July

FRC publishes annual report 2013/14

16 Jul, 2014

The Financial Reporting Council (FRC) has today published its 2013/14 annual report (“the annual report”). The annual report reviews the activity of the FRC over the last year, highlights the achievements of the FRC in 2013/14 and also identifies areas that it will address in 2014/15.

The annual report provides an assessment of the progress that the FRC has made against its three year strategy, set in 2013.  The strategy, focusing on five areas, seeks to promote:

  • High quality corporate governance and investor stewardship which foster trust in the way companies are run.
  • High quality corporate reporting that is fair, balanced and understandable.
  • High quality audit and confidence in the value of audit.
  • Actuarial oversight and standards which underpin high quality actuarial practice, and integrity, competence and transparency of the actuarial profession.
  • Effective, proportionate and independent investigative, monitoring and disciplinary procedures.

The annual report highlights:

  • That “the quality of governance amongst larger listed UK companies is generally sound” as indicated by the high levels of compliance with the UK Corporate Governance Code (“the Code”) found in the annual review of the Code and Stewardship Code published in December 2013.  However the FRC comment that many companies “still struggle to articulate clearly why they have chosen not to comply with the Code”.  The FRC also indicate that it has “concerns about whether companies, markets and policymakers take a sufficiently long-term view” and that, going forward, it will be looking to provide thought leadership in the EU on the developing role of risk capital.
  • That corporate reporting has generally been “good” but notes that improvements could be made in the reporting by smaller listed and AIM companies.  The annual report highlights the initiatives, such as the publication of the Guidance on the Strategic Report that the FRC is undertaking to improve the overall quality of corporate reporting in order to address the needs of investors. 
  • That the quality of auditing in the UK is “generally good” most notably in relation to the largest listed companies.  The FRC highlight that “there is scope for improvement in the banking sector in particular, including a concern about the lack of sufficient challenge when testing key assumptions underpinning loan loss provisions”.  This was highlighted in the 2013/14 Audit Quality Inspections Annual Report.  The FRC also highlight that there has been a “positive response” to their efforts to promote audit re-tendering and that its work, alongside UK stakeholders, on the new EU audit Regulation and Directive will “ensure that UK audit regulation can remain effective and proportionate”.

Looking ahead, key priorities for the FRC include:

  • Undertaking a project to evaluate and plan how it might assist smaller listed and AIM companies to address the quality of their reporting so as to improve confidence in the integrity of their financial statements and of the markets as a whole.  The project will aim to achieve a step change in the quality of financial reporting of smaller listed and AIM companies over a three year period. 
  • Undertaking a thematic review of UK bank audits, focusing on how these are conducted, identifying why improving their quality has been slow and seeking to understand what needs to be done to improve them.
  • Developing further guidance for audit committees focusing how audit quality and effectiveness might best be assessed by audit committees.
  • Implementation of aspects of the EU Audit Regulation including reviewing auditor independence requirements.
  • Reviewing audit firm governance.
  • Supporting the application of the new UK GAAP standards.
  • Implementation of Lord Sharman’s recommendations on going concern. reporting.
  • Promoting Clear and Concise reporting in annual reports.

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New SORPs issued for charity accounting and reporting

16 Jul, 2014

The Charity Commission for England and Wales (Charity Commission) and the Office of the Scottish Charity Regulator (OSCR) have today published two new Statements of Recommended Practice (SORPs) setting out a new framework for charity accounting and reporting.

SORPs issued by the Charity Commission and OSCR apply to charities preparing accounts under UK GAAP to present a ‘true and fair view’ and are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique within the charities sector. 

The SORPs set out the required accounting and reporting by charities in the context of the new accounting framework introduced by Financial Reporting Standard (FRS) 102 applicable in the UK and Republic of Ireland for financial years beginning on or after 1 January 2015.  One SORP is targeted at those charities that adopt FRS 102 (“the FRS 102 SORP”) and the other is targeted at those charities that, depending on their size, can choose to adopt the Financial Reporting Standard for Smaller Entities (FRSSE) (“the FRSSE SORP”).  Each SORP reflects the different accounting treatments under the two standards.  Both SORPS are effective from financial years beginning on or after 1 January 2015 and have been developed after reflecting on feedback received on the original Exposure Draft issued in July 2013.

The SORPs have been created in a modular format containing a set of core ‘modules’ which apply to all charities and also a number of additional modules which will only apply to specific charities.  The Charity Commission and the OSCR have highlighted that charities will be able to customise the SORP according to their specific circumstances through an interactive website.  It is hoped that this modular format will help to better meet the needs of the preparers of charity accounts especially for smaller charities. 

