The IASB and FASB impairment models for financial assets could differ if the FASB’s plans to find an alternative to the “three bucket” approach are successful.
The IASB and FASB have been deliberating a three bucket impairment model for financial assets. The FASB met recently to discuss the next steps for the project, after announcing its intention to further discuss key aspects of the model. It considered the results of outreach efforts and constituent feedback, and unanimously agreed with concerns from US constituents that aspects of the three bucket impairment model are complex and difficult to understand. The FASB will not, therefore, move forward with an exposure draft on the three bucket impairment model; it will instead explore a revised approach.
Under the three bucket impairment model, financial assets would initially be placed in bucket 1, where impairment losses would only be recognized for those assets expected to experience a loss event in the next 12 months. As credit risk deteriorates, assets would then move to bucket 2 or bucket 3, where impairment losses would be measured based on lifetime expected losses, irrespective of when the loss event is expected to occur.
Key aspects of the three bucket impairment model include determining whether a loss event is expected to occur in the next 12 months, and the level of credit deterioration that requires a transfer of assets between buckets. Feedback from US constituents indicated defining these concepts may be difficult and raised concerns over the understandability, operability and auditability of the model. The FASB considered whether implementation guidance could adequately clarify the objectives of the model. It concluded that, even with improved definitions for the key terms, there was still likely to be concern over whether the model results in impairment losses that faithfully represent the credit risk of the portfolio. The FASB, therefore, directed its staff to explore a model that incorporates the concept of expected losses, but applies that concept to all financial assets held and uses a single measurement approach.
The FASB’s decision to explore a revised approach could result in an impairment model that differs from the IASB’s model. During that discussion, certain IASB members indicated that they have heard much less concern about the three bucket impairment model; it, therefore, plans to move forward with that approach.
The FASB directed its staff to develop the new model and is hopeful that the staff will be able to leverage the discussions held to date in that process. Discussions of the new model are expected to take place over the next several weeks, with the FASB’s sharing its findings with the IASB in September. The IASB has not publicly discussed this FASB decision and whether it will affect its timetable, which is to issue an IASB exposure draft in Q4 2012.
The EU’s likely endorsement of a wave of standards for 2014 means that IFRS reporters will have to early adopt the standards in 2013 if they need to claim compliance with IFRS and EU IFRS.
The EU is likely to endorse IFRS 10, 11, 12 and IAS 27 and 28 (the standards) for financial years starting on or after January 1, 2014, one year later than the mandatory adoption date required by the standards.
The Accounting Regulatory Committee voted on June 1, 2012 to recommend endorsement of the standards for adoption in 2014. This recommendation is likely to be accepted by the EU; in which case, companies applying IFRS, as endorsed by the EU (EU IFRS), will have to apply these standards, from financial years starting on or after January 1, 2014 at the latest. The EU endorsement is expected to occur by the end of 2012, with early adoption permitted. EU IFRS reporters will be able to early adopt the standards in 2013 if they need to claim compliance with IFRS and EU IFRS.
All entities that report under EU IFRS will be affected. However, because the application of standards is retrospective, there will not be significant differences carried forward.
EU IFRS reporters should consider the impact of these standards and whether it will be beneficial to early adopt. Entities that need to comply with both IFRS and EU IFRS may find it beneficial to early adopt these standards when they are endorsed.
The IASB and FASB ended their redeliberations of the leasing project with tentative agreements on a number of issues relating to presentation and disclosure.
However, there is likely to be dissent on a number of areas from some members of both boards at the proposals in the revised exposure draft.
The revised exposure draft is due to be published late November 2012 and will have a 120-day comment period.
The IASB and FASB at their July meeting reached tentative decisions on identifying separate performance obligations, performance obligations satisfied over time and onerous performance obligations. They also discussed the accounting for licences but did not reach any decisions.
Other key issues still to be redeliberated include the “reasonably assured” constraint on recognition of variable consideration, collectibility, time value of money, contract combination and modification, disclosures and transition.
The SEC staff has published its final report on its work plan intended to help the SEC evaluate the implications of incorporating IFRS into the US financial reporting system. However, the report does not include a decision as to whether IFRS should or should not be incorporated, or how such incorporation should occur. The IFRS Foundation said in response that it “regrets” the report was not accompanied by a recommended action plan.
The report does state that IFRS is generally perceived to be of high quality, although there are areas where gaps remain (for example, accounting for extractive industries, insurance and rate-regulated industries) and inconsistencies in the application of IFRS globally.
It also believes enhancements should be made to the IASB’s coordination with individual country standard setters and the IASB’s funding process.
