IASB Research Forum and ABR special issue on the Conceptual Framework

30 Aug 2013

On 2 October 2014, the first IASB Research Forum will be held offering an interdisciplinary platform for academics from around the world to exchange their views with peers and with members of the International Accounting Standards Board (IASB) on topics that address the interaction between international financial reporting requirements, policy and the functioning of capital markets. The topic of this first research forum will be the Conceptual Framework for Financial Statements.

In July 2013, the International Accounting Standards Board (IASB) published a comprehensive Discussion Paper containing proposals for topical areas where it considers a revision and amendment of the existing Conceptual Framework necessary. In connection with the consultation, the IASB is interested in academic input on all aspects of the project, to help it to develop the revised Framework. It has therefore dedicated its inaugural IASB Research Forum to the topic.

At the same time, the IASB is cooperating with the Accounting and Business Research (ABR) which has issued a call for papers for a special edition of academic papers addressing issues relevant to the development and application of the Conceptual Framework. Authors of selected papers entered into the review process for the special issue will be invited to present their work at the IASB Research Forum, planned to be held at Said Business School, Oxford University, England. IASB members will provide commentary on each paper and the ABR special issue will be published in the latter half of 2015.

Please click for the following information on the IASB website:

EFRAG feedback statement on the results of the roundtable on financial reporting for long-term investing business models

30 Aug 2013

On 8 July 2013, the European Financial Reporting Advisory Group (EFRAG) held a roundtable meeting 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.

The event was part of EFRAG’s public consultation connecting the European Commission green paper and the limited scope amendments to IFRS 9 Financial Instruments proposed by the IASB that indicate that fair value measurement and long-term horizons are not mutually exclusive.

The part of discussions regarding the question of whether fair value measurement leads to short-termism revealed that the users of financial statements believe that fair value information is important to understand a company's exposure to financial market risks and is a good indication of the liquidity of the market. A user panellist also pointed out that there was no academic evidence that fair value was leading to short-termism.

The panellists from the insurance and banking industry noted they would prefer that fair value did not impact the profit and loss account when the business model is long-term investing. They stressed that volatility due to short-term variations does not provide information on real performance and should be communicated through appropriate disclosures. They also expressed concern regarding the amount of non-GAAP measures companies feel compelled to use to present a long-term investing business model in a way that is understandable to users.

Please click for the following information on the EFRAG website:

Insurance contracts web presentations available

29 Aug 2013

The IASB staff has made available a web presentation recorded on 21 August 2013 detailing the transition proposals included in the revised insurance contracts exposure draft.

In addition, previous web presentations are also available on the proposals included in the revised exposure draft:

  • 31 July 2013 — Web presentation on the proposals for unlocking the contractual service margin
  • 19 July 2013 — Web presentation on contracts linked to underlying items proposals
  • 15 July 2013 — Discussing the revenue proposals of the revised ED Insurance Contracts
  • 25 June 2013 — Introduction to the revised ED Insurance Contracts

All of the web presentation recordings are available on the IASB website. The IASB expects to add additional web presentations over the next few weeks.

Conceptual framework web series

28 Aug 2013

The International Accounting Standards Board (IASB) will be hosting a series of web presentations on its 'Conceptual Framework' Discussion Paper. Seven dates between September–November have been announced.

Following the introductory web presentations on 26 July 2013, the IASB will host seven more live web presentations on the issues raised in the DP. Each presentation will also feature a question and answer session.

Date Topic
Tuesday 3 September 10:00 am Definitions of assets and liabilities
Friday 13 September 2:30 pm Other comprehensive income
Friday 27 September 10:00 am Definition of equity and distinction between liability and
equity elements
Wednesday 2 October 10:00 am Measurement
Thursday 10 October 2:00 pm Additional guidance to support the liability definition
Tuesday 22 October 4:00 pm Objective and Qualitative Characteristics
Friday 15 November 3:00 pm Presentation and disclosure

Click for:

Japanese proposals to permit wider voluntary IFRS adoption

27 Aug 2013

The Financial Services Agency of Japan (FSA) has released proposals to amend applicable ordinances to allow the wider voluntary application of International Financial Reporting Standards (IFRS) in consolidated financial statements by Japanese companies. The proposals would implement earlier policy recommendations from Japan's Business Accounting Council (BAC) to ease the eligibility criteria for voluntary IFRS adoption in Japan.

