We comment on the post-implementation review of IFRS 3

30 May, 2014

We have published our comment letter on the IASB's 'Post-implementation Review: IFRS 3 Business Combinations'.

We believe the review of IFRS 3 deserves careful consideration, since the standard frequently presents conceptual and practical issues in preparing and auditing financial statements. It also addresses highly significant transactions that might frequently be an area of focus for users.

One item in particular that we believe should be considered is the subsequent measurement of goodwill and indefinite life intangible assets acquired in a business combination. We recognise that a full consideration of this issue may be outside the scope of a post-implementation review of IFRS 3, but we believe the issue is significant and that the post-implementation review provides an appropriate opportunity to begin its consideration

Click for the full comment letter.

May 2014 IASB meeting notes — Part 3

29 May, 2014

The IASB's meeting was held on 20–22 May 2014, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from the joint session on leases as well as the IASB's session on IAS 12 — Recognition of deferred tax assets for unrealised losses.

Click through for direct access to the notes:

Thursday, 22 May 2014

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting. Notes from the remaining conceptual framework session will be posted in due course.

Joint webcast on revenue recognition

29 May, 2014

On 5 June 2014, the IASB and FASB will hold a joint webcast on the boards’ final standard on revenue from contracts with customers.

Speakers include FASB Member Larry Smith and IASB Member Patricia McConnell, who will discuss the new revenue model and answer questions about it. The presentation starts at 3:00 p.m. (BST) and is scheduled to last one hour. Registration information is available on the FASB website.

Hans Hoogervorst discusses the IASB work programme

29 May, 2014

IASB Chairman, Hans Hoogervorst gave a speech today at the IFRS Conference in Singapore titled 'Charting progress towards global accounting standards'. He provided an overview of the current use of IFRS around the world and discussed the IASB's work programme, specifically providing insight into the joint leases project.

Mr Hoogervorst began his speech by talking about the successful spread of IFRS around the world and noted that "[a]lthough some big economies are still missing, the countries where IFRS is used already cover more than half of the world's GDP."

His speech focussed on the IASB's work programme; he began by highlighting yesterday's issuance of the joint revenue recognition standard with the FASB. Mr Hoogervorst went on to discuss the joint leases project. He emphasised that the leases standard will only affect significantly fewer than 10% of listed companies. He noted that the use of operating leases is highly concentrated and explained that approximately 50% of listed companies report material operating leases, and that of the 12,000 entities that the IASB analysed, less than 10% accounted for 80% of all operating leases. He stated "We calculated that inclusion of the lease liability would lead to an increase of the long-term debt-to-equity ratio from 13 percentage points in Europe through 20 percentage points in Asia." Mr Hoogervorst also acknowledged the cost to preparers to implement the leases standard, saying that the IASB is 'motivated' to find ways to make the standard less costly to implement and apply. He mentioned that the IASB and FASB hope to finalise its work on the leases project "in the next couple of months".

Moving on to financial instruments, Mr Hoogervorst summarised the IASB's deliberations on IFRS 9 Financial Instruments and said that the new standard will be issued in July. He highlighted two "improvements over current accounting": (1) 'own credit' fix and (2) loan loss provisioning.

Mr Hoogervorst then discussed the steps the IASB is taking to simplify disclosures. He noted that in June 2013 he presented a 10-point plan to improve disclosures in financial reporting and the IASB published an Exposure Draft in March 2014 which clarifies immaterial information. Looking forward, Mr Hoogervorst mentioned the IASB's research project to develop clearer principles of disclosures and subsequent review of all standards in an effort to make disclosure requirements more consistent and easier to apply.

Please click for access to the full text of Mr Hoogervorst's speech on the IASB website.

ICAEW expresses concerns over BIS proposals for implementing country-by-country reporting requirements for large extractive companies

29 May, 2014

The Institute of Chartered Accountants in England and Wales (ICAEW) has responded to the Department for Business, Innovation and Skills (BIS) consultation on proposals to implement the country-by-country reporting requirements for large extractive companies introduced by the European Union (EU) Accounting Directive. Although the ICAEW “welcome the Government’s commitment to introducing the requirements of the Directive into UK law”, they have expressed a number of concerns over the proposals for implementing the requirements of the Directive “that the Government should consider”.

