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The Bruce Column — Making the future more realistic than rosy

25 Jul 2019

The Chairman of the International Accounting Standards Board, Hans Hoogervorst, is half way through his second, and final, term as Chairman.

In a video interview with Robert Bruce, he reflects on recent achievements, work still to be finalised, how non-GAAP measures lead to what he terms a ‘rosy’ view in accounts, and work ahead on many issues, including ensuring climate change is reflected in the figures.

The difficulties that have faced the IASB and its Chairman, Hans Hoogervorst, in recent years have all been ones that by their very nature are hard to pin down. Everyone knows that the risks surrounding climate change and market dislocation reflect real financial risks. But often the systems available make it harder for the financial reporting standards, (IFRS), to deal with them.

Hoogervorst looks to future IASB projects to provide at least some of the answers. He talks of the upcoming revision of the Board’s Management Commentary Practice Statement as part of the solution. ‘It would’, he says, ‘be a good vehicle for focusing on financial risks not yet captured in financial statements’. And he also sees it as a solution to issues surrounding the recommendations as to how to deal with climate-related financial disclosure.

While he insists it is not the place of the IASB to get involved with sustainability reporting he said that Management Commentary would be ‘an excellent vehicle’ to convey the disclosures. He said that such disclosures ‘fit perfectly in the annual report’ and that the IASB will write new guidance to cover it. And he is also keen that the IASB project on the nature of Primary Financial Statements should provide the guidance needed to ensure that there is more rigour surrounding the financial information that currently escapes financial statements.

These are the non-GAAP numbers that he suggests are generally more ‘rosy’ than the numbers reported under IFRS. ‘This is one of the most important pieces of work that we are currently working on’, he says. ‘The income statement’, he says, ‘ is the most important piece of information that is used by investors for future cash-flow projections and evaluations’, yet ‘what is currently the case in IFRS is that in the income statement we define revenue and we define profit or loss but in between we define not all that much’. Investors and companies, he suggests, like to look at subtotals like operating profit, or EBIT, or EBITDA, to better understand their own results or to explain it to investors. ‘But’, as Hoogervorst points out, ‘we don’t define any of that’. And into that gap has grown the mass of non-GAAP.

‘Non-GAAP is basically created by companies themselves’, he said, ‘but without the discipline of proper accounting standards. So it is no surprise’, he said, ‘that much of this information tends to be on the optimistic side. 70 to 80% of non-GAAP is more rosy than the IFRS numbers’. Hence the Primary Financial Statements project. ‘We have decided to make a definition for operating income. We have decided to define an EBIT-like subtotal which makes it possible for investors to better compare the performance of companies irrespective of the way that they are financed; by leverage or more by equity. By doing so’, says Hoogervorst, ‘we will provide more anchors in the financial statements for comparison across the board. It is extremely important’, he says. ‘We will also provide guidance and discipline around the use of the common practice of taking unusual items out of the income statement, which is one of the sources of rosiness’. And we will make it very clear that you have to do that symmetrically – if you take out expenses you probably have to take out some unusual sources of income that might not recur every year’.

All of this, and a variety of other measures will, says Hoogervorst ‘provide a lot more structure and order in the income statement’. All this, as ever, will take time, probably a couple of years, as it goes through the IASB process. The same has been true of IFRS 17 on insurance. ‘It has been clear that a lot of investors avoid investing in insurance companies because they cannot understand the accounting’, he says. ‘The existence of the new standard might draw more investors to the business of insurance’. At present he says that ‘it is a bit of a mess’. ‘Quite frankly’, he said, ‘investors rely more on prudential information than on accounting, and on a lot of non-GAAP, and we all know the problems with non-GAAP’. n Nevertheless he forsees an effective date of 2022 for the finalized standard. And looking at the IFRS landscape generally he is optimistic. ‘Accounting cannot prevent crises’, he says, ‘but we should be able to give better transparency about the risks that are building up in the financial system or within a company’.

