July

EFRAG Discussion Paper on the classification of claims

09 Jul 2014

The European Financial Reporting Advisory Group (EFRAG) has published a Discussion Paper (DP) aimed at assisting the IASB in the development of its project on distinguishing between equity and liabilities in the context of the revision of the Conceptual Framework for Financial Reporting. The EFRAG DP addresses the classification of claims in general and thus goes beyond the discussion around the mere distinction between equity and liabilities.

Under current IFRSs claims on an entity are classified into liabilities and equity and generally only instruments classified as liabilities are directly measured with changes in such measurement are presented in comprehensive income. In order to determine if a claim is classified as a liability or as a claim on equity, IFRSs generally use the conceptual definition of a liability. Sophisticated financial instruments have been developed to exploit the differentiation between equity and liability and instruments that are economically similar may fall on different sides of the divide and therefore be reported very differently. In some cases, the current requirements of IAS 32 Financial Instruments: Presentation also lead to the classification of what are felt to be ownership instruments in various corporate structures as liabilities.

Therefore, the IASB picked up the topic again in its July 2013 Discussion Paper DP/2013/1 A Review of the Conceptual Framework for Financial Reporting, suggesting to continue to define equity as residual interest but to refine the definition. In its comment letter on DP/2013/1, EFRAG recommended that the IASB consider the equity/liability distinction in parallel to, and separate from, the wider project and has now published the DP Classification of Claims to further the discussion and to assist the IASB in developing a discussion paper of its own, which is currently expected to be published at the same time as an Exposure Draft of the revised Conceptual Framework.

The EFRAG DP does not say how the distinction between claims should be made, but discusses approaches to defining elements and aims to identify the choices that must be made in classifying the claims on an entity and the consequences of those choices requirements, including the choices taken in current IFRS. The paper also identifies the extent to which each of the choices is consistent with identified objectives and how these objectives may conflict with each other. Finally, the paper also suggests a possible order in which these choices could be taken and identifies which ones appear to have been taken in developing current IFRS requirements. Choices that need to be taken in developing classification requirements, including the choices taken in current IFRSs, are illustrated by means of a helpful flowchart.

To assist in reducing the identified conflicts between objectives in a two-element approach, the paper also identifies three additional elements that are believed could help in reducing conflicts. These additional elements, which were identified based on current problems with financial reporting, are participating obligations, obligations to transfer claims on equity, and instruments that are contractually bail-inable. The paper shows how they may interact with existing elements and some advantages and disadvantages of including them.

The DP also contains a glossary of terms as discussions around the classification of claims showed that there is not a common vocabulary for describing and understanding the issues. Therefore, a glossary has been developed with the aim of developing a common terminology to increase shared understanding.

Comments on the DP, which also contains several specific questions, are requested by 31 October 2014. Please click to access the Discussion Paper and a corresponding press release on the EFRAG website.

Agenda for inaugural meeting of the Joint Transition Resource Group for Revenue Recognition

08 Jul 2014

The agenda has been released for the upcoming inaugural meeting of the Joint Transition Resource Group for Revenue Recognition (TRG), which is being jointly held at the offices of the International Accounting Standards Board (IASB) and United States Financial Accounting Standards Board (FASB) on 18 July 2014. The TRG will discuss a number of issues related to the recently issued IFRS 15 'Revenue from Contracts with Customers' and United States Accounting Standards Update No. 2014-09, 'Revenue from Contracts with Customers'.

The TRG was formed in June 2014 and is responsible for soliciting, analysing, and discussing stakeholder issues arising from implementation of the new standards in order to assist the IASB and the FASB to determine what, if any, action will be needed to address those issues.

