Practice Note 23 Special considerations in auditing financial instruments is based on International Auditing Practice Note 1000 issued by the International Auditing and Assurance Standards Board (IAASB) and contains supplementary FRC guidance. Some of the supplementary guidance regards the valuation of financial instruments, materiality, valuation uncertainty and hedge accounting.

The revised Practice Note is availabe on the FRC website. Guidance in addition to the IAASB guidance is highlighted with grey shading.

The proposals in the IAASB exposure draft, entitled Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs), follow from earlier consultation documents published in May 2011 and June 2012, which were developed after earlier research on user perceptions on auditor reports. It also responds to constituent feedback in light of the global financial crisis and European Commission (EC) proposals on audit reform.

The key proposals in the exposure draft include:

• Key audit matters. The audit report for audits of listed entity financial statements would include a new section outlining the key audit matters arising during the audit, being "those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period". Such matters would be selected from the matters communicated by the auditor to those charged with governance over the entity being audited
• Independence. The audit report would include an explicit statement that the auditor is independent of the entity and has fulfilled any other relevant ethical requirements, and disclose the sources of those requirements
• Engagement partner. For audits of financial statements of listed entities, the audit report would be required to explicitly state the name of the engagement partner
• Prominence of opinion. The auditors opinion would be placed at the beginning of the audit report
• Ordering. Whilst not mandating specific requirements, the proposals outline a preferred ordering and placement of the elements of the audit report
• Going concern. The auditor would be required to report on going concern in the audit report, including a conclusion the appropriateness of management's use of the going concern basis and a statement whether a material uncertainty about going concern has been identified
• Auditor responsibilities. Improvements are proposed about how the responsibilities of the auditor are described and the key features of the audit. Some elements of the description of responsibilities would be permitted to be moved to an appendix, or referenced from a website of an appropriate authority.

The proposed 'key audit matters' section of the audit report replaces earlier proposals for an 'auditor commentary' which would have required the audit report to highlight matters "likely to be most important to users' understanding of the audited financial statements or the audit". Constituent feedback on the 'auditor commentary' proposal expressed concern about the emphasis on users (in that it would require the auditor to take responsibility for determining what is important a user's understanding of the financial statements) , and the possible inclusion of 'original information' in the audit report (which may blur the roles of management, those charged with governance and the auditor). The revised proposals for the 'key audit matters' section responds to these concerns by linking it with the dialogue with those charged with governance.

The exposure draft is open for comment until 22 November 2013. Click for IAASB press release (link to IFAC website).

Government Financial Reporting Manual (FReM) Exposure Draft (13)01 proposes amendments to the FReM to reflect the application of IFRS 13 ‘Fair Value Measurement’ in the public sector.  The ED highlights that “IFRS 13 raises significant conceptual issues regarding measurement and disclosure for the public sector” noting that fundamental issue is the application of the concept of exit price which IFRS 13 requires to be used to calculate the fair value of an asset or liability.  The ED highlights that the current definition of exit price in IFRS 13 to fair value assets and liabilities may be difficult to apply to the Public Sector and seeks to explore ways that IFRS 13 can be adapted in a Public Sector context whilst maintaining its key principles.    

Government Financial Reporting Manual (FReM) Exposure Draft (13)02 proposes amendments to the FReM to reflect the application of IFRS 10 ‘Consolidated Financial statements’, IFRS 11 ‘Joint Arrangements’ and IFRS 12 ‘Disclosure of interests in other entities’, issued by the International Accounting Standards Board (IASB) in 2011.  The ED also proposes to reflect amendments made to IAS 27 ‘Separate Financial Statements’ and IAS 28 ‘Investments in Associates and Joint Ventures’ in 2011 and the amendments to those standards in relation to transition guidance in June 2012 and Investment Entities in October 2012. 

FReM Exposure Draft (13)02 proposes to apply IFRSs 10, 11, 12 and the amendments to IAS 27 and IAS 28 in full except for areas that it has adapted to apply specifically to the public sector.  These areas, taken from FReM Exposure Draft (13)02 are: 

To maintain the adaptation to current group accounting standards in respect of the departmental consolidation boundary; 

To apply the principles of IAS 28 to departments and Executive Agencies only for investments in Associates and Joint Ventures classified outside of the public sector by the ONS; and 

To maintain the adaptation to current group accounting standards in respect of the Whole of Government Accounts consolidation boundary. 

The effective date for the proposed FReM amendments is 1 April 2014 

Comments are invited in writing by 13 September 2013 after which a revised version of the Exposure Drafts will be submitted to the Financial Reporting advisory Board for approval.  Details of where to send the comments is included within the Exposure Drafts.

