Literature review on the use of information by capital providers

27 Dec, 2013

The European Financial Reporting Advisory Group (EFRAG) and the Institute of Chartered Accountants of Scotland (ICAS) have both launched projects aimed at understanding how capital providers use financial statements. In the context of these projects, EFRAG and ICAS have identified the need to take stock of the existing knowledge accumulated through academic research and have joined forces to commission an international team of academics to undertake a comprehensive literature review. The results of this review have now been made available.

EFRAG and ICAS believe that the IASB standard-setting process must be supported by a sound analysis and understanding of how the information that results from IFRS application is used. They also believe that the current revision of the IFRS conceptual framework will provide a good opportunity to integrate some of the lessons learned from the review and from further research into the IASB's standard-setting process.

The review was undertaken by a team of European academics and was aimed at answering the following questions:

  • Who are the key capital providers to companies in the European Union?
  • What decisions are capital providers making and what are the information needs for these decisions?
  • What information do these capital providers currently use to make financial decisions and assess stewardship?
  • How and for what purposes is this information accessed and used? In particular, what is the 'logic' of the models applied?
  • How important are financial statements for capital providers' decision making and assessing stewardship? How are financial statements used?
  • What additional information would capital providers consider to be useful?

Not surprisingly, the review revealed that financial statements are used in different ways by different capital providers who have different needs and different objectives. The authors of the review maintain, however, that more research into the topic is needed, especially empirical research into what information capital providers use, where and how they obtain the information and what additional information they would like to have. However, the authors feel that the initial results of the review already allow for drawing the following conclusions (reproduced from the report):


  • Standard-setters should focus on the competitive advantages of the financial accounting process when developing standards and financial reporting information should be designed to co-exist with competing information sources with other inherent weaknesses by providing reliable, verifiable data;
  • standard-setters need to decide whether they prefer to balance different user groups' interests on a standard-by-standard basis or to focus systematically on a specific subset of users when developing new standards;
  • standard-setters should consider the role of information intermediaries when developing new standards; and
  • standard-setters should consider the use of financial accounting information in contracting when making standard-setting decisions.

Please click for access to the full report on the EFRAG website.

Preliminary agreement on EU audit reform reached

24 Dec, 2013

The Lithuanian EU Council Presidency and the European Parliament have reached a preliminary agreement on the framework of EU audit reform at the final trilogue meeting held this week. The framework is now subject to the final agreement by member states in coming weeks.

Under the new rules, the societal role of auditors will be clarified, with the aim of increasing audit quality and transparency. Mandatory rotation of auditors will be introduced, requiring companies to retender at 10 years and change the auditor at least every 20 years. The reforms include further restrictions on the provision of non-audit services to audit clients and prohibit the use of restrictive clauses in contracts which limit a company’s choice of auditor. 

Commissioner Michel Barnier welcomed the provisional agreement, calling it a “first step towards increasing audit quality and re-establishing investor confidence in financial information, an essential ingredient for investment and economic growth in Europe.”

The Financial Reporting Council’s (FRC’s) CEO, Stephen Haddrill, added: “This is a good compromise, made possible by the UK developing a plan, showing it was practical and thereby giving confidence to MEPs and policymakers.”

Sue Almond, Technical Director at ACCA (the Association of Chartered Certified Accountants), also congratulated the European Parliament, the Council and the European Commission on reaching an agreement after months of tough negotiations.

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ICAEW responds to the FRC’s request for comments on Directors’ Remuneration

24 Dec, 2013

The Institute of Chartered Accountants in England and Wales (ICAEW) has responded to the Financial Reporting Council’s (FRC’s) request for comments on Directors’ Remuneration.

In its response to the FRC consultation, the ICAEW comments that "the Corporate Governance Code is not the right place to deal with specific requirements on directors’ remuneration" since the Code is implemented on the comply-or-explain basis and is therefore "not the right tool to supplement legislative requirements".

The ICAEW also comments:

The Code sets out a principles-based corporate governance framework. It has never been intended to repeat or mirror law and regulation.  Changes to the Code should therefore take place only when this is to change the scope or substance of the corporate governance framework.  An increasing number of specific requirements could irrevocably damage the balance and overall integrity of the Code.

The response also encourages the FRC to allow time for the new legislative requirements around directors’ remuneration to bed in and for practice to develop. For example, the ICAEW comments that the new requirement on shareholder voting on forward-looking remuneration policies "could affect remuneration policies significantly" when used in conjunction with other shareholder rights such as annual votes on directors’ reappointment.

The full comment letter and detailed responses to all of the questions raised in the FRC consultation can be found on the ICAEW website.

EFRAG Update detailing its November and December developments

24 Dec, 2013

The European Financial Reporting Advisory Group (EFRAG) has released a new issue of its EFRAG Update newsletter, summarising the discussions held at the 28 November EFRAG CFSS meeting and at the 17–18 December EFRAG TEG meeting.

