December 2013

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Breaking News UK − UK and international financial reporting developments

Welcome to Breaking News UK, a monthly bulletin from KPMG in the UK that brings you information on UK and international standards in the accounting and regulatory space. This bulletin is based on articles from KPMG IFRG Limited's Breaking News, which are available on the Global IFRS Institute site.

There are quick links above, giving you easy access to KPMG's Global IFRS Institute and past editions of Breaking News UK.

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FRC seeks consistency in the reporting of exceptional items

As part of its drive for annual reports to be fair, balanced and understandable the Financial Reporting Council (FRC) has issued a reminder to Boards on the need to improve the reporting of additional and exceptional items and ensure consistency in their presentation.

Many companies present additional line items in the income statement to provide clear and useful information on the trends in the components of their profit in the income statement, as required by IAS 1 Presentation of financial statements. The FRC, however, has identified a number of cases where the disclosure falls short of the consistency and clarity required, with a consequential effect on the profit reported before such items.

In its press release, the FRC outlines what it believes companies should have regard to when considering what to include as additional or exceptional items. These include:

  • the approach taken to identifying exceptional items should be even handed between gains and losses, clearly disclosed and applied consistently from one year to the next;
  • when items in the same category recur each year then consideration should be given to including them as part of underlying profit;
  • readers should be able to track movements of these items in future years and reversals should be disclosed on a consistent basis with the original expense; and
  • all significant items which make up IFRS profits should be discussed in management commentary.

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FRS 102 hedging proposals issued

The Financial Reporting Council's (FRC) FRED 51 Amendments to FRS 102: Hedge accounting outlines its proposals to revise the general hedge accounting requirements of FRS 102.

The proposals include:

  • Removing the current restrictions on prescribed hedged risks and hedging instruments.
  • Hedge accounting will be available for a broader range of hedging strategies, including the ability to hedge risks associated with non-financial items.
  • Hedges will no longer need to meet a 'highly effective' test: an economic relationship should exist between the hedging instrument and the hedged item, and hedging should be consistent with the risk management strategy and objectives.

The proposals do not change the current FRS 102 approach of not allowing net investment hedging in individual accounts.

The transitional rules proposed in the FRED state that hedge documentation needs to be in place at the transition date in order for hedge accounting to be applied from that date. However, the FRC has included a subsequent statement on its website clarifying that this was not the intention. The wording on the website states: “hedge accounting is not precluded from the date of transition, if the documentation and designation of the hedging relationship is completed after transition, provided designation and documentation apply as at the date of transition.”

The amendments are proposed to be effective from the same date as the new UK GAAP, 1 January 2015. The FRC invites comments on these proposals by 14 February 2014.

FRED 51 is available to download here.

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New standard provides more hedging opportunities

A new general hedge accounting standard issued by the IASB – part of IFRS 9 Financial Instruments (2013) – will align hedge accounting more closely with risk management.

The new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognise ineffectiveness; however, more hedging strategies that are used for risk management will qualify for hedge accounting.

Assessing the effectiveness of a hedging relationship will require more judgement, and the application guidance in some areas remains complex. Significant effort may be needed to analyse the requirements and their impact, while changes to current practice may lead to additional systems requirements.

The mandatory effective date is still to be determined, but will be no earlier than 1 January 2017. Entities can early adopt the new general hedging model (subject to EU endorsement) if they also apply all existing IFRS 9 requirements at the same time.

Read KPMG IFRG Limited's In the Headlines and its First Impressions: IFRS 9 (2013) Hedge accounting and transition, which provides a detailed analysis of the new standard, combined with KPMG’s insight.

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Consolidation relief for investment entities – now endorsed

On 20 November 2013, Investment Entities (Amendments to IFRS 10, IFRS 12, IAS 27 and IAS 28) was endorsed for use in the EU.

The amendments are effective for annual periods beginning on or after 1 January 2014 with early adoption permitted, hence may be adopted at the same time as IFRS 10.

