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Notes from the second day of the September IFRS Interpretations Committee meeting

12 Sep 2011

The IFRS Interpretations Committee met in London on 9 September 2011 for the second day of its scheduled meeting.

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IIRC issues Discussion Paper on Integrated Reporting, proposes a new approach to corporate reporting

11 Sep 2011

The International Integrated Reporting Committee (IIRC) today released a Discussion Paper 'Towards Integrated Reporting – Communicating Value in the 21st Century'.

The IIRC seeks to bring together world leaders from the corporate, investment, accounting, securities, regulatory, academic, civil society and standard-setting sectors to develop a new approach to reporting.

The Discussion Paper is the first step in the development of an 'International Integrated Reporting Framework', with an exposure draft expected to be published in 2012. It seeks to build on existing developments in reporting such as the international convergence of accounting standards, sustainability guidance published by organisations such as the Global Reporting Initiative (GRI), and the IASB's IFRS Practice Statement Management Commentary.

Integrated reporting aims to combine the different strands of reporting (financial, management commentary, governance and remuneration, and sustainability reporting) into a coherent whole that explains an organisation's ability to create and sustain value. The focus of an Integrated Report would be a broader explanation of performance than traditional reporting, by describing and measuring where practicable, the material components of value creation and, more importantly, demonstrating the links between an organisation's financial performance and the social, environmental and economic context in which it operates.

The IIRC believes an Integrated Report should be an organisation's primary reporting vehicle, replacing rather than adding to existing requirements. Under the IIRC's vision, much information currently produced (including detailed financial reporting information, operational data and sustainability information) would move to an online environment enabled by technology, reducing clutter in the primary report so that report can focus only on the matters the organisation considers most material to long-term success.

The table below provides an overview of the proposed Framework:

The IIRC's Proposed International Integrated Reporting Framework

Guiding principles

The following guiding principles would underpin the preparation of an Integrated Report:

  • Strategic focus – providing insight into the organisations' strategic objectives, and how those objectives relate to its ability to create and sustain value over time and the resources and relationships on which the organisation depends
  • Connectivity of information – shows the connections between the different components of the organisation's business model, external factors that affect the organisation and its performance depend
  • Future orientation – management's expectations about the future, as well as other information to help report users understand and assess the organisation prospects and the uncertainties it faces
  • Responsiveness and stakeholder inclusiveness – insight into the organisation's relationships with its key stakeholders and how and to what extent the organisation understands, takes into account and responds to their needs
  • Conciseness, reliability and materiality – providing concise, reliable information that is material to assessing the organisation's ability to create and sustain value in the short, medium and long term.

Content elements

The guiding principles should be applied in determining the content of an Integrated Report, based on the following key elements:

  • Organisational overview and business model – the organisation's mission, principal activities, markets, products and services, it's business model, value drivers and critical stakeholder dependencies, and its attitude to risk
  • Operating context, including risks and opportunities – a more in-depth description of material issues, the process for determining which issues it considers material, and how the material issues affect the organisation's ability to create and sustain value over time
  • Strategic objectives and strategies to achieve those objectives – risk management arrangements related to key resources and relationships, linkages and what makes the organisation unique and able to realise value in the future, such as the extent to which sustainability considerations have been embedded into its strategy and give it a competitive advantage
  • Governance and remuneration – the organisation's governance structure, how it supports the strategic objectives of the organisation and relates to the organisation's approach to remuneration
  • Performance – a concise and connected assessment of how the organisation has performed against its strategic objectives and related strategies, including KPIs, organisational impacts (both positive and negative) on resources and relationships, and significant external factors impacting performance
  • Future outlook – opportunities, challenges and uncertainties the organisation is likely to encounter in achieving its strategic objectives and the resultant implications for its strategies and future performance.

