Observations on selected
Financial Reporting Issues
Issuers’ financial years ending
on or after 31 December 2013
Published October 2013
Contents
Page
INTRODUCTION
1
Financial reporting review remit of IAASA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2
Purpose of this Observations document . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3
Continued applicability of matters raised in earlier years’ Observations documents . . . . . . . . . . . . . . . . . . . . . . . . . 1
OBSERVATIONS ON SELECTED FINANCIAL REPORTING ISSUES
1
Impairments: value-in-use calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
3
Recognition and measurement of deferred tax assets – entities with a history of recent losses . . . . . 3 - 4
4
Employee benefits: measurement and disclosure of change in the discount rate . . . . . . . . . . . . . . . . . . . . . . . . 4 - 5
5
Alternative performance measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6
Presentation of the Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7
Forbearance: disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 - 6
8
Key management personnel disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 - 7
9
Quality of fair value and risk disclosures by debt issuers/special purpose vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . 7
10
General disclosures in financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
11
New and amended financial reporting pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 - 9
GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
APPENDICES
I.
Matters raised in earlier years’ Observations documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
II.
IAS 19 discount rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 - 13
III.
Other observations on issuers’ IAS 19 measurement and disclosure of defined benefit obligations . . . . . 14
IV.
Reference to avoiding boilerplate language in earlier years’ Observations documents . . . . . . . . . . . . . . . 15 - 16
V.
IAASA’s financial reporting related publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
IAASA publications referred to in this Observations document are available on our website at www.iaasa.ie/publications
DISCLAIMER
Whilst every effort has been made to ensure the accuracy of the information contained in this document,
IAASA accepts no responsibility or liability howsoever arising from any errors, inaccuracies, or omissions occurring.
IAASA reserves the right to take action, or refrain from taking action, which may or may not be in accordance
with this document.
INTRODUCTION
1.
Financial reporting review remit of IAASA
The financial reporting review remit of the Irish Auditing and Accounting Supervisory Authority (‘IAASA’)
derives from the Transparency (Directive 2004/109/EC) Regulations 2007 (S.I. No. 277 of 2007) (as
amended) (‘the Regulations’)1. Under the Regulations, IAASA examines the annual and half-yearly financial
reports of certain equity, debt and fund issuers with securities admitted to trading on a regulated market
within the European Union (‘EU’) for compliance with the relevant reporting framework.
The majority of issuers that publish their annual and half-yearly financial reports in compliance with the
Regulations apply either International Financial Reporting Standards (‘IFRS’) (such issuers being referred to
as ‘IFRS issuers’) or financial reporting standards issued by the Financial Reporting Council in the UK (such
issuers being referred to as ‘Irish GAAP2 issuers’). Therefore, although IAASA’s review activity may extend
to periodic financial reports prepared under other financial reporting standard frameworks (e.g. US GAAP),
the observations offered in this document are limited to the requirements as they apply to IFRS and Irish
GAAP issuers.
The matters raised in the document derive from the outcome of IAASA’s examinations and surveys
conducted in 2013 together with IAASA’s expectations of issuers for 2013 year ends.
2.
Purpose of this Observations document
The purpose of this document is to seek to assist issuers’ management and those charged with issuers’
governance in the preparation of high quality financial reports by offering observations on selected
financial reporting issues to coincide with the preparation of issuers’ 2013 financial statements. It is also
intended that the matters set out in this document will be the focus of IAASA’s attention when examining
issuers’ financial reports in 2014. IAASA will also be monitoring how issuers have implemented any
recommendations that are set out in this document.
The audience for this document is principally intended to be those involved in the preparation, approval
and/or review of issuers’ financial reports, including, issuers’ management, Audit Committees and Boards,
providers of audit and other assurance services, legal advisors, listing agents and, where applicable, fund
administrators and/or other relevant service providers. In that context, IAASA encourages the widest
possible transmission of this document.
3.
Continued applicability of matters raised in earlier years’ Observations documents
This is the sixth Observations document for year end financial reporting published by IAASA and many of
the matters raised in earlier years’ Observations documents have continued applicability in the current
reporting season. This document should be read in conjunction with those earlier years’ documents which
are available on the IAASA website. For ease of reference, the topics addressed in those earlier years’
documents are summarised in Appendix I to this document.
1
2
The Transparency (Directive 2004/109/EC) Regulations 2007 (S.I. No. 277 of 2007) has subsequently been amended by the Transparency
(Directive 2004/109/EC) (Amendment) Regulations 2010 (S.I. No. 102 of 2010), the Transparency (Directive 2004/109/EC) (Amendment)
Regulations 2012 (S.I. No. 238 of 2012), and the Transparency (Directive 2004/109/EC) (Amendment) (No. 2) Regulations 2012 (S.I. No. 316 of
2012). Each of these Statutory Instruments is available at http://www.iaasa.ie/legislation/index.htm#Other_Relevant_Statutory_Instruments
Generally Accepted Accounting Principles
1
OBSERVATIONS ON SELECTED FINANCIAL
REPORTING ISSUES
1. Impairments: value-in-use calculations
While the prospects for some issuers have improved, the economic outlook in general, remains uncertain.
