July

EFRAG draft comment letter on amendments regarding the application of the investment entities exemption

21 Jul 2014

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the proposed amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures'. The proposed amendments aim at addressing issues that have arisen in relation to the exemption from consolidation for investment entities.

The IASB proposes in ED/2014/2 Investment Entities: Applying the Consolidation Exception (Proposed amendments to IFRS 10 and IAS 28) amendments aimed at clarifying the following aspects:

  • Exemption from preparing consolidated financial statements. The suggested amendments confirm that an entity can apply the consolidation exemption even if its parent entity measures its subsidiaries at fair value in accordance with IFRS 10.
  • A subsidiary providing services that relate to the parent's investment activities. A subsidiary that provides services related to the parent's investment activities should not be consolidated if the subsidiary itself is an investment entity.
  • Application of the equity method by a non-investment entity investor to an investment entity investee. When applying the equity method, a non-investment entity investor in an investment entity retains the fair value measurement applied by the associate to its interests in subsidiaries, unless the non-investment entity investor is a joint venturer where the joint venture is an investment entity.

In its draft comment letter, EFRAG supports the first two proposals but disgrees with the third. In EFRAG's view, IAS 28 should be consistent with the principles supporting IFRS 11. In particular, EFRAG notes that the unit of account is the investment in the associate or joint venture, not the individual assets and liabilities of the investee. Therefore, EFRAG believes that IFRS 10 is not relevant.

Comments on the draft comment letter are due by 5 September 2014. It is availble on the EFRAG website.

Collection of research papers on IFRS application in Central and Eastern Europe

20 Jul 2014

The newest edition of the 'Journal of Accounting and Management Information Systems' is devoted to IFRS developments in the Czech Republic, Estonia, the Republic of Moldova, Poland, Romania, Slovenia, Turkey, and Ukraine. The papers are available free of charge on the journal's website.

Latest edition of EFRAG Insider

18 Jul 2014

The European Financial Reporting Advisory Group (EFRAG) has published a new edition of the publicly available newsletter 'EFRAG Insider'.

In addition to discussing IASB Exposure drafts, recent EFRAG publications and stakeholder liaison, the new issue highlights two topical issues:

  • EFRAG reform - succesful completion in line with the directions set by the Maystadt report and
  • developments in connection with the long-term financing of the European economy.

The July 2014 edition of EFRAG Insider also offers an interview with Patricia McBride, the new EFRAG technical director. Please click to download the latest edition of EFRAG Insider from the EFRAG website.

The Bruce Column — Making the long-term work

17 Jul 2014

The B20 summit is taking place in Sydney. One of the greatest challenges facing the world economy, and one that is on the B20’s agenda, is that of how to enable investment in long-term infrastructure projects. A recent report and roundtable pointed a way. Robert Bruce, our resident, regular columnist, explains.

The really big problem up ahead is how to fund the vast, but essential, infrastructure projects required around the world. Estimates suggest that US$3.2 trillion will be needed each year for the next fifteen years. But they also suggest that there will be a shortfall of US$500 billion every year. The reasons for this are straightforward. Governments, post-financial crisis, have constrained budgets. Banks similarly are under pressure to deleverage. So both of the traditional providers of long-term funding are out of the game, as it were.

Instead the world looks to other traditional long-term investors — pension funds and the insurance industry, for example. But these investors are wary. The information that would provide reassurance is not always available or accessible in a form that would help their decision-making. And this is why the B20 Group, which brings together business leaders from the G20 countries, asked the six largest global accounting networks to provide analysis, insights and recommendations which could promote the necessary infrastructure investment.

It is a huge issue, involving huge numbers, but it also links into much of the current thinking in the world of financial and corporate reporting. Even before the financial crisis, and with significantly greater urgency since then, the focus has shifted to how to encourage the long-term view across business and investment.

And the report from the global accounting networks emphasizes this. And as a recent roundtable on its findings agreed it is not the accounting that is an impediment to investment in infrastructure. In the context of long-term investment it is the political and regulatory risks that are the more relevant. Investing decisions by insurers, for example, ‘are likely to be more heavily influenced by the expected stability of cash flows’. And: ‘Financial statements prepared in accordance with International Financial Reporting Statements also offer the significant advantage of being comparable for investors and potential investors across the globe and are therefore especially relevant in the context of cross-border capital flows’.

