July

G20 Finance Ministers and Central Bank Governors stress the importance of convergence for the resilience of financial markets

21 Jul 2013

The communiqué from meeting of the G20 Finance Ministers and Central Bank Governors held in Moscow on 19-20 July 2013 reiterates the call for the finalisation of the joint IASB and FASB projects.

The participants discussed traditional G20 agenda including the G20 Framework agreement for strong, sustainable and balanced growth, the financial regulation reforms, and market transparency. The final communiqué contains the usual sentence urging convergence stressing this time how convergence can contribute to financial stability:

We reiterate our call on the IASB and FASB to finalize by the end of 2013 their work on key outstanding projects for achieving convergence on a single set of high-quality accounting standards. We recall the crucial importance of making swift progress on this issue in order to enhance resilience of financial markets.

Another topic of discussion was also the question of how long-term financing can be encouraged. A research group led by Indonesia and Germany presented information on the experiences and country-specific practices of stimulating long-term investment. Short-termism in investor behaviour is currently a much debated topic, and the question has been raised whether the use of fair value accounting principles has led to it. In a response to the European Commission Green Paper Long-term financing of the European economy, the IASB has already made clear that it "does not believe that fair value accounting principles have of themselves led to short-termism in investment behaviour".

The G20 Leaders' Summit will take place in St. Petersburg on 5-6 September 2013.

Please click for the following information on the G20 website:

The ‘Global Player Segment’ – A new approach to global reporting convergence

20 Jul 2013

Although International Financial Reporting Standards (IFRSs) are being adopted in more and more jurisdictions there still seems to persist a feeling that there are different “flavours” of IFRSs around the world and the promised capital-market effects seem not to have materialised in every case and to the extent expected. Professor Christian Leuz of the Booth School of Business of the University of Chicago has done extensive research into the issue and allows us kindly to present his most recent research papers outlining a suggested new approach or 'thought experiment' in relation to convergence.

Scepticism regarding uniform application and enforcement of IFRSs has often been raised. The Work Plan for the Consideration of Incorporating IFRSs into the Financial Reporting System for U.S. Issuers published by the Staff of the US Securities and Exchange Commission (SEC) in July 2012 for example finds that “enforcement structures around the world differ widely by jurisdiction” and adds that “rigorous enforcement is important to avoid false comparability where the requirements of the standards in each jurisdiction are the same but the interpretations and practices are inconsistent.”

Professor Leuz’ research (links to all papers below) suggests that these concerns are well founded (his paper Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why is quoted in the SEC report). However, he also shows that enforcement differences are not the only reason for reporting variation – he has identified many other institutional differences across countries “in capital markets, securities regulation, investor protection and economic development, to name just a few” that influence reporting practice and will continue to contribute to non-comparability despite of continuing IFRS adoption around the world.

Further research also showed that it is even doubtful whether the expected capital market effects that were observed in some cases when countries adopted IFRSs can indeed be attributed to IFRS adoption, i.e., the new accounting regime. In Mandatory IFRS Reporting and Changes in Enforcement the authors come to the conclusion that the change in accounting standards seems to have had little effect on market liquidity. They show that the liquidity benefits are found only in a few countries and that these countries concurrently or later tightened their enforcement of financial reporting. Furthermore, the authors show that similar liquidity effects occurred around enforcement changes in Japan without having first moved to IFRS. Thus, the results suggests that changes in reporting enforcement appear to play a critical role for the observed liquidity benefits, rather than IFRS adoption.

In light of this and other research, Professor Leuz suggests a new and different approach to global accounting convergence. The basic idea is to focus only on those companies for which international comparability is likely important and going to yield positive capital market effects. He proposes to create a ‘Global Player Segment’ (GPS) in which firms would be required to use the same reporting rules (i.e., IFRS), face the same enforcement mechanisms and have the same incentives for transparency in their reporting. These would be firms that operate internationally and (seek to) raise money in international markets. Importantly, firms would opt to become members of the GPS and on joining (and after a screening) would submit to strict reporting regulation and enforcement established within the segment for all members. Letting companies choose for themselves is likely to enhance the credibility of firms’ commitment to transparency but also addresses concerns that not all firms equally benefit from globally converged reporting standards.

Professor Leuz has outlined this approach and makes more detailed suggestions how it could be implemented in a short paper with the title A New Approach to Global Reporting Convergence: The Global Player Segment. He has also presented his ideas to the public on two occasions recently and has kindly allowed us to post corresponding slide decks.

