Standard setters discuss intangibles at IFASS meeting

30 Sep 2020

The International Forum of Accounting Standard Setters (IFASS) is currently holding its fall meeting as a virtual conference. One presentation today saw a contribution by the standard setters of Canada, Germany, Japan, the United Kingdom and the United States on perspectives on the financial reporting on intangibles.

The five standard setters found that even among their group of five there were different perspectives on the accounting for intangibles - some seeing the difference between book value and market value of a company as a problem, some seeing the difference between book value and market value as a problem that can be solved by disclosures, some seeing no problem in the difference between book value and market value. The purpose of the presentation was to provide a balanced discussion of the alternative perspectives to support community-wide consideration of the issues and stimulate relevant academic research.

FASB Board member Christine Botosan presented the view of those that believe there is a problem, which needs resolving by additional recognition of intangibles. Her arguments included:

  • Failure to recognise important intangible items understates book value of equity and financial performance;
  • failure to recognise important intangible items reduces the relevance of financial statements;
  • recognition of some amount is better than no recognition:
    • Measurement challenges should not preclude recognition; and
    • verifiability concerns should not preclude recognition.

Ms Botosan also commented on measurement bases and their application to intangible assets. She differentiated between "in-exchange" assets that are used on a standalone basis and readily convertible to cash and "in-use" assets that are used in combination and not readily convertible to cash. Ms Botosan noted that most intangible items are "in-use" an that the relevant measurement basis should be historical cost or replacement cost. However, these costs are difficult to determine. Similarly, determining the fair value of intangible assets is difficult as intangible assets tend to be unique.

Kelly Khalilieh, Director of Accounting Standards at AcSB Canada, presented the view of those that believe there is no problem or not a problem that cannot be solved by additional disclosures. She noted that research shows that financial information is not declining in relevance and that it is not the objective of financial statements to show the market value of a company. Ms Khalilieh explored the benefits  of mandatory and voluntary disclosures. She noted that mandatory disclosures could be subject to audit and would be comparable and consistent. Voluntary disclosures would provide greater flexibility and would allow for more tailored disclosures. On possible disclosures she noted the following:

  • Disaggregated information on expenditures of intellectual capital (“future-orientated intangibles”),
  • an additional classification for “intangible activities” in the cash flow statement;
  • a statement of intangible assets or intellectual capital flows; and
  • an explanation in the notes of expenditures on intangible items.

Outside of financial statements she suggested to link intangible activities to the discussion of the organisational strategy and objectives and to supplement it with human capital metrics.

The paper of the five standard setters is currently under review at an academic accounting journal.

IASB issues podcast on latest Board developments (September 2020)

30 Sep 2020

The IASB has released a podcast featuring IASB Vice-Chair Sue Lloyd and Board Member Darrel Scott discussing deliberations at the September 2020 IASB meeting.

The podcast discusses:

  • Management Commentary;
  • Rate-regulated Activities;
  • Business Combinations under Common Control;
  • Extractive Activities; and
  • Maintenance and consistent application.

The podcast (12 minutes) can be accessed through the press release on the IASB website.

The detailed notes taken by Deloitte observers at the meeting are available here.

We comment on the IASB’s exposure draft on general presentation and disclosures

30 Sep 2020

We have published our comment letter on the IASB’s exposure draft ‘General Presentation and Disclosures’ which was published by the IASB on 17 December 2020.

We support the Board’s initiative to improve how information is communicated in the financial statements, in particular the information included in the statement of profit or loss. However, we strongly disagree with the proposals on unusual items and on management performance measures (MPMs).

In addition, we support the objective of improving comparability. However, we believe that this objective will be achieved only if the underlying principles for the determination of the operating category proposed for the statement of profit or loss are expressed more clearly.

Lastly, we disagree with two proposals on classification of items in the statement of profit or loss and the proposal to present income and expenses from cash and cash equivalents as part of financing activities.

Click to view the comment letter.

EFRAG outreach event on business combinations and subsequent accounting for goodwill

30 Sep 2020

The EFRAG, along with the IASB, will be hosting an outreach event on 16 October 2020 to discuss how to improve disclosures regarding acquisitions, enhancing impairment testing and accounting for goodwill.

The event will have a wide range of high-level speakers and will be seeking input from the community of interested stakeholders on the IASB’s preliminary views included in the Discussion Paper Business Combinations —  Disclosures, Goodwill and Impairment and the EFRAG’s Draft Comment Letter.

Please click for more in­for­ma­tion and reg­is­tra­tion for the event on the EFRAG website.

