News

Agenda for July 2008 IASB meeting

14 Jul 2008

The International Accounting Standards Board will hold its July 2008 meeting at the IASB's offices, 30 Cannon Street, London on Tuesday to Friday 22-25 July 2008. The meeting is open to public observation and will be webcast.

You can access the agenda on our July 2008 IASB meeting page. We will also post Deloitte observer notes on this page as they are available.

CESR draft statement on fair value in illiquid markets

14 Jul 2008

The EU Committee of European Securities Regulators has invited comment on a draft statement titled Fair Value Measurement and Related Disclosures of Financial Instruments in Illiquid Markets.

The statement, when finalised, will provide guidance to preparers and auditors in the current financial market situation when preparing the next financial statements. "CESR acknowledges that the competence of setting standards, formally interpreting standards and issuing general interpretation of existing standards lies with the IASB/IFRIC. The work conducted by CESR remains under the domain of the application of current IFRS, as CESR Members' role regarding IFRS is the enforcement of financial information." CESR requests comments by 12 September 2008. CESR intends to consider the comments received and publish a final guidance statement in October 2008. Click for:

CESR Draft Statement on FV in Illiquid Markets (PDF 221k)
CESR Press Release (PDF 78k)
Our Credit Crunch Page

The starting point for the measurement of financial instruments is the assessment of whether the financial instrument is traded on an active or a non active market. The measurement of financial instruments on active markets is conducted with the reference to quoted prices. If an active market does not exist, the measurement is determined by using valuation techniques that incorporate all factors that market participants would consider in setting a price, minimising entity-specific inputs. The distinction between active and non active markets is therefore important in the application of the measurement of financial instruments.

On the identification of active and non active markets the statement stresses:

As judgment is required, a well-documented valuation policy is needed. It should be consistent across time and across financial instruments;
Even if the number of transactions is relatively low compared to other markets or to the past, the market could still be active;
The size of the holdings of instruments is not a criterion to decide whether a market should be considered active;
Different pricing sources can be available in an active market, such as prices for actual transactions or for binding quotes;
Market quotes can only be disregarded if there is sufficient evidence that they do not constitute a reliable reference for valuation.

On the use of valuation techniques CESR highlights that:

It entails a significant amount of judgment;
The issuer should document the criteria, the assumptions and the inputs to the valuation techniques to ensure consistency;
Transactions conducted in a market that is not considered active can often provide the most relevant input for valuation techniques;
Liquidity risk and correlation risk could also be relevant in addition to the inputs to valuation techniques listed in the accounting standards;
The use of indices (e.g. the ABX HE index) should be approached with caution.

The draft statement then proposes some disclosure guidance.

New comparison of IFRSs and Indian GAAP

14 Jul 2008

Deloitte Touche Tohmatsu India Private Limited has published IFRSs and Indian GAAP: A Comparison.

This booklet (PDF 288k, 48 pages) summarises the strategy of the Institute of Chartered Accountants of India (ICAI) for converging Indian Accounting Standards and IFRSs and presents a comparison of current Indian GAAP and IFRSs in issue at 31 March 2008.

Summary of IFRS Convergence Strategy of Indian Institute of Chartered Accountants

Will all entities be required to follow IFRS?

Keeping in view the complex nature of IFRSs, the ICAI in its Concept Paper has expressed the view that IFRSs should be adopted for the public interest entities such as listed entities, banks and insurance entities, and large-sized entities from the accounting periods beginning on or after 1 April 2011.

Accounting standards for small and medium-sized entities

The ICAI has indicated that a separate standard may be formulated based on the IFRS for SMEs (an exposure draft of which has been issued recently) when finally issued by the IASB after making any modifications necessary. In order to be an IFRS-compliant country, it is not necessary to adopt the IFRS for SMEs to be issued by the IASB.

Format of converged Accounting Standards (ASs)

The ICAI, in its Concept Paper, has expressed the view that the format of standards to be adopted for public interest entities should be the same as IFRSs including their numbers. The numbers of existing ASs may be given in brackets for the purpose of easier identification. India-specific regulatory or legal aspects may be included in a separate section, where appropriate.

Date of adoption of IFRSs for public interest entities: whether stage-wise or all at once from a specified future date?

The ICAI, in its Concept Paper, has expressed the view that it would be more appropriate to adopt all IFRSs from a specified future date as has been done in many other countries rather than doing so stage-wise. After considering the current economic environment, expected time to reach the satisfactory level of technical preparedness and the expected time to resolve the conceptual differences with the IASB, the ICAI has decided that IFRSs should be adopted for public-interest entities for accounting periods commencing on or after 1 April 2011. This should give enough time for all the participants in the financial reporting process to help in building the environment supporting the adoption of IFRSs.

Notes from day 2 of the July 2008 IFRIC meeting

12 Jul 2008

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday 10 July and Friday 11 July 2008. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the second and final day of the meeting:

Notes from the IFRIC Meeting 11 July 2008
Review of Tentative Agenda Decisions published in May IFRIC Update IAS 39: Application of the Effective Interest Rate Method The IFRIC confirmed its tentative decision taken in May 2008 not to provide guidance on the application of the effective interest rate method to a financial instrument whose cash flows are linked to changes in an inflation index. In doing so, the IFRIC referred the issue to the IASB. A Board observer noted that the IASB would most likely decide to address the issue as part of the project on 'reducing complexity' in financial instrument accounting. Consequently, it is unlikely that the issue would be resolved in the short term. Staff Recommendations for Tentative Agenda Decision Recognition of Lease Expense under an Operating Lease The IFRIC considered a request that it provide guidance on how a lessee should determine an appropriate pattern of recognition of expense for an operating lease with non-level payments. The IFRIC agreed that it should not add the issue to its agenda. The tentative agenda decision will compare and contrast guidance in IAS 16 paragraph 60 and IAS 38 paragraph 97 (which refer to a depreciation/amortisation method reflecting 'the pattern in which the asset's future economic benefits are expected to be consumed by the entity') with that in IAS 17 paragraphs 33 and 34, which refer to a method being 'representative of the time pattern of the user's benefit'. In an operating lease no asset is recognised in the financial statements, and thus cannot be consumed; thus it is the access or right to use the asset that determines the appropriate accounting. Accounting for Trailing Commissions The IFRIC considered a request that it provide guidance on how an entity should account for ongoing commission arrangements, referred to as trailing commissions. The submission was made in the context of investment funds, but IFRIC members noted that such arrangements exist in other contexts, for example, telecommunications. The IFRIC agreed that it should not add the item to its agenda. However, the IFRIC disagreed with the preliminary staff analysis that suggested that diversity in practice should not arise. Instead, IFRIC members noted that diversity already exists, across industries and across jurisdictions. There was agreement that IAS 32 provided sufficient guidance for the financial asset (although there were measurement challenges) but that revenue recognition was more challenging. However, to address this issue effectively, the IFRIC would have to interpret several different IFRSs, including IAS 18, 32, 27, and 39. As such, the IFRIC was probably the wrong forum to decide the accounting and was unlikely to achieve consensus in a reasonable period of time. Transaction Costs Deducted from Equity The IFRIC considered a request that it provide guidance on the extent of transaction costs to be accounted for as a deduction from equity in accordance with IAS 32 paragraph 37. In addition the submission requests guidance on how the requirements of IAS 32.38 to allocate transaction costs that relate jointly to more than one transaction should be applied. The IFRIC agreed that it should not add the item to its agenda as it could be addressed more conveniently within the Annual Improvements process. In making this recommendation to the IASB, the IFRIC may suggest that the action of listing on a recognised exchange without issuing new equity (that is, a secondary offering of existing shares) was not an equity transaction because no new equity is introduced to the entity. Compliance Costs for REACH REACH is an EU regulation on the Registration, Evaluation, Authorisation, and Restriction of Chemicals. The IFRIC considered a request that it provide guidance on the treatment of costs incurred to comply with the requirements of the European Commission Regulation concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). The Regulation came into force in part on 1 June 2007, is binding immediately on Member States, and companies have begun to account for the first costs incurred to comply. The staff noted that they had not completed their information gathering and analysis of this issue, but that their preliminary assessment was to recommend tentatively adding the issue to the agenda. IFRIC members agreed, noting that the retrospective cost of new regulation was a generic issue faced by entities in a variety of jurisdictions. The staff noted that scoping the issue would be critical, and that the costs of implementing the REACH Regulation could be used as examples, rather than scope the issue to address REACH specifically. The staff will return with scope recommendations at the September 2008 IFRIC meeting. Administrative Session – IFRIC work in progress The IFRIC reviewed the status and progress made on issues on its agenda and new issues referred to it but not yet brought to the IFRIC. In particular, the chairman noted two new issues (customer related intangible assets and valuation of restricted securities) for which the staff will present its agenda decision recommendations at the September 2008 meeting.

Notes from the IFRIC Meeting
11 July 2008

Review of Tentative Agenda Decisions published in May IFRIC Update
IAS 39: Application of the Effective Interest Rate Method
The IFRIC confirmed its tentative decision taken in May 2008 not to provide guidance on the application of the effective interest rate method to a financial instrument whose cash flows are linked to changes in an inflation index.
In doing so, the IFRIC referred the issue to the IASB.
A Board observer noted that the IASB would most likely decide to address the issue as part of the project on 'reducing complexity' in financial instrument accounting. Consequently, it is unlikely that the issue would be resolved in the short term.

Staff Recommendations for Tentative Agenda Decision

Recognition of Lease Expense under an Operating Lease

The IFRIC considered a request that it provide guidance on how a lessee should determine an appropriate pattern of recognition of expense for an operating lease with non-level payments.

The IFRIC agreed that it should not add the issue to its agenda. The tentative agenda decision will compare and contrast guidance in IAS 16 paragraph 60 and IAS 38 paragraph 97 (which refer to a depreciation/amortisation method reflecting 'the pattern in which the asset's future economic benefits are expected to be consumed by the entity') with that in IAS 17 paragraphs 33 and 34, which refer to a method being 'representative of the time pattern of the user's benefit'. In an operating lease no asset is recognised in the financial statements, and thus cannot be consumed; thus it is the access or right to use the asset that determines the appropriate accounting.

