March

Summary of redeliberations in the revenue recognition project

13 Mar 2013

An updated staff summary of redeliberations in the revenue recognition project has been made available on the IASB's website, outlining the decisions made by the IASB and FASB in redeliberations since the issue of ED/2011/6 'Revenue from Contracts with Customers' in 2011. As all substantive redeliberations are now complete, the staff will now commence drafting the final revenue standard, which is currently expected to be finalised before the end of June.

The document prepared by the staff contains a paragraph-by-paragraph summary of the impacts of the redeliberations on the proposals in ED/2011/6 issued in November 2011.  The paper provides links to the agenda papers related to each topic noted, and also notes any differences between the IASB and FASB in conclusions reached.

ED/2011/6 is the second exposure draft issued in the revenue recognition project, following ED/2010/6 Revenue from Contracts with Customers which was issued in June 2010.  The current expectation is that a finalised revenue recognition standard will be completed in the second quarter of 2013 and be applied for reporting periods beginning on or after 1 January 2017. The IASB and FASB have decided that early application would not be permitted.

Click for access to the staff redeliberation summary (link to IASB website).

Second issue of the European Conceptual Framework newsletter

12 Mar 2013

The European Financial Reporting Advisory Group (EFRAG), the French Autorité des Normes Comptables (ANC), the Accounting Standards Committee of Germany (ASCG), the Organismo Italiano di Contabilità (OIC) and the UK Financial Reporting Council (FRC) have published the second issue of their new newsletter ‘Keep up with getting a better framework’ informing European constituents on the latest developments regarding the progress of the Conceptual Framework project with the IASB and other stakeholders.

The second issue of the newsletter summarises and comments on the tentative decisions reached at the February 2013 IASB meeting regarding the content of the forthcoming Discussion Paper on:

  • the purpose of the Conceptual Framework;
  • elements of financial statements;
  • recognition and derecognition;
  • measurement; and
  • reporting entity.

As outlined by project partners in their strategy on conceptual framework, specific newsletters will be issued as new developments become available. In addition, the project partners intend on issuing bulletin reports on specific issues during the course of the project in an effort to stimulate debate that may be used in discussions with the IASB.

The press release and newsletter are available on the EFRAG website.

EFRAG draft comment letter on amendments to hedge accounting

11 Mar 2013

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB's Exposure Draft ED/2013/2 'Novation of Derivatives and Continuation of Hedge Accounting (Proposed amendments to IAS 39 and IFRS 9)' which was published on 28 February 2013.

The EFRAG supports the IASB's proposed amendments to IAS 39 and IFRS 9. However, the EFRAG states that:

The IASB should clarify that novations that take place to meet the requirements of (substantially) enacted laws or regulations – but that are voluntary only in the sense that they take place before the legal novation deadline – would also fall within the scope of the proposed amendment;

Early application should be permitted so that entities can apply the requirements to novations that take place prior to the finalisation of these amendments.

Comments on the letter are invited by 25 March 2013.

Click for:

  • EFRAG press release with link to the draft comment letter (link to EFRAG website).
  • Our previous story on the Exposure Draft ED/2013/2 Novation of Derivatives and Continuation of Hedge Accounting (Proposed amendments to IAS 39 and IFRS 9).
  • Deloitte's IFRS in Focus newsletter on the proposals on novation of derivatives.

Agenda for March 2013 IASB meeting

11 Mar 2013

The IASB will meet on 19-21 March 2013 at the IASB's offices. It will be an IASB only meeting. Discussions will include IAS 41, the comprehensive review of the IFRS for SMEs, conceptual framework, fair value measurement (unit of account), IAS 19, IAS 1, annual improvements 2010-2012, put options on non-controlling interests, and revenue recognition.

The full agenda for the meeting, as of 11 March 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.

IFRS 2013 'Red Book' now available

11 Mar 2013

The International Accounting Standards Board (IASB) has announced that the 2013 edition of the Bound Volume of International Financial Reporting Standards (the 'Red Book') is now available.

The 'Red Book' contains all official pronouncements issued at 1 January 2013, including all pronouncements with an effective date after 1 January 2013, but not the pronouncements they will be replaced or superseded. Accordingly, the 2013 edition contains pronouncements as a result of amendments from Government Loans (Amendments to IFRS 1); Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12); Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27); and Annual Improvements to IFRSs 2009–2011 Cycle (which contained separate amendments to IFRS 1, IAS 1, IAS 16, IAS 32 and IAS 34).

eIFRS and Comprehensive subscribers can now access the electronic files of the 2013 IFRS (Red Book) via the Latest Additions section of eIFRS (you will be required to provide your login details).

The Red Book is also available through the IASB's Web Shop. Copies are priced at £65 each, plus shipping. Discounts are available for multiple copies, academics/students and residents of middle and low-income countries.

Additional IASB information on ED/2013/3

08 Mar 2013

The IASB has posted to its website a new issue of the 'Investor Perspectives' dealing with the ED on Impairment the IASB issued yesterday. Also, the IASB has announced a forthcoming webcast that will explain the proposals in the ED.