Issuers have to estimate future cash flows in a very dynamic and challenging market. This poses a
challenge for the directors of those issuers in trying to monitor the appropriateness of certain asset values
recognised in the financial statements and their underlying cash flow forecasts. It is therefore to be
expected, that issuers’ cash flow forecasting models and methodologies are robust, have been frequently
refined as necessary, and calibrated to reflect current conditions.
The comments made in our 2012 Observations document continue to be relevant and, in particular, the
commentary on the methodologies and key assumptions employed by issuers’ directors in determining the
recoverable amount of the issuers’ assets.
During 2013, we examined the cash flow forecasts of a number of issuers. The areas of our focus and the
issues that Boards and Audit Committee should pay particular attention to include:
(a) whether cash flow projections over a period longer than five years are reliable and, if so, how have
issuers demonstrated the ability to forecast cash flows accurately over that longer period [IAS
36.35 refers];
(b) whether cash flow projections are based upon reasonable and supportable assumptions that
represent management’s best estimate of the range of economic conditions that will exist over the
remaining useful life of the asset [IAS 36.33(a), IAS 36.34 and IAS 36.38 refer]. Key assumptions in
this regard, would include:
- average longer term revenue growth;
- forecast market share;
- forecast profit margins;
- forecast development and operating costs;
- forecast impairment charges;
- non-recurring costs;
- forecast terminal values and
- discount rates.
(c) whether and, if so, how has greater weight been given to external evidence [IAS 36.33(a) refers];
(d) whether and, if so, why the growth rate of the cash flow projections exceed the long-term average
growth rate for the products, industries, or country or countries in which the entity operates, or for
the market in which the asset is used, unless a higher rate can be justified [IAS 36.33(c) refers];
(e) whether the cash flow forecasts reflect expectations about possible variations in the amount or
timing of those future cash flows [IAS 36.30(b) refers]; and
(f) whether the key assumptions of value-in-use calculations are consistent with assumptions made
elsewhere in the financial statements such as impairment calculations and assumptions made in
evaluating deferred tax balances.
2
2.
Provisions
2.1 Continued applicability of earlier years’ observations
Our 2012 Observations document referred to a number of areas impacting the financial reporting
treatment of provisions which are of continued applicability and readers’ attention is accordingly drawn to
that document. Those matters are:
(a) disclosures required in relation to each class of provision and aggregation of provisions into classes
[item 4.1 of our 2012 Observations document refers]; and
(b) discounting of provisions [item 4.2 of our 2012 Observations document refers].
2.2 Exemption from IAS 37’s disclosure requirements in ‘seriously prejudicial’ instances
IAS 37.92 states:
‘In extremely rare cases, disclosure of some or all of the information required by paragraphs 84–89
can be expected to prejudice seriously the position of the entity in a dispute with other parties on
the subject matter of the provision, contingent liability or contingent asset. In such cases, an entity
need not disclose the information, but shall disclose the general nature of the dispute, together with
the fact that, and reason why, the information has not been disclosed.’
Issuers sometimes use this exemption, for example, in the case of litigation and claims on the basis that
their position may be weakened by providing the disclosures otherwise required by IAS 37. However, IAS
39.92 is to be used only in ‘extremely rare cases’ and, in instances where the exemption is availed of by
issuers, certain minimum disclosures must still be provided.
IAASA has identified instances where such disclosure has not been provided. In addition, IAASA has
sought to ensure that litigation provisions have not been aggregated with other provisions to form a single
class and thereby avoid having to make the individual disclosure required by IAS 37.84 – 89 in respect of
litigation claims.
Boards and Audit Committees should carefully consider the circumstances in which the exemption in IAS
37.92 is invoked and, if invoked, to provide the mandated disclosures.
3.
Recognition and measurement of deferred tax assets – entities with a history of recent losses
Given the current recession, some group entities have a history of recent losses. Such entities shall recognise
a deferred tax asset on their balance sheet arising from unused tax losses to the extent that the entity
expects to have sufficient future taxable profits available against which the unused tax losses can be utilised
by the entity. A determination that an entity will have such taxable profits available is based on forecasts of
future events which by their nature are highly subjective requiring the exercise of significant judgements.
In the event that entities have a history of recent losses, the IAS 12 requirement for ‘convincing other
evidence’ imposes a high threshold on issuers and implies that issuers have supportable evidence that
future taxable profits will be available to recover deferred tax assets.
In accordance with IAS 12.36, an entity considers the following criteria in assessing the probability that
future taxable profits will be available against which the unused tax losses or unused tax credits can
be utilised:
(a) whether the entity has sufficient taxable temporary differences relating to the same taxation
authority and the same taxable entity, which will result in taxable amounts against which the
unused tax losses or unused tax credits can be utilised before they expire;
(b) whether it is probable that the entity will have taxable profits before the unused tax losses or
unused tax credits expire;
(c) whether the unused tax losses result from identifiable causes which are unlikely to recur; and
(d) whether tax planning opportunities are available to the entity that will create taxable profit in the
period in which the unused tax losses or unused tax credits can be utilised.
