"The Stage, the Audience and the Players" - SEC Commissioner speaks on disclosure

29 Jun 2013

Commissioner Elisse B. Walter of the US Securities and Exchange Commission (SEC) spoke at the 19th annual Stanford Directors College about disclosure. As IASB Chairman Hans Hoogervorst had done earlier this week, she reminded her audience that disclosure is not merely an obligation - it needs to be an honest dialogue.

In his speech given at the IFRS Foundation conference in Amsterdam, Hans Hoogervorst had spoken of the necessity to "break the boilerplate"; Elisse Walter called disclosures "a chance to tell your story". She focused mainly on disclosure in the management’s discussion and analysis and did so by taking the audience into the world of the playwright William Shakespeare whose plays were and still are successful because he knew three things: the stage, the audience and the players.


The Stage

Commissioner Walter introduced her audience to the idea that regulations set the stage for an entity's disclosures but they do not tell the story. They form the backdrop and the floor and maybe the wings through which the player enters, but depending on them to tell the story would make them do more than they are intended for. It is on this stage that the company needs to tell its story and identify the objects and props that will help it to bring the story across. She also admitted that "a good story may not always be a happy story. Shakespeare was a master of both tragedy and comedy. But the real story — and by that I mean the whole story — is the one that needs to be told".


The Audience

To Commissioner Walter's mind, the audience in the case of disclosures should always be the investors. This would give the company two responsibilities: knowing the audience and accepting them as equals. Knowing the audience will help an entity to identify the questions that will be asked and should not go unanswered. As Commissioner Walter reminded her audience: "Disclosure isn’t driven by what the company wants to disclose but by what the investors want to know." She also believes the audience needs to be accepted as business partners, the paying guests that determine not only the success of the play but also of the company in the long run. This, Commissioner Walter believes, should set the tone for the communication with the investors: "You wouldn’t address a business partner with boilerplate. Your investors deserve the same respect. They also deserve the whole story."


The Players

Carrying her analogy on to the players involved, Commissioner Walter encouraged directors to get know the people and the processes involved in putting disclosures together, including behind the scene. Only then they would see the full picture and could understand the music the disclosures play to. "I believe directors can influence that tone by being engaged, by reading the disclosure with a critical eye and by holding management’s feet to the fire when they believe there is more to the story that ought to be told."


The full text of the speech is available on the SEC website.

FEE comments on the European Commission’s Green Paper concerning long-term financing

29 Jun 2013

The European Federation of Accountants (Fédération des Experts Comptables Européens, FEE) has submitted a letter of comment to the European Commission (EC) concerning its Green Paper, ‘Long-term financing of the European economy’. One of the five topics addressed by FEE in its comment letter are accounting principles.

Much of the debate around the Green Paper has been focused on the question whether it is fair value accounting that leads to short-termism in investor behaviour. FEE admits that the accounting basis, whether fair value or historical cost, has an impact on investment choices. However, it also stresses "that financial information at current valuation is always useful, including for long-term investors. Even long-term investors cannot afford to ignore short-term fluctuations," thus picking up a main point IASB Chairman Hans Hoogervorst made in his April 2013 speech entitled Accounting and long term investment – 'Buy and hold' should not mean 'buy and hope'.

FEE therefore concludes that current value information of long-term investments should be provided. FEE also reminds the European Commission that "the current use of fair value is already limited to instances where it provides more useful information than historical cost".

In connection with stability and long-term financing, FEE explicitly responds to some points raised in the Green Paper:

  • On the Green Paper's claim that the introduction of fair value accounting causes a shift from equity to bonds by institutional investors, FEE "is not aware of any convincing empirical evidence supporting this statement".
  • On the Green Paper's claim that fair value accounting encourages an increase in risk exposure by long-term investors, if the volatility is recognised outside their profit and loss accounts, FEE "is also not aware of any empirical research underlying this assumption".

FEE generally suggests being very careful on conclusions drawn on the possible influences of the use of fair value on stability and long-term financing and to have due regard for empirical evidence. Looking back on the financial crisis and the debate around fair value accounting in that connection, FEE reminds the European Commission that research has not identified a negative role played by fair value in the financial crisis, especially in connection with instability - the majority of academic research concluded fair value accounting was not a major cause of volatility, rather, it contributed to identifying and assessing the situation early.

FEE concludes that the use of fair value accounting should not be restricted any further as applying fair value accounting can make financial information more transparent and does reflect current market conditions.

