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Public Accountability - who’s in and who’s out?
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Public Accountability - who’s in and who’s out?
Tuesday, May 17, 2011 | Posted by: Grant Thornton
Categories: UK GAAP | Tags: IFRS, UK GAAP, ASB
Our comment letter on the future of UK GAAP has now been submitted, two days before the 30 April deadline. Why is it that no matter how organised you try to be, these things always go down to the wire? I suppose that when the subject is this big and this important, then discussion of the issues will always expand to fill the time available.
One of those issues has been the definition of public accountability, and therefore which entities will need to adopt full IFRS. There is a widely-held view that the current guidance isn’t clear enough, but how to fix it isn’t as obvious.
The ‘publicly-traded’ part of the definition isn’t the problem. This is pretty clear cut; either your shares or loan notes are listed or they aren’t.
No, the issue is with the second part of the definition; ‘holds assets in a fiduciary capacity for a broad group or outsiders and/or it is a deposit taking entity for a broad group of outsiders’. The draft standard includes some guidance about who is an ‘outsider’, but there is still uncertainty around the words ‘holds assets’, ‘broad’ and ‘group’.
For example, to ‘hold assets’ do they have to be on your balance sheet? What if they are held in escrow? Is a group of company directors considered to be ‘broad’? What about a group of employees of the same company? And how many outsiders do you need to make a group? 10? 5? 2?
The issues really arise around the borders of the definition. We really don’t want to get in a situation where management say their company isn’t publicly accountable but their auditor says it is. That would be a disagreement with a major impact on the audit report!
So, what’s our solution? Well, we think that the best option is a relatively narrow interpretation of ‘broad group of outsiders’ so that it is taken to mean the general public.
This would mean that banks and building societies which take deposits from the public would be publicly accountable, but a credit union whose membership is restricted to a small pool of people would not. An insurance company offering life cover to the general public would be caught, but a pension scheme which is restricted to employees of a particular company would not.
We think that this solution would lead to a more sensible list of entities which would be considered publicly accountable. It would also remove the need of an exemption for small, prudentially regulated entities since, if they are small because they have few members, they wouldn’t meet the definition in the first place.
Wednesday, May 18, 2011
IFRS 13 unites fair value standards
Among a wave of new standards issued last week was IFRS 13 ‘Fair Value Measurement’, which will unite international and US GAAP treatments from 1 January 2013.
The IASB characterised IFRS 13 as a five-year consolidation project that brought together existing requirements around the use of “mark to market” valuations into a new document that will be “nearly identical” to the guidance issued by the US Financial Accounting Standards Boards (FASB).
However volatile market-based valuations were identified by many bankers and analysts as a contributory factor to the global financial crisis, so IFRS 13 also represents the IASB’s response. There was a heavy focus on financial instruments because of the global financial crisis, but IFRS 13 is wider than that, explained board member Warren McGregor in an IASB webcast. “This is a standard that applies to any asset or liability that requires you to make a valuation,” he said.
The new standard does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP, the board said.
Aside from the close alignment with US GAAP, the most significant point within IFRS 13 is the stipulation that the exit price will stand as the single definition for fair value measurement and disclosure.
Pre IFRS 13, the definitions used didn’t match any concrete formulations for buyers or sellers, so companies applied it differently, explained IASB project manager Hilary Eastman in the webcast. The standard-setters wrestled with a number of options before choosing the exit price.
IFRS will apply from 1 January 2013, but early adoption will be permitted. The ISAB will not require disclosure of comparatives going forward when it comes into effect. Further information on IFRS 13 is available from the IASB's fair value measurement page.
The IASB characterised IFRS 13 as a five-year consolidation project that brought together existing requirements around the use of “mark to market” valuations into a new document that will be “nearly identical” to the guidance issued by the US Financial Accounting Standards Boards (FASB).
However volatile market-based valuations were identified by many bankers and analysts as a contributory factor to the global financial crisis, so IFRS 13 also represents the IASB’s response. There was a heavy focus on financial instruments because of the global financial crisis, but IFRS 13 is wider than that, explained board member Warren McGregor in an IASB webcast. “This is a standard that applies to any asset or liability that requires you to make a valuation,” he said.
The new standard does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP, the board said.
Aside from the close alignment with US GAAP, the most significant point within IFRS 13 is the stipulation that the exit price will stand as the single definition for fair value measurement and disclosure.
Pre IFRS 13, the definitions used didn’t match any concrete formulations for buyers or sellers, so companies applied it differently, explained IASB project manager Hilary Eastman in the webcast. The standard-setters wrestled with a number of options before choosing the exit price.
IFRS will apply from 1 January 2013, but early adoption will be permitted. The ISAB will not require disclosure of comparatives going forward when it comes into effect. Further information on IFRS 13 is available from the IASB's fair value measurement page.
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