EU Set to Integrate Financial Instruments Standard Into Law

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By David R. Jones

Nov. 22 — An international accounting standard on financial instruments should come into force in the European Union within the next few weeks, the chief executive officer of the European Financial Reporting Advisory Group said Nov. 21.

International Financial Reporting Standard 9: Financial Instruments will be officially transposed into EU law when it’s printed in the Official Journal of the European Union, as is expected by the end of the year, EFRAG CEO Andrew Watchman said at the 2016 Meet the Experts Conference in London.

EFRAG, a private organization partly funded by the European Commission, offers the EC advice on whether newly published or revamped international financial reporting standards should be endorsed for use in the EU.

EFRAG Endorsement

The European Parliament last month concluded its three-month scrutiny of the standard with a “substantive endorsement,” Watchman said.

IFRS 9 replaces International Accounting Standard 39: Financial Instruments: Recognition and Measurement.

EFRAG in September 2015 submitted a letter to the EC in which the group said IFRS 9 “would bring a distinct improvement over the existing requirements in IAS 39 in the accounting for basic lending instruments, in the impairment of financial assets and hedge accounting.”

Assessing Leases Standard

Looking ahead, EFRAG is targeting mid-March 2017 for issuing its final endorsement advice on IFRS 16: Leases, which the International Accounting Standards Board published in January 2016.

The group currently is soliciting feedback on the standard, with a comment deadline of Dec. 8.

Evaluating Standard’s Impacts

During the consultation EFRAG is gauging IFRS 16’s potential impact on financial statements, such as its effects on balance sheets and statements of cash flows.

The group also is assessing the standard’s broader effects, including its influence on:

  •  lease versus purchase decisions;
  •  lending decisions, including credit spreads; and
  •  investment decisions.
The EC might endorse IFRS 16 by the end of next year, Watchman said.

Separating Judgments, Estimates

Separately, John Hitchins of the U.K. Financial Reporting Council—which sets accounting, auditing and actuarial standards for the U.K. and Ireland—highlighted FRC’s recent work and its expectations for improvements in financial reporting.

FRC has found that, despite the differences between judgments and estimates in accounting practice, “some companies still muddle them up,” he told meeting attendees.

Judgments are choices among accounting options, Hitchins said in response to a question, and estimates are predictions about future accounting numbers.

Problems With Disclosures

“We continue to see critical judgment disclosures that aren’t sufficiently specific,” he said.

Estimation uncertainty also creates problems in financial reporting. Hitchins said the best disclosures about uncertainty are specific and examine particular assumptions a company has made.

Deficiencies in APM Use

FRC this year also found deficiencies in how U.K. companies use alternative performance measures (APMs).

Hitchins said some entities:

  •  ignore IFRS in discussing their financial results;
  •  provide insufficient explanations about how reconciliations are calculated; and
  •  fail to clearly label subtotals.
Investors in particular have expressed concern about how companies make recurring IFRS adjustments on share-based payments, contingent payments to vendors and acquisition costs.

Expecting Improvements

FRC will look for companies to improve their APM disclosures in the coming years, Hitchens said.

In addition, “We expect companies to step up to the mark and report in a way that is fair, balanced and understandable,” he said.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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