Hans Hoogervorst speaks about 'Accounting and moral hazard'

10 Apr 2014

IASB Chairman Hans Hoogervorst recently delivered the 2014 Ken Spencer Memorial Lecture, titled 'Building trust in financial markets: Accounting and moral hazard'.

In his speech, Mr Hoogervorst looked at the moral hazard that is always present wherever people work with other people's money and he explored the question of what the role of accounting standards is against this backdrop of moral hazard.

According to the IFRS Foundation Constitution, the goal behind accounting standard-setting is to require entities to provide high quality, transparent and comparable information in their financial statements so that investors can make informed decisions. Mr Hoogervorst claimed, however, that the mission of the IFRS Foundation was much more far reaching - according to him it was "building trust in financial markets" and one way to do so would be to minimise moral hazard through discipline and rigour and through eliminating information asymmetry.

In addition to some historical examples of what the IASB has achieved in this area, Mr Hoogervorst pointed at the current battle fought in the leases project. "Stripped bare, the leasing project is all about preventing the understatement of liabilities." He stated that there was huge resistance against bringing these liabilities to the balance sheet and yet he said he had no doubt that discussing leasing liabilities in the boardroom and with investors would soon be as much routine as discussing pension liabilities is now.

However, he also conceded, sometimes the IASB did not manage to do what it set out to do. He cited the incurred loss model for impaired financial assets that was designed to prevent earnings management by banks. However, the global financial crisis showed that that model could actually be used to delay showing the true financial situation of companies. Nevertheless, Mr Hoogervorst refused to connect the financial crisis with the current debate on reintroducing the concept of prudence into the Conceptual Framework:

But I also want to be clear about what Prudence as a concept cannot mean. It cannot mean a return to old-fashioned accounting with hidden reserves. It cannot lead to a systemic bias toward conservatism that is at odds with neutrality. Prudence should not be invoked to create a taboo on using current measurement. There is nothing more imprudent than to measure derivatives at cost or to measure an insurance liability at historic interest rates.

Speaking about governance and moral hazard, Mr Hoogervorst turned to the question of whether the fact that the IASB is privately organised does not make it vulnerable to pressure from private interests. Although he conceded that this question deserves a serious answer and should not be shrugged off lightly, he also pointed out that a public governance structure of standard-setting was in itself no guarantee for avoiding moral hazard. He cited as an example public sector accounting where in most jurisdictions the public accounting standards are set by the public authorities themselves. "Whether these standards always lead to a complete picture of a country's financial position is in doubt," he added. Therefore, he concluded that the key to successful standard-setting was its ability to fend off capture by special interests irrespective of its provenance and the key to preventing moral hazard in standard-setting was to find the right balance between independence and accountability.

Please click for access to the full text of Mr Hoogervorst's speech on the IASB website.

Accounting considerations in view of Venezuela's state as a highly inflationary economy

10 Apr 2014

Since 2010, Venezuela has been considered a highly inflationary economy. In November 2013 the International Practices Task Force (IPTF) of the AICPA's Centre for Audit Quality reported that the three-year cumulative inflation rate for Venezuela was 95% for 2012 and the three-year cumulative inflation rate at the end of 2013 was projected to be 124%. The Venezuelan government has instituted several mechanisms for establishing exchange rates between Venezuelan bolivar fuertes (BsF) and U.S. dollar (USD). This has led to accounting questions in an environment with multiple exchange rates.

The Venezuelan Commission for the Administration of Foreign Exchange (CADIVI) until recently controlled the sale and purchase of foreign currency in Venezuela and set an official exchange rate. In 2013, the Venezuelan government authorised certain companies that operate in designated industry sectors to exchange a limited volume of bolivars for dollars at a bid rate established via weekly auctions under the Complementary System of Foreign Currency Acquirement (SICAD 1). In February 2014, the Venezuelan government announced plans for another currency exchange mechanism (SICAD 2), which is intended to more closely resemble a market-driven exchange rate than the rates provided by Venezuela's other regulated exchange mechanisms. All mechanisms lead to strikingly different results, ranging from  the official exchange rate set at 6.3 BsF to 1 USD to the SICAD 2 rate of 50.86 BsF to 1 USD on 31 March 2014.