Alongside the publication of the SORPs the Charity Commission and the OSCR have published guidance to help charities choose the right SORP to adopt.  Help sheets have been created that explain the main differences between the FRS 102 SORP and the FRSSE SORP and the criteria that must be met to be able to adopt the FRSSE SORP.  An indication is provided that the FRSSE standard is due to be reviewed in 2016 in light of the new EU Accounting Directive and this may mean that charities adopting the FRSSE now will have to change their accounting policies twice in succession due to the amendments. 

The Charity Commission and the OSCR emphasise that “it is important to make the right choice” of accounting framework to adopt and advise that charities speak to their auditor, independent examiner or advising accounting to assist in choosing the standard that is best.  They comment that “although the two SORPS have the same structure and order of modules, the requirements differ significantly due to underlying differences in terminology, accounting policies and disclosures required by the FRSSE and FRS 102”.

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CFA Institute issues study on financial crisis insights on bank performance reporting

16 Jul, 2014

The CFA Institute, a global association of investment professionals, has published a report entitled 'Financial Crisis Insights on Bank Performance Reporting (Part 1): Assessing the Key Factors Influencing Price-to-Book Ratios', suggesting that better reporting of risk, timely loan write-downs on balance sheets, and investor access to comparable reporting of information across jurisdictions, will improve transparency and reduce investor risk aversion towards the banking sector.

The study focusses on price-to-book ratios (P/Bs) as one metric investors monitor when valuing banks and as a metric widely referenced by policymakers as a yardstick for the financial health of banks. It is based on a sample of 51 banks (31 from the European Union and 20 from Australia, Canada, Japan, and the United States). The sample includes large, complex banking groups and the analysis period is 2003–2013, i.e. it covers the periods before, during, and after the financial crisis.

A key analytical angle in the study concerns the relationship between loan impairments and P/Bs as loans are a key element of a bank's financial assets, and their impairments affect both the market value of equity (stock price) and the equity. The survey coincides with a (not yet published) survey by the CFA Institute identifying improved requirements in the accounting for impairments as the second-most important required regulatory reform to avert future financial crises and the current initiatives from IASB (the final version of IFRS 9 Financial Instruments is expected to be issued later this month), the FASB, and other regulatory bodies aimed at improving the accounting for financial instruments and the overall transparency of banking financial institutions.

The study shows that during the financial crisis, the representation of loan impairments on balance sheet and non-performing loans lagged the capital markets' economic writedown of these loans and this lagging trend was particularly evident for the EU banks. In addition, comparing the pre-provision income and net income for the sample banks showed that loan impairments significantly contributed to reduced overall net income at different junctures during the financial crisis. The authors of the study also found an incremental risk aversion toward the bank sector, translating to relatively higher risk premiums, lower stock prices, and lower P/Bs.

Based on these findings, the report contains two major policy recommendations:

  • In addition to amortised cost carrying values, fair value measurement of loans should be recognised on the face of the balance sheet as a means of avoiding "too little, too late" recognition of loan losses and providing decision-useful information.
  • Bank risk disclosures should be enhanced as a better understanding of bank business models reduces the risk premium that investors assign owing to limited transparency of bank financial statements.

The report is available for download on the CFA Institute website. The CFA Institute has announced that part 2 of the report, Relationship between Disclosed Loan Fair Values, Impairments and the Risk Profile of Banks, will be released in August 2014.

FEE factsheet on the EU Directive on disclosure of non-financial and diversity information

16 Jul, 2014

The Federation of European Accountants (Fédération des Experts-comptables Européens, FEE) has published a factsheet on the EU Directive that will require certain large companies to provide additional information on social and environmental matters.

The amendments to European accounting legislation had been proposed by the European Commission in April 2013 and adopted by Parliament in April 2014. They currently await adoption by the Council and publication in the Official Journal of the European Union after which they will become law. Current expected transposition date for EU Member States is autumn 2016.

The FEE factsheet outlines key aspects of the new legislation. Please click to download it from the FEE website.

Call for applications as EFRAG TEG member

16 Jul, 2014

The European Financial Reporting Advisory Group (EFRAG) has issued a call for applications regarding membership in its Technical Expert Group (TEG).

EFRAG is calling for candidates in view of the current preparer vacancies and the fact that the present mandate period of three EFRAG TEG members expires on 31 March 2015 and in anticipation of vacancies that might result from the new EFRAG governance structure. It is expected that some reappointments will take place.

Applications must be submitted by 1 October 2014. More information is available through the press release on the EFRAG website.