3
We have undertaken detailed examination of the deferred tax recognition, measurement and disclosure
policies of a number of issuers that have a history of recent losses and have recognised material amounts
of deferred tax assets in their financial statements.
Our examination of issuers’ deferred tax asset recognition seeks to identify whether the issuer has
identified the cause(s) of previous losses and, if so, evidence that those factors are unlikely to recur in the
future. Key assumptions of future taxable profits must be realistic and reflect the particular circumstances
of the issuer and the products, services, industry or country in which the issuer operates.
It is our expectation that, where deferred tax assets are recognised, future taxable profits forecasts are
underpinned by key supportable assumption(s) that are realistic, reflect the issuer’s circumstances and
constitute convincing evidence of future taxable profits. In addition, the notes to the financial statements
should disclose, in sufficient detail, the amount of the deferred tax asset and the nature of the evidence
supporting its recognition.
4.
Employee benefits: measurement and disclosure of change in the discount rate
4.1 Context
The economic environment has resulted in the downgrading of the credit rating of many corporate (and
government) bonds and a reduction in the number of AAA- and AA-rated bonds. The potential for the
development of divergent practice amongst equity issuers in terms of the measurement of the discount
rate of defined benefit (‘DB’) retirement obligations prompted IAASA to conduct a desk top survey of
equity issuers’ compliance with aspects of IAS 19 during the year. This thematic survey was conducted to
highlight the areas where divergent, but not necessarily non-compliant, approaches have been adopted in
practice and to review the disclosures provided, for compliance with IAS 19.
A particular area of focus was how IAS 19 discount rates were measured in the issuers’ financial
statements, whether a change in the methodology used to measure discount rates had occurred and the
related disclosures required in such a scenario.
The thematic review comprised a desk top review of the published annual financial statements of all 20
equity issuers operating defined benefit plans
IAS 19, which prescribes the financial reporting and disclosure for employee benefits, states:
‘The rate used to discount post-employment benefit obligations ... shall be determined by reference
to market yields at the end of the reporting period on high quality corporate bonds. In countries
where there is no deep market in such bonds, the market yields (at the end of the reporting period)
on government bonds shall be used ...’ [IAS 19.83]
4.2 Results of thematic review
Appendix II to this document summarises and compares the discount rates used by the 20 issuers
in 2012 and 2011 and Appendix III to this document summarises other observations arising from this
thematic review.
4.3 Next steps
Fluctuations in discount rates used to discount defined benefit obligations continue to have a significant
impact on issuers’ defined benefit liabilities as reported in their balance sheets. It is, therefore, our
expectation that Boards and Audit Committees will continue to examine and critically assess the significant
judgements used in applying IAS 19. This should at least include a critical assessment of the determination
and disclosure of discount rates together with other IAS 19 disclosure requirements.
4
IAASA will continue to monitor the extent of issuers’ compliance with the measurement and disclosure
requirements of IAS 19 in general, and in particular, changes, if any, in:
(a) the discount rate methodology;
(b) IAS 19 estimates, e.g. whether or not there is a deep market in high quality corporate bonds
(‘HQCB’) and if the judgement of what constitutes a HQCB has changed;
(c) the significant judgements used; and
(d) the measurement of the defined benefit net interest expense/income charge.
4.4 Amendments to IAS 19
IAS 19(R) is effective as of 1 January 2013.
Directors and Audit Committees are reminded that, in instances where the application of IAS 19(R) has a
material effect on the financial statements of an issuer, its financial statements will include:
(a) the disclosures required by IAS 8.28 – 29 [IAS 8.14 – 31 and IAS 19(R).173 refer]; and
(b) the additional statement of financial position as required by IAS 1.10(f).
5. Alternative performance measures
Last year, IAASA issued recommendations for equity issuers’ on the use of alternative performance
measures (‘APMs’) which were contained in a paper titled Alternative Performance Measures – A Survey of
their use together with key recommendations. The purpose of that publication was to identify and describe
the most common financial APMs presented in equity issuers’ annual reports and to identify key
recommendations which, if applied, should enhance users’ understanding of the performance, financial
position and cash flows and enable better comparability across issuers.
We have engaged with issuers on this matter as part of our full scope reviews. We are disappointed to
note that several other issuers have not made improvements in their presentation of APMs and have not
taken the key recommendations on board. However, given the importance of APMs to users of financial
reports and that they are often quoted in various market and press announcements, we intend to focus on
this area as part of our examination activity in 2014.
6. Presentation of the Income Statement
During the course of its first cycle of reviews undertaken between 2007 and 2012, IAASA identified a
number of instances of non-compliance with the relevant financial reporting requirements relating to the
presentation of the Income Statement by equity issuers. As a follow-up, in 2013 IAASA has performed a
desk top thematic review of selected Irish equity issuers’ application of the requirements of the relevant
financial reporting standard, IAS 1 Presentation of Financial Statements. Based on the results of this
thematic review, we published a Commentary on the application of certain aspects of IAS 1 Presentation of
Financial Statements by selected Irish equity issuers. The Commentary was prepared to highlight for users
of Irish equity issuers’ annual financial statements the areas where divergent, but not necessarily noncompliant, approaches have been adopted in practice. The key messages for users are contained in section
4 of that Commentary.
