At the joint outreach event, EFRAG will present its preliminary views to the below consultations as developed in its comment letters:

• ISSB’s Request for Information (RFI) on its Agenda consultation 
• International Applicability of SASB Standards 

This will be a hybrid event, taking place in EFRAG offices in Brussels or online.

The study aims to collect information on the effects of the new standard, as well as on how the implementation requirements of IFRS 15 impact the internal production and use of information.

The deadline to complete the survey is 1 September 2023.

Further details are available in the press release on the EFRAG website.

In 2022 the Government Response to the BEIS White Paper asked the FRC to use a Code-based approach to strengthen boardroom focus on internal control matters rather than introducing a legislative requirement and that represents one of the most significant changes proposed. Other proposals are:

• Inclusion of wider responsibilities and considerations for the Board and Audit Committee in relation to Environmental, Social and Governance (ESG) objectives and other sustainability matters
• Incorporation of forthcoming new requirements for an Audit & Assurance Policy (AAP) and the Resilience Statement
• Reflecting the publication of ‘Audit committees and the external audit: Minimum Standard’
• Strengthened reporting on malus and clawback remuneration arrangements
• Some other areas of reporting on governance arrangements identified as being weaker

Declaration on the effectiveness of the risk management and internal control systems

With the ultimate aim of strengthening board accountability for the effectiveness of the risk and internal control frameworks, the first proposed amendment is to the relevant Principle: “The board should establish a framework of prudent and effective controls, which enable risk to be assessed and managed” is replaced by “The board should establish and maintain an effective risk management and internal control framework”.

This amended Principle is reinforced by an extension of the existing Code provision (Provision 29) in relation to the board’s responsibility to monitor the company’s risk management and internal control systems and, at least annually, carry out a review of their effectiveness. Building on this review and monitoring activity, it is proposed that the board provides the following disclosure in the annual report:

• A declaration of whether the board can reasonably conclude that the company’s risk management and internal control systems have been effective throughout the reporting period and up to the date of the annual report;
• An explanation of the basis for its declaration, including how it has monitored and reviewed the effectiveness of these systems; and
• A description of any material weaknesses or failures identified and the remedial action being taken, and over what timeframe.

There is also a proposal to amend what was previously considered to make up “all material controls” from “financial, operational and compliance” to “operational, reporting and compliance”. So replacing “financial” with a wider “reporting” control consideration. The paper explains that this has been done because FRC engagement with stakeholders has made clear that narrative reporting increasingly includes materially important information, in the context of each company, which is used by investors for capital allocation decisions. So this change is intended to recognise the importance of narrative reporting on for example strategy, principal risks, corporate governance and environmental and social matters in addition to financial reporting.

In relation to a description of material weaknesses or failures identified, the consultation paper states that the FRC does not envisage that companies will report on all weaknesses identified during the reporting period but that they will be transparent about those weaknesses considered by the company to be material, such as those events which could have a significant impact on a company’s strategy, operations, reporting or compliance objectives. The revised Guidance which will follow will discuss what may constitute a material weakness, but the FRC says that it will ultimately be for the board to determine which weaknesses are material to their specific situation and should be reported in the annual report.

On internal controls, the paper states that the revised Code will not ask for reporting on whether the board intends to obtain external assurance over the effectiveness of the company’s risk management and internal control framework. That will be a matter for companies to determine when setting their Audit and Assurance Policy.

ESG and sustainability matters

Recognising that the Code should reflect the importance of ESG and sustainability matters and that good governance will play an essential role in assessing sustainability-related risks, opportunities and impacts, setting targets, using appropriate internal controls and commissioning assurance where necessary, the following additions to the Code are being proposed:

• An expansion of Provision 1 to make clear that environmental and social matters (including climate ambitions and transitions plans) should be considered in assessing the basis on which the company generates and preserves value over the long-term.
• The addition of “monitoring the integrity of narrative reporting, including sustainability matters, and reviewing any significant reporting judgements” in the list of audit committee responsibilities.
• A requirement for the audit committee to report in the annual report on the significant issues that it considered relating to narrative reporting, including sustainability matters, and how these issues were addressed and, where commissioned by the board, the assurance of environmental, social and governance metrics and other sustainability matters.
• A requirement that consideration of whether remuneration outcomes are clearly aligned to the successful delivery of the company’s long-term strategy includes consideration of environmental, social and governance objectives.

