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July

Deloitte comment letter on the IPSASB strategy consultation

31 Jul 2014

Deloitte Touche Tohmatsu Limited has responded to the International Public Sector Accounting Standards Board’s (IPSASB) Strategy Consultation.

On 31 March 2014, the IPSASB issued its Strategy Consultation, which proposes its work program for 2015-2019 and strategic objectives. We support the strategic objective of the IPSASB to improve transparency in financial reporting by the public sector through increasing adoption of accrual-based IPSASs and continuing to develop high-quality financial reporting standards. We suggest that the IPSASB's focus should be on the development of IPSASs and allocate a limited amount of resources towards related activities since those activities can be carried out by governments, multilateral organisations and through the IFAC’s Transparency Now campaign.

We also recommend the review of the IPSASB’s current standard setting due process to ensure it is sufficiently robust and met the current best practices. Further, we support the approach of basing IPSASs on IFRSs when determining potential future projects and that convergence with IFRSs should be the normative action.

The full comment letter can be downloaded here.

IIRC issues two assurance on integrated reporting papers

31 Jul 2014

The International Integrated Reporting Council (IIRC) has published two assurance papers which provide an overview of assurance and its relationship to integrated report (<IR>). The papers are intended to stimulate global discussion for those interested in assurance.

The first paper, Assurance on <IR>: an introduction to the discussion, provides a high-level outlines of the benefits of assurance and addresses practical and technical challenges. The paper notes that mechanisms, such as assurance, are “likely to be important for the long term credibility of integrated reports.” However, there are current challenges that need to be addressed to ensure consistency and robustness in assurance processes.

The second paper, Assurance on <IR>: an exploration of issues, provides a detailed look at the issues when applying assurance to integrated reporting, which include:

  • “The suitability of criteria
  • Auditing or assurance standards that might be applicable or considered to be useful in developing assurance methodologies related to <IR> and related implications
  • Whether assurance should be obtained in relation to the process of preparing the integrated report or the integrated report itself
  • Potential levels of assurance, including the same level of assurance, varying levels of assurance and carve-out of areas on which other assurance practitioners reported
  • Considerations when performing an assurance engagement, including those regarding narrative information, future-oriented information, connectivity, and using the work of others.”

The IIRC requests that any responses concerning the two papers be submit by 1 December 2014.

For more information, see (links to IIRC’s website):

ASBJ proposes use of modified IFRS

31 Jul 2014

The Accounting Standards Board of Japan (ASBJ) has issued Exposure Draft (ED) “Japan’s Modified International Standards (JMIS): Accounting Standards Comprising IFRSs and the ASBJ Modifications,” which provides details on the application of JMIS when preparing consolidated financial statements.

Specifically, the proposal notes that when preparing consolidated financial statements, "an entity shall comply with the requirements of the Standards issued by the IASB and adopted by the ASBJ, with deletions or modifications specified by the ASBJ Modification Accounting Standards." The ED provides a list of Standards issued by the IASB as at 31 December 2012 that have completed the ASBJ’s initial endorsement process.

As new or revised standards are issued by the IASB, the ASBJ will initiate an endorsement process to determine whether the standard should be adopted with or without any deletions or modifications and will subsequently issue an exposure draft for public consultation before considering redeliberations or finalisation.

Concurrently, the ASBJ has issued two modification accounting standards exposure drafts that propose changes to certain guidance related to the accounting of goodwill and other comprehensive income as issued by the IASB (links to ASBJ website).

For more information, see the press release, foreword to the ED, and the JMIS ED on the ASBJ website.

IASB issues second work plan update for July

30 Jul 2014

Following its July meeting, the International Accounting Standards Board (IASB) has again updated its work plan. The revised plan updates the expected redeliberation periods in the insurance contacts, leases and IFRS for SMEs projects, and extends the expected timing for the exposure draft in the conceptual framework project. The plan also reflects the IASB's decision to discontinue the 2013-2015 cycle of annual improvements in favour of a new 2014-2016 cycle, and updates the expected timing of board discussions on a number of research projects.