Accounting for Trailing Commissions

The IFRIC considered a request that it provide guidance on how an entity should account for ongoing commission arrangements, referred to as trailing commissions. The submission was made in the context of investment funds, but IFRIC members noted that such arrangements exist in other contexts, for example, telecommunications.

The IFRIC agreed that it should not add the item to its agenda. However, the IFRIC disagreed with the preliminary staff analysis that suggested that diversity in practice should not arise. Instead, IFRIC members noted that diversity already exists, across industries and across jurisdictions. There was agreement that IAS 32 provided sufficient guidance for the financial asset (although there were measurement challenges) but that revenue recognition was more challenging. However, to address this issue effectively, the IFRIC would have to interpret several different IFRSs, including IAS 18, 32, 27, and 39. As such, the IFRIC was probably the wrong forum to decide the accounting and was unlikely to achieve consensus in a reasonable period of time.

Transaction Costs Deducted from Equity

The IFRIC considered a request that it provide guidance on the extent of transaction costs to be accounted for as a deduction from equity in accordance with IAS 32 paragraph 37. In addition the submission requests guidance on how the requirements of IAS 32.38 to allocate transaction costs that relate jointly to more than one transaction should be applied.

The IFRIC agreed that it should not add the item to its agenda as it could be addressed more conveniently within the Annual Improvements process. In making this recommendation to the IASB, the IFRIC may suggest that the action of listing on a recognised exchange without issuing new equity (that is, a secondary offering of existing shares) was not an equity transaction because no new equity is introduced to the entity.

Compliance Costs for REACH

REACH is an EU regulation on the Registration, Evaluation, Authorisation, and Restriction of Chemicals.

The IFRIC considered a request that it provide guidance on the treatment of costs incurred to comply with the requirements of the European Commission Regulation concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). The Regulation came into force in part on 1 June 2007, is binding immediately on Member States, and companies have begun to account for the first costs incurred to comply.

The staff noted that they had not completed their information gathering and analysis of this issue, but that their preliminary assessment was to recommend tentatively adding the issue to the agenda. IFRIC members agreed, noting that the retrospective cost of new regulation was a generic issue faced by entities in a variety of jurisdictions. The staff noted that scoping the issue would be critical, and that the costs of implementing the REACH Regulation could be used as examples, rather than scope the issue to address REACH specifically.

The staff will return with scope recommendations at the September 2008 IFRIC meeting.

Administrative Session – IFRIC work in progress

The IFRIC reviewed the status and progress made on issues on its agenda and new issues referred to it but not yet brought to the IFRIC. In particular, the chairman noted two new issues (customer related intangible assets and valuation of restricted securities) for which the staff will present its agenda decision recommendations at the September 2008 meeting.

This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.

Notes from day 1 of the July 2008 IFRIC meeting

12 Jul 2008

The International Financial Reporting Interpretations Committee (IFRIC) is meeting at the IASB's offices in London on Thursday 10 July and Friday 11 July 2008. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the first day of the meeting:

Notes from the IFRIC Meeting 10 July 2008
The new IFRIC members are: Margaret M. (Peggy) Smyth, Vice President, Controller, United Technologies Corp., United States Scott Taub, Managing Director, Financial Reporting Advisors, LLC, United States, and former Acting Chief Accountant and Deputy Chief Accountant, US Securities and Exchange Commission. Exposure Draft IFRS 2 Share-Based Payment and IFRIC 11: IFRS 2 – Group Treasury Share Transactions – Preliminary Comment Letter Analysis The IFRIC commenced its detailed redeliberation of the proposed amendments to IFRS 2 and IFRIC 11. The exposure draft (ED) proposes to include cash-settled group share-based payment transactions within the scope of IFRS 2 and would provide guidance on the appropriate accounting. In May 2008 the IFRIC had been presented with a preliminary analysis. The staff structured the session as follows: Scope Accounting for transactions within the scope Scope Regarding the topic of scope the staff highlighted that even with the scope definition as proposed there would still be group share-based payment transactions that would not be covered by IFRS 2 and that the proposals aggravate that issue. One reason for that seemed to be that the proposals would amend the scope, not the defined terms. The staff therefore presented the following recommendations: To amend the related definitions in Appendix A of IFRS 2; Paragraph 2 of IFRS 2 be amended to mirror the revised defined terms; Paragraph 3 of IFRS 2 be amended to more clearly articulate the principle of IFRS 2 when a party other than the entity receiving the goods or services settles the group share-based payment transaction. One IFRIC member asked whether this is something the Board should deliberate. The chairman answered that the issue originally came from the IFRIC, but the Board formally issued the ED as it included amendments to existing Standards and that once IFRIC concludes its redeliberations it recommends its conclusions to the Board. Some IFRIC members expressed concerns over the view the ED takes – group or entity view, that is, is the group accounting relevant for the accounting in the subsidiary? One IFRIC member questioned whether separate financial statements of joint ventures or associates would be addressed by the amendments. It was stated that only subsidiaries would be covered and that this would be made clear by referring to the definitions in IAS 27. The IFRIC agreed to the staff recommendations subject to editorial changes. Accounting for transactions within the scope The staff then turned to the accounting for the transactions within the scope of IFRS 2 in a group situation. Many commentators had argued that if an entity (the subsidiary) has no obligation to make a payment, it would not be sound to require the subsidiary in the its financial statements to recognise a liability. This would also conflict with the Framework. The IFRIC had a lengthy debate about whether the accounting in the parent and in the subsidiary should be symmetrical. Some IFRIC members were of the view that there should be some relationship – which would often result in some form of push-down accounting. Others followed the entity route and concluded that the subsidiary should account for the transaction as an equity-settled share-based payment. One of the Board members present highlighted the structuring opportunities that would result if the subsidiary would account for such a transaction as an contribution by the parent under an equity-settled accounting model. One IFRIC member highlighted that the solution should be in line with the conclusions reached during the redeliberation of D23. There was a lengthy debate about whether, when a transaction is accounted for as equity-settled, it should reflect any true-ups when value and/or vesting changes which would be important in some scenarios (for example, if the share-based payments are granted to employees of the subsidiary) should be considered. The IFRIC coordinator highlighted that the staff wanted to avoid introducing an additional accounting model and tried to be as close to IFRS 2 as possible. In the end, there seemed to be agreement over a model that would true-up for vesting of the share-based payments, but not for other changes in value. This would effectively be the accounting for equity-settled share-based payments as per current IFRS 2. The chairman summed up the discussions and highlighted that any conclusion reached would be reported back to the Board including any strong minority views. The IFRIC coordinator reemphasised that the general approach to the accounting model was not to increase complexity. The chairman than took a vote on the staff recommendations reflecting the outcome of the discussions as suggested by one of the Board members present. The IFRIC accepted the recommendations with two dissents. Next steps The modified staff recommendations will be presented to the Board in one of the next Board meetings. D23 Distributions of Non-cash Assets to Owners – First redeliberations D23 is aimed to provide guidance on the accounting for non-cash distributions to owners. The purpose of this session was to present to the IFRIC a comment letter analysis along with recommendation of the staff on how to proceed with D23. The issues addressed were: General approach in D23 Applicability of IFRS 5 for the asset to be distributed and timing of recognition of the liability General approach in D23 The staff highlighted in its overview of the comment letter analysis that the following significant concerns were expressed by commentators: The scope is too narrow by excluding common control transactions Fair value measurement of the liability and reference to IAS 37 is not appropriate The difference between book value of the asset distributed and the distribution liability should not be recognised in profit or loss Based on those concerns the staff proposed the following: Continue with the project Include common control transactions Provide an consistently applicable accounting policy choice to measure the dividend liability at either fair value or book value of the assets to be distributed Keep the disclosures proposed in D23 The staff noted that under the fair value approach taken in D23 most respondents would support recognition of the difference in profit or loss. One IFRIC member asked if the staff analysed whether those respondents would accept recognising the difference directly in equity. The staff answered it did not analyse this. The IFRIC coordinator explained that most of the transactions that the draft Interpretation attempts to address arise in common control situations. However, some IFRIC members expressed their concerns about the dramatic change in scope. The chairman proposed first to answer the question if common control transactions should be within the scope of the draft Interpretation before proceeding to the remaining issues. Some of the IFRIC members said that in the case of inclusion of common control transactions this would trigger re-exposure. The IFRIC discussed at length whether common control transactions should be within the scope. Some IFRIC members noted that while the scope should not be extended it should be made clear, possibly in the Basis for Conclusions, what transactions IFRIC considers to be within the scope of the draft Interpretation. The staff highlighted that even with a scope excluding common control transactions, constituents consider an Interpretation useful. There seemed to be agreement around the table that the scope should not be broadened, but that the scope should be clarified. Most IFRIC members were against providing an accounting option as proposed by the staff although it might be appropriate if the scope would be extended to include common control transactions. However some IFRIC members had difficulties with the proposed measurement of the liability and acknowledged that this was shared by commentators. Notably, the reference solely to IAS 37 caused concern. One IFRIC member highlighted that often the liability recognised would be a financial liability as defined in IAS 32 and hence, in the scope of IAS 39. Others proposed to prescribe the measurement attribute 'fair value' instead of referring to IAS 39 which requires applying the best estimate which some considered not to be equal to fair value. The chairman noted that the IFRIC rejected the staff proposal to provide for an accounting option. Applicability of IFRS 5 for the asset to be distributed and timing of recognition of the liability The staff then presented the comment letter analysis regarding the proposed amendment to IFRS 5 resulting from the deliberation of D23. Both the IFRIC and the Board concluded that IFRS 5 should apply to non-cash distributions although this is not a sales transaction. The staff noted that the majority of commentators agreed. The IFRIC discussed whether IFRS 5 should also be amended to allow fair value measurement above the carrying amount that would avoid creating a mismatch between the measurement of the dividend liability and the asset to be distributed in settlement of that liability. The IFRIC reaffirmed its position that the assets (groups) should be within the scope of IFRS but that allowing measurement above the carrying amount would be a big change to the principle of IFRS 5. The staff then asked the IFRIC when the assets should be reclassified in accordance with IFRS 5. The possible options would be commitment date or obligation date, notably in jurisdictions where shareholder approval is necessary. After a short discussion, the IFRIC agreed that the principles of IFRS 5 should apply and that any shareholder approval would be included in the assessment of high probability (one IFRIC member dissented). The staff then brought to IFRIC's attention the question when to recognise the liability, which is not addressed by the draft Interpretation. The staff recommended that this should be covered by the final Interpretation. It further proposed that this should be dependent on the requirement of shareholders' approval in a jurisdiction. If shareholder approval of a distribution declared by management is required, the liability would be recognised on the date of shareholders' approval. Otherwise, it would be recognised on the date of declaration by management. There seemed to be agreement with the staff recommendations. The staff was asked to provide a redraft of D23 based on these conclusions and to prepare a paper on possible ways of addressing the accounting mismatch between dividend liability and asset to be distributed in extinguishment of the liability. It was noted by some IFRIC members on that occasion that when businesses are distributed there might be unrecognised assets and that there could be a difference between the liability and the assets recognised even if they were measured at fair value. D24 Customer Contributions – First redeliberations The IFRIC discussed comments received on the draft Interpretation D24 Customer Contributions published in April 2008. The staff noted that of the 58 comment letters received a majority supported IFRIC's proposal to develop an Interpretation. However, almost all comment letters expressed concern regarding certain aspects of D24. The discussion focussed on the key concern raised by constituents being whether the entity receiving the customer contributions always has an obligation to provide ongoing access to a supply of goods or service. Some respondents pointed out that when, for example, a utility company is required by law or regulation to provide access to a supply of goods or services to all customers at the same price, the access provider does not have any further obligation once the connection has been made. The IFRIC discussion was based on the following example relating to customer contributions for connection to a price-regulated network: A real estate company is developing a residential real estate in a remote area that is not connected to the electricity network. In order to have access to the electricity network, the real estate company is required to construct an electricity substation that is then contributed to the utility company operating the electricity network. The contributed electricity substation becomes an asset of the utility company that it must maintain or replace at its cost. The utility company uses the contributed asset to connect each house of the residential real estate development to its electricity network. The developer then sells the connected houses to customers at a price that includes a share of the costs of the electricity substation. By law or regulation, the utility company has an obligation to provide ongoing access to the electricity network to all connected customers at the same price, regardless of whether they have contributed an asset. Customers can choose to purchase their electricity from suppliers other than the utility company, but the utility company always provides the distribution. In that event, the electricity supplier charges the customers quarterly for the consumption of electricity and collects an ongoing access fee on behalf of the utility company. The staff was of the view that in contrast to paragraph 16 of D24 in such scenario revenue should be recognised once the connection services have been performed since providing initial access would be the only service provided in exchange for the contributed asset. The staff pointed out that generally speaking they could not see why there is an ongoing obligation arising from the customer contribution when the entity that receives the contribution from a customer has no obligation to this customer that is different from its obligation to other customers who did not contribute. Some IFRIC members agreed to the staff with regard to this particular (simple) fact pattern but noted that there may be other scenarios where an ongoing obligation may exist. Other IFRIC members stated that the answer should be given from an IAS 18 Revenue standpoint, that is, whether the service in return for the customer contribution has been provided or not. In doing so the guidance in paragraph 13 of IAS 18 regarding separately identifiable components should be applied. In addition, one IFRIC member noted that the obligation arising from the customer contribution should be considered separately from obligations to other customers. The IFRIC had a thorough debate on when an ongoing obligation to provide access exists but could not agree on a principle. There seemed to be a consensus that the answer depends on facts and circumstances and that judgement may be required. However, the chairman pointed out that simply referencing to facts, circumstances, and judgement would not be appropriate in an Interpretation but that specific guidance should be given. The chairman noted that at the September 2008 meeting a decision whether the IFRIC would be able to reach a consensus on this matter on a timely basis should be made. The IFRIC decided to proceed with the project for the time being and directed the staff to further elaborate this issue by: Developing further examples to enable establishing a principle under which circumstances a performance obligation exists. The staff was asked to also address the concerns of constituents raised in respect of analogous application in this context. Develop indicators regarding the existence or non-existence of performance obligations. The IFRIC will discuss the staff's analysis on performance obligations and an analysis of the other issues raised by constituents at the September 2008 meeting.

