October

The Bruce Column — Being prudent about prudence

03 Oct 2013

The concept of prudence is, on the surface, a simple one. But, as our regular resident columnist Robert Bruce explains, that is why it needs to be better defined.

‘Dear Prudence’, the Beatles once sang before launching into a song about sunshine, blue skies and birds singing. And that is the problem with prudence. The word, the concept, is lost in such a haze of vaguely positive feelings that it is hard to pin it down and define what it really means. Small wonder that when accountants try to work out an acceptable definition of the concept of prudence as it applies in the field of financial reporting they find it both almost impossible and contentious.

Outsiders can’t really see what the fuss is about. If they have any idea where prudence fits in they tend to feel that accountants should be more likely to emphasise bad news than good news, more likely to recognise losses than to push up the profits. Or as the original version of the IASB’s conceptual framework put it: ‘Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.’

The problem with this is that prudence can lead accountants a bit of a dance. Historically prudence became the oldest trick in the book. You cite ‘extra’ prudence one year and then, marvel upon marvel, discover that you can feed the fruits of that prudence into a bumper crop of profits the next year.

This, as the IASB points out in the latest discussion paper on the conceptual framework, means that the financial statements concerned ‘would not be neutral and therefore, not have the quality of reliability’. Instead the IASB decided in 2008 that the problem of precisely defining the application of prudence meant prudence should be dropped and the idea of neutrality introduced instead. Neutrality would effectively cover the admirable aspects of prudence but not the more problematic and worrying downsides. The pursuit of neutrality, it was felt, would be more effective than prudence at ridding the process of bias.

But the word prudence is emotive and a significant number of people mourn her loss and refuse to accept the IASB concept that she is still alive and well and can be found in the standards. ‘Some would prefer financial statements to show a bias towards conservatism and reject the notion of neutrality’, explains the discussion paper.

The rationale for the IASB’s views on neutrality and prudence is that a systemic bias towards conservatism undermines the value of earnings as a performance indicator, but the on-going debate proves that this view is not universal.

The IASB also realises that fans of ‘a bias towards conservatism’ would not accept its definition of the good lady as ‘the exercise of caution when making estimates and judgements under conditions of uncertainty.’ EFRAG noted in its Bulletin ‘Prudence’ (April 2013) that there is a view that ‘prudence is compatible with neutrality and request that, as prudence is important, the Framework needs to explicitly acknowledge it, because otherwise it will be incomplete.’  EFRAG concludes that, given that not everyone ‘exercises the degree of “caution” in the same way,’ the Framework should discuss the role of prudence explicitly.

There is an opportunity during the discussion of the conceptual framework to acknowledge that, while the idea of prudence should be all around financial reporting, we need to be more explicit about how it influences it. Or as the Beatles put it: ‘Dear Prudence see the sunny skies, the wind is low, the birds will sing, that you are part of everything’.

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World Bank launches programme to improve financial reporting in Eastern Europe

02 Oct 2013

The World Bank has launched a new programme to strengthen corporate financial reporting in the countries of the EU’s Eastern Partnership. Countries participating in the new programme, "Strengthening Auditing and Reporting in the Countries of the Eastern Partnership" (STAREP), include Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine.

These six countries (that all require the application of IFRSs for at least some of their listed companies) have made significant progress in modernising their systems of corporate financial reporting but face several outstanding common challenges (e.g. institutional capacity). During the launch conference in Vienna, participants discussed how recent and prospective changes in international reporting standards and the international and European regulatory frameworks would affect their own plans for the reform of accounting and auditing.

The STAREP programme aims to (1) assist the participating countries set up effective and sustainable frameworks for accounting and auditing that are in line with international standards and (2) take account of the requirements of the EU's system of law and regulations. The STAREP programme will also support building the institutions that are needed to operate the new legislative frameworks effectively. In addition, the programme will help professional accounting and auditing bodies fulfill their roles in establishing professional entry standards and discipline and modernise systems of professional education in the university sector and elsewhere. The programme also puts a high priority on learning from the experiences of other countries that are facing or have faced similar challenges in implementing accounting and auditing reforms.

