Archives For IASB

The big picture fades

aksaroya —  28 January 2013 — Leave a comment

By Romano Dzinkowski, economist and business journalist

2012 brought CFOs in the US so much to get to grips with on financial standards and mandatory auditor rotation that precious little headspace was left for strategic direction of business.

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2012 was a tough year for US corporate accountants. With heads down, eyes focused on managing risk, and more often than not buried in compliance and tax issues, there was little room for strategic growth for the finance C-suite. While most CFOs would claim their role is to be a true business partner and a critical forward-looking thinker on the C-level team, last year was full of distractions.

First, the US Financial Accounting Standards Board (FASB) issued up to 15 new exposure drafts (13 at the time of this writing) and seven freshly linked new standards. CFOs were also anxiously awaiting the final revisions to several big memorandum of understanding projects with the FASB and International Accounting Standards Board (IASB) – on financial instruments, impairment, hedge accounting, accounting for macro hedging, leases, and, last but not least, revenue recognition. Many finance folks were busy figuring out exactly what the proposals would mean for them.

Also on the standards agenda, the FASB and newly formed Private Company Council (PCC) proposed a new, simplified framework for modifying US GAAP for private companies. There was much debate on whether what many are calling a two-GAAP system would ultimately be good for corporate America as a whole. That argument continues.

Also in 2012, the coming of International Financial Reporting Standards (IFRS) was again a source of confusion for public company CFOs who would have liked some direction one way or another. An announcement regarding adoption (or not) was expected at the end of 2011, and again in 2012…but none was forthcoming. This has angered many US finance chiefs who would like a heads-up for their planning cycle and have already started going down the IFRS adoption path.

Against the backdrop of a fairly heavy accounting standards agenda came the threat of mandatory auditor rotation in the US, which many CFOs say would make their life much more complicated, not to mention expensive. The Public Company Accounting Oversight Board is now deliberating on what, if anything, it is going to do about changing the rules on mandatory auditor rotation in 2013. Currently, most votes are in the nay camp.

At the same time, COSO – the Committee of Sponsoring Organisations of the Treadway Commission – released a significant update to its original risk management framework, which many SOX 404 filers have adopted. The new model has been criticised for being prohibitively large for all but the bigger public companies with the resources to adopt it. COSO is revising the document; the hope is that the new framework will be ready for CFOs to start implementing in 2013.

So what does it all foreshadow for the role of the CFO this year and beyond? More of the same, says a recent ACCA/IMA study released in October 2012. CFOs, predicts the study, will continue to be challenged by the tug of war between their role as senior strategist and business partner and the ever-increasing demands of greater compliance,control and regulatory complexity.

This post first appeared in Accounting and Business International, January 2013.

In ACCA, CFO, FASB, IASB, IFRS , ,
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Truly international standards

aksaroya —  23 January 2013 — 2 Comments

By Barry Cooper, ACCA President

The growth of Islamic finance brings a need for harmonising its standards with those of IFRS.

Barry Cooper-0513Towards the end of last year, I was delighted to take part in ACCA’s International Assembly. We heard from some outstanding speakers and looked at a number of key issues, including the progress being made on globalisation of standards and the increasing role played by emerging economies in the standard setting process.

These discussions chimed with a report, Global alignment, produced by ACCA and KPMG which called for consistency and harmonisation in the way in which Islamic financial institutions report, and for the International Accounting Standards Board (IASB) and the Islamic finance industry to work together to develop guidance and standards, and to educate the investor community on key issues.

It also suggested the IASB consider issuing guidance on the application of International Financial Reporting Standards (IFRS) when accounting for certain Islamic financial products; that it review the needs of the report users with leading Islamic finance standard setters and regulators; and that Islamic financial institutions should form an expert advisory group to help develop standards.

There have already been signs of progress. IASB chairman Hans Hoogervorst told the International Assembly that the IASB was considering establishing an Islamic finance advisory committee. This is an excellent start but, given the growing importance of Islamic finance, everyone involved in the sector needs to work to ensure that the sector operates to consistent and harmonised standards.

This post first appeared in Accounting and Business International, January 2013

In ACCA, Barry Cooper, Corporate reporting, IASB, IFRS
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Impaired vision

aksaroya —  7 January 2013 — Leave a comment

By Jane Fuller, former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation thinktank

The IASB and FASB differ over how best to switch from an incurred loss model for loans to an expected loss one. While the IASB has the ‘least bad’ option, it will be a case of seeing which works best.

Goodbye convergence, hello competition. Now that the US has backed away from adopting International Financial Reporting Standards (IFRS), the latest transatlantic duel is over how to switch from an incurred loss model for loans to an expected loss one.

As the chair of a committee responding to the plan from the International Accounting Standards Board (IASB), we felt a definite steer towards its ‘deterioration approach’. So it was hard to give the ‘lifetime loss approach’ proposed by its US peer, the Financial Accounting Standards Board (FASB) a fair hearing.