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The European Financial Reporting Advisory Group (EFRAG) will hold a roundtable meeting on 8 July 2013 in Brussels to facilitate a discussion with European constituents regarding “the financial reporting aspects of long-term investing business models and financial reporting issues raised in the EC Green Paper on the long-term financing, more particularly on the use of fair value accounting for long-term investments.”

Wang Haoyu appointed to the IFRS Advisory Council

28 Jun 2013

The Trustees of the IFRS Foundation have announced the appointment of Wang Haoyu as a representative of the International Organisation of Securities Commissions (IOSCO) on the IFRS Advisory Council. She replaces Alexsandro Broedel Lopes as IOSCO representative of an emerging economy with immediate effect.

Ms Haoyu is an officer in the Accounting Regulatory Department of the Chinese Securities Regulatory Commission (CSRC). Before joining the CSRC, she worked as an auditor in Hua Ming. Ms Haoyu is a CPA and holds a master’s degree in management from Peking University.

Please click for the announcement on the IASB website and more information on the work of the IFRS Advisory Council on IAS Plus.

Updated EFRAG endorsement status report

28 Jun 2013

The European Financial Reporting Advisory Group (EFRAG) has updated its report showing the status of endorsement, under the EU Accounting Regulation, of each IFRS, including standards, interpretations, and amendments. The latest report includes 'Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)' issued by the IASB yesterday.

On 27 June 2013, the International Accounting Standards Board (IASB) issued Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39 'Financial Instruments: Recognition and Measurement'). Under the amendments there would be no need to discontinue hedge accounting if a hedging derivative was novated, provided certain criteria are met. The amendments are effective for annual periods beginning on or after 1 January 2014, with earlier application being permitted.

Endorsement of the amendments for application in Europe might be expected in the first quarter of 2014.

Please click for the EFRAG Endorsement Status Report as of 27 June 2013.

IASB issues amendments to IAS 39 regarding novations of derivatives

27 Jun 2013

On 27 June 2013 the International Accounting Standards Board (IASB) issued 'Novation of Derivatives and Continuation of Hedge Accounting' (Amendments to IAS 39 'Financial Instruments: Recognition and Measurement'). Under the amendments there would be no need to discontinue hedge accounting if a hedging derivative was novated, provided certain criteria are met. The amendments are effective for annual periods beginning on or after 1 January 2014, with earlier application being permitted.

A novation indicates an event where the original parties to a derivative agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. In order to benefit from the amended guidance, novation to a central counterparty (CCP) must happen as a consequence of laws or regulations or the introduction of laws or regulations.

The IASB saw an urgent need for the amendment, as the G20 had committed themselves to improve transparency and regulatory oversight of over-the-counter (OTC) derivatives in an internationally consistent and non-discriminatory way. Consequently, all OTC derivatives should be cleared centrally going forward. This includes OTC derivatives that are within the scope of the European Market Infrastructure Regulation (EMIR), or the Dodd-Frank Act in the USA, respectively. The objective of the amendments is to avoid any impact on an entity’s hedge accounting from derecognising the derivative, following its novation. Specifically, the IASB was concerned that the effectiveness for cash flow hedges might not be sufficient to maintain the designation or to designate the novated derivative as a hedging instrument.

In order to benefit from the changes to IAS 39 an entity must meet all of the following criteria:

  1. Novation to a central counterparty (CCP) must happen as a consequence of laws or regulations or the introduction of laws or regulations.
    This constitutes a significant change to the requirements proposed in the Exposure Draft, as the novation need not be required by law or regulation: A novation might equally occur because of existing or newly introduced laws or regulations. However, the mere possibility of laws or regulations being introduced would not be sufficient.

  2. Following the novation, a central counterparty would become the new counterparty to each of the original parties to the derivative.
    In this context, it would also be possible to introduce a party that is acting as a counterparty in order to effect the clearing with a CCP. This could be a clearing member or a clearing organisation that is contracted because the party does not have direct access to a CCP. In some jurisdictions, a novation will be effected with clients of clearing members of a CCP (so-called indirect clearing). The IASB reasoned that such novations should also be in the scope of the amendments because they are consistent with the objective of the proposed amendments. Further, intragroup novations would also be in the scope if these were in order to access a CCP. In cases in which a novation is not effected directly with the CCP, an entity must ensure that each of the parties to the hedging instrument effects clearing with the same CCP.

  3. Any changes to the hedging instrument are limited to those that are necessary to effect such a replacement of the counterparty.
    Such changes include changes in the collateral requirements, rights to offset receivables and payables balances, and charges levied. However, this does not include changes to the maturity, the payment dates, or the contractual cash flows or their basis of their calculation.

