The principal issue arising from the review related to the company’s decision not to recognise as a liability in its accounts a schedule of contributions prepared under schedule 227 of the Pension Act 2004 between a subsidiary of the company and the company’s pension trustee. 

Following the review the FRRP concluded that a schedule of contributions (prepared under section 227 of the Pensions Act 2004) between a company and the company’s pension trustee constitutes a minimum funding requirement under IFRIC 14 ‘IAS 19 – The Limit On a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’. 

Please click here for the full press release on the FRC’s website.

The Financial Reporting Council (FRC) has approved CCAB as the recognised SORP-making body for issuing a recognised SORP for Limited Liability Partnerships incorporated in Great Britain under the Limited Liability Partnerships Act 2000.  The members of CCAB are; The Institute of Chartered Accountants in England and Wales (ICAEW), The Institute of Chartered Accountants of Scotland (ICAS), The Institute of Chartered Accountants in Ireland (ICAI), The Association of Chartered Certified Accountants (ACCA) and The Chartered Institute of Public Finance and Accountancy (CIPFA).  

SORPS issued by CCAB apply to LLPs preparing accounts under UK GAAP to present a ‘true and fair view’.  CCAB has stated that “the underlying purpose of the SORP is to ensure that, as far as possible, LLPs present financial statements that are comparable with those of limited companies”. 

The Exposure Draft of the LLP SORP proposes updates to the previous SORP (2010) to reflect the requirements of FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’. 

The changes proposed as a result of FRS 102 are: 

Updating the guidance on business combinations and group accounts to reflect the fact that FRS 102 only allows merger accounting to be used for group reconstructions.

Updating the guidance on contractual or constructive obligations and annuities to reflect the fact that FRS 102’s requirements relating to financial liabilities differ from current UK GAAP requirements.

Updating references throughout to reflect the introduction of the option to produce a single statement of comprehensive income, including adding an additional exhibit in appendix 1. 

A number of other changes have been proposed to clarify areas of the 2010 SORP “where there were known issues or misunderstandings”: 

Clarifying that if a reconciliation of members’ interests is to be shown as a primary statement in place of the statement of changes in equity then comparatives must be shown for all figures presented.

Improving the table that follows paragraph 60 to ensure the recommended format not only provides a reconciliation of members’ interests but also meets related Companies Act requirements.

Providing more guidance on cash flow statement presentation to reduce divergent practices.

Refining the examples in appendix 2 to focus on more commonly encountered scenarios and to eliminate some duplication. 

The final SORP will be effective for accounting periods beginning on or after 1 January 2015 and earlier, if an entity chooses to early adopt FRS 102. 

Click for (all links to CCAB website):

• Press release
• Draft Statement of Recommended Practice — Accounting by Limited Liability Partnerships.

FRED 51 proposes limited amendments to FRS 102 in respect of hedge accounting with the following stated objectives: 

To allow entities to apply hedge accounting when this reflects their economic and risk management strategies, without onerous conditions; and

To use concepts and language that are, as far as possible, consistent with those included within IFRS 9 Financial Instruments. 

No comments are requested on the Staff draft as these will be invited once FRED 51 is published. 

The Staff draft can be accessed on the FRC website here.

In August 2013, the PRA and FCA both consulted on a number of proposals for amendments to their respective handbooks as a result of the transposition of CRD IV.  The FCA handbook is applicable to nearly all investment firms under the Capital Requirements Directive (CRD) and the PRA handbook applicable to credit institutions and those investment firms ‘designated’ for prudential supervision by the PRA. 

The consultations in August 2013 noted the key features of the changes in remuneration policies that will be required as a result of CRD IV but did not consult on these.  These consultations are now included in the FCA consultation paper ‘CP13/12 – CRD for investment firms’ and the PRA consultation paper ‘CP8/13 – Occasional Consultation paper’. 

The CRD IV requirements are in respect of “variable elements of remuneration”.  The areas that are being consulted on are: 

• Limits on bonuses (limits between the fixed and variable component of total remuneration);
• Areas of national discretion to set up stricter measures on bonuses; and
• Use of the principle of proportionality in applying the bonus limits according to the ‘type’ of investment firm. 