The accounting considerations arising in this context include:

  • Remeasurement in an environment with multiple exchange rates. Entities will be required to reevaluate the exchange rate previously used for remeasurement and determine the most appropriate exchange rate(s) for remeasurement. The ultimate selection of an exchange rate (or multiple rates) should be based on an entity's specific facts and circumstances and will require significant judgment. Accordingly, an entity should clearly document the facts and circumstances that it considered in its analysis of what exchange rate(s) to use for remeasurement.
  • Classified balance sheet considerations. Entities with classified balance sheets should consider whether classifying certain BsF-denominated monetary assets as current is still appropriate in light of the present economic environment.
  • Deconsolidation and impairment considerations. Volume restrictions on exchange activity in Venezuela (either explicit or in-substance), in conjunction with the uncertainties of obtaining approval for foreign exchange through the established exchange mechanisms, may indicate an other-than-temporary lack of exchangeability associated with its Venezuelan operations. Similarly, the operating and economic uncertainties in Venezuela may indicate an other-than-temporary impairment.
  • Disclosure. There is a need for robust disclosure in the notes to the financial statements as well as in the description of business, the risk factors, and the management discussion and analysis. Entities should also clearly document their accounting conclusions and the underlying rationale.

Deloitte (United States) has published a Financial Reporting Alert that discusses considerations related to accounting and disclosure under U.S. GAAP in connection with the foreign currency exchange environment in Venezuela. Although U.S. GAAP focused, the publication contains many considerations that equally apply to accounting under IAS 29 Financial Reporting in Hyperinflationary Economies that applies where an entity's functional currency is that of a hyperinflationary economy and requires the financial statements (and corresponding figures for previous periods) of an entity with a functional currency that is hyperinflationary to be restated for the changes in the general pricing power of the functional currency. Many considerations can also be transferred to situations in Belarus, the Islamic Republic of Iran, South Sudan, Sudan, the Democratic Republic of Congo, and Ethiopia, all of which are also regarded as hyperinflationary according to the IPTF.

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Fifteenth ESMA enforcement decisions report released

10 Apr 2014

The European Securities and Markets Authority (ESMA) has published further extracts from its confidential database of enforcement decisions taken by European national enforcers. This batch deals with decisions in relation to IFRS 3, IAS 36, IFRS 5, IAS 40, IAS 1/IAS 8/IFRS 11, IAS 32, IAS 39, and IAS 19/IFRIC 14.

The European national enforcers of financial information monitor and review financial statements published by issuers with securities traded on a regulated European market and who prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and consider whether they comply with IFRS and other applicable reporting requirements, including relevant national law.

ESMA has developed a confidential database of enforcement decisions taken by individual European enforcers as a source of information to foster appropriate application of IFRS.

The publication of enforcement decisions is designed to inform market participants about which accounting treatments European national enforcers may consider as complying with IFRS, i.e. whether the treatments are considered as being within the accepted range of those permitted by IFRS. ESMA considers the publication of the decisions, together with the rationale behind them, will contribute to a consistent application of IFRS in the European Union.

Topics covered in the latest batch of extracts, fifteenth in the series and covering the period from December 2012 to November 2013, include:


IFRS 3 Business Combinations Classification of contingent consideration based on continuing employment – classification of contingent payments where the vendor is required to be employed over the earn-out period
IAS 36 Impairment of Assets Allocation of goodwill to cash-generating units (CGUs) – use of a method other than the using relative values of operations disposed of when allocating goodwill to disposed operations
Identification of a cash-generating unit (CGU) – whether each merchant and retail branch should be identified as a separate CGU
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Sale of single licences presented as discontinued operations – whether a component of an entity can be a single CGU (producing oil and gas field, field under development, discovery licence)
IAS 40 Investment Property Determination of the fair value of land – treatment of land with unclear legal status as investment property under construction
IAS 1 Presentation of Financial Statements / IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors / IFRS 11 Joint Arrangements Change of presentation of the share in profit or loss of associates and joint ventures accounted for using the equity method – separate presentation of 'non-operating' associates and joint ventures
IAS 32 Financial Instruments: Presentation Cost of listing – allocation of amounts to the costs of issuing equity instruments
IAS 39 Financial Instruments: Recognition and Measurement Conditions for hedge accounting – assessment of effectiveness of hedging instrument
Hedging of presentation currency – cross-currency interest rate swaps involving subsidiaries
IAS 19 Employee Benefits / IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Minimum funding requirements – whether a schedule of contributions governed by national law is a minimum funding requirement under IFRIC 14 when an issuer's pension scheme is in surplus

Click for access to the full report (link to ESMA website).

Proposed roadmap for IFRS adoption in India

10 Apr 2014

The Institute of Chartered Accountants of India (ICAI) has publicly released a summary of its recommendations on the timetable for the adoption of Indian Accounting Standards (Ind AS), which are largely converged with International Financial Reporting Standards (IFRSs). The ICAI recommendations, which will be considered by the Indian Ministry of Corporate Affairs (MCA) in determining its final decision on implementation, propose that listed and large entities should mandatorily apply Ind AS in consolidated financial statements for accounting periods beginning on or after 1 April 2016, with other companies being able to apply Ind AS on an irrevocable voluntary basis.

