PwC IFRS blog

2008: Wasn’t that supposed to be a quiet year?

As we enter 2009, this seems a good opportunity to reflect on the year that has just ended. I could talk, for example, about the economic climate or, on a happier note, the Beijing Olympics. But this is an IFRS blog so I ought to focus on financial reporting matters.

 

2008 was supposed to be a reasonably quiet year. The IASB stated in 2006 that it would not make any major new standards effective before 2009. And with the exception of IFRS 7, ‘Financial instruments: Disclosures’, being effective from 2007, on the whole there have been few new requirements for companies to deal with.

 

So at the beginning of 2008, companies with a calendar year end were not expecting to implement any new or amended standards. Unless the new IFRIC interpretations effective that year (IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’, IFRIC 12, ‘Service concession arrangements’, and IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’) were relevant, we might have expected the 2008 annual report to look a lot like its 2007 equivalent. Some may have been looking forward to a trouble-free year end.

 

Since around the third quarter of the year, financial reporting matters have been hitting the headlines on almost a weekly basis. Fair value measurement, classification and reclassification of financial assets, impairments and going concern disclosures have been exercising not just the accountants; accounting has been thrust into the political limelight, for example, becoming a key area of focus at the G20 heads of government meeting in November.

 

Meanwhile, the IASB has continued its standards improvement programme, with an ambitious target for 2011 delivery. This is driven by the Memorandum of Understanding with the FASB and linked to possible US adoption of IFRS from 2014. It also creates additional change and perhaps uncertainty to be absorbed and managed by those territories transitioning to IFRS earlier, in say 2010/2011. Furthermore, coupled with the additional demands placed on the IASB by the credit crunch and financial crisis, this is a very demanding programme.

 

For our part, during 2008 PwC submitted 15 formal comment letters to the IASB or IFRIC in response to discussion papers and proposed new standards or interpretations. We have also commented on a number of draft IFRIC agenda decisions. And we are currently forming our views in response to five other documents, including discussion papers on the important topics of financial statement presentation and revenue. Add to this the call for action arising from the G20 meeting, and we can reasonably expect a significant number of exposure drafts and discussion papers during 2009, perhaps also, for some at least, with shorter comment periods than hitherto.

 

It is an over-used cliché, but it is fair to say that we live in interesting times. I will not dare to predict what 2009 might hold, but I certainly do not expect it to be a quiet year.

 

As always, I am interested to hear your views, either by commenting here or by email.

Show me the money!

Sometimes, in business, cash needs to be on the table before a deal can be done. In the film Jerry Maguire, the client’s nervousness was illustrated by his repeated call to ‘Show me the money’. It is fair to say that we are currently living in nervous times and, inevitably, there is a greater focus on corporate cash flow.

Some of you may have seen my colleague David Phillips’ Corporate Reporting blog in October where he drew attention to articles in the Financial Times addressing reporting of cash in company accounts. One of these was a letter from the Corporate Reporting Users' Forum (CRUF) highlighting the importance of providing a clear reconciliation of cash flows to movements in net debt.

The phrase ‘net debt’ is well known in some parts of the world, including in the UK where its disclosure is required by entities reporting under UK accounting standards. The UK’s Financial Reporting Standard 1, ‘Cash flow statements’, defines net debt as, “the borrowings of the reporting entity (comprising capital instruments classified as liabilities in accordance with [IAS 32], ‘Financial Instruments: Presentation’, together with related derivatives and obligations under finance leases) less cash and liquid resources”. The terms ‘capital instruments’ (basically, instruments issued as a means of raising finance), ‘cash’ and ‘liquid resources’ are separately defined.

In other parts of the world there is less clarity about what ‘net debt’ actually means. But does this mean that the IASB should not consider introducing a disclosure similar to that existing in the UK? IAS 1, ‘Presentation of financial statements’, includes disclosure requirements in respect of an entity’s capital. The word ‘capital’ is not defined but an entity is required to explain what it considers to be capital. The IASB commented that “this disclosure is intended to give entities the opportunity to describe how they view the components of capital they manage”. Could not net debt be viewed in a similar way? 

In a previous posting, I asked whether the IASB may have missed an opportunity in its recent discussion paper on financial statement presentation by not tackling some of the more complex topics in financial reporting. Given the prominence of cash flow reporting in the discussion paper and the focus on cash flows by users and others in the current environment, I wonder also whether the IASB should be taking the opportunity to suggest a disclosure requirement for net debt.

The importance of cash flow cannot be over-emphasised in the current economic environment and companies could improve their disclosures by going beyond regulatory compliance in order to improve trust and transparency. But if an objective of financial reporting is to provide information that is useful to investors and others in making decisions, the views of investment professionals such as the CRUF are important - so maybe it is time for the IASB to ‘show me the money’.

I would be interested in your thoughts, either by commenting here or by email.