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June

Educational webcast on IFRS 9

29 Jun 2018

The IASB has released a webcast that discusses how to apply IFRS 9 'Financial Instruments' to financial assets with prepayment features.

The eleven minute webcasts focusses on the 'SPPI test', including the amendments made to the IFRS 9 requirements in October 2017.

Please click to access the webcast on the IASB website (available as full webcast or in a slides only version).

ECON motion for resolution on IFRS 17

29 Jun 2018

At its meeting on 18-19 June 2018, the members of the Committee on Economic and Monetary Affairs (ECON) of the European Parliament adopted a motion for resolution on IFRS 17 'Insurance Contracts'. The final text has now become available.

As reported earlier, the motion notes the benefits that IFRS 17 will bring about but also states that ECON members have several concerns regarding the standard.

Please click to access the motion for resolution on the European Parliament website.

IASB chair provides update on current activities

28 Jun 2018

At the IFRS conference in Frankfurt, IASB Chair Hans Hoogervorst provided an update on the use of IFRS Standards around the world and the current thinking of the IASB.

In his overview of the current state of IFRS adoption, Hoogervorst also referred to the Brexit, the current transatlantic tensions and the rise of protectionism in general. Hoogervorst then transferred his considerations to accounting. He noted:

In 2011, even before the Trump era, it became clear that the United States would not be adopting IFRS Standards anytime soon. Fortunately, the rest of the world reacted just as it does now in the face of the American challenge to the global trade system: rather than following the United States in retreat, the use of IFRS Standards continued to spread around the world.

In this context, he also addressed the situation in the EU and the fitness check on public reporting by companies. He urgently warned against making local modifications to IFRS:

Acting in ‘enlightened self-interest’ means foregoing a smaller self-interest to achieve a bigger self-interest. Even when our stakeholders may not agree with certain aspects of our Standards, they know it is not in their ‘enlightened self-interest’ to modify them. They know this could set in motion a process of gradual balkanisation of the world of IFRS Standards, undoing the benefits of a single set of global standards.

Following his general observations, Mr Hoogervorst provided an update on the developments in IFRS Standards. The topics he covered included primary financial statements, the implementation of IFRS 17, and wider corporate reporting as well as financial instruments with characteristics of equity, where the IASB has recently issued a discussion paper on this research project.

For more information, see the speech transcript on the IASB’s website. A video recording is also available.

June 2018 IASB meeting notes posted

28 Jun 2018

The IASB met in London on 19–21 June 2018 to discuss fifteen topics and included an educational session with the FASB. We have posted our comprehensive Deloitte observer notes for all projects discussed during the meeting.

Joint IASB–FASB Education Meeting

The topics being discussed were mainly those related to Standards that the IASB and FASB developed together, or are largely converged, as well as new topics that both boards have on their work programmes.

Segment Reporting

The IASB’s and FASB’s Standards on segment reporting (IFRS 8 Segment Reporting and Accounting Standards Codification Topic 280, Segment Reporting) are largely converged. The IASB provided a summary of its post-implementation review of IFRS 8 and explained why it decided not to finalise the amendments to IFRS 8 it had exposed. The FASB outlined the targeted changes related to the segment aggregation process that it is considering making to Topic 280.

Primary Financial Statements and Financial Performance Reporting

Both boards are working on projects related to the primary financial statements. The IASB gave an overview of its Primary Financial Statements project and the FASB updated IASB members on the background and scope of its Financial Performance Reporting. The FASB is focusing on two types of improvements: disaggregation of performance information; and the structure of the performance statement (subtotals).

Disclosure Initiative and the Disclosure Framework

Both boards are working on projects related to improving disclosures in the financial statements. The IASB provided an update on its Disclosure Initiative—in particular the Principles of Disclosure and Targeted Standards-level Review of Disclosures projects. The FASB gave an update on its Disclosure Framework project.

Fair Value

The IASB’s and FASB’s Standards on measuring fair value (IFRS 13 Fair Value Measurement and Accounting Standards Codification Topic 820, Fair Value Measurement) are largely converged.