The understanding that especially global players benefit from IFRS adoption has also been picked up in discussions about possible IFRS adoption in the US. At recent event in Berlin that also saw the presentation of the GPS proposal, IASB chairman Hans Hoogervorst conceded that he did not expect the United States to adopt IFRSs for all entities and that his expectations were rather that the Unites States would make IFRSs an option for large, internationally-oriented companies that would benefit from an IFRS adoption.

Please click for Professor Leuz’ papers and presentations referred to:

ESMA consults on revised accounting enforcement guidelines

20 Jul 2013

The European Securities and Markets Authority (ESMA) has launched a consultation on guidelines on the enforcement of financial information published by listed entities in the European Union. The proposed guidelines are the result of a review of Standards No. 1 and 2 on the enforcement of financial information developed by the Committee of European Securities Regulators (CESR), ESMA's predecessor, in April 2003 and April 2004 respectively.

ESMA has decided to review the CESR standards in order to reflect the experience gained by their use since 2005. The new guidelines are based on the same principles, however, they have been reformulated throughout and have been combined into one document.

Also, the objective of enforcement has been revised in order to reflect the importance of compliance with the relevant financial reporting standards and transparency of financial information. Additionally, the concept of enforcement has been extended in order to include, in addition to the enforcers’ review of the financial information, any other actions which might contribute to enforcement such as for example issuing alerts.

Regarding the scope, ESMA noted that investor protection requires the extension of the scope of enforcement to the whole financial reporting framework applicable to listed issuers on the EU Single Market. This includes national GAAPs from the EU jurisdictions and third countries' accounting standards, which have been declared equivalent to IFRS.

The proposed guidelines would apply to all competent authorities and any other bodies from the EU undertaking enforcement responsibilities under the Transparency Directive and the IFRS Regulation.

Please click for access to the consultation document and a corresponding press release on the ESMA website. The closing date for responses to the consultation is 15 October 2013 and ESMA expects to publish the final guidelines in 2014.

EFRAG Update detailing June and July EFRAG developments

19 Jul 2013

The European Financial Reporting Advisory Group (EFRAG) has released a new issue of its EFRAG Update newsletter summarising the discussions held at the EFRAG TEG meetings of 4 and 15-17 July 2013 and EFRAG TEG conference call held on 26 June 2013.

Highlights were the publication of:

Additional topics discussed in the newsletter are:

Click for the EFRAG Update (link to EFRAG website).

IASB issues an ‘Investor Perspectives’ article on conceptual framework

19 Jul 2013

The International Accounting Standards Board (IASB) has released another edition in its 'Investor Perspectives' series. In this edition, Stephen Cooper (IASB Board member) discusses the relevance of the proposals in the recently issued discussion paper on conceptual framework will have to the investor community.

The article covers two key issues from the discussion paper that investors should take note:

    1. “the reporting of performance, including what should be reported in profit or loss and what should be reported outside profit or loss in other comprehensive income”; and
    2. “the accounting for items classified as equity and the dilutive effects of some financing instruments on common shareholders.”

Click to view:

July IFRS Interpretations Committee meeting notes

19 Jul 2013

We've posted Deloitte observer notes from the IFRS Interpretations Committee meeting which was held on 16-17 July 2013.

The topics discussed were as follows (click through to access detailed Deloitte observer notes for each topic):

Tuesday, 16 July 2013

Introduction

Finalisation of tentative agenda decisions

Redeliberation of proposed amendments

Items for continuing consideration

Items for initial consideration

Administrative session


Wednesday, 17 July 2013

Items for initial consideration

Click here to go to the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

Video of a panel discussion on the future of IFRS in Africa

19 Jul 2013

The IASB has posted to its website a video of a panel discussion on the future of financial reporting in Africa which was part of a stakeholder event hosted jointly by the Trustees of the IFRS Foundation and the South African Institute of Chartered Accountants (SAICA).

One of the panelists was Hans Hoogervorst, chairman of the IASB. In his contributions to the discussion, he admitted that Africa might not have been that clearly on the IASB's radar yet, but with four IASB Board members from emerging economies the focus is shifting and he promised to keep Africa on hos personal and the IASB's radar more prominently.

He also cited instances where the IASB had paid careful attention to the needs of emerging economies. Most obvious, he said, were the discussions around impairment where the IASB's and the FASB's position differ. The FASB's proposal to recognise a charge equalling the present value of lifetime expected credit losses at initial recognition would be a clear disincentive in African markets where the upward trend in the markets is coupled with greater innovation and higher risk taking.

