following documents on the ESMA website:

• Press release ESMA calls for improvements in disclosures related to goodwill impairment
• ESMA Report European enforcers review of impairment of goodwill and other intangible assets in the IFRS financial statements

The IASB published the review draft in September 2012 in order to enable constituents to familiarise themselves with the document and to detect potential inconsistencies (fatal flaw review).

The EFRAG letter follows on from an analysis of the review draft by the IFRS Committee of the Accounting Standards Committee of Germany (ASCG).  The field testing and was conducted in conjunction with the ASCG, together with the UK Financial Reporting Council (UK FRC, which also endorsed the ASCG analysis), Autorité des Normes Comptables (ANC) and Organismo Italiano di Contabilità (OIC).

The letter includes the following high-level themes:

• Confirmation of important improvements to the hedge accounting model, such as improvements to hedge effectiveness testing, designation of risk components as eligible hedged items, and the ability to rebalance hedge relationships
• Continuing complexity in the general hedge accounting model "because of the number of exceptions, restrictions and options"
• Concerns about the readability of hedge accounting standard as a standalone document due to cross references to the existing requirements of IFRS 9 and the macro hedge accounting requirements in IAS 39 Financial Instruments: Recognition and Measurement
• Implications of the review draft on current macro hedging practices, including possible unexpected changes to macro hedge accounting.

In addition, the letter contains appendices outlining fatal flaws, implementation difficulties, requests for additional guidance, and input into the IASB's effect analysis.  Some highlights from this analysis include:

Fatal flaws

• Hedged items: aggregated exposures and net positions - clarification that a net position could consist of several risks that on a net basis amount to a nil position
• Hedge ratio and effectiveness - rewording of additional guidance to address "tensions existing between economic hedges and hedge accounting", potential cross-cutting issues between the general and macro hedge accounting projects, and the interaction of the hedge ratio and its potential rebalancing

Implementation difficulties

• Treatment of basis risk in cross currency interest rate swaps - whether synthetic cross currency swaps can be used to measure hedge effectiveness, and recommendations that basis spreads should be treated in the same way as the time value of options or forward points
• Time value and forward points - the requirements are considered operationally complex, and recommendations that the change in fair value of basis risk should be recognised in other comprehensive income (OCI) to more closely align with risk management strategies
• Own use exception - interaction with net agreements and net positions covering both recognised and unrecognised contracts

Requests for additional guidance

• Hedge ratio and rebalancing - additional guidance to address concerns that the application of the rebalancing concept is not entirely clear and that insufficient guidance is provided for non-finance sectors
• Eligible hedged items - clarifying whether non-financial items could qualify as hedged items, and whether foreign currency risk on highly probable transactions involving non-controlling interests can be designation as hedged items
• Open and closed portfolios - which requirements can be applied to closed portfolios
• Other - including eligible hedging instruments, presentation of forward points, and various other matters.

Effects analysis

• The document outlines a number of areas where EFRAG believes the field testing reveals that the objective of reflecting the result of an entity's risk management activities is not fully achieved.  Matters are noted in relation to credit risk, sub-LIBOR, open and closed portfolios, the treatment of foreign currency risk compared to other risk components and disclosures.
  

Refer to the full report for the complete listing of matters raised.  Click for EFRAG press release (link to EFRAG website).

Narrowing of recoverable amount disclosures

The genesis of the proposed changes to the recoverable amount disclosures lies in the consequential amendments to IAS 36 Impairment of Assets made by IFRS 13 Fair Value Measurement.

This consequential amendment introduced the requirement to disclose the recoverable amount of each cash-generating unit (or units) to which a significant portion of the overall carrying amount of goodwill or intangible assets with indefinite useful lives has been allocated (in paragraph 134).  The requirement to disclose recoverable amount of any such cash generating units therefore applies whether or not an impairment loss has been recognised in respect of that unit in the current period.

The proposed amendments would remove this requirement for all cash-generating units, and instead require the disclosure of the determined recoverable amount only where an impairment loss was recognised during the reporting period.  This would be achieved by moving the requirement to paragraph 130 of IAS 36, which applies where an impairment loss has been recognised.

Clarification of disclosures where an asset is impaired

In addition to moving the requirement to disclose recoverable amount to paragraph 130 as noted above, the exposure draft proposes to amend and clarify the disclosures required when an asset is impaired and recoverable amount has been determined on the basis of the asset's fair value less costs of disposal.