Boards and Audit Committees should carefully consider the presentation and disclosure of the Income
Statement on a regular basis to ensure that decision useful information is provided to users.
7. Forbearance: disclosure
While forbearance is of interest mainly to financial institutions it can also impact non-financial institutions
having significant amount of forbearance activities. The term ‘forbearance’ is not formally defined in IFRS.
However, the issue of the terms of loans and advances to customers being renegotiated is referred to in
IFRS 7.18. IAS 39.59(c) refers to instances where the lender, for economic or legal reasons relating to the
borrower’s financial difficulty, grants to the borrower a concession that the lender would not otherwise
consider.
5
In recent years Irish financial institutions have significant levels of loans that are the subject of forbearance
measures. The disclosures of the risks arising from loans that have been the subject of forbearance
measures are the subject of much attention by users of financial statements.
There are minimum qualitative and quantitative risk disclosures required by IFRS 7.33 – 35 that apply
to all risks including the risks arising from holding loans that have been the subject of a range of
forbearance measures.
IFRS 7.B3 states that an entity decides, in the light of its circumstances, how it aggregates information
without combining information with different characteristics and ‘... an entity shall not disclose information
that is so aggregated that it obscures important differences between individual transactions
or associated risks.’
Loans that have been extended forbearance measures, by their nature, have a lower credit quality, a higher
risk of impairment, higher loss given default rates and have less certain future cash flows. The metrics used
to monitor and measure forborne loan and related risks (which include probability of default, loan-to-value
ratios, loss given default rates and impairment rates) are likely to differ significantly from similar nonforborne loans metrics.
Consequently, risk disclosures (both qualitative and quantitative) in the financial statements should not
limit the ability of users to understand important differences between the risks of non-forborne loans with
forborne loans. For that reason, risk disclosure related to forbearance measures, where material, should not
be aggregated within other non-forborne loan disclosures in the financial statements. Forbearance risk
disclosures should enable users to understand:
(a) the type of forbearance measures adopted;
(b) the risks associated with forborne loans;
(c) the accounting policies applied in respect of forborne loans including impairment
of forborne loans and the classification of loans to and from the forborne category;
(d) the level of forbearance activity through the disclosure of quantitative information
(e.g. a reconciliation of forbearance activity during the year);
(e) the amount of interest and impairment charges recognised in relation to forborne assets; and
(f) the credit quality of forborne assets.
Attention is also drawn to a public statement by the European Securities and Markets Authority (‘ESMA’)
issued in December 2012 titled Forbearance Practices in IFRS Financial Statements of Financial
Institutions 3.
8. Key management personnel disclosures
The quality of the disclosure of key management personnel compensation is an issue that we have
highlighted in previous Observations documents. During the course of our first cycle of financial statement
reviews, we identified a number of instances of non-compliance with the requirements of IAS 24 Related
Party Disclosures in respect of key management personnel (‘KMP’) compensation and had agreed
undertakings with 11 equity issuers in relation to improvements in this area.
As a follow-up to these instances of non-compliance, during 2013 we examined the 2012 annual financial
reports of the 24 equity issuers under our remit for compliance with the relevant requirements of IAS 24.
We published the results in a document titled Review of the application of accounting standard
requirements in respect of the disclosure of key management personnel compensation by Irish equity
issuers. Arising from those examinations we corresponded with 10 issuers in respect of their KMP
compensation disclosures.
3
Available at http://www.esma.europa.eu/system/files/2012-853.pdf
6
Boards and Audit Committees should carefully consider each of the following matters when preparing their
KMP disclosures:
(a) whether there are individuals who are not directors but who have authority and responsibility for
planning, directing and controlling the entity’s activities and who should be classified as KMP.
Factors to be considered in this respect include the balance of executive versus non-executive
directors, the members of the entity’s senior management team and the roles and responsibilities
of divisional managing directors;
(b) whether there are other transactions with KMP which require disclosure. Factors to be considered
in this respect include items such as dividend payments;
(c) whether disclosure of the composition of KMP, particularly the non-director members, is necessary
to add context and clarity for users; and
(d) whether there are any differences between the KMP compensation disclosures and those in the
Directors’ Remuneration Report which require clarification for the benefit of users.
9. Quality of fair value and risk disclosures by debt issuers/special purpose vehicles (‘SPVs’)
In March 2012, we published a document titled Review of the quality of selected debt and fund issuers’ fair
value and risk disclosures which contained the findings of a thematic review undertaken on a selection of
fund and debt issuers. The debt issuers in this instance refer to SPVs that facilitate structured finance
transactions. As a result of the non-compliance identified in that thematic review, in 2012 and 2013 we
undertook focused examinations of the fair value and risk disclosures of a number of debt/SPV issuers in
order to assess whether the quality of the disclosures had been improved.
We subsequently engaged with these issuers; as a consequence a number of them have provided
undertakings to enhance their disclosures in the next published financial report.
