Changes to Ethical Standards for Auditors, which became effective in December 2010, prohibited firms from undertaking any tax services on a contingent fee basis for companies that they audit where the outcome is dependent on the proposed application of tax law which is uncertain or has not been established.

Recognising that firms were likely to have a number of uncompleted engagements of the nature described above, the revised Ethical Standards contained a transitional provision permitting firms to continue with such engagements until the earlier of the completion of the engagement or 31 December 2011. In November 2011, following consultation, the transitional period was extended to 31 December 2014.

The FRC reminds audit firms that there will be no further extension of this transitional provision and that to remain compliant with the Ethical Standards for Auditors they will need to take the appropriate action by 31 December 2014.

The FRC press release can be accessed on the FRC website.

The IAASB ED, which follows an earlier discussion paper, proposes changes to various International Standards on Auditing (ISAs) to better deal with disclosures in financial statement audits. The ED seeks to achieve an appropriate focus by auditors on disclosures and encourage earlier auditor attention on them during the audit process, including disclosures where the information is not derived from the accounting system.

The FRC’s equivalent ISAs (UK and Ireland) are largely developed from the ISAs published by the IAASB and are amended, where necessary, to address specific UK and Ireland legal and regulatory requirements and other matters that are appropriate in the UK and Ireland national legislative, cultural and business context.

As well as understanding respondents comments in relation to the questions posed by the IAASB in the ED, the FRC are also keen to understand from respondents whether, and if so how, the proposed changes should be adopted in the UK through amendments to the ISAs (UK and Ireland).

Comments are invited by the FRC until 4 August 2014.

Click for:

• FRC Invitation to Comment on the IAASB Exposure Draft (May 2014) – Proposed changes to the International Standards on Auditing (ISAs) – Addressing disclosures in the audit of financial statements (link to FRC website).
• Our previous UK Accounting Plus news item on the IAASB's ED.

The ITCG discussed current and possible future activities in relation to the IFRS Taxonomy which currently focus mainly on the maintenance and further development of the content of the IFRS Taxonomy. One of the planned projects is to publish jurisdictional profiles on the use of the IFRS Taxonomy around the world.

The group also discussed the proposals for the new IFRS Taxonomy due process including optional steps, resources and the process for common practice additions. The ITCG also considered IASB review and approval of new due process documents.

Regarding the objectives and working practices of the ITCG, the members discussed agenda-setting, taxonomy review and meeting frequency. They found that the main topic for further review is the formalisation of the interaction between the ITCG and the IFRS Advisory Council which is expected to provide strategic guidance on the IFRS Taxonomy.

The main content topics discussed were the 2014 common practice project and amendments to the IFRS Taxonomy resulting from IFRS 15 Revenue from Contracts with Customers. One of the points was convergence with the US GAAP taxonomy, as IFRS 15 is a converged standard.

The meeting concluded with an update on a joint trial project with the FASB, consisting of the development of a data model for IFRS 13 Fair Value Measurement and updates on the use of the IFRS Taxonomy within members' jurisdictions.

Please click for access to the meeting notes on the IASB website.

EFRAG groups the feedback in two reports: feedback from preparer outreach activities and feedback from user outreach activities.

Feedback from preparers was mainly gathered through a questionnaire EFRAG and the standard-setters of France, Germany, Italy and the UK issued in February 2014 to invite European companies to share their practical experiences with IFRS 3 Business Combinations (and any consequential amendments to other Standards). The report also includes feedback received during outreach events of the national standard-setters EFRAG staff participated in.

The main practical issues identified by preparers were: 

• The definition of a business in IFRS 3 was too broad and lacked guidance on what should not be considered a business.
• Determining the fair value of certain assets and liabilities was highly complex and subjective.
• Identifying intangible assets was generally highly complex and subjective.
• Views on the most appropriate accounting treatment for subsequent accounting for goodwill were mixed; but overall the impairment test was considered very difficult to perform.

Feedback from users was mainly gathered through telephone meetings and face-to-face interviews with investors and analysts. The discussions were based on a number of case studies from published IFRS financial statements. The report also reflects feedback received during the joint outreach event on 1 April 2014.

The key messages provided were:

• The reasons for undertaking the business combination were often described in a “boiler plate” manner and did not sufficiently explain the key drivers of the transaction.
• There was a need for more transparency on the expected synergies from a business combination.
• There were mixed views on the non-amortisation of goodwill and indefinite life intangible assets.
• Adjustments to contingent consideration were considered to be part of the acquisition price.
• Fair values were considered to be highly subjective, creating a need for additional information on how they were determined.

