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FRC responds to IASB Annual Improvements 2012-14
Hans Hoogervorst Chairman International Accounting Standards Board 30 Cannon Street London EC4M 6XH
Submitted electronically
20 February 2014
Dear Hans
IASB Exposure Draft Annual Improvements to IFRSs 2012 – 2014 Cycle
I am writing on behalf of the Financial Reporting Council in response to the above Exposure Draft (ED).
The FRC's detailed responses to the questions set out in the Invitation to Comment in the ED are included as an appendix to this letter. Overall the FRC supports the proposed amendments to International Financial Reporting Standards (IFRSs) as part of the annual improvements project, although we have reservations on the detail of some of the proposed changes.
If you would like to discuss these comments, please contact Anthony Appleton on 020 7492 2432, [email protected] or myself as set out below.
Yours sincerely
Roger Marshall FRC Board Member and Chair of the Accounting Council DD: 020 7492 2429 Email: [email protected]
Aldwych House, 71-91 Aldwych, London WC2B 4HN Tel: +44 (0)20 7492 2300 Fax: +44 (0)20 7492 2399 www.frc.org.uk The Financial Reporting Council Limited is a company limited by guarantee. Registered in England number 2486368. Registered office: as above.
Appendix: FRC responses to the general questions in the IASB Exposure Draft Annual Improvements to IFRSs 2012 – 2014 Cycle
Question 1
Do you agree with the IASB's proposal to amend the Standards as described in the Exposure Draft? If not, why and what alternative do you propose?
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
In respect of the proposed clarification concerning the reclassification of non-current assets or disposal groups between held for sale and held for distribution, we question whether the amendment is necessary. We acknowledge that IFRS 5 is silent in respect of the measurement requirements on reclassifications. However, in our view such transactions should be rare in practice and adding a new rule to IFRS 5 may be a disproportionate response.
In respect of the proposed amendment in paragraph 26B, we note that entities that reclassify non-current assets or disposal groups between held for sale and held for distribution should continue to apply the classification, presentation and measurement requirements applicable to the non-current asset or disposal group that is classified as held for sale or as held for distribution. We are uncertain whether under the proposed amendment it is the IASB's intention that in a situation of a reclassification a non-current asset or disposal group held for sale may be measured at fair value less cost of distribution and a non-current asset or disposal group held for distribution may be measured at fair value less cost of sale. In our view the described inconsistency between the intended method of disposal and the measurement basis is not a desirable accounting outcome.
We agree with the proposed clarification set out in paragraph 26A concerning cease to hold for distribution accounting.
IFRS 7 Financial Instruments: Disclosure
As a general point, we note that paragraph 42C of IFRS 7 describes two situations where an entity has continuing involvement in a transferred financial asset. It can arise because the transferee has retained any of the contractual rights or obligations inherent in the transferred asset or because it has obtained new contractual rights or obligations relating to the transferred asset. IFRS 9 Financial Instruments (at paragraphs 3.2.16 et seq) only uses the term for the former situation to describe to what extent an entity should continue to recognise the financial assets when the entity has neither transferred nor retained substantially all the risks and rewards, and has retained control. This may be a source of confusion since the use of the term in IFRS 9 may be understood to imply a definition that contradicts that in IFRS 7. The confusion might be exacerbated by the proposed amendment in paragraph B30A of IFRS 7 which describes whether a service contract constitutes continuing involvement within the context of IFRS 7, because IFRS 9 also contains accounting requirements in relation to service contracts although not under the caption of continuing involvement.
In relation to the content of the amendment in paragraph B30A we believe the proposed drafting could be improved as follows.
When an entity transfers a financial asset the entity may retain the right to service that financial asset for a fee that is included in, for example, a servicing contract. The right to earn a fee for servicing the financial asset is generally continuing involvement for the purposes of applying the disclosure requirements. The entity must assess the servicing contract in accordance with the guidance in paragraphs 42C and B30 to make that determination determine whether the right to earn a fee for servicing the financial asset is continuing involvement for the purposes of applying the disclosure requirements. For example,
We agree with the proposed amendment to paragraph 44R of IFRS 7 concerning the interim reporting requirements and the IASB's rationale for proposing this change.
IAS 19 Employee Benefits
We understand the IASB's rationale for making the change and generally agree that in some jurisdictions, such as those within the Eurozone, the proposed clarification may be beneficial.
However, we note that paragraph 78 of IAS 19 requires entities to apply mutually compatible assumptions in relation to inflation and discount rates and would be concerned that the use of a discount rate of a foreign currency bond might be seen to be incompatible with other required inputs such as inflation or might lead to uncertainty as to which inflation rate to apply, e.g. domestic, regional or foreign. We recommend that before finalising the amendment some further analysis is carried out to ensure there are no unintended consequences and to ensure there is common understanding of mutually compatible inflation, discount rates and other assumptions where the discount rate is derived from a bond issued in a foreign currency. This additional analysis could form part of the IASB's broader project on the use of discount rates.
Furthermore, in, for example, the Eurozone, the amendment might lead to confusion where the same currency is used for domestic and cross-regional bond issues each with different yields. It would be useful to explain the factors for entities to consider where a number of bonds covering different geographical areas exist.
IAS 34 Interim Financial Reporting
We agree with the proposed clarification and in our view it should improve the ability of users of interim financial report to find relevant information.
We note that the interim financial statements may be subject to different external review requirements (on a voluntary or mandatory basis) than the remainder of the interim financial report and the information included in other parts of the interim financial report may therefore not be subject to the same level of scrutiny than the disclosure in the interim financial statements. We acknowledge that it is the remit of national regulators to implement external review requirements of interim financial statements, rather than that of the IASB. The IASB may, however, wish to liaise with the International Auditing and Assurance Standards Board (IAASB) in respect of the IAASB's existing pronouncements concerning the review interim financial statements and assess how IFRS reporting requirements and IAASB review requirements are interlinked.
Question 2
Do you agree with the proposed transitional provisions and effective date for the issue as described in the Exposure Draft? If not, why and what alternative do you propose?
FRC response:
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
In our view there are no significant issues associated with the proposed transitional requirements. However, we note that the IASB has not explained its rationale for departing from its usual policy to make changes effective retrospectively and consistent application of this policy may be preferable to aid consistency and comparability of financial statements.
IFRS 7 Financial Instruments: Disclosure
We agree with the proposed transitional requirements.
IAS 19 Employee Benefits
We agree with the proposed transitional requirements.
IAS 34 Interim Financial Reporting
We note the proposed clarification is effective retrospectively. It may not be possible for entities to make the 'other parts of the interim financial report' available at the same time and the same terms on a retrospective basis. We therefore believe that there is justification to depart from the policy of retrospective application and recommend that the IASB implements these changes prospectively.