Reporting review
The Ernst & Young bulletin on auditing, accounting and corporate governance. November 2011
Top companies see need for audit changes
Britain's leading companies have accepted the need to shake up Britain's audit market in the face of impending EU reforms. The audit committee chairs of a quarter of FTSE 100 companies have backed reforms which could dilute the dominance of the "Big Four" accountants by bringing in greater competition, transparency and independence. However interviews conducted by the ICAEW, found objections to several proposals. ICAEW CEO Michael Izza said that the "rationale that in some way auditors are responsible for the crisis is just mistaken", but said some of the proposals were merited.
Investors urge Cable to rid accounting rules of profit distortion
A group of institutional investors have called for the UK Business Secretary Vince Cable to override international accounting rules for banks and introduce a system that does not distort profits. The fund managers, who have argued for two years that aspects of the International Financial Reporting Standards inflate bank profits, said that waiting for the regulators to change the system will take too long. Tim Bush, member of the Urgent Issues task force for the Accounting Standards Board said: "There is a now a wide recognition that the standards are not fit for purpose. Correcting this would be a simple thing to change, except the standards are bound up in a process that could take years to work through. Vince Cable should just intervene and change the rules before any more damage is done."
Plans to tighten rules on credit firms stalled
European Internal Markets Commissioner Michel Barnier have shelved, at least for now, plans to give European regulators the power to suspend credit ratings on countries seeking bailouts. Barnier had pushed hard for the proposal, as well as a plan to prevent larger ratings companies from acquiring smaller ones, but had to backtrack on both changes in the face of opposition from other commissioners at a final discussion. "Significant concerns" among Barnier's counterparts prevented his plans from going ahead.
SEC nearing decision on accounting standards
The US Securities and Exchange Commission has cleared the way for a long-awaited decision on whether American companies should switch to using global accounting rules. The SEC chief accountant's office issued two fact-finding papers about the use of the International Financial Reporting Standards. While one paper compares IFRS to GAAP, and notes that key differences still exist between the two systems, the other paper analyzes the use of IFRS in practice around the world, and concludes that disclosure has been lacking at some companies using the rules. Based on these, the SEC will decide by the end of 2011 whether they should move to IFRS or not.
EU watchdog to soften accountancy reforms
Europe's top financial regulator is preparing to water down ambitious reforms designed to break the grip of the Big Four accountancy firms, as he attempts to stave off a brewing revolt among his fellow European commissioners. Michel Barnier, the European Union internal market commissioner, has had to delay unveiling a shake-up of the European audit sector after at least 10 commissioner's representatives voiced concerns over some of its most radical provisions. Barnier is likely to offer some significant concessions to avoid a repeat of his climb-down on credit ratings reforms. Serious concerns have been voiced to Barnier's team over the three most controversial elements of the audit proposal. These force firms to abandon consultancy work, share audit work with smaller rivals and so-called "mandatory rotation" rules that impose a nine-year time limit on working for a big company.
Latest publications from Ernst & Young
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Discount rates: one size does not fit all
The IASB and FASB both issued proposals for a new recognition and measurement model for insurance contracts in 2010. Both require the use of current discount rates that are consistent with observable market prices for instruments whose characteristics reflect those of the insurance contract liability. How will this affect insurers? Our newest publication explains.
IFRS Core Tools Package
Our IFRS Core Tools are designed as practical building blocks, which are free and provide a comprehensive basis for clients and our client-service teams to keep up with the changing landscape of IFRS. The tools are updated as of 30 September 2011 and reflect the changes for the year ending 31 December 2011.
IFRS Developments for Mining & Metals - Accounting for waste removal costs.
In October 2011, the IFRS Interpretations Committee (the Committee) finally issued its interpretation on accounting for waste removal costs - IFRIC Interpretation 20 – Stripping Costs in the Production Phase of a Surface Mine (the Interpretation). This Interpretation is effective for annual periods beginning on or after 1 January 2013.
In this publication, we summarise the key requirements of the Interpretation and explore some of the challenges a mining entity may face when determining how to apply its requirements
IFRS Outlook – October 2011
We look at current and emerging IFRS issues with the needs of business leaders very much in mind and we share our views on the pertinent issues and their potential impact for businesses.
