Under the Companies Act 2006 ("the Act"), the Conduct Committee of the FRC reviews the reports and accounts of public and large private companies to determine whether they comply with the Act and other reporting requirements. Where it appears that those requirements have not been complied with, the Conduct Committee investigates the position and determines the action to be taken to address any non-compliance. 

The Conduct Committee reviewed the reports and accounts of 264 companies split across different market categories.  Following the initial review, 91 companies were asked to provide further information and explanations.  The report identifies seven common areas that were challenged: 

• Business reviews.  The Conduct Committee challenged where the Business reviews included inconsistent narrative when compared to what was reported in the accounts and those which only reported “good news”.
• Revenue.  The Conduct Committee challenged, among other things, generic revenue descriptions which were inconsistent with those described in the Business review.
• Cash flow statements.  The Conduct Committee challenged “inconsistencies” between information reported in the cash flow statements and that reported elsewhere in the report or accounts.
• Alternative performance measures/financial KPIs.  The Conduct Committee challenged where alternative performance measures/KPIs were not clearly defined or explained and where their use “detracts from the IFRS information provided”.
• Investment property valuations.  The Conduct Committee challenged where there was insufficient disclosure around the significant assumptions used and methodology applied.
• Business combinations.  The Conduct Committee challenged a number of areas of accounting for business combinations including “where it was unclear whether the Board had identified all separately acquired intangible assets”.
• Impairment.  The Conduct Committee challenged certain areas such as the key assumptions used and lack of sensitivity disclosures.   

The key messages from the report are: 

• There is continued “good quality corporate reporting” by large public companies especially those in the FTSE 350.
• Corporate reporting by smaller listed and AIM quoted companies is impacted by lack of “sufficient or appropriate resource to recognise of address accounting questions”.  The report notes that with these types of companies there are usually “straightforward areas of non-compliance” rather than non-compliance in a particularly complex area.  The Conduct Committee asks that the Boards of smaller listed and AIM quoted companies “consider whether they have access to the level of technical resource and expertise needed to prepare corporate reports and accounts to an acceptable standard”.
• The majority of Boards had not performed a review of their accounts to ensure that only key messages were displayed supported by relevant and concise disclosures.  A number of accounts had not removed the “clutter” within their annual reports and the Conduct Committee note that performing this review and cutting clutter will make accounts “more readily understandable by investors and other users” and will also support the “fair, balanced and understandable” statement required by the UK Corporate Governance Code.
• There has been an improvement in companies’ reporting of principal risks and uncertainties in the Business review.
• A number of companies still continue to misclassify cash flow or report non-cash movements as cash flows. 

The report also highlights a number of areas of focus for the next financial reporting period.  Those areas identified are:

• Compliance with accounting standards.  The report highlights that, where IFRSs allow the use of judgement, the Conduct Committee “expects judgement to be exercised in good faith” and “will challenge where the exercise of judgement appears to have resulted in aggressive accounting”.  They also note that they will challenge non-compliance with specific requirements of the standards and they “will monitor the application” of new standards such as IFRS 13 “Fair Value Measurement”.
• Compliance with the new strategic report requirements.
• Reporting by smaller listed and AIM quoted companies.  The FRC will consider how improvements can be made in this area and will incorporate this into its 2014/15 Plan and Budget. 

Further information on the findings is provided in a more detailed technical presentation. 

The FRC will be presenting the findings of the report at the December 2013 Institute of Chartered Accountants in England and Wales (ICAEW) Financial Reporting Discussion Group (FRDG).

Click for (all links to FRC website):

• Press release
• Corporate Reporting Review: Annual Report 2013
• Technical findings of the Conduct Committee’s Financial Reporting Review Panel: 2012-13

Mr Prada reflected on Europe's adoption of IFRS and spoke about protecting the Standards in their entirety; he cautioned against customising them for use in Europe. Mr Prada cited Philippe Maystadt's draft report, warning that "a tweak here, a failure to endorse there and very quickly you can have Standards that are once again incompatible with other parts of the world. . . . We all need to be vigilant to ensure that Europe continues to be a champion in global financial accounting reporting, for the good of Europe and for the stability of the global financial system".