The amendments to IAS 39 are effective for annual periods beginning on or after 1 January 2014. Earlier application is permitted but requires corresponding disclosures. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the amendments are to be applied retrospectively.

In addition to amending IAS 39, the IASB decided to make equivalent amendments to forthcoming chapter 6 on hedge accounting in IFRS 9 Financial Instruments, which is expected to be issued during the third quarter of 2013.

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IASB Chairman announces 10-point plan in relation to disclosures

27 Jun 2013

At the IFRS Foundation conference currently held in Amsterdam, Hans Hoogervorst, the IASB Chairman, spoke about the adoption of IFRSs around the world, the current work programme of the IASB and necessary changes in relation to financial disclosures.


Global standards

On global accounting standards Hoogervorst first pointed at the recently posted collection of 66 'jurisdiction profiles' detailing information about the adoption of International Financial Reporting Standards (IFRSs) and the IFRS for SMEs in all of the G20 jurisdictions and 46 other jurisdictions. He reiterated many of the conclusions he had already drawn in his Hong Kong speech entitled "Are we there yet?" He also mentioned the recent developments in Japan where the Business Accounting Council (BAC) in its final report recommended a greater use of IFRSs in Japan as a positive signal.


Current work programme

Regarding the current work programme of the IASB, Hoogervorst shared his thoughts on impairment, insurance accounting and the conceptual framework. 

He pointed at the Exposure Draft ED/2013/3 Financial Instruments: Expected Credit Losses published on 7 March 2013. He believes that the proposed new model will faithfully reflect the economics of the underlying transactions. However, he also admitted that it was unfortunate that the FASB has developed another variant of an expected loss approach but expressed hope that convergence or at least more convergence was still possible.

On insurance contract accounting he mentioned the Exposure Draft ED/2013/7 Insurance Contracts published on 20 June 2013. At present, the industry operates under a patchwork quilt of accounting practices, some of which date back to the days before IFRSs were introduced and which were, in effect, stitched together and grandfathered when IFRS 4 was introduced as an interim measure. Hoogervorst called this "unacceptable" and concluded: "Fortunately, the end to this unacceptable situation is in sight."

Lastly, Hoogervorst also spoke about the conceptual framework project, where a discussion paper is due to be released in July 2013. It will address those areas in the Framework that the IASB thinks are critical and need attention. As the project is no longer a phase-by-phase project, the DP will present all chapters. However, Hoogervorst warned that discussion paper will not "give a definitive answer to all accounting problems."


Financial disclosures

The final topic of Hoogervorst's speech were disclosures. He spoke of the necessity to "break the boilerplate" as there was a risk is that annual reports become simply compliance documents, rather than instruments of communication. The IASB itself has decided to give a good example - the size of the IFRS Foundation Annual Report 2012 was reduced by 25 per cent while increasing the amount of useful information and making it easier to read.

Nevertheless, as already announced in the feedback statement on disclosure that was released in May 2013, the IASB will react to the perceived disclosure problem with certain measures. Hoogervorst set out a ten-point plan to deliver tangible improvements to disclosures in financial reporting:

  1. Clarify in IAS 1 that the materiality principle does not only mean that material items should be included, but also that it can be better to exclude non-material disclosures;
  2. Clarify that a materiality assessment applies to the whole of the financial statements, including the notes;
  3. Clarify that if a Standard is relevant to the financial statements of an entity, it does not automatically follow that every disclosure requirement in that Standard will provide material information;
  4. Remove language from IAS 1 that has been interpreted as prescribing the order of the notes to the financial statements;
  5. Make sure that IAS1 gives companies flexibility about where they disclose accounting policies in the financial statements;
  6. Consider adding a net-debt reconciliation requirement;
  7. Look into the creation of either general application guidance or educational material on materiality;
  8. Seek to use less prescriptive wordings for disclosure requirements when developing new standards;
  9. Begin a research project to undertake a more fundamental review of IAS 1, IAS 7 and IAS 8 with the goal to replace those standards, in essence creating a new disclosure framework;
  10. Undertake a general review of disclosure requirements in existing Standards.

These measures, Hoogervorst said, should "remove most excuses for boilerplate disclosures. They will certainly help to ignite the much‑needed change in mind set of preparers, auditors and regulators that is so sorely needed."

The full text of the speech is available on the IASB website. A video recording of the speech is also available.

