August

FRC Exposure Draft clarifies accounting for residential management companies

05 Aug, 2013

The Financial Reporting Council (FRC) has issued a financial reporting Exposure Draft FRED 50 containing Draft FRC Abstract 1: Residential Management Companies’ Financial Statements which sets out the treatment of residential management transactions in the financial statements of residential management companies (RMCs). The FRC has also issued consequential amendments to the Financial Reporting Standard for Smaller Entities (FRSSE).

FRED 50 Draft FRC Abstract 1 replaces UITF Draft Abstract 49 Residential Management Companies’ Financial Statements and applies to residential management companies preparing financial statements under FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.  It clarifies that all RMCs act as principals and not agents in their residential management transactions with third party suppliers.  On the basis that they RMCs are acting as principals, FRED 50 Draft FRC Abstract 1 addresses how RMCs shall recognise transactions with third party suppliers in their financial statements when discharging their duties to manage and arrange maintenance of a property. 

Entities will be required to apply FRED 50 Draft FRC Abstract 1 and the consequential amendments to the FRSSE for accounting periods beginning on or after 1 January 2015 with early adoption permitted.  

The FRC invite comments by 11 November 2013.  

FRED 50: Draft FRC Abstract 1 - Residential Management Companies' Financial Statements can be found here (link to FRC website).

IPSASB publishes preliminary preface to forthcoming public sector conceptual framework

02 Aug, 2013

The International Public Sector Accounting Standards Board (IPSASB) has released a preliminary version of a Preface to its forthcoming Conceptual Framework for the public sector. The purpose of the Preface is to highlight characteristics of the public sector that underpin the development of International Public Sector Accounting Standards (IPSAS) and Recommended Practice Guidelines (RPGs), including the identification of areas where departures from private sector approaches to financial reporting are likely.

The document, entitled Preliminary Board View: Preface to the Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities, identifies that the primary objective of most public sector entities is to deliver services to the public, rather than to make profits and generate a return on equity to investors.

The preface notes discusses the following characteristics of public sector entities:

  • The volume and financial significance of non-exchange transactions including involuntary transfers such as the collection of taxation, increasing the importance of the accountability objective of financial reporting
  • The importance of the approved budget and information to compare actual spending, revenues and the resulting surplus or deficit with budget estimates
  • The nature and purpose of assets in the public sector, which are primarily held to provide services rather than to generate cash flows. In addition, such assets may contribute to the historical and cultural character of a nation or region, or represent areas of natural significance
  • The longevity of the public sector and the nature of public sector programs, making the going concern concept difficult to interpret in the public sector context, and resulting in an increased need for information about the long term sustainability of an entity's finances
  • The regulatory role of public sector entities, including entities operating in certain sectors of the economy, to address market failures, or to regulate themselves
  • Relationship to statistical reporting, and the commonalities and differences between general purpose financial statements (GPFS) and government finance statistics (GFS).

The preliminary preface follows an earlier exposure draft which was issued in April 2011, and will not be finalised until the IPSASB finalises its conceptual framework during 2014. The IPSASB is not formally calling for constituent comment on the preliminary preface, but considered its publication important "because of the importance of the characteristics identified to the future development of IPSASs and RPGs".

Click for access to the preliminary preface (link to IFAC website).

PRA and FCA consult on CRD IV

02 Aug, 2013

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have published proposals on implementing the new EU Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR), collectively known as CRD IV. Among other things, the proposals include requirements for UK banks, building societies and large investment firms to set quotas for the number of women on boards. Comments on the FCA consultation are invited until 30 September 2013 and comments on the PRA consultation are invited until 2 October 2013.

CRD IV is the EU package of rules and regulations which implements Basel III, the international regulatory framework for banks. The package is binding on all EU member states. It aims to address the problems that caused the financial crisis by increasing the level and quality of capital held by banks, enhancing risk coverage, expanding disclosure requirements and reducing procyclicality. CRD IV provides a basis for EU liquidity standards and introduces leverage disclosure requirements.    

The Capital Requirements Regulation is directly applicable in all member states whilst the Capital Requirements Directive must be incorporated within UK law, by means which would include through the rules and regulations of the PRA and FCA. 

One provision in the CRD in relation to the role of the nomination committee will affect how companies approach boardroom diversity and the disclosures they make.  It states: 

The nomination committee shall decide on a target for the representation of the underrepresented gender in the management body and prepare a policy on how to increase the number of the underrepresented gender in the management body in order to meet that target. The target, policy and its implementation shall be made public.

In their consultation document ‘Strengthening Capital Standards: implementing CRD IV’ (link to PRA website), the PRA has stated that these proposals will be included within their regulation and once incorporated into UK law will therefore require firms to set and publish quotas in order to promote gender diversity.  This will represent a change from current requirements in the UK where, although companies are encouraged to adopt diversity targets this is not a legal requirement.  The FCA has also indicated that it will implement these proposals in their consultation ‘CRD IV for Investment Firms’

Aside from the requirements in relation to diversity, the CRD contains a number of other specific provisions relating to the “management body”, risk management and remuneration which the PRA will implement although it highlights that some of these will not have a significant impact.  

