The Initiative's Framework-based teaching project is designed to help educators train the next generation of accountants in how to make sound judgements in the preparation of financial reports in accordance with principle-based accounting standards.

Material on the different topics has been prepared in three separate sections to support Framework-based IFRS teaching students at three stages:

1. a student's first financial reporting course;
2. a financial reporting course mid-way to qualifying as a CA or CPA; and
3. a course immediately before qualifying as a CA or CPA.

(The stages are broadly defined to take into account the many different approaches to qualifying as accountants worldwide.)

Please click for the following information on the IASB's website:

• Press release
• Access to the Framework-based teaching material

Statistics released by the Professional Boards Forums’s BoardWatch highlight that women made up 19 per-cent of FTSE 100 directors (as of 1 October 2013), up from 17.4 per-cent as of May 2013 and 12.5 per-cent as of February 2011 when Lord Davies reported.  The figures also highlight that 25 per-cent of all board appointments since 1 March 2013 have been women.  To achieve the target set by Lord Davies, 66 more board seats on FTSE 100 companies are required to be held by women. 

FTSE 250 companies are also reporting an increase with 14.9 per-cent of women directors on their boards, up from 13.8 per-cent as of May 2013 and 7.8 per-cent as of February 2011.  Thirty-six per cent of all board appointments to FTSE 250 companies since March 2013 have been women.  To achieve the target set by Lord Davies, 202 more board seats on FTSE 250 companies are required to be held by women. 

Against these improvements, there has been a slight increase in the number of all-male boards in the FTSE 100 which has increased from five in May 2013 to six in October 2013.  The number of all-male boards for FTSE 250 companies has decreased from 62 in May 2013 to 51 in October 2013. 

The government sees the figures as “encouraging” but has stated that it will continue to “work closely with the FTSE 350 to help them increase female representation on their boards”.  There will also be a series of roundtables with FTSE 350 companies in the autumn.   

Click for:

• Press release (Link to BIS website)
• Latest women on boards statistics (Link to Professional Boards Forum BoardWatch website)
• Latest annual progress report (April 2013) from Lord Davies into Women on Boards (Link to BIS website)
• The original Lord Davies Women on Boards report from 2011 (Link to BIS website)

The draft report, which went through its first reading, maintains that it is important to ensure that the interests of the European Union are respected and that global accounting standards are of high quality and compatible with Union law. Therefore, ECON believes the programme for supporting specific activities in the field of financial reporting should be used to ensure that public money contributed towards the functioning of international accounting and auditing standard-setting, "and in particular to the IFRS Foundation, EFRAG and the PIOB", is spent in accordance with the public interest and responding to European Union needs.

To this end the draft report contains the following suggested amendment:

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.

Moreover, ECON suggests moving from giving six years of funding in one go to an annual assessment of whether certain criteria are fulfilled and releasing the money in stages:

Financing under the Programme shall be provided in the form of operating grants, shall be awarded on an annual basis, and shall be conditional on compliance with criteria relating to the objectives and content of the standards, and with criteria concerning developments in Union governance, namely regarding EFRAG, the IFRS Foundation and IASB.

The ECON proposed amendments will now go to official trialogue - tripartite meetings attended by representatives of the European Parliament, the Council and the Commission aimed at getting agreement on a package of amendments acceptable to the Council and the European Parliament.

Please click for access to the provisional version of the report on the European Parliament website.

In December 2012 the FASB published its proposed model on current expected credit losses, which was followed by the IASB's expected losses impairment model in March 2013. Despite global calls for a converged standard, the FASB model calls for more upfront recognition of expected credit losses than the IASB model.

In order to back its comment letter to the IASB and the FASB, the CFA Institute conducted a survey of its membership to ascertain investor preferences related to financial reporting for credit losses. More than 300 of its members responded to the survey. The key findings were:

• Respondents were almost evenly split on which proposed model they preferred (47% preferred the IASB's model, 44% backed the FASB's model).
• Respondents from the Americas preferred the FASB's proposed model (53%) to the IASB's model (41%), while the IASB's proposed model was preferred by Asia-Pacific respondents (49% to 42%) and Europe, Middle East and Africa participants (50% to 40%).
• Respondents supported fair value as a measurement method that is most decision-useful for measuring credit losses slightly more than an expected-loss model (46% to 41%). The current incurred-loss approach was supported by just 5% of respondents.
• Despite a lack of agreement regarding the model to use, 92% said the FASB and the IASB should arrive at a converged method of estimating credit losses.