Notes from the IFRIC Meeting
10 July 2008

The new IFRIC members are:

Margaret M. (Peggy) Smyth, Vice President, Controller, United Technologies Corp., United States
Scott Taub, Managing Director, Financial Reporting Advisors, LLC, United States, and former Acting Chief Accountant and Deputy Chief Accountant, US Securities and Exchange Commission.

Exposure Draft IFRS 2 Share-Based Payment and IFRIC 11: IFRS 2 – Group Treasury Share Transactions – Preliminary Comment Letter Analysis

The IFRIC commenced its detailed redeliberation of the proposed amendments to IFRS 2 and IFRIC 11. The exposure draft (ED) proposes to include cash-settled group share-based payment transactions within the scope of IFRS 2 and would provide guidance on the appropriate accounting. In May 2008 the IFRIC had been presented with a preliminary analysis. The staff structured the session as follows:

Scope
Accounting for transactions within the scope

Scope

Regarding the topic of scope the staff highlighted that even with the scope definition as proposed there would still be group share-based payment transactions that would not be covered by IFRS 2 and that the proposals aggravate that issue. One reason for that seemed to be that the proposals would amend the scope, not the defined terms. The staff therefore presented the following recommendations:

To amend the related definitions in Appendix A of IFRS 2;
Paragraph 2 of IFRS 2 be amended to mirror the revised defined terms;
Paragraph 3 of IFRS 2 be amended to more clearly articulate the principle of IFRS 2 when a party other than the entity receiving the goods or services settles the group share-based payment transaction.

One IFRIC member asked whether this is something the Board should deliberate. The chairman answered that the issue originally came from the IFRIC, but the Board formally issued the ED as it included amendments to existing Standards and that once IFRIC concludes its redeliberations it recommends its conclusions to the Board.

Some IFRIC members expressed concerns over the view the ED takes – group or entity view, that is, is the group accounting relevant for the accounting in the subsidiary? One IFRIC member questioned whether separate financial statements of joint ventures or associates would be addressed by the amendments. It was stated that only subsidiaries would be covered and that this would be made clear by referring to the definitions in IAS 27.

The IFRIC agreed to the staff recommendations subject to editorial changes.

Accounting for transactions within the scope

The staff then turned to the accounting for the transactions within the scope of IFRS 2 in a group situation. Many commentators had argued that if an entity (the subsidiary) has no obligation to make a payment, it would not be sound to require the subsidiary in the its financial statements to recognise a liability. This would also conflict with the Framework. The IFRIC had a lengthy debate about whether the accounting in the parent and in the subsidiary should be symmetrical. Some IFRIC members were of the view that there should be some relationship – which would often result in some form of push-down accounting. Others followed the entity route and concluded that the subsidiary should account for the transaction as an equity-settled share-based payment. One of the Board members present highlighted the structuring opportunities that would result if the subsidiary would account for such a transaction as an contribution by the parent under an equity-settled accounting model.

One IFRIC member highlighted that the solution should be in line with the conclusions reached during the redeliberation of D23.

There was a lengthy debate about whether, when a transaction is accounted for as equity-settled, it should reflect any true-ups when value and/or vesting changes which would be important in some scenarios (for example, if the share-based payments are granted to employees of the subsidiary) should be considered.

The IFRIC coordinator highlighted that the staff wanted to avoid introducing an additional accounting model and tried to be as close to IFRS 2 as possible.

In the end, there seemed to be agreement over a model that would true-up for vesting of the share-based payments, but not for other changes in value. This would effectively be the accounting for equity-settled share-based payments as per current IFRS 2.

The chairman summed up the discussions and highlighted that any conclusion reached would be reported back to the Board including any strong minority views. The IFRIC coordinator reemphasised that the general approach to the accounting model was not to increase complexity.

The chairman than took a vote on the staff recommendations reflecting the outcome of the discussions as suggested by one of the Board members present. The IFRIC accepted the recommendations with two dissents.

Next steps

The modified staff recommendations will be presented to the Board in one of the next Board meetings.

D23 Distributions of Non-cash Assets to Owners – First redeliberations

D23 is aimed to provide guidance on the accounting for non-cash distributions to owners. The purpose of this session was to present to the IFRIC a comment letter analysis along with recommendation of the staff on how to proceed with D23. The issues addressed were:

General approach in D23
Applicability of IFRS 5 for the asset to be distributed and timing of recognition of the liability

General approach in D23

The staff highlighted in its overview of the comment letter analysis that the following significant concerns were expressed by commentators:

The scope is too narrow by excluding common control transactions
Fair value measurement of the liability and reference to IAS 37 is not appropriate
The difference between book value of the asset distributed and the distribution liability should not be recognised in profit or loss

Based on those concerns the staff proposed the following:

Continue with the project
Include common control transactions
Provide an consistently applicable accounting policy choice to measure the dividend liability at either fair value or book value of the assets to be distributed
Keep the disclosures proposed in D23

The staff noted that under the fair value approach taken in D23 most respondents would support recognition of the difference in profit or loss. One IFRIC member asked if the staff analysed whether those respondents would accept recognising the difference directly in equity. The staff answered it did not analyse this.

The IFRIC coordinator explained that most of the transactions that the draft Interpretation attempts to address arise in common control situations. However, some IFRIC members expressed their concerns about the dramatic change in scope. The chairman proposed first to answer the question if common control transactions should be within the scope of the draft Interpretation before proceeding to the remaining issues. Some of the IFRIC members said that in the case of inclusion of common control transactions this would trigger re-exposure.