Across the economy from banks to insurance companies he believes the useful and reliable information will be there. ‘I believe the introduction of IFRS 9, with the introduction of the expected loss model, should give investors a much quicker and better insight into the risks building up on the balance sheet of a bank’. The insurance reforms are also, he says, extremely important for the whole financial system. The update of management commentary will, he says, give investors a better insight into the future risks of a company related to, for example, sustainability issues, but also related to its business model or the technology it is working with. ‘All of these improvements will’, he says, ‘serve investors better in a future period of crisis’.

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EBA publishes IFRS 9 roadmap, launches IFRS 9 benchmarking exercise

24 Jul 2019

The European Banking Authority (EBA) has published a IFRS 9 roadmap providing a comprehensive overview of planned monitoring activities on IFRS 9 implementation. The EBA has also launched an IFRS 9 benchmarking exercise on a sample of institutions aimed at analysing the different modelling practices followed by institutions and how IFRS 9 implementation impacts the amount of expected credit losses in terms of own funds and regulatory ratios.

In the roadmap, the EBA clarifies its intention to continue monitoring and promoting a consistent application of IFRS 9 as well as working on the interaction with prudential requirements. The roadmap includes the different phases of this work from qualitative and quantitative perspectives which will take place in the coming months and years.

The IFRS 9 benchmarking exercise represents an important step in the context of the on-going quantitative monitoring activities. The focus of this exercise is to assess whether the use of different modelling techniques and inputs can lead to significant inconsistencies in terms of expected credit losses amount that directly impacts own funds and regulatory ratios.

Please click for more information on the EBA website.

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Summary of the June 2019 joint CMAC-GPF meeting

23 Jul 2019

Representatives from the International Accounting Standards Board (IASB) met with both the Capital Markets Advisory Council (CMAC) and Global Preparers Forum (GPF) in London on 13 and 14 June 2019. Notes from the joint meeting have now been released.

The topics discussed at the meeting included:

  • Disclosure of sensitive information
  • Goodwill and impairment
  • Primary financial statements
  • Business combinations under common control
  • Management commentary
  • Targeted standards-level review

The next GPF meeting will be held on 8 October 2019; the next CMAC meeting will take place on 10 October 2019.

For more information, see the meeting page and the meeting summary on the IASB's website.

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IFRS Foundation developing a stakeholder engagement register

23 Jul 2019

The IFRS Foundation has announced that it will publish a register to provide a public record of IASB members’ engagement with stakeholders. The register will be published quarterly, beginning December 2019.

The register is being created to increase transparency and "continue demonstrating the Board’s independence and accountability and is also in line with stakeholder feedback." The register will include speaking engagements and face-to-face, web-based or phone meetings of more than 30 minutes duration. IASB members will record the date, the name of the relevant stakeholder organisation, and location and purpose of each engagement.

This development can be traced back, among other things, to demands made by the European Commission in its annual report on the activities of the IFRS Foundation, EFRAG and PIOB in 2017, which was published in October 2018. The Commission had observed:

When members of the IFRS Foundation meet with stakeholders outside the framework of the Due Process Handbook, no formal record is kept.

The Commission had noted that it would take action in this regard:

The Commission will engage with the beneficiaries in 2018 in order to ensure (even) higher standards of transparency, in particular with regard to the establishement of mandatory transparency registers on meetings with external stakeholders.

As the Commission has made similar comments when reporting on the activities of EFRAG, it is likely that EFRAG will also present a transparency register in the near future.

The full Commission report is available here. For more information on the engagement register, see the press release on the IASB's website.

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IASB posts webinar on IFRS 9 after IFRS Interpretations Committee discussion

23 Jul 2019

The IASB has posted to its website a webinar summarising the IFRS Interpretations Committee's recent discussions on how a company should present amounts in its statement of profit or loss if a credit-impaired financial asset is subsequently paid in full or no longer credit-impaired (cured).

The webinar is hosted by IASB technical staff members Angie Ah Kun and Elizabeth Figgie. They discuss the March 2019 meeting of the IFRS Interpretations Committee and walk through the relevant requirements in IFRS 9 for amortised cost measurement and impairment.

