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2013

IAESB re-exposes proposals on audit engagement partner competence

15 Dec 2013

The International Accounting Education Standards Board (IAESB) has published a revised exposure draft dealing with the professional competence of audit engagement partners. The revised exposure draft is a substantial revision of earlier proposals in response to constituent feedback.

The proposed International Education Standard IES 8 Professional Competence for Engagement Partners Responsible for Audits of Financial Statements, outlines learning outcomes for professional competence that professional accountants are required to demonstrate when performing the role of an engagement partner responsible for audits of financial statements.

The IES would require member bodies of the International Federation of Accountants (IFAC) to require professional accountants performing this role to undertake continuing professional development (CPD) that maintains and further develops the professional competence required. The exposure draft includes a table of learning outcomes in various competence areas, including technical competence, professional skills and professional values, ethics and attitudes.

In developing the revised exposure draft, the IAESB responded to 'mixed' constituent feedback on an earlier exposure draft published in August 2012, with saw clarifications being sought in a number of areas:

  • improving the clarity of the title, objective, and scope paragraphs to ensure that there is focus on professional competence
  • focusing the requirement on learning outcomes related to the professional competence required of engagement partners responsible for audits of financial statements
  • improving the clarity of the explanatory material by delineating the scope, explaining the concepts of learning outcomes and competence areas, and discussing the importance of applying professional scepticism in assessing audit evidence and exercising professional judgement when determining an appropriate audit strategy
  • amending the explanatory material related to engagement partners of small and medium practices to emphasise the relevance of CPD even though they may undertake a much wider range of tasks in performing the audit than would otherwise be the case.

The proposals are accompanied by an explanatory supplement to demonstrate how the text of the existing IES 8 maps to the proposed IES 8, and a marked up version of the August 2012 exposure draft showing changes made in developing the current exposure draft.

Comments on the proposals close on 17 April 2014 and the IAESB intends to finalise the revised standard by the end of 2014. Click for (links to IFAC website):

Listing rules: Changes to remuneration disclosure requirements

13 Dec 2013

The Financial Conduct Authority (FCA) has today issued a policy statement (PS13/11) outlining changes to the remuneration reporting requirements currently included in Chapter 9.

The FCA has amended the Listing Rules in response to the new directors’ remuneration report and narrative reporting regulations in order to ensure that any duplication in relation to directors’ remuneration is kept to a minimum and that unnecessary requirements are not imposed on UK incorporated listed companies.  These changes follow the FCA consultation, CP13/7 ‘Consequential Changes to the Listing Rules resulting from the BIS Directors’ Remuneration Reporting Regulations and Narrative Reporting Regulations’, in August 2013. 

The key changes are: 

  • All of the disclosures relating to remuneration, currently contained in LR 9.8.8, have been removed with the exception of what was LR 9.8.8 (9). This provision now becomes LR 9.8.8 and requires the disclosure of the unexpired term of any director’s service contract where that director is proposed for election or re-election at the forthcoming annual general meeting. This rule remains as it is applicable to both UK and overseas companies with a premium listing and therefore maintains the current requirements for overseas companies. 
  • LR 9.8.11 and 9.8.12, which related to the auditors’ review of the disclosures relating to directors’ remuneration, have also been removed. 
  • There is a minor change to LR 9.8.13 in response to the narrative reporting regulations which changes existing references to ‘summary financial statements’ to ‘strategic report with supplementary information’ which will reflect the new requirement for the production of a strategic report. 

There are no changes to LR 9.8.6. This rule relates to the disclosure of directors’ share interests at end of the period under review and any changes between this date (LR 9.8.6 (1)); share interests disclosed to the listed company in accordance with Disclosure and Transparency Rule 5 (LR 9.8.6 (2)); a statement that the business is a going concern (LR 9.8.6 (3)); details of any shareholder authority for purchase of its own shares and details of such purchases (LR 9.8.6 (4)); a statement of how the company has applied the principles set out in the UK Corporate Governance Code (LR 9.8.6 (5)) and a statement of compliance with the Code, or details of non-compliance (LR 9.8.6 (6)).  Companies incorporated outside the UK with a premium listing must comply with LR 9.8.6 (5) and (6). 