Click for (links to Exposure Drafts):

• Government Financial Reporting Manual (FReM) Exposure Draft (13)01
• Government Financial Reporting Manual (FReM) Exposure Draft (13)02

Click through for direct access to the notes:

Tuesday, 23 July 2013

• Comprehensive review of the IFRS for SMEs

Wednesday, 24 July 2013

• Revenue recognition (IASB and FASB)
• Rate-regulated activities
• Financial instruments — Limited amendments to IFRS 9 (classification and measurement)
• Post-implementation review — IFRS 3

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

The outreach events will provide participants a direct opportunity to discuss the proposals in greater detail with the IASB. In order to cover a wide range of views on the topic, the Boards are seeking participation from preparers, auditors, users of financial statements, and others.

Click for:

• More information, including details on regional events, on the IASB website
• IAS Plus article on the insurance contracts exposure draft
• Robert Bruce interviews — Revised insurance contracts proposals
• IAS Plus project page on the IASB’s insurance contracts project

The summary of the meeting includes the following reports:

Report of the Trustees’ Executive session

• On-going relationship with the International Organisation of Securities Commissions (IOSCO)
  The Trustees stressed the need for consistent application of IFRSs and the need to work with securities regulators. Also, they are seeking to strengthen their relationship with the IOSCO by developing a statement of co-operation with the IOSCO’s Committee on Issuer Accounting, Audit and Disclosure.
• Funding of the IFRS Foundation
  The Trustees discussed stabilising longer-term funding and various funding initiatives.
• Strategy Review
  The Trustees noted that most of the actions resulting from the the 2012 reports of the Trustees’ Strategy Review and the Monitoring Board Governance Reviews have been fully implemented without modifications, except for long-term financing.
• Canada survey on cost of transition to IFRSs
  The Trustees found the survey useful and can be used by other jurisdictions when evaluating their own transitional plans to IFRSs.
• IFRS developments around the world
  • European Union — Updated on developments in EU, particularly on meetings with Philippe Maystadt as part of his review on the governance of European bodies involved with financial reporting and the process for the endorsement of IFRSs in the EU.
  • United States — Updated on developments in the US, particularly on the initial meeting between Michel Prada, Yael Almog, and new US SEC Chair Mary-Jo White.
  • Japan — the Trustees noted the progress of companies adopting IFRSs in Japan, the intention by Japanese authorities to introduce a new index of international companies listed in Japan which required the use IFRSs to be included in the index, and an additional version of Japanese GAAP that was closer inline to IFRSs
  • Emerging economies — the Trustees reviewed steps taken by the IASB to satisfy the G20 recommendation to develop its outreach to emerging economies.
• Nominations
  The Trustees appointed Dr Abdulrahman Al-Humaid (Saudi Arabia) and Joji Okada (Japan) and reappointed Duck-Koo Chung (Korea), Dick Sluimers (Netherlands) and Antonio Zoido (Spain).
• Trustee meetings
  The Trustees discussed meeting locations for 2014.

Report of the Chairman of the IASB

Hans Hoogervorst, Chairman of the IASB, provided the Trustees with an update on the IASB’s activities including the leases and insurance contracts exposure drafts, developments in the impairment project, discussion paper on conceptual framework, and the feedback statement on the Discussion Forum on Financial Statement Disclosure.

Report of the Chairman of the Due Process Oversight Committee

Scott Evans, Chairman of the Due Process Oversight Committee (DPOC) reported on the recent activities of the DPOC. Mr Evans discussed the IASB’s current technical activities, an upcoming report on the revenue recognition project lifecycle, an annual review of consultative groups, and a review of production activities.

Regional outreach activity

As part of the Trustees’ meeting, the IFRS Foundation hosted a joint event with the South African Institute of Chartered Accountants (SAICA) at which the Trustees and the leadership of the IASB met with representatives of key stakeholders to discuss issues under the theme The future of financial reporting in Africa.

The full summary of conclusions of the IFRS Foundation Trustees' meeting is available on the IASB website.

The first phase will develop the scope of the PIR by reviewing how entities have implemented IFRS 3 and identify where issues or unexpected costs were encountered.  It will also analyse research concerning the application of IFRS 3 developed by the academic community. Information gathered during this phase will be included in a Request for Information (RFI) for public consultation, which is targeted to be issued during the fourth quarter of 2013. 