The agenda for the meeting is as follows:

Friday, 18 July 2014 (13:00-17:00 BST, 08:00-12:00 US Eastern)

  • Introductory remarks
  • Gross versus net revenue
  • Gross versus net revenue: amounts billed to customers
  • Sales-based and usage-based royalties in contracts with licenses and goods or services other than licences
  • Impairment testing of capitalised contract costs

 

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

AOSSG report considers standard setting capacity in Nepal

08 Jul 2014

The Asian-Oceanian Standard Setters Group (AOSSG) has released a report providing a review of Nepal's standard-setting process, as part of its initiative to build regional standard-setting capacity by establishing a pilot IFRS Center of Excellence in Nepal. The report outlines a number of recommendations to assist the Accounting Standards Board (ASB) of Nepal in building its capacity to adopt and facilitate implementation of International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

Nepal is currently undertaking a transition to Nepal Financial Reporting Standards (NFRS), which are converged with IFRS.  Listed multi-national companies will report using NFRS for the first time for financial reporting periods beginning on 15 July 2014.  Financial institutions, state-owned corporations and other listed companies will transition over the following two years.

The IFRS Center of Excellence in Nepal was established by agreement between the ASB and AOSSG as a two year pilot project and may lead to the establishment of further IFRS Centers of Excellence in other developing jurisdictions within the Asian-Oceanian region.

The review of the pilot project was undertaken by the AOSSG 'IFRS CoE for a Developing Country Working Party', and included benchmarking against A Model for National Standard-Setters developed by the International Forum of Accounting Standard Setters (IFASS).

The working party's report considers the statutory framework for accounting in Nepal, the governance of the ASB, ASB board membership and characteristics, resources, due process, board meetings. communication with constituents, and relationships with key stakeholders.

The key recommendations the report makes include:

  • The ASB needs to develop technical skills and knowledge appropriate to the jurisdiction, including hiring additional full-time staff, developing a business plan with key strategies, and identifying planned activities under each strategic initiative
  • The ASB should develop a strategic plan, as a subset of its business plan, that identifies the IFRS technical projects and the IFRS adoption plan that the ASB is pursuing, including plans to raise the awareness of IFRS adoption in Nepal and initiatives to discharge its accountability to stakeholders in financial reporting
  • A strategic plan for greater funding needs to be developed as part of the business plan and executed with the Nepal Government and donor agencies
  • The ASB should align its due processes as closely as possible with the timing by the IASB to enable the views of Nepal stakeholders to be heard before the IASB proposals are finalised to ensure IFRS compliance is maintained in Nepal
  • A board member appointment policy document, including preferred skills and experience for ASB members, should be formulated and provided to the Nepal Government and the Institute of Chartered Accountants of Nepal (ICAN) to assist them in nominating and appointing ASB members.

The report is available on the AOSSG website.

Agenda for the July 2014 IFRS Interpretations Committee meeting

08 Jul 2014

The IFRS Interpretations Committee will meet at the IASB's offices in London on 15–16 July 2014. The agenda for the meeting is now available.

The Committee will:

  • Continue discussion on a number of issues related to IFRS 11, IAS 12, IAS 16, IAS 19, and IFRIC 14
  • Consider finalising tentative agenda decisions on IAS 1, IAS 39, IAS 34, IFRS 2 and IAS 12
  • Consider new issues on IFRS 12, IAS 16, IAS 39 and IAS 21.

The full agenda for the meeting can be found here. We will update this page for any changes to the agenda, and our Deloitte observer notes from the meeting as they become available.

Survey on developments in securitisation markets

04 Jul 2014

The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) have announced that they are co-leading a task force that will undertake a wide-ranging survey of global securitisation markets.

The task force has been established in consultation with the International Association of Insurance Supervisors (IAIS) and the International Accounting Standards Board (IASB). It has been set up to survey securitisation markets with the aim of understanding how they are evolving in different parts of the world, identify factors that may be hindering the development of sustainable securitisation markets, assess whether there are factors inhibiting the participation of investors, particularly non-bank investors, and develop criteria to identify and assist in the development of simple and transparent securitisation structures.

