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2013

November 2013 IASB meeting notes — Part 1

21 Nov 2013

The IASB's meeting is being held in London on 20-22 November 2013, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from Wednesday's sessions on four narrow scope projects (IFRS 10/IAS 28, IFRS 11, IAS 16/IAS 39, 2012-2014 Annual improvements cycle), 2010-2012 Annual improvements cycle on vesting conditions (IFRS 2), rate-regulated activities (interim IFRS), disclosure initiative (IAS 1), disclosures about going concern (IAS 1), revenue recognition, and leases.

Capital Markets Advisory Committee October 2013 meeting update

21 Nov 2013

The IASB has made available recordings of the discussions for the Capital Markets Advisory Committee (CMAC) 17 October 2013 meeting which was held in London. A detailed summary of the meeting will be provided by the CMAC at a later date.

The topics discussed at the meeting included:

  • Conceptual framework. The CMAC discussed aspects of the conceptual framework discussion paper concerning profit or loss/other comprehensive income, liabilities/equity and prudence/stewardship/reliability.
  • Disclosure initiative. The CMAC discussed the need for disclosures on ‘net debt’. They decided that although it is an important issue, it should not be considered as part of the amendments to IAS 1.
  • Leases. The CMAC agreed that assets and liabilities should be recognised for all leases that last longer than 12 months on a lessee’s balance sheet to improve financial reporting. Also, most of the members supported the proposed changes to lessor accounting model.
  • IFRS 3: Post-implementation review. The CMAC discussed the investors’ prospective to the business combinations guidance. Main discussion points centered on disclosures, goodwill and intangibles, and other concerns.
  • Appointment of new members. The CMAC extended Jane Fuller term for one more year and appointed seven new members.

Click for more information (link to IASB website).

IASB clarifies accounting for employee contributions to defined benefit plans

21 Nov 2013

The International Accounting Standards Board (IASB) has issued 'Defined Benefit Plans: Employee Contributions (Amendments to IAS 19 'Employee Benefits')'. The amendments clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. In addition, it permits a practical expedient if the amount of the contributions is independent of the number of years of service. The amendments are effective for annual periods beginning on or after 1 July 2014, with earlier application being permitted.

 

Background

In outlining the accounting requirements for employee benefits, IAS 19 Employee Benefits mandates that an entity has to consider contributions from employees (or third parties) when accounting for defined benefit plans. Contributions that are linked to service must be attributed to periods of service as a reduction of service cost.

In 2012, the IFRS Interpretations Committee received submissions seeking clarification regarding the accounting for employee contributions set out in the formal terms of a defined benefit plan. The submitters requested additional guidance on the accounting of employee contributions in respect of service and also expressed concerns about the complexity of the requirements when applied to simple contributory plans.

The Interpretations Committee referred the matter to the IASB and suggested simplifying the requirements in IAS 19 for these plans. The IASB came to the conclusion that contributions from employees or third parties reduce the ultimate cost of a defined benefit and should therefore be accounted for consistently with the accounting for the defined benefit. The conclusions were published as ED/2013/4 Defined Benefit Plans: Employee Contributions (Proposed amendments to IAS 19) in March 2013.

 

Amendments

With Defined Benefit Plans: Employee Contributions (Amendments to IAS 19 Employee Benefits) the IASB has amended the requirements in IAS 19 for contributions from employees or third parties that are linked to service:

  • If the amount of the contributions is independent of the number of years of service, contributions may be recognised as a reduction in the service cost in the period in which the related service is rendered (note: this is an allowed but not required method). 
  • If the amount of the contributions depends on the number of years of service, those contributions must be attributed to periods of service using the same attribution method as used for the gross benefit in accordance with paragraph 70 of IAS 19.

The amendments are intended to provide relief in that entities are allowed to deduct contributions from service cost in the period in which the service is rendered. This was common practice prior to the 2011 amendments to IAS 19. In those cases the impact of retrospective application would be minimal.

