PwC IFRS blog

Belated, but welcome – final reports on IFRS governance

The IFRS Foundation has finally released – a little later than planned – its strategy review alongside the Monitoring Board’s review of the Foundation’s governance. It seems the delay was due to the Monitoring Board’s difficulties arriving at a consensus on its report.

The reports do not propose any radical change to IFRS governance. The current three-tier structure (the IASB being responsible for the technical quality of the standards, and the two oversight bodies ensuring independent standard setting and accountability) will continue. I think that’s sensible − it seems to be working. Some of the detail, though, points to changes of emphasis, which I think could be interesting.

Firstly it is worth stating that both reviews have involved extensive consultation, and it is clear that commentators have been listened to carefully. The process should allay the concerns of those who have been critical of IASB governance in the past – or least those whose concern is about the transparency of the governance rather than a disagreement with the technical content of the standards. This may help resolve one of the barriers to IFRS adoption cited in this summer’s US roundtables on IFRS adoption.

The review by the IFRS Foundation Trustees is very similar to the draft published in October. I was glad to see that the commitment to do more to promote consistency of IFRS interpretation across borders was widely supported; this is perhaps the biggest challenge for the IFRS community as it expands. The enhanced role of the Due Process Oversight Committee is also important for building confidence in the standard-setting process among the sceptics.

The Monitoring Board on the other hand has made a number of changes, backing off from what could have been seen as a dramatic extension of its role. Proposals that the Monitoring Board should be able to put topics directly onto the IASB agenda and should take a much greater role in appointing IASB members  have been dropped. There are caveats though: if the Monitoring Board suggests an urgent topic that the IASB rejects, the IASB will have to give the reason why. Similarly, the Monitoring Board will be closely involved in the appointment process for a new Chair. But these proposals are really just a reflection of what is already happening today.

Membership of the Monitoring Board looks like the area that probably had the most intense discussion. It will be expanded to include some emerging markets representatives, and two of the seats will be rotating – this in itself is uncontroversial, although the report admits the details of how to achieve it are not yet worked out. Membership will be restricted to capital markets authorities rather than expanded to include prudential and other regulators – a pragmatic decision, as it would be difficult to know where to stop.  More significantly, members in future will have to come from countries where IFRS is required for domestic use. One can see the tensions here – if a country   permits IFRS but few companies actually use it - is this sufficient “domestic use”? The elephant in the room is of course the US position –can one conclude that allowing use by foreign companies filing with the SEC amounts to ‘domestic’ use? On this, no doubt, there will be more!

Finally, the most disappointing part of the reviews is the lack of a concrete proposal on the future funding of the IASB. Both boards agree there should a transparent system whereby the jurisdictions using IFRS commit funds. The Monitoring Board says the Trustees are primarily responsible; the Trustees comment that they do not have the authority to mandate financing.  At the same time, the Trustees have indicated an aspiration to have a significantly expanded budget.  This is perhaps the biggest collective challenge for the two oversight bodies to resolve.

As ever let me know what you think about any of this.

Delays and more delays – will 2012 be any different?

Will we remember 2011 as a year of delays? Will the theme continue into 2012? We started 2011 with high hopes that the year would see the completion of the convergence agenda and that we would end it with a decision by the US as to whether they would adopt IFRS. Here is a look back at this year’s developments and a look forward at what we can expect in 2012.

Use of IFRS in the US

The SEC had promised us an announcement before the end of 2011 to confirm the position on companies using IFRS, but in December they told us they needed more time to complete their work plan.  Given the parallel delays in the IASB work plan, this was not surprising, but we hope it doesn’t lead to further delays in other countries’ implementation plans.  But the SEC did complete a key part of its work plan when it published two staff papers in November.

The first paper summarises differences between US GAAP and IFRS frameworks, commenting that US GAAP’s detailed industry and transaction-specific standards promote consistency within an industry, whereas IFRS’ broad principles promote consistency across industries. The second paper analyses IFRS as applied in practice and identifies diversity in applying IFRS across various territories. Both are factual and add new perspectives to the debate. The second paper in particular is well worth a read – the SEC highlights poor clarity of disclosure, particularly around accounting policy implementation, as perhaps the biggest issue identified in its review. This is something well within the grasp of all of us to fix.  