 

Current status

The revised time table for the major projects is now as follows:

Project Current status Next project step Expected timing
Conceptual Framework — Comprehensive IASB project Redeliberations Exposure draft Q1 2015*
Financial instruments — Macro hedge accounting Discussion paper Public consultation Q3 2014*
Insurance contracts Re-exposure Redeliberations Q3 and Q4 2014*
Leases Re-exposure Redeliberations Q3 and Q4 2014*
Disclosure initiative — Principles of disclosure Agenda decision Board discussion Q3 2014*
Disclosure initiative — Amendments to IAS 1 Exposure draft Redeliberations Q3 2014
Disclosure initiative — Reconciliation of liabilities from financing activities Redeliberations Exposure draft Q4 2014
IFRS for SMEs — Comprehensive review Exposure draft Redeliberations Q4 2014*

* Indicates a change since the previous work plan update on 24 July 2014.

The IASB expects to issue an exposure draft in the newly introduced 2014-2016 cycle of annual improvements in the second quarter of 2015.  This exposure draft will carry over the one amendment originally expected to be included in the now discontinued 2013-2015 cycle.  Apart from these changes to the annual improvements projects, there are no other changes in expected timing of the narrow-scope projects. 

In addition to the principles of disclosure research project noted above, the expected timing of board discussion has been deferred for the following research projects:

Click for the IASB work plan dated 30 July 2014 (link to IASB website). We have updated our project pages to reflect the updated work plan and other known developments.

EFRAG outreach event on leases

30 Jul 2014

The European Financial Reporting Advisory Group (EFRAG) will be holding an outreach event in Brussels on 15 September 2014 to discuss preliminary results of its public consultation on leases.

On 30 June 2014, the EFRAG, along with European standard setters (ANC, ASCG, FRC and OIC), launched a public consultation to obtain examples where contracts or transactions could qualify as leases under a single-model approach (IASB) or a dual-model approach (FASB), but are viewed by constituents as in-substance services. In addition, the EFRAG and European standard setters are seeking input on which of the two alternative approaches is preferred.

The outreach on 15 September 2014 will include discussions on the initial feedback gathered from the public consultation concerning the two lessees models, as well as possible improvements on how to identify a lease arrangement.

Registration for this outreach event is requested by 8 September 2014.

For more information, see the press release on the EFRAG’s website.

July 2014 IASB meeting notes — Part 2

29 Jul 2014

The IASB's meeting was held on 22–24 July 2014, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from Wednesday's joint session on leases and the IASB only session on IFRS Interpretation Committee issues, as well as Thursday's session on rate-regulated activities.

Click through for direct access to the notes:

Wednesday, 23 July 2014

Thursday, 24 July 2014

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting. Notes from the remaining sessions will be posted in due course.

Agenda for the September 2014 ASAF meeting

25 Jul 2014

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 25-26 September 2014. The meeting will discuss a number of the IASB's active projects, including the disclosure initiative, the conceptual framework, and liabilities/equity.

The agenda for the meeting (as at 25 September 2014*) is summarised below:

Thursday, 25 September 2014 (10:15-17:45)

  • Leases
  • Discount rates
  • Post-implementation review IFRS 3
  • Conceptual framework
  • Disclosure initiative - principles of disclosure, IAS 1 amendments


Friday, 26 September 2014 (09:00-15:00)

  • Insurance
  • Disclosure initiative - materiality (including significant accounting policies)
  • Equity/Liabilities
  • IASB project update and agenda planning
  • Debrief

* Note: The agenda for the meeting was originally released on 24 July 2014, revised on 12 August 2014, and revised again on 25 September 2014.  The agenda shown is a summary of the final agenda dated 25 September 2014.  Changes made between the initial and final agenda including moving items between days, and removing an agenda topic on inflation accounting. 

Agenda papers for the meeting will be made available on the IASB's website in due course.

EFRAG issues two final endorsement advices and effects study reports on the amendments to IFRS 11 and IAS 16/IAS 38

25 Jul 2014

The European Financial Reporting Advisory Group (EFRAG) has submitted to the European Commission its endorsement advice letter and effects study report on the amendments to IFRS 11 regarding the acquisitions of interests in joint operations and the amendments to IAS 16 and IAS 38 on acceptable methods of depreciation and amortisation.

In both cases, the EFRAG supports the adoption of the amendments and recommends that the European Commission endorses the amendments because it believes implementation that the benefits for preparers and users implementing the amendments outweigh the costs.

Concurrently, EFRAG has updated its report showing the status of endorsement to reflect the final EFRAG endorsement advices.

Click for the following information on the EFRAG website:

Amendments to IFRS 11Amendments to IAS 16 and IAS 38

IASB work plan update for July 2014

24 Jul 2014

Following the issuance of IFRS 9 'Financial instruments', the International Accounting Standards Board (IASB) has updated its work plan. In the updated work plan, the completed projects on impairment and limited reconsideration of IFRS 9 have been removed.