Additional public consultation on lessee accounting

16 Jul, 2014

The European Financial Reporting Advisory Group (EFRAG) and the major European standard-setters (ANC, ASCG, FRC and OIC) have launched an additional public consultation on the two different approaches for lessees proposed by the IASB and FASB. This consultation is focused on users' views.

This new consultation complements the consultation on preparers' views launched on 30 June 2014.

Again, the objective of the consultation is to obtain examples where contracts or transactions could qualify as leases under a single-model approach (IASB) or a dual-model approach (FASB), but are viewed by constituents as in-substance services. In addition, the EFRAG and European standard-setters are seeking input on which of the two alternative approaches is preferred.

Users interested in participating can either do so through an interview of no more than 30 minutes or through filling in and submitting a questionnaire. Questionnaires must be submitted by 29 August 2014.

Further information, contact details for the interview, and a link to the questionnaire are available through the press release on the EFRAG website.

CCAB issues new SORP for Limited Liability Partnerships

15 Jul, 2014

The Consultative Committee of Accountancy Bodies (CCAB) has published a revised Statement of Recommended Practice (SORP) which sets out a new framework for accounting by Limited Liability Partnerships (LLPs) (“the revised SORP”).

The Financial Reporting Council (FRC) has approved the CCAB as the recognised SORP-making body for issuing a recognised SORP for LLPs incorporated in Great Britain under the Limited Liability Partnerships Act 2000.  The members of the CCAB are; The Institute of Chartered Accountants in England and Wales (ICAEW), The Institute of Chartered Accountants of Scotland (ICAS), The Institute of Chartered Accountants in Ireland (ICAI), The Association of Chartered Certified Accountants (ACCA) and The Chartered Institute of Public Finance and Accountancy (CIPFA).  

SORPS issued by the CCAB apply to LLPs preparing accounts under UK GAAP to present a ‘true and fair view’. 

The revised SORP updates the previous SORP (2010) to reflect the requirements of FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’. 

The key changes included in the revised SORP as a result of FRS 102 are: 

updating the guidance on business combinations and group accounts (paragraphs 102-119) to reflect the fact that FRS 102 only allows merger accounting to be used for group reconstructions and some public benefit entity combinations;

updating the guidance on contractual or constructive obligations (paragraph 76) and annuities (paragraph 80) to reflect the fact that FRS 102’s requirements relating to financial liabilities differ from current UK GAAP requirements; and

updating references throughout to reflect the introduction of the option to produce a single statement of comprehensive income, including adding an additional exhibit in Appendix 1. 

A number of other changes have also been made to clarify areas of the 2010 SORP “where there were known issues or misunderstandings”: 

clarifying the requirements in relation to automatic division of profits to make it clear that payment is unavoidable where profits are automatically divided among members in accordance with the LLP agreement in force at the time, and that in such instances a liability should be recognised;

clarifying that if a reconciliation of members’ interests is to be shown as a primary statement in place of the statement of changes in equity then comparatives must be shown for all figures presented;

improving the table that follows paragraph 60 to ensure the recommended format not only provides a reconciliation of members’ interests but also meets related Companies Act requirements;

providing more guidance on cash flow statement presentation to reduce divergent practices; and

refining the examples in Appendix 2 to focus on more commonly encountered scenarios and to eliminate some duplication. 

Additionally LLPs will not be required to produce a separate Members’ Report; however the disclosures that would previously have had to be included in the Members’ Report are retained as these are “considered helpful”.  The CCAB comment that “LLPs may still wish to produce a Members’ Report, but the SORP now allows them to include these disclosures elsewhere in the financial statements if they prefer”.

The CCAB highlights that the revised SORP will be kept under review for changes in accounting practice and new developments.  It also highlights that changes to accounting standards since 2 July 2014 have not been reflected in the revised SORP.

The revised SORP will be effective for accounting periods beginning on or after 1 January 2015 and earlier, if an entity chooses to early adopt FRS 102. 

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Further collaboration planned between ESMA and IFRS Foundation

15 Jul, 2014

The European Securities and Markets Authority (ESMA) and the IFRS Foundation announced that the two organisations will deepen their cooperation in the consistent application of IFRSs.

The IFRS Foundation and ESMA statement of protocols for cooperation on International Financial Reporting Standards published today reiterates the current relationship between the two organisations, and identifies three new areas for mutually supportive work.

