Question

The Senior Partner of the firm you work for has appointed you to a new role. It is now your responsibility to review upcoming accounting standards and provide a report to the partners on the proposed standard and the opinions of other industry players on the changes.

Firstly, you are required to find a current exposure draft or proposal for a new accounting standard which has been opened for public comments. (These can be found on the websites of most standard-setting organisations, such as the IASB, AASB and FASB. Hint: These websites can be quite difficult to navigate, so as a first step try typing “IASB exposure draft and comment letters”/”FASB exposure draft and comment letters” into Google or other search engine of your choice). Read a sample of the comments from a range of respondents. Select four respondents, ideally from different types of organisations for example, from accounting bodies, industry, companies or corporate bodies. If you are having a problem finding suitable comments letters then contact your subject coordinator.

In your own words, supporting your evaluation with appropriate citations, appropriately referenced in APA 6 style, you are required to include the following information in the report.

An outline of what the exposure draft is introducing or changing.

An assessment as to whether the exposure draft is being introduced in the ‘public interest’.

An outline of the views presented in the comments letters which highlights the areas of agreement and disagreement with the exposure draft and/or other comments letters.

An assessment (with relevant examples) as to whether the comments letters utilise any of the arguments 'for' or 'against' regulation.

An application of each of the theories of regulation (public interest, private interest and capture) to the comments letters and a justification as to which theory(ies) is most effective at explaining the comments and which theory(ies) is least effective at explaining the comments.

Tentative agenda decision—Classification of short-term loans and credit facilities (IAS 7)

The IFRS Interpretations Committee tentatively decided not to add this matter to its standard-setting agenda at its meeting in March 2018. The Committee will reconsider the following tentative agenda decision, including the reasons for not adding the matter to the standard-setting agenda, at a future meeting. The Committee encourages interested parties to submit their responses using the link below.

Tentative agenda decision

The Committee received a request asking about the types of borrowings an entity includes in its statement of cash flows as a component of cash and cash equivalents. In the fact pattern described in the request:

an entity has short-term loans and credit facilities (short-term arrangements) that have a short contractual notice period (eg 14 days);

the entity says it uses the short-term arrangements for cash management; and

the balance of the short-term arrangements does not often fluctuate from being negative to positive.

The Committee observed that:

applying paragraph 8 of IAS 7, an entity generally considers bank borrowings to be financing activities. An entity, however, includes a bank borrowing as a component of cash and cash equivalents only in the particular circumstances described in paragraph 8 of IAS 7—ie the banking arrangement is a bank overdraft that (i) is repayable on demand, and (ii) forms an integral part of the entity’s cash management.

cash management includes managing cash and cash equivalents for the purpose of meeting short-term cash commitments rather than for investment or other purposes (paragraphs 7 and 9 of IAS 7). Assessing whether a banking arrangement is an integral part of an entity’s cash management is a matter of facts and circumstances.

if the balance of a banking arrangement does not often fluctuate from being negative to positive, then this indicates that the arrangement does not form an integral part of the entity’s cash management and, instead, represents a form of financing.

In the fact pattern described in the request, the Committee concluded that the entity does not include the short-term arrangements as components of cash and cash equivalents. This is because these short-term arrangements are not repayable on demand. Additionally, the fact that the balance does not often fluctuate from being negative to positive indicates that the short-term arrangements are a form of financing rather than an integral part of the entity’s cash management.

The Committee also noted that paragraphs 45 and 46 of IAS 7 require an entity to (a) disclose the components of cash and cash equivalents and present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in its statement of financial position; and (b) disclose the policy which it adopts in determining the composition of cash and cash equivalents.

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to assess whether to include in its statement of cash flows the short-termarrangements described in the request as components of cash and cash equivalents. Consequently, the Committee [decided] not to add this matter to its standard-setting agenda.

Marking criteria

Thorough identification and elaboration of all the key issues.

Response provides an in-depth application of the notion of ‘public interest’ to the exposure draft and provides a thorough justification that critically evaluates the relevance of notion to the behaviour of the regulator.

All of the key areas of conjecture are described in depth and this is supported by evidence from comment letters.

Response identifies a range of appropriate examples of comments letters are thoroughly justified as being for or against the existence of accounting regulation.

Response clearly applies all of the theories to the various issues in the comment letters and provides a well-developed justification that critically evaluates the relevance of the theories to the issue.

Response critically evaluates all the underlying assumptions of the theories and perspectives of regulation. Exemplary use of relevant sources from within prescribed materials and attempts to include sources beyond prescribed material.

A well-designed answer will:   

Outline of what the Exposure Draft is introducing or changing.

An assessment as to whether the Exposure Draft is being introduced in the 'public interest'.

An outline of the views presented in the comments letters which highlights the areas of agreement and disagreement with the exposure draft and/or other comment letters.

An assessment (with relevant examples) as to whether the comment letters utilise any of the arguments 'for' or 'against' regulation.

An application of each of the theories of regulation (public interest, private interest and capture) to the comments letters and a justification as to which theory(ies) is most effective at explaining the comments and which theory(ies) is least effective at explaining the comments.

Critically evaluate the underlying assumptions and assumptions of the theories of regulation, in particular, with regard to their application to the issues identified in the Exposure Draft and Comment Letters.

Answer 1

1. The exposure draft mainly talks about whether to treat short term bank borrowings as a part of financing activity or as a part of cash and cash equivalents at the time of preparation of cash flow for the entity i.e. the IAS 7 deals with classification of short term loans and credit facilities offered by the Bank.

2. The committee has decided not to include the discussion to it's standard setting agenda. Such an action on part of the committee is in public interest. The issue to include the short term borrowings and credit facilities extended by the bank are clearly defined in the IFRS. As per Para 8 of of the IAS 7, in any general scenario, the short term borrowings and credit facilities have to classified under financing activity. However, it can be classified as a cash or cash equivalent provided, two conditions are met with. Conditions being, the banking arrangement is repayable on demand and forms intergral part of company's cash management.

Whether the borrowing is forming part of company's cash management is matter of facts and circumstances. Since there is no ambiguity in classification of such short term borrowings no additional modifications are required. We agree with the Interpretations Committee’s decision not to add this item onto its agenda.

3.Requirement of IAS 7 clearly stipulate that an entity is required to disclose the;

a) Opening balance of cash & cash equivalents

b) Adjustements (additions / deletions) to cash & cash equivalents

c) Closing balance of cash & cash equivalents

there by creating a reconciliation and highlighting the changes to the cash & cash equivalants. Also, the policy adopted by an entity in determining the composition of cash and cash equivalents has to be disclosed.

Paragraph 8 of IAS 7 clearly stipulates the requirements of classification of bank borrowings and short term credit facilities. The above mentioned clauses are in agreement to the exposure draft.

4. The comment letter utilizes the arguments 'for' the regulation. The IFRS provides a detailed guideline on the classification of short term borrowing as a financing activity and also provides clear cut conditions to be met for classification of the same as cash or cash equivalant. The basis for the conclusion provided by the committee is given as short-term arrangements are not repayable on demand and the balance does not often fluctuate from being negative to positive indicates that the short-term arrangements are a form of financing rather than an integral part of the entity’s cash management.

5. The public interest theory is the most effictive at explaining the comments. It provides adequate justification on the changes required in the accounting standards. that is, the changes should bring about a more clear picture of the organization in the public eyes.

The capture theory is the least effective at explaining the comments as it does not provide any justification for the changes to be introduced in the accounting standard there by reducing the chances of a healthy debate on the changes to the AS.