We have detected an improvement in the quality of the fair value and risk disclosures in debt/SPV issuers
financial reports. However, this has been largely limited to issuers that have been the subject of IAASA
reviews in the past. In many instances the quality of the financial statements of issuers that have not been
the subject of IAASA reviews are of a lower quality and are characterised as:
(a) having fair value and risk disclosures that are boilerplate in nature;
(b) providing minimum disclosure in the notes to the financial statements; and
(c) lacking issuer specific information with broadly similar disclosures repeated from one year to the
next despite evidence that the issuer’s circumstances have changed.
Improved quality of the financial statements of such issuers can be achieved by:
(a) issuers engaging with relevant service providers such as investment managers and pricing
vendors at an earlier stage in the planning process for the preparation of the annual financial
statements; and
(b) issuers exercising a deeper consideration of the main drivers of risk in the entity during the period
and providing disclosures that reflect the needs of those exposed to these risks. This will result in
more transparent, relevant and user specific fair value and risk disclosures that complies in full with
the relevant reporting framework.
10. General disclosures in financial statements
There has been much commentary on the issue of disclosure overload in financial reports and, in response,
the IASB is undertaking a broad-based initiative to explore how disclosures in IFRS financial reporting can
be improved. Obviously the matter is for the IASB to deliberate.
However, IAASA has in the past taken enforcement actions against issuers resulting in undertakings being
provided by those issuers where it was felt that the disclosures provided were too boilerplate, not issuer
specific and provided limited, if any, decision useful information to users. Boards and Audit Committees
may find it useful to refer to earlier years’ Observations documents where such matters have been
highlighted. For ease of reference, extracts from these documents have been included as Appendix IV.
7
11. New and amended financial reporting pronouncements
4
5
The following table sets out the effective dates and the EU endorsement status of recent IASB financial
reporting pronouncements.
4
5
6
7
8
9
Pronouncement
IASB effective date applicable to accounting
periods beginning
on or after ...
EU endorsement
status
Amendments to IAS 19 Employee Benefits
1 January 2013
Endorsed
5 June 2012
IFRS 13 Fair Value Measurement
(see note hereunder)
1 January 2013
Endorsed
11 December 2012
Amendments to IFRS 1 First-time Adoption
of International Financial Reporting Standards
– Government Loans
1 January 2013
Endorsed
4 March 2013
IFRIC 20 Stripping Costs in the Production Phase
of a Surface Mine
1 January 2013
Endorsed
11 December 2012
Amendments to IFRS 7 Financial Instruments:
Disclosures – Offsetting Financial Assets and Financial
Liabilities (see note hereunder)
1 January 2013
Endorsed
13 December 2012
Annual Improvements to IFRSs (2009 – 2011)
1 January 2013
Endorsed
27 March 2013
IAS 27 Separate Financial Statements
1 January 20146
Endorsed
11 December 20127
IAS 28 Investments in Associates and Joint
Ventures (2011)
1 January 20146
Endorsed
11 December 20127
IFRS 10 Consolidated Financial Statements
1 January 20146
Endorsed
11 December 20127
IFRS 11 Joint Arrangements
1 January 20146
Endorsed
11 December 20127
IFRS 12 Disclosure of Interests in Other Entities
1 January 20146
Endorsed
11 December 20127
Consolidated Financial Statements, Joint Arrangements
and Disclosure of Interests in Other Entities: Transition
Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12)
1 January 2014
Endorsed
4 April 2013
Investment Entities (Amendments to IFRS 10, IFRS 12
and IAS 27)
1 January 2014
Expected
Q4 2013
Recoverable Amount Disclosures for Non-Financial
Assets (Amendments to IAS 36)
1 January 2014
Expected
Q4 2013
Amendments to IAS 32 Financial Instruments:
Presentation – Offsetting Financial Assets and Financial
Liabilities
1 January 2014
Endorsed
13 December 2012
IFRIC 21 Levies
1 January 2014
Expected
Q1 2014
Novation of Derivatives and Continuation of Hedge
Accounting (Amendments to IAS 39)
1 January 2014
Expected
Q4 2013
IFRS 9 Financial Instruments (2009), IFRS 9 Financial
Instruments (2010) and Mandatory Effective Date
of IFRS 9 and Transition Disclosures (Amendments
to IFRS 9 (2009), IFRS 9 (2010) and IFRS 7) (2011)
1 January 20158,
9
Postponed
Refer to http://www.efrag.org for the up-to-date EU endorsement status of IASB pronouncements
International Accounting Standards Board
Entities early adopting this Standard must also adopt the other Standards in the consolidation/joint arrangements and disclosures
“package”, i.e. IAS 28 Investments in Associates and Joint Ventures (2011), IFRS 10 Consolidated Financial Statements, IFRS 11 Joint
Arrangements, and IFRS 12 Disclosure of Interests in Other Entities
Each entity preparing financial statements under IFRS as endorsed by the EU shall apply IFRS 10, IFRS 11, IFRS 12, the amended IAS
27, the amended IAS 28, and the consequential amendments, at the latest, as from the commencement date of its first financial
year starting on or after 1 January 2014
IFRS 9 (2010) supersedes IFRS 9 (2009). For annual reporting periods beginning prior to 1 January 2013, entities may early adopt
IFRS 9 (2009) rather than IFRS 9 (2010)
On 24 July 2013, the IASB tentatively decided to defer the mandatory effective date of IFRS 9
8
For 2013 year end financial reports, it is likely that the two more significant impacts of changes to financial
reporting standards will arise from the adoption of IFRS 13 and the amendments to IFRS 7.