In Of "Great Expectations"—Accounting for Expected Credit Losses in Financial Instruments IASB member Patrick Finnegan explains why the IASB believes investors will benefit from the suggested new impairment model. He shows how the proposals differ from current IFRSs, summarises the proposals and gives three examples showing how the concepts would be applied to financial instruments such as loans or debt securities. Please click for the newest issue of the Investor Perspectives on the IASB's website.

On 13 March 2013, IASB staff will give a live web presentation on proposals included in the Exposure Draft Financial Instruments: Expected Credit Losses including a question and answer session. For the convenience of those in different time zones, the presentation will be held twice – once in the morning (10:00h London time) and once in the afternoon (14:00h London time). Each presentation, including the question and answer session, will last approximately forty minutes. Please click for more information and for registering on the IASB's website.

ASBJ and FASB continue discussions

08 Mar 2013

The fourteenth meeting between representatives of the Accounting Standards Board of Japan (ASBJ) and the Financial Accounting Standards Board (FASB) was held in Norwalk, Connecticut on 4-5 March 2013. The meeting saw updates on each board's respective standard setting activities and an exchange views on the IASB's activities, especially about the conceptual framework, which both Boards believe is essential to the development of high-quality global accounting standards.

The FASB and the ASBJ also discussed the following projects that the FASB and the International Accounting Standards Board (IASB) are currently deliberating:

The ASBJ and FASB will continue to meet, with another meeting to be scheduled for the second half of 2013.  Click for press release (link to ASBJ website).

IASB proposes new impairment model

07 Mar 2013

The International Accounting Standards Board (IASB) has published its long-awaited proposal for a new accounting model for impairments of financial assets. In the Exposure Draft (ED) the Board proposes a model according to which credit losses are no longer recognised if incurred; rather, entities would recognise expected credit losses on financial assets and on commitments to extend credit based upon current estimates of expected shortfalls in contractual cash flows as at the reporting date. Comments are due 5 July 2013.

Background

Exposure Draft ED/2013/3 Financial Instruments: Expected Credit Losses contains a revised approach as regards the impairment of financial assets. Since 2009 the Board has been developing a new approach for recognising impairments. During the global financial crisis, the IASB came under pressure to change its requirements, which were perceived as being complex and inconsistent, and to provide for a more timely recognition of dawning credit losses. Under the current rule set in IAS 39 Financial Instruments: Recognition and Measurement, a financial instrument is impaired and impairment losses are incurred if a loss event occurred and this loss event had a reliably measurable impact on the future cash flows (so-called Incurred Loss Model, ILM).

In November 2009 the IASB published its first proposal in which it suggested measuring expected credit losses through adjusting the effective interest rate of a financial instrument (ED/2009/12 Amortised Cost and Impairment). This approach was based on the fact that expected credit losses of a financial asset are usually priced into the interested rate to be charged. Hence, expected credit losses should ideally be reflected in the yield on the financial asset, whereas changes in credit loss expectations should be recognised when incurred as those changes are not priced into the asset. This original approach was hailed as being conceptually sound, however, it was also deemed impracticable given that the tracking that is needed to follow changes in credit for the individual instrument is seldom done.

In January 2011, the IASB and the U.S. Financial Accounting Standards Board (FASB) issued a supplement in which they proposed to de-couple interest recognition from the recognition of impairments (ED/2011/1 Supplementary Document). Financial instruments would have been allocated to a ‘good book’ and a ‘bad book’, whereby the former would comprise those financial assets for which there had been no loss as at the reporting date. All other instruments would be allocated to the ‘bad book’. While for financial assets in the ‘bad book’ an allowance equal to the credit losses expected over the remaining life of the instruments would be recognised —which is not that different to what used to be done for instruments under the ILM—, the allowance booked for assets allocated to the ‘good book’ would be a time-proportionate allocation of credit losses expected over their life. If an entity expected a higher amount for the foreseeable future, it would then book that higher amount instead of the time-proportionate amount.

Since 2011 the IASB and FASB have worked on fine-tuning this approach, which is still the basis of the current proposal. Two questions were of special concern to the Boards: (1) What amount should be recognised for assets in the ’good book’? (2) When and how should assets move between ‘good book’ and ‘bad book’ if their credit significantly deteriorated or improved? Although the FASB had decided in July 2012 not to pursue the jointly developed approach any further and to issue its own impairment model instead, the IASB continued the work.

If finalised the proposals now published in the ED would be integrated into IFRS 9 Financial Instruments as a separate section.

 

Summary of key proposals

Objective. The objective is to recognise expected credit losses for all financial instruments within the scope of the requirements. Expected credit losses are defined as the expected shortfall in contractual cash flows. An entity should estimate expected credit losses considering past events, current conditions and reasonable and supportable forecasts.

Scope. The following instruments are within the scope of the proposed requirements:

  • all financial assets measured at amortised cost;
  • all debt instruments measured at fair value through other comprehensive income under the new proposal issued in December 2012;
  • all trade and lease receivables; and
  • other financial instruments subject to credit risk, such as written loan commitments and written financial guarantee contracts as long as they are not measured at fair value through profit or loss.

