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FRC hedge accounting proposals would move FRS 102 further away from the IFRS for SMEs

18 Nov 2013

The Financial Reporting Council (FRC) has issued Financial Reporting Exposure Draft (FRED) 51: ‘Draft amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland: Hedge Accounting’. The amendments would widen the eligibility criteria for hedge accounting.

In March 2013, the UK’s Financial Reporting Council (FRC) published FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which will replace current UK GAAP with effect for periods beginning on or after 1 January 2015. FRS 102 is derived from the IASB’s IFRS for SMEs but incorporates changes made by the FRC, one of which widens the scope of the standard significantly compared to the IFRS for SMEs.

At the time of the publication of the standard, the FRC already announced that the hedge accounting guidance in FRS 102 was not considered sufficient for the larger companies electing to apply the standard instead of full IFRSs. One of the aims behind publishing the proposed amendments is therefore relaxing the simple, yet prescriptive existing requirements that the FRC feels may 'unduly' restrict the application of hedge accounting.

The FRC's overriding objective in setting accounting standards is to enable users of accounts to receive high-quality understandable financial reporting proportionate to the size and complexity of the entity and users' information needs.

The draft hedge accounting amendments to FRS 102 were developed from the IASB's review draft of the parts of IFRS 9 Financial Instruments relating to general hedge accounting. The finalised IASB requirements regarding hedge accounting have not yet been published but are expected to be issued in the fourth quarter of 2013.

The IASB itself decided not to integrate the new hedge accounting proposals into its Exposure Draft of suggested amendments to the IFRS for  SMEs published in October 2013. The Board decided that not necessarily all changes made to full IFRSs would be copied to the IFRS for SMEs; rather, a change in full IFRSs would cause the Board to consider whether (and, if so, how) the current version should be amended after the effects of changes have been observed in practice. The IASB is also extremely wary regarding incorporating not finalised pronouncements into the IFRS for SMEs as Board decisions might take a different route at the end and would leave the IFRS for SMEs even further from existing IFRS requirements.

Comments on FRED 51 are invited by 14 February 2014. The following information is available on the FRC website:

2014 IFRS Blue Book — Coming soon

15 Nov 2013

The IFRS Foundation has announced that the 2014 IFRS Consolidated without early application will be published in December 2013. This volume (nicknamed the "Blue Book") will contain all official pronouncements that are mandatory on 1 January 2014. It does not include IFRSs with an effective date after 1 January 2014. The Blue Book differs from the traditional BV (the "Red Book"), which includes all pronouncements issued at the publication date, including those that do not become mandatory until a future date.

The Blue Book will sell for £68 plus shipping (academic, developing country, and volume discounts apply). You will find more information and ordering details here.

Agenda for the December 2013 ASAF meeting

15 Nov 2013

The International Accounting Standards Board (IASB) has released the tentative agenda for the meeting of the Accounting Standards Advisory Forum (ASAF), which is to be held at the IASB's offices in London on 5-6 December 2013. The meeting will discuss a number of the IASB's projects, including conceptual framework, leases, post-implementation review of IFRS 3, and rate regulation.

The agenda for the meeting (as at 15 November 2013*) is summarised below:

Thursday, 5 December 2013 (10:30-15:30)

Friday, 6 December 2013 (09:00-15:30)

* The agenda was subsequently revised on 6 December 2013, to amend the finish times on both days, and swap the discussion of the liabilities and profit and loss/measurement/OCI on the first day. These changes have not been reflected in the summary of the agenda.

Agenda papers for the meeting are available on the IASB's website.

FEE upcoming roundtable for public sector accounting

15 Nov 2013

The Federation of European Accountants (Fédération des Experts-comptables Européens — FEE) will be hosting a roundtable on 22 January 2014 in Brussels on EU standard-setting in the public sector.

The roundtable will cover characteristics of good governance in standard-setting, Directorate General Eurostat’s EPSAS governance proposal, and suitable governance model for EPSAS discussions. The roundtable will bring together European and national policymakers, public sector representatives, accountants, and auditors.

For additional information, please see the press release on the FEE’s website.