Chapter 10 of the EU Accounting Directive (Directive 2013/34EU (link to European Commission website)) (“the Directive”) and changes made by Directive 2013/50/EU (link to the European Commission website) to the Transparency Directive (2004/109/EC)) require listed and large non-listed companies with activities in the extractive industry and the logging of primary forests to report any payments made to governments on a country-by-country basis in an effort to improve the transparency.  The Directive was published in the Official Journal of the European Union on 29 June 2013 and EU Member States have until 20 July 2015 to incorporate the rules into their national law.  The BIS proposals were published in March 2014.

The ICAEW recognise that there is “political pressure to expedite the implementation of these new requirements”, but have expressed concern over the “very short” consultation period allowed by BIS, particularly as this may not have allowed “interested parties who have not been involved in the prior discussions” to provide a response “in a timely manner”. 

The ICAEW is also concerned about the wording of the final regulations (included as an appendix in the consultation) and provide areas that they suggest BIS pay “particular attention” to in their comment letter.  Areas identified include:

  • Making it clear in the regulations that payments made to governments must be reported on a cash (rather than an accruals) basis.  The ICAEW highlight that “this is a critical point for companies to understand, not only because it will impact the figures reported but also because it is likely to represent a significant challenge when they start to collate the required information – company accounting systems and accruals based”.
  • Increasing the clarity over the scope of the regulations for entities in a group context and for the treatment of joint ventures and associates undertaking extractive activities.

In response to the proposed penalty regime in the consultation, the ICAEW agree that “as an initial starting point, the penalty regime should be similar to that in place for the failure to prepare and file statutory accounts and reports”.  However, they comment that in establishing the penalty regime “it is important for the Government to take into consideration that the new reporting requirements for extractive industries differ in nature from more conventional financial reporting”.

The ICAEW also express concern over the timing of the availability of industry guidance and comment that as “companies are likely to find it difficult to apply the draft regulations as they currently stand”, guidance on the new reporting requirements should be “finalised as quickly as possible”.   

BIS propose that the first report should be prepared in respect of financial years commencing on or after 1 January 2015.  The ICAEW comment that BIS may need to “settle for a slightly later implementation date” in order to address concerns raised with the consultation.

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IASB work plan update for May 2014

29 May, 2014

Following its recent meeting and the issue of IFRS 15 'Revenue from Contracts with Customers' yesterday, the International Accounting Standards Board (IASB) has updated its work plan. A final pronouncement in the narrow scope project on 'Sales or contributions of assets between an investor and its associate/joint venture’ is now expected in Q3 2014 instead of Q2 2014. The updated work plan also confirms that the narrow scope on 'Share of other net asset changes' has been stopped due to a lack of support.

Current status

The revised time table for the major projects is now as follows:

Project Current status Next project step Expected timing
Conceptual Framework — Comprehensive IASB project Redeliberations Exposure draft Q4 2014
Financial instruments — Impairment Redeliberations Finalised IFRS Q2 2014
Financial instruments — Macro hedge accounting Discussion paper Public consultation Q2 and Q3 2014
Financial instruments — Limited reconsideration of IFRS 9 (classification and measurement) Redeliberations Finalised IFRS Q2 2014
Insurance contracts Re-exposure Redeliberations Q2 2014
Leases Re-exposure Redeliberations Q2 2014
Disclosure initiative — Amendments to IAS 1 Exposure draft Redeliberations Q3 2014
Disclosure initiative — Reconciliation of liabilities from financing activities Redeliberations Exposure draft Q4 2014

* Indicates a change since the prior work plan update.

Changes concerning narrow scope projects are:

Click for the IASB work plan dated 28 May 2014 (link to IASB website). We have updated our project pages to reflect the updated work plan and other known developments.