Resources and relationships - the "capitals"

In order to assist in understanding the concepts underlying the Discussion Paper, it contains the following example resources and relationships that can be conceived as different forms of "capital":

  • Financial capital – pool of funds available to produce goods and provide services, obtained through financing or generated through operations or investments
  • Manufactured capital – manufactured physical objects, e.g. buildings, equipment and infrastructure
  • Human capital – people's skills and experience and their motivations to innovate
  • Intellectual capital - intangibles that provide competitive advantage including intellectual property, brand and reputation
  • Natural capital – an organisation's activities may impact positively or negatively on natural capital such as water, land, minerals and forests, and biodiversity and eco-system health
  • Social capital - institutions and relationships established within and between each community, group of stakeholders and other networks to enhance individual and collective well-being.
The Discussion Paper notes the development of Integrated Reporting will require a change in established thinking about decision making and reporting, and identifies regulatory change as one of many challenges. The IIRC is conducting a two-year pilot programme, commencing in October 2011, to test and further develop the International Integrated Reporting Framework (see our earlier story).

If, and until, Integrated Reporting is the primary report for all organisations, the report outlines a number of possible alternate pathways to integrated reporting, including combining the sustainability report with the management commentary or the full annual report, publishing a separate integrated report, modifying sustainability reports or adopting integrated reporting internally to underpin management information.

The IIRC is calling for comments on the Discussion Paper to be submitted by 14 December 2011. Click for:

 

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Upcoming Canadian IFRS webcast

09 Sep 2011

Deloitte (Canada) is hosting a IFRS quarterly technical update webcast in late September.

One of a series of quarterly updates with a focus on combining technical knowledge with practical experience, the webcast will discuss some of those IFRS requirements that are effective for 2011 as well as a review of recently and soon to be issued IFRSs, changes to the IASB project plan, and an update on regulatory matters.

Full details of the webcast are provided below:

Topic: Moving ahead in an IFRS world — 2011 IFRS third-quarter technical update
Date and time: Tuesday, 27 September 2011 at 2:00pm-3:30pm Eastern Time (GMT-05:00)
More information: Click Here
Registration: Click Here
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EFRAG draft comment letter on IASB's exposure draft on the mandatory effective date of IFRS 9

09 Sep 2011

The European Financial Reporting Advisory Group (EFRAG) has issued its draft comment letter on the IASB Exposure Draft Mandatory Effective Date of IFRS 9.

In this draft letter, EFRAG agrees that there should be a delay in the effective date of IFRS 9 Financial Instruments, but expresses concern about the revised effective date of 1 January 2015. Below is an excerpt from the draft letter:
EFRAG believes that, rather than setting a fixed effective date, it would be more appropriate to allow entities at least three years to implement IFRS 9 after the completion of all phases of IFRS 9 and the standard on insurance contracts. We believe that not requiring restatement of comparative information in the first year of application of IFRS 9 would be an inappropriate alternative to setting a proper effective date in the first place.

EFRAG is seeking comments on its draft letter by 17 October 2011. Click for:

 

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2011 IFRS 'Green Book' — Coming Soon

09 Sep 2011

The IFRS Foundation has announced that A Guide through IFRS July 2011 will be available in October 2011.

This volume (nicknamed the "Green Book") will include the full text of the Standards and Interpretations and accompanying documents (such as the Basis for Conclusions) issued by the IASB as at 1 July 2011 with extensive cross-references and other annotations. This edition does not contain documents that are being replaced or superseded but remain applicable if a reporting entity chooses not to adopt the newer versions early.

Accordingly, this edition will include new standards such as IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements, but will not contain IAS 31 Interests in Joint Ventures.

The Green Book will sell for £90 plus shipping for the two book set (academic, developing country, and volume discounts apply). You will find more information and ordering details here.

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Notes from the first day of the September IFRS Interpretations Committee meeting

09 Sep 2011

The IFRS Interpretations Committee met in London on 8-9 September 2011. We have posted Deloitte observer notes from the topics discussed on the first day of the meeting, as follows (click through for direct access to the notes for that particular topic):

Thursday 8 September 2011

Note that a late change was made to the agenda to include the discussion on IFRS 8. Deloitte observer notes from Friday (continuing the discussion of new items for initial consideration) will be posted soon.

Click here to go to the preliminary and unofficial Notes Taken by Deloitte Observers for the meeting.

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IASB effect analyses for IFRS 10 and IFRS 11

08 Sep 2011

The IASB has posted to its website effect analyses for IFRS 10 Consolidated Financial Statements (including IFRS 12 Disclosure of Interests in Other Entities) and IFRS 11 Joint Arrangements (see our earlier story for more information about the effects analysis for IFRS 11).