At the American Institute of Certified Public Accountants’ annual conference on SEC and PCAOB developments, Jim Kroeker, the SEC’s Chief Accountant, explained that it would be sensible not to race to a decision; the SEC needs to take time to find the best answer. Given the US domestic concerns about IFRS adoption voiced at the SEC roundtables in July , it makes sense for the SEC to be as thorough in its analysis as possible. I think therefore we need to be patient. But it is an election year in the US and it would be very unfortunate if the decision gets sidelined by politics.

Activity at the IASB

For the IASB, much of 2012 looks set to be taken up with Memorandum of Understanding projects. Key accounting standards are taking much longer to develop than we expected, and the complexities of international standard development are becoming very obvious.

Following the high-level of concern raised by the many respondents to the first revenue exposure draft issued in June 2010, we now have a revised revenue exposure draft. We expect two more revised exposure drafts in early 2012, on leasing and financial assets impairment, with macro hedging to follow. We wait to see how people respond to the revised exposure drafts. Currently, standards on revenue and leasing are expected later in 2012. No date has yet been set for an impairment standard.

The IASB has also announced a ‘limited’ review of IFRS 9. Given the topics to be comprise operational issues identified so far − possible changes to help resolve the impact of market volatility on assets held to back insurance contracts and whether further changes could be made to achieve a converged standard with the FASB − I think the IASB has found an entirely new meaning of the word ‘limited’!  However, if this does lead to a converged financial instruments classification and measurement model and a breakthrough in the insurance project, I for one would be happy to see ‘limited’ change.  Let’s see how much gets resolved this year – hopefully we will be able to start 2013 with the new agenda that should emerge from 2011’s agenda consultation, but there’s a lot to be done this year first.  I’ll leave you though with my good wishes for a successful new year!  Lets hope it won’t be entirely dominated by the Eurozone crisis!

Revenue recognition – are we there yet?

The IASB and FASB have finally released the much awaited new exposure draft on revenue. The boards have been generally responsive to feedback from the first exposure draft. Many of the changes will be welcomed by industry groups, users and preparers, especially the simplification of the proposals for collectability, warranties, licences and contract separation. But the question is: in solving one problem have they opened up others?

A number of significant changes respond directly to industry feedback − for example, more contracts will be accounted for as a single unit; more revenue will be recognised over time; and the recognition of revenue will be restricted when the consideration is variable. But as we have seen before, a good answer for one industry may be a concern for another. This is always a potential pitfall of a principles-based standard. 

What do I think? A principles-based approach remains the best way to achieve consistency across industries and capital markets. Industry-specific guidance and rules should be limited. The boards will no doubt continue working to retain the core model principles under pressure from those various industries that did not get what they wanted in the re-deliberations. 

The boards have asked for specific feedback on the more significant changes from the original exposure draft:

• Collectability – All amounts related to credit risk are now to be recorded in a line item adjacent to revenue. This is closer to current practice, although it affects gross margin.  
• Services – There is no separate recognition model for services; instead, the proposals include criteria for determining when control transfers over time. The criteria could capture activities beyond those we would normally consider a service. 
• Contingent consideration – Variable consideration is recognised as revenue only when management has enough predictive experience to make an estimate. This is likely to be an area of judgement for industries where contingent consideration arrangements are common and industry practices could emerge.
• Onerous performance obligations – This is now limited to performance obligations satisfied ‘over time’ and over more than one year. This is a step closer to current practice but remains controversial.

Will people limit their comments to these issues? The boards received nearly 1,000 letters on the last exposure draft, and we expect the same level of response this time around. And most will not be able to stop themselves commenting on everything – so we might be in for another long period of deliberation. There are already suggestions that the final standard might slip into 2013.

Remember that revenue falls at the bottom of the standards ‘waterfall’. The proposals scope out financial instruments, leases and insurance contracts.  The revenue proposals and timing could be significantly affected by the changes in the leasing project. And when the standard is finished, the boards also have implementation issues to look forward to. Will the EITF and IC work through the issues together? There have been no significant problems from the joint business combination project so far, but revenue is more pervasive. Preparers should, wherever possible, test the proposals against real transactions to flush out implementation issues now.

I said that the ‘masses have spoken’ when describing the response rate during the last comment period. The question is ‘Will they speak again?’ I suspect so.