FRC publishes Audit Quality Inspections Annual Report 2013/14

28 May, 2014

The Financial Reporting Council (FRC) has today published the Audit Quality Inspection Annual Report for 2013/14 which provides an overview of the audit quality inspection work carried out by its Audit Quality Review (AQR) team for the year ended 31 March 2014 (“the annual report”). The annual report provides an assessment of audit quality and also provides key messages that audit firms should pay attention to if they are to improve their overall level of audit quality. The annual report indicates that “the overall quality of audit work in the UK continues to be of a generally good standard” but “quality is not consistent across all audit firms and types of company”.

The AQR team monitors the quality of the audits of listed and other major public interest entities and the policies and procedures supporting audit quality at the major audit firms in the UK. The overall objective of their work is “to monitor and promote improvements in the quality of auditing of listed and other major public interest entities”.  Reviews were performed on a risk-based approach with a specific focus on banks and building societies and the audit of letterbox companies (those groups or companies that have little more than a registered office in their country of registration, with management and activities being based elsewhere). 

Detailed findings from the inspection of individual audits showed that there was “an improvement on prior years”.  Specifically the annual report highlights: 

  • That 60 per cent of all audits were assessed as either good or requiring only limited improvements, maintaining the improvements in grading of audits seen last year.
  • That there was an increase in the proportion of audits that achieved the highest grading (19 per cent up from 13 per cent in 2012/13 and 11 per cent in 2011/12).
  • That 86 per cent of the FTSE 100 audits reviewed were assessed as either good or requiring limited improvements.  

However, against these improvements the annual report also highlights that: 

  • Of the audits inspected, 15 per cent were assessed as requiring “significant improvements”, consistent with 2012/13.  This included one FTSE 100 company, a level consistent with 2012/13 and 2011/12.  The number of FTSE 350 audits assessed as requiring significant improvements increased from two to four.
  • Four of the audits assessed as requiring significant improvements related to letterbox companies, compared with two in 2012/13.
  • One bank/building society audit was assessed as requiring significant improvements and no bank/building society audits were assessed as good, with 56 per cent assessed as requiring improvement. 

Alongside these key findings, the annual report also provides key messages that audit firms should pay attention to if they are to improve their overall audit quality: 

Banks and building societies 

  • The annual report highlights that “the overall grading of bank and building society audits is, and continues to be, generally below those of other types of entity”.
  • The key area of concern is the audit of loan loss provisioning, particularly “weaknesses in the testing of loan impairment models and related assumptions”.  Such weaknesses include “insufficient challenge of management or the failure to obtain further evidence to support provisioning judgments” and the audit testing procedures to test management’s identification of loans subject to forbearance arrangements for both provisions and disclosure purposes.
  • There were also deficiencies in testing operational effectiveness of general IT controls and IT application controls.
  • The annual report indicates that in response to these findings, the FRC are undertaking a thematic inspection of the quality of bank and building society audits in these areas.  The results of this thematic review will be published in Autumn 2014.

Group audit considerations  

  • The annual report highlights that “firms should ensure that there is greater consistency in quality between the audit work undertaken at group level and that in respect of components”. 

Letterbox company audits 

  • Inspection work undertaken in 2013/14 indicated that there were issues in respect of the control, supervision, and review of audit procedures performed by other auditors.
  • The annual report indicates that “firms should ensure that their methodologies and related guidance for the audit of letterbox companies require sufficient involvement at all stages of the work of other auditors to meet the relevant requirements of Auditing Standards”. 

Fair value measurements and impairments    

  • Inspection work undertaken in 2013/14 indicated that there deficiencies in the audit of fair value measurements and impairments with “limited evidence” that firms had robustly challenged management assumptions and key judgments.
  • The FRC would like firms to apply professional scepticism, robustly challenge management assumptions and request adjustments to be made in the financial statements, where appropriate.  It highlights that audit committees “have a valuable roles to play in supporting and encouraging their auditors to challenge management in this way”. 

IT controls

  • The FRC comment that “significant improvements are required in the audit of IT controls” and that firms should review their approach to the audit of IT controls.  Areas to address include whether audit teams have sufficient training and knowing when to use an IT specialist.