Subsequently to publishing their consultation, the PRA has also published a Supervisory statement (link to Bank of England website) as to how they expect companies, subject to the Remuneration Code in SYSC 19A of the handbook, to comply with the malus provisions.  A further consultation will be published later proposing clawbacks of vested awards. 

Comments on the FCA consultation are invited until 10 November 2013 and comments on the PRA consultation are invited until 1 November 2013. 

Click for:

• FCA press release (link to FCA website)
• FCA consultation paper ‘CP13/12 – CRD for investment firms’ (link to FCA website)
• PRA consultation paper ‘CP8/13 – Occasional Consultation paper’ (link to Bank of England website).
• Our previous story on the PRA and FCA consultations on CRD IV

After its January 2013 public discussion forum on disclosure, the IASB issued a feedback statement that consisted of the forum's discussions, the IASB's response, a summary of work already undertaken on disclosure, and the outcomes of the IASB's survey issued in December 2012. In June 2013, Chairman Hans Hoogervorst announced a 10-point plan as the first step to this initiative.

The Disclosure Initiative group consists of members of the IASB standard-setting team and its eXtensible Business Reporting Language (XBRL) team. By including the XBRL team in the standard-setting process, the group can also improve how electronic filing of financial information is presented. The group will also be assist by the German national standard-setter, the DRSC.

The integration of the XBRL team into the IASB’s work programme is a component of the XBRL strategic review performed by IFRS Foundation Trustees.

Please click for:

• Press release (link to IASB website).
• IAS Plus project page on the Disclosure Initiative.

It is one of the oldest complaints in the world of regulators, standard-setters and investors.  The investment community, it is always said, doesn’t engage as fully as regulators and standard-setters would like in the process of creating and refining the rules and codes which aim to give investors the security and confidence they crave.  Up in lights on the opening page of the Financial Reporting Council’s website is a mission statement: ‘The FRC is the UK’s independent regulator responsible for promoting high level corporate governance and reporting to foster investment’.

And Stephen Haddrill, the FRC’s CEO, reiterated this at its annual open meeting in mid-September.  Amongst the FRC’s three key principles, he said, was ‘promoting effective consultation with stakeholders, especially investors, (an area where we have not always been able to tease out an investor view as effectively as we would like), so we are seeking to build bridges to the investor community even more strongly’.

And this, as he pointed out, is where Angus Bogle comes in.  In mid-July he was appointed Director of Investor Engagement at the FRC.  And in mid-September he rolled up his sleeves and started the process of, as he puts it, ‘getting the FRC closer to the investment community’.

He is well placed.  He has been in financial services for the last 25 years on both buy and sell-side, latterly as head of equities at Fidelity International. ‘I understand investors and what makes them tick’ was how he summed it up.

And he doesn’t underestimate the task. ‘It is important the FRC gets close to investors, and vice versa, to get their voices heard’, he says. ‘I need to get everyone throughout the organisations to understand what the FRC does and play a part.  Our role is to look after investors and it is very important for them to get engaged.  Without that we will develop our policies not exactly in a vacuum but certainly in an area of reduced air’.

And he wants to extend the breadth of the connections.  ‘Our links with big institutions are already good’, he says, ‘but the coordination could be better’. And another issue is the tendency for an understanding of what regulators are doing to be kept in a relatively isolated silo in the investment institution.  ‘If I am a busy portfolio manager in a big institution I will probably have someone who deals with “this sort of stuff” on behalf of the organisation’, he says, ‘and they will attend the relevant investor bodies, like CRUF, the corporate reporting user’s forum, for example’.

Bogle’s worry is that information and the exchange of views within the industry probably tends to remain within that small department rather than becoming common knowledge across the firm.  ‘The crucial thing’, he says, ‘is to ensure there is a strong link between that person and the people at the coalface.  And there needs to be more drive from the top of the organisation’.  It all needs to be more connected.  ‘If the motivation when something new comes in is that it is passed to “the person who deals with this” then we are missing out’, he says. ‘So we need to talk to the people at the coalface, the analysts, the portfolio managers and so on, and get the communication across’.