EFRAG draft endorsement advice on IFRS 17 now available

30 Sep 2020

As reported earlier, the Board of the European Financial Reporting Advisory Group (EFRAG) agreed to publish positive a draft endorsement advice (DEA) on IFRS 17 'Insurance Contracts' in a public meeting on 10 September 2020, however, the actual document itself was still outstanding.

The Board achieved consensus on all issues with the exception of annual cohorts, with nine Board members voting in favour of the cohorts meeting the endorsement criteria and seven members disagreeing. Comments on the DEA are requested by 29 January 2021. Please click to access the different consultation documents and appendices through the press release on the EFRAG website.

EFRAG has also updated its endorsement status report to the issuance of the positive draft endorsement advice.

IFRS Foundation consults on establishing a sustainability standards board

30 Sep 2020

The Trustees of the IFRS Foundation have published a consultation paper to assess demand for global sustainability standards and what role the Foundation might play in the development of such standards.

After an introductory assessment of the current situation, which stresses the growing and urgent demand and the need for consistency in reporting and comparable information, the consultation paper sets out high-level options for the IFRS Foundation. These options are explained as maintaining the status quo, facilitating existing initiatives, or creating a Sustainability Standards Board (SSB) and becoming a standard-setter working with existing initiatives and building upon their work.

For establishing the possible new sustainability standards board the existing IFRS Foundation’s three-tier governance structure could be leveraged. The new board could operate alongside the International Accounting Standards Board (IASB) under the existing governance structure, build on existing developments and collaborate with other bodies and initiatives in sustainability, focusing initially on climate-related matters. However, the consultation paper sets out critical success factors for the creation of an SSB. These include:

  • Achieving sufficient support from public authorities and market participants;
  • working with regional initiatives to achieve global consistency and reduce complexity in the reporting landscape;
  • achieving the appropriate level of funding; and
  • ensuring the current mission of the IFRS Foundation is not compromised.

If respondents believe that the SSB could and should be established by the IFRS Foundation, the discussion paper suggests a ‘climate-first’ approach, proposes that the SSB would initially focus its efforts on the sustainability information most relevant to investors and other market participants and could consider how to broaden its scope as it proceeds with its work, and discusses assurance aspects.

The consultation paper includes ten questions to respondents and encourages stakeholders to raise any other comment or relevant matters for the consideration of the Trustees. Comments on the consultation are requested by 31 December 2020.

Please click for the following additional information:

In addition, the CDP, Climate Disclosure Standards Board, Global Reporting Initiative, International Integrated Reporting Council and Sustainability Accounting Standards Board have issued an open letter to Erik Thedéen, Chair of the Sustainable Finance Task Force of the International Organization of Securities Commissions, on the need to work together to meet the needs of the capital markets. Mr. Thedéen acknowledged the letter and the IFRS Foundation consultation in a speech stating that: "While these initiatives are currently running in parallel, I expect them to come together."

IFAC has issued a press release, applauding both, the IFRS Foundation consultation and the open letter.

We comment on IFRS Interpretation Committee tentative agenda decision on supply chain financing arrangements — reverse factoring

29 Sep 2020

We have published our comment letter on the IFRS Interpretations Committee tentative decision not to take onto the Committee’s agenda the request for clarification on how to present liabilities to which reverse factoring arrangements relate and what information is required to be disclosed in relation to these arrangements in the financial statements.

We agree that the IFRS Interpretations Committee’s conclusions regarding supply chain financing arrangements reflect the requirements of IFRS Standards and that the outcome of applying these requirements will lead to different presentations in the statement of financial position, within trade payables, other payables or in other financial liabilities depending on the terms of the arrangement and the relative similarity of the nature and function of the liability under the arrangement with more conventional trade payables. However, we are concerned that users are not benefiting from a fuller understanding of these arrangements given the lack of specific disclosures required by IFRS 7. The Board may wish to consider adding to its agenda a project to improve disclosures in this area, potentially through illustrative examples, due to the increasing prevalence of alternative financing models such as these, and the move away from obtaining finance from a broad range of suppliers to a more concentrated approach with a single or small number of financial institutions or other funding vehicles.

Click to view the comment letter and Deloitte's notes from the June 2020 IFRS Interpretations Committee meeting.

September 2020 IASB meeting notes posted

29 Sep 2020

The IASB met on Tuesday 22 and Wednesday 23 September 2020 via video conference. We have posted our comprehensive Deloitte observer notes for all projects discussed during the meeting.