Respondents also commented on which disclosures related to impairments of financial assets they felt were needed.

Please click for the following documents on the CFA Institute website:

• Credit loss and impairment survey
• Comment letter to the IASB and the FASB with a detailed analysis of the survey results

For several months now legal wrangling over International Financial Reporting Standards has produced some meaty headlines. In one case there was a suggestion that IFRSs were somehow illegal. Some argued that investors were not getting the best of information if companies followed IFRS. It all seemed slightly bizarre given that IFRS are promulgated by the IASB, an independent body, but one which is overseen by, amongst others, IOSCO, the International Organisation of Securities Commissions, a body which exists to protect investors on a global basis.

Now a definitive legal opinion has been handed down from Martin Moore QC. And as a result the Department for Business has confirmed that on the specific point of the legality of IFRS all the concerns and worries expressed were ‘misconceived’.

So with that worry knocked on the head for good, (or at least for the time being), there are other areas of contention which the Moore Opinion addresses. One is the confusion which has been created by what he refers to as ‘the failure to require prudence as a fundamental accounting principle’.

He looks to the IASB’s Conceptual Framework.  ‘The Conceptual Framework’, he says, ‘has determined that there should be only two fundamental qualitative characteristics, described as relevance and faithful representation. The word prudence does not appear. Instead neutrality is given greater emphasis.’ 

He looks again at the wording of the Conceptual Framework:

A neutral depiction is without bias in the selection or presentation of financial information. A neutral depiction is not slanted, weighted, emphasised, de-emphasised or otherwise manipulated to increase the probability that financial information will be received favourably or unfavourably by users. Neutral information does not mean information with no purpose or no influence on behaviour. On the contrary, relevant financial information is, by definition, capable of making a difference in users’ decisions 

And then he makes the point that: 'To my mind the key message in that paragraph is the reference to the prevention of manipulation…The Conceptual Framework is emphatically not outlawing the application of common sense and caution in the judgments that inevitably need to be made in the production of financial statements'. 

To those who ask why the specific word prudence was left out of the Conceptual Framework’s wording he points out that simply: 'The IASB decided to remove the reference to the concept of prudence because it was thought that all too often it had become a cover for bias in the form of excessive conservatism'.  He sees a resonance with the Accounting Directive, which he sees as ‘an unequivocal reaffirmation of the caution principle but without bias which seems to me to be the essence of prudence…' 

He also downplays the importance of the use of the word prudence. ‘It is also, in my view, important to bear in mind that the word itself is not of overriding importance’, he says. 'Although “prudent” is used in domestic and European legislation, it is not totemic. “Prudence” is an abstract concept – like “true and fair” – and its content is capable of variation and evolution; its meaning will change and develop over time. What is important is the concept and behaviour that the language used is seeking to describe and mandate'. 

But his Opinion accepts that it would be useful, to avoid future argument, to actually put the word prudence into the Conceptual Framework, just to take away any doubt.  'I would add, however’, he says, ‘that in order to facilitate the adoption by the European Union of further standards developed in accordance with the Conceptual Framework, and given the concern apparently caused by the retirement of the word prudence, this debate could be avoided if the Conceptual Framework, when next published, were to confirm the importance and centrality of caution without bias, and expressly use the term 'prudence' when setting out the principles to be applied when matters to be reflected in the financial statements are uncertain'. 

Moore’s Opinion also knocks the old canard of there being no override available firmly on the head. IAS 1, paragraph 15 ‘[makes] it clear that more than slavish adherence to IFRS is required to achieve fair presentation’. He concludes succinctly: 'Where the express requirement of financial statements is, by paragraph 15 of IAS 1, to achieve fair presentation and the required explanation for departure from an IFRS is that departure was necessary in order to achieve fair presentation, there is simply no reasonable basis for denying the existence of a true and fair override'. 

This Opinion is timely and clear. Anyone with further doubts should sit down quietly and read it through. It only runs to 26 pages. It is short, sweet, and clearly expressed.

Click for:

• FRC press release (link to FRC website).
• FRC independent legal opinion (link to FRC website).
• BIS press release (link to BIS website).
• UK Accounting Plus project page on the IASB's Conceptual Framework project
• Conceptual Framework Bulletins

When preparing accounts, there is a legal requirement under the Companies Act (derived from EU accounting directives) that they show a true and fair view.  Observers had expressed the view that the use of IFRS will not enable this legal requirement to be achieved.  