The Audit & Assurance Policy and the Resilience Statement

The FRC has reached the view that all companies reporting against the Code should consider producing an AAP on a ‘comply or explain’ basis, using the future legislation as a guide to what should be included. This reflects the fact that not all companies reporting against the Code will be within the scope of the new legislative requirement (UK companies with annual turnover greater than £750m and 750 or more employees).

To achieve this the FRC have added “developing, implementing, and maintaining the audit and assurance policy” to the list of audit committee responsibilities and have cross-referenced to the future legislative requirement. In addition, the audit committee reporting requirement has been expanded to include the “approach to developing the triennial audit and assurance policy and the annual implementation report”.

In relation to the new Resilience Statement, which will also only be a legislative requirement for some companies reporting against the Code due to the size criteria, the proposed approach is to make clear that compliance with the new reporting requirement for a Resilience Statement will also mean compliance with the relevant Code provisions. The existing Code provision on going concern is retained unamended but the viability statement provision has been amended to just call for an explanation of how the board has assessed the future prospects of the company including its ability to meet its liabilities as they fall due.

Presentation of a Resilience Statement would remove the need to present separate disclosures to meet the Code provisions on going concern and future prospects. Conversely, companies below the size threshold for the Resilience Statement will still, under the Code, be required to report on an assessment of going concern and future prospects in order to meet those remaining Code provisions.

Audit committees and the external audit: Minimum Standard

A new Standard for audit committees in relation to external audit was issued in May 2023. The Standard contains several sections which are identical to existing Code Provisions, specifically where these Provisions cover the work of the audit committee in relation to external audit, and the requirement for the audit committee to report on this. To avoid duplication, the FRC is proposing that these aspects are removed, and that the new Code instead refers companies to the Standard.

The paper recognises that, as the Standard was intended to apply to FTSE 350 companies only, there will be some non-FTSE 350 companies who will be brought into the scope of the Standard because of this proposal. However, the FRC notes that non-FTSE 350 companies can approach implementation of the Standard on a ‘comply or explain’ basis.

Reporting on malus and clawback arrangements

It is proposed that the following new reporting is required in relation to malus and clawback arrangements:

• the minimum circumstances in which malus and clawback provisions could be used;
• a description of the minimum period for malus and clawback and why the selected period is best suited to the organisation;
• whether the provisions have been used in the last reporting period and, if provisions have been used, a clear explanation of the reason; and
• the use of malus and clawback provisions in the last five years.

The intention is to include further guidance on the suggested format for this disclosure in an update to the Guidance on Board Effectiveness.

Other proposed changes

The consultation includes a number of other proposed changes designed to enhance and/or clarify existing disclosure requirements where the FRC has observed weak reporting in past reviews. These include:

• Activities and outcomes - when reporting on its governance activity the board should focus on outcomes in order to demonstrate the impact of governance practices and how the Code has been applied
• Culture – an additional requirement to report on how effectively the desired culture has been embedded
• Shareholder engagement – the Chair to report on the outcomes of engagement with shareholders
• Director appointments – all significant director appointments to be listed in the annual report together with an explanation of how able to meet those commitments
• The remuneration policy – a replacement of the existing Provision 40 characteristics with a more focused requirement that “the policy should be clear, identify and mitigate risks associated with remuneration, and ensure outcomes are proportionate and do not reward poor performance”

Supporting guidance

The revised Code will be supported by updated guidance, and the paper notes that work is currently underway to revise the Guidance on Audit Committees and Guidance on Board Effectiveness so that these can be aligned with the revised Code and Audit Committee Standard. The FRC will also be amending the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting specifically to take account of changes to the principles and provisions on risk management and internal control.

