UITF gives guidance on RPI-CPI and IASB pushes forward on its financial instruments projects |
Welcome to Financial Reporting Matters
Welcome to the latest edition of Financial Reporting Matters. In particular in this issue we focus on the UITF's RPI-CPI guidance and the further proposals from the IASB on its financial instruments project. The FRC has also been active, considering a number of aspects of corporate reporting. If you have any comments on this edition or if you would like one of your colleagues to receive future editions of Financial Reporting Matters you can contact me at FinancialReportingMatters@kpmg.co.uk. Andrew Vials, Senior Technical Partner |
RPI-CPI change – UITF issues Abstract 48
The UITF has issued guidance on accounting for the government’s recent changes to the inflation rate used to measure certain pension increases. The guidance is largely consistent with the draft proposals. Our initial concern when reading the draft proposals was that it might be difficult to determine whether or not a constructive obligation exists. The Abstract acknowledges that judgement may be needed in this area. As a reminder, the Abstract considers how and when any change in scheme liabilities as a result of a change from RPI to CPI should be recorded. A key test is whether an obligation exists to pay benefits based on RPI. This can be ‘hard-wired’ within the formal terms of the scheme or be a constructive obligation. If an obligation to pay RPI benefit is changed to a CPI benefit, any gain is recognised in profit or loss. Any effect is recognised in the accounting period when any necessary consultations have been concluded or, in the case of a constructive obligation, when employees’ valid expectations have been changed. Any change to an unspecified inflation-linked obligation will give rise to an actuarial gain or loss. The Abstract states that a ministerial announcement, as made in July 2010, forms a reasonable basis for a change in market expectations of the appropriate assumption. Some commentators had expected legislation allowing a retrospective change of hard-wired RPI benefits to CPI, which would have permitted the change to be negotiated for benefits accrued to date. The government’s December 2010 announcement did not include this. The guidance, available here, is effective immediately. Whilst this is not an interpretation of IFRS, the Abstract notes that it ‘may be a source of guidance for entities applying IFRSs’ and we would expect IFRS preparers to have regard to the Abstract. |
IASB proposes new hedge accounting rules
The IASB has issued the first phase of its hedge accounting proposals. We welcome this ED as a major milestone on the road to improving the financial instruments accounting model as called for by the G-20. The changes also respond to criticisms of the complexity and burden of hedge accounting under current IFRS. The proposals attempt to simplify some of the more difficult day-to-day requirements of hedge accounting, such as the quantitative threshold and retrospective assessment for hedge effectiveness testing. The changes base hedge accounting on an entity’s risk management strategies rather than a strict set of criteria. This may make hedge accounting easier to achieve for some. The changes regarding non-financial risks may make hedge accounting possible for some commodity components of operating exposures (such as the oil component of jet fuel purchases). This may be of particular interest to entities outside the financial sector. One important piece remains outstanding – new proposals for portfolio or macro hedging. We expect an exposure draft to be issued by mid 2011. The portfolio hedging proposals will also be of particular significance in Europe where the IAS 39 “carve-out” is currently available. The ED currently proposes prospective application for annual periods beginning on or after 1 January 2013. Early application is permitted. However, the hedge accounting requirements can only be applied if all existing IFRS 9 requirements are adopted at the same time or have already been applied. Comments are due to the IASB by 9 March 2011. KPMG International Standards Group is a part of KPMG IFRG Limited ("KPMG IFRG") and has produced a New on the Horizons publication, available here. This summarises the proposals and KPMG IFRG’s initial observations on them. In addition, a Briefing Sheet summarising the proposals of the exposure draft is available here. |
FRC proposes enhancements to company reporting and audit
In response to the financial crisis the FRC revised the UK Corporate Governance Code and issued the Stewardship Code for Institutional Shareholders. However, the FRC believe that more is required (see press release). The proposals would appear to increase the level of narrative disclosure required from directors within the annual report and accounts and extend the scope of the audit and additional reporting by audit committees. The proposals, if adopted, could have a significant impact on the way directors prepare their report and accounts and the opinions their auditors give. We encourage stakeholders to respond to these proposals by the FRC’s 31 March deadline. The KPMG sponsored Audit Committee Institute ("ACI") has produced a summary of these proposals, available on their website here, highlighting some of the key impacts. |
IASB and FASB issues new offsetting requirements
Netting is an issue particularly for banks and other financial sector entities. Under the proposals entities would offset a financial asset and a financial liability only when there is both an unconditional right and an intention to settle net. This would represent a major change from current US GAAP requirements. Banks reporting under IFRS also may be impacted as a result of the more detailed criteria and guidance contained in the proposals, including those related to derivatives and cash collateral. We welcome the prospect of convergence in this area - although there is a debate to be had about whether the proposals offer the best possible converged solution. The IASB have requested comments by 28 April 2011. KPMG International Standards Group is a part of KPMG IFRG Limited ("KPMG IFRG") and has produced an 'In the Headlines' publication, available here, summarising the proposals. |
IASB and FASB propose amendments to the financial instruments impairment model
The changes are intended to respond to the concerns about operationality and complexity of the previous impairment proposals. We welcome the Boards' efforts to develop a single proposal on one of the key elements of a future impairment model for financial instruments. This combined approach acknowledges the huge importance of trying to achieve a converged solution, particularly for banks. However, there are many other elements of the project which are still to be deliberated. There is still a great deal to do; the IASB faces a significant challenge to finalise the standard by 30 June 2011. The proposals, on open portfolios of loans, are published as a supplement to an exposure draft published by the IASB in November 2009 and are open for comment until 1 April 2011. KPMG International Standards Group is a part of KPMG IFRG Limited ("KPMG IFRG") and has produced an 'In the Headlines' publication, available here, summarising the proposals. |
FRC to consult UK boards on risk management
The FRC intends to meet stakeholders to explore how companies are applying recently added risk management provisions of the Corporate Governance code. The responsibility of the board to ‘consider the nature and extent of significant risks it is willing to take’ was added to the code in part as a response to the financial crisis. The FRC’s consultation, summarised in its press release, is at an early stage. Whilst additional guidance may be useful for boards we hope that the FRC’s intention is to discuss how the current guidance is applied rather than to impose new requirements. |
FRRP re-emphasises concerns over the reporting of principal risks and uncertainties
In a recent press release the FRRP have again highlighted their concerns about how companies are reporting the principal risks and uncertainties facing their business. In addition, the FRRP believes explanation of how the company manages its principal risks and uncertainties is required. This is a recurring theme from the FRRP’s reviews of annual reports in recent years and was highlighted in the FRRP’s 2011/12 priorities. The 2011/12 priorities are discussed in our sister publication, Financial Reporting Update, here. The FRRP press release is available here. |
Other news
The ASB has issued a study on the quality of capital management disclosures (available here). The ASB study aims to ‘draw attention to better practice’. The FRRP has described compliance with capital management disclosure requirements as ‘poor’ in both their 2009 and 2010 annual reports. This is clearly an area of concern to the FRRP. We would also like to remind preparers that December year ends have until the end of March to file their accounts if they are not ready for iXBRL. Information on this and KPMG’s iXBRL tools and guidance is available here. |
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