However, he also admitted voting against the wishes of emerging economies in cases where the brand of IFRSs might be endangered. He pointed at calls for making the IFRS for SMEs available for application by certain listed companies. Especially emerging economies feel that the more easily grasped IFRS for SMEs might be easier to adopt and might do more justice to their specific economic circumstances. The IASB chairman said that there was no way the IASB could prohibit jurisdictions from requiring the IFRS for SMEs for certain listed companies, however, he added, these jurisdictions could no longer call the standard applied thus the "IFRS for SMEs" and would have to call it something else - for example "South African GAAP".

The IASB chairman also touched on some general topics such as disclosures (where he explained his 10-point plan and the aspect of materiality), the IASB's view on integrated reporting ('it is not clear where this is going yet, but our standards don't bite each other') and the IASB's project on going concern.

Returning once more to impairment, he mentioned that the reactions to the IASB's proposals had been very encouraging. The IASB expects to finalise its re-deliberations by the end of 2013. It would take another two years, however, until a final standard would be effective.

Please click for access to the video on the IASB's website.

EFRAG is looking for new TEG members

19 Jul 2013

The European Financial Reporting Advisory Group (EFRAG) has issued a call for applicants for its Technical Expert Group (TEG) as the present mandate period for six of the twelve members expires on 31 March 2014.

The TEG is the arm EFRAG operates through. Its 12 voting members are selected from a range of professional and geographical backgrounds from throughout Europe and EFRAG is looking for corresponding applications. The full text of the call for EFRAG TEG applicants available through the press release on the EFRAG website details the requirements regarding technical competence, background, experience and geographical spread.

Deloitte view on the IIRC's integrated reporting proposals

19 Jul 2013

We have published our comment letter on the International Integrated Reporting Council (IIRC) Consultation Draft of its proposed 'International Integrated Reporting Framework'. We support the IIRC in its efforts to develop the framework, seeing its development as timely as annual reports are getting longer and "the story of an organisation’s value proposition can often be lost in all that information".

Our comment letter includes the following points:

  • We agree that Integrated Reporting responds to a demand from market participants for better information, but note that it is not clear what role an integrated report plays in relation to existing financial, sustainability, and corporate governance reports, and that it would not replace these reports
  • We agree that an integrated report should aim to become a primary communication document, telling the value creation story, rather than being compliance-focused. We think that flexibility in Integrated Reporting is critical to foster innovation
  • We agree that the primary audience for integrated reports should be providers of financial capital in order to support their financial capital allocation assessments, but note it would be useful for the Framework to acknowledge explicitly that providers of financial capital are rarely a homogeneous group, allowing companies flexibility to meet the information needs of various types of providers of financial capital
  • We believe a better and clearer articulation is required in the Framework on how materiality for an integrated report is distinct from materiality for other reports such as financial reports, and how to handle the tension between application of materiality and achieving conciseness
  • We are of the view that the Framework should contain only the objectives, concepts and principles and minimum content elements for an integrated report in order to allow for experimentation and believe it would be premature to portray it as a reporting standard at this stage
  • We agree that the ability to obtain independent third party assurance on the information presented will be of utmost importance to the integrity and credibility of an integrated report, and believe that an international standard or applicable assurance guidance specific to Integrated Reporting will be required.

Click for the full comment letter.

IASB completes Post-implementation Review of IFRS 8

18 Jul 2013

The IASB has completed its Post-implementation Review (PIR) of IFRS 8 'Operating Segments'. The completion of the PIR of IFRS 8 marks the first ever PIR conducted by the IASB as part of its due process. The review concluded that IFRS 8 has achieved its objectives.

Some of the key results from the PIR of IFRS 8 were:

  • Management and investors communicated more efficiently with the use of the management perspective.
  • Low incremental costs of implementing IFRS 8.
  • Achieves convergence with the FASB's guidance.
  • General consensus by preparers was that the Standard works well and was supported by the accounting community (auditors, accounting firms, standard-setters and regulators). 
  • Many considered the requirement to report revenue by customer's attributed country to be useful.

Further, the investor community's view of IFRS 8 were mixed. Some believed that the information about how management views the business to be useful information, while others investors felt that management's intentions could "obscure the entity's true management structure (often as a result of concerns about commercial sensitivity) or to mask loss-making activities within individual segments."

Any issues found in the PIR that are warranted will be discussed with the FASB to ensure that convergence with US GAAP is achieved.

 

Additional information

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