The letter submitted to the IASB also offers an analysis of the feedback received by topic. The topics chosen were definition of a business, fair value measurement, separate recognition of intangible assets from goodwill, subsequent accounting for goodwill, measurement of contingent consideration, and step acquisitions and loss of control.

The EFRAG website offers the following documents:

• Letter submitted to the IASB
• Feedback received from preparers and press release.
• Feedback received from users and press release.

The newsletter “Setting the Standard” covers the following key areas:  

• The recently published guidance on the preparation of a Strategic Report ‘Guidance on the Strategic Report’ highlighting main areas of change from the original Exposure Draft.  The FRC highlight that “early indications from companies with 2013 year ends suggest that Strategic Reports are often longer than the business reviews that preceded them” and that they expect more companies to drive towards more clear and concise reporting in 2014.  The FRC indicate that this may be achieved “with a sharper focus on materiality and by considering the placement of information”.
• The FRC’s contribution to the International Accounting Standard Board’s (IASB’s) work to develop its Conceptual Framework for Financial Reporting.  The newsletter highlights that the FRC are “participating energetically” in the debates on prudence, accountability and the importance of reliability.
• The FRC’s response to the IASB’s request for information on the Post-Implementation Review of IFRS 3 'Business Combinations'.  The newsletter highlights that an outreach event in March with the Institute of Chartered Accountants in England and Wales (ICAEW) and also the FRC research paper ‘Investor views on intangible assets and their amortisation’ were both used to inform the FRC response.
• Key changes to the governance of the European Financial Reporting Advisory Group (EFRAG).
• Recent activity of the Financial Reporting Lab including ‘clear and concise’ case studies, two new projects (Disclosure of Dividend Policy and Capacity and Corporate Reporting in a Digital World) and a survey that seeks respondents’ views as to what should be the priorities of the Lab going forward and views on activities of the Lab to date.
• Updates on UK GAAP since the last edition of the newsletter - the issuance of Financial Reporting Exposure Draft (FRED) 54 ‘Draft Amendments to FRS 102 – Classification of debt instruments’, three editorial amendments to Financial Reporting Standard (FRS) 102, the issuance of FRS 103 ‘Insurance Contracts’, amendments made to the Financial Reporting Standard for Smaller Entities (FRSSE) – Micro Entities and a revised Policy and Code of Practice on Statements of Recommended Practice (SORPS).  The newsletter highlights that the amendments to FRS 102 (with FRED 51 and FRED 54) and FRS 101 (with FRED 53) will be issued in the summer.     
• The FRC consultation on drafts of three proposed new XBRL accounts taxonomies to support XBRL reporting under new UK GAAP and EU-adopted IFRS.  The FRC intends to target the release of the final taxonomies in September 2014 for implementation from 1 January 2015 to coincide with implementation of FRS 102.
• The FRC consultation proposing some changes to the operating procedures of the Conduct Committee.
• The FRC consultation on changes to the UK Corporate Governance Code.

An indication is also provided on a future Financial Reporting Standard for Smaller Entities (FRSSE) project which will entail a review of the FRSSE in light of the changes to the small companies’ regime that are expected to take place when the new EU Accounting Directive is implemented.  The FRC comment:

As the legal changes to the small companies’ regime will be significant, retaining the FRSSE in its current form is not a realistic option, nor really is having accounting standards for small companies that are based on standards for larger companies that have been withdrawn. We have been giving more thought to how we will replace the FRSSE for small entities and micro-entities, as we develop a consultation document that will seek formal stakeholder feedback. We expect to issue this in the summer, alongside a consultation from the Department for Business, Innovation and Skills (BIS) which will discuss its proposals for implementing the Accounting Directive in the UK. 

As well as seeking stakeholders’ views on our outline plans for bringing small entities within the scope of FRS 102 (with reduced disclosures), we also expect to propose a new Financial Reporting Standard for Micro-entities (FRSME). This will be based on the new micro-entities regime, which has now been reflected in the FRSSE, and may include recognition and measurement simplifications that are appropriate to the very smallest entities. 

Please click here for the full newsletter on the FRC website.

Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) issued in November 2013 and has a stated effective date of annual periods beginning on or after 1 July 2014. The updated report indicates final endorsement is currently expected in the fourth quarter of 2014.