The proposed amendments would retain the existing exemption from the disclosure requirements of IFRS 13, but would require the provision of the following information:

• the valuation techniques used and any changes in that valuation technique
• the level of the 'fair value hierarchy' (from IFRS 13) within which the fair value measurement of the asset has been determined
• for items in Levels 2 and 3 of the fair value hierarchy, key assumptions used in the measurement of fair value, including an explicit requirement to include the discount rate used if a present value technique has been used.

The explicit requirement to disclose the discount rate has already been proposed by the IASB in Exposure Draft ED/2012/1 Annual Improvements to IFRSs arising from the 2010-2012 cycle of annual improvements.  Because this requirement has already been exposed, the IASB is not requesting comment on this aspect, but will not proceed with the annual improvement amendment in favour of one combined amendment as proposed in the exposure draft.

The proposed changes to the disclosures above will align them with those required where an asset is impaired and recoverable amount has been determined on the basis of value in use.  This would complete the alignment of disclosures between value in use and fair vale less disposal costs, which originally began in the 2006-2008 cycle of annual improvements though the issue of Improvements to IFRSs in 2008.

The proposed amendments would apply retrospectively.

ED/2013/1 is open for comment until 19 March 2013.

Click for (links to IASB website):

• IASB press release
• ED/2013/1 Recoverable Amount Disclosures for Non-Financial Assets

The IFRS Taxonomy 2013 is a translation of IFRSs as issued at 1 January 2013 into XBRL and consolidates all IFRS Taxonomy interim releases that were published in 2012 for the use of early adopters. The proposed IFRS Taxonomy 2013 also includes concepts reflecting some industry practices derived from an analysis of financial statements prepared by companies' representatives from the banking, insurance and extractive industries.

The proposed IFRS Taxonomy 2013 is open for comment until 18 March 2013.

Click for (links to IASB website):

• IASB press release
• IFRS Taxonomy 2013
• IFRS Foundation webcast recorded on 4 February 2013

The report, Principles for Effective Business Reporting Processes (link to IFAC website), provides an explanation of why business reporting processes are important, noting that "high-quality business reports lie at the heart of strong and sustainable organizations", enabling stakeholder decision making, better internal decision making, and contributing to the successful management of businesses.

The report provides 11 key principles for evaluating and improving business reporting processes, together with practical guidance designed to outline the critical arrangements that need to be in place for effective business reporting.

These principles are summarised as follows:

• Committing to effective reporting processes at the senior management and governing body levels
• Determining roles and responsibilities of people involved the reporting process, across a broad range of functions, including the governing body, audit committee, senior management, legal counsel, information technology, investor relations and others
• Planning and controlling the reporting processes, including implementing risk management and internal control over processes
• Engaging stakeholders, including entering a dialogue with stakeholders to identify material financial and non-financial matters when designing the organisation’s reporting strategy
• Defining the reporting content by identifying the content to be included in reports and also deciding on the audience, layout, and timing of reports
• Selecting frameworks and standards, not just ensuring compliance with relevant laws, but also being familiar with other frameworks such as the IASB Practice Statement Management Commentary and the International Integrated Reporting Framework being developed by the International Integrated Reporting Council (IIRC)
• Determining reporting processes by identifying information needs, information processes and related systems
• Using reporting technology by establishing a process that evaluates and improves the presentation of information by taking advantage of the possibilities of new technologies such as eXtensible Business Markup Language (XBRL)
• Analysing and interpreting reported information sufficiently before providing it to internal and external stakeholders
• Obtaining assurance and providing for accountability, not only from a compliance perspective, but also considering voluntary internal or external assurance on reports and reporting processes
• Evaluating and improving reporting processes on a regular basis to maintain reporting effectiveness.

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

The parliamentary commission, a joint committee of the House of Commons and the House of Lords, is preparing a report on how banks' governance and ethics need to change after the financial crisis and had issued a call for evidence on 4 December 2012. The IASB's position can be summed up by the quote "In sum, we do not support the notion that accounting standards led to a systemic bias to overly favourable financial statements in the banking industry." A written submission setting out the response of the IASB to all questions posed by the Committee's Panel on tax, audit and accounting can be downloaded from the IASB's website.