The outreach round-tables 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 Conceptual Framework Discussion Paper
• IAS Plus project page on the IASB’s conceptual framework project
  
  

Sir David was Chairman of the IASB for 10 years and served another decade before that as Chairman of the UK Accounting Standards Board. He overhauled UK GAAP and spearheaded the adoption of IFRS in over 100 countries. Sir David now serves as Chairman of the International Valuation Standards Council (IVSC) Board of Trustees.

The IASB published a short press release on its website about Sir David's induction into the Hall of Fame. A detailed press release can be found on the Ohio State University website.

The proposals are intended to address what the Competition Commission sees as lack of competition within the provision of statutory audit services in the UK and ensure that competition is directed towards satisfying the demands of shareholders.  The proposals are also intended to increase the influence of audit committees, something that the FRC has re-emphasised in publishing their guidelines for an efficient audit tender process. 

While the FRC “supports the objectives that the Competition Commission is seeking to achieve through the remedies it has proposed”, they have raised a number of concerns (link to FRC website) around the proposal for FTSE 350 companies to put their statutory audit engagements out to tender at least every five years highlighting that the tendering could become a “sham process” as it is not taken seriously by companies or by firms. 

The FRC note that there are a number of benefits to regular audit tendering, highlighting that, among other things, it will “guard against complacency on the part of the auditor”, “stimulate innovation and spread best practice” and will provide “audit firms which are seeking to expand the opportunity to win new work”.  The FRC also recognise that there are risks and costs associated with regular audit tenders such as time and resources spent on the tender and the inability to fully understand the business and risk of the company to be audited if tenders are too frequent. 

The FRC do not see that the benefits of retendering every five years will outweigh the costs and highlight that, for “non-Big Four firms” the 5 yearly proposals may actually impede their ability to enter the market for FTSE 350 audits due to the costs involved.  The proposals also remove comply or explain which is central to the UK Corporate Governance Code. 

Instead, the FRC favours a ten year retender period in line with their recent revisions to the UK Corporate Governance Code.  They would like the Competition Commission to give the ten year period “time to demonstrate its effectiveness”. 

They comment:

We are concerned that if the retendering period is reduced from ten years, a firm will not be confident of recovering the costs of tendering, introducing innovations and securing any necessary skills.  It may therefore be less willing to innovate or, if it has invested, seek a close relationship with the company to increase the chance of reappointment but, in the process, jeopardise its independence.

Concerns were also expressed over the proposals in relation to the role of the AQR team.  The Competition Commission proposed that

The Audit Quality Review team (AQR) should review every audit engagement in the FTSE 350 on average every five years; and

Those firms that audit ten or more public interest entities should be inspected and reported upon by the AQR on an annual basis

The FRC “supports the Competition Commission’s objective of enhancing the effectiveness of audit committee oversight of audits by increasing the availability of information on audit quality at the main firms auditing public interest entities”.  However they are concerned that the level of review proposed will require an increased budget for the investigations and also could “undermine” their risk-based approach to the selection of audits for inspection.  The Competition Commission would like the AQR list to be limited to the six largest firms - and not the nine that the proposed remedy would catch.  The FRC points out that “thematic reviews” could be carried out for the smallest firms which focus on particular aspects of the audit process rather than carrying out an annual AQR.

A number of other comments are made by the FRC on areas of the Competition Commission proposals. 

On the proposals to strengthen the accountability of the external audit the FRC are broadly supportive but are of the view that there areas of the proposal that “would undermine the independence of the auditor”. 

In response to the proposal for the FRC to “amend its articles of association to include a secondary objective to have due regard to competition”, the FRC highlight that they are not a competition regulator but “will continue to have regard for competition issues”

Aside from expressing concerns over a number of the proposals, the FRC does support the removal of mandatory auditor rotation, compulsory joint audit and a role for the FRC in the appointment of auditors which were included in original proposals of the Competition Commission.  The European Commission (EC), however, does not support the removal of mandatory auditor rotation insisting that it is "as essential step for ensuring the independence and professional scepticism of auditors". 

The views of the FRC are echoed by the Institute of Chartered Accountants in England and Wales (ICAEW); and other organisations such as the UK Shareholders Association have also criticised the Competition Commission proposals.  In their response to the Competition Commission proposals the ICAEW note that by requiring FTSE 350 companies to retender every five years it is "unlikely to enhance competition and will increase cost".  They also note that linking the audit tender proposal to the FRC's requirement for engagement partners to rotate every five years "ignores the point that those requirements are to achieve a completely different purpose, namely auditor independence".