The IFRIC discussed at length whether common control transactions should be within the scope. Some IFRIC members noted that while the scope should not be extended it should be made clear, possibly in the Basis for Conclusions, what transactions IFRIC considers to be within the scope of the draft Interpretation.

The staff highlighted that even with a scope excluding common control transactions, constituents consider an Interpretation useful. There seemed to be agreement around the table that the scope should not be broadened, but that the scope should be clarified.

Most IFRIC members were against providing an accounting option as proposed by the staff although it might be appropriate if the scope would be extended to include common control transactions.

However some IFRIC members had difficulties with the proposed measurement of the liability and acknowledged that this was shared by commentators. Notably, the reference solely to IAS 37 caused concern. One IFRIC member highlighted that often the liability recognised would be a financial liability as defined in IAS 32 and hence, in the scope of IAS 39. Others proposed to prescribe the measurement attribute 'fair value' instead of referring to IAS 39 which requires applying the best estimate which some considered not to be equal to fair value.

The chairman noted that the IFRIC rejected the staff proposal to provide for an accounting option.

Applicability of IFRS 5 for the asset to be distributed and timing of recognition of the liability

The staff then presented the comment letter analysis regarding the proposed amendment to IFRS 5 resulting from the deliberation of D23. Both the IFRIC and the Board concluded that IFRS 5 should apply to non-cash distributions although this is not a sales transaction. The staff noted that the majority of commentators agreed.

The IFRIC discussed whether IFRS 5 should also be amended to allow fair value measurement above the carrying amount that would avoid creating a mismatch between the measurement of the dividend liability and the asset to be distributed in settlement of that liability.

The IFRIC reaffirmed its position that the assets (groups) should be within the scope of IFRS but that allowing measurement above the carrying amount would be a big change to the principle of IFRS 5.

The staff then asked the IFRIC when the assets should be reclassified in accordance with IFRS 5. The possible options would be commitment date or obligation date, notably in jurisdictions where shareholder approval is necessary. After a short discussion, the IFRIC agreed that the principles of IFRS 5 should apply and that any shareholder approval would be included in the assessment of high probability (one IFRIC member dissented).

The staff then brought to IFRIC's attention the question when to recognise the liability, which is not addressed by the draft Interpretation. The staff recommended that this should be covered by the final Interpretation. It further proposed that this should be dependent on the requirement of shareholders' approval in a jurisdiction. If shareholder approval of a distribution declared by management is required, the liability would be recognised on the date of shareholders' approval. Otherwise, it would be recognised on the date of declaration by management.

There seemed to be agreement with the staff recommendations.

The staff was asked to provide a redraft of D23 based on these conclusions and to prepare a paper on possible ways of addressing the accounting mismatch between dividend liability and asset to be distributed in extinguishment of the liability.

It was noted by some IFRIC members on that occasion that when businesses are distributed there might be unrecognised assets and that there could be a difference between the liability and the assets recognised even if they were measured at fair value.

D24 Customer Contributions – First redeliberations

The IFRIC discussed comments received on the draft Interpretation D24 Customer Contributions published in April 2008. The staff noted that of the 58 comment letters received a majority supported IFRIC's proposal to develop an Interpretation. However, almost all comment letters expressed concern regarding certain aspects of D24.

The discussion focussed on the key concern raised by constituents being whether the entity receiving the customer contributions always has an obligation to provide ongoing access to a supply of goods or service.

Some respondents pointed out that when, for example, a utility company is required by law or regulation to provide access to a supply of goods or services to all customers at the same price, the access provider does not have any further obligation once the connection has been made.

The IFRIC discussion was based on the following example relating to customer contributions for connection to a price-regulated network:

A real estate company is developing a residential real estate in a remote area that is not connected to the electricity network. In order to have access to the electricity network, the real estate company is required to construct an electricity substation that is then contributed to the utility company operating the electricity network. The contributed electricity substation becomes an asset of the utility company that it must maintain or replace at its cost. The utility company uses the contributed asset to connect each house of the residential real estate development to its electricity network. The developer then sells the connected houses to customers at a price that includes a share of the costs of the electricity substation. By law or regulation, the utility company has an obligation to provide ongoing access to the electricity network to all connected customers at the same price, regardless of whether they have contributed an asset. Customers can choose to purchase their electricity from suppliers other than the utility company, but the utility company always provides the distribution. In that event, the electricity supplier charges the customers quarterly for the consumption of electricity and collects an ongoing access fee on behalf of the utility company.

The staff was of the view that in contrast to paragraph 16 of D24 in such scenario revenue should be recognised once the connection services have been performed since providing initial access would be the only service provided in exchange for the contributed asset. The staff pointed out that generally speaking they could not see why there is an ongoing obligation arising from the customer contribution when the entity that receives the contribution from a customer has no obligation to this customer that is different from its obligation to other customers who did not contribute.

Some IFRIC members agreed to the staff with regard to this particular (simple) fact pattern but noted that there may be other scenarios where an ongoing obligation may exist.

Other IFRIC members stated that the answer should be given from an IAS 18 Revenue standpoint, that is, whether the service in return for the customer contribution has been provided or not. In doing so the guidance in paragraph 13 of IAS 18 regarding separately identifiable components should be applied. In addition, one IFRIC member noted that the obligation arising from the customer contribution should be considered separately from obligations to other customers.

The IFRIC had a thorough debate on when an ongoing obligation to provide access exists but could not agree on a principle. There seemed to be a consensus that the answer depends on facts and circumstances and that judgement may be required. However, the chairman pointed out that simply referencing to facts, circumstances, and judgement would not be appropriate in an Interpretation but that specific guidance should be given.

The chairman noted that at the September 2008 meeting a decision whether the IFRIC would be able to reach a consensus on this matter on a timely basis should be made.

The IFRIC decided to proceed with the project for the time being and directed the staff to further elaborate this issue by:

Developing further examples to enable establishing a principle under which circumstances a performance obligation exists. The staff was asked to also address the concerns of constituents raised in respect of analogous application in this context.
Develop indicators regarding the existence or non-existence of performance obligations.

The IFRIC will discuss the staff's analysis on performance obligations and an analysis of the other issues raised by constituents at the September 2008 meeting.

This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.

Notes from the IASC Foundation Trustees' meeting - Part 2

11 Jul 2008

The Trustees of the IASC Foundation (IASCF) met in Washington on 8 and 9 July 2008. The portion of the meeting on 8 July 2008 was open to public observation.

Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting on discussions relating to matters other than the Constitution Review. Our notes of discussions about the Constitution Review were presented separately in an earlier news story (scroll down).

