We agree with the principal reasoning provided by the IASB that bearer plants, once mature, no longer undergo significant biological transformation and therefore are similar to, and should be subject to, the same measurement requirements as manufacturing. However, we believe this same approach may also be equally applied to livestock, and note this would eliminate volatility in reported income arising from changes in fair value when the holder of the assets has no intention to change the use of its assets other than by sale for ancillary use at the end of its useful life:

We believe that the IASB should further consider the scope of this amendment and specifically that further consideration be given to whether the proposed amendments be extended to livestock that is held for production rather than for its own carcass, for example sheep for wool, chicken and ducks for eggs and dairy cattle for milk. The existence of an active market for bearer livestock that provides a reliable fair value does not alter the nature of these types of biological asset and hence we see no reason in principle why the rationale underlying the proposed amendment to the measurement of bearer plants should not also apply to bearer livestock. We do not see any immediately compelling reason to distinguish between these two types of biological assets.

Notwithstanding our recommendations around bearer livestock, the comment letter notes that we would not object to the IASB finalising the proposed amendment on bearer plants and then undertaking a second phase of the project to consider bearer livestock.

Other observations made in the comment letter include:

• We agree that bearer plants should be measured at accumulated cost before being placed in production, in the same way as self-constructed items of machinery
• We do not concur with the IASB’s comment that in most cases the impact of accounting separately for the roots of perennial plants would not be material and request additional guidance on applying the concepts in IAS 16 to these plants
• We recommend additional guidance be included in any finalised amendment as to when bearer plants are considered to be 'mature' and hence that cost capitalisation ceases, and for the treatment of costs associated with a plant's growth stage through to maturity
• We do not see bearer plants as being sufficiently different in nature to other classes of property, plant and equipment to warrant incremental disclosures, and consider possible additional disclosures identified in the exposure draft as non-financial in nature and not required in general purpose financial statements, e.g. disclosures about productivity, age profiles, physical quantities.
• We agree with the proposed transitional provisions and first-time adoption considerations, but note a number of consequential and other matters that should be considered in finalising the amendments, including around classification, reclassification and impairment.

Click for access to the full comment letter.

Please click for the following documents on the IASB's website:

• Video recording and full text of Mr Prada's speech The bumpy path towards global accounting standards
• Video recording of the panel discussion The Future of Global Financial Reporting

Additional information on IAS Plus:

• Short summary of Mr Prada's speech
• Observer notes from the IFRS Foundation Trustees meeting

Points made in the comment letter include:

• We are generally supportive of the Boards’ approach to unlocking of the Contractual Service Margin (CSM), the presentational split of interest expense from insurance contracts between profit or loss and other comprehensive income (the “OCI solution”) and the new transition provisions. However, we believe that the proposals around the unlocking of the Contractual Service Margin (CSM) requires substantial improvements to allow for the faithful representation of the impact that insurance and participating contracts will have on insurers’ performance. We also believe an entity should be able to make an irrevocable election at initial recognition of insurance contracts to recognise the change in carrying value associated with changes in discount rates to profit or loss
• Although we are supportive of the objective of reducing accounting mismatches, we are not supportive of the proposed “mirroring approach” for participating contracts due to its complexity, cost and departure from the pricing and product design that insurers apply and that should be represented faithfully in their financial statements
• We believe that the proposed measure of insurance revenue is not the most relevant amount for presenting long-coverage insurance contracts’ contribution to an insurer’s performance because it is not consistent with the measurement of insurance portfolios, we are not aware it is the metric sought by investors and it is not used by key management personnel for assessing performance and allocating resources of an insurer
• We recommend the Board consider the timing of any new IFRS for insurance contracts noting the delays in finalising IFRS 9 Financial Instruments as different effective dates for these standards would unduly penalise those entities for which the parallel adoption of both standards is the only reasonable transition strategy.

