July

ACCA survey highlights that non-financial reporting by companies is inadequate for investors' needs

11 Jul 2013

The Association of Chartered Certified Accountants (ACCA) has published findings from a survey carried out to gather feedback from investors on their use of non-financial information. The survey highlights that whilst investors are placing increasing importance on non-financial disclosures made by companies, companies must do more in order to enhance the value of the information that they provide especially in terms of creating a better linkage to business strategy, risk and financial information.

In April, the European Commission published proposed amendments to European accounting legislation in order to require certain large companies to provide additional information on social and environmental matters.  It was determined that large companies would need to disclose information on policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors.

An Executive Summary of the Impact Assessment prepared by Commission staff noted that "the majority of large EU companies fail to adequately meet growing demand from stakeholders (including investors, shareholders, employees and civil society organisations) for non-financial transparency", both in terms of quantity and quality. 

The ACCA survey (link to ACCA website) results support this view and follow two reports published in June which highlighted that investors are open to the concept of the integrated report which would encompass reporting of non-financial information alongside financial information. 

The survey highlights the growing importance of non-financial information with the most important sources being Sustainability/Corporate Social Responsibility (CSR) reports and annual reports.  The majority of those surveyed (67%) noted that they always make use of such information where available. 

Additional findings of the survey highlighted:

  • The majority (78%) of respondents felt that current levels of non-financial disclosure were inadequate.
  • 73% highlighted that non-financial information was not linked to the company strategy and risk and 93% were of the view that current levels of non-financial disclosure were insufficient to assess materiality.
  •  92% felt that comparability of non-financial information across companies was poor and it was suggested that additional information such as corporate governance and supply chain impacts could also be reported.
  • Company Boards should be made more accountable for non-financial information and disclosures should be approved at Annual General Meetings.

Click for ACCA survey: ‘What do investors expect from non-financial reporting?’ (link to ACCA website)

IASB live webcast on insurance contracts

09 Jul 2013

On Monday 15 July the IASB staff will present a live webcast regarding the revenue proposals in the insurance contracts exposure draft. The live webcast will include a question and answer session.

The IASB issued a revised exposure draft on insurance contracts on 20 June 2013 to establish the principles that insurers should apply to report the nature, amount, timing and uncertainty of cash flows from insurance contracts.

The webcast is free of charge, but you need to register to participate. For the convenience of participants in different time zones the IASB has scheduled two slots for the webcast:

  • 10:00 (London time)
  • 14:00 (London time)

Registration for the different slots is available on the IASB’s website.

EFRAG recommends staged completion of leases project, further work on conceptual basis for right-of-use model

09 Jul 2013

A draft comment letter on IASB Exposure Draft ED/2013/6 'Leases' has been published by the European Financial Reporting Advisory Group (EFRAG). The draft letter is supportive of the IASB's lease project and the application of the right of use model. However, EFRAG believes there are some leases for which the right-of-use model is not appropriate and recommends further work on the conceptual basis for the model.

EFRAG's concerns around the application of the right-of-use model are expressed as follows:

The IASB has emphasised in its communications that the project was intended to recognise financial liabilities that are currently left off balance sheet. Focussing on this objective seems to have been the primary driver behind the development of the right-of-use model. This model is based on a notion that an asset is a bundle of rights, one of them being the right-of-use; this is a new approach, which has never been debated on a conceptual level and we are not convinced that the focus on liability recognition has led to capturing the right population to which the right-of-use model should be applied. This is in our view illustrated by the inconsistencies in the proposed application, in particular the use of two measurement bases and different accounting for lessors and lessees which will add to the perception of complexity.

EFRAG believes there is a need to need to fully explain the project from a conceptual perspective, and so recommends that the IASB finalise its project in a series of steps. EFRAG recommends the introduction, "without delay", of enhanced disclosures for lease arrangements, and then refining the concept of 'right-of-use' (and how this right is distinguished from other rights bundled in an asset) as part of its conceptual framework project, before then finalising the revised accounting for leases.