IASCF Trustees Meeting, Washington, 8 July 2008 Matters Other Than the Constitution Review
Proposals Regarding the Future of the Standards Advisory Council (SAC) Proposals for the future of the SAC are part of the second part of the Constitutional Review. The Chairman noted that because the term of the current Chairman of the SAC, Nelson Carvalho, is ending, a subgroup was created to form ideas on the future of the SAC so that the incoming Chairman of the SAC would be aware of the responsibilities that may change in light of these proposals. Phil Laskawy, IASCF Vice-Chair and the chair for the SAC subgroup, presented the subgroup's recommendations. The focus was to enhance the role of the SAC, integrate it better into the overall IASCF organisation, and to make the process more effective. The recommendations include what the SAC should do, who should be participants, and the number of meetings. The sub-group recommended that: The primary purpose of the SAC is to advise the Board. The Chairman of the SAC should be rotated every three years. There was support for two plenary meetings and one regional meeting, but this is open for discussion and to be determined. The membership of the SAC should primarily be persons who serve as representatives of appropriate organisations, with the ability of the Trustees to appoint several members as individuals who do not represent organisations. This would be different from the current approach whereby SAC members are appointed as individuals rather than as representative of organisations. Mr Laskawy noted that this was the most important change to the SAC of all the recommendations made. Regarding the last recommendation on composition, the IASCF Director of Operations commented that the vision is that the representative of an organization would serve as a liaison between the SAC and the organization. Therefore, the representative would not necessarily be an employee or member of that organisation, but that the organisation would participate to help select their appropriate liaison. It was also noted that all these recommendations were acceptable within the language of the current Constitution, so amendment of the Constitution is not needed. Current SAC Chairman Nelson Carvalho offered the following comments, which he had previously communicated to the subgroup and which are incorporated in the subgroup's paper provided to the Trustees: Proper mix between representatives of organisations versus individuals. Introductory session to get new members involved and aware of their responsibilities. The need for action against non-performers. Breakout sessions in the plenary sessions should be maintained. Keep voting by the SAC rare. Enhance feedback from the IASB and the Trustees regarding the SAC's advice. Supportive of regional meetings. Future SAC Chairman should come from the existing SAC members because their experience will make the transition easier. Also suggested that the identified new Chairman can assist in the November 2008 meeting. The IASCF Chairman asked the Trustees for comments on their views on regional SAC meetings, since this remained an open question in the subgroup's recommendations. He clarified that there would be two plenary meetings and then several open regional meetings which would allow the SAC members, Trustees, and others within the region outside of SAC to discuss regulatory or practical issues specific to the region. Several Trustees agreed with having regional meetings. One Trustee noted that regional meetings require substantial time and effort for the Chairman. Therefore, he also suggested keeping an option open for a SAC vice-chairman to provide an additional resource to conduct further regional activities, thereby enhancing the understanding of the regional issues. One Trustee had concerns with cutting down the plenary meetings from three to two, particularly because of the long time gap between meetings. Therefore, he suggested retaining the three plenary meetings, in addition to conducting regional meetings. Regarding the size and composition of the SAC, some Trustees said that it would be difficult to have fewer than the current 40 members and continue to be inclusive, even though this larger size may affect efficiency. However, other Trustees noted that the quality of the members is more important to efficiency, which will come through the selection process of these organisations. In general, there was support for the suggestion of more representatives of organisations. Based on the discussions, the Trustees concluded that: There was support for a structure containing primarily representatives of organisations, with some individuals. There was support for more regional activities, but the frequency of the plenary and regional meetings will be discussed at a later time when the new Chairman of the SAC is decided. Regarding feedback to the SAC, both the following options could be undertaken: The IASB staff could note where SAC expressed a particular view on a topic in the IASB meeting papers, and the IASB could address the views during the public meeting. The IASC could also dedicate a portion of their public meetings to discuss the views received at the last SAC meeting and determine items to raise at the next SAC meeting. Review of Long-term Funding of the IASC Foundation The IASC Foundation Director gave a very brief report on the current state of the ongoing efforts to secure a stable long-term funding base for the Foundation. Several processes are being undertaken in countries to achieve this. In India, Spain, and potentially Israel, the stock exchanges are organising a levy collection process on registered entities. In Canada, a levy collection system is also underway organised by the securities regulator and the accounting standards body. Currently, the IASCF had secured approximately £13.7 million of the £16 million annual funding it is seeking. The levy systems have been working since they have been successful in the collection of the committed funds, receiving approximately half of the budget. Report of the IASB Chairman The IASB Chairman reported on IASB activities. He highlighted the projects relating to the MOU between the IASB and FASB, noting that the goal is to complete those projects by 2011. The two Board's met in April to consider how best to meet that deadline. They did not change the projects but rather recognised that they will need to carefully consider the scope of each project and stop increasing the issues to address within each project. Regarding the convergence projects, he noted that the most urgent in light of the credit crisis are (1) fair value measurement and (2) derecognition of financial instruments. Some questions were asked for more information on the fair value measurement project, the interaction between the conceptual framework project and the liabilities and equity project, the some other projects not related to the MOU, including the IFRS for Private Entities (formerly IFRS for Small and Medium Entities). The IASB Chairman noted the priority of several projects was raised to respond to the credit crisis. He noted that the three issues central to the issues are (1) valuation of collaterised debt, for which an valuation expert advisory panel has been created, (2) consolidation, for which a draft of an exposure draft will be presented to the Board in July, and (3) derecognition of financial instruments, for which the Board is proposing to move to the active agenda. The IASB Directors on the consolidation and derecognition projects responded to several Trustees' questions regarding these projects. The IASCF Chairman asked the Trustees if they agree that the two research agenda items, (1) Liabilities and Equity and (2) Derecognition of Financial Instruments, should be put on the active agenda. The Trustees agreed that they should be added. In response to a Trustee's comment regarding whether there should be some sort of emergency procedures to respond quickly to urgent matters (such as the credit crisis), the IASCF Chairman noted that they should consider incorporating emergency procedures in part two of the Constitutional Review. The IASB Chairman noted that they also plan to conduct roundtables around the consolidation and derecognition projects to expedite these topics. Report of the SAC Chairman The SAC Chairman presented the views of SAC members at the June 2008 meeting on several IASB agenda items. There was general support for the IASB agenda items although SAC members recommended that the due process not be sacrificed to appease the pressure by regulators for completion. There is support for the consolidation project. They recommended that the derecognition project be coordinated with the consolidation project since they are interrelated. There was no objection to the projects on the active agenda, but recommended that lower priority is given to non-MOU items in order to meet the 2011 timeline for the MOU. There was general support for the liabilities and equity project but SAC members recommended that the conceptual framework issues also affecting this project be considered. Regarding the Constitutional Review, concerns were already voiced in the previous discussion. Items suggested by the SAC Agenda Committee to be on the agenda in November for a revisit by the Board are revenue recognition, conceptual framework, consolidations, financial instruments and the expert panel, financial statement presentation, and private entities. Also non-technical matters related to those adopting IFRSs, particularly what are the issues when initially adopting and how those issues have been resolved in particular jurisdictions. SAC would also like to invite the new coordinator of the IFRIC to the November SAC meeting to share views on how IFRIC will address implementation activities. SAC would also like to take that opportunity to share experiences on post-implementation reviews. Regarding the SAC minutes, one Trustee asked if, in light of the proposals on the future of SAC made previously, there should be more of an attempt to come to a majority agreement which would represent the SAC advice to the Board (in other words, take a vote on issues). To capture the views, the SAC Chairman suggested that one or more Board members summarise what they have observed as key issues by SAC. Then a SAC member would ensure that the summary of views is complete. He noted that the SAC has tried to avoid voting to prevent a bias of the views of those that speak during the meeting over those that do not. He also commented that improvement of their procedures could also be tackled in the discussions on the future procedures of the SAC. Report of the Due Process Oversight Committee IASB will conduct a review of the effectiveness of IASB working groups. The objective will be to determine how to make working groups better and to obtain feedback from current members of all working groups. Regarding timing, they originally were targeting the last IASCF Trustee meeting for the year (October 2008), but because the Constitutional Review is a higher priority, they are now targeting a completion date of January 2009. The IASCF staff provided Trustees with a first effort to amend the Due Process Handbook to reflect all the activities that are performed. During that process, it sparked discussion on how far to define impact assessment (also known as an Effect Analysis) and whether these assessments are consistent with the Framework. Some discussion ensued among the Trustees on impact assessments, particularly whether the IASB was comfortable doing the assessment and if it was more appropriate for an economic analysis firm to do. Some noted that an impact analysis is important since the macro-economic consequences are relevant to supporting the standard-setters' accounting decisions. Since a further discussion is needed on impact assessments, the Due Process Handbook will be revisited at a later date. Finally, the Trustees were asked if there were any additional topics to put on the agenda for the next joint meeting with the IASB in September. No additional topics were provided. This summary is based on notes taken by observers at the IASCF meeting and should not be regarded as an official or final summary.

IASCF Trustees Meeting, Washington, 8 July 2008
Matters Other Than the Constitution Review

Proposals Regarding the Future of the Standards Advisory Council (SAC)

Proposals for the future of the SAC are part of the second part of the Constitutional Review. The Chairman noted that because the term of the current Chairman of the SAC, Nelson Carvalho, is ending, a subgroup was created to form ideas on the future of the SAC so that the incoming Chairman of the SAC would be aware of the responsibilities that may change in light of these proposals.

Phil Laskawy, IASCF Vice-Chair and the chair for the SAC subgroup, presented the subgroup's recommendations. The focus was to enhance the role of the SAC, integrate it better into the overall IASCF organisation, and to make the process more effective. The recommendations include what the SAC should do, who should be participants, and the number of meetings. The sub-group recommended that:

The primary purpose of the SAC is to advise the Board.
The Chairman of the SAC should be rotated every three years.
There was support for two plenary meetings and one regional meeting, but this is open for discussion and to be determined.
The membership of the SAC should primarily be persons who serve as representatives of appropriate organisations, with the ability of the Trustees to appoint several members as individuals who do not represent organisations. This would be different from the current approach whereby SAC members are appointed as individuals rather than as representative of organisations. Mr Laskawy noted that this was the most important change to the SAC of all the recommendations made.

Regarding the last recommendation on composition, the IASCF Director of Operations commented that the vision is that the representative of an organization would serve as a liaison between the SAC and the organization. Therefore, the representative would not necessarily be an employee or member of that organisation, but that the organisation would participate to help select their appropriate liaison. It was also noted that all these recommendations were acceptable within the language of the current Constitution, so amendment of the Constitution is not needed.

Current SAC Chairman Nelson Carvalho offered the following comments, which he had previously communicated to the subgroup and which are incorporated in the subgroup's paper provided to the Trustees:

Proper mix between representatives of organisations versus individuals.
Introductory session to get new members involved and aware of their responsibilities.
The need for action against non-performers.
Breakout sessions in the plenary sessions should be maintained.
Keep voting by the SAC rare.
Enhance feedback from the IASB and the Trustees regarding the SAC's advice.
Supportive of regional meetings.
Future SAC Chairman should come from the existing SAC members because their experience will make the transition easier. Also suggested that the identified new Chairman can assist in the November 2008 meeting.

The IASCF Chairman asked the Trustees for comments on their views on regional SAC meetings, since this remained an open question in the subgroup's recommendations. He clarified that there would be two plenary meetings and then several open regional meetings which would allow the SAC members, Trustees, and others within the region outside of SAC to discuss regulatory or practical issues specific to the region. Several Trustees agreed with having regional meetings. One Trustee noted that regional meetings require substantial time and effort for the Chairman. Therefore, he also suggested keeping an option open for a SAC vice-chairman to provide an additional resource to conduct further regional activities, thereby enhancing the understanding of the regional issues. One Trustee had concerns with cutting down the plenary meetings from three to two, particularly because of the long time gap between meetings. Therefore, he suggested retaining the three plenary meetings, in addition to conducting regional meetings.

Regarding the size and composition of the SAC, some Trustees said that it would be difficult to have fewer than the current 40 members and continue to be inclusive, even though this larger size may affect efficiency. However, other Trustees noted that the quality of the members is more important to efficiency, which will come through the selection process of these organisations. In general, there was support for the suggestion of more representatives of organisations.

Based on the discussions, the Trustees concluded that:

There was support for a structure containing primarily representatives of organisations, with some individuals.
There was support for more regional activities, but the frequency of the plenary and regional meetings will be discussed at a later time when the new Chairman of the SAC is decided.
Regarding feedback to the SAC, both the following options could be undertaken:
- The IASB staff could note where SAC expressed a particular view on a topic in the IASB meeting papers, and the IASB could address the views during the public meeting.
- The IASC could also dedicate a portion of their public meetings to discuss the views received at the last SAC meeting and determine items to raise at the next SAC meeting.

Review of Long-term Funding of the IASC Foundation

The IASC Foundation Director gave a very brief report on the current state of the ongoing efforts to secure a stable long-term funding base for the Foundation.

Several processes are being undertaken in countries to achieve this. In India, Spain, and potentially Israel, the stock exchanges are organising a levy collection process on registered entities. In Canada, a levy collection system is also underway organised by the securities regulator and the accounting standards body.

Currently, the IASCF had secured approximately £13.7 million of the £16 million annual funding it is seeking. The levy systems have been working since they have been successful in the collection of the committed funds, receiving approximately half of the budget.

