Pro-active Accounting Activities in Europe (PAAinE )
In 2005, the European Financial Reporting Advisory Group (EFRAG) and European National Standard-Setters (NSS) agreed to work more closely together on a number of projects under the PAAinE initiative. The ASB is leading the work on the PAAinE project on pensions accounting (see page 3). Progress on a number of other projects is outlined below.
Discussion Paper (DP) 1 – Conceptual Framework
The work on this project is being led by the French standard-setter, the CNC. As reported in Inside Track 50, a first DP ‘The Conceptual Framework: Starting from the Right Place?’ was issued towards the end of 2006. The DP covers some fundamental questions that the authors believe should be considered by the IASB and FASB in their conceptual framework project (see page 4), in particular: what is the purpose and status of the Framework?; which users should the Framework focus on?; which entities should come within the Framework?; and what should be the scope of financial reporting?
Responses to the DP, including that from the ASB, can be accessed via the EFRAG website at: http://www.efrag.org/projects/detail.asp?id=59.
DP2 - Performance Reporting
In November 2006, the second PAAinE DP ‘The Performance Reporting Debate: What (if anything) is wrong with the good old income statement?’ was published, having been prepared jointly by the staff of EFRAG and the Spanish standard-setter, ICAC.
The paper identifies and analyses the arguments of those who believe that fundamental changes are needed to the existing performance reporting model, and also explains the reasoning of those who believe such changes are not needed. The paper does not reach any conclusions on the issues, but it sets the scene for a subsequent paper that will explore the underlying issues involved in greater detail. The comment period ended on 31 March 2007. The ASB provided comments and in its comment letter welcomed the DP, although it noted that no reference to the UK’s Financial Reporting Standard (FRS) 3 ‘Reporting Financial Performance’, which is relevant to the performance reporting debate, had been made.
Responses to the DP, including that from the ASB, can be accessed via the EFRAG website at: http://www.efrag.org/projects/detail.asp?id=54
Revenue recognition
EFRAG and the German standard-setter, the DRSC, are developing a DP that considers two broad approaches to revenue recognition:
- 'critical event' approaches that involve recognising no revenue under a contract until a particular event or threshold in the contract (the critical event) has been reached; and
- the 'continuous' approach, where revenue is recognised continuously over the course of the contract as the contract as the contract progresses and the entity performs.
The DRSC has concluded that the continuous approach offers a solution for overcoming the problem of conceptual inconsistencies in current accounting standards and would propose extending the application of such a 'percentage of completion method' to all kinds of transactions, not just long-term construction contracts. Others take a different view. The plan is for the DP to be issued shortly, which will help to bring the debate to a wider audience.
Differentiating liabilities and equity
EFRAG and the DRSC have also been developing a DP proposing a different way of differentiating between liabilities and equity.
The suggestion is the a 'loss absorption capital' approach should be investigated. This focuses on a single attribute of the intuitive concept of equity - that it is available to absorb losses without the entity going into default or bankruptcy.
The proposals are not fully worked through and are put forward as a starting point for further development rather than as a finished product. The approach was considered by the IASB and FASB at their joint meeting in April.
EU Endorsement of IFRS
The process for the adoption of IFRS for use in the EU is becoming more complicated, with two new developments. The first is the setting up of a Standards Advisory Review Group (SARG), whose task is to advise the European Commission on the objectivity and neutrality of EFRAG?s advice on the endorsement of IFRS.
The second concerns the introduction of the so-called 'regulatory procedure with scrutiny', which will give the European Parliament (EP) more powers to scrutinise proposals to adopt IFRS and to block any such proposal on the grounds that it (i) is not compatible with the aim or the content of the basic instrument (ie EU Regulation 1606/2002) or (ii) does not respect the principles of subsidiarity or proportionality under the Treaty. The EP has three months to scrutinise any proposal. This new procedure will start once an amendment to Regulation 1606/2002 has been passed by the European Council and the EP. It remains to be seen how it will operate in practice, but it will lengthen the time taken for any new or amended IFRS to be adopted for use in Europe.
On one specific endorsement issue, EFRAG has now (with ASB support) given positive advice to the Commission on the adoption in the EU of International Financial Reporting Interpretations Committee (IFRIC) on 'Service Concession Arrangements' (IFRIC 12). This remains a controversial issue, which is currently being considered by the EU Accounting Regulatory Committee (ARC).