The BAC met in June 2013 and recommended the elimination of a number of eligibility criteria for voluntary IFRS adoption. Specifically, the following existing requirements would be removed:

  • that an entity shall be a listed company in Japan
  • the entity conducts financial and/or business activities internationally.

After finalisation of the proposals, the only remaining hurdle for Japanese entities to voluntarily adopt IFRS would be to establish internal process and systems (including securing capable human resources) to ensure appropriate IFRS reporting, with such fact being disclosed. In addition, Japanese companies would be permitted to use IFRS in documentation prepared for initial public offerings (IPOs). The proposal also includes measures to make it possible for an entity to commence IFRS reporting from the beginning of any quarter in a financial year.

Comments on the FSA proposals close on 25 September 2013. Click for more information (link to FSA website, currently available in Japanese).

New proposals for private entity reporting in Malaysia

26 Aug 2013

The Malaysian Accounting Standards Board (MASB) has published an exposure draft with revised proposals for 'private entity' reporting in Malaysia. The new proposals would remain based on the IFRS for SMEs, but would make some amendments to it in the Malaysian context, and have a wider application than earlier proposals.

The revised proposals follow the issue of a 'roadmap' in March 2013 proposing the introduction in Malaysia of ‘Financial Reporting Standards for Small and Medium-sized Entities’ (FRS for SMEs) which would have been virtually identical to the IFRS for SMEs. The FRS for SMEs would have been used by medium-sized private entities, with small entities continuing to use existing Malaysian Private Entity Reporting Standards (PERS), themselves based on pre-2003 international accounting standards.

The revised proposals, contained in MASB Exposure Draft ED 77 Malaysian Private Entities Financial Reporting Standard (MPERS), would:

  • apply a single financial reporting framework to all private sector entities, completely replacing the current PERS with the Malaysian Private Entities Reporting Standard (MPERS). The MASB's reasons for the change from the roadmap proposals to retain the PERS include a belief that application of the MPERS to micro-sized entities should not be onerous, the existing PERS are outdated, and that is costly to maintain three different frameworks for use in Malaysia
  • amend the requirements of the IFRS for SMEs in the Malaysian context in three areas:
    • income taxes - the MPERS would have income tax accounting requirements which are equivalent to existing IFRS literature (the IFRS for SMEs income tax requirements are based on the IASB's 2009 exposure draft, these proposals were not adopted, and the IASB has also tentatively decided to align the IFRS for SMEs requirements with IAS 12 Income Taxes)
    • real estate - removing principles that are consistent with IFRIC 15 Agreements for the Construction of Real Estate (non-private Malaysian real estate entities also have deferred application of Malaysian IFRS-equivalent standards)
    • exemption from preparing consolidated financial statements - requiring an ultimate Malaysian parent to prepare consolidated financial statements, regardless of whether any non-Malaysian ultimate parent has prepared consolidated financial statements.

The amendments from the IFRS for SMEs proposed in ED 77 were determined on the basis of MASB developed criteria on when it would be appropriate to make sure modifications in the Malaysian context. These criteria include whether the change would result in more relevant and useful information to users, result in improved comparability with private entity financial statements in other jurisdictions, respond to a need to reduce complexity, or consider IASB proposals for fundamentally different requirements in the existing IFRS for SMEs. The criteria were used to reject constituent calls for amendments to the IFRS for SMEs in areas such as property, plant and equipment, investment property, development costs and borrowing costs.

The revised proposals are open for comment until 30 September 2013. The MASB hopes to finalise the MPERS by the end of 2013 for application by Malaysian private entities in accounting periods beginning on or after 1 January 2016.

Click for press release (link to MASB website).

EDTF progress report on the implementation of disclosure recommendations

22 Aug 2013

In October 2012 the Enhanced Disclosure Task Force (EDTF) presented a report to the Financial Stability Board (FSB) recommending key enhancements to the risk disclosures made by banks. The report identified seven fundamental principles for enhancing risk disclosure and included 32 specific recommendations. The EDTF has now published a progress report in line with its October 2012 report.