Report of the IASB Chairman

The IASB Chairman reported on IASB activities. He highlighted the projects relating to the MOU between the IASB and FASB, noting that the goal is to complete those projects by 2011. The two Board's met in April to consider how best to meet that deadline. They did not change the projects but rather recognised that they will need to carefully consider the scope of each project and stop increasing the issues to address within each project. Regarding the convergence projects, he noted that the most urgent in light of the credit crisis are (1) fair value measurement and (2) derecognition of financial instruments. Some questions were asked for more information on the fair value measurement project, the interaction between the conceptual framework project and the liabilities and equity project, the some other projects not related to the MOU, including the IFRS for Private Entities (formerly IFRS for Small and Medium Entities).

The IASB Chairman noted the priority of several projects was raised to respond to the credit crisis. He noted that the three issues central to the issues are (1) valuation of collaterised debt, for which an valuation expert advisory panel has been created, (2) consolidation, for which a draft of an exposure draft will be presented to the Board in July, and (3) derecognition of financial instruments, for which the Board is proposing to move to the active agenda. The IASB Directors on the consolidation and derecognition projects responded to several Trustees' questions regarding these projects.

The IASCF Chairman asked the Trustees if they agree that the two research agenda items, (1) Liabilities and Equity and (2) Derecognition of Financial Instruments, should be put on the active agenda. The Trustees agreed that they should be added.

In response to a Trustee's comment regarding whether there should be some sort of emergency procedures to respond quickly to urgent matters (such as the credit crisis), the IASCF Chairman noted that they should consider incorporating emergency procedures in part two of the Constitutional Review. The IASB Chairman noted that they also plan to conduct roundtables around the consolidation and derecognition projects to expedite these topics.

Report of the SAC Chairman

The SAC Chairman presented the views of SAC members at the June 2008 meeting on several IASB agenda items.

There was general support for the IASB agenda items although SAC members recommended that the due process not be sacrificed to appease the pressure by regulators for completion.
There is support for the consolidation project.
They recommended that the derecognition project be coordinated with the consolidation project since they are interrelated.
There was no objection to the projects on the active agenda, but recommended that lower priority is given to non-MOU items in order to meet the 2011 timeline for the MOU.
There was general support for the liabilities and equity project but SAC members recommended that the conceptual framework issues also affecting this project be considered.

Regarding the Constitutional Review, concerns were already voiced in the previous discussion.

Items suggested by the SAC Agenda Committee to be on the agenda in November for a revisit by the Board are revenue recognition, conceptual framework, consolidations, financial instruments and the expert panel, financial statement presentation, and private entities. Also non-technical matters related to those adopting IFRSs, particularly what are the issues when initially adopting and how those issues have been resolved in particular jurisdictions. SAC would also like to invite the new coordinator of the IFRIC to the November SAC meeting to share views on how IFRIC will address implementation activities. SAC would also like to take that opportunity to share experiences on post-implementation reviews.

Regarding the SAC minutes, one Trustee asked if, in light of the proposals on the future of SAC made previously, there should be more of an attempt to come to a majority agreement which would represent the SAC advice to the Board (in other words, take a vote on issues). To capture the views, the SAC Chairman suggested that one or more Board members summarise what they have observed as key issues by SAC. Then a SAC member would ensure that the summary of views is complete. He noted that the SAC has tried to avoid voting to prevent a bias of the views of those that speak during the meeting over those that do not. He also commented that improvement of their procedures could also be tackled in the discussions on the future procedures of the SAC.

Report of the Due Process Oversight Committee

IASB will conduct a review of the effectiveness of IASB working groups. The objective will be to determine how to make working groups better and to obtain feedback from current members of all working groups. Regarding timing, they originally were targeting the last IASCF Trustee meeting for the year (October 2008), but because the Constitutional Review is a higher priority, they are now targeting a completion date of January 2009.

The IASCF staff provided Trustees with a first effort to amend the Due Process Handbook to reflect all the activities that are performed. During that process, it sparked discussion on how far to define impact assessment (also known as an Effect Analysis) and whether these assessments are consistent with the Framework. Some discussion ensued among the Trustees on impact assessments, particularly whether the IASB was comfortable doing the assessment and if it was more appropriate for an economic analysis firm to do. Some noted that an impact analysis is important since the macro-economic consequences are relevant to supporting the standard-setters' accounting decisions. Since a further discussion is needed on impact assessments, the Due Process Handbook will be revisited at a later date.

Finally, the Trustees were asked if there were any additional topics to put on the agenda for the next joint meeting with the IASB in September. No additional topics were provided.

This summary is based on notes taken by observers at the IASCF meeting and should not be regarded as an official or final summary.

European joint statement on the current market turmoil

11 Jul 2008

EFRAG and the accounting standard setters in France, Germany, and the United Kingdom have discussed the current turmoil in the world's capital markets and have issued a Joint Statement.

Here as an excerpt:

The ASB, CNC, EFRAG and GASB take very seriously the questions that are being asked about financial reporting as a result of the current market turmoil. While we do not believe that financial reporting has caused the crisis as some have claimed, we do believe it is essential that a comprehensive review is carried out of existing external financial reporting requirements to determine whether any of those requirements has intensified some or all of the problems that have arisen. It is also essential that any weaknesses identified in the financial reporting requirements are addressed and improvements made as a matter of priority.

A number of bodies have carried out work on this subject and have suggested that the main areas worth exploring further are:

The consolidation model, particularly in the context of SPEs.
Derecognition and the disclosures provided about off-balance sheet items, particularly those items that were near to being recognised.
The requirement to measure many financial instruments at fair value, how that requirement should be applied particularly in illiquid markets.
The disclosures that should be provided to support the measure used.

In response to the credit crisis, the IASB has undertaken to carry out and complete in a timely fashion work on all these areas. It has also undertaken to consider whether other improvements in IFRSs are necessary in the light of recent experience.

In our view, the IASB should be the body that first responds to the accounting issues arising as a result of the current market turmoil. However, if the IASB is to be able to move quickly and with confidence, it is important that it receives timely and high quality advice from bodies such as ourselves. Therefore, we will follow closely the IASB's work and on a timely basis provide advice and other comments to help the IASB complete its work effectively and quickly, and evaluate and respond to any other relevant proposals on the subject that might affect financial reporting.

In this situation we recognise and accept that it might be necessary for the IASB to adopt some sort of modified due process in developing its response.

Click to view the Joint Statement (PDF 65k).

You will find much related information on our Credit Crunch Page.

Notes from the IASC Foundation Trustees' meeting - Part 1

11 Jul 2008

The Trustees of the IASC Foundation (IASCF) met in Washington on 8 and 9 July 2008. The portion of the meeting on 8 July 2008 was open to public observation.

The 2008 Constitution Review was a key topic for discussion. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting on discussions relating to the Constitution Review.