IFRS 13 Fair Value Measurement
IFRS 13 defines fair value, sets out in a single IFRS a framework for measuring fair value and requires
disclosures about fair value measurements. IFRS 13, which applies not only to financial instruments, but
also to other assets, liabilities and equity instruments, applies when another IFRS requires or permits fair
value measurements or disclosures about fair value measurements. Entities are required to these
measurements into a fair value hierarchy based on the nature of the inputs (i.e. Level 1, Level 2 or Level 3).
Appendix B of IFRS 13 provides detailed explanations and indicators that should be taken into account
when assessing whether a market is liquid or illiquid and the consequences for classification of fair value
measurement within the fair value hierarchy.
Fund issuers should carefully assess and plan for the implications of IFRS 13 on their measurement and
disclosure of the fair value of financial instruments including, where there are significant levels of
unobservable inputs used, the use of prices within a bid-ask spread, reflecting changes in own credit risk
and portfolio level valuation methodologies.
IFRS 13 is effective for annual financial reporting periods beginning on or after 1 January 2013.
Amendments to IFRS 7 Financial Instruments: Disclosures – Offsetting Financial Assets
and Financial Liabilities
These amendments to IFRS 7 require entities to disclose information to enable users to evaluate the effect
or potential effect of netting arrangements and similar agreements on an entity’s financial position. The
new disclosures require an entity to disclose gross amounts subject to rights of set-off, amounts set off in
accordance with the financial reporting standards adopted, and the related net exposure. The amendments
are effective for annual financial reporting periods beginning on or after 1 January 2013.
New Irish/UK GAAP
Financial reporting standards in the Ireland and the UK have been revised with the publication of three
Financial Reporting Standards: FRS 100 Application of Financial Reporting Requirements, FRS 101 Reduced
Disclosure Framework and FRS 102 The Financial Reporting Standard applicable in the UK and Republic
of Ireland.
FRS 101 sets out a reduced disclosure framework and FRS 102 provides accounting and reporting
requirements for unlisted entities.
These new FRSs are mandatory for 2015 year ends with 2014 comparative amounts required. Consequently,
early preparation for transition to new Irish/UK GAAP is highly recommended.
9
GLOSSARY OF TERMS
APMs
Alternative Performance Measures
CGUs
Cash Generating Units
DB
Defined Benefit
ESMA
European Securities and Markets Authority
EU
European Union
FRS
Financial Reporting Standard
GAAP
Generally Accepted Accounting Principles
HQCBs
High Quality Corporate Bonds
IAASA
Irish Auditing & Accounting Supervisory Authority
IAS
International Accounting Standard
IASB
International Accounting Standards Board
IFRIC
International Financial Reporting Interpretations Committee (now: IFRS
Interpretations Committee)
IFRS
International Financial Reporting Standard
KMP
Key Management Personnel
Regulations, the
Transparency (Directive 2004/109/EC) Regulations 2007 (S.I. No. 277
of 2007) (as amended by the Transparency (Directive 2004/109/EC)
(Amendment) Regulations 2010 (S.I. No. 102 of 2010), the Transparency
(Directive 2004/109/EC) (Amendment) Regulations 2012 (S.I. No. 238
of 2012), and the Transparency (Directive 2004/109/EC) (Amendment)
(No. 2) Regulations 2012 (S.I. No. 316 of 2012)
SPVs
Special Purpose Vehicles
10
APPENDICES
Appendix I – Matters raised in earlier years’ Observations documents
This is the sixth Observations document published by IAASA and readers may find it helpful to read this
document in conjunction with those earlier years’ documents which are available on the IAASA website.
For ease of reference, the topics addressed in those earlier years’ documents are set out below:
2012
2011
Observations
2010
2009
2008
Risks and uncertainties and risk disclosures
√
√
√
√
√
New and amended accounting pronouncements
√
√
√
√
√
√
√
√
Financial instruments
√
Impairment
√
√
√
- impairment of goodwill
Cash flow statements
√
Off balance sheet items: qualitative disclosures
√
Significant judgements
√
Provisions
√
Financial reporting pronouncements not yet effective
√
Alternative performance measures
√
Employee benefits
√
√
√
√
√
√
√
- amendments to employee benefit plans
√
- discount rates
Exceptional items and non-recurring items
√
Restatement and reclassification of amounts
√
√
√
√
Materiality
√
Interim reporting
√
√
√
√
Bank covenants
√
√
√
Hedging
√
√
Operating profit
√
√
Related party disclosures
√
- Disclosure of Key Management Personnel
(‘KMP’) compensation
Recoverable amount of assets / Cash Generating
Units (‘CGUs’)
√
Tax risks and uncertainties
√
Sovereign debt
√
Financial reporting considerations relevant
to the making of distributions
√
Presentational errors
√
Revision to IAS 1 Presentation of Financial
Statements
√
Operating segments
√
Accounting for Government grants and Government
assistance
√
Management reports
√
Additional disclosures
√
Reliance on ‘industry practice’
√
Judgements
√
Deferred tax assets
√
Business combinations
√
Earnings per share
√
Prior period errors
√
11
APPENDIX II – IAS 19 DISCOUNT RATES
Movement in the yields of High Quality Corporate Bonds (‘HQCBs) / Government bonds used by equity issuers to determine IAS 19 discount rates
This chart summarises the variability in the IAS 19 discount rate by issuer together with the average discount rate for all issuers for 2012 and 2011.