Comments on the consultation are requested by 13 September 2023.  The intention is that the revised Code will apply to accounting years commencing on or after 1 January 2025 to allow sufficient time for implementation.

The FRC will also be hosting a webinar and a series of roundtables related to this topic.

A press release and the consultation are available on the FRC website.

This follows the Government's Response to its ‘Restoring Trust in Audit and Corporate Governance’ consultation, and was driven by a specific recommendation from the Competition & Markets Authority’s Statutory Audit Services Market Study that the FRC “should have the power and a requirement to mandate minimum standards for both the appointment and oversight of auditors”.

A consultation process took place earlier this year and just a small number of changes have been made to the final version of the Standard. The title has been changed to reflect the focus on the audit committee’s role in relation to external audit only and the section on oversight of auditors has been expanded to include more guidance on how the audit committee should undertake an assessment of the effectiveness of the audit process.

The Standard is applicable to the FTSE350 only (although is noted as representing good practice for more general application). Companies within scope are encouraged to begin to apply the Standard as soon as they are able.  Additionally until the establishment of the Audit Reporting and Governance Authority (ARGA), the FRC does not have powers to enforce the Standard and so until that time, the intention is that the Standard is adopted on a 'comply or explain' basis by FTSE350 audit committees.  The FRC states that the majority of the text in the Standard is taken from existing publications including the UK Corporate Governance Code, Guidance on Audit Committees and Audit Tenders: Notes on Best Practice. The key new aspect is primarily to reflect the Government’s focus on diversity in the audit market.

In addition to an initial section on ‘Scope & Authority’, the Standard comprises the following sections:

• Responsibilities
• Tendering
• Oversight of auditors and audit
• Reporting

Responsibilities

This section reflects the audit committee responsibilities set out in the UK Corporate Governance Code in relation to the external audit but also includes some additional responsibilities:

• requiring that the company manages its non-audit relationships with audit firms to ensure that it has a fair choice of suitable external auditors at the next tender and in light of the need for greater market diversity and any market opening measures which may be introduced
• engaging with shareholders on the scope of the external audit (where appropriate)
• inviting challenge by the external auditor, giving due consideration to points raised and making changes to financial statements in response where appropriate

Tendering

This section of the Standard includes the recommendations from the FRC’s ‘Audit Tenders: Notes on Best Practice’ but also incorporates considerations of the need to expand audit market diversity and challenges to those firms eligible to participate in a tender process but who choose not to and how that is in the public interest. In particular, the Standard states “The Audit Committee should remind eligible firms that refuse to tender that they may as a result be ineligible to bid for non-audit services work.”

Oversight of auditors and audit

This section emphasises the need for the audit committee to create a culture which recognises the work of and encourages challenge by the auditor. The Standard also notes that engagement level Audit Quality Indicators can be used as evidence of the effectiveness of the external audit and the auditor.

This is the section of the final Standard to receive the most significant amendment further to the consultation process. Reflecting the importance of the audit committee’s assessment of the effectiveness of the external audit process, this section has been expanded to include elements from the ‘Guidance on audit committees’ in relation to that assessment.

Reporting

The audit committee will be required to report on the activities it has undertaken to meet the requirements of the Standard. Where, in line with the new responsibility to engage with shareholders on the scope of the audit, shareholders have requested that certain matters be covered in an audit and that request has been rejected, an explanation of the reasons why should be provided.

A press release and the full standard are available on the FRC website.

Through the non-financial reporting review, the government is looking at what opportunities exist to refresh and rationalise current reporting requirements so that the UK’s non-financial reporting framework is fit for purpose and delivers decision-useful information to the market.