Securitisation played a significant role in the American subprime mortgage crises which led to the financial crisis. The regulators reacted with different measures to the financial crisis (IFRS 9 Financial instruments expected to be issued in its completed version later this month was the IASB's response to the crisis to improve the accounting for financial instruments), and the work of the task force is designed to determine how the measures have influenced the developments in securitisation markets since the crisis and how the development of orderly and sustainable securitisation markets, which could provide an alternative source of funding for economic activity and recovery, can be supported.

To this end, the task force has developed a questionnaire to seek the views of market participants. Among other questions, participants are asked in the survey for their assessment of the developments in securities markets, whether accounting changes have helped or hindered development in these markets and whether they believe that further accounting changes could lead to an increased activity in them.

The questionnaire and a corresponding press release are available on the IOSCO website. The questionnaire should be completed by 25 July 2014.

Agenda for the July 2014 IFRS Foundation Trustees meeting

04 Jul 2014

An agenda has been released for the upcoming meeting of the IFRS Foundation Trustees, which is to be held in London on 10 July 2014. The meeting will consider reports from the Chairs of the IFRS Foundation and International Accounting Standards Board (IASB), receive a technical update on IFRS 9 'Financial Instruments', and discuss a number of matters during a report from the Due Process Oversight Committee (DPOC).

The agenda for the meeting is summarised below:

THURSDAY, 10 JULY 2014

IFRS Foundation Trustees meeting (12:15-13:45 BST)

  • Report of the Chair of the IFRS Foundation
  • Report of the Chair of the International Accounting Standards Board (IASB)
  • Technical update – IFRS 9 Financial Instruments
  • Report of the Due Process Oversight Committee (DPOC)
    • Introduction
    • Update on technical activities
    • Effects analysis – update on the proposed report of the Effects Analysis Consultative Group
    • IFRS Taxonomy – update on revised due process proposals
    • Annual review of consultative groups (including an update on DPOC engagement)
    • Reporting protocol – general reports (comment letters, availability of meeting papers, market and prudential regulators)
    • Correspondence – update
    • Summary/any other business/wrap up

 

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

Summary of the ASAF June meeting

03 Jul 2014

A summary of the Accounting Standards Advisory Forum (ASAF) June 2014 meeting has been made available by the IASB staff. During the meeting, the members discussed various IASB projects, such as the disclosure initiative, equity method of accounting, insurance contracts, macro hedging and the conceptual framework.

 

Disclosure initiative

The ASAF members discussed an Exposure Draft published by the Brazilian Accounting Standards Committee proposing that immaterial information should not be disclosed and that this should be enforced. They also considered a comment letter by the European Financial Reporting Advisory Group (EFRAG) on the consultation on alternative performance measures launched by the European Securities and Markets Authority (ESMA) and discussed whether the IASB was the appropriate organisation to address non-IFRS information. Finally, they considered the FASB's work on its disclosure framework project.

 

Equity method of accounting

The ASAF discussed a paper introduced by the IASB staff that sought input from ASAF members on the scope of the research project on the equity method of accounting. During the discussion, some ASAF members suggested that it might be useful to consider the project in two stages: a short-term simplification project and a long-term conceptual review of the application of the equity method. The discussion also made reference to the EFRAG paper and the KASB paper on this topic.

 

Insurance contracts

The ASAF considered the release of the contractual service margin for non-participating contracts, contracts with participating features, whether the IASB should develop a separate model for contracts with participating features, whether the shareholders' share of returns from underlying items should unlock the contractual service margin, and whether there should be specific requirements for options and guarantees.

 

Macro hedging

The IASB staff wanted to gather initial feedback from the ASAF members on the main areas of the Discussion Paper DP/2014/1 Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging. The discussion assessed the need for an accounting approach, the scope of the application of the portfolio revaluation approach and other risks. There was overall agreement that before going ahead with the approach, there would need to be acceptance of the consideration of behaviouralisation. ASAF members also considered issues in connection with revaluation and transfer pricing transactions as well as operational complexity and OCI.

 

Conceptual framework

ASAF members discussed the reporting of income and expenses and the choice of measurement based on a paper by the Financial Reporting Council (UK), suggesting a justification for a mixed measurement model and principles for distinguishing between profit or loss and other comprehensive income.