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

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European Lab Project Task Force to conduct interviews related to climate-related reporting

19 Jul 2019

The European Lab Project Task Force (PTF) will be conducting interviews in September and October with practitioners who have experience in the reporting or use of climate-related reporting information.

The interviews will assist the PTF in gather practical insights on good practices from stakeholders. This information will used in a draft report on climate-related reporting which is expected to be issued during the fourth quarter of 2019. The interviews are expected to last between 45 minutes to one hour; but could be longer depending on the whether a group format or workshop occurs. Those interested in participating should contact the European Lab by 17 September 2019.

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

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Pre-meeting summaries for the July IASB meeting

19 Jul 2019

The IASB is meeting on Monday 22, Wednesday 24 and Thursday 25 July 2019. On Tuesday 23 July the IASB and US FASB will meet together in public. We have posted our pre-meeting summaries for the meeting that allow you to follow the IASB’s decision making more closely. For each topic to be discussed, we summarise the agenda papers made available by the IASB staff and point out the main issues to be discussed by the IASB and the staff recommendations.

IBOR Reform: The staff will summarise the feedback from comment letters and discuss additional issues for consideration before finalising the proposed amendments. The IASB plans to hold an additional meeting in late August to discuss the project.

Classification of Liabilities as Current or Non-current: The Board will consider liabilities with equity-settlement features as well as transition and early application requirements.

Primary Financial Statements: The Board will discuss potential amendments to IAS 34, whether to include special provisions for management performance measures and subtotals that are similar to gross profit, how to classify interest and dividends in the statement of cash flows and how earnings per share should reflect management performance measures. The staff are also asking for permission to begin preparing the Exposure Draft.

Goodwill and Impairment: The staff are asking permission to begin preparing the Exposure Draft.

Rate-regulated Activities: The Board will consider whether to have an exception in IFRS 3 for rate-regulated activities. They will also discuss the regulatory agreement period and incentive schemes. The staff are recommending that the Board publish an Exposure Draft, rather than a second Discussion Paper, and are seeking permission to prepare that ED.  

Disclosure Initiative: The Board will consider possible changes to the disclosure requirements in IAS 19.

Dynamic Risk Management: The staff will demonstrate how the DRM model is designed to operate. The Board will consider some operational simplifications, whether it should be mandatory or optional and the areas of focus for disclosure.  

Financial Instruments with Characteristics of Equity—Summary of feedback: The Board will continue to discuss feedback on the Discussion Paper, focusing on presentation of financial liabilities; presentation of equity instruments and disclosure; contractual terms; users of financial statements and the overall objective, scope and challenges.

Comprehensive review of the IFRS for SMEs Standard: The Board plans to issue a Request for Information (RFI) in the second half of 2019. At this meeting the Board will consider whether to propose changes to the IFRS for SMEs Standard to reflect IFRS 3, IFRS 10, IFRS 11 and IFRS 15 as well as a range of amendments to IFRS Standards and IFRIC Interpretations that have been published since the last review.

Management Commentary: The Board will consider how to apply the Conceptual Framework’s qualitative characteristics to information presented in management commentary as well as how to make relevance and materiality judgements.

Business Combinations under Common Control: The staff will present their analysis of the implications of potential equity investors in BCUCC and the measurement approaches could be applied. It is an education session with no staff recommendations.

Implementation Matters: The Board will be asked for any feedback on the June meeting of the IFRS Interpretations Committee.  

Joint session with the US Financial Accounting Standards Board (FASB): The middle day of the IASB meeting has been set aside for a joint meeting with the FASB. The boards will update each other on projects each Board is working on separately: Segments (FASB); Primary Financial Statements (IASB); Financial Performance Reporting (FASB); Financial Instruments with Characteristics of Equity (IASB); Distinguishing Liabilities from Equity (FASB); IBOR reform (both); Goodwill and Impairment (IASB); Identifiable Intangible Assets and Subsequent Accounting for Goodwill (FASB); Disclosure Initiative (IASB); Disclosure Framework (FASB); and Implementation: Revenue and Leases (FASB).