During the second phase of the review, the IASB will schedule outreach events and review the responses to the RFI to gain additional knowledge on how the Standard is being applied in practice. At the end of the PIR, the IASB will publish a Feedback Statement with the main findings and discuss any additional steps if needed as a result of the review.

Click for:

• Press release (link to IASB website)
• IAS Plus project page on the post-implementation review of IFRS 3

RPGs are a new type of pronouncement issued by the IPSASB, and they are designed to provide guidance on the broader aspects of financial reporting that are outside the financial statements. RPGs are considered 'good practice' and entities are encouraged to apply them, but compliance with RPGs is not required in order for an entity's financial statements to comply with International Public Sector Accounting Standards (IPSAS). In this context, Recommended Practice Guideline 1 Reporting on the Long-Term Sustainability of an Entity’s Finances (RPG 1) provides guidance on providing information about a public sector entity's projected flows which underlie its long-term fiscal sustainability, including projected inflows and outflows related to the provision of goods and services and programs providing social benefits using current policy assumptions over a specified time horizon.

RPG 1 is the result of a long project and consultation process, which initially began as a project on accounting for 'social policy obligations' in 2002 and more recently saw an exposure draft issued in October 2011.  The importance of the project has been amplified by the global financial crisis and the sovereign debt crisis.

The IPSASB recognised that financial statements in themselves could not provide sufficient information about a public sector entity's long term fiscal sustainability, as the IPSASB's Conceptual Framework determined that an entity could not recognise an asset for future tax receipts and liabilities for future obligations such as social benefits which had been legislated. Accordingly, RPG 1 focuses on the provision of projections of future inflows and outflows, including future capital expenditure, over a specified time horizon.

Under the RPG, projections are prepared on the basis of current policy assumptions, and assumptions about future economic and other conditions.  The projections may be based on relevant budgets and forecasts already prepared, and may make use of assumptions and projections prepared by others, such as finance ministries. The time period for the projection will depend on balancing verifiability, faithful representation and relevance, reflect the characteristics of the entity and the longevity of its key programs, and will often be presented in a tabular format. Additional guidance is provided on factors such as demographic and economic assumptions, inflation and discount rates and sensitivity analysis. The RPG also sets out the minimum disclosure requirements surrounding the projections and the overall long-term fiscal sustainability information.

When an entity reports on its long-term fiscal sustainability, it discusses three inter-related dimensions, by reference to their capacity and vulnerabilities, which are summarised below:

As a non-mandatory guide, RPG 1 does not have a stated effective date, but long-term fiscal sustainability information should not be described as complying with the RPG unless it complies with all of its requirements. Click for IPSASB press release (link to IFAC website).

The debate as to what these roles and responsibilities are has intensified with the publication in 2012 of Professor Kay’s review of the UK equity market and the recently revised FRC Stewardship Code. 

The recommended improvements seek to ensure a robust Corporate Governance environment within listed companies and the protection of shareholders.  The ABI notes that companies should “focus more on the application of the principles of the UK Corporate Governance Code, rather than just compliance with provisions”    

The ABI report highlights that good Corporate Governance is critical to the success of a company, commenting: 

Good Corporate Governance enhances and underpins a company’s long-term sustainable performance; it is critical to long-term value creation and economic growth

The report considers that the “principal elements” within Corporate Governance are 

• Directors;
• Executive Directors;
• Non-executive directors; and
• Shareholders being either asset managers or asset owners. 

The report provides a particular focus on the role of non-executive directors highlighting “possible measures to improve the framework within which they operate and so enhance their ability to achieve the appropriate balance between support and challenge”.  The report also considers the role of shareholders in the appointment of non-executive directors. 

The main recommendations of the ABI report are:

Improved disclosure

• Companies should improve Corporate Governance reporting.  The report notes that “all companies should adopt a Chairman’s introductory statement to the Corporate Governance section of the annual report”.  The report also notes that improvements could be made when explaining deviations from the Code to ensure that they are still indicative of good Corporate Governance.

Non-executive directors

• Companies should review the time-commitment requirements of different non-executive roles to give them the opportunity to be able to achieve a “good understanding of the company’s business and the strategic opportunities and challenges it faces”.
• Greater empowerment of non-executive directors.  Non-executive directors should have appropriate time and greater power to request information that will allow them to be able to challenge and support the decisions of executive directors.  The report also notes that companies should also ensure that “general” information, commonly in the form of a board pack, is easily understandable and accessible by the non-executive directors prior to board meetings and non-executive directors should be able to refuse a board pack that is too long. 
• Companies should ensure that non-executive directors receive timely and full information on potential merger and acquisition transactions to allow them to have “sufficient time and information to give proper consideration to the merits of the transaction”.  Non – executive directors should also seek independent advice, where required.