The review will largely consider the following:

• costs and benefits of current non-financial reporting requirements and opportunities to streamline existing reporting requirements. This will also consider the degree to which stakeholders believe that requirements within company law align with regulatory rules set by other regulators such as the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA);
• thresholds and definitions used to determine whether companies and LLPs must comply with certain requirements. As part of considering size thresholds, the government will also review whether the existing micro-entity, small and medium reporting thresholds are set at appropriate levels; and
• the future of the UK’s non-financial reporting framework. This will include views on the best way to integrate standards introduced by the International Sustainability Standards Board (ISSB) into the UK’s reporting framework, as well as the potential role for other reporting initiatives that are designed with sustainability-related goals in mind.

The call for evidence is open until 16 August 2023.

For more information, see the consultation on the DBT page.

We welcome the opportunity to respond to FRED 83.

We commend the FRC for acting promptly to address this emerging issue and we encourage the FRC to proceed to issue the final amendments to FRS 101 and FRS 102 as soon as possible.

We support the FRC’s overall approach in relation to the Pillar Two model rules. However, rather than adapt the proposed disclosure requirements set out in the International Accounting Standards Board’s (IASB's) Exposure Draft IASB/ED/2023/1 International Tax Reform—Pillar Two Model Rules – Proposed amendments to IAS 12, we recommend that the FRC incorporates into FRS 102 the disclosure requirements set out in the final amendments to IAS 12 that were issued on 23 May 2023.

Our full comment letter is available here.

Background

The IFRS Interpretations Committee received a submission about supply chain finance arrangements asking:

• How an entity presents liabilities to pay for goods or services received when the related invoices are part of a supply chain finance (or reverse factoring) arrangement; and
• what information about reverse factoring arrangements an entity is required to disclose in its financial statements.

In response to that submission, the Committee published an agenda decision in December 2020. However, feedback and input received — in particular from investors and analysts — suggested the information entities provide about supplier finance arrangements applying existing IFRS requirements does not meet all investor information needs.

In response to that feedback, the Board decided to amend IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures to add disclosure requirements, and ‘signposts’ within existing disclosure requirements, that ask entities to provide qualitative and quantitative information about supplier finance arrangements.

Key changes

The amendments in Supplier Finance Arrangements (Proposed amendments to IAS 7 and IFRS 7): 

• Do not define supplier finance arrangements. Instead, the amendments describe the characteristics of an arrangement for which an entity is required to provide the information. The amendments note that arrangements that are solely credit enhancements for the entity or instruments used by the entity to settle directly with a supplier the amounts owed are not supplier finance arrangements.
• Add two disclosure objectives. Entities will have to disclose in the notes information that enables users of financial statements
  • to assess how supplier finance arrangements affect an entity’s liabilities and cash flows and
  • to understand the effect of supplier finance arrangements on an entity’s exposure to liquidity risk and how the entity might be affected if the arrangements were no longer available to it.
• Complement current requirements in IFRSs by adding to IAS 7 additional disclosure requirements about:
  • the terms and conditions of the supplier finance arrangements;
  • for the arrangements, as at the beginning and end of the reporting period:
    • a) the carrying amounts of financial liabilities that are part of the arrangement and the associated line item presented;
    • b) the carrying amount of financial liabilities disclosed under a) for which suppliers have already received payment from the finance providers;
    • c) the range of payment due dates (for example, 30 to 40 days after the invoice date) of financial liabilities disclosed under a) and comparable trade payables that are not part of a supplier finance arrangement; and
  • the type and effect of non-cash changes in the carrying amounts of the financial liabilities that are part of the arrangement.
  The IASB decided that, in most cases, aggregated information about an entity’s supplier finance arrangements will satisfy the information needs of users of financial statements.
• Add supplier finance arrangements as an example within the liquidity risk disclosure requirements in IFRS 7.

Effective date and transition

An entity applies the amendments to IAS 7 for annual reporting periods beginning on or after 1 January 2024 (with earlier application permitted) and the amendments to IFRS 7 when it applies the amendments to IAS 7.

There is a certain amount of transition relief provided, including relief regarding comparative information and interim period information.