EFRAG is requesting comments on the draft comment letter by 6 September 2013 (comments on ED/2013/6 close on 13 September 2013). Click for access to the full draft comment letter (link to EFRAG website).

Agenda for July 2013 IFRS Interpretations Committee meeting

09 Jul 2013

The IFRS Interpretations Committee will meet at the IASB's offices in London on 16-17 July 2013. The agenda for the meeting is now available.

The Committee will:

  • Discuss comments received on IASB exposure drafts on various narrow-scope amendment projects (transfers of assets between an investor and associates or joint ventures, acceptable methods of depreciation or amortisation, acquisition of an interest in a joint operation, share of other net asset changes under the equity method)
  • Consider finalising one tentative agenda decision on pre vs. post tax discount rates (IAS 19)
  • Continue discussion on various topics (IAS 19, IAS 7, IAS 40, IAS 19, IFRS 7)
  • Consider a number of new topics (IFRS 10/IAS 32, IFRS 10/IFRS 11, IAS 1, IAS 32, IAS 32/IAS 39).

The full agenda for the meeting, as of 5 July 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.

FASB issues standard deferring certain disclosures for nonpublic employee benefit plans

08 Jul 2013

The FASB has issued Accounting Standards Update (ASU) No. 2013-09, ‘Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04’. The ASU defers indefinitely the effective date for certain disclosures about investments held by a nonpublic employee benefit plan in the plan sponsor’s own equity securities.

The main provisions provided in this ASU are:

[D]efer indefinitely the effective date of certain required disclosures in Update 2011-04 (Topic 820) of quantitative information about the significant unobservable inputs used in Level 3 fair value measurements for investments held by a nonpublic employee benefit plan in its plan sponsor’s own nonpublic entity equity securities, including equity securities of its plan sponsor’s nonpublic affiliated entities. The amendments in this Update do not defer the effective date for those certain quantitative disclosures for other nonpublic entity equity securities held in the nonpublic employee benefit plan or any qualitative disclosures.

The amendments address the concerns where nonpublic entities with annual periods beginning after December 15, 2011, would potentially provide proprietary information about nonpublic entities through the dissemination of their employee benefit plans’ financial statements on the regulator’s website.

The deferral is effective immediately for all financial statements that have not yet been issued.

Click for (links to FASB website):

Two new Conceptual Framework bulletins

08 Jul 2013

EFRAG and the National Standard Setters of France, Germany, Italy and the United Kingdom have published two more issues of their joint publication series on the IASB's Conceptual Framework project. They are dedicated to the role of the business model in financial reporting and the role of a Conceptual Framework.

The Conceptual Framework Bulletins are intended to promote discussion and to inform about European views on the IASB's Conceptual Framework project. They are also designed to elicit feedback on these views therefore come with specific questions at the end of each issue.

Please click for access to the two new bulletins:

Constituents wishing to comment on the views in the bulletins are invited to do so by 30 September 2013.

We have also created an archive of all bulletins available. We are grateful to EFRAG and the National Standard Setters for giving us permission to host them on IAS Plus.

We comment on the IASB's financial asset impairment proposals

07 Jul 2013

We have published our comment letter on the International Accounting Standards Board’s Exposure Draft, ED/2013/3 'Financial Instruments: Expected Credit Losses'. We support the Board's efforts to improve the accounting for recognition of credit losses on financial assets by addressing the weaknesses in the existing incurred loss model that were observed during the global financial crisis. We agree with the Board’s objective of recognising and measuring credit losses of financial assets on the basis of an entity’s current expectations about the collectability of contractual cash flows. However, we have a number of concerns about the proposed impairment model and suggest an alternate approach using an absolute assessment of credit quality which would avoid accounting anomalies when similar economics of financial assets are measured differently.

