In September 2012, the IASB published a review draft of a hedge accounting chapter of IFRS 9. The review draft was issue to allow constituents an opportunity to provide a fatal flaw review on the proposals. The EFRAG, along with European National Standards Setters, conducted a field test on the review draft to determine if there are any fatal flaws and to test how the proposals will work when performing actual transactions.

As a result of the field test, the EFRAG initiated an additional consultation concerning the impact on macro hedge accounting relationship proposed in the review draft and those currently existing under IAS 39. The outcome of the consultation resulted in two options, which are (1) retain IAS 39 hedge accounting for all of their hedges until either they decide to apply IFRS 9 irreversibly or the project on macro hedging is completed or (2) to adopt irreversibly the requirements of the Review Draft as drafted.

The feedback statement is available on the EFRAG website.

Early in FASB history, the position of vice chairman was created but later retired. Recently, the FAF Trustees decided to reinstate the position of vice chairman due to the increasing time demands on the FASB chairman. The vice chairman’s role is to assist in representing the FASB with external stakeholder and to stand in for current chairman as needed in guiding FASB’s internal operations.

Mr Kroeker formally worked as the US Securities and Exchange Commission’s (SEC) Chief Accountant from 2009 to 2012. During his tenure as SEC Chief Accountant, he expressed his support for convergence and emphasised the need for the Boards to have adequate time to develop fully converged standards.

Prior to his term with the SEC, he was a partner at Deloitte & Touche, LLP, serving in its National Office Accounting Services Group and he was previously a practice fellow at the FASB from 1999 to 2001.

Mr Kroeker’s term will last five years ending on 30 June 2018, at which time he’ll be eligible for re-appointment for an additional five years.

A press release of the announcement is available on the FAF website.

The update consists of removing the example of the special purpose vehicle that issues credit-linked notes, which had proved problematic.

The updated Effects Analysis and the previous version (last updated January 2012, example now deleted on pages 25 and 26) are both available on the IASB website.

In 2012, European enforcers performed full reviews of around 1,050 interim and annual accounts covering around 17 % of listed entities accounts in Europe. In addition, 1,200 accounts were subject to partial review, representing a coverage of 20% of the population of listed entities.

ESMA noted that there is still room for improvement in the quality of financial reporting. Examples of areas requiring additional effort from issuers in order to comply with IFRS include:

• application of the classification criteria for assets held for sale,
• determination of the discount rate for the calculation of defined benefit obligations,
• classification and measurement of financial instruments,
• assessment of goodwill impairment,
• distinction between a change in an accounting policy and an accounting estimate and
• disclosures about the risks and uncertainties or judgments and estimates used in preparation of IFRS financial statements.

A separate targeted review of goodwill impairment, where the results were already published in January 2013, was conducted in 2012 and illustrated "that goodwill impairment losses recognised in 2011 were limited to a handful of issuers and concentrated in a very limited number of industries" and in many cases the related disclosures "were of a boiler-plate nature and not sufficiently entity-specific".

As the enforcers feel that this means that, in many cases, the users of the financial statements are not able to evaluate the reliability of the assumptions used from the disclosures given, ESMA and European enforcers decided to monitor this area in 2013 and included this topic in the common enforcement priorities defined for the 2012 annual financial statements.

In an additional effort to strengthen enforcement, the ESMA has launched a consultation on guidelines on the enforcement of financial information published by listed entities in the European Union. The proposed guidelines are the result of a review of Standards No. 1 and 2 on the enforcement of financial information developed by the Committee of European Securities Regulators (CESR), ESMA's predecessor, in April 2003 and April 2004 respectively.

Please click for the Activity Report of the IFRS Enforcement activities in Europe in 2012 on the ESMA website.

Exposure Draft ED/2013/3 Financial Instruments: Expected Credit Losses proposes a model according to which credit losses are no longer recognised if incurred; rather, entities would recognise expected credit losses on financial assets and on commitments to extend credit based upon current estimates of expected shortfalls in contractual cash flows as at the reporting date.

The field-test, conducted through a questionnaire developed by EFRAG and National Standard Setters, was focused on the practical application of the new requirements and was intended to gather solely facts and objective data, rather than views and opinions.

The main findings of the survey are reproduced below from the press release published on the EFRAG website:

The proposed model would be more responsive to changes in credit quality compared to the incurred loss model in IAS 39.

Many participants were concerned that the proposals in the ED did not allow them to sufficiently rely on their existing credit risk management and regulatory practices; and that not all necessary data are available.

While overall the requirements were found to be clear, they were rated operationally difficult to apply. As a consequence further guidance was considered necessary by participants.

Tracking credit quality, assessing the significance of credit deterioration, having access to sufficient data, discounting expected credit losses and fulfilling the disclosures would be operationally difficult.

Participants were divided as to whether the proposals in the Exposure Draft reflected the manner in which they assessed credit deterioration.

Participants would incur significant implementation costs to apply the requirements in the ED.

Please click for access to the full field-test results on the EFRAG website.

IFRIC 21 provides guidance on when to recognise a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain.

EFRAG published its draft endorsement advice tentatively recommending to adopt IFRIC 21 for use in Europe on 19 July 2013. Currently, EFRAG believes that final endorsement of IFRIC 21 might be expected in the first quarter of 2014.

Please click for the EFRAG Endorsement Status Report as of 22 July 2013.

The participants discussed traditional G20 agenda including the G20 Framework agreement for strong, sustainable and balanced growth, the financial regulation reforms, and market transparency. The final communiqué contains the usual sentence urging convergence stressing this time how convergence can contribute to financial stability:

We reiterate our call on the IASB and FASB to finalize by the end of 2013 their work on key outstanding projects for achieving convergence on a single set of high-quality accounting standards. We recall the crucial importance of making swift progress on this issue in order to enhance resilience of financial markets.