 

Effective Date

The amendments are effective for annual periods beginning on or after 1 July 2014. Earlier application is permitted but corresponding disclosures are required. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the amendments are to be applied retrospectively.

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Updated EFRAG endorsement status report

21 Nov 2013

The European Financial Reporting Advisory Group (EFRAG) has updated its report showing the status of endorsement, under the EU Accounting Regulation, of each IFRS, including standards, interpretations, and amendments. The latest report reflects the European Commission endorsement of 'Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)'.

The IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) in October 2012 in order to provide an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities which meet the definition of an 'investment entity'. The European Union published a Commission Regulation endorsing the amendments on 21 November 2013.

Please click for the EFRAG Endorsement Status Report as of 21 November 2013.

European Union formally adopts investment entities amendments

21 Nov 2013

The European Union has published a Commission Regulation endorsing 'Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)'.

The European Union has published the Commission Regulation (EC) No 1174/2013 of 20 November 2013 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council in the Official Journal on 21 November 2013. This regulation adopts the amendments made by the IASB in October 2012 providing an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities which meet the definition of an 'investment entity'.

The amendments have been given an effective date of 1 January 2014 but can be applied earlier (this is the same effective date the IASB has given the amendments).

We recommend clarifying the use of inflation accounting outside hyperinflationary economies

20 Nov 2013

We have published our comment letter on IFRS Interpretations Committee tentative agenda decision on IAS 29, as published in the September IFRIC Update.

In responding to the Committee’s tentative agenda decision, we recommend that an amendment be made to IAS 29 to clarify the use of inflation accounting.

Click for access to the full comment letter.

IASB finalises IFRS 9 chapter on general hedge accounting

19 Nov 2013

The International Accounting Standards Board (IASB) has published an amendment to IFRS 9 'Financial Instruments' incorporating its new general hedge accounting model. This represents a significant milestone as it completes another phase of the IASB’s project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. The new general hedge accounting model will allow reporters to reflect risk management activities in the financial statements more closely as it provides more opportunities to apply hedge accounting.

Background

In developing a new model the IASB comprehensively reviewed the hedge accounting requirements of IAS 39. IAS 39 had long been criticised as being too rules-based and viewed by many as unnecessarily preventing hedge accounting from being applied in reasonable circumstances. This has led to more volatility in profit or loss from risk management activities.

In overhauling the hedge accounting requirements, the IASB chose to deal with portfolio (or “macro”) hedge accounting of open portfolios separately from general hedge accounting. The idea behind this was to first set the principles of a general hedge accounting model before considering how this might apply for a macro hedging.

In December 2010, the IASB published the Exposure Draft ED/2010/13 Hedge Accounting (the 'ED') proposing a new general hedge accounting model. That ED contained an objective to align hedge accounting more closely with risk management. To meet this objective the ED proposed to increase the scope of eligible hedged items and hedging instruments. It proposed an objective-based hedge effectiveness assessment starkly different to IAS 39’s 80-125 per cent hedge effectiveness threshold. To accompany these changes to eligibility and qualification, it also proposed changes to the mechanics of cash flow and fair value hedge accounting, as well as revised hedge accounting presentation and disclosure requirements.

The ED was well received in many respects since it addressed many concerns relating to hedge accounting restrictions in IAS 39. The IASB also received feedback on areas where the proposed new requirements were not well understood, overly complex or contained restrictions on the application of hedge accounting that constituents did not agree with. This resulted in changes that were included in the IASB’s review draft of its proposals that were posted on the IASB's website in September 2012.

The IASB received comments on its review draft which lead to further changes, the most significant of which introduced an accounting policy choice under IFRS 9 to continue to apply the hedge accounting requirements of IAS 39. This policy choice was introduced to alleviate concerns that the proposed general hedge accounting model could not accommodate macro cash flow hedging of interest rate risk in the same way as IAS 39. Also since the macro hedge accounting project is not yet complete, some preparers did not want to change their hedge accounting processes twice (ie once to accommodate the general hedge accounting model and then again to accommodate the macro hedge accounting model). 