The FASB has developed amendments to the disclosure requirements for fair value measurements which it plans to finalise, by updating Topic 820, in the third quarter of 2018. The FASB provided an overview of those changes. The IASB set out the role of post-implementation reviews and provide some background on IFRS 13, including differences between Topic 820 and IFRS 13. The staff summarised the main messages received and how the IASB plans to consider the usefulness of disclosures as part of its work on ‘Better Communication in Financial Reporting’.

Goodwill and Impairment

The IASB and FASB requirements for business combinations were developed jointly. The requirements for the initial recognition and measurement of goodwill are therefore largely converged. The IASB and FASB requirements for the allocation of goodwill to cash-generating units and impairment are similar, but there are differences. Both boards have projects looking at goodwill. The boards shared information about those projects.

Implementation

The boards shared information about their respective implementation support activities undertaken regarding revenue recognition and leases.

Update on all projects not otherwise covered

The boards provided updates on their projects that will not otherwise be discussed during the Joint Education Session.

IASB Meeting

Disclosure Initiative

This session has three threads: Better Communication in Financial Reporting; Targeted Standards-level Review of Disclosures—Guidance for the Board; and Materiality.

The staff provided the background to, and current status of, the projects in Better Communication in Financial Reporting (Primary Financial Statements, Principles of Disclosure, Targeted Standards-level Review of Disclosures, Definition of Material, Management Commentary and IFRS Taxonomy). IASB members indicated that they were satisfied with the current interaction and distinction between them.

The staff presented an analysis and recommendations to the Board about the development of ‘Guidance for the Board’ to use when developing and drafting disclosure objectives and requirements. The IASB decided to assign a member of the IFRS Taxonomy team to each of the Board’s active projects in an advisory capacity when developing disclosure objectives and requirements. The IASB also supported using a five-step approach to develop disclosure objectives and requirements. The Board will select the Standards to review at its July 2018 meeting.

The IASB continued to consider the feedback on its proposed amendments to the definition of material, supporting all of the staff recommendations in relation to the effective date, ‘immaterial’ vs. ‘not material’, the materiality practice statement, use of the term ‘material’ and the definition of material of the International Auditing and Assurance Standards Board (IAASB).

Dynamic Risk Management (DRM)

The IASB decided that it will address as part of the first phase of DRM project the derivative financial instruments that may be used as the hedging instruments for DRM and their designation and de-designation. The IASB also supported the staff analysis of what performance means in the context of DRM and the information about DRM activities that should be provided in the statement of profit or loss.   

Research programme

The staff gave a general update on the research programme.

IBOR reform

The IASB decided to start a research project to consider the effects on financial reporting of potential discontinuation of IBORs (interest reference rates such as LIBOR, EURIBOR and TIBOR).

Primary Financial Statements

In developing the proposals for primary financial statements the staff have been focusing on non-financial entities. At this meeting the staff presented its preliminary analysis and observations about whether the tentative decisions made so far could apply, with little or no change, to financial entities. The IASB did not make any decisions.  

Insurance Contracts

The IASB decided to propose, as part of its annual improvements cycle, a series of amendments to IFRS 17 Insurance Contracts. This is to address problems where the drafting of IFRS 17 does not achieve what the Board intended.

Implementation

The staff had recommended that the IASB not finalise the amendments it proposed and exposed to IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. However, the Board voted in favour of the staff performing further work. The issue will be brought back at a future meeting.

Islamic Finance Consultative Group Update

The staff provided a summary of the March 2018 meeting of the Islamic Finance Consultative Group.

Business Combinations under Common Control 

The Board asked the staff to drop the Full Fair Value approach but continue to work on the Ceiling and Revised Ceiling approaches. IFRS 3 should be used as a basis and the staff should explore different overlays to providing the most useful information about BCUCC that affect NCI. 

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.

IASB publishes discussion paper on financial instruments with characteristics of equity

28 Jun 2018

The International Accounting Standards Board (IASB) has published a comprehensive discussion paper DP/2018/1 'Financial Instruments with Characteristics of Equity'. The discussion paper defines the principles for the classification of financial liabilities and equity instruments without, however, fundamentally changing the existing classification outcomes of IAS 32. The IASB's proposed preferred approach is based on two features, timing and amount, and is accompanied by the provision of additional information through a separate presentation of expenses and income from certain financial liabilities in other comprehensive income and additional disclosures. The comment period ends on 7 January 2019.