Another topic of discussion was also the question of how long-term financing can be encouraged. A research group led by Indonesia and Germany presented information on the experiences and country-specific practices of stimulating long-term investment. Short-termism in investor behaviour is currently a much debated topic, and the question has been raised whether the use of fair value accounting principles has led to it. In a response to the European Commission Green Paper Long-term financing of the European economy, the IASB has already made clear that it "does not believe that fair value accounting principles have of themselves led to short-termism in investment behaviour".

The G20 Leaders' Summit will take place in St. Petersburg on 5-6 September 2013.

Please click for the following information on the G20 website:

• Press release
• Final communiqué

Scepticism regarding uniform application and enforcement of IFRSs has often been raised. The Work Plan for the Consideration of Incorporating IFRSs into the Financial Reporting System for U.S. Issuers published by the Staff of the US Securities and Exchange Commission (SEC) in July 2012 for example finds that “enforcement structures around the world differ widely by jurisdiction” and adds that “rigorous enforcement is important to avoid false comparability where the requirements of the standards in each jurisdiction are the same but the interpretations and practices are inconsistent.”

Professor Leuz’ research (links to all papers below) suggests that these concerns are well founded (his paper Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why is quoted in the SEC report). However, he also shows that enforcement differences are not the only reason for reporting variation – he has identified many other institutional differences across countries “in capital markets, securities regulation, investor protection and economic development, to name just a few” that influence reporting practice and will continue to contribute to non-comparability despite of continuing IFRS adoption around the world.

Further research also showed that it is even doubtful whether the expected capital market effects that were observed in some cases when countries adopted IFRSs can indeed be attributed to IFRS adoption, i.e., the new accounting regime. In Mandatory IFRS Reporting and Changes in Enforcement the authors come to the conclusion that the change in accounting standards seems to have had little effect on market liquidity. They show that the liquidity benefits are found only in a few countries and that these countries concurrently or later tightened their enforcement of financial reporting. Furthermore, the authors show that similar liquidity effects occurred around enforcement changes in Japan without having first moved to IFRS. Thus, the results suggests that changes in reporting enforcement appear to play a critical role for the observed liquidity benefits, rather than IFRS adoption.

In light of this and other research, Professor Leuz suggests a new and different approach to global accounting convergence. The basic idea is to focus only on those companies for which international comparability is likely important and going to yield positive capital market effects. He proposes to create a ‘Global Player Segment’ (GPS) in which firms would be required to use the same reporting rules (i.e., IFRS), face the same enforcement mechanisms and have the same incentives for transparency in their reporting. These would be firms that operate internationally and (seek to) raise money in international markets. Importantly, firms would opt to become members of the GPS and on joining (and after a screening) would submit to strict reporting regulation and enforcement established within the segment for all members. Letting companies choose for themselves is likely to enhance the credibility of firms’ commitment to transparency but also addresses concerns that not all firms equally benefit from globally converged reporting standards.

Professor Leuz has outlined this approach and makes more detailed suggestions how it could be implemented in a short paper with the title A New Approach to Global Reporting Convergence: The Global Player Segment. He has also presented his ideas to the public on two occasions recently and has kindly allowed us to post corresponding slide decks.

The understanding that especially global players benefit from IFRS adoption has also been picked up in discussions about possible IFRS adoption in the US. At recent event in Berlin that also saw the presentation of the GPS proposal, IASB chairman Hans Hoogervorst conceded that he did not expect the United States to adopt IFRSs for all entities and that his expectations were rather that the Unites States would make IFRSs an option for large, internationally-oriented companies that would benefit from an IFRS adoption.

Please click for Professor Leuz’ papers and presentations referred to:

• A New Approach to Global Reporting Convergence: The Global Player Segment (also available in Spanish translation)
• Slightly modified slide deck presented at the 74th Annual Meeting of the German Academic Association for Business Research (VHB) in Bozen/Bolzano (slides in English)
• Slide deck presented at the symposium held in celebration of the 15th anniversary of the German Accounting Standards Board (GASB) in Berlin (slides in German)
• Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why published in Accounting and Business Research (ABR)
  • available through Taylor & Francis Online (there is a charge for downloading)
  • and also available through SSRN (free of charge, scientific citation requires use of the version published in the ABR)
• Mandatory IFRS Reporting and Changes in Enforcement (available through SSRN)

ESMA has decided to review the CESR standards in order to reflect the experience gained by their use since 2005. The new guidelines are based on the same principles, however, they have been reformulated throughout and have been combined into one document.

Also, the objective of enforcement has been revised in order to reflect the importance of compliance with the relevant financial reporting standards and transparency of financial information. Additionally, the concept of enforcement has been extended in order to include, in addition to the enforcers’ review of the financial information, any other actions which might contribute to enforcement such as for example issuing alerts.

Regarding the scope, ESMA noted that investor protection requires the extension of the scope of enforcement to the whole financial reporting framework applicable to listed issuers on the EU Single Market. This includes national GAAPs from the EU jurisdictions and third countries' accounting standards, which have been declared equivalent to IFRS.

The proposed guidelines would apply to all competent authorities and any other bodies from the EU undertaking enforcement responsibilities under the Transparency Directive and the IFRS Regulation.

Please click for access to the consultation document and a corresponding press release on the ESMA website. The closing date for responses to the consultation is 15 October 2013 and ESMA expects to publish the final guidelines in 2014.