The effect analyses provide detailed insights into the potential impacts of the new requirements using case studies and other quantitative and qualitative material. They include an assessment of both the costs incurred by preparers of financial statements and the costs incurred by users of financial statements when information is not available. The analyses also consider the comparative advantage that preparers have in developing information that users would otherwise have to develop themselves.

The effects analysis for IFRS 10 includes the following observations:

  • IFRS 10 does not introduce new concepts, but instead builds on the control guidance that existed in IAS 27 and SIC-12 by adding additional context, explanation and application guidance that is consistent with the definition of control. Accordingly, at a very basic level, most consolidation decisions should be unaffected by the new consolidation model in IFRS 10
  • IFRS 10 will change the way in which control of structured entities is assessed, by focusing on all three elements of control (power, exposure or rights to variable returns and ability to use power to affect returns), rather than on risks and rewards which sometimes was the case when applying SIC-12. This may result in the consolidation of some entities previously 'off balance sheet' due to the brighter lines in IAS 27 and SIC-12
  • The IASB believes that although IFRS 10 contains an explicit requirement to continually assess control, it will not be necessary to constantly monitor and track changes in each factor that might affect control, as the circumstances that will trigger a reassessment should be obvious to the entity.

The IFRS 10 analysis also provides a number of examples illustrating where the Standard may have an effect, grouped into examples where diversity in practice exists under IAS 27 and SIC-12 or where the control assessment relied on 'bright lines'. The examples include control without a majority of voting rights, investees previously within the scope of SIC-12, agency relationships and potential voting rights.

Please click for:

 

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GRI calls for input into sustainability reporting guidelines and first country annex

08 Sep 2011

The Global Reporting Initiative (GRI) has called for comments on the proposed 'fourth generation' of its Sustainability Reporting Guidelines ("G4") and the first version of GRI's Guidelines tailored specifically for a country.

The GRI's 'Sustainability Reporting Framework' includes Sustainability Reporting Guidelines, which are currently in their third version ("G3" and an updated "G3.1") and can be followed by entities in preparing sustainability reports. Annexes and supplements provide guidance in particular areas.

The G4 guidelines are expected to address new requirements for sustainability data, and improve on the content in the current G3 and G3.1 guidelines with strengthened technical definitions and improved clarity (see our earlier story). The initial 'public comment period' on the G4 guidelines invites feedback, through an online survey, on the inclusion of proposed sustainability topics, and the potential shape of G4. The survey runs for 90 days and closes on 24 November 2011.

GRI has also published a 'Brazilian National Annex' for public comment, the first version of GRI's Guidelines that is tailored specifically for a country. The deadline for submission of feedback on the National Annex is 25 October 2011.

The GRI also supports the International Integrated Reporting Committee (IIRC) which is developing proposals for an integrated reporting framework. The IIRC is expected to publish a Discussion Paper in the near future.

Click for:

 

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Our summary of new and revised accounting pronouncements

07 Sep 2011

We've updated our summary of new and amended pronouncements document to provide a high level overview of new and revised accounting pronouncements that should be considered for financial reporting periods ending on or after 30 September 2011.

The resource provides a brief summary of each pronouncement, and indicates whether it must be mandatorily applied for the first time at 30 September 2011, or whether it may be optionally applied, for various quarter ends. This information can be used to ensure that all new financial reporting requirements have been fully considered in the reporting close process.

The information reflects developments to 31 August 2011 and will be updated through to December 2011, after which we'll produce an edition for December 2011 reporting.

Click for:

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The Bruce Column — Going global, and positive

06 Sep 2011

With summer coming to an end minds will start concentrating again on the decision, due towards the end of the year, on whether the US will move across to IFRS.

And perhaps a good starting point would be some of the recent submissions that have arrived at the SEC's offices in response to their staff paper on a possible approach to IFRS adoption.

Many of these submissions take the view that the idea of moving from the tried and trusted US GAAP to the IFRS system which has taken a hold around the world should be dismissed. Companies cite the perceived costs of doing so. They argue that they don't see the point of such a move and they argue, understandably, that within the internal US market alone there is no need for it.

But at for many multinational companies the submissions are more focused on the global outlook.

