February

We comment on FRED 51 'Draft amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland — Hedge Accounting'.

17 Feb, 2014

We have published our comment letter on the Financial Reporting Council’s (FRC’s) Financial Reporting Exposure Draft (FRED) 51 ‘'Draft amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland — Hedge Accounting'. We are supportive of the aims of FRED 51 but highlight a number of areas which we consider require amending before a finalised standard is published.

The amendments propose to replace the restrictive hedge accounting requirements in FRS 102 with a set of hedge accounting principles based on the IFRS 9 Financial Instruments hedge accounting model.  Current FRS 102 requirements are narrow and do not permit hedge accounting in a number of common hedging scenarios leading to volatility in profit or loss when hedging instruments are transacted to reduce rather than increase risk.  In addition to broadening the eligibility criteria, FRED 51 also proposes to remove the requirement that an entity must expect the hedging instrument to be highly effective in offsetting the hedged risk in order to apply hedge accounting.  Instead, FRED 51 would require there to be “an economic relationship between the hedged item and the hedging instrument”.  

Our key concerns are around the measurement of hedge ineffectiveness and transition.  We comment: 

We believe the measurement of hedge ineffectiveness will be a major difficulty in the practical application of hedge accounting for simple entities and that this complexity has been underestimated.  We suggest the FRC may wish to consider allowing a ‘short cut’ method that would allow a sub-group of common hedge relationships to be accounted for as if they were 100 per-cent effective. 

We believe the proposed transitional requirements are unclear and open to various interpretations.  More generally, we have concerns about the timing of designation of hedge relationships on transition.  We accept that a pragmatic solution is needed to overcome the problem that the hedge accounting requirements will be finalised after the effective date of FRS 102, but as drafted, the proposals could be read as allowing complete flexibility as to the timing of documenting hedge relationships in the period up to the issue of the first financial statements that include these amendments.  We consider some discipline should be introduced to reduce the risk that hedges are designated with the benefit of hindsight. Further, because entities will transition from different GAAPs with different eligibility and documentation requirements we believe that the transitional provisions should differ. 

In addition to the above comments we also highlight that more detailed guidance is needed for where items are grouped together for risk management purposes and also in relation to which risk components can qualify as hedged items. 

Further comments and a full response to all questions raised in the invitation to comment are contained within the full comment letter.

Joint outreach series started by the EFRAG, EFFAS/ABAF, and IASB

17 Feb, 2014

The European Financial Reporting Advisory Group (EFRAG), the European Federation of Financial Analysts Societies (EFFAS) and the Association Belge des Analystes Financiers (ABAF), and the International Accounting Standards Board (IASB) are initiating a series of joint outreach events to discuss relevant financial reporting matters with the user community.

The first outreach event will discuss the post-implementation review of IFRS 3 Business Combinations. It will provide users of financial statements and other non-users, the chance to provide their input on the usefulness of the information resulting from the implementation of IFRS 3. Registration for this event is requested by 20 March 2014. A programme for the event is available on the EFRAG website.

Additional events on macro hedging and a high level roundtable on topical developments in financial reporting are expected in the near future.

For more information, see the press release on the EFRAG website.

IASB issues investor webcasts series

14 Feb, 2014

As part of its Investor Education Initiative, the IASB has published a new series of investor-focused education webcasts to keep the investor community informed on recent accounting matters. The webcasts are done in collaboration with the CFA Institute.

The following webcasts are available:

The IASB plans to issue additional webcasts discussing how the amendments made to joint arrangement and employee benefits may affect investors.

For more information, see the press release and the Investor Education Programme on the IASB website.

OECD discussion draft considers country-by-country reporting

14 Feb, 2014

The Organisation for Economic Co-operation and Development (OECD) has released a discussion draft of revised guidance on transfer pricing documentation and country-by-country reporting. The discussion draft is part of the process in responding to the OECD 'Action Plan on Base Erosion and Profit Shifting' (BEPS), a tax transparency initiative which is aimed to be implemented by the end of 2015.