Annual improvements - 2010-2012 cycle and 2011-2013 cycle were issued in December 2013 and have a stated effective date of annual periods beginning on or after 1 July 2014. The updated report indicates final endorsement is currently expected in the first quarter of 2015.

The endorsement status report, dated 24 June 2014, is available here.

As the Panel found that information about key inputs for investment decisions is often not captured in a cohesive, balanced and structured way by the existing corporate reporting model, it recommends corporate reporting innovations and initiatives that provide investors with a longer-term and broader perspective on shareholder value creation to complement the historical financial performance and current financial position perspective provided by financial statements should be encouraged. The relevance of integrated reporting is especially noted in this respect. The Panel recommends that each G20 Finance Minister should assess and address any practical, legal or statutory barriers to improved corporate reporting.

The Panel also investigated suggestions that the use of fair value accounting principles has led to short-termism in investor behaviour but found that when making investing decisions, investors tend to place the emphasis on the underlying features and risks of investment opportunities. Therefore, the Panel concludes that changes to accounting principles would not increase the attractiveness of long-term infrastructure investments. However, the Panel supports the IASBs efforts to improve financial reporting and recommends that the IASB should continue working with priority on the issuance of a global standard on insurance contracts in the near future and should give further consideration to performance reporting as part of the Conceptual Framework and disclosure initiative projects.

Since regulatory requirements, regulatory changes and related uncertainties often influence investing decisions, the Panel recommends that regulators should evaluate whether risk charges or calculations are appropriately aligned with the risk patterns of investments in infrastructure projects desired in their respective jurisdictions.

Please click for access to the full report.

The IASB issued a Request for Information (RFI) in January 2014 seeking comments from stakeholders to identify whether IFRS 3 'Business Combinations' provides information that is useful to users of financial statements; whether there are areas of IFRS 3 that are difficult to implement and may prevent the consistent implementation of the standard; and whether unexpected costs have arisen in connection with applying or enforcing the standard.

The ICAEW’s response contains many consistent comments with those raised by the Financial Reporting Council (FRC) and the Association of Chartered Certified Accountants (ACCA).

The key responses from the ICAEW are:

• That the definition of a business needs clarifying.  The ICAEW comments that the current definition works well in straightforward cases but “in some cases the distinction between what is and isn’t a business is unclear”.  It proposes that the IASB considers expanding guidance in this area.  Although not advocating a strict rules-based approach, the ICAEW feel that “more guidance is needed to help draw a clearer dividing line between the two types of transaction”.
• That the costs of separately recognising some intangibles outweigh the benefits.  The ICAEW comments that as the standard requires the acquirer to recognise separately from goodwill the identifiable intangible assets acquired in a business combination, it means that certain assets acquired such as customer relationships, customer lists and brands need to be separately recognised and measured at fair value.  The ICAEW highlights that “businesses will often incur significant costs in order to obtain these fair values” and as “both users and preparers see little, if any advantage in separately recognising such intangibles” it is difficult to argue that the benefits outweigh the costs.  The ICAEW indicate that they agree with the analysis of the FRC which put forward the view that only ‘wasting’ intangibles should be recognised separately from goodwill and ‘organically replaced’ intangibles should be subsumed within goodwill.
• That there are “some problems” with the approach to step acquisitions.
• That “there should be more room for judgement” in determining whether a payment to former owners of the business acquired, which they will forfeit if they leave employment, should be accounted for as part of the cost of the acquisition or as a post-acquisition expense.  Paragraph B55 (a) states that payments under such arrangements should be treated as compensation for post-acquisition services unless the service condition is not substantive.
• That the present disclosure requirements “provide useful information” and that the IASB should “resist the temptation to supplement the current requirements”.  However the ICAEW does request that the IASB “step back and critically assess each of the disclosures required by paragraphs B64-67 with the aim of cutting some of the clutter and refocusing the disclosures on those issues that really matter to the users of the financial statements”.

Click for:

• Full comment letter (link to ICAEW website).
• UK Accounting Plus story on the IASB's RFI on the Post implementation review of IFRS 3.
• UK Accounting Plus story on the FRC comment letter.
• UK Accounting Plus story on the ACCA comment letter.
• UK Accounting Plus story on the Deloitte comment letter.
• UK Accounting Plus project page on the Post-implementation review of IFRS 3.