Click for (all links to FRC website):

• FRC press release
• FRC response to Competition Commission's Summary of Provisional Decision on Remedies for the Statutory Audit Market
• ICAEW response (link to ICAEW website)
• Our previous story on the Competition Commission proposals

There have been a number of reports and projects initiated by national standard-setters and others on the topic of disclosure, and in May 2013 the IASB issued a Feedback Statement Discussion Forum – Financial Reporting Disclosure and announced that it would start a short-term initiative to explore opportunities to improve and simplify disclosures.

However, the CFA Institute felt that the investors' perspective has not been sufficiently considered and notes "that such efforts were heavily informed by reports based on interviews, surveys, and the work of preparers, accountants, and auditors rather than investors". Therefore, the CFA Institute initiated its own survey among its members in February 2012, and the report reflects the opinions expressed in 332 valid responses received on a web-based survey. Of these responses roughly 2/3 came from the Americas and roughly 1/6 each from Asia Pacific and Europe/Middle East/Africa.

The results presented in the report suggests that many investors and financial analysts feel that they already have the tools at hand to "cut through the clutter", so reducing the amount of disclosure is not their foremost priority. Rather than trying to develop a disclosure framework aimed at reducing the disclosure overload, the CFA Institute believes that accounting standard-setters should focus on improving presentation in and transparency of financial statements themselves. Many inefficient disclosures would disappear when the underlying financial statements are more effective and disclosures no longer need to compensate for poor presentation.

The CFA Institute report also discusses other ways that standard-setters will need to consider to improve disclosures, such as materiality, technology, cost-benefit analysis, and underlying behavioural elements. (These aspects have of course not been disregarded by the standard-setters, and materiality and behavioural aspects were central points of Hans Hoogervorst's "Breaking the boilerplate" speech given in June 2013 at the IFRS conference in Amsterdam.)

Please click for access to the report on the CFA Institute website.

Traditionally, materiality has been defined through the lens of financial reporting. However, as investors increasingly recognize the financial implications, risks, and opportunities that arise from non-financial social, environmental, and governance issues there is a need to expand the definition of materiality and to apply it also to areas such as climate change, human rights, and board accountability.

Thus materiality is no longer restricted to purely financial indicators or single issues. Rather it is necessary to apply it to all five capitals (manufactured, financial, social, human and natural capital) if reports are to continue to be meaningful communications to investors. In our comment letter on the International Integrated Reporting Council (IIRC) Consultation Draft on integrated reporting, which has the multiple capitals theory at its core, we note: "We believe a better and clearer articulation is required in the Framework on how materiality for an integrated report is distinct from materiality for other reports such as financial reports, and how to handle the tension between application of materiality and achieving conciseness," and in his June 2013 "Breaking the boilerplate" speech, IASB Chairman Hans Hoogervorst maintained that it is necessary to clarify "that the materiality principle does not only mean that material items should be included, but also that it can be better to exclude non-material disclosures."

Therefore, the report made available this week describes the landscape of various global materiality initiatives and provides a framework for CEOs, senior managers, and boards that helps them to:

• discerne which issues are most material to the company, its stakeholders, industry, and the wider operating environment,
• develop appropriate mechanisms and processes that enable continual assessment of material priorities,
• manage materiality, and
• disclose the corresponding performance on a timely and transparent basis.

Please click for the following information on the AccountAbility website:

• Press release
• Redefining Materiality II: Why It Matters, Who’s Involved and What it Means for Corporate Leaders and Boards

SORPS issued by the IMA apply to UK authorised funds preparing accounts under UK GAAP to present a ‘true and fair view’ and are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique to the sector within which authorised funds operate.

The ED updates the previous SORP to include the requirements of FRS 100 ‘Application of Financial Reporting Requirements’ and FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland'; two of the three main standards that were introduced as a package to replace UK GAAP.  The revised SORP includes:

• New disclosures about the methods to determine fair value;
• Revised disclosures about the risks to which funds are exposed; and
• Simplification of the recognition of debt security interest

The SORP also includes a number of specific requirements aimed at non-UCITS (Undertakings for Collective Investment in Transferable Securities) funds introduced as a result of the Alternative Investment Fund Managers Directive (AIMFD) in July 2013.  The SORP includes an appendix as to how to apply the requirements in the context of FRS 102 including a requirement to disclose gains and losses that are realised separately to those that are unrealised in the notes to the statement of total return.      

Proposals are also made for a new format to present performance and charges in the ‘comparative table” required by the Financial Conduct Authority (FCA) regulations (the Collective Investment Schemes sourcebook).  The SORP proposes “a format for the presentation of this data such that there will be a single table for each unit class which enables investors to focus on the numbers relevant to their holding”. 

The ED proposes that the final SORP will be effective for accounting periods beginning on or after 1 January 2015 although, for certain provisions not connected with FRS 102, it recognises that earlier application may be desirable and seeks comments on this.

Click for the link to the Investment Manager Association website (includes links to the Invitation to Comment and the Exposure Draft Statement of Recommended Practice: Financial Statements of UK Authorised Funds).