IASCF Trustees Meeting, Washington, 8 July 2008Constitution Review Proposals
Background and Observations on the Roundtables The objective of the discussion was to determine whether the trustees are prepared to publish and invite comment on the first part of the Constitution Review proposals. To facilitate the discussion, the IASCF Director of Operations introduced a paper that summarised the comments made at the 19 June 2008 Roundtables on the draft document Proposals and Issues for the Constitutional Review, as well as a revised version of those proposals after consideration of comments made at the roundtables. The two principal changes being proposed would be: Creation of a 'monitoring group' of representatives of official organisations, including securities regulators, that would approve Trustee appointments and review Trustee oversight activities. Expansion of the IASB to 16 members from the present 14, with a specified geographical mix. In summary, there appeared to be support for the concept of creating a Monitoring Group (MG). However, several concerns were raised regarding the independence of the IASC Trustees and IASB and the absence of investor representation on the MG. The proposals on the IASB size and composition generated fewer concerns than the proposal on the MG. However, some comments included concerns around the geographical criteria diluting the other technical competence criteria of IASB membership and the omission of a specific mention of Africa and South America in the geographical spread. Some comments made during the roundtables may not have been reflected in the revised version brought before Trustees at meeting, but the expectation is to consider them with the other written comments received on the proposals. Several Trustees noted that they received positive feedback on the use of roundtables. Regarding the composition of the MG, Trustees asked if the initial composition should also include banking supervisors, since they have a strong influence in emerging markets. The Chairman suggested adding a specific question to the proposals on whether banking supervisors should be represented on the MG. Regarding the geographical composition of the IASB, the Chairman also noted that there was language in the revised proposals that suggests that of the seats appointed from any area, the Trustees would normally appoint at least one member from South America and Africa, but this language had not been added to the marked Constitution changes. He suggested specifically requiring this in the Constitution. Revisions to the draft proposals discussed at the Roundtables The discussion moved to the revisions made to the proposals. The IASCF Director explained the rationale for the revisions from the initial draft provided during the roundtables. Some minor revisions were made for better readability of the document. Other revisions were made to better clarify the concepts or arguments behind the proposal for the MG (for instance, to draw a better link between creation of a Monitoring Group and the objective for public accountability) or to address some of the recurring concerns noted at the roundtables. The more significant revisions include: An added line in the Introduction, noting that Constitution Review must be completed by June 2010. A paragraph was added under the section titled 'Enhancing Public Accountability' that states that the Trustees will continue active engagement of stakeholders through SAC and formal discussion with interested parties. This paragraph was added to address a concern frequently raised at the Roundtables about why investor groups are not included on the MG. The reason is that there already are other avenues available to investors for interfacing with the IASCF and the IASB. New paragraphs were added to clarify the relationship between the Trustees and the MG, particularly that the MG will be a group outside of the IASCF's formal organisational framework. Accordingly, the MG will be an autonomous entity. For purposes of the Constitutional Review, the proposal is for the Constitution to recognise a relationship with a Monitoring Group. However, the actual working relationship between the MG will be further defined in a Memorandum of Understanding (MOU) between the Trustees and the MG. Regarding the proposal on the geographical composition of the IASB, language has been added to the proposed Constitution revisions that the Trustees 'should normally appoint at least one member each from Africa and South America'. A paragraph has been added to explain that geographical component of IASB membership should not dilute the importance of the other criteria for Board membership. The proposals emphasised that members shall act in the public interest, not as representatives of constituencies of geography. The voting majority under the larger IASB would rise to 10 out of 16 members or nine if there are fewer than 16 serving members. Relationship Between the Trustees and the Monitoring Group A discussion started regarding the relationship between the Trustees and the Monitoring Group. One Trustee asked for more information regarding the MOU between the Trustees and the MG. The IASCF Chairman noted that the details of what is in the MOU would not be established in the Constitution amendments. Rather, the proposals recognise that an MOU between the parties must be created and agreed upon by both parties. The MOU is intended to be another public document that will be negotiated between the MG and Trustees after this first part of the Constitution Review is completed. The same Trustee asked if the MOU, as a public document, will also be exposed for a comment period. The Chairman was in favour of a comment period for the MOU. Several Trustees raised concerns around the independence of the IASCF and whether the MG responsibilities will conflict or overlap with Trustee responsibilities. The IASCF Chairman recognised that the negotiation of a reasonable MOU will be central to easing these concerns. He also noted that the MOU cannot change the requirements in the Constitution itself. Before the proposals are published for comment, they will be revised to clarify that adoption of the MOU will require agreement of 'the MG and the Trustees' rather than 'members of the MG and the Trustees'. This is to clarify that each member of the MG is not required to agree with the MOU before it can be effective. The Chairman noted that the proposals as drafted intend to view the MG as a monitoring group akin to an audit committee, not an oversight committee. Any wording in the proposals suggesting that the MG would have oversight capacity would be removed. Several Trustees were also concerned about future disputes between the Monitoring Group and the Trustees and what 'safety mechanism' would be available if the parties are unable to agree. This concern related both to overall disputes and to disagreements on the future composition of the MG since the proposals only define the composition at initial formation. Echoing those concerns, other Trustees highlighted the conflict between independence and the need to obtain sustainable long-term funding, particularly when the proposed members of the MG are also the public authorities organising the funding for that jurisdiction. The IASCF Chairman was hesitant to add a 'safety mechanism' to the Constitution language because it could be perceived to contradict the MG as an independent external group. The intent is that the future composition of the MG would be at their discretion going forward, potentially under guidance written in the MOU. The discussion moved to the reporting requirements between the IASCF and the Monitoring Group. One Trustee suggested that the MG as an external group should also have public accountability and, therefore, should consider providing its own annual report on its activities. The IASCF Chairman noted it was a good suggestion, but would be one that the MG would need to decide when its sets up its operating procedures. Since the MG's operations are outside of the IASCF, it would not be appropriate to incorporate reporting requirements in the Constitutional proposals. Regarding the reporting from the IASCF to the Monitoring Group, another Trustee suggested the IASCF Annual Report should serve this purpose, to ensure IASCF independence and transparency to the public. The IASCF Director of Operations hoped that the IASCF Annual Report would be sufficient reporting to MG due to its extensive disclosures. The Chairman agreed that there should be one public report for the public and Monitoring Group, and the Trustees would incorporate any additional requests from the MG into the annual report. Consistency with Governance Recommendations of European Council One Trustee asked for clarification on how the European Council's suggestions on the governance of the IASCF provided in the materials reconcile with the Trustees' proposals. [See IAS Plus News Story of 9 July 2008 The IASCF Director noted that it is broadly aligned with the Trustee proposals, and meetings with the European Council have confirmed that. Although the language is different, the broad concepts are consistent. Any additional points relating to issues outside of the proposals suggested in part one of this Constitutional Review will be considered in the second part of the review. Changes to the Proposals Agreed by the Trustees Based on these discussions, the following additions would be incorporated to the proposals before issuance for public comment: An additional question asking if other parties should be considered in the initial composition of the MG, specifically banking supervisors. Adding language to the Constitution marked text to specifically require that of the seats appointed from any area, the Trustees would appoint at least one member from South America and one from Africa. Language noting that the MOU between the Trustees and the MG would be issued for public comment. The wording that states 'A Memorandum of Understanding will be agreed between the members of the Monitoring Group and the Trustees describing' will be revised to 'A Memorandum of Understanding will be agreed between the Monitoring Group and the Trustees describing'. This change is to clarify that not all individual members of the Monitoring Group have to agree for it to be considered agreed upon. Agreed that the IASCF Annual Report would be the one deliverable sufficient for purposes of public reporting and reporting to the MG. Any additionally requested disclosures required by the MG would also be incorporated in the Annual Report. Approval and Timing of Proposals The Trustees approved these revisions and approved issuance of the proposals for public comment shortly after the meeting. Comments received will be reviewed at the October IASCF Trustees meeting. Due to timing (August holiday season), a Trustee said that a 15 September 2008 comment deadline seemed aggressive. The IASCF Director noted that there is a clear expectation by regulators that this part will be done by year-end. Therefore, the date cannot be extended much further. Regulators need to make decisions based on completion of this process. Examples of those decisions include: SEC decisions on domestic use of IFRS, and EU equivalency assessment. To meet that timing, staff need to assess the comments in time for 9-10 October 2008 Trustees' meeting. As a compromise, Trustees agreed to push the comment deadline for these proposals to 20 September 2008. Regarding second part of Constitution Review, October is the goal for an initial draft of the second part of the Constitution Review proposals. The Constitution Committee will have an interim meeting before October to draft part two proposals to meet the October timing. Additional roundtables will be held for this second part also since there was positive feedback on the roundtable process. This summary is based on notes taken by observers at the IASCF meeting and should not be regarded as an official or final summary.

IASCF Trustees Meeting, Washington, 8 July 2008Constitution Review Proposals

Background and Observations on the Roundtables

The objective of the discussion was to determine whether the trustees are prepared to publish and invite comment on the first part of the Constitution Review proposals. To facilitate the discussion, the IASCF Director of Operations introduced a paper that summarised the comments made at the 19 June 2008 Roundtables on the draft document Proposals and Issues for the Constitutional Review, as well as a revised version of those proposals after consideration of comments made at the roundtables.

The two principal changes being proposed would be:

Creation of a 'monitoring group' of representatives of official organisations, including securities regulators, that would approve Trustee appointments and review Trustee oversight activities.
Expansion of the IASB to 16 members from the present 14, with a specified geographical mix.

In summary, there appeared to be support for the concept of creating a Monitoring Group (MG). However, several concerns were raised regarding the independence of the IASC Trustees and IASB and the absence of investor representation on the MG. The proposals on the IASB size and composition generated fewer concerns than the proposal on the MG. However, some comments included concerns around the geographical criteria diluting the other technical competence criteria of IASB membership and the omission of a specific mention of Africa and South America in the geographical spread.

Some comments made during the roundtables may not have been reflected in the revised version brought before Trustees at meeting, but the expectation is to consider them with the other written comments received on the proposals. Several Trustees noted that they received positive feedback on the use of roundtables.

Regarding the composition of the MG, Trustees asked if the initial composition should also include banking supervisors, since they have a strong influence in emerging markets. The Chairman suggested adding a specific question to the proposals on whether banking supervisors should be represented on the MG.

Regarding the geographical composition of the IASB, the Chairman also noted that there was language in the revised proposals that suggests that of the seats appointed from any area, the Trustees would normally appoint at least one member from South America and Africa, but this language had not been added to the marked Constitution changes. He suggested specifically requiring this in the Constitution.

Revisions to the draft proposals discussed at the Roundtables

The discussion moved to the revisions made to the proposals. The IASCF Director explained the rationale for the revisions from the initial draft provided during the roundtables. Some minor revisions were made for better readability of the document. Other revisions were made to better clarify the concepts or arguments behind the proposal for the MG (for instance, to draw a better link between creation of a Monitoring Group and the objective for public accountability) or to address some of the recurring concerns noted at the roundtables.

The more significant revisions include:

An added line in the Introduction, noting that Constitution Review must be completed by June 2010.
A paragraph was added under the section titled 'Enhancing Public Accountability' that states that the Trustees will continue active engagement of stakeholders through SAC and formal discussion with interested parties. This paragraph was added to address a concern frequently raised at the Roundtables about why investor groups are not included on the MG. The reason is that there already are other avenues available to investors for interfacing with the IASCF and the IASB.
New paragraphs were added to clarify the relationship between the Trustees and the MG, particularly that the MG will be a group outside of the IASCF's formal organisational framework. Accordingly, the MG will be an autonomous entity. For purposes of the Constitutional Review, the proposal is for the Constitution to recognise a relationship with a Monitoring Group. However, the actual working relationship between the MG will be further defined in a Memorandum of Understanding (MOU) between the Trustees and the MG.
Regarding the proposal on the geographical composition of the IASB, language has been added to the proposed Constitution revisions that the Trustees 'should normally appoint at least one member each from Africa and South America'.
A paragraph has been added to explain that geographical component of IASB membership should not dilute the importance of the other criteria for Board membership. The proposals emphasised that members shall act in the public interest, not as representatives of constituencies of geography.
The voting majority under the larger IASB would rise to 10 out of 16 members or nine if there are fewer than 16 serving members.

Relationship Between the Trustees and the Monitoring Group

A discussion started regarding the relationship between the Trustees and the Monitoring Group. One Trustee asked for more information regarding the MOU between the Trustees and the MG. The IASCF Chairman noted that the details of what is in the MOU would not be established in the Constitution amendments. Rather, the proposals recognise that an MOU between the parties must be created and agreed upon by both parties. The MOU is intended to be another public document that will be negotiated between the MG and Trustees after this first part of the Constitution Review is completed. The same Trustee asked if the MOU, as a public document, will also be exposed for a comment period. The Chairman was in favour of a comment period for the MOU.

Several Trustees raised concerns around the independence of the IASCF and whether the MG responsibilities will conflict or overlap with Trustee responsibilities. The IASCF Chairman recognised that the negotiation of a reasonable MOU will be central to easing these concerns. He also noted that the MOU cannot change the requirements in the Constitution itself.