IASB publishes guidance for micro entities

27 Jun 2013

The International Accounting Standards Board (IASB) today issued guidance to help micro-sized entities apply the IFRS for Small and Medium-sized Entities (IFRS for SMEs). The Guide accompanies, but is not part of, the IFRS for SMEs.

As many requirements of the IFRS for SMEs are not relevant to micro-sized entities, the IASB has developed, with input from the SME Implementation Group (SMEIG), a guide that extracts from the IFRS for SMEs only those requirements that are likely to be necessary for a typical micro-sized entity, without modifying any of the principles for recognising and measuring assets, liabilities, income and expenses. (Some wording changes were necessary to improve the flow of the drafting or for other editorial reasons.) It thus helps these entities to identify more easily the requirements of the IFRS for SMEs that are relevant to them.

The Guide is not a stand-alone standard for micro entities. It contains cross-references to the IFRS for SMEs for matters not covered by the guidance and micro entities that encounter these matters are required by the Guide to refer to the applicable requirements in the IFRS for SMEs. Therefore, compliance with this Guide will result in compliance with the IFRS for SMEs. (For easy identification, transactions, other events or conditions covered in the IFRS for SMEs but not in the Guide are identified in a seperate box at the beginning of the relevant sections in the guidance.)

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Deloitte views on European Commission’s Green Paper concerning long-term financing

26 Jun 2013

Deloitte Touche Tohmatsu Limited’s European Economic Area member firms have submitted a letter of comment to the European Commission (EC) concerning its Green Paper, ‘Long-term financing of the European economy’. The comment letter provides Deloitte’s perspective to questions concerning the role of banks, cumulative impacts of prudential reforms on long-term investments, fair value accounting principles, and the integration of financial and non-financial information.

Regarding fair value accounting principles, we believe that "it would be inappropriate to say that it is fair value accounting that leads to short-termism in investor behaviour. No evidence has been provided so far for such a statement. This would also suggest that, in the absence of fair value accounting, investors would necessarily adopt a long term view. [...] It would be more appropriate to consider that fair value accounting may contribute, albeit to a limited degree only, to short-termism in investor behaviour."

As a response to this, we believe the following elements should be considered when fair value is used in the measurement of assets and liabilities on the balance sheet, in the measurement of performance, or as supplemental information in the notes to the financial statements:

  • the role of the business model;
  • alternative measures to fair value; and
  • ensuring that the information delivered does not create further uncertainty.

Click for a full summary and access to the comment letter.

IASB issues Exposure Draft of proposed amendments to IAS 16 and IAS 41

26 Jun 2013

The International Accounting Standards Board (IASB) has published an Exposure Draft (ED) of proposed amendments to IAS 16 ‘Property, Plant and Equipment’ and IAS 41 ‘Agriculture’ to include bearer plants within the scope of IAS 16. Currently, IAS 41 requires that all biological assets that are related to agricultural activity must be measured at fair value less costs to sell. The amendments issued today would bring bearer plants which no longer undergo significant biological transformation into the scope of IAS 16 so that they would be accounted for in the same way as property, plant and equipment. Comments on ED/2013/8 ‘Agriculture: Bearer Plants’ are requested by 28 October 2013.



Concerns had been repeatedly raised about the relevance and usefulness of information provided to users for certain biological assets accounted for at fair value. Specifically, an ‘Issues Paper’ produced by the Asian-Oceanian Standard Setters Group (AOSSG) and the IASB's Emerging Economies Group (EEG), which included a survey performed by the Malaysian Accounting Standards Board (MASB) in 2010, found that a group of analysts specialising in plantation did not find fair value information for bearer biological assets useful, particularly the presentation of changes in fair value within the profit or loss. Respondents to the IASB's agenda consultation also considered a project on bearer plants to be important.


Motivation for the amendments

When bearer plants reach their full maturity, they no longer undergo significant biological transformation but are used to grow produce until the end of their productive life, after which they are usually disposed of. Hence it is argued that they are more akin to property plant and equipment for which the accounting treatment is prescribed in IAS 16.



The scope of the proposed amendments is restricted to bearer plants which are defined as plants that are used in the production or supply of agricultural produce, are expected to bear produce for more than one period, and are not intended to be sold as a living plant or harvested as agricultural produce. Plants that are grown both to bear produce and for sale as living plants or agricultural produce remain in the scope of IAS 41 (for example, trees that are cultivated for their lumber as well as their fruit). Equally, the produce on the bearer plants would continue to be accounted for under IAS 41.