Having sought once again their own independent legal opinion, the FRC and BIS have confirmed that “compliance with accounting standards will result in a true and fair view”.  Where this is not the case, IAS 1 Presentation of Financial Statements paragraph 19 and FRS 102 The financial reporting standard applicable in the UK and the Republic of Ireland paragraph 3.4 allows that where compliance with an accounting standard may not achieve that objective, the standard may be overridden. 

The FRC will continue to work towards the improvements of accounting standards and will be contributing to the debate towards the development of the Conceptual Framework, a comprehensive project of the International Accounting Standards Board (IASB).  

The FRC and BIS believe that further improvements can be made to IFRSs and the Conceptual Framework for financial reporting, although these changes are not required to enable existing accounting standards to comply with UK company law.  

They believe that stewardship reporting should be included as a “primary objective of financial reporting” in the Conceptual Framework and prudence should be explicitly mentioned.  Both also believe that “clear principles are needed to describe when specific approaches to measurement, such as fair value, should be used”. 

Click for:

• FRC press release (link to FRC website).
• FRC independent legal opinion (link to FRC website).
• BIS press release (link to BIS website).
• UK Accounting Plus project page on the IASB's Conceptual Framework project
• Conceptual Framework Bulletins

‘Dear Prudence’, the Beatles once sang before launching into a song about sunshine, blue skies and birds singing. And that is the problem with prudence. The word, the concept, is lost in such a haze of vaguely positive feelings that it is hard to pin it down and define what it really means. Small wonder that when accountants try to work out an acceptable definition of the concept of prudence as it applies in the field of financial reporting they find it both almost impossible and contentious.

Outsiders can’t really see what the fuss is about. If they have any idea where prudence fits in they tend to feel that accountants should be more likely to emphasise bad news than good news, more likely to recognise losses than to push up the profits. Or as the original version of the IASB’s conceptual framework put it: ‘Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.’

The problem with this is that prudence can lead accountants a bit of a dance. Historically prudence became the oldest trick in the book. You cite ‘extra’ prudence one year and then, marvel upon marvel, discover that you can feed the fruits of that prudence into a bumper crop of profits the next year.

This, as the IASB points out in the latest discussion paper on the conceptual framework, means that the financial statements concerned ‘would not be neutral and therefore, not have the quality of reliability’. Instead the IASB decided in 2008 that the problem of precisely defining the application of prudence meant prudence should be dropped and the idea of neutrality introduced instead. Neutrality would effectively cover the admirable aspects of prudence but not the more problematic and worrying downsides. The pursuit of neutrality, it was felt, would be more effective than prudence at ridding the process of bias.

But the word prudence is emotive and a significant number of people mourn her loss and refuse to accept the IASB concept that she is still alive and well and can be found in the standards. ‘Some would prefer financial statements to show a bias towards conservatism and reject the notion of neutrality’, explains the discussion paper.

The rationale for the IASB’s views on neutrality and prudence is that a systemic bias towards conservatism undermines the value of earnings as a performance indicator, but the on-going debate proves that this view is not universal.

The IASB also realises that fans of ‘a bias towards conservatism’ would not accept its definition of the good lady as ‘the exercise of caution when making estimates and judgements under conditions of uncertainty.’ EFRAG noted in its Bulletin ‘Prudence’ (April 2013) that there is a view that ‘prudence is compatible with neutrality and request that, as prudence is important, the Framework needs to explicitly acknowledge it, because otherwise it will be incomplete.’  EFRAG concludes that, given that not everyone ‘exercises the degree of “caution” in the same way,’ the Framework should discuss the role of prudence explicitly.

There is an opportunity during the discussion of the conceptual framework to acknowledge that, while the idea of prudence should be all around financial reporting, we need to be more explicit about how it influences it. Or as the Beatles put it: ‘Dear Prudence see the sunny skies, the wind is low, the birds will sing, that you are part of everything’.

Click for:

• UK Accounting Plus project page on the IASB's Conceptual Framework project
• Conceptual Framework Bulletins
• Our news story on the IASB discussion paper on the Conceptual Framework.