That said, as participants at the roundtable were swift to point out, under current regulation corporate reporting can fall short in terms of communicating a company’s long-term value proposition. The narrative reporting which accompanies accounts often provides a review of business performance and, in varying detail, a description of strategy, risks and opportunities.  However, it may stop short of the strategic insight into what really makes the company tick which, in some cases, would account for 80% or so of the company’s market value.  This would include the value not on the balance sheet relating to the company’s order book or ‘pipeline’, or representing the company’s intangibles and risks.

There are also the inherent difficulties in long-term investment. An infrastructure project may represent a 25-year long project to build roads, railways, or airports, for example. As one participant at the roundtable pointed out, 25 years in the US would span ten congressional terms. The political risk and uncertainty over that time would be immense. Investors need extraordinary comfort and contact with the project. Sovereign wealth funds or giant pension funds will gain this by investing directly into the project. Other investors will invest through intermediaries, like fund managers. All investors will have different levels and means of access to information across the project’s term. But they will all require transparency.

So the way forward must be innovation that will unlock an understanding of that critical, and currently unseen project information. And the innovation has to be something that works with the grain rather than against it. So it cannot be direct regulatory action. It has to be something that encourages the innovation that investors in long-term projects need and which allows best practice to emerge rather than be proscribed.

This is not easy. Providing that sort of forward-looking information is not something which CFOs traditionally feel comfortable with; not because they are intrinsically opposed, but because they recognize the dangers for the company, themselves, and the investors. The commercial sensitivity of risk and forward-looking information are difficult. Amongst other things some form of safe harbor provision need to be provided.

Many projects may well be public sector infrastructure looking for private sector investment. And here there will have to be much greater symmetry between the different financial and corporate reporting models for it to work.

But recent developments in corporate reporting have been moving in the right direction to free up the information required to facilitate long-term investment. Internationally the development of integrated reporting is an example. This directly addresses many of the issues of reporting that elusive but vital information. And innovation is also coming into play in other ways. The UK Financial Reporting Council’s financial reporting lab is a good example of how companies and investors can come together and experiment and exchange views as they try to identify best practices. Also, requirements in the UK for a strategic report, and corporate governance “comply or explain” provisions in South Africa for an integrated report, create a good climate for experimentation and innovation in this space.

The answers to the problems are within people’s grasp. It is a question of understanding what is at stake and allowing best practices to emerge. It is all about creating an enabling environment.

IFRS Advisory Council’s terms of reference amended

17 Jul 2014

During its July 2014 meeting, the IFRS Foundation Trustees approved an amendment to the secondary objective of the IFRS Advisory Council’s terms of reference in order to address a shift in focus from promotion and adoption of IFRS to one that encourages board participation in IFRS development.

Previously, the terms of reference were discussed during the IFRS Advisory Council meeting held on 9-10 June 2014, where the council members recommended a change to the secondary objective to clear any misconceptions regarding its independence and objectivity.

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

IFRS conference in Mexico City announced

17 Jul 2014

The IFRS Foundation has announced that an upcoming conference will be held in Mexico City on 6-7 October 2014. The English and Spanish-language conference will include discussions on the latest IASB updates on the major IFRSs and its future plans. In addition, the conference will focus on innovations in IFRS disclosures and the support for consistent implementation of new IFRSs.

The conference will feature presentations by IASB Chairman Hans Hoogervorst, Vice-Chairman Ian Mackintosh, and IASB members (Amaro Gomes, Darrel Scott, and Mary Tokar).

Some of the topics to be covered at the conference include:

  • IASB update: progress and plans
  • Panel discussions on:
  • Advice on implementing new IFRSs:
    • IFRS 9 Financial Instruments
    • IFRS 15 Revenue from Contracts with Customers

The conference will also have a special-interest session on fair value measurement and other cross-cutting measurement issues, as well as break-out sessions led by IASB members and senior staff on the following topics:

  • Macro hedge accounting
  • Leases
  • Insurance contracts
  • Business combinations under common control
  • IFRS 9 implementation for financial institutions
  • IFRS 9 implementation for nonfinancial institutions
  • IFRS 15 implementation
  • Conceptual framework

More details, including registration information, are available on the IIR & IBC Finance website.