Aer Lingus F = Funded scheme UF 1 and UF 2= Unfunded schemes, C&C 1 and 2 refer to minimum and maximum discount rates on multiple C&C DB schemes, Kerry 1 and 2 refer
to minimum and maximum discount rates on multiple Kerry DB schemes, and Kingspan 1 and 2 refer to minimum and maximum discount rates on multiple Kingspan DB schemes
12
13
Aer Lingus F = Funded scheme, UF 1 and UF 2 = Unfunded schemes, C&C 1 and 2 refer to minimum and maximum discount rates on multiple C&C DB schemes, Kerry 1 and 2 refer to
minimum and maximum discount rates on multiple Kerry DB schemes, and Kingspan 1 and 2 refer to minimum and maximum discount rates on multiple Kingspan DB schemes
where relevant, Government bonds.
This chart reflects the absolute change in each issuer’s IAS 19 discount rate (%) between 2011 and 2012 highlighting the fall in the discount rate on HQCBs and,
Movement in the IAS 19 discount rate (%) 2011 – 2012
Appendix III – Other observations on issuers’ IAS 19 measurement and disclosure of defined
benefit obligations
In addition to the discount rates used and movements therein as set out in Section 4 of this document,
the following observations were also noted in our IAS 19 thematic examination:
(a) the increase in the DB deficit during 2012 ranged from 2% to 353% with an average increase
in the defined benefit obligation of 187%;
(b) the discount rate used ranged from 2.9% to 4.65% with an average discount rate of 3.81% (2011:
4.8%). Four issuers disclosed a range of discount rates that had been applied by multiple DB plans;
(c) 85% of issuers (17/20) referred to HQCBs as the basis for discount rate with 15% (3/20) making
reference to a hybrid of corporate bonds and Government bond yields;
(d) the effects of implementation of IAS 19(R) (either an increase or decrease in the DB charge) was
referred to by 75% (15/20) of issuers and, of these 15 issuers, 12 disclosed the monetary effect of
the revised Standard with 3 issuers not disclosing the monetary effect;
(e) 25% (5/20) of issuers did not provide all the disclosures required by IAS 1.30 i.e. information
relevant to assessing the possible impact that application of the new IFRS will have on the entity’s
financial statements. In the absence of an explanation it is unclear whether or not the impact of the
revised Standard was material;
(f) 40% (8/20) of issuers give a narrative description of the changes in estimate used to determine
the discount rate. 60% (12/20) of issuers made no reference to any change in estimate of the
discount rate notwithstanding an apparent significant change in the discount rate used;
(g) of the issuers that disclosed a change in the estimate of the discount rate, 7 issuers reported a
significant expansion of the bond universe and/or a refinement of the method used to extrapolate
available bond data;
(h) 15% (3/20) issuers made reference to Government bonds being used (directly or indirectly) to
derive a discount rate as distinct from a discount rate based solely on HQCBs;
(i) a sensitivity analysis of the key actuarial assumptions required by IAS 19.145(a) was provided by
70% (14/20) of issuers. The requirement to provide a sensitivity analysis and the related disclosures
is subject to there being reasonably possible changes to key actuarial assumptions at the end of
the reporting period;
(j) all issuers had disclosed the contributions expected to be paid during the year beginning after the
reporting period; and
(k) 25% (5/20) of issuers had a formal actuarial valuation within the previous 12 months. 85% (17/20) of
issuers had a full actuarial valuation within three years of the reporting date and 25% (5/20) issuers
had a full actuarial valuation greater than 3 years prior to the reporting date.
14
Appendix IV – Reference to avoiding boilerplate language in earlier years’ Observations documents
2012 Observations document
Item 7: Off balance sheet items: qualitative disclosures
…
In determining the level of disclosure to be provided in this regard, Boards and Audit Committees need
to strike a balance between:
(a) providing information relevant to users even if such disclosure is not explicitly specified by IFRS
[IAS 1.112(c)]; and
(b) providing disclosure required by IFRS only if the information is material [IAS 1.31].
2011 Observations document
Item 4: Risks & uncertainties
…
In this regard, IAASA has found, during the course of its examinations of issuers’ periodic financial
reports, that:
(a) certain issuers provide disclosures that appear to be ‘boiler plate’ in nature and, therefore, provide
limited, if any, decision useful information to users;
(b) the information provided can sometimes focus almost exclusively on ‘good news’ rather than
presenting a balanced view of the issuer’s development and performance during the period; and
(c) the management report can sometimes omit an analysis of the strategy being pursued by the
issuer, any changes thereto and the significant activities underway to achieve that strategy.