India originally intended to converge with IFRSs in a phased approach beginning in 2011, but transition to Ind AS was postponed and a transition date is yet to be formally announced by the Indian Ministry of Corporate Affairs (MCA).

The latest recommendations by the ICAI, which may or may not be accepted by the MCA, propose the following:

  • Ind AS will be applied by the following classes of companies in preparing consolidated financial statements for accounting periods beginning on or after 1 April 2016, with comparatives for the year ending 31 March 2016 or later:
    • Entities with equity or debt securities listed, or in the process of listing, in or outside India
    • Companies having a net worth of Rs. 500 crore or more, with net worth calculated by reference to the stand alone audited balance sheet of companies as at 31 March 2014 (or the first balance sheet after that date)
    • Holding, subsidiary, joint venture or associate companies of the above two classes of entities
  • Companies meeting the criteria for applying Ind AS would be required to continue applying Ind AS in subsequent consolidated financial statements even if they no longer meet the criteria for mandatory application
  • Companies not required to apply Ind AS would apply existing notified Accounting Standards (AS) ('Indian GAAP'), which would also be used to prepare individual financial statements of the companies applying Ind AS in their consolidated financial statements
  • Companies not required to apply Ind AS can optionally apply Ind AS instead of existing Indian GAAP on a voluntary basis, but the election would be irrevocable and consolidated financial statements would be consistently prepared in accordance with Ind AS in all subsequent periods.

The roadmap for financial institutions and insurance companies will be determined in a separate process, in consultation with the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority (IRDA).

In preparation for adoption of Ind AS, the MCA initially notified 35 Indian Accounting Standards that are converged with, but not identical to, IFRSs. Subsequently, amendments and additions to Ind AS have been made as the IASB has issued pronouncements. As a result of this process, modifications made to IFRS in promulgating Ind AS may prevent an entity following Ind AS from making an explicit and unreserved statement of compliance with IFRSs (Ind AS 1 Presentation of Financial Statements requires a statement of compliance with Ind AS, not IFRSs).

IASB Chair Hans Hoogervorst recently gave a speech at an event hosted by the ICAI in New Delhi where he invited India to move to 'full' IFRS compliance soon due to his belief that only adoption of IFRSs can lead to a single set of high quality global accounting standards. In a recent blog post (link to ICAI website), K Raghu, President of the ICAI, noted in the following in response:

Here I must mention that we have very consciously decided to converge with IFRS and not fully adopt it, mainly because a resurgent India is very different from its peers in the West or elsewhere, with its own priorities and preferences. There is no change in that stand as of now. However, in the longer term we may consider his viewpoint, but only after sorting out some crucial issues and testing the impact of our converged Ind AS on [the] corporate sector.

Click for access to the ICAI recommendations (link to ICAI website).

EFRAG Update detailing March and April developments

09 Apr 2014

The European Financial Reporting Advisory Group (EFRAG) has released a new issue of its EFRAG Update newsletter, summarising the discussions held on the EFRAG TEG conference calls of 11 and 21 March 2014 and at the EFRAG TEG meeting of 2-3 April 2014.

Highlights were the adoption of:

  • a letter sent to the IASB about the IASB Exposure Draft ED/2012/3 Equity Method: Share of Other Net Asset Changes -Proposed amendments to IAS 28,
  • a draft comment letter on the ESMA Consultation Paper Guidelines on Alternative Performance Measures,
  • a draft comment letter on the IASB Exposure Draft ED/2014/1 Disclosure Initiative – Proposed amendments to IAS 1 (draft comment letter not made publicly available yet),
  • endorsement advice on the annual improvements to IFRS (cycles 2010-2012 and 2011-2013),
  • a feedback statement on the IASB Exposure Draft ED/2013/9 Proposed Amendments to the IFRS for SMEs detailing the comments EFRAG received on its draft comment letter.

Additional topics discussed in the newsletter are:

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

EU Regulation regarding the financing of IFRS Foundation, EFRAG, and PIOB published in the Official Journal

08 Apr 2014

Regulation (EU) No 258/2014 of the European Parliament and of the Council of 3 April 2014 establishing a Union programme to support specific activities in the field of financial reporting and auditing for the period of 2014-20 has been published in the Official Journal of the European Union.

The regulation forms the legal basis for the continuation of financing the IFRS Foundation and PIOB for the period 2014-2020 and of EFRAG for the period 2014-2016. The financing period of EFRAG is limited to three years in view of prospective reforms that might arise from the Maystadt Report.