CFA Institute issues study on financial crisis insights on bank performance reporting

16 Jul 2014

The CFA Institute, a global association of investment professionals, has published a report entitled 'Financial Crisis Insights on Bank Performance Reporting (Part 1): Assessing the Key Factors Influencing Price-to-Book Ratios', suggesting that better reporting of risk, timely loan write-downs on balance sheets, and investor access to comparable reporting of information across jurisdictions, will improve transparency and reduce investor risk aversion towards the banking sector.

The study focusses on price-to-book ratios (P/Bs) as one metric investors monitor when valuing banks and as a metric widely referenced by policymakers as a yardstick for the financial health of banks. It is based on a sample of 51 banks (31 from the European Union and 20 from Australia, Canada, Japan, and the United States). The sample includes large, complex banking groups and the analysis period is 2003–2013, i.e. it covers the periods before, during, and after the financial crisis.

A key analytical angle in the study concerns the relationship between loan impairments and P/Bs as loans are a key element of a bank's financial assets, and their impairments affect both the market value of equity (stock price) and the equity. The survey coincides with a (not yet published) survey by the CFA Institute identifying improved requirements in the accounting for impairments as the second-most important required regulatory reform to avert future financial crises and the current initiatives from IASB (the final version of IFRS 9 Financial Instruments is expected to be issued later this month), the FASB, and other regulatory bodies aimed at improving the accounting for financial instruments and the overall transparency of banking financial institutions.

The study shows that during the financial crisis, the representation of loan impairments on balance sheet and non-performing loans lagged the capital markets' economic writedown of these loans and this lagging trend was particularly evident for the EU banks. In addition, comparing the pre-provision income and net income for the sample banks showed that loan impairments significantly contributed to reduced overall net income at different junctures during the financial crisis. The authors of the study also found an incremental risk aversion toward the bank sector, translating to relatively higher risk premiums, lower stock prices, and lower P/Bs.

Based on these findings, the report contains two major policy recommendations:

  • In addition to amortised cost carrying values, fair value measurement of loans should be recognised on the face of the balance sheet as a means of avoiding "too little, too late" recognition of loan losses and providing decision-useful information.
  • Bank risk disclosures should be enhanced as a better understanding of bank business models reduces the risk premium that investors assign owing to limited transparency of bank financial statements.

The report is available for download on the CFA Institute website. The CFA Institute has announced that part 2 of the report, Relationship between Disclosed Loan Fair Values, Impairments and the Risk Profile of Banks, will be released in August 2014.

FEE factsheet on the EU Directive on disclosure of non-financial and diversity information

16 Jul 2014

The Federation of European Accountants (Fédération des Experts-comptables Européens, FEE) has published a factsheet on the EU Directive that will require certain large companies to provide additional information on social and environmental matters.

The amendments to European accounting legislation had been proposed by the European Commission in April 2013 and adopted by Parliament in April 2014. They currently await adoption by the Council and publication in the Official Journal of the European Union after which they will become law. Current expected transposition date for EU Member States is autumn 2016.

The FEE factsheet outlines key aspects of the new legislation. Please click to download it from the FEE website.

Call for applications as EFRAG TEG member

16 Jul 2014

The European Financial Reporting Advisory Group (EFRAG) has issued a call for applications regarding membership in its Technical Expert Group (TEG).

EFRAG is calling for candidates in view of the current preparer vacancies and the fact that the present mandate period of three EFRAG TEG members expires on 31 March 2015 and in anticipation of vacancies that might result from the new EFRAG governance structure. It is expected that some reappointments will take place.

Applications must be submitted by 1 October 2014. More information is available through the press release on the EFRAG website.

Additional public consultation on lessee accounting

16 Jul 2014

The European Financial Reporting Advisory Group (EFRAG) and the major European standard-setters (ANC, ASCG, FRC and OIC) have launched an additional public consultation on the two different approaches for lessees proposed by the IASB and FASB. This consultation is focused on users' views.

This new consultation complements the consultation on preparers' views launched on 30 June 2014.

Again, the objective of the consultation is 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.

Users interested in participating can either do so through an interview of no more than 30 minutes or through filling in and submitting a questionnaire. Questionnaires must be submitted by 29 August 2014.

Further information, contact details for the interview, and a link to the questionnaire are available through the press release on the EFRAG website.

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