FEI proposes simplified approach to leases

14 Nov 2013

Against the backdrop of repeated complaints about the complexity of the IASB's and FASB's joint re-exposed proposed approach for the recognition and measurement of leases, Financial Executives International (FEI) has reminded the boards of an alternative approach to lease accounting it developed in its original comment letter. FEI believes its suggested 'Display approach' would achieve the enhanced balance sheet display that is the primary goal of the leases project while at the same time avoiding the complexity of the boards' proposals.

In a letter dated 13 November 2013, FEI emphasises the need to focus on display issues versus a change to the recognition and measurement model for leases. In order to reduce complexity, FEI believes it would be beneficial to adopt a more limited approach that focuses on changing the display of the contract in the statement of financial position. Therefore, FEI points again at its 'Display approach' developed in its September 2013 comment letter.

Under the suggested display model, the lessee would record a leased asset and a lease obligation at the end of each period based upon the present value of the remaining lease payments, adjusted for any prepaid or deferred rent recorded under existing GAAP. According to FEI, the liability recognised under this approach should not be characterised as debt because FEI believes such obligations are not legally or economically debt equivalents. The statement of financial position would be prepared using this methodology, and the statement of earnings would reflect the rent expense during the period in accordance with existing GAAP.

FEI states: "Our proposed model would achieve the enhanced balance sheet display which is the primary goal of this project while avoiding the artificial allocation of costs in the statement of earnings that is proposed  for Type A leases. We believe that our proposed model would also eliminate the amortization computations required for Type B leases under the proposed recognition model, which could be challenging to implement across the broad spectrum of lease arrangements."

FEI also lists the benefits the suggested approach is believed to have:

  • It is relatively straightforward to implement and could be adopted more quickly than any of the recognition and measurement alternatives under consideration by the Boards.
  • It greatly simplifies lessee accounting by eliminating the necessity to classify leases.
  • It allows lessees to retain their current unit of accounting for all leases.
  • It avoids the distortive cost allocations that arise in many Type A leases.
  • It eliminates the need for systems changes required for Type B lease accounting.
  • It avoids the distortion and complexity that would arise with foreign currency leases when translating nonmonetary assets and monetary liabilities into the entity’s functional currency.
  • It simplifies transition substantially.
  • It clearly separates the lessee model from lessor accounting and eliminates any need for symmetrical results.

IASB and FASB will discuss the accounting for leases again at the upcoming IASB meeting. Agenda papers for the meeting have been made available on the IASB's website.

Please click for access to the FEI letters:

ESMA publishes response to draft Maystadt report

14 Nov 2013

Following the publication of the final Maystadt report, the European Securities and Markets Authority (ESMA) has made available its response to the draft of the report. The final report has undergone some changes vis-à-vis the draft version but the main recommendations remained the same so ESMA's core points remain applicable.

While pointing to broad support for a commitment towards globally accepted, high-quality accounting standards and for maintaining the current endorsement process as such, Mr Maystadt proposed three options in his report how the process could be improved to ensure that the EU’s voice is better heard in developing high quality accounting standards:

  • Under option 1 EFRAG would be transformed such that the public policy voice was embedded into the decision-making process already before recommendations are made to the Commission.
  • Option 2 suggests making EFRAG a part of the European Securities and Market Authority (ESMA).
  • Option 3 would be to set up a separate European agency to replace EFRAG.

Mr Maystadt's preliminary recommendation is to follow the option 1.

In its comment letter, ESMA expresses the belief "that options 2 and 3 are not sufficiently developed [...] to allow a real assessment of their validity and merit with respect to the objectives assigned". At the same time, ESMA believes that the recommended first option does not fully meet the objective of reinforcing the credibility and political legitimacy of the body in charge of providing advice to the European Commission. The letter states:

Our main concern relates to the fact that it does not embody significant characteristics that would be necessary such as:
  • the need for ensuring independence from private stakeholders' interests which has been identified as a significant weakness of the current system,
  • the need to insure that all EU MS [Member States] are represented as part of the democratic process of establishing legislation in the EU, and
  • the importance of ensuring proper interaction with existing European authorities which also play a role in the area of financial reporting.