As a brief reminder, they require qualifying investment entities to account for investments in controlled investees at fair value through profit or loss.

EFRAG's latest endorsement report is available to download here.

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IASB issues amendment to IAS 19

Changes to pension accounting finalised recently by the IASB will simplify the accounting for contributions from employees or third parties under IAS 19R.

However, not all companies will see the benefits of this practical expedient. The amendments are relevant only to defined benefit plans that meet certain criteria.

Companies accounting for employee or third party contributions that cannot (or decide not to) apply the practical expedient will benefit instead from an amendment that clarifies how service-linked contributions from employees or third parties should be included in determining net current service cost and the defined benefit obligation.

The amendments apply retrospectively for annual periods beginning on or after 1 July 2014. Earlier application is permitted (subject to EU endorsement).

Read KPMG IFRG Limited's In the Headlines to understand what the amendments could mean for your business.

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Improving the quality of disclosures

Following the global financial crisis, the transparency and comparability of the financial statements of financial institutions are ever more important to investors and other users. To help address this demand, the European Securities and Markets Authority has published a review of the comparability and quality of disclosures in the 2012 financial statements of 39 major European financial institutions.

ESMA expects financial institutions and their auditors to consider the findings of this review when preparing and auditing 2013 IFRS financial statements.

As with ESMA’s recently announced enforcement priorities for 2013, we expect that national regulators within Europe, and beyond, will take notice of this report and pay particular attention to these areas of focus.

Read KPMG IFRG Limited's In the Headlines to find out the possible implications of ESMA’s review for your business.

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Financial Instruments – Effective date deferred until at least 2017

The IASB has officially removed the previous mandatory effective date of IFRS 9 – i.e. 1 January 2015 – as part of IFRS 9 (2013), and tentatively decided that it would be no earlier than 1 January 2017.

This was one of several developments that came out of the IASB's November discussions on the financial instruments project.

In the impairment project, the IASB continued to make progress, reaching further tentative decisions on a number of topics – in particular, on the measurement and presentation of expected credit losses.

The IASB and the FASB also reconfirmed the basic approach to the classification and measurement of financial assets and financial liabilities, as presented in their respective exposure draft and proposed accounting standard update. The Boards also provided clarifications to address concerns about the application of the business model test.

Read KPMG IFRG Limited's IFRS Newsletter: Financial Instruments for a summary of recent developments.

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Are you prepared for the newly effective standards?

Companies with 31 December financial year ends will be preparing their annual financial statements considering the consequential effects of newly effective and forthcoming standards. Among others, the revised standard on employee benefits now applies.

Many companies will be keen to early adopt the amendments to pension accounting issued on 21 November 2013, which offer some welcome relief from the potentially burdensome requirements of applying the revised standard on employee benefits.

Similarly, companies can obtain relief from the disclosure requirements of IFRS 13 Fair Value Measurement by early adopting Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets.

Read KPMG IFRG Limited's In the Headlines for a summary of the newly effective and forthcoming standards.

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A key milestone on the journey to better business reporting

The Integrated Reporting Framework, launched recently by the International Integrated Reporting Council, is an ambitious attempt to reshape the direction and focus of corporate reporting.

Its aim is to provide investors with a more complete picture of business value by extending reporting beyond historical financial performance. The Framework is likely to be of particular interest to those companies already looking to improve the quality of their narrative reporting as a basis for a better dialogue with their investors.

KPMG IFRG Limited's In the Headlines will help you to understand what the Framework could mean for your business. For more on these issues, visit KPMG's Better Business Reporting site.

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Narrow-scope amendments to IFRS

As part of its annual improvements process, the IASB has published two cycles of non-urgent but necessary amendments to IFRS. Together, the final amendments cover a total of nine standards, with consequential amendments to other standards.

Most of the amendments apply prospectively for annual periods beginning on or after 1 July 2014.

KPMG IFRG Limited's IFRS Newsletter: The Balancing Items to find out what these changes could mean for your business.

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