Before the proposals are published for comment, they will be revised to clarify that adoption of the MOU will require agreement of 'the MG and the Trustees' rather than 'members of the MG and the Trustees'. This is to clarify that each member of the MG is not required to agree with the MOU before it can be effective.

The Chairman noted that the proposals as drafted intend to view the MG as a monitoring group akin to an audit committee, not an oversight committee. Any wording in the proposals suggesting that the MG would have oversight capacity would be removed.

Several Trustees were also concerned about future disputes between the Monitoring Group and the Trustees and what 'safety mechanism' would be available if the parties are unable to agree. This concern related both to overall disputes and to disagreements on the future composition of the MG since the proposals only define the composition at initial formation. Echoing those concerns, other Trustees highlighted the conflict between independence and the need to obtain sustainable long-term funding, particularly when the proposed members of the MG are also the public authorities organising the funding for that jurisdiction. The IASCF Chairman was hesitant to add a 'safety mechanism' to the Constitution language because it could be perceived to contradict the MG as an independent external group. The intent is that the future composition of the MG would be at their discretion going forward, potentially under guidance written in the MOU.

The discussion moved to the reporting requirements between the IASCF and the Monitoring Group. One Trustee suggested that the MG as an external group should also have public accountability and, therefore, should consider providing its own annual report on its activities. The IASCF Chairman noted it was a good suggestion, but would be one that the MG would need to decide when its sets up its operating procedures. Since the MG's operations are outside of the IASCF, it would not be appropriate to incorporate reporting requirements in the Constitutional proposals. Regarding the reporting from the IASCF to the Monitoring Group, another Trustee suggested the IASCF Annual Report should serve this purpose, to ensure IASCF independence and transparency to the public. The IASCF Director of Operations hoped that the IASCF Annual Report would be sufficient reporting to MG due to its extensive disclosures. The Chairman agreed that there should be one public report for the public and Monitoring Group, and the Trustees would incorporate any additional requests from the MG into the annual report.

Consistency with Governance Recommendations of European Council

One Trustee asked for clarification on how the European Council's suggestions on the governance of the IASCF provided in the materials reconcile with the Trustees' proposals. [See IAS Plus News Story of 9 July 2008 The IASCF Director noted that it is broadly aligned with the Trustee proposals, and meetings with the European Council have confirmed that. Although the language is different, the broad concepts are consistent. Any additional points relating to issues outside of the proposals suggested in part one of this Constitutional Review will be considered in the second part of the review.

Changes to the Proposals Agreed by the Trustees

Based on these discussions, the following additions would be incorporated to the proposals before issuance for public comment:

An additional question asking if other parties should be considered in the initial composition of the MG, specifically banking supervisors.
Adding language to the Constitution marked text to specifically require that of the seats appointed from any area, the Trustees would appoint at least one member from South America and one from Africa.
Language noting that the MOU between the Trustees and the MG would be issued for public comment.
The wording that states 'A Memorandum of Understanding will be agreed between the members of the Monitoring Group and the Trustees describing' will be revised to 'A Memorandum of Understanding will be agreed between the Monitoring Group and the Trustees describing'. This change is to clarify that not all individual members of the Monitoring Group have to agree for it to be considered agreed upon.
Agreed that the IASCF Annual Report would be the one deliverable sufficient for purposes of public reporting and reporting to the MG. Any additionally requested disclosures required by the MG would also be incorporated in the Annual Report.

Approval and Timing of Proposals

The Trustees approved these revisions and approved issuance of the proposals for public comment shortly after the meeting. Comments received will be reviewed at the October IASCF Trustees meeting.

Due to timing (August holiday season), a Trustee said that a 15 September 2008 comment deadline seemed aggressive. The IASCF Director noted that there is a clear expectation by regulators that this part will be done by year-end. Therefore, the date cannot be extended much further. Regulators need to make decisions based on completion of this process. Examples of those decisions include:

SEC decisions on domestic use of IFRS, and
EU equivalency assessment.

To meet that timing, staff need to assess the comments in time for 9-10 October 2008 Trustees' meeting. As a compromise, Trustees agreed to push the comment deadline for these proposals to 20 September 2008.

Regarding second part of Constitution Review, October is the goal for an initial draft of the second part of the Constitution Review proposals. The Constitution Committee will have an interim meeting before October to draft part two proposals to meet the October timing. Additional roundtables will be held for this second part also since there was positive feedback on the roundtable process.

This summary is based on notes taken by observers at the IASCF meeting and should not be regarded as an official or final summary.

First six national action plans under IFAC compliance programme

10 Jul 2008

The IFAC Member Body Compliance Program, launched four years ago, has reached a major milestone in its mission to encourage accountancy organizations worldwide to work together with their members, regulators, standard setters, and other key stakeholders to strengthen the profession.

The Compliance Program is a three-part process:

A member organisation's assessment of its country's regulatory and standard-setting framework.
A self-assessment of the extent to which a member body has committed to international convergence of standards and promoted the implementation of strong quality assurance and enforcement regimes as specified in IFAC membership requirements.
Development of action plans to further the convergence process and meet other IFAC membership requirements.

The Compliance Program is now in this third phase and the action plans of IFAC members from six countries have recently been publicly released on the IFAC Website. The six countries with action plans are Argentina, Botswana, China, Czech Republic, Kenya, and Romania. Click for IFAC Press Release (PDF 17k).

SEC advisory committee proposals on financial reporting

10 Jul 2008

The US SEC's Advisory Committee on Improvements to Financial Reporting will meet on 11 July 2008 to consider a draft of its final report.

The five main themes of the committee's draft recommendations, and examples of specific proposals, are presented below. Click to Download the Draft Report (PDF 5mb). You can get more information on the Advisory Committee's Page on the SEC's website.

SEC Advisory Committee on Improvements to Financial Reporting Examples of draft proposals
A. Increasing the usefulness of information in SEC reports Put executive summaries at the beginning of annual and quarterly financial reports. The private sector should develop key performance indicators (KPIs), on an activity and industry basis, that would capture important aspects of a company's activities that may not be fully reflected in its financial statements or may be non-financial measures. B. Enhancing the accounting standards-setting process Recognise the pre-eminence of the perspective of investors as the primary users of financial reports by increasing investor representation on the FASB and FAF. FASB should increase the field work for proposed standards, formalise post-adoption reviews, and make periodic assessments of existing standards. Create a Financial Reporting Forum (FRF) to coordinate the efforts of FASB with the SEC, the Public Company Accounting Oversight Board, investors, auditors, and other parties. The FRF would meet regularly to evaluate the current pressures on the financial reporting system, set priorities for projects, and discuss how to carry out these projects. C. Improving the substantive design of new accounting standards Redesign accounting standards to clearly articulate their objectives and principles. Use simple language. Avoid detailed rules, all-or-nothing bright-line tests (which sometimes make similar circumstances look different and which are susceptible to manipulation), and numerous exemptions. The SEC should recommend that the FASB be judicious in issuing new standards and interpretations that expand the use of fair value until FASB completes a measurement framework and the infrastructure for measuring fair values is strengthened. Because the current mixed attribute system of historic cost and fair value is likely to continue, the draft report supports the FASB's efforts to divide the income statement into two or more sections that would, among other things, help investors distinguish cash receipts from unrealised changes in fair value. Move away from industry-specific guidance in authoritative literature. Formally promulgated alternative accounting policies should not exist. D. Delineating authoritative interpretive guidance All authoritative accounting standards and interpretive implementation guidance of general significance should come from a single standard-setter – the FASB. The SEC should codifying its existing accounting guidance in a format consistent with that used by FASB. "If the convergence of US GAAP and IFRSs does not occur within a few years, FASB and the SEC should consider a systematic rethinking of US GAAP." E. Clarifying guidance on financial restatements and accounting judgments The SEC and PCAOB should adopt policy statements to provide more transparency into how these regulators evaluate the reasonableness of judgements.

SEC Advisory Committee on Improvements to Financial Reporting Examples of draft proposals

A. Increasing the usefulness of information in SEC reports

Put executive summaries at the beginning of annual and quarterly financial reports.
The private sector should develop key performance indicators (KPIs), on an activity and industry basis, that would capture important aspects of a company's activities that may not be fully reflected in its financial statements or may be non-financial measures.

B. Enhancing the accounting standards-setting process

Recognise the pre-eminence of the perspective of investors as the primary users of financial reports by increasing investor representation on the FASB and FAF.
FASB should increase the field work for proposed standards, formalise post-adoption reviews, and make periodic assessments of existing standards.
Create a Financial Reporting Forum (FRF) to coordinate the efforts of FASB with the SEC, the Public Company Accounting Oversight Board, investors, auditors, and other parties. The FRF would meet regularly to evaluate the current pressures on the financial reporting system, set priorities for projects, and discuss how to carry out these projects.

C. Improving the substantive design of new accounting standards

Redesign accounting standards to clearly articulate their objectives and principles. Use simple language. Avoid detailed rules, all-or-nothing bright-line tests (which sometimes make similar circumstances look different and which are susceptible to manipulation), and numerous exemptions.
The SEC should recommend that the FASB be judicious in issuing new standards and interpretations that expand the use of fair value until FASB completes a measurement framework and the infrastructure for measuring fair values is strengthened.
Because the current mixed attribute system of historic cost and fair value is likely to continue, the draft report supports the FASB's efforts to divide the income statement into two or more sections that would, among other things, help investors distinguish cash receipts from unrealised changes in fair value.
Move away from industry-specific guidance in authoritative literature.
Formally promulgated alternative accounting policies should not exist.

D. Delineating authoritative interpretive guidance

All authoritative accounting standards and interpretive implementation guidance of general significance should come from a single standard-setter – the FASB.
The SEC should codifying its existing accounting guidance in a format consistent with that used by FASB.
"If the convergence of US GAAP and IFRSs does not occur within a few years, FASB and the SEC should consider a systematic rethinking of US GAAP."

E. Clarifying guidance on financial restatements and accounting judgments

The SEC and PCAOB should adopt policy statements to provide more transparency into how these regulators evaluate the reasonableness of judgements.

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First six national action plans under IFAC compliance programme

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