The other downside of the process of engagement being often seen as the role of only one person in the investment organisation is the wasteful repetition of effort.  Bogle gives an example.  ‘I had one investor say to me: “I take an interest but I need other people in the organisation to share the burden. The IASB phones up wanting views on a particular issue.  The FASB then do the same and then the FRC calls up.  I am giving more or less the same answer to each. And then the results of those consultations don’t seem to go anywhere and it all takes time.  And if we engage and spend that time we want to see an effect and see it reach a conclusion”’, says Bogle.

So investors can be frustrated by the process.  And they also feel that they are under time pressure.  ‘They are’, says Bogle, ‘extremely busy people trying to work out what the drivers of a share price are and what is going to get them to outperform’.

It is the old difficulty of people in the investment world understanding the issues but feeling that they are too busy to engage with them.  ‘Most of them have developed a sense of how good corporate governance and really good stewardship is very important’, he says.  ‘But at the same time they are concentrating on running after the next nugget.  So some rely more on the accounts and audit to ensure that the corporate governance is good rather than spending time engaging directly with management’.

What Bogle wants is both wider engagement and specific engagement.  ‘We want a greater degree of the investment community to engage with us’, he says, ‘so it is not just the loudest voices’.

One way of getting closer is the FRC’s Financial Reporting Lab which brings companies and investors together in an unofficial space to try and produce solutions to problems they are encountering.  ‘The Lab’, as Bogle puts it, ‘is where companies and investors meet and chuck ideas about.  We are incredibly grateful to those people who are happy and willing to give us input’.

Another is a more traditional method.  ‘I will be burning shoe leather’, he says, ‘to see the top-level contacts and gaining familiarity with the people we need to see in organisations and investor bodies.  It is important for me to understand the framework in which the FRC works, particularly in Europe’.

This brings up another strand.  The world is changing.  The recent figures released by the Office of National Statistics show that, in terms of value, overseas ownership of shares on the UK stock market has now risen to 53%, over half the market.  This changes the game.  ‘The UK shareholder base is very different to what it was 15 years ago’, says Bogle. ‘The UK investment community has always been seen as the people to engage with.  Plainly that is now not the whole picture.  If 53% of the market is owned by the rest of the world that is a big number and so we need to engage with foreign investors as well’.

It is a changing world and Bogle, through his work, will want to change it further.  ‘It is not just about corporate governance and stewardship’, he says. ‘It’s about getting people across the investment spectrum to care about what the FRC is doing and to get the whole investment base to understand.’

The Exposure Draft (ED) proposes an interim standard that will allow entities currently recognising regulatory assets and regulatory liabilities in accordance with their jurisdiction-specific GAAPs to continue to do so upon the initial adoption of International Financial Reporting Standards (IFRSs).  The ED also provides a number of specific disclosure requirements such as separate line item disclosure in the statement of financial position and movements in regulatory assets and regulatory liabilities as a separate line item in the statement of profit or loss and other comprehensive income. 

In July 2013, the FRC published a draft comment letter on ED/2013/5 and asked for its constituents to comment.  The views expressed by the FRC in their final comment letter are consistent to those in their draft comment letter. 

The FRC provide four main reasons as to why they do not support the proposed interim standard: 

• It is not principles based;
• It will not allow the objective of a single set of International Financial Reporting Standards (IFRSs) to be obtainable as “different jurisdictions will be permitted to carry forward previous practices”.  The FRC comment that this will result in there being “two or more versions of IASB sanctioned IFRSs”.  However the FRC do comment that although the interim standard may result in diversity in accounting policies within a particular jurisdiction it should mean that more entities are encouraged to adopt IFRS;
• By permitting entities to maintain their existing accounting policies for recognition, measurement and impairment and hence introducing the potential for diversity, it will impact upon the confidence users of financial statements have in the IASB for producing high quality accounting standards; and
• It is likely that the interim standard may be in place for a long time and hence will have a far greater impact than just in facilitating first time adoption of IFRS.  The FRC comment that they feel the interim standard could be applied until the Conceptual Framework project is completed as only then will the IASB be able to perform a comprehensive review of rate regulated regulation and whether regulatory assets and regulatory liabilities should be recognised as assets and liabilities. 