Auditor independence and ethics:  

Financial interests in audited entities

  • The FRC identified instances where partners were holding financial interests in audit clients and comment that “firms should review the robustness of their policies and procedures and the communication thereof, both to prevent and respond to instances of this nature”. 

Non-audit services

  • The FRC identified instances where insufficient consideration was given to the provision of non-audit services and comment that “firms should ensure that they have appropriate procedures in place to monitor the ongoing provision of non-audit services to existing clients”.  

In 2013/14, the FRC also undertook further inspection activity including two thematic inspections related to audit materiality and aspects of the audit of fraud risks and compliance with laws and regulation.  These activities provide additional key messages that firms and audit committees should pay attention to.

In the future, the FRC’s inspection activity is set to increase as a result of major legislative change and other proposals affecting audit and audit monitoring including the Competition Commission recommendations, the EU audit Directive and Regulation and a new requirement for the FRC to review local government audits.

Alongside the Audit Quality Inspection Annual Report for 2013/14, the FRC has also published individual reports for the 'Big Four' accountancy firms in the UK; Deloitte LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP and a separate report for overseas inspections.

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IASB and FASB issue new, converged revenue standards

28 May, 2014

The International Accounting Standard Board (IASB) has today published its new revenue Standard, IFRS 15 'Revenue from Contracts with Customers'. At the same time, the US-based Financial Accounting Standards Board (FASB) has published its equivalent revenue standard, ASU 2014-09 'Revenue from Contracts with Customers' (Topic 606).The standards are the result of a convergence project between the two Boards. IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard supersedes IAS 18 'Revenue', IAS 11 'Construction Contracts' and a number of revenue-related interpretations. Application of the standard is mandatory for all IFRS reporters and it applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts.



The joint revenue project commenced in 2002 and the key objectives of the project were to:

  • remove inconsistences and weaknesses in existing revenue requirements;
  • provide a more robust framework for addressing revenue issues;
  • improve comparability of revenue recognition practices across entities, jurisdictions and capital markets;
  • provide more useful information to users of financial statements through improved disclosure requirements; and
  • simplify the preparation of financial statements by reducing the number of requirements to which preparers must refer.

The first discussion paper was published in December 2008, and the first Exposure Draft was issued in June 2010. Subsequent to the comment period, a decision was made by the Boards to re-expose the updated proposals. A second Exposure Draft was published in November 2011. The Boards received many comments from respondents and engaged in extensive outreach on their proposals, all of which was taken into account in their re-deliberations. These have resulted in some important changes in the final standards.



IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for: leases within the scope of IAS 17 Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.



  • The new standard provides a single, principles based five-step model to be applied to all contracts with customers. The five steps are:
    • Identify the contract with the customer,
    • Identify the performance obligations in the contract,
    • Determine the transaction price,
    • Allocate the transaction price to the performance obligations in the contracts,
    • Recognise revenue when (or as) the entity satisfies a performance obligation.
  • There is new guidance on whether revenue should be recognised at a point in time or over time, which replaces the previous distinction between goods and services.
  • Where revenue is variable, a new recognition threshold has been introduced by the standard. This threshold requires that variable amounts are only included in revenue if, and to the extent that, it is highly probable that a significant revenue reversal will not occur in the future as a result of re-estimation. However, a different approach is applied for sales and usage-based royalties from licences of intellectual property; for such royalties, revenue is recognised only when the underlying sale or usage occurs.
  • The standard provides detailed guidance on various issues such as identifying distinct performance obligations, accounting for contract modifications and accounting for the time value of money.
  • Detailed implementation guidance is included on topics such as sales with a right of return, customer options for additional goods or services, principal versus agent considerations, licensing, and bill-and hold arrangements.
  • The standard also introduces new guidance on costs of fulfilling and obtaining a contract, specifying the circumstances in which such costs should be capitalised. Costs that do not meet the criteria must be expensed when incurred.
  • The standard introduces new, increased requirements for disclosure of revenue in an IFRS reporter’s financial statements.