For the progress report the EDTF conducted a survey on the level and quality of the implementation of their report Enhancing the Risk Disclosures of Banks in major banks’ 2012 annual reports.

The survey results demonstrate that the recommendations are beginning to make a positive impact on the reporting practices of global banks. The banks’ self-assessment is that they have implemented 50% of the EDTF recommendations in aggregate in 2012 disclosures. 2011 this number was at 34%; and the banks expect to implement 72% of the recommendations in 2013.

Geographically, banks in the United Kingdom showed the highest implementation rates (80%), while implementation was lowest in the United States and Canada (39% and 41%, respectively). Canadian banks expect to implement an additional 50% of recommendations in 2013, though.

Analysed by sections, qualitative disclosures related to the EDTF's general recommendations and other risks show the highest implementation rates (exceeding 71% over all banks) while the lowest implementation rates were observed in relation to market risk and funding disclosures.

The findings of the EDTF are in line with the results of a survey conducted by Deloitte (UK) that reviewed the implementation of the 32 recommendations by banks that were members of the EDTF Working Group.

Please click for the following information on the FSB website:

IAASB Chairman speaks about evolving role of auditors and auditor reporting

16 Aug 2013

At the 2013 CReCER Conference in Nicaragua, Prof. Arnold Schilder, Chairman of the IAASB, delivered a speech on the evolving role of auditors and auditor reporting. He specifically discussed how he felt the proposals outlined in the recent exposure draft on auditor reporting would provide more value to users of financial statements.

The IAASB recently issued an exposure draft that proposes changes to audit reports, including provisions to include more information on how audits are performed. During his speech, Mr Schilder highlighted certain aspects of the proposal that would create substantial changes in how auditors communicate their opinion to users of their reports, including:

  • Movement of the opinion to the first item in the auditor's report.
  • A new section of the report where the auditor communicates significant matters during the audit.
  • A specific statement in the report about the entity's ability to continue as a going concern.
  • A statement about the auditor's independence from the audited entity.

The transcript of his speech is available on the IFAC website.

AASB essay on presentation and disclosure

14 Aug 2013

The Australian Accounting Standards Board (AASB) has published an essay discussing disclosure and presentation in the context of conceptual frameworks. The essay argues there is a "gap" in frameworks between the objective level and the lower levels, due to an insufficient exploration of the connection between users' needs and the characteristics of the entity. The essay suggests a possible broader focus on 'stocks' and 'flows' and a resultant new approach to presentation and disclosure which would move away from topic based disclosure.

The essay, AASB Essay 2013-1 Rethinking the Path from an Objective of Economic Decision Making to a Disclosure and Presentation Framework, was principally authored by Kevin Stevenson (AASB Chair) and represents the first in series intended to be produced by the recently formed AASB Research Centre. The essay series is "designed to provide an avenue for a wide range of financial reporting issues to be discussed and for ideas to be raised to stimulate debate and provide thought leadership in accounting standard-setting" but does not necessarily represent the views of the AASB.

The essay contends that much of the debate in the history of accounting standards has predominantly focused on recognition and measurement issues, and more recently also seen as a rise in the importance of business models in the development of accounting standards. These foci have resulted in disclosures "expounding on recognised items" and providing more information about an entity's business model. As a result, the paper argues, the current disclosure regime "might be characterised as largely... topically driven" and focused on drawing out information about cash flow implications of each topic, whilst presentation is in Mr Stevenson's view characterised by "minimum required line items, somewhat stilted formatting and limited ordering principles".

Although the essay was originally intended to contribute towards discerning the principles for disclosure and presentation, it instead concludes that the focal point of conceptual frameworks "should be the identification of the characteristics of entities with which users would need to be concerned in order to make decisions about allocating scarce resources". It goes on to say:

In essence, ... we have been glib about economic decision making and too ready to accept somewhat unexplored phrases such as “the amount, timing and uncertainty of cash flows”. The essay does not decry information about the amount, timing and uncertainty of such flows. Rather, it calls for identification of the generic characteristics of entities that will enable users to understand the significance of that information at understandable levels of aggregation and classification.