Management Body 

The CRD introduces a new requirement relating to the management body who it defines as those which “are empowered to set the institution’s strategy, objectives and overall direction”.  This requires that the chairman and chief executive officer must be independent, however this is not a new requirement to UK companies as this is not seen as good governance. 

Risk management

The PRA intends to implement the CRD requirements in relation to risk management.  The main requirements are that: 

  • The management body should approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the institution is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.
  • The management body should devote sufficient time to consideration of risk issues
  • Large organisations should establish a risk committee composed of members of the management body who do not perform any executive function in the institution concerned.
  • The management body should retain overall responsibility for risks and have access to all relevant information to be able to perform their role.
  • Organisations should have a risk management function which is independent from the operational functions and which shall have sufficient authority, stature, resources and access to the management body. 

Remuneration 

The CRD provisions in relation to remuneration, introduce, among other things limits on bonuses, where a base line level will be set and can only be amended with shareholder approval.  The provisions also stipulate that the board should review the general principles of its remuneration policy and, at least annually, review compliance with that policy.  The FCA and PRA will consult at a later date how best to take these provisions forward. 

In addition, a number of reporting and disclosure requirements are required by the CRR to which the PRA is introducing rules for.  These include the requirements to disclose certain regulatory information publicly and a new rule for financial institutions to disclose their return on assets among their key indicators in their annual reports.  Additionally the CRR and CRD require companies within their scope to report on a country by country basis.  This will require a change in the law which HM Treasury will consult on in the autumn.

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FRC issues revised SORP ‘Policy and Code of Practice’

02 Aug, 2013

The Financial Reporting Council (FRC) has issued a revised version of its ‘Policy and Code of Practice’ on Statements of Recommended Practice (SORPS). The revised version is effective from 1 August 2013 and supersedes the earlier version issued by the Accounting Standards Board in July 2000.

SORPS, issued by ‘SORP-making bodies’ are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique within specialised industries or sectors.  

The SORP ‘Policy and Code of Practice’ (link to FRC website) provides the policy which industry or sectoral bodies must follow if they are to become a recognised ‘SORP-making’ body.  The SORP ‘Policy and Code of Practice’ also contains a Code of Practice for such bodies on developing SORPS.

The revisions do not alter the overall policy in relation to SORPS but have been made to reflect “FRC reform and experience of applying the previous version”.  The FRC has been working with SORP-making bodies in updating their SORPS to reflect the requirements of FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’. 

The FRC has also provided some guidance on the early application of FRS 102 for entities within the scope of a SORP.  Paragraph 1.14 of FRS 102 permits early application, where an entity is within the scope of a SORP when “it does not conflict with the requirements of a current SORP or legal requirements for the preparation of financial statements”.  The FRC notes that current SORPS, as they are currently written, may not conflict with FRS 102 and so careful consideration is required to determine whether there is a conflict prior to them being updated to reflect FRS 102.  They note that “in particular an entity should consider whether or not the recognition and measurement requirements of FRS 102 are consistent with the current SORP”.  Nevertheless, the FRC emphasise that legal or regulatory requirements will still need to be considered to determine whether early application is permitted. 

FRC calls for comments on the IAASB proposed changes to audit reports

01 Aug, 2013

The Financial Reporting Council (FRC) has requested comments from interested parties on the International Auditing and Assurance Standards Board’s (IAASB’s) recently issued Exposure Draft which proposes changes to audit reports including the provision of more information on how audits are performed. The FRC intends to use comments received to assist it in developing its response to the IAASB’s proposals. Comments are invited by the FRC until 1 November 2013.

The IAASB released their Exposure Draft (ED) ‘Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs) in July 2013.  The ED revises a number of existing ISAs (700, 260, 570, 705 and 706) but also introduces a new ISA, ISA 701 ‘Communicating Key audit matters in the Independent Auditor’s Report’.  Under ISA 701, the IAASB proposes that within the audit report there should be a “key audit matters” section which would outline audit matters that were of most significance which arose during the audit.     

The FRC’s equivalent ISAs (UK and Ireland) are largely developed from the ISAs published by the IAASB.  The FRC has made a number of recent revisions to ISAs 260 and 700 (UK and Ireland) as a result of changes that have been made to the UK Corporate Governance Code in October 2012.  The FRC have also recently issued further revisions to ISA 700 ‘The Independent Auditor’s Report on Financial Statements’ (UK and Ireland) in response to calls from investors to make audits more transparent.  These revisions cover broadly the same areas as the proposed ISA 701.   

In the Invitation to comment the FRC note that they believe the recent changes they have made to the UK Corporate Governance Code and subsequent changes to ISAs (UK and Ireland) will achieve many of the aims that the IAASB is seeking to achieve with the current revisions to ISAs.  However they are keen to understand from respondents whether any further changes to ISAs (UK and Ireland) should be made to incorporate the IAASB proposals and also the new ISA 701.  In providing their comments, the FRC would like respondents to have regard to “the inter-relationship of the IAASB’s proposals and the changes already made by the FRC in 2012/13”. 

Respondents are also invited to provide comments on the 14 specific questions raised by the IAASB in their ED. 

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