Impairment – Amount. The impairment amount to be recognised on these financial instruments depends on whether or not they have significantly deteriorated since their initial recognition. Three stages are being distinguished:

  • Stage 1: Financial instruments whose credit quality has not significantly deteriorated since their initial recognition;
  • Stage 2: Financial instruments whose credit quality has significantly deteriorated since their initial recognition; and
  • Stage 3: Financial instruments for which there is objective evidence of an impairment as at the reporting date.

For stage 1 financial instruments, the present value of 12-month expected credit losses are recognised which are the expected shortfalls in contractual cash flows over the life of a financial instrument that will result if a default occurs in the 12 months after the reporting date (12 months expected credit losses); in contrast, an impairment is recognised for financial instruments classified as stage 2 or 3 at the present value of expected credit shortfalls over their remaining life (lifetime expected credit loss).

Impairment – Recognition. For financial assets entities would recognise a loss allowance whereas for commitments to extend credit a provision would be set up to recognise expected credit losses.

Interest. For stage 1 and 2 instruments interest revenue would be calculated on their gross carrying amounts, whereas interest revenue for stage 3 financial instruments would be recognised on a net basis (i.e. after deducting expected credit losses from their carrying amount).

Purchased or originated credit-impaired financial assets. Rather than apply the two-stage approach, changes in lifetime expected credit losses in the estimate of lifetime losses since initial recognition are recognised directly in profit or loss.

Simplified approach for trade and lease receivables. Entities will have an accounting policy choice to always measure the impairment at the present value of expected cash shortfalls over the remaining life of the receivables instead of applying the two-class model.

New disclosures. The proposed approach comes with new disclosure requirements, including a reconciliation, a description of inputs and assumptions used to measure expected credit losses, and information about the effects of the deterioration and improvement in the credit risk of financial instruments.

Effective date. The IASB will decide on the effective date only upon completion of its redeliberations.

 

Comparison with FASB proposal

In December 2012 the FASB published its proposed model on Current Expected Credit Losses (CECL). The key difference between the IASB’s proposals above and the FASB’s approach is that the FASB would not distinguish between instruments that have deteriorated since their initial recognition and those that have not. Instead, the FASB would require a single measurement model for all financial instruments when determining the impairment allowance: At initial recognition entities would recognise a charge equalling the present value of lifetime expected credit losses.

Comments on the IASB’s proposal are due 5 July; the comment period for the FASB’s ED will already end 30 April.

 

Additional information

The ED will be discussed in the upcoming Dbriefs webcast — IFRS: Important developments on 27 March.

Sixth edition of IFAC survey reveals sovereign debt issues and confidence in international standards as key concerns

07 Mar 2013

The International Federation of Accountants (IFAC) has published its Sixth Annual Global Leadership Survey. IFAC received 113 responses to its questions regarding respondents’ opinions about perceptions of the profession and the most significant issues facing global accountancy in 2013. Over one third of the responses came from Europe.

As in the fifth edition of the survey, respondents' highest priorities continue to be "increasing the confidence in international standards, increasing their adoption, enhancing their implementation, and new standards and revision of existing standards."

International Financial Reporting Standards (IFRS) were viewed as being most important for global adoption, implementation and enforcement, with International Standards on Auditing (ISAs) being ranked second, then followed by the Code of Ethics for Professional Accountants, International Education Standards (IESs) and International Public Sector Accounting Standards (IPSASs).

The volatile environment continues to be another big area of concern. Aspects include the difficult global financial climate, public sector financial management and sovereign debt issues. This is connected with concerns regarding the reputation and credibility of the profession.

Please click for the IFAC press release and  access to the survey on the IFAC website.

Eurostat report on the suitability of IPSAS for EU Member States

07 Mar 2013

The European Commission has issued a report assessing the suitability of the International Public Sector Accounting Standards (IPSAS) for the Member States of the EU. The report concludes that, “even if IPSAS cannot easily be implemented in EU Member States as it stands currently, the IPSAS standards represent an indisputable reference for potential development of European Public Sector Accounting Standards (EPSAS), based on a strong EU governance system.”

The report used information from the feedback received on the public consultation on the suitability of  IPSAS for application in the EU. Overall, two conclusions were made: (1) it seemed that IPSAS cannot easily be implemented in EU Member States as it stands currently and (2) the IPSAS standards represent a suitable framework for the future development of EPSAS.

Additionally, the report describes steps that will need to be taken in the development of EPSAS, including the establishment of EU governance that will clarify the conceptual framework and aim for common EU public sector accounting.  The report also makes the following points about the relationship between ESPAS and other frameworks:

EPSAS would need to establish and maintain close links to the IPSAS Board in order to inform its agenda and decision-making and because EPSAS standards may need to differ in some cases from IPSAS standards. It would be important not to create unnecessary divergence between EPSAS and IPSAS, and between EPSAS and IFRS, given that government-controlled entities may already be required to report on an IFRS basis or according to national commercial accounting standards.

The development of EPSAS will be discussed further at a conference held on 29-30 May 2013 in Brussels.

Click for (links to European Commission website):

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