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As reported in this month's roundup, the US Treasury has financial regulation squarely in its sights. By Nick Topazio, financial reporting specialist, CIMA.
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:
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.
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.
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.
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.
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.
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 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.
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