 

Background

The project on financial instruments with characteristics of equity was originally commenced as a joint IASB-FASB project addressing the distinction between liabilities and equity. The joint project saw a discussion paper discussion paper Financial Instruments with Characteristics of Equity published in February 2008, however, during their joint meeting in November 2010, the IASB and FASB decided to defer further work on this project. In December 2012, as part of its response to the Agenda consultation 2011, the IASB formally reactivated this project as an IASB-only research project.

The main objective is to identify the characteristics that should be present in an instrument for it to be classified as either an equity or liability instrument. Accordingly, this project is exploring whether the existing requirements in IAS 32 Financial Instruments: Presentation can be improved. The Board also examines presentation and disclosure requirements.

The project is linked to the Conceptual Framework as the complexity of questions around distinguishing between liabilites and equity meant that these were excluded from the project to revise the Conceptual Framework. The revised framework published in March 2018 therefore includes a revised definition of a liability and new supporting guidance, but the definition of equity remained unchanged and will be reviewed in this research project.

 

Summary of main proposals

To begin with, the IASB expects many of the existing classification outcomes of IAS 32 to remain unchanged if the approach preferred by the IASB is implemented.

In accordance with the preferred approach proposed by the IASB, equity is a residual that remains if the characteristics of a financial liability are not fulfilled. Accordingly, a financial instrument must be classified as a financial liability if its contractual terms contain an unavoidable obligation:

  • a) to transfer cash or another financial asset at a specified time other than at liquidation (timing feature);

    and/or

  • b) for an amount independent of the entity’s available economic resources (amount feature).

The analysis of the timing feature enables the assessment of funding liquidity and cash flows, including whether an enterprise has the economic resources necessary to meet its obligations at maturity and to estimate the need for economic resources at specific times. The timing feature can be specified as a fixed date as another date such as for example dates of coupon or interest payments.

The amount feature, on the other hand, supports the assessment of the balance sheet solvency and returns. This concerns in particular the question of whether an entity has sufficient economic resources to meet its obligations in terms of amount. It is central to the amount feature that a change in the value of the issuer's available economic resources does not limit the amount of the obligation. A simple example is the obligation to repay a loan when it matures: this obligation exists on the merits and in terms of amount, regardless of how the economic resources of the debtor develop. Nevertheless, there may also be changes in the amount of the obligation if, for example, the nominal amount changes due to exchange rates.

In the opinion of the IASB, the component approach already known under IAS 32 should be retained for compound financial instruments that contain both an equity and a liability component. Consequently, the issuer of a non-derivative financial instrument must assess whether it contains both a debt and an equity component. These components would continue to be classified separately as financial liabilities, financial assets or equity instruments.

A puttable instrument that comes puttable exception in IAS 32 would meet the definition of a financial liability if the Board’s preferred approach with timing feature and amount feature is applied. Consequently, the puttable exception would continue to be required under the Board’s preferred approach.

A derivative on own equity would be classified in its entirety. Such a derivative may be classified as an equity instrument, a financial asset or a financial liability in its entirety. The individual legs of the exchange would not be separately classified. A derivative on own equity would be classified as a financial asset or financial liability if:

  • a) the derivative requires the entity to deliver cash or another financial asset, and/or contains a right to receive cash, for the net amount at a specified time other than at liquidation - it is net-cash settled (timing feature); or
  • b) the 'net amount' of the derivative is affected by a variable that is independent of the entity’s available economic resources (amount feature).

The proposed preferred approach requires consistent accounting for redemption obligations, including NCI puts, and compound instruments with derivative components, e.g. convertible bonds. The IASB sees this as an improvement in the usefulness of financial statements because consistent debt and equity classifications are achieved for similar contractual rights and obligations.

