IMA believes that four issues must be addressed to reap the benefits of IR:

1. The ultimate goal should not be to produce a single, integrated report. Rather, it should be to motivate disclosures that better inform investors and other stakeholders.
2. Market evidence should be developed by shifting the assessment of the benefits of integrated reporting more towards to "actual value delivery participants" of the value chain among which IMA sees business owners, business managers, CFOs, preparers, investors, and analysts.
3. A "learning and growth" approach should be taken with tangible step changes such as improving disclosures and motivating more concise and informative financial reports including reporting on intangibles. IMA believes mandatory reporting would have an adverse effect.
4. Supporting technology such XBRL/structured data standards that could potentially improve the cost/benefit of integrated reporting should be developed.

Please click for:

• Press release on the IMA website
• Suggested Actions to Transform Corporate Reporting on the IMA website
• Our earlier story summarising the International Integrated Reporting <IR> Framework released on 9 December 2013

The draft plan and budget and levy proposals identify a number of priority areas for the FRC to focus on in 2014/15.  An update on the progress that the FRC are making against their three year plan (2013-2016) is also given. 

Corporate Governance and stewardship.  

The FRC will “continue to promote a longer term approach to Corporate Governance and investor stewardship”.  

In the area of Corporate Governance and stewardship, key areas the FRC will focus on are: 

• To consult on any further proposals for amending the UK Corporate Governance Code.  The FRC has recently consulted on “how the UK Corporate Governance Code should address risk management and reporting by listed companies so as to implement Lord Sharman’s proposals in relation to going concern” (link to FRC website).  The FRC will seek to update the UK Corporate Governance Code for these areas. 
• To “undertake an assessment of the quality of board succession planning” where a number of board reviews identify that improvements can be made.  
• To encourage “improvements in the quality of explanations where Boards choose not to comply with a Code provision”. 
• To consider the impact of the revised UK Corporate Governance Code.  It is expected that the Financial Reporting Lab will carry out a project on risk management once the new guidance is finalised in 2014 and update its findings from its October 2013 report of audit committee reporting.
• To focus on better implementation of the Stewardship Code and overall development of a “stewardship culture”.  To achieve this the FRC will “work with markets and investors in the UK and internationally to try to ensure that investors in the capital markets have the information they need to invest for the long-term”. 

Corporate reporting  

In seeking to “meet the needs of investors for trustworthy and relevant information”, the FRC will focus on key areas such as: 

• Carrying out “thematic reviews on narrative reporting and progress on cutting clutter”.
• Commencing a three year project with the intention of creating a “step change in the quality of reporting of smaller listed and AIM quoted companies”.
• Continue to influence the International Accounting Standards Board’s (IASB’s) agenda especially in the areas of the Conceptual Framework and the post-implementation review of International Financial Reporting Standard (IFRS) 3 ‘Business Combinations’.
• The FRC has indicated that one way it will assess its effectiveness in this area will be to perform a Corporate Reporting Review assessing the quality of reporting. 

Audit quality and value          

The FRC will “continue to focus on the quality and value of audit and what measures may be needed for audit to meet evolving public expectations”.  A particular focus will be on the quality of bank audits. 

In 2014/15, the FRC focus on key areas such as: 

• The quality of auditing of banks.  The FRC has indicated that this review will begin in Q2 2014 with a “formal report expected to be published by the end of the year”.  In a separate press release (link to FRC website) the FRC comment that “the pace of improvements in the quality of auditing of banks and building societies has not been sufficient” and during their audit reviews, these audits are “below the average of all audits inspected”.  The need for improvements in the quality of auditing of financial institutions was highlighted as a key concern in the 2013 Audit Quality Inspection Report.  The FRC indicates that “the review will focus on the testing of loan loss provisions and general IT controls”.
• Continue to monitor and report on the quality of approximately 125 audit engagements under the annual programme.  The FRC will use “new regulatory powers to impose sanctions where poor quality audit work is identified”. 
• Continue to contribute to the work of the International Auditing and Assurance Standards Board (IAASB), the International Forum of Independent Audit Regulators (IFIAR) and the European Audit Inspection Group (EAIG). 

Oversight, monitoring and enforcement activities 

The FRC will continue to develop their monitoring and enforcement responsibilities. 

Key areas of focus will be: 

• To implement the recommendations of the Competition Commission regarding 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”. 
• To “prepare to implement the requirements of the new Audit Directive which the EU is expected to agree in early 2014” and “the implementation of local public sector audit inspection regimes”.  The first inspection of public sector audits is expected in 2016.
• To inspect auditors of public interest entities as a result of “likely” EU requirements. 

The FRC recognise that these extra activities will result in a requirement for increased resource. 