This is a pity because the FASB version appears simpler. Its ‘current expected credit loss model’ offers a single measurement objective of assessing expected losses (EL) over the life of the loan. So on day one there is no impediment to recognising any losses, whereas the IASB model entails booking ‘a portion’ effectively a 12-month horizon.

As the loan progresses, expectations are reassessed and adjustments made to the loan loss allowance. A bank that expands its lending by making more loans and/or extending its maturity will have bigger upfront losses.

Objections to this include that a day one loss is a nonsense. What management in its right mind – and let’s assume what chastened bankers are now closer to that – would lend at an immediate loss? Is it right that growing bank has to book bigger upfront losses?Is there a perverse incentive to keep loans to a short maturity?

The IASB suggest there is no reason to make a growing lender look less profitable than one in a steady state. The obvious counter is that the growing bank is more risky – and that should be reflected in the accounting.

It should be remembered that the IASB made itself vulnerable to US divergence by proposing a confusing ‘three-bucket’ approach to impairment. The deterioration model still has a trigger that switches loans from one bucket, where only a portion of EL are provided for, to another that allows the full lifetime losses. But the trigger sounds rather fussy – ‘a sufficient deterioration in credit quality’.

Forecasting full life-time losses at the outset of a loan is also fuzzy, so you have to pick which of the approaches offers better information about credit quality and is less easily gamed.

The principle should be that the accounting reflects economic reality, indeed that’s what the incurred loss model did. Banks are cyclical. They make a profit on a loan until it goes sour: the cliff edge is there. This can be anticipated with the help of experience – the EL idea – and postponed through forbearance, but it is not a smooth business.

Since the incurred loss model was used as an excuse for foot-dragging on loss recognition, the move to EL has broad support. But it should not provide an opportunity for a return to ‘general provisions’ that can later be fed back in to flatter profits.

The FASB promises that investors will receive plenty of information about changes in credit quality through the lenders’ regular reassessment of loss expectations. But this still means the analysis of profits will be done through the prism of movements in and out of the provision pool, at a remove from the actual performance of the loans.

There is a suspicion, denied by the FASB, that prudential regulators have applied pressure for more upfront provisioning. Accounting should remain neutral in this. It is bank boards, prompted by much tighter prudential requirements, that need to ensure enough profits are retained to absorb expected – and unexpected – losses.

So the IASB’s hybrid looks the least bad option. We are back in a world of competing standards, so let’s see which works best.

This post first appeared in Accounting and Business UK December 2012

In ACCA, IASB, IFRS, Uncategorized
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Revenue recognition: a final International Financial Reporting Standard is expected within the next six months

aksaroya —  21 December 2012 — Leave a comment

By Paul Cooper, corporate reporting manager, ACCA

revenue recognition

IAS 18 Revenue and IAS 11 Construction Contracts currently determine how entities subject to IFRS recognise their income. The IASB has been conducting a lengthy consultation on this important area, beginning in 2008. This process culminates in a replacement IFRS on Revenue Recognition, with publication expected during the first half of 2013. Responses to the final consultation stage were submitted by mid-March 2012.

The project has been jointly undertaken by the IASB and FASB in the United States, and represents a further step towards global convergence at a time of more general concern over the future of the convergence process. At the same time as updating international and US GAAP, the new Standard should establish common principles, and provide additional guidance on revenue recognition.

There have always been questions about the recognition and disclosure of revenue which is subject to complexity or uncertainty.  Complexity can arise because of the long time-period for the fulfilment a contract, the numerous components within a contract, and the extent of tailoring of the good or service to a customer’s specific requirements. Credit risk (not being paid for the work) and warranties (whether statutory or specific to the contract) add uncertainty about the overall amount and timing of total contract revenue.

As the final Standard, reflecting any changes consequent on the last consultation stage, has yet to be published, the following points reflect the most recent proposals, and ACCA’s responses to them. However, it is not anticipated that the published Standard will look much different.

The IASB’s consultation process on revenue recognition has been evolutionary: changes to the proposals along the way have not caused a major or widespread impact. Revenue is to be recognised in a stepped process, starting with the separate identification of a project, then the components within the contract, called ‘performance obligations’, and the price of each. When an obligation is satisfied, the revenue attaching to it can be recognised in the financial statements.

For an obligation to be satisfied, the customer must have control of the good or service. For example, a contract to supply and deliver furniture may involve several deliveries, each of which the customer accepts by signing to confirm satisfaction with the goods on receipt. Each delivery may involve items which can be enjoyed (i.e., controlled) separately by the customer, and so revenue is recognised on each delivery. Alternatively, the deliveries are of parts, all of which are necessary before the customer can use any of the furniture, and this results in revenue being recognised only on the acceptance of the final delivery.