 

Summary of key requirements

Increased eligibility of hedged items

IFRS 9 increases the scope of hedged items eligible for hedge accounting. For example:

  • Risk components of non-financial items may be designated provided they are separately identifiable and reliably measurable
  • Derivatives may be included as part of the hedged item
  • Groups and net positions may be designated hedged items

 

Increased eligibility of hedging instruments

The new model allows financial instruments at fair value through profit or loss to be designated as hedging instruments. It also introduces a new way to account for the change in time value of an option when the intrinsic value is designated, resulting in less volatility in profit or loss. The alternative accounting treatment for forward points and currency basis (when excluded from the designated hedge) can also result in less volatility in profit or loss.

 

New hedge effectiveness requirements

A fundamental difference to the IAS 39 hedge accounting model is the lack of the 80-125 per cent bright line threshold for effective hedges and the requirement to perform retrospective hedge effectiveness testing. Under the IFRS 9 model, it is necessary for there to be an economic relationship between the hedged item and hedging instrument, with no quantitative threshold. This will allow flexibility in how an economic relationship is demonstrated and for qualifying hedges actual hedge ineffectiveness will be reported.

 

Increased hedge accounting disclosures

The trade off to increased hedge accounting possibilities is increased disclosures about an entity’s risk management strategy, cash flows from hedging activities and the impact of hedge accounting on the financial statements.

 

Alternatives to hedge accounting

As part of developing the new model, the IASB introduced some alternatives to hedge accounting as a means to reflect risk management activities in the financial statements. For example:

  • IFRS 9 includes an option to designate a credit exposure as measured at fair value through profit or loss if the credit risk is managed using a credit derivative
  • IAS 39, as amended for application with IFRS 9, includes an option to designate at fair value through profit or loss “own use contracts” if doing so eliminates or significantly reduces an accounting mismatch

 

Policy options to continue applying hedge accounting under IAS 39

The newly developed general hedge accounting model does not deal with the accounting for hedges of open portfolios (portfolio/macro hedge accounting). To alleviate concerns of preparers having to change their policies twice within a relatively short period of time, the IASB introduced two policy options in the final version of the hedge accounting chapter of IFRS 9:

  • Those entities that currently apply the requirements in IAS 39.81A (the application of fair value hedge accounting to portfolio hedges of interest rate risk) may continue doing so under the new requirements. In that case, the requirements in IFRS 9 would apply to hedges in general, whereas portfolio hedges would continue to be accounted for according to IAS 39.
  • Additionally, entities would be given an accounting policy choice to account for all hedges under either IAS 39 or IFRS 9. That option would be all inclusive, i.e. entities could not pick and choose (e.g., entities wishes to continue applying IAS 39 would have to continue testing effectiveness in the narrow 80-125 per cent corridor, could not benefit from the increased eligibility of hedge items and hedging instruments, etc.).

 

Effective date and transition

The IFRS 9 amendment to introduce the new hedge accounting model removed the mandatory effective date for IFRS 9 which will be set once the standard is complete with a new impairment model and finalisation of any limited amendments to classification and measurement, both of which are due to be finalised in 2014. The standard is available for early adoption (subject to local endorsement requirements), but if an entity elects to apply it it must apply all of the requirements in the standard at the same time. On transition the hedge accounting requirements are generally applied prospectively with some limited retrospective application.

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EBA publishes response to draft Maystadt report

19 Nov 2013

Following the publication of the final Maystadt report, the European Banking Authority (EBA) has made available its response to the draft of the report. As with the ESMA response to the draft report published last week, the core points remain applicable even though the final Maystadt report has undergone some changes vis-à-vis the draft version.