Application of the IAS 16 requirements to bearer plants

The IASB proposes that before bearer plants are placed into production (ie before they reach maturity and bear fruit) they should be measured at accumulated cost. After they reach maturity, bearer plants would be accounted for either under the cost model or a revaluation model.


Cost model

Unlike property, plant and equipment, life transformation of agriculture assets is a continuous process where older plants are replaced on a continual basis. Therefore, the IASB deliberated the unit of account and the aggregation of these. The IASB at last decided that accounting for an aggregation of plants would be no different from accounting for a large quantity of equipment that is acquired or constructed in batches and therefore the requirements of IAS 16 could be applied without modification.

The IASB also discussed (a) how to assess what is an abnormal amounts of wastage/mortality during the growth phase of the bearer plants; and (b) how to determine when bearer plants are in the condition necessary for them to be capable of operating in the manner intended by management. The IASB concluded that (a) would be akin to a case in which an entity constructs a large number of fragile items of machinery for use within the business and (b) would be similar to a factory requiring an initial run-in period. Consequently, the IASB concluded that the current requirements of IAS 16 are sufficient without further guidance.

For the same reasons the IASB concluded that the disclosure requirements under the cost model in IAS 16 can be applied to bearer plants without modification. 


Revaluation model

Entities would also be permitted to choose the revaluation model for mature bearer plants subject to the requirements in IAS 16. The IASB believes that the revaluation recognition and measurement requirements of IAS 16 can be applied to bearer plants without modification since the revaluation model is a fair value measurement model and akin to the current measurement requirements for biological assets.


Transition requirements and effective date

For cost-benefits reasons, the proposed amendments to IAS 16 permit the use of fair value as deemed cost for items of bearer plants at the start of the earliest comparative period presented in the financial statements. Consistent with the reasoning for accounting for bearer plants in the same way as for property, plant and equipment, the deemed cost exemptions provided for property, plant and equipment in IFRS 1 First-time Adoption of International Financial Reporting Standards would also be available for items of bearer plants.

The IASB will decide on the effective date and full transition details only upon completion of its redeliberations. As the amendment addresses an urgent accounting issue, the IASB proposes that the amendments to IAS 16 and IAS 41 should be available for early adoption.


Alternative views

Two Board members voted against the publication of the ED because they believe that the proposal will eliminate information about the fair value changes in bearer plants and the underlying assumptions used to estimate those changes. They come to the conclusion that the IASB proposals are no improvement to IFRSs and do not adequately address the needs of users of financial statements.


Comment deadline and next steps

Comments on ED/2013/8 Agriculture: Bearer Plants close on 28 October 2013.

The IASB will consider the comments it receives on the proposals and will then decide whether to proceed with amendments to IAS 16 and IAS 41.


Additional Information

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UK FRC publishes feedback statement regarding its paper on disclosure

26 Jun 2013

In October 2012, the United Kingdom Financial Reporting Council (FRC) published a discussion paper on enhancing disclosure in financial reporting. The paper stated that one of its aims is to influence the IASB before it commences its disclosure framework project, and it identified a number of action points for the IASB.

The feedback on the discussion paper Thinking about disclosures in a broader context summarised in the feedback statement published today showed broad support for FRC‘s suggestions that:

  • Improving disclosure should be a shared responsibility between preparers, regulators, auditors and users.
  • The main end-users of reports are investors and disclosures should be framed with that in mind, having regard to communication, relevance and materiality.
  • There should be a move away from piecemeal approach to disclosures by standard setters and regulators and that a framework would provide a benchmark for measuring suggested disclosures.

When the FRC published its discussion paper in October 2012, the IASB did not have an official project on disclosures on its agenda. In December 2012, the IASB formally added a short-term initiative on disclosure to its work programme in December 2012 as part of its response to the Agenda Consultation 2011.  The objective of the initiative was to explore opportunities to see how those applying IFRS can improve and simplify disclosures within existing disclosure requirements.

In implementing this initiative, the IASB undertook a constituent survey on disclosure and held a disclosure forum designed to bring together securities regulators, auditors, investors and preparers. The IASB subsequently issued Feedback Statement Discussion Forum – Financial Reporting Disclosure on 28 May 2013, which outlined the IASB's intention to consider a number of further initiatives.

The FRC welcomes that the IASB has initiated its own project on disclosures and believes that the ideas from the discussion paper, together with the feedback received on them, will be helpful in setting the agenda for the IASB’s project.

Please click for access to the FRC feedback statement on the FRC website.

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