We also express a note of caution regarding the practical implications surrounding adoption of any new standard on insurance:

Given the diverse approaches currently used in measuring insurance contracts and the complexity of the contracts it addresses, the new IFRS for insurance will present a challenge for preparers, auditors and regulators and we expect there will be a high volume of interpretation issues in advance of the effective date. We would urge the IASB to address interpretations issues quickly and in advance of the effective date to maximise consistent application. The IASB may wish to consider continuing its outreach efforts with preparers and other stakeholders beyond the finalisation of the standard up to the effective date so that issues are captured quickly and addressed by the IFRS Interpretations Committee expeditiously.

Click for access to the full comment letter.

The main result of the consultation was the identification of two business models: the 'liability-driven' business model and the 'asset-driven' business model.

According to EFRAG, the liability-driven business model is especially found with insurers, pension funds and others entities with long-term commitments. The model is characterised by entering into a long-term liability first and then having to find appropriate assets for generating returns to match it. The asset-driven business model EFRAG found with long-term development banks and other entities with public-interest objectives as these are usually granted easy and cheap access to stable financing sources to meet their public policy objectives.

EFRAG has not yet formed a view on whether the asset-driven business model, which is not necessarily seen as as long-term as the liability-driven model, should have effects on the accounting requirements for financial and other assets and financing liabilities. However, EFRAG believes that the liability-driven model is not properly reflected in IFRS 9 Financial Instruments (and other standards).

One of the measures EFRAG is suggesting in the letter concerns extending the use of other comprehensive income (OCI) to a broader set of asset classes by introducing an option of reporting of short-term changes that are not a relevant primary measure of performance outside profit or loss. EFRAG acknowledges, however, that a decision to extend the use of OCI would require the development of an appropriate impairment model.

Please click for access to the full letter on the EFRAG website. EFRAG has also outlined these findings in its letter of comment to the European Commission concerning the Green Paper Long-term financing of the European economy.

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.

Although EFRAG does not deny that fair value accounting may contribute to a limited degree to short-termism in investor behaviour, it comments that it "does not make any sense to ban fair value as such". EFRAG states that when selecting the measurement basis for a particular item, the IASB should consider carefully what information that measurement will produce and then propose the most suitable measurement basis. According to EFRAG it is then also the constituents' responsibility to "ensure that fair value measurements are mandated only when they support high quality financial reporting".

EFRAG also looks at the relationship between prudence and the use of fair value and concludes:

Exercising prudence does not, in itself, rule out measurement at fair value (or any other form of current value). If estimates provided have the appropriate level of reliability, and the use of current values provides the best representation of how assets and liabilities contribute to the entity's financial position and performance, then the use of fair value should be required.

A large part of the comment letter is also dedicated to EFRAG's consultation on a "long-term investment" business model and the recommendations made to the IASB as a result of the consultation.

Please click for access to the comment letter on the EFRAG website. Other reactions to the Green Paper (e.g. by the IASB, FEE, Deloitte) had taken a similar view and concluded that fair value accounting principles have of themselves not led to short-termism in investment behaviour.

The proposals in ED 53 First-Time Adoption of Accrual Basis International Public Sector Accounting Standards address the transition from either a cash basis of accounting, or an accrual basis under another reporting framework, or a modified version of either the cash or accrual basis of accounting, and would apply when an entity first adopts accrual basis IPSASs and during the period that it transitions to accrual basis IPSASs. The proposed IPSAS would provide relief to a first-time adopter in presenting its opening statement of financial position, and allow a first-time adopter to choose to apply certain voluntary exemptions during the period of transition.

The proposals in the exposure draft include:

• Voluntary exemptions impacting fair presentation and compliance. A three year transitional relief period would be available in relation to the recognition and/or measurement of various items, including investment property, property, plant and equipment, defined benefit plans, biological assets, intangible assets, service concession arrangements, financial instruments and non-exchange revenue. Further exemptions related to these items (where applicable) would also be available in relation the capitalisation of borrowing costs, finance lease accounting, and recognition of provisions. The non-elimination of inter-entity balances when preparing consolidated financial statements or accounting for joint ventures or associates, and relief from certain related party disclosures, would also be available during the transitional period.  At the end of the transitional period, and entity would be required to comply with all relevant requirements
• Use of deemed cost. Fair value could be used as a deemed cost of the following assets when reliable cost information is unavailable: inventory, investment property (in some cases), property, plant and equipment, intangibles assets (in some cases), financial instruments, service concession arrangements and assets acquired through non-exchange transactions. This deemed cost would be able to be determined at any point during the three year transitional period for eligible assets. A deemed cost election would also be available in separate financial statements for investments in controlled entities, joint ventures and associates
• Comparative information. Comparative information would not be required (but is encouraged) in transitional financial statements and the first IPSAS compliant financial statements
• Other voluntary exemptions. Entities would have additional relief available in relation to cumulative exchange differences on transition, borrowing costs, segment information during a three year transitional period
• Other mandatory modifications. Additional requirements are proposed in relation to situations where an entity and its subsidiary become first-time adopters at different times, the entity is subject to hyperinflation, leases are in existence at the time of transition, various aspects of impairment, recognition of defined benefit plan liabilities, the classification, designation, derecognition and uncollectability of certain financial instruments, and internally generated intangible assets.
• Asserting compliance with IPSASs. Where a first-time adopter takes advantage of the exemptions that affect fair presentation and its ability to assert compliance with accrual basis IPSASs (the first point above), during the transition period the entity will not be able to make an explicit and unreserved statement of compliance with IPSASs in accordance with IPSAS 1 Presentation of Financial Statements
• Presentation and disclosure. Additional disclosures and reconciliations would be required (with some exceptions), during the transitional period and in an entity's first IPSAS compliant financial statements. Specific disclosures related to deemed costs and other available exemptions and modifications.

Although the IPSASB considered the requirements of IFRS 1 First-time Adoption of International Financial Reporting Standards in developing the exposure draft, it is not part of the IPSASB's ongoing IFRS convergence efforts (unlike the consolidation, joint arrangement and disclosure proposals released earlier this week, which were a convergence project). However, some of the modifications and exemptions proposed in the exposure draft are consistent with those in IFRS 1, although IFRS does not permit a transitional period. The three year transitional period proposed for certain exemptions in ED 53 responds to the complexity of issues related to the first-time adoption of IPSASB, which might be more acute particularly for public sector entities previously preparing financial statements using a cash basis of accounting.

An IPSAS resulting from ED 53 would replace the existing transitional guidance in various IPSASs, and the exposure draft contains numerous consequential amendments to this effect. The IPSASB has indicated that transitional provisions will only be included in individual IPSASs in the future where they deal with changes in a standard after it has already been applied. Equally, the development of new IPSAS may give rise to amendments to the proposed first-time adoption IPSAS.

The exposure draft is open for comment until 15 February 2014. Click for access to the following documents on the IFAC website:

• IPSASB press release
• ED 53 First-Time Adoption of Accrual Basis International Public Sector Accounting Standards.

The exposure drafts follow the IPSASB practice of, where relevant, developing its International Public Sector Accounting Standards (IPSAS) based on IFRS, and follows a Memorandum of Understanding between the IASB and IFAC signed in November 2011, which among other objectives, seeks "to highlight financial reporting issues where alignment between the requirements of the IASB and the requirements of the IPSASB is necessary".

The exposure drafts are based on IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures, including the amendments made in 2012 in relation to transitional guidance and investment entities. The proposals in the IPSASB exposure drafts align with the requirements of these equivalent IASB pronouncements, except where departure is considered justified. In this regard, the IPSASB notes various reasons for modifying IFRS in developing the proposals, including:

• Modifying terminology to reflect public sector needs and align with the vocabulary used in other standards
• Considering the interaction with the Government Finance Statistics and the System of National Accounts
• Reflecting differences between existing IPSAS and IFRS, e.g. the IPSASB has not yet issued an equivalent standard to IFRS 9 Financial Instruments
• Developing additional guidance addressing specific public sector issues.