EBA believes that financial stability and prudence considerations should be given appropriate weight in standard-setting and that a wider engagement of prudential and financial stability authorities in the standard-setting process would therefore be advisable. (The suggestion to make EBA one of the contributing actors was taken up in the final version of the report.)

The main three points EBA raises in the comment letter concern endorsement advice, member states and stakeholders, and independence.

On endorsement advice, EBA believes that this "should be provided with the objective to respect the public interest according to the IAS Regulation and, therefore, the body entrusted with this mission should serve the needs of the public interest". EBA is not convinced that the recommended transformation of EFRAG with a Supervisory Board composed of both, members representing public and private interest, will achieve this objective. EBA is especially sceptical regarding the ability of such a body to make decisions on a consensus basis and has concerns that situations might arise where the public authorities are outvoted by the other members. Therefore, EBA suggests either leaving decisions on the endorsement advice to the public authorities represented in the body alone or to install a separate independent body responsible for providing the endorsement advice (which would be a public authority).

On member states and stakeholders EBA requests that "the body representing the EU voice should have the capacity to encompass all member states' interest and should also be able to consider the view of all stakeholders with an interest in financial reporting", and on independence the response simply states that "the independence of the members of this body should be ensured".

Please click for access to the full letter on the EBA website. (Please keep in mind that this is a response to the draft report and some of the concerns were addressed in the final report.)

November IFRS Interpretations Committee meeting notes

18 Nov 2013

We've posted the Deloitte observer notes from the IFRS Interpretations Committee meeting which was held on 12-13 November 2013.

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

Tuesday, 12 November 2013

Items for continuing consideration

Tentative agenda decisions to finalise

New Issues

Wednesday, 13 November 2013

New Issues

Items for continuing consideration

Administrative session

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

ESMA reviews disclosures of financial statements by financial institutions

18 Nov 2013

The European Securities and Markets Authority (ESMA) has issued a report, “Review of Accounting Practices: Comparability of IFRS Financial Statements of Financial Institutions in Europe”, which provides an overview of financial institutions’ accounting practices in selected areas of financial instruments. In particular, it assessed the comparability and quality of the disclosures in 2012 IFRS financial statements from 39 major European financial institutions. The report also provides recommendations to enhance transparency of financial information.

The report focused on five key areas of financial statements when evaluating comparability and quality of disclosures: (1) structure and content of income statements, (2) liquidity and funding, (3) hedging and the use of derivatives, (4) credit risk, and (5) criteria used to assess impairment of equity securities classified as available-for-sale.

Overall, the report concluded that there are improvements needed to the disclosures provided by financial institutions. The report uncovered instances when there was insufficient information provided or not structured properly to allow comparability between financial institutions. Key findings from the review included:

  • “[D]ifficult to compare the income statements of the financial institutions, due to differences in their structure, the line items content and lack of comprehensive accounting policy disclosures.”
  • “[F]inancial statements did not include sufficient information on the use of derivatives.”
  • “[S]ignificant divergence in the application of the significant or prolonged criteria when assessing impairment of the equity securities classified as available-for-sale.”

Based on these findings, the ESMA recommends:

  • Additional guidance in IFRS on individual income statement line items would be beneficial.
  • Financial institutions should further develop their disclosure on contingent funding needs and assess potential impacts.
  • The quality of financial information should be improved by providing qualitative information on the use of derivatives for different purposes and clearly linking them with their classification in the financial statements.
  • Financial institutions should adapt their disclosures concerning credit risk so users can identify significant changes of the credit risk profile over time.
  • Financial institutions should provide additional granular quantitative information on the effects of forbearance.
  • More transparency on the risk of impairment by preparing separate disclosure of the amount of positive and negative available-for-sale reserve related to equity instruments is needed.

ESMA will discuss its recommendations with the IASB in areas where the ESMA believes additional guidance is needed to improve quality and transparency.

For additional information, please see (links to ESMA website):

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.