Our detailed pre-meeting summaries are available on our July meeting notes page and will be supplemented with our popular meeting notes after the Meeting.

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European Lab consults on future projects

18 Jul 2019

The European Financial Reporting Advisory Group (EFRAG) has published a consutlation document to start planning for the next projects of the European Corporate Reporting Lab.

The consultation documents proposes three future project topics and seeks views on their prioritisation:

  • Reporting of social matters and human rights
  • Reporting of non-financial risks and opportunities, and linkage to the business model
  • Reporting on the materiality assessment process and outcomes for Environment, Social and Governance (ESG) matters

The document also asks for any possible alternative project that respondents believe would be more important and urgent for the European Lab to undertake than the projects proposed.

Please click for more information on the EFRAG website. To get additional stakeholder input, EFRAG will also be hosting a two-hour lunch event on Tuesday 10 September. Please click for more information on the EFRAG website

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AcSB and OIC hold joint meeting

18 Jul 2019

On 15 July 2019, the Canadian Accounting Standards Board (AcSB) and the Italian standard-setter Organismo Italiano di Contabilità (OIC) held a joint meeting in Rome. The meeting was the second bilateral meeting between the two standard-setters.

In addition to giving updates on their respective standard-setting activities at the meeting, the two boards exchanged views on the IASB’s current project on proposed amendments to IFRS 17 and on rate-regulated activities. In addition, the AcSB and the OIC discussed implementation activities regarding IFRS 16 Leases.

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

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IASB publishes proposed amendments to IAS 12

17 Jul 2019

The International Accounting Standards Board (IASB) has published an exposure draft 'Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Proposed amendments to IAS 12)' that aims at clarifying how companies account for deferred tax on leases and decommissioning obligations. Comments are requested by 14 November 2019.



The IFRS Interpretations Committee received a submission about IAS 12 Income Taxes and the recognition of deferred tax in relation to leases (when a lessee recognises an asset and a liability at the lease commencement) and decommissioning obligations (when an entity recognises a liability and includes the decommissioning costs in the cost of the item of of property, plant and equipment). The submitted fact pattern assumed that lease payments and decommissioning costs were deductible for tax purposes when paid and identified different approaches in practice.

The Committee discussed the submission at its meetings in March 2018 and June 2018 and came to the conclusion that the matter was relevant and widespread, as there are various kinds of contracts and fact patterns affected. Moreover, the question as to whether tax deductions are attributable to a contract, a (single) asset/liability, or rather to cash flows, and as to which consequences this may have for determining temporary differences, is fundamental within IAS 12. Therefore, the Committee recommended that the IASB develop clarifying amendments to IAS 12.

The IASB discussed the issue in October 2018 (general discussion of the issue and agreement with the IFRS Interpretations Committee's recommendation) and January 2019 (transition, retrospective application, and early application) and has now published an exposure draft of proposed clarifying amendments.


Suggested changes

The main change proposed in ED/2019/5 Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Proposed amendments to IAS 12) is a proposed exemption from the initial recognition exemption provided in IAS 12.15(b) and IAS 12.24. Accordingly, the initial recognition exemption would not apply to transactions in which both deductible and taxable temporary differences arise on initial recognition that result in the recognition of deferred tax assets and liabilities of the same amount. This is also explained in the newly inserted paragraph IAS 12.22A.

    Comments on the proposed changes are requested by 14 November 2019.


    Effective date and transition

    The exposure draft does not contain a proposed effective date as the IASB intends to decide on this after exposure. The proposed amendments would be applied retrospectively in accordance with IAS 8 and early adoption would be permitted.

    For practical and cost reasons, some simplification is provided for the assessment of the probability that a taxable profit will be available against which the deductible temporary difference can be utilised. A similar simplification is proposed for first-time adopters.


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