Additional information

The following additional information is available on the website of the IFRS Foundation and on IAS Plus:

• IASB press release (link to IFRS Foundation website)
• Webcast explaining the amendments (link to IFRS Foundation website)
• Investor Perspectives article (link to IFRS Foundation website)
• Our UK Accounting Plus project page on Supplier finance arrangements

The following topic was discussed:

Maintenance of the SASB Standards: In this meeting, the ISSB ratified consequential amendments to the SASB Standards in connection with the issuance of IFRS S2 Climate-related Disclosures. The ISSB also confirmed it is satisfied that it has complied with the applicable due process requirements to publish the climate-related revisions to the SASB Standards.

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.

No amendments have been made to FRS 101 as a result of this review.

Click for (all links to the FRC website):

• Press release
• Amendments to Basis for Conclusions FRS 101 Reduced Disclosure Framework – 2022/23 cycle
• Feedback Statement and Impact Assessment – Amendments to Basis for Conclusions FRS 101 Reduced Disclosure Framework – 2022/23 cycle
• FRS 101 Reduced Disclosure Framework 

Background

In March 2022, the OECD released technical guidance on its 15% global minimum tax agreed as the second ‘pillar’ of a project to address the tax challenges arising from digitalisation of the economy. This guidance elaborates on the application and operation of the Global Anti-Base Erosion (GloBE) Rules agreed and released in December 2021 which lay out a co-ordinated system to ensure that multinational enterprises with revenues above €750 million pay tax of at least 15% on the income arising in each of the jurisdictions in which they operate.

The IASB decided to respond to stakeholders’ concerns about the potential implications of the imminent implementation of these rules on the accounting for income taxes by jurisdictions. In particular, the IASB noted that the situation is very complicated as:

• jurisdictions may change statutory tax rates to avoid being considered a low-tax environment;
• companies might decide to move their business to jurisdictions with higher statutory tax rates; and
• companies might engage in business that comes with tax incentives that might bring down their statutory tax rate to below 15% although the jurisdiction they are doing business in is not generally considered a low-tax environment.

All of these and further considerations would entail most complicated calculations of deferred tax in a situation that is highly volatile due to the fact that jurisdictions implement the OECD rules at different speed and different points of time. Due to the many unknown variables involved, the IASB has decided to develop a mandatory exemption until the global tax system has settled and reestablished itself and the IASB can thoroughly assess the situation and provide a reliable solution.

Changes

The amendments in International Tax Reform — Pillar Two Model Rules (Amendments to IAS 12) are:

• An exception to the requirements in IAS 12 that an entity does not recognise and does not disclose information about deferred tax assets and liabilities related to the OECD pillar two income taxes. An entity has to disclose that it has applied the exception.
• A disclosure requirement that an entity has to disclose separately its current tax expense (income) related to pillar two income taxes.
• A disclosure requirement that state that in periods in which pillar two legislation is enacted or substantively enacted, but not yet in effect, an entity discloses known or reasonably estimable information that helps users of financial statements understand the entity’s exposure to pillar two income taxes arising from that legislation.
• The requirement that an entity applies the exception and the requirement to disclose that it has applied the exception immediately upon issuance of the amendments and retrospectively in accordance with IAS 8. The remaining disclosure requirements are required for annual reporting periods beginning on or after 1 January 2023.

The IASB will continue to monitor developments related to the implementation of the pillar two model rules. It plans to undertake further work to determine whether to remove the temporary exception — or to make it permanent — after there is sufficient clarity about how jurisdictions implemented the rules and the related effects on entities.

The IASB has also decided that the pillar two model rules (and the amendments to IAS 12) are relevant to entities applying the IFRS for SMEs. The IASB has added to its work plan a narrow-scope standard-setting project to amend Section 29 Income Tax of the IFRS for SMEs. An exposure draft is expected in June 2023.

Dissenting opinion

The final amendments contain a dissenting opinion as one Board member is concerned that these amendments will result in an entity disclosing less useful information to help users of financial statements assess the entity’s future cash flows.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Our UK Accounting Plus project page on IAS 12 — OECD pillar two model rules