Effective date

IFRS 15 must be applied in an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2017. Application of the Standard is mandatory and early adoption is permitted. An entity that chooses to apply IFRS 15 earlier than 1 January 2017 must disclose this fact.

The 2017 effective date has been chosen, in part, to allow time for entities to make changes to systems and processes that may be needed in order to comply with the new Standard.


Additional information

IASB website

FASB website

  • Press release
  • ASU 2014-09:
    • Section A— Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers
    • Section B— Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables
    • Section C — Background Information and Basis for Conclusions
  • FASB in Focus introducing the new standard
  • Three-part video series discussing the objectives, changes, and disclosure requirements in the new standard
  • Joint webcast: Being held 5 June 2014 at 3:00 p.m. BST

UK Accounting Plus

Additional Deloitte guidance

Adopting the new standard will involve a significant amount of work for many entities. Moreover, the impacts of the standard may be very different for different industries and different entities. In some cases, the profile of revenue and profit recognition may change significantly. However, even where this is not the case, the process of reviewing the impact of the new guidance for a particular entity, including the required disclosures, should not be underestimated. In particular, if changes to systems or processes are required, these may take time to implement, making it important that the associated analysis is performed on a timely basis.

Deloitte has produced guidance relating to the new standard, and further guidance will be issued over the next few months.

Further guidance to be issued in due course will include:

  • IFRS industry implementation guides – a more in-depth analysis of the potential implications for various industries

Summary of the EFRAG Supervisory Board meeting details timing of new EFRAG structure

28 May, 2014

The summary of the European Financial Reporting Advisory Group (EFRAG) Supervisory Board meeting held on 22 May 2014 has been published on the EFRAG website. One of the points discussed was the effective date of the new EFRAG structure that results from considerations after the publication of the Maystadt report.

During its meeting, the EFRAG Supervisory Board finalised the revised EFRAG Statutes and EFRAG Internal Rules. After a final fatal flaw review by existing and future members these will be submitted to the EFRAG General Assembly for approval on 16 June 2014.

The effective Date of the new documents and thus of the new governance structure is linked to the appointment of the president of the new EFRAG Board. The meeting summary states that the European Commission will only be able to nominate the President of the EFRAG Board after having heard the European Parliament and the Council of Ministers. Given the recent European Parliament elections, the effective date will therefore be at earliest a date in September 2014. In the interim period between 16 June and the effective date the members of the new EFRAG Board will be nominated.

Until the effective date the existing governance structure remains operational under the existing EFRAG Statutes and EFRAG Internal Rules.

Please click for access to the full meeting summary on the EFRAG website.

Legislation for audit reform published in the Official Journal

27 May, 2014

Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 and Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014, both of which form the legislative package for audit reform in the EU, have been published in the Official Journal of the European Union.

Under the new rules, the societal role of auditors will be clarified, with the aim of increasing audit quality, transparency and audit supervision.  The new rules will require that audit reports be more detailed and informative and their work will be more closely monitored with strengthened audit committees.

Mandatory rotation of auditors for public interest entities (PIEs) will be introduced, requiring such companies to retender at 10 years and change the auditor at least every 20 years. The reforms include a prohibition on the provision of certain non-audit services to PIE audit clients (including tax advice and services linked to the financial and investment strategy of the audit client) and also introduce a cap on the fees that can be earned from the provision of permitted non-audit services to PIEs.

Additionally the rules prohibit the use of restrictive clauses in contracts which limit a company’s choice of auditor in order to promote market diversity.

Both the Directive, which amends the Statutory Audit Directive (Directive 2006/43/EC) (link to Europa website) and the Regulation will enter into force 20 days after their publication in the Official Journal of the European Union (namely 16 June 2014).  The EU Member States have two years from the date of entry into force to incorporate the rules of the Directive within their national law (namely by 16 June 2016).  Although the Regulation enters into force on 16 June 2014 there is a two year delay, until 16 June 2016, in the application of most of its provisions.

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Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.