You could start with the comments from CalPERS, which runs the largest US public pensions plan. If you want the views of investors this is a pretty good place to start. And what CalPERS wants is simple. It is the big bang approach, or as they put it: 'A single effective implementation approach to ensure comparability'. And they cite the obstacles to that goal: 'Uncertainty is costly; lack of clarity in the timeline makes it hard for investors to know when and how to prepare and is an obstacle to committing resources towards movement to IFRS'. And from the investor perspective the big bang version of implementation would simply 'allow investors and issuers to be better prepared and able to provide retrospective data for analysts'.

And it also points clearly to the improvement in US financial reporting which would follow a decisive SEC move towards IFRS. 'The focus on investors and investor representation, where standards are consistently interpreted and applied to ensure comparability —with consistent audit application and enforcement — are integral to adoption of one set of high-quality, global accounting standards', it says. 'CalPERS believes that the SEC has the opportunity to effectively improve accounting standards, and to regain and increase investors' trust in financial reporting'.

And CalPERS would find its views endorsed by another submission, this time from a powerful group of preparers in their comments to the SEC. A joint paper from seven important corporations, including the Ford Motor Company, Kellogg, Bank of New York Mellon Corporation, Archer-Daniel-Midland, and United Continental Holdings, provides equally forthright views, though they are closer to flexibility than big bang when it comes to implementation. But they also emphasise that anyone who wishes to adopt IFRS on a voluntary basis ahead of the end of any transition arrangements should be allowed to do so. In other words those who wish to act with urgency should be allowed to do so.

As multi-national organisations they are naturally in favour of dealing with the same accounting rules wherever they are operating. That is a simple truth running through all of their comments. 'In today's global economy', they say, 'companies such as ours often are involved in business transactions that must be accounted for and reported using multiple methods as a result of differences between the requirements of local and US GAAP. Having to account for a single business transaction using multiple accounting methods drives unnecessary cost, including systems and process complexity, which can ultimately put US registrants at a competitive disadvantage in the global marketplace. In certain instances, parties to a business transaction may even find that conflicting interests during negotiations are driven exclusively by differences in financial statement outcome under local and US GAAP'.

They elaborate on this: 'As multinational companies, we also engage in cross-border strategic funding transactions', they say. 'A number of companies have faced limitations on access to global transactions or funding opportunities based solely on the inability to produce carve-out financial statements for foreign affiliates under a universally accepted set of financial reporting standards. We believe a common platform such as IFRS is critical to enhancing capital formation that will allow us to compete most effectively in a global economy. A global accounting language will facilitate our ability to effectively participate in the globalization of capital markets, and enhance our ability to access the cross-border flow of funds. Furthermore, we believe the adoption of a universally-accepted financial reporting language is an important step in providing a common platform for investors to more easily compare the financial health and operations of our companies'.

That sums up the current plight of many companies which operate out of the US and around the world. These are among the organisations which would stand to benefit the most from adopting IFRS. What they are looking for is a firm commitment from the SEC. 'Uncertainty', they point out, 'is a significant cause for delay, and delay will only increase the cost of implementation'. On the other hand: 'Certainty will enable us to develop detailed implementation plans, negotiate agreements, design systems architecture and establish processes and procedures once in a cost efficient and resource effective manner'.

And they dramatise what they are up against. 'We believe', they say, 'that the introduction of one global financial reporting standard will provide global enterprises with significant tangible benefits, including the reduction of conflicting accounting standards, simplification of business operations, elimination of multiple instances of operating systems, and more efficient leveraging of resources, while standardizing internal controls and enhancing communications with investors'.

The parameters of financial reporting and the reach of organisations in the US which will be affected by the upcoming SEC decision are huge. They extend from the global giants to sizeable companies which operate in the US market alone.

Supporters of IFRS believe that investors will be better served by shifting to IFRS. And they feel that using IFRS is critical to allow US companies to compete most effectively in a global economy. But that cannot be allowed to outweigh the domestic US opposition to IFRS. 'We recognise that some companies with exclusively US operations may find the cost of conversion to IFRS outweigh the benefits', say the preparers in their submission. 'We believe the SEC will best accommodate the needs of a diverse US market by providing flexibility in the transition'. In other words those companies which operate globally should have the advantage of IFRS, and soon.

Robert Bruce
September 2011

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