Mr Prada went on to examine the challenges of transparency and maintaining legitimacy. He also discussed the importance of collaboration with national and regional standard-setting bodies. The cooperation allows greater consistency in adoption, implementation and enforcement of IFRS.

The full text of the speech and a video recording of the speech are available on the IASB website.

One of the agenda items is to discuss the feedback received on EFRAG's draft comment letter on the IASB's Exposure Draft ED/2013/8  'Agriculture: Bearer Plants (proposed Amendments to IAS 16 and IAS 41)' and to discuss EFRAG's final comment letter response. 

Interested listeners have the ability to dial into the conference call.  Please click link for details of the registration on the EFRAG website.

The provisional report of the Committee on Economic and Monetary Affairs (ECON) of the European Parliament was made available earlier this month. It recommended an annual assessment of the EU's funding for the IASB and suggested making the outcome of the assessment dependent on certain conditions.

Those funding arrangements depend on whether the IFRS Foundation and IASB implement the proposals of the Union regarding their governance; whether the Union accounting concepts, in particular with regard to 'prudence' and the requirement for the 'true and fair view' are appropriately considered in the revision of the Conceptual Framework; whether the IASB decides not to include those concepts in the revised Conceptual Framework; and whether the IASB provides reasons for its decision, including publishing the details of the jurisdictions, non-governmental organisations, undertakings or other stakeholders, which objected to those concepts.

When updating the Advisory Committee members about the IASB's activities, Mr Hoogervorst referred in passing to the provisional ECON report and the technical issues that are suggested as criteria for the funding assessment when he spoke about the IASB's conceptual framework project. In the course of the project there have been calls from various sides to reintroduce the concept of 'prudence' and Mr Hoogervorst acknowledged the discussion in his September 2012 speech on prudence. Referring to the provisional ECON report he commented though that he found it "very difficult to discuss the concept as long as it is tied in to a political discussion". He called tying funding to the outcomes of standard-setting "something we cannot accept" and "a threat to our independence" and also warned "if Europe is going to do this, other parts of the world might be encouraged to do so". The IASB Chairman added, however, that he had the impression that the European Commission has also realised that the current situation is "not something to be wished for" and he expressed the hope that the official trialogue now beginning and involving the European Parliament, the Council and the Commission would have a "positive outcome".

Mr Hoogervorst's remarks were recorded as part of his update on the IASB's activities and can be listened to on the IASB's website (recording ACM – Session1/3).

The Competition Commission began an investigation into statutory audit services to FTSE 350 companies in 2011 following a request from the Office of Fair Trading.  They found that there were features within the UK market for the supply of audit services (such as barriers which prevented companies from switching auditors) which either combined or individually resulted in an “adverse effect on competition” (AEC).  

The final package of remedies is 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.  

The final decision to mandate audit tendering every ten years is in line with the revisions to the UK Corporate Governance Code (“the code”), introduced by the Financial Council (FRC) in September 2012, and is a change from the Competition Commission’s original proposals for a 5 year mandatory tender period in July 2013.  However, the Competition Commission does not agree that FTSE 350 companies should be able to delay a tender any longer than ten years on a “comply or explain” basis.  The Competition Commission highlights that ten years is the longest that a company can wait and indicate that they are still of the view that “many companies would benefit from going out to tender every five years”.  Where a FTSE 350 company chooses not to tender every five years the Competition Commission notes that “the Audit Committee should set out in the Audit Committee Report section of the Annual Report in which financial year it next plans to go to tender and why going out to tender in that year is in the best interests of shareholders”. 