There are also no current plans to change LR 9.4.1, which deals with the requirement for shareholder approval of employee share plans and long term incentive plans, and LR 9.4.2 which allows exemptions from these requirements for all employee plans and plans put in place for one director to facilitate, in unusual circumstances, the recruitment or retention of the relevant individual, where those plans only operate with ‘market purchase’ shares. However, the policy statement notes the potential overlap between this provision and the requirements of the new regulations and suggests that this may be reviewed again once the new requirements have been in place for a reasonable period of time. 

The new Listing Rules will be effective from 13 December 2013 and apply to all companies with financial years ending on or after 30 September 2013 that have not published their annual financial report before 13 December 2013. 

Companies already preparing their report can continue to publish the report after 13 December 2013 in compliance with both the existing Listing Rules and the new remuneration reporting requirements if they choose to do so. 

Click for (all links to FCA website):

FRAB minutes for October 2013 meeting released

13 Dec 2013

The minutes of the Financial Reporting Advisory Board’s (FRAB’s) meeting of 10 October 2013 have been made available on the HM Treasury website.

The role of the Financial Reporting Advisory Board (FRAB) is “to ensure that government financial reporting meets the best possible standards of financial reporting by following Generally Accepted Accounting Practice (GAAP) as far as possible”.  The FRAB includes representatives from the accountancy profession in the private and public sectors, academia and government bodies.  The board meets regularly to consider proposed changes to policy and practice.

Key topics discussed during the meeting were:  

  • Simplifying and streamlining annual reports and accounts.
  • Mid-year reporting – proposals to introduce a new “mid-year report” to Parliament by the 17 main Central Government Departments were finalised on 7 October 2013.  These are not intended to be IAS 34 compliant interim financial reports but instead provide a high level summary of performance against key departmental policies and objectives.
  • IFRS Group Accounting Standards and accounting for schools.
  • The application of IFRS 13 ‘Fair Value Measurement.
  • Draft FReM 2014-15.
  • NHS Manual for Accounts.
  • Accounting issues related to Local Authority Transport Infrastructure.
  • European Public Sector Accounting Standards. 

Click here for detailed minutes and other supporting documents on HM Treasury website.

New appointment to IAASB

13 Dec 2013

The International Auditing and Assurance Standards Board (IAASB) has announced the appointment of Marek Grabowski, Director of Audit Policy at the FRC.

Marek will work with other IAASB members towards developing global standards on auditing and assurance that enhance public trust in financial reports. Marek will take up his position from 1 January 2014 and will serve on the board for an initial period of 3 years. 

Click for press release on the FRC website.

FRC calls for improvements in the reporting of exceptional items

13 Dec 2013

The Financial Reporting Council (FRC) has today issued a statement reminding Boards of what they should consider when they present exceptional or similar items and “encourages them to improve reporting in this area”.

The Financial Reporting Review Panel (FRRP) of the FRC has identified that many companies report exceptional items on the face of the income statement and provide a subtotal of profit before these (“underlying profit”).  However, the FRC has identified that many companies do not present exceptional items consistently.  The quality of reported exceptional items was identified by the Conduct Committee as an “area of concern” in their Corporate Reporting Review Annual Report 2013

To encourage improved reporting of exceptional items and to encourage greater consistency the FRRP believe that companies should consider the following in “judging what to include in additional items and underlying profit”:

The approach taken in identifying additional items that qualify for separate presentation should be even handed between gains and losses, clearly disclosed and applied consistently from one year to the next.  It should also be clearly distinguished from alternative performance measures used by the company that are not intended to be consistent with IFRS principles. 

Gains and losses should not be netted off in arriving at the amount disclosed unless otherwise permitted. 

Where the same category of material items recurs each year and in similar amounts (for example, restructuring costs), companies should consider whether such amounts should be included as part of underlying profit. 