These regulations come into force alongside a number of other changes which will apply to companies with periods commencing on or after 1 October 2012:

• The 2012 UK Corporate Governance Code and related Guidance for Audit Committees - this includes the requirement to report whether the annual report contains the information necessary to understand the company’s performance, strategy and business model and whether, taken as a whole, the annual report is “fair, balanced and understandable”; enhanced disclosure of the work of the audit committee; and more transparency on the auditor relationship and on how the effectiveness of the external audit process is assessed.
• The extended auditor’s report – this applies to audit reports for listed companies and requires the auditor to give significantly more detail about and insight into the audit.
• Going concern - the FRC is encouraging larger companies to provide more reporting of risks around financing and going concern in line with the proposals set out in its recent consultation.

A number of other regulations were also approved simultaneously (all links to statutory instruments):

• The Companies (Receipt of Accounts and Reports) Regulations 2013 - these allow companies to provide shareholders who do not wish to receive the full report and accounts with a strategic report with certain supplemental information instead of a summary financial statement;
• The Companies (Revision of Defective Accounts and Reports) (Amendment) Regulations 2013 amend the 2008 regulations that provide how companies should revise their accounts and reports if they are found to be defective; and
• The Unregistered Companies (Amendment) Regulations 2013.  The amendments were made as a consequence of changes to the Companies Act 2006 made by the Enterprise and Regulatory Reform Act 2013 and the Strategic Report Regulations

Click for:

Approved directors’ remuneration report regulations (link to statutory instrument)

Approved narrative reporting regulations (link to statutory instrument)

Our previous story on the narrative reporting regulations

Our previous story on the new directors’ remuneration report regulations

EFRAG appreciates the large number of changes that ED/2013/7 Insurance Contracts shows in comparison with the 2010 ED and supports most of those changes. However, EFRAG also voices some concerns:

• EFRAG believes that the IASB’s proposals in the ED in combination with the classification and measurement requirements in other standards will not help to eliminate accounting mismatches and would result in reporting the insurance performance split across profit or loss and OCI.
• EFRAG also suggests that the IASB should acknowledge the long-term oriented investment business model of insurance activities in the requirements.
• In respect of the proposed measurement and presentation exception, EFRAG voices several concerns (starting point of the proposed ‘mirroring’, scope, measurement basis, and presentation).

Regarding the proposed measurement and presentation exception, EFRAG is currently considering an alternative proposal developed by the insurance industry that might, wholly or partly, address EFRAG's concerns. The alternative is described in an appendix to the draft comment letter, however, EFRAG has not yet formed a view on the approach and has not yet assessed its technical details, operational complexities or conceptual/technical merits.

Please click for the draft comment letter and a corresponding press release on the EFRAG's website. Comments on the draft comment letter are requested by 18 October 2013.

Under the ‘The Partnerships (Accounts) Regulations 2008’ [QP 2008 Reg 3(1)] a partnership (including a limited partnership) is a qualifying partnership if each of its members is 

• A limited company; or
• An unlimited company, or a Scottish partnership, each of whose members is a limited company. 

The regulations [QP 2008 Reg 2(2)] then state “any reference in the Qualifying Partnerships Regulations to the members of a qualifying partnership should be construed, in relation to a limited partnership, as a reference to its general partner or partners”. 

This implies that the status of the general partner or partners would be considered when determining whether the partnership is a qualifying partnership.  However, a view exists under the currently effective legislation (‘The Partnerships (Accounts) Regulations 2008’) that by having a single limited partner with unlimited liability, such as an individual, a partnership does not meet the definition of a qualifying partnership, despite the fact that their liability is limited by virtue of being a limited partner.  This view is supported by the fact that the Government has found it necessary to amend the law rather than issue clarifying guidance. 

The updated definition (link to approved regulations) of a qualifying partnership now ensures that when the partnership is a limited partnership, only the status of the general partners is taken into account when considering whether it is a qualifying partnership.  The effect is that more limited partnerships will fall under the definition of a qualifying partnership and, among other things, will need to prepare and file annual accounts and reports. 

In addition to updating the definition of a qualifying partnership, the amendments also revise the rules around the publication of accounts and amend the definition of members for the purposes of applying the requirements of the regulations.

Each update lasts no more than an hour, and sessions are normally held three times a year, approximately at the end of March, July, and November. We intend to make a recording of each session available on IAS Plus for a period of at least four months from the date of the presentation. The topics covered in the July 2013 webcast include:

• a round up of UK corporate reporting news, including the following items which apply for September 2013 year ends:
  • the new narrative reporting regulations, which require companies to prepare a strategic report; and
  • the new regulations that overhaul the reporting of directors’ remuneration;
• the IASB’s exposure draft on accounting for leases; and
• other IASB developments.

To access the recording click here.