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June

FRC reminds audit firms of approaching deadline for terminating or amending contracts for tax services provided on a contingent fee basis

26 Jun 2014

The Financial Reporting Council (FRC) has issued a reminder to audit firms that the deadline for terminating or amending contracts for tax services provided on a contingent fee basis is 31 December 2014.

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.

FRC calls for comments on the IAASB’s Exposure Draft on proposed changes to various International Standards on Auditing (ISAs) to better deal with disclosures in financial statement audits

26 Jun 2014

The Financial Reporting Council (FRC) has requested comments from interested parties on the International Auditing and Assurance Standards Board’s (IAASB’s) recently issued Exposure Draft (ED) ‘Addressing Disclosures in the Audit of Financial Statements’ that was published in May 2014. The FRC intends to use comments received to assist it in developing its response to the IAASB and to assist it in developing proposals for the adoption into the UK equivalent ISA (UK and Ireland) when the changes to the ISAs are finalised.

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.

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Summary of the discussions at the first ITCG meeting

25 Jun 2014

The IASB's IFRS Taxonomy Consultative Group (ITCG) held its inaugural meeting on 29 May 2014. The IASB has now published on its website meeting notes from that meeting.

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 submits collected views of European preparers and users on IFRS 3

25 Jun 2014

The European Financial Reporting Advisory Group (EFRAG) has responded to the IASB's Request for Information (RFI) regarding IFRS 3 'Business Combinations' by submitting reports of feedback received from various outreach activities and events.

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:

FRC publishes third edition of quarterly newsletter on financial reporting

24 Jun 2014

The Accounting and Reporting Policy team of the Financial Reporting Council (FRC) has today published the third edition of their quarterly newsletter on financial reporting. The newsletter covers the period February 2014 to June 2014 and details the activities of the FRC since the last newsletter was published which covered the period October 2013 to January 2014.

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

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.

IASB work plan update for June 2014

24 Jun 2014

Following its recent meeting, the International Accounting Standards Board (IASB) has updated its work plan. Given that the second quarter of 2014 will end next Monday, most consultation documents that were still marked as expected in the second quarter have been moved to the third quarter 2014 and as a consequence some other projects have been moved to the fourth quarter. The only pronouncement still expected in June are the IAS 41 amendments regarding bearer plants.

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 Q3 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 Q3 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 24 June 2014 (link to IASB website). We have updated our project pages to reflect the updated work plan and other known developments.

Updated EFRAG endorsement status report reflects positive ARC vote on IAS 19 amendments and new expected endorsement dates for annual improvements

24 Jun 2014

The European Financial Reporting Advisory Group (EFRAG) has updated its endorsement status report to reflect that the Accounting Regulatory Committee (ARC) has voted in favour of 'Defined Benefit Plans: Employee Contributions (Amendments to IAS 19)'. The report also notes that endorsement of the amendments from the 2010-2012 and 2011-2013 annual improvements cycles is no longer expected in 2014.

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.

B20 Panel believes changes to accounting principles are not a tool to increase the attractiveness of long-term financing

24 Jun 2014

In light of the importance of infrastructure and other long-term investment for the global economy, the B20 forum through which the private sector produces policy recommendations for the Group of 20 (G20) leaders created a taskforce, which developed actionable recommendations for the G20. As a result of one of these recommendations, the six largest international accounting networks formed a panel to analyse existing accounting and corporate reporting practices and suggest improvements. The panel has now published a report focussing on whether improvements in accounting and corporate reporting could help to attract increased private financing by offering a broader, longer-term perspective on shareholder value creation.

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.

IASB to create a transition resource group for the impairment of financial instruments

23 Jun 2014

The International Accounting Standards Board (IASB) has announced the creation of a transition resource group that will focus on the upcoming new requirements for impairment of financial instruments. The transition group will support stakeholders by providing a discussion forum on implementation issues that may arise as a result of the new impairment requirements under IFRS 9 'Financial Instruments' (2014), which is expected to be issued later this year.

The new expected credit loss model for the impairment of financial instruments under IFRS 9 will represent a fundamental change to current practice. The changes will have significant implications from an implementation as well as a systems perspective, particularly in the financial services sector. The transition resource group will provide support for stakeholders after the standard is published, ensuring a robust and consistent implementation.

The IASB is seeking nominations for the transition resource group, which will consist of 14 to 18 specialists representing financial statement preparers, auditors and related groups. The group is expected to meet 2–3 times per year.

More information on the impairment of financial instruments transition resource group is available on the IASB website.

ICAEW response to the IASB’s request for information on the Post-Implementation Review of IFRS 3

23 Jun 2014

The Institute of Chartered Accountants in England and Wales (ICAEW) has published a comment letter responding to the International Accounting Standard Board’s (IASB’s) request for information on the Post-Implementation Review of IFRS 3 Business Combinations. Overall the ICAEW comment that the “standard works well” but has highlighted a number of areas for consideration by the IASB.

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”.

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Correction list for hyphenation

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