Financial Reporting Brief - February 2015

The Challenge of Transition

Welcome to our Financial Reporting Brief for February, our opportunity to update you on recent developments with our featured article "The Challenge of Transition" commenting on developments in both Irish GAAP and IFRS, some with immediate effect and some a little further down the line for implementation.

The Challenge of Transition

In our first article of 2015 we reflect on major developments that have occurred over the past couple of years in both International GAAP and closer to home, in Irish and UK GAAP and what the current position is in relation to them.

Internationally, we have seen the International Accounting Standards Board (IASB) bring to conclusion during 2014 the standards on both Revenue and Financial Instruments not long after they had completed their work in such areas as the ‘Consolidation Standards’ and Fair Value. Much of this has been completed on an agreed basis with the US Financial Accounting Standards Board (FASB), albeit that there may still be some minor differences in detail.

With Irish/UK GAAP we are experiencing the biggest development in years, probably ever, in terms of the varied and widespread impact on so many entities. FRS 102 is the new Irish and UK GAAP replacing all that we have known until now. The new Companies Act 2014 is also on its way.

The new Irish GAAP from 2015 also includes FRS 101, considered by some as ‘IFRS – Lite’, insofar as it includes all the IFRS recognition and measurements requirements but with significantly reduced disclosure requirements. There are qualifying conditions for entities to be able to avail of this favourable regime, which is geared towards group subsidiary accounts but also may also be applied to individual accounts of parent companies

IFRS – The Way Forward
In 2009 the G20 group of nations called on the IASB and the FASB to improve standards on valuation and provisioning, and to achieve a single set of high quality global accounting standards. At much the same time the Financial Crisis Advisory Group (FCAG) was established in response to the global financial crisis.

FCAG called for :

  • Improving the accounting for what is on or off balance sheet and related disclosures
  • Fixing the so-called ‘own credit’ problems
  • Devising a more forward-looking impairment model for loan loss provisions
  • Achieving converged solutions for new and upgraded standards.

The IASB has responded well to these calls for action with the standards mentioned earlier in such areas as financial instruments, fair value, own credit and consolidations. Impairment of assets, possibly the biggest challenge of all highlighted by the financial crisis, has been addressed with a change from ’incurred loss’ provisioning to ‘expected loss’ which will come in with IFRS 9 in due course.

The IASB did not just make progress; there was also disappointment. The central recommendation was not achieved. Despite many years of development and research work by both, seemingly reaching convergence on occasion as the project progressed, ultimately it was not achieved with impairment perhaps being the single biggest area where it has not been achieved.

The inability to deliver compatible outcomes clearly demonstrated the inherent weakness of convergence as a means to achieve a single set of global accounting standards. The only one of the major convergence standards now unfinished is leasing, which is currently under review with the possibility of a revised draft in the next few months.

The IASB and the FASB have dropped the objective of convergence from their plans and mode of operation going forward. After a number of years, the communique published by G20 after their meeting in February 2014 does not contain a call for converged accounting standards, unlike previous communiques.

Notwithstanding, The U.S. - EU Financial Markets Regulatory Dialogue (FMRD) meet regularly to exchange information on regulatory developments as part of their ongoing dialogue and discuss their strong cooperation and shared interests in continuing to implement and enforce robust standards, including those on the G-20 financial regulatory agenda.

The Consolidation standards are for mandatory adoption by European IFRS-adopters for 2014, Revenue and Financial Instruments are scheduled for 2017 and 2018 respectively provided they are endorsed by the EU, and both Leasing and Insurance are moving through the stages of development, albeit slowly.. It will not stop there as the IASB has a substantial programme of other standards (or developments) underway and research projects in progress.

Changing your GAAP
IFRS – Adopters will as seen be faced with major reporting challenges. So too will entities that adopt Irish GAAP with the move to FRS 102 for periods beginning on or after 1 January 2015, if not already early adopted.

Much was written in publications, guidance and articles when the new standards were first published, and the opportunity is being taken here to comment on developments since then.
In July 2014, the Financial Reporting Council (FRC) issued amendments to IFRS 102 in respect of both basic financial instruments and hedge accounting.

  • Basic financial instruments – the amendments revise the criteria that determine whether a debt instrument is ‘basic’ and is intended to reduce the need for entities to measure debt instruments at fair value. The amendments permit amortised cost measurement for a broader range of debt instruments where it adequately captures the risks associated with those financial instruments.
  • Hedge accounting – the amendments replace the restrictive hedge accounting requirements previously in FRS 102 with a set of hedge accounting requirements based on the IFRS 9 model, with more opportunities for entities to apply hedge accounting. In addition to broadening the eligibility criteria, the amendments also remove the highly effective requirements. Instead the arrangements require there to be ‘an economic relationship’ between the hedged item and the hedging instrument’.

The FRC has also issued editorial amendments or clarification statements relating to FRS 102 and the following topics:

  • Scope – early application by entities within the scope of a SORP.
  • Financial Instruments – the presentation requirements for financial instruments when an entity chooses to apply the recognition and measurements provisions of IAS39 or IFRS 9 and/or IAS 39.
  • Other Financial Instruments – net investment hedges of foreign operations that are branches.
  • Income Tax - deferred tax arising on business combinations.
  • Transition – transitional exemptions in relation to accounting for service concessions

In March 2014 the FRC published FRS 103 Insurance Contracts which is mainly directed towards those involved in insurance business activity with much written to provide oversight and guidance for insurers.

Statements of Recommended Practice are under review by the SORP- making bodies and are being updated to achieve compatibility with FRS 102. Those on Charities and Pensions Schemes, which are much used in Ireland have both been finalised.

The most recent development has been the publication of ED 56 – “Draft FRS 104: Interim Financial Reporting”. The proposals set out a new standard on interim reporting for entities that apply FRS 102, and are based on IAS 34 the international standard on interim reporting. It is intended that this will be finalised in time for implementation during 2015.

Changing times in financial reporting and nobody is escaping, whether you are an IFRS Reporter or an Irish GAAP Reporter. Changes in Company Law will add to the challenge of transition.

Efforts made now in gaining familiarity with the changes and how they may affect you should help to avoid having to deal with any unexpected consequences including those which may arise when having to deal with reporting requirements often at a time of constrained timelines.

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