The full ‘Draft plan and budget and levy proposals 2014/15” contains further areas of focus for 2014/15 in addition to the above areas.  The FRC also identify actions it will take to enhance actuarial regulation and standards and explain how these key activities for 2014/15 will be funded. 

Click for (all links to FRC website): 

• FRC press release
• Draft plan and budget and levy proposals 2014/15

The endorsement status report notes the issuance of Annual Improvements to IFRSs 2010-2012 Cycle and Annual Improvements to IFRSs 2011–2013 Cycle, both on 12 December 2013. These collections of amendments are effective for annual periods beginning on or after 1 July 2014.  The report indicates that endorsement is currently expected in the third quarter of 2014.

The endorsement status report, dated 12 December 2013, is available here.

Mr Shields follows Sue Lloyd who is currently Senior Director of Technical Activities for the IASB and has been appointed as IASB member beginning 1 January 2014. The change in title to 'Executive Technical Director' suggests that Mr Shields' portfolio of tasks will differ slightly from Ms Lloyd's.

Mr Shields currently serves as a Managing Director for Credit Suisse in the Europe, Middle East and Africa region and is responsible for both financial and regulatory reporting across the bank. He will begin his work at the IASB in March 2014.

Please click for more information in the press release on the IASB website.

Following the appointment of Hugh Shields, IASB Chairman Hans Hoogervorst provided an overview of recent changes to the leadership of the IASB's technical staff which recognises the changing landscape within accounting standard-setting.

Annual Improvements 2011–2013 Cycle makes amendments to the following standards:

The amendments are effective for annual periods beginning on or after 1 July 2014, but can be applied earlier. For more information, please see the press release on the IASB's website or our Annual improvements page.

Deloitte has prepared an 'Need to know' newsletter explaining the amendments.

Annual Improvements 2010–2012 Cycle makes amendments to the following standards:

The amendments are effective for annual periods beginning on or after 1 July 2014, but can be applied earlier. For more information, please see the press release on the IASB's website or our Annual improvements page.

Deloitte has prepared a 'Need to know' Newsletter explaining the amendments.

The updated guidance, Tech 14/13 FRF ‘Disclosure of auditor remuneration’, supersedes the draft guidance set out in TECH 04/11 FRF.  It provides guidance on the application of the legal requirement for companies to disclose in their individual and group accounts the remuneration receivable by the company’s auditor and the auditor’s associates for the audit of the accounts and (non-audit) services.  The legal requirements are set out in the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011 (SI 2011/2198) (“the 2011 Regulations”) which amended the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 (SI 2008/489).      

Tech 14/13 FRF is “substantively unchanged” from the draft guidance in Tech 04/11 FRF.  However the ICAEW has included additional guidance in relation to question 46 ‘Does information about other services performed after the period end need to be disclosed in the accounts?’  They comment: 

additional guidance has been added to the answer to question 46 to clarify the relationship between the requirements of the 2011 Regulations and the contents of the illustrative template for communicating information on audit and non-audit services to those charged with governance that is appended to the Auditing Practices Board’s Ethical Standard 1 Integrity, objectivity and independence. 

Click for Tech 14/13 FRF on the ICAEW website.

In November, HM Treasury invited comments on draft Regulations and draft guidance.  Following a short period of consultation HM Treasury has indicated that the “responses to the final consultation were broadly positive”.  However, as a result of the consultation, HM Treasury has made some amendments to the draft guidance to provide some further clarification in certain areas. 

The key aspects of the Regulations are:

• All institutions (as defined in Article 4(1)(3) of the CRR) should publish annually, on a consolidated basis, by country where they have an establishment:

a)      their name, nature of activities and geographic location;

b)      number of employees;

c)      their turnover;

d)     pre-tax profit or loss;

e)     corporation tax paid; and

f)     any public subsidies received.

• Institutions will be required to publicly disclose the information from 1 January 2015 and from 1 July 2014 they must disclose (a)-(c) above. 
• Certain “global systematically important institutions” will be required to disclose additional information such as their pre-tax profit or loss, their taxes paid and any public subsidies received by 1 July 2014.  Should this disclosure not be deemed to be prejudicial all credit institutions and investment firms will have to disclose this information from 1 January 2015. 
• This information is to be published “in accordance with accepted accounting standards on a consolidated basis for each country in which the institution has a subsidiary, branch or both”.  The final guidance states that “in practice this will require institutions to use an accounting approach to consolidation either in accordance with International Financial Reporting Standards (IFRSs) or Generally Accepted Accounting Principles (GAAP)".  The final guidance explains that aggregation of disclosure may be allowed where more than one institution within the group is within the scope of the Regulations.  The final guidance also elaborates on how institutions which are part of a wider group may meet their disclosure obligations.
• The disclosures are required to be audited and the final guidance explains that this could be part of the statutory audit or part of an additional external assurance engagement. 