Initial funding for the programme has been provided by the Austrian Development Agency and Austria's Ministry of Finance. STAREP will be managed by the Centre for Financial Reporting Reform (CFRR), the World Bank's specialist centre in Vienna for providing knowledge and advisory services in implementing reforms to financial reporting.

Please click for more information on the World Bank website:

New IFRS for SMEs training module available

01 Oct 2013

The IFRS Foundation Education Initiative has developed a training module for Section 26 of the IFRS for SMEs 'Share-based Payment'. This section of the IFRS for SMEs provides guidance on share-based payment transactions and the related non-mandatory guidance subsequently provided by the IFRS for SMEs group.

Within the context of the IFRS for SMEs, the learning objectives of the Section 26 training module are designed to allow participants to:

  • Identify share-based payment transactions.
  • Apply the recognition requirements for share-based payment transactions, including the requirements when there are vesting conditions.
  • Apply the measurement principle for recording equity-settled share-based payment transactions, including shares and share options.
  • Account for modification of terms and cancellations and settlements of equity-settled share-based payment transactions.
  • Account for cash-settled share-based payment transactions, including share-based payment transactions with cash-settled alternatives.
  • Understand how to account for government-mandated share-based payment plans.
  • Demonstrate an understanding of the significant judgements that are required in accounting for share-based payment transactions.
  • Disclose share-based payment arrangements in financial statements.

In total, the IFRS Foundation is developing 35 stand-alone training modules for each section of the IFRS for SMEs with most of the modules being available in Arabic, Russian, Spanish, and Turkish. The IFRS Foundation hopes to expand the number of languages in which the modules are available.

Please click for more information on the Section 26 training module or access all training modules on the IASB website (free registration is required to access the individual modules).

We comment on a number of tentative agenda decisions of the IFRS Interpretations Committee

01 Oct 2013

We have published our comment letters on IFRS Interpretations Committee agenda decisions on IFRS 10, IFRS 11, IAS 19 and IAS 32, as published in the July IFRIC Update.

More information about the issues is set out below:

Issue

More information

IFRS 10 Consolidated Financial Statements — Classification of puttable instruments that are non-controlling interests
IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements — Transitional provisions in respect of impairment, foreign exchange and borrowing costs
IAS 32 Financial Instruments: Presentation — Classification of a financial instrument that is mandatorily convertible into a variable number of shares (subject to a cap and a floor) but giving the issuer the option to settle by delivering the maximum (fixed) number of shares
IAS 32 Financial Instruments: Presentation — Classification of a financial instrument that is mandatorily convertible into a variable number of shares upon a contingent ‘non-viability’ event
IAS 19 Employee Benefits — Actuarial assumptions — discount rate

You can access all our comment letters to the International Accounting Standards Board, IFRS Foundation, and IFRS Interpretations Committee here.

IFRS Survey 2013: Focus on financial reporting by Swiss listed companies

01 Oct 2013

Deloitte Switzerland has completed the fourth survey of the application of IFRS accounting standards by Swiss public companies. For the first time, the survey also includes a section on the emergence of Swiss GAAP FER as the number of companies switching from IFRSs to Swiss accounting standards continues to increase.

While in the past, companies switching from IFRS to Swiss GAAP FER were primarily small to medium-size listed groups, October 2012 witnessed the first ground-breaking switch of a company registered on the Swiss Market Index (SMI) and the debate around the choice of accounting standards will be of a greater focus in the future. The survey offers an analysis of the profiles of companies that switched from IFRS to Swiss GAAP FER in the last few years, discusses some of the pros and cons and highlights the key differences between these standards on the main financial reporting matters.

The newest issue of the survey also includes a qualitative review of the accounting policies driven by the fact this subject was one of the SIX Exchange Regulation focus areas. The analysis in complex and judgmental areas such as goodwill and impairment as well as provisions has been enhanced. The publication also offers a detailed analysis of the implications of the revised IAS 19 Employee Benefits for Swiss listed companies. Last but not least, benchmarks with international companies in France, Germany and UK were also added in these areas.

Please click to download IFRS Survey 2013: Focus on financial reporting by Swiss listed companies.

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