Aside from the proposals for ten year audit mandatory tendering, the Competition Commission remedy package also includes: 

• Additional responsibilities for the Audit Quality Review Team (AQR) of the FRC to “review every audit engagement in the FTSE 350 on average every five years”.  Less risky audits can be reviewed less frequently.  Findings are to be reported to the shareholders by the Audit Committee “during the reporting period” including the grade awarded and how both the auditor and Audit Committee are addressing the findings. 
• The proposal for the companies to hold a shareholders’ vote at the AGM on whether “Audit Committee Reports in company annual reports are satisfactory”.
• Reporting by the AQR team on firms within its scope on an annual basis.
• Prohibitions on provisions in loan agreements which restrict a company’s choice of auditor to a pre-selected list or category. 
• Measures to “strengthen the accountability of the external auditor to the Audit Committee”.  These measures include:
  • Only allowing the Audit Committee to negotiate and agree audit fees and the scope of audit work with the external auditor.
  • Only allowing the Audit Committee to initiate tender processes and make recommendations for the appointment of auditors and authorise the external audit firm to carry out non-audit services.
• A requirement for the FRC to amend its articles of association “to include an objective to have due regard to competition”. 

There are a number of other measures that the Competition Commission have not included in their remedy package such as mandatory auditor rotation (something which the European Commission is pushing for) and further constraints on non-audit services by the auditor.     

Whilst the Competition Commission recognise that the measures will impose additional costs “principally arising from the increased activities of the FRC with respect to the AQR team”, they do comment that “the benefits of the package are considerable”. 

They comment: 

We expect the [above] measures taken together as a package will be effective and proportionate in remedying the AEC.  We expect this remedy package to result in a substantially improved environment for competition in the FTSE 350 statutory audit market. 

The FRC has welcomed the move to ten yearly audit tendering after having expressed their concerns in August 2013 over original proposals for five yearly audit tendering.  They also support the increased role of the audit committee, commenting that "the emphasis on audit committee reporting builds on the changes introduce to the Code in October 2012".  In relation to the proposals for AQR, the FRC comment that they will "consider the implications to our resource and funding requirements". 

Subsequent to their initial response, the FRC also published a letter to the Competition Commission in January 2014 providing their comments on the individual remedies that the Competition Commission addressed to the FRC.  This can be accessed below. 

The Institute of Chartered Accountants in England and Wales (ICAEW) also agreed that ten yearly tendering is "the right decision".  The Institute of Chartered Accountants of Scotland (ICAS), along with the ICAEW would, however, have "preferred" ten year tendering on a "comply or explain" basis. 

The full final report (including appendices) has now been issued and can be accessed on the Competition Commission website here.  The timetable published by the Competition Commission, on their website, shows that these remedies are to be effective from 1 October 2014. 

Click for:

• Competition Commission Press release (link to Competition Commission website)
• Summary of Competition Commission final report (link to Competition Commission website)
• Other documents supporting the Competition Commission proposals (link to Competition Commission website)
• FRC response (link to FRC website).
• FRC letter to the Competition Commission (link to FRC website).
• ICAEW response (link to ICAEW website).
• ICAS response (link to ICAS website)
• Our previous story on the Competition Commission provision proposals
• Our previous story on the FRC response to the Competition Commission proposals 

There are two outreach events in November 2013; one in partnership with the Institute of Chartered Accountants in England and Wales (ICAEW) and one in partnership with The Confederation of British Industry (CBI).

Among the issues to be discussed are:

• what should be reported in the profit or loss account and other comprehensive income (OCI);
• the use of current market values and historical cost; and
• the role of prudence and stewardship.

Subsequent to the events, the FRC released the slide packs from the outreach events.  These can be accessed below.

Click for:

• More information, including registration details for the joint ICAEW event on the FRC website
• Slide Pack: FRC and ICAEW Outreach event (link to FRC website). 
• More information, including registration details for the joint CBI event on the FRC website.
• Slide Pack: FRC and CBI Outreach event (link to FRC website).
• IAS Plus article on the Conceptual Framework Discussion Paper
• IAS Plus project page on the IASB’s conceptual framework project

Disclosure

The ASAF explored the IASB's Disclosure Initiative project and an approach to rethinking a disclosure and presentation framework. The IASB staff provided an overview of the project including the five short- and medium-term strategies. ASAF members supported the project; however, some members felt the timeline was over-ambitious and noted that the IASB should include input from regulators and auditors. Also, the IASB staff provided an overview on the proposed amendments to IAS 1. The ASAF members generally supported the proposals, but suggested some drafting changes. They suggested that the IASB should investigate ways to make accounting policies more entity-specific and whether the policies should be presented with detailed notes. In addition, ASAF members expressed mixed views on the issue of 'net debt', since 'net debt' is not a feature of financial reporting in some jurisdictions. To wrap up the disclosure discussion, the ASAF members viewed a presentation by Kevin Stevenson, Chair of the AASB, on his paper, 'Rethinking the Path from an Objective of Economic Decision Making to a Disclosure and Presentation Framework'. 