In this issue you will find .....
A better revenue accounting model?
As we anticipate the imminent release of the IASB's and FASB's (the Boards) second exposure draft (ED) on revenue recognition, read about the highlights of tentative decisions made by the Boards during their redeliberations. These proposed changes will significantly impact current revenue recognition practices for most entities.
Conversation with Wayne Upton — A tough balancing act for the IFRS Interpretations Committee
Read our interview with Wayne Upton, the new chairman of the IFRS Interpretations Committee, and learn more about the Committee's role and the challenges it faces. The Interpretations Committee wants to provide more guidance for companies using IFRS, but this is not always easy.
IFRS project update
Find out which projects the IASB and the IFRS Interpretations Committee are currently discussing.
Resources
Look here for an up to date list of our recent publications.
IFRS Developments - Issue 18: IASB and FASB issue revised revenue recognition proposals
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) (collectively, the Boards) have issued revised proposals to improve the accounting for revenue under both IFRS and US GAAP. Their decision to re-expose the proposals will delay the project, but gives constituents an opportunity to re-evaluate the revised model.
We have provided a summary of the revised proposals in this issue of IFRS Developments. The Boards' objective is to create a single revenue model that can be applied to most revenue transactions under both accounting frameworks. For some entities, the revised proposals may alleviate the burden of implementation as aspects of the proposed model are now more aligned with current practice. For other entities, when and how much revenue is reported may still be significantly impacted.
Our IFRS Developments publication summarises what you need to know about these developments.
Applying IFRS in Power & Utilities: Accounting for joint arrangements in the power and utilities sector.
In May 2011, the IASB issued IFRS 11 Joint Arrangements,which is effective for periods beginning on or after 1 January 2013.
This publication addresses some of the challenges and implications of applying IFRS 11 to joint arrangements of power and utilities entities. For some joint arrangements, the accounting is about to significantly change – particularly for entities that applied proportionate consolidation accounting to jointly controlled entities that meet the definition of joint ventures under the new standard. In addition, not all arrangements currently described as 'joint ventures' or 'joint arrangements' will meet the new definition of a joint arrangement. As a result, careful assessment of the structure and legal form of the arrangement, the contractual terms agreed to by the parties to the arrangement and other facts and circumstances will be required.
Insurance Accounting Alert November - IASB decides to consider limited improvements to IFRS 9; Boards discuss unbundling
On 15 November, the IASB continued its re-deliberations of the tentative decisions in the Exposure Draft Insurance Contracts (ED). This discussion focused on treatment of residual margins and was educational in nature. In a separate session, the IASB discussed whether to consider making limited improvements to IFRS 9.
On 16 November, the IASB met with the FASB to discuss disaggregation/unbundling and the presentation of explicit account balances included within insurance contracts.
IFRS Developments - Issue 19: SEC staff issues two papers on IFRS.
As part of its work plan to consider whether, and if so, when and how IFRS should be incorporated into the US financial reporting system, the SEC staff has released two papers: An Analysis of IFRS in Practice and A Comparison of US GAAP and IFRS.
We have provided a high level summary of the observations made by the SEC staff. These Staff Papers provide additional information for the Commission to review before it decides whether to incorporate IFRS into the US financial reporting system.
Applying IFRS: IFRS 10 Consolidated Financial Statements
In May 2011, the International Accounting Standards Board (IASB) issued IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Interests in Other Entities. These new standards are effective for annual periods beginning on or after 1 January 2013, and must be applied retrospectively.
IFRS 10 establishes a single control model that applies to all entities, including 'special purpose entities' ('structured entities' and 'variable interest entities' under the new standards and US GAAP, respectively).
The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled, compared with the requirements that were in IAS 27.
IFRS 12 contains all disclosure requirements related to an entity's interests in subsidiaries, joint arrangements, associates and structured entities, including a number of new disclosures. One of the most significant changes introduced by IFRS 12 is that an entity is required to disclose judgements that were made in determining whether it controls another entity. Even if management concludes that it does not control an entity, the information used to make that judgement will be transparent to users of the financial statements.