The Regulations will be enforced by the Prudential Regulation Authority (PRA) for PRA-regulated institutions and by the Financial Conduct Authority (FCA) for all other institutions.  They will come into force on 1 January 2014. 

Click for:

• Press release (link to HM Treasury website).
• ‘Capital Requirements (Country by Country Reporting) Regulations 2013: guidance’ (link to HM Treasury website).
• Approved Regulations (link to approved Regulations).
• Capital Requirements Regulation (link to European Union website)
• Capital Requirements Directive (link to European Union website).
• Our previous UK Accounting Plus story on the draft Regulations and draft guidance.

The IAASB Exposure Draft (ED) ‘Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs) 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 “continues to be strongly supportive of the IAASB’s proposals” but also feel certain changes or improvements can be made: 

• Proposed ISA 701.  The FRC comment that although the auditor should use judgment when describing key audit matters, the proposed ISA 701 should still be “more prescriptive regarding the minimum description in the auditor’s report of each key audit matter”.  The FRC comment that the current proposals are “minimal and may fail to achieve the outcome that the IASB is hoping for in the content of auditor’s reports”.
• Addition to proposed ISA 700.  The FRC comment that this should “require the auditor’s reports of listed companies to include information concerning the scope of the audit and the way in which the scope was influenced by the auditor’s risk assessment and application of the concept of materiality”.  The FRC “encourage” the IAASB to adopt a similar level of requirements as the FRC has introduced in their revisions to ISA 700 ‘The Independent Auditor’s Report on Financial Statements’ (UK and Ireland) which increase disclosures to be provided in three areas; risks, materiality and scope of the audit. 
• Key audit matters disclosure.  The FRC comment that the proposed requirement to describe key audit matters in the auditor’s report or to refer to such a description “is unnecessary where the auditor is satisfied that such matters have been appropriately disclosed in the Annual Report by those charged with Governance”.  The FRC are keen to avoid duplication of a description of the key audit matters in both the auditor’s report and the report prepared by those charged with governance.  They comment that where key audit matters have been described by the audit committee (but not explicitly highlighted as key audit matters), the audit report need only highlight what were the key audit matters in the report prepared by those charged with governance rather than repeating them in the audit report.
• Key audit matters distinction.  The FRC comment that “the IAASB’s proposals do not fully take into account the important definitional difference between an Emphasis of Matter and a Key Audit Matter”.  The FRC indicate that the proposals do not highlight which key audit matters were, in the auditor’s judgment, fundamental to users’ understanding of the financial statements.  The FRC “strongly recommend” that the auditor is required to make this distinction. 

The FRC also comment that they do not believe that the IAASB should provide illustrative examples of key audit matters as this may result in a “standardised” approach, something that was reiterated by investors at a recent roundtable event held in Brussels jointly hosted by the FRC and ACCA.  The FRC believes that key audit matters should be entity specific. 

Additional responses to the detailed questions raised in the IAASB ED are contained within the full FRC comment letter which can be obtained on the International Federation of Accountants (IFAC) website link below. 

The views of the FRC are echoed by The European Securities and Markets Authority (ESMA), The Association of Chartered Certified Accountants (ACCA) and the Investment Management Association (IMA). 

ESMA believe that “the proposed auditor’s report should bring a higher degree of transparency to the audit process” and enhance the accountability of the auditor.  ESMA also believe that the key audit matters section of the audit report should be unique to the specific entity and “should not contain boilerplate language” although, ESMA does acknowledge the usefulness of examples of the key audit matter section.  ESMA also expresses some concerns over the proposals indicating that they do not feel that the proposed standards “provide clear requirements and sufficient guidance to guarantee consistency in the auditor’s approach to key audit matters”. 

The ACCA comment that the inclusion of a key audit matters section within the audit report, as specified by ISA 701, will be “beneficial for users”.  The ACCA also believe that the content of the key audit matters section “should be determined by auditor judgment”.  However, the ACCA believes that the proposals should not be prescriptive but remain “principles-based” which will allow consistency and comparability in approach. 

The IMA comment that the 'key audit matters' section "is a significant step towards increasing the transparency of the audit process and improving the usefulness of the audit report for investors".  They also support that audit reports should be bespoke and "tailored to a company's changing circumstances".

Click for:

• FRC comment letter (link to IFAC website).
• Second FRC comment letter supporting the IAASB work (link to FRC website).
• ESMA comment letter (link to ESMA website)
• ACCA comment letter (link to IFAC website).
• IMA comment letter (link to IFAC website).
• Transcript: 'Improved transparency in auditor reporting' event in Brussels (link to FRC website).
• Our previous story on the IAASB’s proposed changes to audit reports