Click for:

• Full comment letter (link to the FRC website).
• Our previous story on the IASB ED/2013/5 'Regulatory Deferral Accounts'

For lessees, the Exposure Draft ED/2013/6 Leases proposes the recognition of a liability and a right-of-use asset for all leases with a profit or loss impact dependent on the classification of a lease. The lessor model in the ED is similar to current lease accounting with some nuances for the recognition of revenue and discounting of the residual asset. The proposals are only applicable for leases with a lease term of more than 12 months.  

Whilst the FRC agrees with the “focus of the ED” and “the need to report useful information about the amounts, timing and uncertainty of cash flows arising from a lease”, they have expressed concerns over a number of areas contained within the proposals: 

• Allocation of consideration to lease components.  The FRC “has concerns regarding the proposals for the allocation of consideration to lease components” commenting that the application of the hierarchy in paragraph 23 “may result in an accounting treatment that may not reflect the substance of the contract”.  The FRC comment that where there are no observable stand-alone prices for any components of the contract, a lessee should be able to use an estimate “in a similar way to the proposed requirements in the Revenue Recognition ED”.  
• Dual approach to measurement.  The FRC comment that the dual approach proposed in the ED is “difficult to apply in practice as it requires a high degree of judgment in determining whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded within the underlying asset”.  They consider that the dual approach is complex to apply and will reduce “users’ ability to understand the financial statements”.  They comment that constituents have raised concerns over the use of the terms “insignificant”, “substantially all” and “major” in the ED and highlight that users may interpret them differently “leading to inconsistent application in practice”.  If the dual approach is maintained, the FRC believe that “the distinction between finance leases and operating leases in IAS 17 ‘Leases’ should be retained to reduce complexity and increase understandability”.  They comment that IAS 17 finance leases would apply “Type A” accounting and IAS 17 operating leases would apply “Type B” accounting.
• Lease term.  The FRC comment that “it is not clear when a change in the lease term should be accounted for as a reassessment of the lease term and when it should be accounted for as a new lease” and ask that the IASB clarify this point.  Concerns are also expressed over the term “significant economic incentive”.
• Variable lease payments.  The FRC ask that the IASB provides further guidance for the term “in-substance” fixed lease payments as they consider that the examples provided in the ED are insufficient.
• Disclosure.  The FRC considers that the disclosure requirements in the ED are “extensive and very detailed” and are concerned that preparers may seek to disclose everything in the ED rather than considering materiality.  This would prove costly for preparers. 

The FRC comment letter can be found here (link to FRC website).

The report (link to UK Parliament website) made recommendations in five areas: i) making individual responsibility in banking a reality for senior management; ii) reforming governance within banks to reinforce each bank’s responsibility for its own soundness and standards; iii) creating better functioning and more diverse banking markets; iv) reinforcing the responsibilities of regulators in the exercise of judgment; and v) specifying the responsibilities of this and future Governments.  Many of the recommendations were aimed specifically at the Bank of England (including the Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA)) and the FCA.

Among other things, the report recommended: 

• “A new framework for individuals” to replace the Approved Persons Regime.   

The FCA comment that they “support the creation of a Senior Persons Regime” and have highlighted in their response what they expect the key features of such a regime to contain.  Such features would include pre-approval by the regulator of any individual before they take up their role, acceptance by Senior Persons of their role and responsibilities in a written statement and handovers when Senior Persons leave or pass on duties.  

The Bank of England is also supportive of these proposals and has commented that they “expect to consult on the design of the new regime and enact the final rules in 2014, ahead of implementation in 2015”.  They also note that the PRA will ensure that key activities and key risks of firms are assigned to individual Senior Persons including the Chief Executive Officer. 

• Changing remuneration standards.   