The comment letter makes the following points:

  • We support the Board’s decision to develop a single impairment objective for all types of financial assets within the scope of the exposure draft
  • We are concerned that the approaches taken by the Board and by the Financial Accounting Standards Board (FASB) in Accounting Standards Update, Financial Instruments – Credit Losses are significantly different and believe that converged guidance on this topic is critical to supporting well-functioning global capital markets
  • We are supportive of the basic elements of the IASB’s proposed impairment model such as differentiating financial assets on the basis of credit quality and basing the impairment measurement on expected losses. However, we have concerns about certain aspects of the model, e.g. requiring entities to use a relative credit quality assessment
  • In measuring the allowance for cash flows not expected to be received, we agree with use of the effective interest rate but are concerned with the proposed approach to allow the use of a reasonable discount rate within a range
  • With respect to measuring interest revenue, we disagree with the proposal to measure interest revenue on originated credit-impaired financial assets based on the net carrying amount
  • For purchased credit-impaired assets, we recommend recognising an allowance both at initial recognition and subsequently that includes those contractual cash flows not expected to be collected
  • We have concerns about the FASB proposed impairment approach, including that the FASB proposed impairment model requires recognition of full lifetime expected credit losses for all financial assets, particularly at inception of these financial assets.

In light of our concerns with both the IASB’s and FASB’s proposed models, we propose another approach that we believe retains many aspects of both boards’ proposals and remains faithful to their objectives. The comment letter summarises are recommended approach as follows:

Under our recommended approach, an entity would continue to monitor the credit quality of its financial assets during the reporting period. We believe that when it becomes apparent for a financial asset or assets that, on the basis of credit indicators and other relevant factors, it is not highly probable that the entity will collect all contractual cash flows when due, the entity should immediately recognise all expected credit losses (i.e., those estimated credit losses for the remaining life of the asset or for the average remaining life for the portfolio of assets). Generally, entities would assess whether such indicators and relevant factors exist at the most granular level reasonable without undue cost and effort, which in some cases may result in their making such assessments on a portfolio basis (i.e., portfolio of similar assets).

Click for the full comment letter.

Research paper shows that historical cost accounting alone would not have made banks safer

05 Jul 2013

A recent research paper written by Oana M. Georgescu and Christian Laux analyses the failure of three large German banks during the financial crisis. The authors look especially at the interrelation between financial reporting and financial stability.

In their article the authors trace several "myths" on the relation between financial reporting, financial regulation, and financial stability that sprang up in connection with the financial crisis of 2007-2008. The crisis has led to a major debate about the role of accounting in general and fair value accounting in particular for financial stability. Most persistent is the claim that the recognition of banks’ assets at fair value played an important role in the demise of banks and that historical cost accounting would have resulted in less bank failures.

Looking at three German bank failures in detail leads the authors to some interesting conclusions. All three banks were regulated based on German local GAAP (HGB), not International Financial Reporting Standards (IFRS) even though two banks were required to publish reports based on IFRS. Even banks that were required to publish IFRS reports could choose to be regulated based on HGB (on basis of financial statements in accordance with HBG which needed to be submitted for this purpose but not published).

In contrast to IFRS, HGB distinguishes primarily between two reporting categories (current and fixed assets) with assets being reported in both categories at amortised cost; it is just the impairment rules that differ. So, interestingly, the authors find that “ some of the most spectacular failures of European banks occurred for banks that were regulated based on historical cost accounting.”

Although the evidence is specific, it is important for the current regulatory debate. Moreover, the examples show “that one can reasonably doubt that bank regulation and reporting based on historical cost alone would have made banks safer”. 

We thank Professor Laux for giving us permission to present the article on IAS Plus. Its full text is available through SSRN.