Maintenance and Consistent Application — Lease Liability in a Sale and Leaseback — Sweep Issue: The staff are drafting the exposure draft (ED) to amend IFRS 16. They identified matters that the Board needed to consider. The Board decided that the ED specify that when measuring the ROU asset and lease liability arising from a sale and leaseback, a seller-lessee determines the proportion of the asset sold that relates to the right of use it retains by comparing the present value of the expected payments for the lease to the fair value of the asset sold.  It also decided to modify its tentative proposed approach for how a seller-lessee subsequently measures the lease liability arising from the leaseback such that the seller-lessee would reduce the carrying amount of the lease liability to reflect expected payments for the lease at market rates. The ED is expected to be published in November 2020.

Business Combinations under Common Control: The BCUCC Discussion Paper is expected to be published in November 2020. The Board decided to have a comment period of 180 days.

Management Commentary: The Board decided that the proposed revised practice statement remain a non-binding framework for the preparation of management commentary; require management commentary to include an unqualified statement of compliance with the Practice Statement if it complies with all the requirements in the Practice Statement; retain the requirement that when management commentary relates to financial statements, an entity should either make the financial statements available with the management commentary or identify in the management commentary the financial statements to which it relates; and require an entity to specify the date when its management commentary is authorised for issue and to reflect any material information about events occurring after the end of the reporting period and before the date when the management commentary was authorised for issue.

Extractive activities: The staff papers summarise the results of outreach to determine what problems, if any, entities with extractive activities have applying IFRS Standards and whether the primary users of financial statements of entities with extractive activities are obtaining all the information they need for these entities. The Board asked the staff to examine further differences identified between jurisdictions of reserve and resource disclosure requirements.

Rate-regulated Activities: The staff are drafting the ED on regulatory assets and liabilities. They identified matters that the Board needed to consider. The Board decided to change the definitions of a regulatory asset and regulatory liability and to clarify the measurement of regulatory returns on assets not yet available for use.  The Board also decided to have a comment period of 150 days. The ED is expected to be published in January 2021.

Board work plan update: The staff gave the Board an oral update on the work plan. The staff intend to bring more formal work plan updates every 3 to 4 months.

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

IASB publishes editorial corrections

29 Sep 2020

The IASB has published its second batch of editorial corrections in 2020.

The new set of editorial corrections affect the Red Book and the annotated Red Book 2020 as well as the Blue Book and the annotated Blue Book 2020 regarding IFRS 7 Financial Instruments: Disclosures, IFRS 9 Financial Instruments and the glossary. The only stand-alone standard affected is IFRS 17 Insurance Contracts.

Editorial corrections do not change the meaning or application of pronouncements, but instead correct inadvertent errors. The editorial corrections can be viewed on the editorial corrections page of the IASB's website.

IASB Chair says Trustees are 'considering' sustainability reporting

28 Sep 2020

In his keynote speech at the IFRS Foundation Virtual Conference, IASB Chairman Hans Hoogervorst spoke about sustainability reporting and how ‘traditional’ financial reporting can help to make climate-related financial issues more visible.

In his speech, which also touched briefly on COVID-19 matters, Mr Hoogervorst noted that the growing urgency of climate change has intensified interest in sustainability reporting in recent years. Exploring the relationship between financial reporting and non-financial reporting, he made the following points:

  • None of the IFRSs even mentions ‘climate change’ or ‘sustainability’. Financial reporting merely seeks to neutrally describe economic reality as it is.
  • However, that does not mean that there is a disconnect between IFRSs and sustainability issues and financial reporting based on current IFRSs can be more reflective of sustainability issues than many people realise.
  • The principle-based approach of IFRSs means that many issues can be captured by the requirements, both in terms of recognition and measurement and disclosure. In fact, separate disclosures on the effects of climate change might already be required based on the materiality requirements.
  • Sustainability reporting has important added value to the financial statements. However uncertain this information may be, it can very well be material to investors.
  • Sustainability reporting may also serve to make a company aware of the financial consequences of such issues much earlier.
  • There is hope that in the future financial reporting and sustainability reporting will come even closer together.

Mr Hoogervorst also noted that, as a separate piece of work that is complimentary to the requirements in IFRSs and the IASB’s work on Management Commentary, the Trustees of the IFRS Foundation are currently considering sustainability reporting. They are in the process of preparing for their next five-yearly strategy review and a working group of Trustees has done research into sustainability reporting. Mr Hoogervorst explained that the Trustees plan to build on that work by consulting on the topic more broadly shortly.

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

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