The discussion draft follows an earlier summary of issues associated with country-by-country reporting which was published in October 2013. It includes a proposed 'model template' for confidential country-by-country reporting by taxpayers, which contains an overview of income, taxes and business activities on a country-by-country basis.

In relation to the determination of amounts, the discussion draft contains the following proposed guidance:

It is not required that the amounts of revenue or other financial information be reported using the same accounting standards for all Constituent Entities. Thus, revenue of a Constituent Entity organised in one country may be reported in IFRS if it uses IFRS in its accounts, and revenue of a Constituent Entity organised in another country may be reported in local GAAP if it uses local GAAP in its accounts. Taxpayers wishing to do so, however, may elect to report all amounts under consistent accounting principles and translated on a consistent basis to a single currency.

Many of the issues discussed in the discussion draft are relevant in the context of other calls for broader country-by-country reporting.

The discussion draft is open for comment until 23 February 2014. Click for OECD announcement (link to OECD website).

IAESB paper seeks to assist with accountant examinations

14 Feb, 2014

The International Accounting Education Standards Board (IAESB) has released a revised 'International Education Information Paper', which is designed to help professional organisations conduct written examinations of accountants seeking qualification.

The paper, Development and Management of Written Examinations, has been updated in response to the revised International Education Standard IES 6, Initial Professional Development, Assessment of Professional Competence, which was issued in November 2012.

IES 6 prescribes the requirements for the assessment of professional competence of aspiring professional accountants that need to be achieved by the end of Initial Professional Development (IPD). International Federation of Accountants (IFAC) member bodies have the primary responsibility for complying with IES 6 in developing their admission programmes.

The paper provides examples of “good practice” in developing and administering written examinations, including examples of the processes and procedures that member bodies use to deliver written examinations which meet the principles of assessment identified in IES 6, including appropriate elements of quality control.

Based on feedback from the paper and further developments in the area of assessment, the IAESB will reconsider the need to develop guidance in the form of a practice statement supporting IES 6.

Click for IAESB press release (link to IFAC website).

ABI highlights actions to enhance collective engagement

13 Feb, 2014

The Association of British Insurers (ABI) has highlighted actions that it will take to contribute to improved collective engagement. The actions stem from a report the ABI published on corporate governance and shareholder engagement in July 2013.

The report called ‘Improving Corporate Governance and Shareholder Engagement” demonstrated that the UK Corporate Governance system and shareholder engagement was generally working well but also highlighted ways that the overall quality of collective engagement could be enhanced. 

Among other things, the report recommended that: 

  • The current ABI meetings with companies to discuss the principles of good corporate governance and to facilitate collective engagement should be extended to a wider pool of institutional investors rather than just to ABI members so that these can benefit from ABI’s expertise in this area. 
  • An “Investor Exchange” mechanism should be established which would enable shareholders to raise concerns regarding UK listed companies with other shareholders through the ABI.

The ABI has stated that in terms of the ABI meetings, they are “extending this approach by inviting, as a matter of course, non-ABI members who are significant shareholders in the company to participate in ABI Collective Engagement”.  The ABI has also now established an Investor Exchange mechanism which “enables any shareholder proactively to raise a concern on a particular UK-listed company with other significant shareholders”.

Click here for more details on the ABI website.

FRC proposes amendments to the classification of financial instruments under FRS 102.

13 Feb, 2014

The Financial Reporting Council (FRC) has today issued Financial Reporting Exposure Draft (FRED) 54 ‘Draft amendments to FRS 102 – Basic financial instruments (“the Exposure Draft”) containing proposed amendments to FRS 102 ‘The Financial Reporting Standard Applicable in the UK and Republic of Ireland’ in respect of the classification of financial instruments as ‘basic’.

Under FRS 102, a debt instrument must be regarded as ‘basic’ in order for it to be measured at amortised cost.  The Exposure Draft proposes to amend the criteria that determine whether a debt instrument is ‘basic’ and is intended to reduce the need for entities to measure debt instruments at fair value.
  