The article draws on two earlier articles published jointly by Professor Laux and Professor Christian Leuz:

  • The crisis of fair-value accounting: Making sense of the recent Debate published 2009 in Accounting, Organizations and Society (AOS). In this article, the authors provide a detailed and systematic discussion of the pros and cons of fair value accounting. It is available through ScienceDirect (there is a charge for downloading) and also through SSRN (free of charge). Scientific citation requires use of the version published in the AOS:
  • Did fair-value accounting contribute to the financial crisis? published 2010 in Journal of Economic Perspectives. In this article, the authors look at U.S. bank holding companies and do not find any evidence that fair value accounting contributed to the severity of the financial crisis of 2007-2008 in a major way. The article is available free of charge on the website of the American Economic Association.

IASB responds to the European Commission’s Green Paper on long-term financing

05 Jul 2013

The IASB has submitted a response to the European Commission (EC) concerning the Green Paper, ‘Long-term financing of the European economy’. Focus of the letter is the EC's question regarding a possible relationship between the use of fair value accounting principles and short-termism in investor behavior.

The Memorandum the IASB has made available on its website opens commenting on the EC's question Q20 – To what extent do you consider that the use of fair value accounting principles has led to short-termism in investor behaviour? What alternatives or other ways to compensate for such effects could be suggested? with the statement:

The IASB does not believe that fair value accounting principles have of themselves led to short-termism in investment behaviour.

The IASB points at the wide range of factors that contribute to short-termism (which are also acknowledged in the Green Paper). Fair value accounting may be one of these, however, the comment letter points to the fact that in some cases, there is no alternative as only the fair value can capture meaningful information about financial instruments with complex cashflows. This does not mean that the IASB is seeking a full fair value model for financial instruments, as the comment letter explains, contradicting claims that were not raised expressis verbis in the Green Paper.

As in the IASB's Chairman's April 2013 speech entitled Accounting and long term investment – 'Buy and hold' should not mean 'buy and hope', which is added to the comment letter as an appendix, the IASB notes that even long-term investors require shorter-term, reliable and unbiased performance measures to keep track of their investments and to hold management to account.

The IASB also points at IFRS 13 Fair Value Measurement, which was published in 2011 to explain how to measure fair value for financial reporting and to increase transparency when entities use models to measure fair value, especially when markets become less active.

After explaining that IFRSs seek to report economic performance as it happens which also includes not to hide or to reduce volatility in an artificial way when volatility reflects the actual economic conditions, the letter mandates that accounting should not be seen as or even tried to be used as an instrument to smooth out short-term volatility. It concludes:

Finally, it is important for all users to recognise the limitations of financial reporting.

Please click for:

EFRAG draft endorsement advice can be commented on until next Thursday

05 Jul 2013

The European Financial Reporting Advisory Group (EFRAG) has published draft endorsement advice on changes to IAS 36 and IAS 39. As a consequence of a request from the European Commission aimed at accelerating the endorsement process, the draft endorsement advice is only available for comment until 11 July 2013. EFRAG intends to deliberate on the final endorsement advice on 15 July 2013 and publish it as soon as possible.

The endorsement of the amendments regarding the novation of derivatives seems especially urgent. Amendments to existing standards can only be applied in the European Union after they have been endorsed and published in the Official Journal. At the same time, the amendments to IAS 39 published by the IASB on 27 June 2013 are available for early application. Therefore, the novation of a hedging derivative currently means in the European Union that the hedge accounting is discontinued while outside of the European Union this need not be the case.

The G20's efforts to improve transparency and regulatory oversight of over-the-counter (OTC) derivatives led to the adoption of the European Market Infrastructure Regulation (EMIR) which requires the novation of all hedging derivatives to a central counterparty. EMIR entered into force on 16 August 2012. The Commission Delegated Regulations supplementing EMIR were published in the Official Journal on 23 February 2013 and entered into force on 15 March 2013.

Please click for the following information on the EFRAG website:

EFRAG has updated its Endorsement Status Report to reflect the publication of the draft endorsement advice.

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