The FCA “support the Commission’s wider recommendations on remuneration, including the benefits of flexibility in firms’ choice of instruments and the development of legal and contractual arrangements to allow deferred remuneration to be recouped in a wider range of circumstances”.  They note that they will “work with the PRA” on whether changes are required to the Remuneration Code in 2014.  However they do not agree that the remuneration code should be extended beyond “Material Risk Takers”. 

• Heightening expectations on, and sanctions for, the failures of individuals and increasing the competitiveness within banks.   

The FCA agrees with extending the time limit between the regulator learning of an offence and taking enforcement action against individuals from three to six years.  The FCA also support the proposal that Senior Persons must show that they “took all reasonable steps to prevent or mitigate the effects of a specified failing” in the event of successful enforcement action. 

Additionally, the report made a number of recommendations in the areas of corporate governance, auditing and accounting.  

• Corporate Governance 

The FCA agrees with the PCBS recommendations that the “Board’s must be responsible for managing the risks within their organisations” and agree that “the chairman and non-executive directors require access to independent advice and expertise to provide effective challenge to the executive”.  The FCA has, however, expressed concern that “overly prescriptive regulation” may lead to a “tick-box” approach to corporate governance.  The FCA also supports the whistleblowing recommendations of the PCBS report and comments that they will consult in 2014 on “whether additional rules are needed to set minimum standards for whistleblowing”. 

The Bank of England agrees with the PCBS recommendations on governance and risk management and will consult on these in 2014, noting that some of the areas have already consulted during CRD IV consultations. 

• Auditing and Accounting 

The PCBS report recommended that banks should prepare a separate set of accounts for regulators on the basis of specified prudent principles set by the Prudential Regulation Authority (PRA).  The PRA comment that they are currently working with “other authorities and the FPC” on this recommendation and will consider the “costs and benefits of such an initiative” as well as the impact that the new CRD IV regulatory reporting regime may have. 

The PCBS report also recommended that auditors of banks should meet regularly with the PRA and FCA – and more often than the once a year required by current Codes of Practice.  The PRA response is that “for each of the four largest UK banks, there were at least four bilaterals between the supervisors and auditors”.  They also comment that the first report on the quality of dialogue between supervisors and regulated firms’ auditors is scheduled for June 2014. 

The government has proposed a series of amendments to the Financial Services (Banking Reform Bill), for consideration in Lords Committee, to incorporate, among other things, the above and other recommendations of the Parliamentary Commission on Banking Standards.

For full details of the Bank of England and the FCA responses and next steps in implementing the recommendations please refer to the links below. 

Click for:

• FCA press release (link to FCA website)
• Full FCA response (link to FCA website)
• Bank of England press release (link to Bank of England website)
• Full Bank of England response (link to Bank of England website)   
• Banking Reform Bill proposed amendments (link to UK government website)
• Our previous story on the final report of the Parliamentary Commission on Banking Standards.

The proposals are part of the government’s Red Tape Challenge which is considering whether improvements can be made to existing regulation in order to benefit, predominantly, small UK companies.  

The consultation also seeks views on a number of areas such as 

1. Annual Filings;
2. Transparency;
3. Communications; and
4. Resolving problems. 

Among the proposals are changes to the rules regarding annual returns which all companies must currently file, by law, on an annual basis.  BIS propose that the requirement to complete an annual return could be scrapped with companies only being required to confirm, potentially digitally, that the information held on the register is correct.  Other options proposed by BIS are to require companies to file details as and when there is an event that drives the change or to maintain the current system of annual reporting but incorporate a number of simplified processes (such as allowing companies the opportunity to file both annual return and accounts on the same date). 

Further key proposals in the consultation are:

• Aligning the filing dates for accounts at both HMRC and Companies House.
• The removal of the requirement for companies to make their registers available at their registered office (or an alternative inspection location) as well as provide this information to Companies House for inclusion in the public register.
• Simplified processes for Statements of Capital.
• Changes to reporting and disclosure of subsidiary undertakings. 

For further details please refer to the press release and the full consultation on the BIS website.