Following the publication of FRS 102 in March 2013, concerns were expressed about the restrictive nature of the criteria for classifying financial instruments as ‘basic’. The amendments proposed in the Exposure Draft are intended to reduce the cost of compliance with FRS 102 by allowing amortised cost measurement where it adequately captures the risks associated with those financial instruments. 

Examples illustrating the application of the revised requirements are also included in the Exposure Draft.  In particular, under the new proposals some inflation-linked debt instruments, which would not meet the definition of basic financial instruments under FRS 102 as currently drafted, would now be classified as basic.  

The FRC invites comments on FRED 54 until 30 April 2014.  The comment period is slightly shorter than the standard consultation period of three months, in order to allow for the publication of the final amendments to FRS 102 by mid-2014.  The draft amendments are proposed to be effective from 1 January 2015. 

Alongside the publication of the Exposure Draft, the FRC announced that:

  • It aims to issue FRS 103 ‘Insurance Contracts’ by the end of March 2014 after considering responses to its consultation;
  • It aims to finalise hedge accounting requirements under FRS 102 after taking into account responses to its consultation on FRED 51 ‘Draft amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland: Hedge Accounting’; and
  • It does not intend to make amendments in respect of the impairment of financial assets to ‘new’ UK GAAP and Irish GAAP prior to 1 January 2015. 

The FRC aims to issue FRS 103 and finalise the hedge accounting requirements in advance of the ‘new’ UK GAAP mandatory effective date of 1 January 2015.

Additionally the FRC highlight that they will continue to assess the impact of the new EU Accounting Directive on small companies and they will continue to consider the accounting requirements for micro-entities

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RSA and AuditFutures publish report on the future of the audit profession

13 Feb, 2014

The Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) and AuditFutures, a thought-leadership programme of ICAEW run in partnership with the Finance Innovation Lab, have published 'Enlightening professions? A vision for audit and a better society', a report which discusses how the audit profession can respond to the political and social demands of the modern business world.

The report sets out to address what it sees as the principal challenge facing the audit profession today - the need to win back public trust following the financial crisis and a series of perceived audit failures. It argues that the unprecedented organisational and informational complexity of the modern world will lead to an ever greater public demand for transparency, which the audit profession is ideally placed to deliver. However, in order to do this it needs to move away from reliance on its foundation stone, the statutory audit report on historic financial information, and respond to the challenges of a business world where fortunes can fluctuate overnight on the basis of a tweet or a negative news story, and shareholding periods are measured in days, not months or years.

The authors set out the view that audit needs to develop away from being a service consisting almost exclusively of external investigation and towards a more co-productive process, with the auditor’s role expanding to include that of an expert convenor willing to share the tools of enquiry. Instead of focussing on the audit report as a trust-producing product, the profession should instead focus on making the audit process a trust-producing practice, bringing into consideration all aspects of an organisation’s value.

To make this change, the audit profession would need to adjust the focus of its training process, to include not just technical rigour but also qualities like empathy, imagination and moral reasoning.

The report is based on interviews and comment from over 200 professionals, both from within and outside the audit profession. It has been produced by RSA 2020 Public Services, a practice-research and policy development hub which is part of RSA’s Action and Research Centre, and AuditFutures, a programme run by the Finance Innovation Lab (a partnership between ICAEW and the World Wide Fund for Nature) and the ICAEW's Audit and Assurance Faculty.

Click here for details of the release of this publication on the AuditFutures website and here for similar details on the RSA site. 

The report itself can be downloaded here (link to the AuditFutures site).

ESMA consults on alternative performance measures

13 Feb, 2014

The European Securities and Markets Authority (ESMA) has launched a consultation on 'Guidelines on Alternative Performance Measures'. The aim of the guidelines is to improve the transparency and comparability of financial information, reduce information asymmetry among the users of financial statements, coherent use and presentation of alternative performance measures (APMs) and finally to "contribute to restoring confidence in the accuracy and usefulness of financial information and improve investor protection".

Although financial statements and other financial information are presented in accordance with applicable financial reporting frameworks which should result in relevant and reliable information, there sometimes seems to be a demand from users or a desire from issuers for other information that is intended to lead to a better understanding of a company's position and performance. This information is often included in financial statements or documents accompanying the financial statements and normally consists of either re-calculated information already provided or new metrics designed to improve the understanding of that information.