There are three main issues on which views are sought: 

1. Clawback provisions.  Whether the current Code requirements are sufficient around clawback arrangements or whether the Code should include a “comply or explain” presumption that companies have provisions to recover and/or withhold variable pay.  The consultation also asks whether the Code should adopt the terminology of the new directors’ remuneration regulations and specifically note circumstances under which payments could be recovered/withheld;
2. Remuneration Committee membership.  Whether non-executive directors who are also executive directors in other companies should sit on the remuneration committee to avoid the perceived conflict of interest that may arise; and
3. Vote against the remuneration report.  Actions companies might take if they fail to obtain a substantial majority in support of a resolution on remuneration.  The consultation asks whether there should be an explicit requirement in the Code to report to the market in circumstances where a company fails to obtain at least a substantial majority in support of a resolution on remuneration. 

In providing their comments, the FRC would like respondents to have regard to the new directors’ remuneration report regulations published by the Department for Business, Innovation and Skills (BIS), the guidance issued by the GC100 and Investor Group on implementing those regulations and the Financial Conduct Authority’s current consultation on changes to the Listing Rules as a result of the new regulations. 

As well as consulting on the three specific issues, the FRC would also like respondents to highlight whether they feel that there should be any further changes to the remuneration sections of the Code. 

Any changes would be applicable for accounting periods beginning on or after 1 October 2014.

Click for (all links to FRC website):

• Press release
• FRC consultation

For accounting periods ending on or after 30 September 2013, all companies (except those that are small) will have to comply with the new “narrative reporting” regulations issued by the Department for Business, Innovation and Skills (BIS) which, among other things, will require all companies to prepare a strategic report, replacing the current business review.  As well as disclosing information on the company’s strategy, business model and risks, quoted companies will also have to disclose information on human rights and diversity in the strategic report and greenhouse gas emissions in their directors’ report.  

Currently there is no obligation for companies to have this information audited but these regulations will increase the attention stakeholders will pay to the “front half” of annual reports.  

The ICAEW Narrative Assurance Working Party report “The Journey: Assuring all of the Annual Report?” explores the “challenges and opportunities involved in assurance over the annual report” and is an extension of the debate held by The Institute of Chartered Accountants of Scotland (ICAS) in their discussion paper; “Balanced and reasonable” which recommended that the auditor should provide an explicit opinion that the management commentary in the annual report is balanced and reasonable and free from spin. 

As consequence of the financial crisis, more questions are being asked about the value of corporate reporting and the related assurance. Often these questions concern perceptions that the story presented by management in the narrative commentary within the annual report is not free from spin and does not provide users with an insight into the way in which the organisation is being directed.  The ICAEW comment that trust in business information can be achieved through assurance on the whole of the annual report and are of the opinion that this is also achievable. 

Adding to the weight of their argument, the ICAEW comment that organisations are already asking for additional assurance reports aside from the traditional audit report on the financial statements and hence this “indicates that there is a market need for more assurance than is required by law”. 

The ICAEW Narrative Assurance Working Party report puts forward four scenarios for assurance over the narrative part of the annual report:

• No assurance is given over any part of the annual report apart from the financial statements. 
• The audit report is accompanied by an assurance report covering one or two other aspects of the financial statements.
• The audit report is accompanied by an assurance report covering most of the rest of the annual report.
• A single assurance report replaces the audit and gives one opinion over the whole of the annual report. 

Details are provided for each of these proposed scenarios and an analysis of how this may be achieved.  The first scenario is the current situation for many companies and the last scenario is the ideal where there will be one provider assuring the whole of the annual report and only one opinion. 

The ICAEW Narrative Assurance Working Party recognise that there will be challenges to be addressed before assurance over the whole of the annual report can be provided.  They raise five key questions that need to be answered before “an assurance opinion is to be provided over narrative reporting at all”: 

1. What does ‘fair, balanced, and understandable’ mean in practice?
2. How can a business preparing an annual report, and their assurance provider, know what the content of the annual report should be?
3. How do a business preparing an annual report, and their assurance provider, decide what is material in a narrative report?
4. How can an assurance opinion on risk disclosures conclude that they are fair, balanced and understandable?
5. How can an assurance opinion over forward-looking information be supported with evidence? 

The report will be followed up at a later date, exploring the issues identified in more detail. 

Click here for: 

• Press release (link to Economia website)
• ICAEW report; “The Journey: Assuring all of the Annual Report?”
• Our previous story on the ICAS discussion paper; “Balanced and Reasonable”
• Our previous story on the narrative reporting regulations