 

Current status

The revised time table for the major projects is now as follows:

Project Current status Next project step Expected timing

Conceptual Framework — Comprehensive IASB project

Redeliberations

Exposure draft

Q4 2014

Financial instruments — Macro hedge accounting

Discussion paper

Public consultation

Q2 and Q3 2014

Insurance contracts

Re-exposure

Redeliberations

Q2 2014

Leases

Re-exposure

Redeliberations

Q2 2014

Disclosure initiative — Amendments to IAS 1

Exposure draft

Redeliberations

Q3 2014

Disclosure initiative — Reconciliation of liabilities from financing activities

Redeliberations

Exposure draft

Q4 2014

Click for the IASB work plan dated 24 July 2014 (link to IASB website). We have updated our project pages to reflect the updated work plan and other known developments.

IASB publishes final version of IFRS 9

24 Jul 2014

The International Accounting Standards Board (IASB) has published the final version of IFRS 9 'Financial Instruments' bringing together the classification and measurement, impairment and hedge accounting phases of the IASB's project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. This version adds a new expected loss impairment model and limited amendments to classification and measurement for financial assets. The Standard supersedes all previous versions of IFRS 9 and is effective for periods beginning on or after 1 January 2018.

 

Background

The IASB has had the project to replace IAS 39 on its active agenda since 2008 and has undertaken the project in phases. The IASB first issued IFRS 9 in 2009 with a new classification and measurement model for financial assets followed by requirements for financial liabilities and derecognition added in 2010. Subsequently, IFRS 9 was amended in 2013 to add the new general hedge accounting requirements.

This final version of IFRS 9 adds a new expected loss impairment model and amends the classification and measurement model for financial assets by adding a new fair value through other comprehensive income (FVTOCI) category for certain debt instruments and additional guidance on how to apply the business model and contractual cash flow characteristics test.

 

Summary of key requirements


Expected loss impairment model

The impairment model in IFRS 9 is based on the concept of providing for expected losses at inception of a contract, except in the case of purchased or originated credit-impaired financial assets, where expected credit losses are incorporated into the effective interest rate.

Scope

The impairment requirements of IFRS 9 apply to:

  • Financial assets measured at amortised cost;
  • Financial assets mandatorily measured at FVTOCI (see below);
  • Loan commitments when there is a present obligation to extend credit (except where these are measured at FVTPL);
  • Financial guarantee contracts to which IFRS 9 is applied (except those measured at FVTPL);
  • Lease receivables within the scope of IAS 17 Leases; and
  • Contract assets within the scope of IFRS 15 Revenue from Contracts with Customers (i.e. rights to consideration following transfer of goods or services).

General Approach

With the exception of purchased or originated credit impaired financial assets (see below), expected credit losses are required to be measured through a loss allowance at an amount equal to:

  • the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or
  • full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument).

A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial instrument has increased significantly since initial recognition, as well as to contract assets or trade receivables that do not constitute a financing transaction in accordance with IFRS 15.

Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for all contract assets and/or all trade receivables that do constitute a financing transaction in accordance with IFRS 15. The same election is also separately permitted for lease receivables.

For all other financial instruments, expected credit losses are measured at an amount equal to the 12-month expected credit losses.

Significant increase in credit risk

With the exception of purchased or originated credit-impaired financial assets (see below), the loss allowance for financial instruments is measured at an amount equal to lifetime expected losses if the credit risk of a financial instrument has increased significantly since initial recognition, unless the credit risk of the financial instrument is low (e.g. investment grade) at the reporting date in which case it can be assumed that credit risk on the financial instrument has not increased significantly since initial recognition.

The assessment of whether there has been a significant increase in credit risk is based on an increase in the probability of a default occurring since initial recognition.

The requirements also contain a rebuttable presumption that the credit risk has increased significantly when contractual payments are more than 30 days past due. IFRS 9 also requires that (other than for purchased or originated credit impaired financial instruments) if a significant increase in credit risk that had taken place since initial recognition and has reversed by a subsequent reporting period (i.e., cumulatively credit risk is not significantly higher than at initial recognition) then the expected credit losses on the financial instrument revert to being measured based on an amount equal to the 12-month expected credit losses. [IFRS 9 paragraph 5.5.11]

Purchased or originated credit-impaired financial assets

Purchased or originated credit-impaired financial assets are treated differently because the asset is credit-impaired at initial recognition. For these assets, the estimated cash flows used to calculate the (credit-adjusted) effective interest rate at initial recognition incorporate lifetime expected credit losses. Subsequently, any changes in expected losses are recognised as a loss allowance with a corresponding gain or loss recognised in profit or loss.