The EFRAG Consultative Forum of Standard Setters (CFSS) held its meeting in preparation for the Accounting Standards Advisory Forum (ASAF) meeting of 5 and 6 December 2013. Topics discussed were:

  • Profit and loss, other comprehensive income and recycling,
  • Stewardship,
  • Reliability,
  • Definition, recognition and measurement of liabilities,
  • IFRS 3 post implementation review, and
  • Rate regulation.

Topics discussed at the EFRAG Technical Expert Group (TEG) meeting were:

Click for the EFRAG Update (link to EFRAG website).

EFRAG updates endorsement status report for employee contributions to defined benefit plans

23 Dec, 2013

EFRAG has updated its Endorsement Status Report to reflect the fact that draft endorsement advice has been published on 'Defined Benefit Plans: Employee Contributions' (Amendments to IAS 19 'Employee Benefits').

The IASB issued the amendments in November 2013 to clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service.

EFRAG's initial assessment is that the amendments satisfy the technical criteria for EU endorsement and EFRAG should therefore recommend their endorsement.

The endorsement status report, dated 23 December 2013, is available here.

IPSASB proposals on reporting service performance information

23 Dec, 2013

The International Public Sector Accounting Standards Board (IPSASB) has published an exposure draft of a Recommended Practice Guideline (RPG) that would provide guidance on the reporting of service performance information. The draft RPG is designed to allow public sector entities to be held accountable through the provision of high quality service performance information, by providing guidance on how such information should be presented, and its recommended characteristics.

The exposure draft, ED 54 Reporting Service Performance Information, follows an earlier consultation paper released in 2011 and responds to the perceived need for a principles-based and consistent framework for service performance information that focuses on user needs. The principles in ED 54 align with the IPSASB's view that public sector financial reporting has a greater scope than financial statements alone, and are consistent with the IPSASB Conceptual Framework . The Basis for Conclusions on the exposure draft expresses this in this way:

The Conceptual Framework notes that the primary function of governments and most public sector entities is to provide services to constituents. Consequently, their financial results need to be assessed in the context of the achievement of service delivery objectives. Reporting non-financial as well as financial information about service delivery activities, achievements and/or outcomes during the reporting period is necessary for a government or other public sector entity to discharge its obligation to be accountable―that is, to account for, and justify the use of, the resources raised from, or on behalf of, constituents. Decisions that donors make about the allocation of resources to particular entities and programs are also made, at least in part, in response to information about service delivery achievements during the reporting period, and future service delivery objectives.

The proposed RPG recommends that entities define service performance objectives that describe the planned result(s) that an entity is aiming to achieve, expressed in terms of inputs, outputs, outcomes, efficiency, or effectiveness. Objectives depend on the nature of the entity and might include for example impacts on society such as educational achievements, poverty and crime levels, and health outcomes in general or of particular groups within society - the draft RPG provides the following specific example of an objective: "To increase the percentage of infants that have received a vaccination for measles from 65% to 95%".

Once the service performance objectives have been determined, the presentation of service performance information is then presented in a way that is appropriate to those objectives, so as to enable users to assess:

  • service delivery activities and achievements during the reporting period
  • financial results in the context of the achievements and service delivery objectives
  • efficiency (relationship between inputs and outputs or outcomes) and effectiveness (relationship between actual results and objectives in terms of outputs or outcomes).

Service performance information can be presented either as part of a report that includes the financial statements, or be presented in a separate report. The RPG provides factors to consider in making this choice and provides guidance on additional disclosures that should be presented in a separate report.

After requesting constituent comment in the 2011 consultation paper on whether the guidance on service performance information should be authoritative or non-authoritative, the IPSASB decided in March 2013 that it "should be addressed presently through development of a Recommended Practice Guideline". Accordingly, consistent with other RPGs already issued by the IPSASB, the proposed RPG would be best practice, and entities would not be required to comply with it in order to asset compliance with International Public Sector Accounting Standards (IPSAS) in their financial statements.

The exposure draft is open for comment until 31 May 2014. Click for (link to the IFAC website):

EFRAG issues draft endorsement advice and effects study report on limited scope amendments to IAS 19

22 Dec, 2013

The European Financial Reporting Advisory Group (EFRAG) has issued for comment its draft endorsement advice for the use of the amendments to International Accounting Standard (IAS) 19 (Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) in the European Union (EU). EFRAG has also issued their Effects Study Report.

The amendments to IAS 19, issued by the International Accounting Standards Board (IASB) in November 2013, clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. In addition, it permits a practical expedient if the amount of the contributions is independent of the number of years of service. The amendments are effective for annual periods beginning on or after 1 July 2014, with earlier application being permitted.

EFRAG supports the adoption of the amendments to IAS 19 and recommends its endorsement.  EFRAG’s initial assessment is that the amendments to IAS 19 meet the technical requirements of the Regulation (EC) No 1606/2002 of the European Parliament and of the Council on the application of international accounting standards.     