In the opinion of the IASB, additional information on the timing feature is not necessary, as the current presentation and disclosure requirements in other IFRS Standards provide sufficient information to facilitate assessments of funding liquidity and cash flows. In contrast, additional disclosures on the amount feature are required to provide more comprehensive information to users of the financial statements; more detailed breakdowns are required in the balance sheet, the income statement and the revaluation reserve (other comprehensive income) to facilitate the assessment of solvency and return. The IASB proposes a separate disclosure in other comprehensive income for income and expenses from financial liabilities and derivative financial assets or financial liabilities that depend on the company's available economic resources, as well as partially independent derivatives. These amounts are not subsequently reclassified to profit or loss.

In addition, the discussion paper proposes to provide more comprehensive information on the characteristics of issued instruments, such as the ranking of financial liabilities and equity instruments in the event of liquidation.

Annexes to the discussion paper contain a discussion of the two alternative approaches discussed by the IASB, each based on only one of the two features, and a comparison of the classification of selected financial instruments under IAS 32 and under the IASB's preferred approach.

Comments on the discussion paper are requested by 7 January 2019.

 

Additional information

 

CFA Institute and IFRS Foundation discuss technology’s impact on financial information

26 Jun 2018

At their 5 June 2018 event, the CFA Institute and the IFRS Foundation hosted a joint investor event, 'Transforming the impact of financial information—the role of technology,' where they discussed the benefits of technological advancements as well as its fears.

The panel discussed how technological developments in the collection and analysis of data has create an era of systematic investing which can search past price correlations and predict future changes in price. In addition, technological developments in AI are assisting auditors by flagging anomalies that may need to be investigated. Further, the automation of some task eliminates some of the human error that occurs during the collection of data.

The fears of technological advancements discussed by the panel included price crashes of exchanges within the highly automated trading environment; loss of jobs due to automation, and the loss of skepticism in the algorithms used (the human element).

For more information, please the event notes on the IASB website.

IFRS Foundation appoints two IFRS Interpretations Committee members

26 Jun 2018

The Trustees of the IFRS Foundation have announced the appointment of Guy Jones and Goro Kumagai as IFRS Interpretations Committee members.

Mr Jones and Mr Kumagai will begin their three-year terms on 1 July 2018. For more information, see the press release on the IASB’s website.

Updated IASB work plan — Analysis

22 Jun 2018

Following the IASB's June 2018 meeting, we have analysed the IASB work plan to see what changes have resulted from the meeting and other developments in June. The work plan reveals that the discussion paper on financial instruments with characteristics of equity will be published next week.

Below is an analysis of all changes made to the work plan since our last analysis on 25 May 2018. The most important change is one not made.

Research projects

Main­te­nance projects

The above is a faithful com­par­i­son of the IASB work plan at 25 May 2018 and at 22 June 2018. For access to the current IASB work plan at any time, please click here.

FRC Lab report on reporting performance metrics

22 Jun 2018

A new report from the Financial Reporting Lab of the UK Financial Reporting Council (FRC) includes a framework and set of questions for companies and their boards to consider when deciding on how they report their performance.

The report points out that investors are calling on companies to reassess how they report their performance metrics. The metrics chosen by companies to report their performance should be clearly aligned to the company’s strategic goals, be transparent on how they are calculated and provide sufficient information that allows comparisons to be made to previous years’ performance.

The questions companies and their boards should consider when deciding on how they report their performance focus on:

  • alignment to strategy,
  • transparency,
  • context,
  • reliability, and
  • consistency.

The report build on the guidance on alternative performance measures issued by the European Securities and Markets Authority (ESMA) in October 2015 but provides an investor perspective on the reporting of all types of metrics (including wider metrics that are not covered by ESMA’s guidelines).

Please click to access the report on the FRC website.

FASB and OIC hold joint meeting

22 Jun 2018

On 21 June 2018, representatives of the US Financial Accounting Standards Board (FASB) and the Italian standard-setter Organismo Italiano di Contabilità (OIC) held a joint meeting in Norwalk. The meeting was the third bilateral meeting between the two standard-setters.

The FASB and the OIC had an exchange of views on implementation activity related to standards on revenue, expected credit losses, and leases and discussed future projects and the FASB’s upcoming standard on targeted improvements to long-duration insurance contracts.

For more information about the meeting, see the press release on the FASB website.

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.