Some of the differences between the proposals and the IASB's requirements include:

• Modification of the scope exemptions from the requirement to prepare consolidated financial statements, including focusing on the information needs of users
• Provide modified guidance on when an entity would be considered an 'investment entity' that is exempt from consolidation, and to extend the requirement to measure investments on the fair value basis to the consolidated financial statements of a controlling entity of an investment entity, even if it is itself not an investment entity
• Inclusion of additional guidance on when the definitions of 'power' and 'control' may be met in the public sector context, focused on concepts such as regulatory control, economic dependence, special voting rights, and considering 'benefits' rather than 'returns' (including the assessment of non-financial benefits)
• Modifying the measurement of an investment in an associate or joint venture at initial recognition in some cases, and requiring an investor to have a 'quantifiable ownership interest' before the equity method is applied
• Permit an entity to use the equity method in its separate financial statements to account for its interests in controlled entities, joint ventures and associates (the IASB is also considering introducing this option into IAS 27)
• Changing the associated disclosure requirements to reflect public sector needs.

The proposals would replace IPSAS 6 Consolidated and Separate Financial Statements, IPSAS 7 Investments in Associates and IPSAS 8 Interests in Joint Ventures. As these IPSASs were themselves largely based on previous IASB requirements, the changes proposed from these standards are consistent with those faced by for-profit entities applying the 'package of five' IASB standards, e.g. a unified control model based on control and power, the elimination of proportionate consolidation, and numerous additional disclosures. Additionally, the exposure drafts propose the elimination of permitted alternative treatments in some cases where an interest was 'temporary' (an earlier IFRS requirement).

The consideration of how the new consolidation, joint venture and disclosure requirements might be applied in the public sector has already been subject to some debate. For instance, the Australian Accounting Standards Board (AASB) had previously issued proposals on this matter in the Australian context, and these proposals where considered by the IPSASB in developing its own proposals. Additionally, the New Zealand External Reporting Board (XRB) has recently published a policy paper where it states that standards issued by the IASB on new topics will not be included in New Zealand standards for 'public benefit entities' unless the IPSASB addresses the issue. The proposals could also impact the proposed harmonised government accounting standards in Europe, based on 'European Public Sector Accounting Standards' (EPSAS) which would be based on IPSAS.

The IPSASB exposure drafts are open for comment until 28 February 2014.

Click for (links to IFAC website):

• IPSASB press release
• IPSASB 'At a glance' document summarising the five exposure drafts
• Access to the individual exposure drafts and supporting materials:
  • IPSASB ED 48 Separate Financial Statements
  • IPSASB ED 49 Consolidated Financial Statements
  • IPSASB ED 50 Investments in Associates and Joint Ventures
  • IPSASB ED 51 Joint Arrangements
  • IPSASB ED 52 Disclosure of Interests in Other Entities.

The FASB and the ASBJ also discussed the following projects that the FASB and the International Accounting Standards Board (IASB) are currently deliberating:

• Leases.
• Insurance contracts.
• Conceptual framework.
• Financial instruments — Macro hedge accounting.

The FASB and ASBJ will continue to meet, with another meeting to be scheduled for the first half of 2014 in Norwalk. 

Click for:

• Press release (link to FASB website).
• Our story on the speech given by FASB Chairman Russell Golden at the 16 October Keidanren and Financial Executives International Japan meeting.

Highlights were the publication of:

• Draft comment letter on IASB discussion paper on conceptual framework.
• Final comment letter on IASB ED Leases.
• Feedback statement on the EFRAG comment paper on emission trading schemes.
• Finalised letters to the IASB and European Commission as a result of the EFRAG public consultation on long-term investing activities business models.

Additional topics discussed in the newsletter are:

• IASB Discussion Paper on the conceptual framework.
• IASB ED on leases.
• IAS 28 Accounting for Associates and Joint Ventures.
• Macro hedging.
• IASB ED on insurance contracts.
• EFRAG Public Consultation on the need for specific financial reporting for long-term investing activities business models.
• Korean Accounting Standards Board paper on rate-regulated activities.
• Revenue from contracts with customers.
• EFRAG comment paper on emission trading schemes.

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