2010 Observations document
Item 2.2 of the Preface: Quality of ‘front end’ reporting
Previous Observations documents have commented on the quality of information contained in what is
commonly termed as the ‘front end’ of financial reports. In common with peer accounting enforcers’
experiences, IAASA has observed that issuers’ front end reporting is of variable standard, with some
Boards opting for boilerplate language that often fails to provide users with any particular insights into
issuers’ business models and the risks and uncertainties associated therewith (i.e. information that is
not particularly decision useful).
Front end reporting should be user-needs driven and not ‘boilerplate’ and should be consistent with
other elements of periodic financial reports. In current market conditions, issuers need to focus on ways
to effectively communicate with a broad range of users as to how the business has performed during
the period. Boards and Audit Committees are, therefore, encouraged to carefully consider the contents
of their reports with a view to ensuring that they meet users’ needs, in particular that they are:
(a) comprehensive;
(b) balanced; and
(c) reflective of the size and complexity of the business.
Item 1.3 (e) Sensitivity analysis (other price risk, interest rate risk, foreign currency risk)
The provision of sensitivity analysis is necessary in order to assist users in understanding the
uncertainty in valuations (other price risk) and other risks such as (but not limited to) interest rate risk
and currency risk. The sensitivity analysis is required to be based on reasonably possible assumptions,
rather than worse case scenarios or unexpected outcomes. In the case of certain fund and debt issuers,
sensitivity analyses have been found to be boilerplate and not user-specific and the rationale for the
rate of the sensitivity analysis reported was not always apparent.
15
2009 Observations document
Item 2.7 Financial Instruments – Risk disclosures
…
In agreeing upon the disclosures to be provided, Boards and Audit Committees should ensure that
those disclosures are comprehensive and meaningful, with non-specific, boilerplate narrative being
avoided. It is, however, equally important to ensure that disclosures are not drafted in a manner that
serves to obscure important information.
Item 2.10 Management Reports
…
Examinations of certain issuers’ Management Reports have identified the use of generic (i.e. non issuerspecific) and boilerplate language, which does not provide users with any particular insight into those
entities’ business activities or the risks attaching thereto. This, in turn, has led to a number of issuers
providing undertakings to effect the necessary improvements in future periodic financial reports. In
current market conditions, entities need to give a renewed focus to the ways in which they can
effectively communicate how the business has performed during the period. Boards and Audit
Committees are, therefore, encouraged to carefully consider the content of their Management Reports
with a view to ensuring that they are comprehensive, balanced, and specific to the business.
2008 Observations document
Item 3: Going concern/principal risks and uncertainties:
…
Based on its review activities to date, IAASA has found the standard of compliance with the
requirements associated with disclosure of principal risks and uncertainties to be varied and, on that
basis and having regard to current economic circumstances, one of the aspects that is likely to be
focused on during the course of reviews of issuers’ financial reports in the coming year will be the
quality of risk and uncertainty disclosures. Specifically, IAASA is likely to focus on whether the
disclosures provided by preparers are meaningful and issuer-specific as opposed to being boiler plate
in nature.
Item 4: Financial Instruments: IFRS 7/FRS 29 disclosures
…
IAASA’s review activity to date has given rise to a range of findings regarding issuers’ financial
instrument disclosures and, as a consequence, this will continue to be an area of focus during 2009. In
conducting its reviews of financial reports in the coming year, IAASA is likely to focus on the standard,
quality and appropriateness of issuers’ IFRS 7 disclosures and, in particular, on whether disclosures are
meaningful, issuer-specific and balanced as opposed to being boiler plate in nature.
16
Appendix V – IAASA’s financial reporting related publications
Readers may find it helpful to refer to other IAASA financial reporting related publications, available on the
IAASA website, including:
Category
Document
Observations
documents
Observations on selected financial reporting issues issuers’ financial years ending
on or after 31 December 2012
Observations on selected financial reporting issues issuers’ financial years ending
on or after 31 December, 2011
Observations on selected financial reporting issues – issuers’ financial years ending
on or after 31 December, 2010
Observations on materiality in financial reporting
Observations on selected financial reporting issues – issuers’ financial years ending
on or after 31 December, 2009
Observations on year end financial reporting issues for issuers admitted to trading
on a regulated market and whose Home Member State is Ireland
Information Notes
Financial reporting considerations relevant to the disclosure requirements
of the European Communities (Takeover Bids (Directive 2004/25/EC))
Regulations 2006
Information Note: Financial reporting considerations relevant to the making
of distributions
Other
Commentary on the application of certain aspects of IAS 1 Presentation
of Financial Statements by selected Irish equity issuers
Review of the application of accounting standard requirements in respect of the
disclosure of key management personnel compensation by Irish equity issuers
Alternative Performance Measures – A survey of their use together with key
recommendations
Review of the quality of selected debt and fund issuers’ fair value and risk
disclosures
Commentary on half-yearly financial reports prepared since the coming into effect
of the Transparency (Directive 2004/109/EC) Regulations, 2007
Guides
Guide to the financial reporting requirements of the EU Transparency Directive
Annual Reports
2012 Annual Report
2 0 1 1 Annual Report
2010 Annual Report
2009 Annual Report
2008 Annual Report
2007 Annual Report
2006 Annual Report
17
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