EFRAG’s conclusion is supported by an Effects Study Report which considers the costs and benefits of implementing the amendments to IAS 19. EFRAG’s assessment is that the benefits for preparers and users in implementing the amendments to IAS 19 outweigh the costs.

Comments are requested by 17 January 2014. 

Click for (all links to EFRAG website):

EFRAG updates endorsement status report for amendments to IAS 36 and IAS 39

21 Dec, 2013

The European Financial Reporting Advisory Group (EFRAG) has updated its endorsement status report to reflect the endorsement by the European Commission of the amendments to IAS 36 (Recoverable Amount Disclosures for Non-Financial Assets) and to IAS 39 (Novation of Derivatives and Continuation of Hedge Accounting).

The endorsement status report notes the endorsement of Amendments to IAS 36: Recoverable Amount Disclosures for Non-Financial Assets and Amendments to IAS 39: Novation of Derivatives and Continuation of Hedge Accounting, both on 19 December 2013. These amendments are effective for annual periods beginning on or after 1 January 2014.

The endorsement status report, dated 20 December 2013, is available here.

European Union formally adopts amendments concerning novations of derivatives and recoverable amount disclosures

20 Dec, 2013

The European Union has published Commission Regulations endorsing 'Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)' and 'Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36)'.

Commission Regulation (EC) No 1375/2013 of 19 December 2013 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council published in the Official Journal on 20 December 2013 adopts the amendments made by the IASB in June 2013 eliminating the need to discontinue hedge accounting if a hedging derivative is novated, provided certain criteria are met.

Commission Regulation (EC) No 1374/2013 of 19 December 2013 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council published in the Official Journal on 20 December 2013 adopts the amendments made by the IASB in May 2013 clarifying that the scope of the disclosures of information about the recoverable amount of assets, where that amount is based on fair value less costs of disposal, is limited to impaired assets.

The European effective dates are the same ones the IASB has given the amendments (1 January 2014).

FRC publishes its annual review of the UK Corporate Governance Code and UK Stewardship Code for 2013

19 Dec, 2013

The UK Financial Reporting Council (FRC) has issued its third Developments in Corporate Governance Report, which covers three main topics. These are the quality of compliance with, and reporting against, the UK Corporate Governance and Stewardship Codes and on regulatory and other developments in the UK listed sector in 2013; the FRC’s assessment on the quality of engagement between companies and investors; and areas where the FRC considers further efforts are needed to bring necessary improvements in governance and leadership.

Compliance and reporting

Reported compliance with the Code remains high, with the majority of companies either complying with all, or all but one, of its provisions.  However, the FRC comments that these high compliance levels do not reduce the need for companies to provide a meaningful explanation when they choose not to follow the Code.  In particular, it was noted that some companies continue to struggle to provide a rationale for any deviation from the Code.

Quality of engagement

The report notes that there are some encouraging signs that more engagement on a wider range of issues is taking place between large companies and their major shareholders.  However, there are concerns about the quality of engagement at mid-market companies and an emerging “engagement deficit”.  The FRC believes that the main priority must be to encourage and assist signatories to the Stewardship Code to deliver on the commitment they have given, and to monitor whether they are doing so.

Further efforts needed

Reporting by mid- and small-cap companies – the FRC believes that, in general, the reporting of these companies is less informative than that produced by larger companies.  While the FRC recognises that there are greater resources available to larger companies, the FRC does not believe that the size of a company should be a determining factor in the level of transparency investors can expect.

Succession planning – boards need to do more to anticipate the need for changes rather than being purely reactive.  For these reasons, the FRC will undertake a project in 2014 with the aim of identifying and spreading good practice in succession planning and, more generally, how the nomination committee can play its role effectively.

Board evaluation – some companies have raised concerns about the variable quality of service provided by external facilitators.  The FRC has published data from Practical Law which shows that 51 different facilitators were appointed by FTSE 350 companies in the period under review.  On the same topic, the FRC is encouraging companies to disclose the main actions that were agreed following the board effectiveness review and, where relevant, how those actions have been or will be implemented.

Election of directors – the FRC has reviewed a sample of 50 AGM notice papers to assess the extent to which companies were setting out the reasons why the company believed that the directors should be re-elected.  The FRC considers that the majority of companies could do more to explain to investors in the AGM papers how individual directors contribute to the effectiveness of the board as a whole.

Possible changes to the Code in 2014

Responding to the recommendations from the Competition Commission – the FRC is considering the recommendations in relation to audit committee reporting and to implement the advisory shareholder vote on the audit committee report.  In addition, the FRC will review whether to retain the “comply or explain” tendering provision in the Code in light of the Competition Commission’s decision on mandatory tendering.

Website publication of the full corporate governance statement – the FRC is considering whether the Code should be amended to allow companies to place the full corporate governance statement on the website, with an edited version containing the disclosures most relevant to investors in the annual report.

Remuneration – the section of the Code dealing with remuneration will be updated in light of the new legislative requirements on reporting and voting on directors’ remuneration.

The full report is available on the FRC website.

Correction list for hyphenation

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