Insurance Contracts

The ASAF discussed the IASB's exposure draft on insurance contracts. Members supported the IASB's direction regarding insurance contract revenue and transition, but had concerns about the accounting mismatches that would arise as a result of applying the proposals relating to contracts with cash flows that vary with underlying items, and those relating to the use of other comprehensive income.

Leases

The ASAF reviewed the IASB's exposure draft on leases. Members had mixed comments on the proposals. While most members supported the direction of the proposals in the exposure draft, some had concerns about the complexity of having dual approaches. The ASAF members also suggested specific points for the IASB and FASB to consider regarding the measurement of lease assets and liabilities, the definition of a lease, disclosure, and transition.

Financial Instruments

Macro-hedge accounting

The IASB staff presented a summary of the macro-hedge accounting portfolio revaluation approach to solicit feedback by the ASAF. The ASAF members suggested the model should (1) be extended to include risks other than interest rate, (2) clarify how the model handles financial products managed on the basis of expected maturity, and (3) carefully consider the scope of the model. The ASAF suggested an extended comment period of six months for the discussion paper that is expected to be issued later this year.

Impairment

The ASAF discussed the proposals in the IASB's exposure draft on expected credit losses. The IASB staff presented some clarifications and enhancements to the proposals on the responsiveness of the general model, the measurement objective for Stage 1, and the definition of 'default'. Some ASAF members commented that the proposals should be finalised. They also stressed that it is important that the objectives and principles remain clear and do not become too prescriptive. Further, some members needed additional clarification on the definition of 12 months' expected credit losses and that the IASB should consider divergence that exists in IFRSs when measuring impairment losses.

Conceptual framework

ASAF members discussed the EFRAG's bulletin on prudence. Many ASAF members felt the IASB should consider reintroducing the concept of prudence in the conceptual framework. They emphasised the importance of providing a clear definition for 'prudence' so it is not used differently by different groups of people and suggested that it should be described as the exercise of caution under conditions of uncertainty.

Future meetings

The ASAF will next meet on 5 and 6 December 2013 in London. Also, the date of its September 2014 meeting has been changed from 8 and 9 September to 25 and 26 September.

A full summary is available on the IASB website.

IFAC states that there is growing recognition that in addition to capturing the financial information organisations prepare and use in managing and directing their business, it is important to capture and report other, largely non-financial, information. Financial reporting cannot satisfy all information needs and stakeholders continue to seek more and different information that they find relevant to their decision making. This includes, but is not limited to, information pertaining to an organisation’s strategy, governance, risk management, human resources, and approach to broader sustainability issues, including environmental and social issues.

However, IFAC recognises that there are a range of different organisational reporting frameworks and regulations available and being developed (among them IIRC, GRI, UN Global Compact, CDSB, IPSASB, SASB, and OECD Guidelines for Multinational Enterprises), and considers it important to examine the relationship between these frameworks and promote global consistency and convergence:

IFAC considers it vital that regulators, standard setters, and others involved in the development of reporting frameworks recognize and promote not just the need for enhancing organizational reporting, but also the need for globally consistent and convergent practices and arrangements. The challenges associated with convergence of financial reporting arrangements in the last decade provides a sound reason for all parties to aim to agree on a consensus, or at least the identification of the relationships and consistency between the different frameworks, at the earliest possible time.

Please click for the following information on the IFAC website:

• IFAC press release
• Enhancing Organizational Reporting - two page overview
• Enhancing Organizational Reporting - full Policy Position Paper