Where significant items of expense are unlikely to be finalised for a number of years or may subsequently be reversed, the income statement effect of such changes should be similarly identified as additional items in subsequent periods and readers should be able to track movements in respect of these items between periods.  

The tax effect of additional items should be explained. 

Material cash amounts related to additional items should be presented clearly in the cash flow statement. 

Where underlying profit is used in determining executive remuneration or in the definition of loan covenants, companies should take care to disclose clearly the measures used. 

Management commentary on results should be clear on which measures of profit are being commented on and should discuss all significant items which make up the profit determined according to IFRS.

The press release can be obtained from the FRC website here.

LASAAC issues draft guidance on Asset Decommissioning Obligations

13 Dec 2013

The Local Authority (Scotland) Accounts Advisory Committee (LASAAC) yesterday issued draft guidance for Scottish local government entities on accounting for Asset Decommissioning Obligations. Comments are requested by Friday 17 January 2014.

The LASAAC proposals (link to CIPFA website) set out guidance for Scottish local government on the following aspects of accounting for Asset Decommissioning Obligations:

  • Criteria for inclusion in the cost of an asset
  • Pattern of decommissioning obligations
  • Depreciation
  • Valuation
  • Unwinding of the discounted present value
  • Componentisation
  • Capital Financing Requirement
  • Increases in Asset Decommissioning Obligations (IFRIC 1)

LASAAC is a body which is constituted of volunteer members representing CIPFA, ACCA, ICAS, Audit Scotland and the Scottish Government.

Click here for a link to the consultation on the CIPFA website, as well as a Microsoft Excel workbook example to assist practitioners in estimating the potential funding impact of the proposals.

ABI and NAPF issue guidance for companies on directors' remuneration

13 Dec 2013

The Association of British Insurers (ABI) and National Association of Pension Funds (NAPF) have recently published statements of principles that they expect companies to consider when setting remuneration policies, as part of the implementation of the recent changes to the UK directors' remuneration reporting regulations. The principles set out complement the guidance published by the GC100 and Investor Group in September 2013 on implementing the revised legislation.

Both the ABI and NAPF have responded to the issuance of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (link to legislation.gov.uk) by setting out a number of remuneration principles that they expect companies to follow when designing their executive remuneration policy. As part of the new regulations, this policy will need to be included each year in the company's annual report.

These statements of principles are designed to be read in conjunction with the guidance (link to Practical Law website) issued in September 2013 by the GC100 and Investor Group, which sets out more widely the considerations facing companies when implementing the new legislation.

The ABI statement (link to IVIS website) is an update to their previously issued guidance on this subject. The significant changes from the previous version are:

  • Executive director and senior management shareholdings – Executive directors and senior management should build up significant shareholdings in companies.
  • Performance adjustment: malus and clawback – Remuneration structures should include provisions that allow the company, in specified circumstances, to forfeit all or part of a bonus or long-term incentive award before it has vested and been paid (“performance adjustment” or “malus”) and recover sums already paid to an executive (“clawback”).
  • Performance on grant schemes – Where performance is measured prior to grant, there should be clear disclosure in advance of the performance required, and achieved, to justify grants. Shareholders expect the amounts awarded to be significantly lower than under long-term incentive schemes which are subject to conditions.
  • Variable remuneration – Remuneration committees may consider non-financial performance criteria, for example relating to environmental, social and governance objectives, provided the link to strategy and method of performance measurement is clearly explained.

The main principles of the NAPF guidance (link to NAPF website) are:

  • Remuneration committees should expect executive management to make a material long-term investment in shares of the businesses they manage.
  • Pay should be aligned to long-term success and the desired corporate culture throughout the organisation.
  • Pay schemes should be clear, understandable for both investors and executives, and ensure that executive rewards reflect long-term returns to shareholders.
  • Remuneration committees should use the discretion afforded them by shareholders to ensure that awards properly reflect business performance.
  • Companies and investors should have regular discussions on strategy and long-term performance.