Credit-impaired financial asset

Under IFRS 9, a "financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include[s] observable data about the following events:

(a) significant financial difficulty of the issuer or the borrower;

(b) a breach of contract, such as a default or past due event;

(c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;

(d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

(e) the disappearance of an active market for that financial asset because of financial difficulties; or

(f) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.”

Basis for estimating expected credit losses

Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probability-weighted amount that is determined by evaluating the range of possible outcomes as well as incorporating the time value of money. Also, the entity should consider reasonable and supportable information about past events, current conditions and reasonable and supportable forecasts of future economic conditions when measuring expected credit losses.

To reflect time value, expected losses should be discounted to the reporting date using the effective interest rate of the asset (or an approximation thereof) that was determined at initial recognition. A “credit-adjusted effective interest” rate should be used for expected credit losses of purchased or originated credit-impaired financial assets.  In contrast to the “effective interest rate” (calculated using expected cash flows that ignore expected credit losses), the credit-adjusted effective interest rate reflects expected credit losses of the financial asset.

Presentation

Whilst interest revenue is always required to be presented as a separate line item, it is calculated differently according to the status of the asset with regard to credit impairment. In the case of a financial asset that is not a purchased or originated credit-impaired financial asset and for which there is no objective evidence of impairment at the reporting date, interest revenue is calculated by applying the effective interest rate method to the gross carrying amount.

In the case of a financial asset that is not a purchased or originated credit-impaired financial asset but subsequently has become credit-impaired, interest revenue is calculated by applying the effective interest rate to the amortised cost balance, which comprises the gross carrying amount adjusted for any loss allowance.

In the case of purchased or originated credit-impaired financial assets, interest revenue is always recognised by applying the credit-adjusted effective interest rate to the amortised cost carrying amount.

 

Limited amendments to classification and measurement of financial assets

Fair value through other comprehensive income (FVTOCI) category

The final version of IFRS 9 introduces a new classification and measurement category of FVTOCI for debt instruments that meet the following two conditions:

  • Business model test: The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
  • Cash flow characteristics test: The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

When an asset meets both of these conditions it is required to be measured at FVTOCI unless, on initial recognition, it is designated at fair value through profit or loss to address an accounting mismatch.

For such assets, interest revenue, foreign exchange gains and losses and impairment gains and losses are recognised in profit or loss with other gains or losses (i.e., the difference between those items and the total change in fair value) recognised in other comprehensive income (OCI). Any cumulative gain or loss recorded in OCI would be reclassified to profit and loss on derecognition or dealt with in accordance with specific guidance in the case of reclassifications.

Interest income and impairment gains and losses are recognised and measured in the same manner as for assets measured at amortised cost such that the amounts in OCI represents the difference between the amortised cost value and fair value. This results in the same information in profit of loss as if the asset was measured at amortised cost, yet the statement of financial position reflects the instrument’s fair value.

Additional guidance

The final Standard also adds guidance on how to determine whether financial assets are held under a business model that is ‘hold to collect’ or ‘hold to collect and sell’ with examples and explanations of the types and levels of sales that are acceptable for such business models.

In addition to guidance on the business model test, the Standard adds guidance on the contractual cash flow characteristics test to clarify that in basic lending arrangements the most significant elements of interest are consideration for the time value of money and credit risk. If the time value of money element is modified (e.g. interest rate resets every month to a one-year rate), an entity is required to assess the modified element against new criteria introduced by the amendment.

The application guidance also introduces an additional exception that allows certain additional prepayment features to meet the contractual cash flow characteristics requirements to qualify for amortised cost or FVTOCI measurement.

 

Effective date

The Standard has a mandatory effective date for annual periods beginning on or after 1 January 2018, with earlier application permitted (subject to local endorsement requirements). The Standard is applied retrospectively with some exceptions (for example most of the hedge accounting requirements apply prospectively) but entities need not restate prior periods in relation to classification and measurement (including impairment).

The final version of IFRS 9 supersedes all previous versions of the Standard. However, for annual periods beginning before 1 January 2018, an entity may elect to apply those earlier versions of IFRS 9 if the entity’s relevant date of initial application is before 1 February 2015.

 

Additional information

IASB website

IAS Plus

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.