The IASB has issued an amendment to the transition requirements in IFRS 10, 11 and 12. It clarifies that the date of initial application is the first day of the annual period in which IFRS 10 is adopted − for example, January 1, 2013 for a calendar year entity that adopts IFRS 10 in 2013. Entities adopting IFRS 10 should assess control at the date of initial application; the treatment of comparative figures depends on this assessment.
A key clarification in the amendment is that adjustments to previous accounting are not required for investees that are consolidated under both IFRS 10 and the previous guidance in IAS 27/SIC 12 as at the date of initial application, or investees that will no longer be consolidated under both sets of guidance as at the date of initial application.
Comparative disclosures will be required for IFRS 12 disclosures in relation to subsidiaries, associates and joint arrangements. However, this is limited only to the period that immediately precedes the first annual period of IFRS 12 application. Comparative disclosures are not required for interests in unconsolidated structured entities.
The amendment is effective for annual periods beginning on or after January 1, 2013, consistent with IFRS 10, 11 and 12. It will affect all reporting entities (investors) that need to adopt IFRS 10, 11 or 12.
IFRS preparers should start considering the transition amendment, and how they can use the exemptions granted to minimize implementation costs of IFRS 10, 11 and 12. IFRS preparers should also start collating the comparative disclosure information required by the amendment.
The IFRS Interpretations Committee (IC) discussed in its May meeting issues around rate-regulated activities, specifically:
The IC staff recommended that the IASB should add this to its agenda, given that the IASB has listed rate-regulated activities as a potential project in its Agenda Consultation. However, there was some concern that, if the IASB does not address it, the issues will resurface at the IC. So the IC has deferred its decision until it is clear whether the IASB will address the issue.
Entities that are subject to rate regulation might be affected by the ongoing discussions. Management should continue to monitor developments and engage with the IASB and IC on this topic.
The preparation of the statement of cash flows sounds easy, but it is always the last of the primary statements to be prepared and can give rise to the most questions from users. Test yourself against PwC’s statement of cash flows specialist, Tak Yano, with this IFRS quiz. You might also want to read our topic summary on statement of cash flows to improve your chances of a better score.
Q1: What is the principle in IAS 7 for the classification of cash flows?
Q2: Which criterion is not included in the definition of cash equivalents under IAS 7?
Q3: Which of the following should be shown as cash and cash equivalents within the consolidated statement of cash flows?
Q4: Where can interest paid be classified?
Q5: Which of the following expenditures should not be classified as cash flows from investing activities?
Q6: Which of the following statements is false?
Q7: Where is cash acquired in a business combination classified?
Q8: How should the subsequent settlement of deferred consideration for a business combination be classified?
Q9: Entity A acquired an additional 20% interest in a subsidiary. How should management classify the transaction in A’s consolidated statement of cash flows?
Q10: Which of the following is not an acceptable presentation of cash flows from discontinued operations?
Galina Ryltsova, PwC Russia partner and member of the Russian Ministry of Finance’s Interagency Working Group for IFRS Implementation, looks at recent developments in Russia’s adoption of IFRS.
The use of IFRS is expanding rapidly in Russia and, based on the government’s plans, may expand further still. Russian credit institutions, insurance companies and companies whose shares are admitted for trading will need to issue a full set of IFRS consolidated financial statements by 2012. Entities that issue securities through subscriptions involving a group of over 500 individuals are also required to prepare IFRS consolidated financial statements.
The official date of transition for those companies not already reporting under IFRS is January 1, 2011. IFRS consolidated financial statements need to be audited and filed by April 30, 2013 and published by May 31, 2013 (see box below).
Around 1,000 more companies are expected to be required to prepare IFRS consolidated financials statements in future, although approximately 200 of the largest companies in Russia already prepare IFRS consolidated financial statements.
The IFRS transition activity in entities affected by the law has been rather slow to date. Activity levels are expected to rise as the year-end approaches and the deadline of April 30, 2013 moves closer.
The slow start could be a result of lack of detailed descriptions in the new law, a number of cross-references to other federal laws, and lack of clarity over fines and penalties to comply. Fines and penalties also seem low, compared to the cost of adopting IFRS. However, consistent with the experience of other countries in adopting IFRS, delays in starting creates challenges in meeting the reporting deadline for all parties. This deadline is just nine months away.
Plans for the further development of accounting and financial reporting in Russia based on IFRS have been adopted for 2012-2015, including:
Non-public companies are expected to be able to choose between reporting under Russian GAAP or IFRS following suggestions from the Russian government in April this year for revoking requirements to submit financial statements prepared under Russian GAAP for non-public companies. In addition, the president issued an order in May related to simplifying financial reporting for certain types of economic entities.
Word clouds take a given text and present all the words in a pattern that gives greater prominence to words that appear more frequently. What IFRS standard do you think this word cloud represents?