A full summary of the meeting is available on the IASB's website. The ASAF's next meetings will be on  25 and 26 September 2014 and on 4 and 5 December 2014.

Finalised framework on public sector governance released

03 Jul 2014

The International Federation of Accountants (IFAC) and the Chartered Institute of Public Finance and Accountancy (CIPFA) have released a finalised international framework on governance in the public sector. The framework contains seven key principles designed to ensure that public sector entities achieve their intended outcomes whilst acting in the public interest at all times. The framework encourages a focus on sustainable economic, social and environmental outcomes and the links between governance and public financial management, and supports the use of International Public Sector Accounting Standards (IPSAS) and Integrated Reporting.

The finalised framework, titled International Framework: Good Governance in the Public Sector, was developed by an 'international reference group' of individuals drawn from a wide range of organisations and follows the publication of an exposure draft in June 2013. The stated aim of the framework is "to encourage better service delivery and improved accountability by establishing a benchmark for aspects of good governance in the public sector". It is designed to be used by those who develop and set public sector governance codes when existing codes at the national or sectoral level are updated or new codes are put in place.

The framework considers governance as comprising the arrangements put in place to ensure that intended outcomes for stakeholders are defined and achieved. It seeks to do this by setting out seven principles covering topics such as ethics, openness, defining outcomes and how they are achieved, capability development, risk management and strong financial management.

The seventh principle focuses on implementing good practices in transparency, reporting and audit to deliver effective accountability. Specific recommendations related to the seventh principle include:

  • Accountability reports should be written and communicated in an open and understandable style appropriate to the intended audience, whilst striking a balance between the right amount of information and imposing onerous requirements on the entity to prepare
  • Public sector entities should report publicly at least annually in a timely manner, and performance information and accompanying financial statements should be prepared on a consistent and timely basis, with International Public Sector Accounting Standards (IPSAS) prepared by the International Public Sector Accounting Standards Board (IPSASB) seen as providing "the most complete suite of accrual-based international financial reporting standards developed specifically for the public sector"
  • Integrated reporting is also seen as supporting public sector entities in engaging with stakeholders in a more integral and coherent manner
  • The provision of assurance through external audit is an essential element of a public sector entity's accountability, whilst internal audit can also contribute to accountability mechanisms.

Click for press release (link to IFAC website).

EFRAG draft comment letter on macro hedging

01 Jul 2014

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB’s Discussion Paper DP/2014/1 ‘Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging’.

EFRAG commends the IASB’s effort in comprehensively analysing banks’ risk management practices and developing new thinking in how to best reflect the effects of such practices on an entity’s financial position and performance. EFRAG supports the view that a new hedge accounting model for open portfolios, which are managed on a net risk basis, is needed.

However, EFRAG disagrees with the widening the scope of the project evidenced in the discussion paper and in contrast to the original objective when the project was decoupled from the project on general hedge accounting. The focus of the IASB is no longer on finding a hedge accounting solution for open portfolios but on the revaluation of all portfolios that are dynamically managed. EFRAG does not believe that revaluing all portfolios that are dynamically managed, regardless of whether or not they have been risk-mitigated through hedging, will lead to decision-useful information.

EFRAG recommends that the IASB develops a model for hedge accounting in accordance with the original objective of the project. Such a hedge accounting solution would mitigate the accounting mismatch inherent in a mixed measurement model where hedged items are measured at amortised cost and hedging instruments are measured at fair value. At the same time, such a solution would not override the measurement requirement in IFRS 9 Financial Instruments that amortised cost measurement is appropriate for some financial instruments (which the proposed scope in the discussion paper would).

Comments are due by 10 October 2014.

For more information, see:

June 2014 IASB meeting notes — Part 3 (concluded)

01 Jul 2014

The IASB's meeting was being held on 17–19 June 2014, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from the session on Thursday covering the conceptual framework.

Click through for direct access to the notes:

Thursday, 19 June 2014

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

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