As reported in this month's roundup, the US Treasury has financial regulation squarely in its sights. By Nick Topazio, financial reporting specialist, CIMA.
International
US targets regulatory reform
The US Treasury has published a paper aimed at rebuilding financial supervision and regulation. The paper has recommendations on the regulation of companies, markets and accounting.
It calls on:
- accounting standard setters (the FASB, the IASB and the SEC) to review accounting standards to determine how financial firms should employ more forward-looking loan loss provisioning practices
- fair value accounting rules to be reviewed. This should identify changes that could provide users of financial reports with fair value information and greater transparency.
The report also recommends that accounting standard setters make substantial progress by the end of 2009 toward development of a single set of high quality global accounting standards.
See the full report.
IASB consults on expected loss model
IAS 39 requires an entity to account for credit losses in financial assets only if an event (or a combination of events) has had a negative effect on future cash flows, and that effect can be reliably estimated. This is known as the incurred loss model.
The entity is not permitted to consider the effects of future expected losses. The financial crisis has highlighted this as an area of concern. The IASB is reviewing this, and examining the expected loss model as an alternative.
The expected loss model requires an entity to make an ongoing assessment of expected credit losses, which may require earlier recognition of credit losses. This would better reflect the way that financial assets are priced and the way some companies manage their business.
The IASB is requesting input on the practical issues that might arise if the expected loss model is adopted. The deadline for submission of responses is 1 September 2009. Members can give their views to CIMA either via my blog 'Incurred loss or expected loss' on CIMAsphere or the consultation database.
See the IASB site for more.
Border acts to eliminate mark-to-market anomalies
The fact that issuers can record gains as a result of poor financial performance has long been seen as a counter-intuitive aspect of mark-to-market rules. The IASB is now acting to eliminate it.
The discussion paper 'Credit risk in liability measurement' is open for comment until 1 September. Register your views at the consultation database.
Read the IASB press release.
Changes to IFRS 2 share-based payment
These changes aim to improve accounting for group cash settled share based payment transactions by clarifying the scope of IFRS 2, and the interaction of IFRS 2 and other standards.
Read the IASB press release.
IASB proposes management commentary framework
The IASB has proposed a non mandatory framework to help entities prepare and present a narrative report, often referred to as management commentary.
The commentary is an opportunity for management to outline how an entity’s financial position, financial performance and cash flows relate to their objectives and strategies. The exposure draft is out for comment until 1 March 2010.
See IASB for more information.
UK
FRC head pensions warning
Paul Boyle, retiring chief executive of the Financial Reporting Council, has warned pension fund trustees and sponsoring companies’ directors about the limitations of accounting and actuarial information on pensions relating to the discounting of cash flows.
His speech to a pensions conference highlighted the effect of long-term investment returns below the discount rate applied to liabilities, and the effect on future investment returns of a modest current under funding. His conclusions included:
- there is a high probability of further shortfalls emerging in cases where there is already a deficit in the pension scheme
- the higher the rate used to discount pensions liabilities, the greater the risk of shortfalls emerging later
- the greater the delay in addressing pensions deficits, the greater the amount that will ultimately be required to address them
- companies should consider whether the disclosures they are making about likely future cash flows associated with their pension obligations are adequate to convey a balanced and realistic view of the risks which they face.
See the full text.
FRC reducing complexity in corporate reporting discussion paper
There is concern that corporate reports are becoming more complex. The Financial Reporting Council’s 'Louder than words: principles and actions for making corporate reports less complex and more relevant' aims to reduce complexity by concentrating on principles for better communication, and improvements in regulation quality and effectiveness.
See the FRC for more.
Company accounting in the USA mastercourse
July 2009