Consistent with this analysis, the essay argues that disclosure and presentation should be considered at a much 'higher' level in the Framework as "we need to know what we are trying to convey before deciding on when and how". It notes what Mr Stevenson considers "unstated or undeveloped principles" in presentation and disclosure and "unproductive arguments between competing and incompatible ideas" results in "excessive and inconsistent disclosure requirements".

In developing its thesis further, the essay picks up on the broader economic concepts of 'stocks' and 'flows' and explores "the possible stocks and flows that could, generically, be used to characterise the 'economics of an entity'" before contending "there is an identifiable list of such stocks and flows and that we are actually quite familiar with the items on that list."

The essay puts forward six tentatively identified stocks:

  1. The current capacity of the entity to provide goods or services
  2. The capacity of the entity, with its current financial structure, to efficiently and effectively fund its current operations and meet its commitments as and when they fall due
  3. The capacity of the entity to sustain current operations
  4. The capacity to sustain the entity’s current funding model
  5. The capacity of the entity to change operationally
  6. The capacity to finance material changes in operations

It then relates these concepts to flows, being material changes in attributes of these stocks, with a focus on "volume, direction, pace of change, variability and predictability of change". The paper notes:

In accounting terms, we have seen the various attempts to define profit, operating profit, comprehensive income and many variants thereof. In broad terms, and ignoring opportunistic behaviour, those attempts, and the attempt of businesses to reveal “underlying profitability”, are symptoms of the implicit need to find a better way to explain flows.

The paper further explores these concepts, by relating them to the notion of 'performance', considering the inter-relationship of stocks, and addressing their relationship to cash flows. It also notes that the 'stocks' and 'flows' approach would provide guidance to standard-setters and regulators when considering whether topics such as integrated reporting are within their scope.

The paper concludes with a discussion on 'operationalising' the concepts of 'financial position' and 'performance' within the context of 'stocks' and 'flows'. On disclosure and presentation, it argues for moving away from a 'topical basis' of disclosures and concludes:

The essay contends that, among other consequences, purpose-driven disclosure and presentational approaches could flow from attempts to faithfully represent... stocks and flows. This would result in a substantial rationalisation of existing disclosures and provide a way of cutting through the unending debates about presentation that stem from multiple implicit conflicting goals.

The author is of the view that the implications... could be illustrated by taking existing disclosures and presentation requirements and trying to classify them by reference to stocks and flows set out... This will prove not to be a simple task as the principles underlying those requirements are often unclearly stated or not stated at all.

Click for:

  • AASB press release (link to AASB website).
  • AASB Essay 2013-1 Rethinking the Path from an Objective of Economic Decision Making to a Disclosure and Presentation Framework (link to AASB website).

Australia adopts investment entities amendments

14 Aug 2013

The Australian Accounting Standards Board (AASB) has issued an Amending Standard which implements the International Accounting Standards Board's 'Investment Entities' amendments in the Australian context. The issue of the Amending Standard follows a long debate about the investment entities amendments in Australia, with divergent views being expressed, including the possibility of not adopting the amendments at all. However, the final Amending Standard adopts the IASB's amendments without modification and represents a change from original proposals which may have required additional Australian disclosures requiring consolidated financial information to be included in Australian financial reports.

In developing the Amending Standard, the AASB decided they should reject "the approach of not adopting the IASB's amendments for Australian investment entities as this would result in Australian investment entities not being able to assert IFRS compliance".

The decision to adopt the IASB's amendments without additional disclosures responds to constituent feedback, the vast majority of which did not support the proposed disclosures. The AASB was persuaded by constituent arguments that fair value information was the most relevant to investors in investment entities and that the costs of preparing additional disclosure requirements proposed would disadvantage Australian entities by comparison to their international counterparts.

The AASB further concluded, again on the basis of constituent feedback, that the existing disclosure requirements in AASB 12 Disclosure of Interests in Other Entities (equivalent to IFRS 12) would be sufficient to meet the needs of users of financial statements of investment entities, but that it would undertake a post-implementation review at a later time to determine if additional disclosures are warranted.

As a result of the amendments, Australian investment entities are provided with an exception to consolidation, and they are required to measure unconsolidated subsidiaries at fair value through profit or loss.

The amendments are effective from 1 January 2014 and early adoption is permitted. Click for:

Correction list for hyphenation

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