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

EFRAG Update detailing its October and November developments

14 Nov 2013

The European Financial Reporting Advisory Group (EFRAG) has released a new issue of its EFRAG Update newsletter, summarising the discussions held at the 6–8 November EFRAG TEG meeting and the EFRAG TEG conference calls held on 23 October and 29 October 2013.

Highlights were the publication of:

Additional topics discussed in the newsletter are:

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

Results of the European field-test on the IASB's proposed leasing model

14 Nov 2013

EFRAG and the National Standard Setters of France, Germany, Italy and the United Kingdom have conducted a field-test designed to evaluate how the proposals contained in the IASB Exposure Draft ED/2013/6 'Leases' would affect European companies applying IFRS.

For lessees, the ED published on 16 May 2013 proposes the recognition of a liability and a right-of-use asset for all leases with a profit or loss impact dependent on the classification of a lease. The lessor model in the ED is similar to current lease accounting with some nuances for the recognition of revenue and discounting of the residual asset.

The field-test, conducted through a questionnaire developed by EFRAG and National Standard Setters, was focused on the practical application of the new requirements. Forty preparers participated in the field-test with almost half of the respondents (18) from Germany. Industrywise, respondents from the retail industry were the biggest group (12).

Regarding the practical implications the main findings were that the most common areas of concern were assessment of the lease term where 67% of the respondents reported difficulties in applying the proposed guidance and disclosure requirements where the majority of respondents (also 67%) expect difficulties in applying the disclosure requirements as they consider them to be complex, too extensive and too detailed.

Apart from the practical implications, respondents also commented on other issues. The following fundamental concerns about the proposals were expressed (reproduced from the EFRAG report):

  • the IASB had not explained why they believed a lease creates assets and liabilities at commencement;
  • the right-of-use model did not depict the business model of the entities and did not reflect that most leases are ways to obtain a service rather than obtain access to an asset;
  • the proposals were complex, involve significant judgment and would likely result in inconsistent application;
  • there was not a clear need for a change in accounting guidance for leases and the IASB should rather considering improvements in disclosures;
  • the benefit of the new accounting model was questionable or at best limited, while the cost to apply it was extremely high especially for entities that have thousands of individually small leases; and
  • the proposals would result in time-consuming discussions because of diverging interpretations from auditors.

Please click for access to the full field-test results on the EFRAG website.

EFRAG issues feedback statement on its draft comment letter for bearer plants

13 Nov 2013

The European Financial Reporting Advisory Group (EFRAG) has issued a feedback statement to summarise the comments received by the EFRAG on its draft comment letter on bearer plants.

In June 2013, the IASB published an exposure draft on bearer plants, which proposed amendments to IAS 16 and IAS 41. In response to the exposure draft, the EFRAG issued a draft comment letter that noted its support for the project and provided several suggestions to improve the proposed amendments. The EFRAG’s feedback statement provides the main comments received from constituents on its draft comment letter. The general consensus from constituents was that the “main principle of IAS 41 was not appropriate for bearer plants and that the cost model or the revaluation model of IAS 16 applied to bearer plants would provide more useful financial information.”

For more details on the feedback statement, please see (links to EFRAG website):

EU Transparency Directive published, disclosure on non-financial information moving along

13 Nov 2013

The new European Transparency Directive has been published in the Official Journal and enters into force on the twentieth day following its publication. Additionally, a draft report on the proposal for disclosure of non-financial and diversity information by certain large companies and groups was presented to the European Parliament committee on legal affairs (JURI).

The new Transparency Directive closes an existing gap in the notification requirements by requiring disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies. A second major change is the fact that the requirement to publish quarterly financial information was abolished. This aims at reducing the administrative burden and encouraging long term investment. Finally country-by-country reporting disclosure requirements have been incorporated in the new Transparency Directive. Please click for access to the full text of the Directive in the Official Journal.

The draft report on amendments to the European accounting legislation proposed by the European Commission (EC) in order to require certain large companies to provide additional information on social and environmental matters shows the amendments proposed by the EC next to suggested additional changes suggested by JURI. Also available is the draft opinion of the Committee on Economic and Monetary Affairs (ECON) commending the EC in seeking to improve transparency in the information provided by large companies in the EU and suggesting further improvements to the Commission's text. Please click for the drafts on the European Parliament website:

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