05 February 2014

ESMA publishes comments on IFRS IC's tentative agenda on IAS 8, IAS 39 and IFRS 10

ESMA has issued its comment letters to IFRS IC's tentative agenda on: the distinction between a change in an accounting policy and a change in an accounting estimate (IAS 8); accounting for term-structured repo transactions (IAS 39); and a definition of investment related services (IFRS 10).

IAS 8 - 'Accounting Policies, Changes in Accounting Estimates and Errors': Distinction between a change in an accounting policy and a change in an accounting estimate

ESMA supports the IFRS Interpretations Committee request to the IASB to deal with changes in the method of estimation. Whereas ESMA agrees with the IFRS Interpretations Committee that information about the change in method of estimation would need to be disclosed in accordance with paragraph 39 of IAS 8, ESMA is of the view that further clarification in this area is needed. ESMA strongly believes that the clarification should reiterate that any change in a method of estimation should only be made if that change produces more reliable and more relevant information. Furthermore, ESMA believes that requiring disclosures analogous to those currently required by paragraph 29 of IAS 8 related to change in an accounting policy for a change in a method of estimation could provide more relevant information to the users.

In view of these considerations, ESMA concurs with the IFRS Interpretations Committee’s assessment that the IASB is the body that is the most able to address this issue. Given that ESMA has observed significant divergence in practice, ESMA is of the view that this issue should be considered and addressed speedily as part of the Disclosure project.

Full comment letter

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IAS 39 'Financial Instruments: Recognition and Measurement' – Accounting for term-structured repo transaction

ESMA agrees with the IFRS Interpretations Committee’s conclusion that application of requirements in paragraph B.6 of Guidance on Implementing of IAS 39 requires judgement. However, ESMA is concerned that the ambiguity related to these criteria creates incentives for issuers to use structuring opportunities that would have a significant impact on the financial statements, not only related to the absolute size of the statement of financial position, but also related to the statement of comprehensive income (e.g. as in the case referred to by the submission, accounting for credit risk in profit or loss or in other comprehensive income).

As a result of the review of financial statements carried out by accounting enforcers and ESMA’s coordination activities, ESMA is concerned that the lack of specific guidance related to accounting for synthetic derivatives and the articulation of detailed indicators mentioned in paragraph B.6 of Guidance on Implementing IAS 39, notably related to the existence of ‘apparent economic need of substantive business purpose for structuring the transactions separately’ would lead to lack of consistent application in this area. For example, different views might arise in assessing whether a decrease in the regulatory capital requirement or a saving in the income tax payable could be considered as a situation of ‘substantive business purpose’.

Moreover, ESMA agrees with the IFRS Interpretation Committee that ‘the presence or absence of any single specific indicator alone may not be conclusive’. However, ESMA would prefer that this clarification is made directly in the Guidance on Implementing IAS 39. ESMA believes that in absence of such clarification, current divergence in practice would continue raising enforceability issues.

Consequently, ESMA does not agree with the IFRS Interpretations Committee’s conclusion neither to add this issue to its active agenda nor to recommend the IASB to address the issue. ESMA believes that there is a need to address the accounting for synthetic derivatives in order to ensure consistent application of IFRS and limit structuring opportunities, directly within the standards. At the same time, ESMA acknowledges that the IFRS Interpretations Committee might not be best placed to address this issue given that the detailed guidance is included only in the Guidance on Implementing IAS 39. ESMA notes that the IASB is currently revisiting the guidance on financial instruments and thus it might not be possible to propose timely amendments to IAS 39. Therefore, in order to promote transparency, to achieve consistent application of IFRS and to improve the enforceability of the standard, ESMA would encourage the IFRS Interpretations Committee to consider the abovementioned concerns and recommend the IASB to define specific requirements related to accounting for synthetic derivatives directly within IFRS 9 – 'Financial Instruments'.

Full comment letter

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IFRS 10 - 'Consolidated Financial Statements': Definition of investment-related services or activities

ESMA welcomes the fact that the IFRS Interpretations Committee is addressing the issue speedily given that IFRS 10 is currently being implemented for the first time by a large number of European entities. ESMA believes that the analysis of the existing IFRS requirements that the IFRS Interpretations Commit-tee provided in the tentative agenda decision is useful for market participants and could contribute to a more consistent application of IFRS 10 in requiring to measure such intermediate subsidiaries providing activities related to tax optimisation at fair value. In a period when a large number of new standards are applied for the first time, ESMA encourages the IFRS Interpretations Committee to provide timely answers to requests that would come up from emerging practices resulting from the application of other new standards such as IFSR 11 - 'Joint Arrangements', IFRS 12 - 'Disclosure of Interest in Other Entities' and IFRS 13 – 'Fair Value Measurement'.

Full comment letter

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