Shareholder engagement

• ABI members attend regular meetings with companies which discuss the principles of good Corporate Governance and to facilitate “collective engagement” with companies.   The report recommends that these meetings are opened to a wider pool of institutional investors rather than just to ABI members so that these can benefit from ABI’s expertise in this area.   
• An “Investor exchange” mechanism should be established which would enable shareholders to raise concerns regarding UK listed companies with other shareholders through the “collective engagement” meetings. 

Additional recommendations in the above areas as well as recommendations relating to asset owners and asset managers are included in the full report which can be obtained here along with the press release (links to ABI website). 

Professor Kay’s review ‘Kay Review of UK Equity markets and long-term decision making’, published in July 2012, sought to address the issue of short-termism in the equity market.  The aim of the report was to “set out principles that are designed to provide a foundation for a long-term perspective in UK equity markets and describe the directions in which regulatory policy and market practice should move”.  

The review concluded: 

Short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain.

The review established 17 recommendations which were intended for the government, regulatory authorities and “key players in the investment chain” to provide “the first steps towards the re-establishment of equity markets that work well for their users”. 

The BISC report highlights that the government has supported all of the recommendations in the Kay report but also note that there is a lack of evidence that progress has been made.  

The BISC report seeks to take forward the recommendations in the Kay review and provide actions for the government to undertake in order that progress against the recommendations can be measured. 

The report comments: 

We recommend that the Government immediately publishes clear, measurable and achievable targets for implementation of the Kay Review. In particular, in its response to this Report, the Government must outline for each of Professor Kay’s 17 recommendations what needs to have been achieved by the Government’s review of progress in 2014

The main conclusions in the BISC report are:

• Investors Forum – Professor Kay’s recommendation was aimed at facilitating collective engagement to the benefit of the equity market and UK businesses.  The BIS Committee recommends that the Government “outlines a clear timetable for setting up the Forum, engaging with different types of investors, along with milestones and assigned responsibilities for achieving this”.
• Fiduciary duty - The BIS Committee recommends that the Government liaises with the Law Commission to bring forward the timing of the project into the legal definition of fiduciary duty.  The report recommends that this issue is given “the appropriate priority and publishes its final definition in the first quarter of 2014”.
• Appointment of executives - Professor Kay provided a recommendation, proposing that companies “consult with major investors over all board appointments”. The BIS Committee recommends that the “Government publishes a timetable for the implementation of this policy, clarifies which investors companies are to consult with and outlines how it intends to combat the issues surrounding insider trading and confidentiality which inevitably accompany such board appointments”.
• Remuneration of executives – Professor Kay recommended that company directors should be tied into the long-term performance of their companies through time-appropriate shares. The BISC report recommends that “since the Government has accepted Professor Kay's analysis and agreed with his findings it should reconsider its response and take an active approach to its implementation”.
• Incentivising fund managers – The Kay Report provided a specific recommendation as to the incentives driving the action of fund managers however the BISC report highlights that the government has not acted on this recommendation.  The report recommends that “the Government takes a harder line when framing the culture in which fund managers work by highlighting best practice where it sees it". Additionally the report recommends that the government “should work towards the goal that fund manager performance be reviewed over longer time horizons than the typical quarterly cycle” 
• Quarterly Reporting - Professor Kay recommended that the removal of quarterly reporting.  The BISC report recommends that “the Government now outlines a clear timetable to implement this recommendation including what alternative strategies would be followed in the absence of any change in EU law”.  The report also recommends that the government seek to ensure that any changes to quarterly reporting practices are accepted globally.
• Narrative Reporting – the BIS Committee recommends that “the Government outlines how it proposes to implement auditing and monitoring of narrative reports”.  The report also recommends that “on-going shareholder scrutiny and transparency must be at the heart of this” and that “these processes must be in place before the proposed changes to narrative reporting come into effect”.

The report also makes a number of recommendations on the UK Stewardship Code, the financial transaction tax and mergers and acquisitions.  Among other things, the BISC report recommends enhancements to be made to the Stewardship Code and includes government action points for encouraging sign up.       

The Business, Innovation and Skills Committee would like the government to have set targets to implementing their recommendations so that they can report on progress against these in their “review of progress” in 2014. 

Click for (all links to BISC website):

• Press release
• BISC report ‘The Kay Review of UK Equity markets and long-term decision making’
• The Kay review 2012