Regarding the premises of continued financing, the regulation states:

The Commission, taking into account developments following the recommendations set out in the special advisor's report, should submit reports in March 2014 and on a yearly basis as of 2015, at the latest in June, on EFRAG's progress in the implementation of its governance reforms. The IASB has initiated the review of the Conceptual Framework. Following the issue of the revised Conceptual Framework, the Commission should report to the European Parliament and to the Council on any changes that have been introduced in the Conceptual Framework and reasons thereof, with a particular focus on the concepts of prudence and reliability ensuring that a ‘true and fair view’, as laid down in Directive 2013/34/EU, is respected.

Please click to access the full text of the regulation on the European Union website (available in all languages of the EU).

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

07 Apr 2014

We have published our comment letters on IFRS Interpretations Committee agenda decisions on IAS 1, IAS 12, IAS 16, IAS 19, IAS 32, IAS 37, IFRS 3 and IFRS 11, as published in the January IFRIC Update.

More information about the issues is set out below:

IssueMore information
IAS 1 Presentation of Financial Statements — Issues relating to the application of IAS 1
IAS 12 Income Taxes — Recognition and measurement of deferred tax assets when an entity is loss-making
IAS 12 Income Taxes — Impact of an internal reorganisation on deferred tax amounts related to goodwill
IAS 12 Income Taxes — Threshold of recognition of an asset in the situation in which the tax position is uncertain
IAS 16 Property, Plant and Equipment — Disclosure of carrying amounts under the cost model
IAS 19 Employee Benefits — Employee benefit plans with a guaranteed return on contributions or notional contributions
IAS 32 Financial Instruments: Presentation — Accounting for a financial instrument mandatorily convertible into a variable number of shares subject to a cap and a floor
IAS 37 Provisions, Contingent Liabilities and Contingent Assets — Measurement of liabilities arising from emission trading schemes
IFRS 3 Business Combinations — Identification of the acquirer in accordance with IFRS 3 and the parent in accordance with IFRS 10 in a stapling arrangement
IFRS 11 Joint Arrangements — Classification of joint arrangements


You can access all our comment letters to the IASB, IFRS Foundation, and IFRS Interpretations Committee here.

IASB XBRL team seeks participants for its 2014 XBRL Common Practice Project

07 Apr 2014

In the last four years, the IASB XBRL team has been interacting with companies from various countries and industries to identify and develop extra concepts to the IFRS taxonomy reflecting common practices. The IASB XBRL team is re-establishing the project to examine and develop common industry practice concepts for the IFRS Taxonomy, and is looking to work directly with stakeholders across different industries and regions in order to increase comparability, reduce the number of XBRL extensions, and lower the burden on preparers.

For 2014, the project will be focusing to the following industries:

  • Chemicals;
  • Information Technology;
  • Media; and
  • Utilities.

Companies interested in participating in this project should express their interest by 15 April 2014.

For further information please go to the press release on the IASB's website.

Capital Markets Advisory Committee February 2014 meeting update

04 Apr 2014

The IASB has made available a summary and recordings of the discussions for the Capital Markets Advisory Committee (CMAC) 27 February 2014 meeting.

The topics discussed at the meeting included:

  • Leases. The CMAC members discussed the alternative lessee accounting models. Most of the members supported the single model approach because it shows a link between the balance sheet and income statement. The few that supported the dual approach believed that it effectively reveals the economic differences between real estate leases and equipment leases.
  • Post-implementation Review of IFRS 3. The CMAC provided feedback to certain questions within the Request for Information paper issued on 30 January 2014. Specifically, the members discussed:
    • Business combinations versus assets acquisitions.
    • Separate recognition of intangible assets from goodwill.
    • Goodwill: Non-amortisation versus amortisation.
  • Integrated reporting. The CMAC members provided feedback on the IASB’s role concerning integrated reporting. There were a variety of views ranging from the IASB not focusing on integrated reporting to others believing the information is already present for investors.
  • Debt disclosures. The CMAC supported the introduction of a project on debt disclosures and provided additional suggestions to the IASB staff.
  • Equity method. The CMAC provided some considerations to the IASB staff on the scope of a project on equity method.
  • Disclosure initiative — Materiality. The CMAC supported the IASB project on materiality. They believe that the goal should be to make disclosures more effective, but not reduce the amount of disclosures. They also suggested that the IASB research ways to clearly define the concept of materiality.

The next CMAC meeting is scheduled for 30 June 2014.

For more information, see the meeting page on the IASB website.

IASB publishes proposal for IFRS Taxonomy 2014

03 Apr 2014

The IFRS Foundation has published 'Proposed Interim Release 1 to the IFRS Taxonomy 2014' for public comment.

The press release is available on the IASB website.

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