ESMA acknowledges the importance of APMs to assist users in making investment decisions and only recently even the IASB Chairman admitted in a speech that preparers and analysts "may need non-GAAP measures to fine-tune their presentation or assessment of an entity". However, ESMA is concerned about widely diverse additional financial data which in some cases cannot be easily derived from or reconciled back to financial statements. Also, this additional information is often not defined and comparatives are lacking in many cases.

ESMA has therefore developed draft guidelines that address the concept and labels of APMs, guidance for the presentation of APMs and consistency in using APMs. The key requirements of the proposed guidelines are:

    1. Issuers should define the APM used and its components as well as the basis of calculation adopted.
    2. APMs should be given meaningful labels reflecting their methodology and basis of calculation in order to avoid conveying misleading messages to users.
    3. Issuers should disclose all APMs used and their definition in an appendix to the publication.
    4. APMs should be reconciled to the most relevant amount presented in the financial statements, separately identifying and explaining each reconciling item.
    5. Issuers should explain the context of any APM disclosed so that users can understand what information the APM concerned is meant to provide them with.
    6. APMs that are presented outside financial statements should be displayed with less prominence, emphasis or authority than measures directly stemming from financial statements prepared in accordance with the applicable financial reporting framework.
    7. When an issuer chooses to present APMs, it should also provide comparatives for corresponding previous periods. 
    8. The definition and calculation of the APM should be consistent over time. If that is not the case, an issuer should explain the reasons why the definition and/or calculation of the APM has changed.
    9. If an APM is redefined, a prior period is corrected, or the calculation of the APM changes, an issuer should provide additional information to explain those changes, the effect of the change compared to the former APM and restated comparative figures.
    10. If an APM ceases to be used, the issuer should explain its removal and the reasons for which any newly defined APM replacing the previous one provides more reliable and relevant information on the financial performance compared with the previous one.

The closing date for responses to the ESMA consultation is 14 May 2014. ESMA expects to publish the final guidelines in the fourth quarter of 2014.

Please click for additional information on the ESMA website:

EFRAG final comment letter on the equity method in separate financial statements

13 Feb, 2014

The European Financial Reporting Advisory Group (EFRAG) has issued their final comment letter on the International Accounting Standard Board’s (IASB’s) Exposure Draft ED/2013/10 'Equity Method in Separate Financial Statements (proposed amendments to IAS 27)' that was published on 2 December 2013. EFRAG supports the IASB's proposed amendments to IAS 27 'Separate Financial Statements' acknowledging that “the equity method may provide informative reporting of the investor’s net assets and profit or loss in its separate financial statements”.

ED/2013/10 proposes to change IAS 27 Separate Financial Statements to:

  • Permit the equity method as one of the options to account for an entity's investments in subsidiaries, joint ventures and associates in the entity's separate financial statements.
  • Require applying the change retrospectively when an entity elects to change to the equity method.

Whilst supporting the proposed amendments, EFRAG “believes that the IASB should better articulate the reasons for re-introducing the equity method in the separate financial statements”.  The comments of EFRAG are consistent with those expressed in the draft comment letter in January 2014.  The key comments of EFRAG are: 

  • Consequential amendment to IAS 28 Investments in Associates and Joint Ventures — EFRAG encourages the IASB to better explain why it is necessary in the Basis for Conclusions and “how it improves the quality of financial  reporting in the separate financial statements”.
  • Retrospective application — EFRAG thinks that "relief should be provided from full retrospective application to entities that opt to use the equity method to account for subsidiaries in their separate financial statements".
  • EFRAG believes that the IASB “should introduce a transitional relief for first-time adopters”.
  • Objective of separate financial statements — EFRAG would like the IASB to clarify the objective of separate financial statements in this project and in the future.
  • EFRAG encourages the IASB to clarify the accounting for how to account for an investment that changes status and where the entity has elected a different measurement option for each category of investments “to ensure consistent application in practice”.

The full comment letter can be accessed from the EFRAG website below. 

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