The methodology for revenue recognition established by the Standard should be practical across industries, and the IASB has provided additional detail which should reduce potential uncertainties in the application of the Standard. It should be noted that for certain long-term contracts, especially where control of the good passes to the customer at a late stage, it is likely that the recognition of revenue will be later than under a percentage of completion method, even if this change goes against industry practice, or any other accepted idea of what is the true ‘substance’ of the contract.

The step process for revenue recognition, based on individual performance obligations, has the advantage of clarity and applicability across industries. This will represent a change for entities which assess the performance of a contract as a whole. They may not find it appropriate to recognise individual loss-making obligations, or onerous commitments, when they view these in the context of the overall contract profitability, and accepted the obligations on this basis.

The value of the consultation process, and the continuing involvement by ACCA in it, is however evident in the clarifications and simplifications made by the IASB. For example, it is no longer proposed that credit risk will be deducted from the revenue figure disclosed in the Income Statement. The amount reflecting credit risk will instead be disclosed adjacent to the revenue figure. The treatment of warranties will now also be closer to current practice.

Once a Standard has been issued, it is not left to operate as it is until an overhaul is considered necessary. After an IFRS has been in operation for two years, the IASB now conducts a Post-Implementation Review of how it is working in practice. In addition, concerned parties are also able to lobby the IFRS Interpretations Committee, if they have concerns such as over divergences in accounting practice. The comments made can then result in proposals for amendments to particular areas of a Standard.

In ACCA, IASB, IFRS
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Changing Role of the CFO in the US

accapr —  28 November 2012 — Leave a comment

tall building, modern CFOBy Jeffrey C. Thomson, CMA; President and CEO, IMA

According to The Changing Role of the CFO, a new report co-published by ACCA and IMA®, CFOs will face many challenges in the future, including global economic uncertainty and volatility, fluctuating energy prices, and turbulent currency markets, along with a shift in economic power. The report identifies emerging priorities that will impact the future role of the CFO and cites nine future key issues that will shape the finance function’s top job, including regulation, globalisation, technology, risk management, transforming finance, stakeholder engagement, strategy, integrated reporting, and talent.

Of course, these emerging priorities could well vary by global region depending on regulation, socio-economic factors, environmental conditions, culture, and more. But as a former U.S.-based CFO, I wonder if we in the U.S. face a couple of unique challenges associated with regulatory uncertainty and litigation. These issues exacerbate the ‘day-to-day’ challenges – and opportunities – of today’s CFO team.

First, let me tee up the uncertainty associated with regulation. Usually, when we discuss the CFO team’s lead role in dealing with uncertainty and disruption, it is in connection with consumers and competition, not regulation since that tends to be a ‘known’ quantity with exposure drafts, comments letters, discussion roundtables etc. before a regulation associated with financial reporting even goes into effect. Specifically, I am focusing on the uncertainty associated with adoption of IFRS in the U.S. Will the U.S. adopt IFRS? If not in full, what would an ‘incorporation’ model look like? The larger questions are around the degree to which U.S.-based CFO teams should begin the training process and technology changes necessary to affect a massive shift from the decades-old US GAAP. This is not the resource allocation challenge that CFOs deal with every day in trading off returns on various investments; it is a long-term decision to invest in training and technology without clarity as to ‘if, how and when.’

Smart CFOs will need to do two things: (1) Hire and nurture good technical talent, so adopting to any deviation to pure-play GAAP will be that much easier; and, (2) Stay close to the regulatory scene and be a proactive advocate for the best solution (e.g., SEC, FASB, IASB, IFRS Foundation, etc.)

The second, arguably unique challenge for U.S.-based CFOs is with integrated reporting, or, the evolution of external corporate reporting. At least in the U.S., the external disclosures are voluminous and yet do not adequately inform stakeholders as to long-term sustainable value generation and growth because they are too financially focused, too complicated, and yet not comprehensive enough. But the unique challenge in the U.S. is not so much about selecting more non-financial measures, or measures more of a leading indicator variety, or even how to source and report measures such as employee learning and growth, process improvements, sustainability, carbon footprint, societal contributions, or governance factors. It is the litigious nature of society and an often ‘unforgiving’ regulatory environment in the U.S. If this challenge is approached as ‘let’s report everything – and thus subject it to internal controls and audit – because it may be useful to some stakeholder in the future,’ then much like in the early days of Sarbanes-Oxley, integrated reporting will be viewed as a ‘social tax’ with little societal good and expensive shackles placed on corporate entities. There are no easy answers here, but leading CFOs need to be at the table to find the right balance, rather than waiting for the steam-roll effect of transforming external corporate reporting ‘to just happen.’

What do you think?

In Corporate reporting, FASB, Finance Transformation, Guest, IASB, IFRS, IIRC, IMA, Integrated reporting, US , , , , , , ,
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