Click here for:

ICAEW publishes report calling for changes to disclosure rules

13 Dec 2013

The Institute of Chartered Accountants in England and Wales (ICAEW) has published a report by its Financial Reporting Faculty calling for urgent reform to the regulation of financial reporting disclosures, saying the current situation will get worse as the volume of irrelevant material increases if the system is not changed quickly.

Financial Reporting Disclosures: Market and Regulatory Failures argues that the current disclosure overload is to a large degree an outcome of the regulatory framework. At the same time, the report also states that this framework is a response to failures in the market for financial reporting information. And both market and regulatory failures in part reflect the inherent limitations of financial reporting.

The most important point of the report is, that the problems are created by a 'one size fits all' approach to disclosures that fails to recognise the conflict between regulation and standardisation of financial reporting disclosures on the one hand and the diversity of firms and user needs on the other. This approach has led to regulation requiring firms to disclose the same information to all users, irrespective of the question whether all users will benefit in the same way from long and complex disclosures. Standardisation of disclosures has also led to a large proportion of immaterial disclosures being published as part "an ever-growing list of required disclosures that have been recognised as important at one time or another for at least some firms".

In its report the Financial Reporting Faculty recommends a programme of reform consisting of four ways in which the causes of the problem can be addressed:

 

    1. Reform the process for setting disclosure requirements
      1. The standard-setting process should be reformed so as to give more weight to the views of equity shareholders who as owners meet the costs of disclosure requirements.
      2. Standard-setters should establish a framework to provide a structure for setting disclosure requirements.
      3. To the extent that firms comply with disclosure requirements even though the resulting information is immaterial, standard-setters should reflect this in deciding whether disclosure requirements are proportionate.
    2. Change the requirements themselves
      1. Disclosure requirements should allow firms to report separate information sets to different types of users.
      2. Standard-setters should regularly review their disclosure requirements to weed out unnecessary disclosures.
    3. Change the way in which the requirements are implemented
      1. To reduce the incentives to provide immaterial disclosures, enforcement agencies should clarify that they will not take action against firms that omit immaterial disclosures, and they should encourage firms to omit immaterial disclosures.
      2. Auditors should refrain from encouraging firms to make immaterial disclosures and should encourage them to omit immaterial disclosures.
      3. Once enforcement agencies and auditors have reformed their approach to materiality, firms should cut out disclosures that are clearly immaterial.
    4. Place more reliance on non-regulatory solutions
      1. Preparers and users should engage directly to discuss voluntary public disclosure of information that is not currently provided, rather than rely entirely on standard-setters to introduce new disclosure requirements.

The ICAEW points out that these recommendations are interdependent and "no one group is in a position on its own to reform financial reporting disclosures and their regulation; a coordinated approach is needed". This comment reflects the main message that came out of the IASB's disclosure discussion forum in January: that users, preparers, standard-setters, auditors and regulators all contribute to the perceived problems about disclosure, and that each of these parties can contribute to improvements. Only recently, the Danish regulator overseeing non-financial entities (Erhvervsstyrelsen or Danish Business Authority (DBA)) was one of the first regulators to actively encourage companies to omit any immaterial information and disclosures in the financial statements.

Further information on the ICAEW website:

IFRS Foundation appoints new Chair of the IFRS Advisory Council

13 Dec 2013

The Trustees of the IFRS Foundation have announced that Joanna Perry has been appoined as new Chair of the IFRS Advisory Council.

Ms Perry follows Paul Cherry whose term ends in December 2013. She previously served as Chairman of the New Zealand Financial Reporting Standards Board (FRSB), leading the evolution of financial reporting standards in New Zealand, including the adoption of IFRSs from 2005. Ms Perry also represented New Zealand as a member of the Asia-Oceania Standard-Setting Group (AOSSG).

Currently, Ms Perry is a member of the IFRS Interpretations Committee. She will resign this position upon taking up the Chair of the Advisory Council.

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

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