In the area of standard development, ESMA currently supports the IASB through participation in working groups, submitting comment letters and coordinating the fatal-flaw review by European enforcers, when appropriate. Regarding the consistent application of IFRSs, ESMA makes submissions to the Interpretations Committee, coordinates the response from European enforcers to outreach requests from Interpretations Committee staff, and submits comment letters to the Interpretations Committee on draft interpretations and tentative agenda decisions whilst the IASB reaches out to ESMA when planning post-implementation reviews and selecting parties for input to help the IASB determine the focus of the review. The IASB also meets with the European Enforcers Coordination Sessions (EECS) regularly, while ESMA invites IASB members and staff to attend and contribute to seminars and workshops ESMA offers and consults with the IASB before issuing publications that relate to IFRS application in the EU.

The new areas of cooperation identified in the statement of protocols are the following:

  • IASB staff will interact with ESMA as part of ESMA's assessment of the IFRS Taxonomy in the context of its mission of drafting regulatory technical standards for use in electronic filings by EU listed entities.
  • IASB staff will explain what pressure points they anticipate are most likely to arise in the implementation of its new or significantly amended standards.
  • ESMA will bring to the IASB's attention emerging financial reporting issues arising from financial innovation and other new developments.

The Statement of Protocols is available on the IASB website.

European Commission consultation on the potential economic consequences of country-by-country reporting under the EU Capital Requirements Directive

14 Jul, 2014

The European Commission has launched a consultation to obtain information and views from stakeholders on the potential economic consequences of country-by-country reporting by institutions under Article 89 of the EU Capital Requirements Directive 4 (“Article 89 CRD IV”).

CRD IV was agreed by the European Council on 20 June 2013 and the legislation was published in the Official Journal on 27 June 2013.  CRD IV is intended to apply from 1 January 2014. 

Article 89 CRD IV requires, among other things, all “credit institutions” and “investment firms” to report on a country-by-country basis from 1 July 2014.  This will include a requirement to disclose annually: 

  • Their name;
  • Nature of activities and geographic location;
  • Number of employees; and
  • Turnover on a consolidated basis by country where they have an establishment. 

Certain “important institutions” will also be required to disclose additional information  contained in sub-paragraphs (d), (e) and (f) being their pre-tax profit or loss, their taxes paid and any public subsidies received by 1 July 2014. 

The European Commission, pursuant to Article 89 must carry out a general assessment as regards potential negative economic consequences of the public disclosure.  The European Commission comment that:

The purpose of this consultation is not only to receive views on any negative effects of disclosure, but also on the positive effects, so that a balanced picture of the consequences can be formed.

In particular, the European Commission are keen to understand the impact of the information to be disclosed under sub-paragraphs (d),(e) and (f).  Should this disclosure not be deemed to be prejudicial all credit institutions and investment firms will have to disclose this information from 1 January 2015.  

The UK is required to transpose CRD IV into national law and final guidance and Regulations (SI 2013/3118) which transpose the country-by-county reporting requirements under Article 89 CRD IV were approved by HM Treasury in December 2013.

Comments are invited until 12 September 2014.

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Report on the progress achieved in the implementation of the EFRAG reform

14 Jul, 2014

The European Commission has submitted to the European Parliament and the Council of the EU a report on the progress achieved in the implementation of the reform of the European Financial Reporting Advisory Group (EFRAG) following the recommendations provided in the Maystadt report.

The EU Regulation on the continued of financing of the IFRS Foundation and PIOB for the period 2014-2020 and of EFRAG for the period 2014-2016 had stipulated that the Commission shall submit annual reports to the European Parliament and to the Council on necessary governance reforms in the area of accounting and financial information in respect of EFRAG, taking into account, inter alia, the developments following the recommendations set out in the the Maystadt report and on the steps that EFRAG has taken to implement those reforms. The Commission has now published its first report.

In its report the Commission notes that the revised EFRAG Statutes and EFRAG Internal Rules reflect recommendations regarding the following issues included in the Maystadt report:

  • Extension of membership of the General Assembly to include National Funding Mechanisms and other private or public organisations.
  • Criteria, commitments and rights for membership of the General Assembly.
  • A minimum of two year financial commitment for members of the General Assembly.
  • Voting rights in the General Assembly, inspired by the notion that no single organisation should be able to block the operations of EFRAG.
  • Tasks of the General Assembly.
  • Nominating Committee with an advisory role on certain aspects of the nomination and selection process.
  • Profile and criteria of the Board.
  • Role of the President of the Board.
  • Responsibilities of the Board.
  • Fallback procedures for the Board for cases where no consensus can be reached.
  • Responsibilities of EFRAG TEG.
  • Profile and criteria for the membership of EFRAG TEG.

The Commission recognizes that in many cases the level of detail of these amendments goes beyond the recommendations provided in the Maystadt report. However, the Commission also notes that there were departures from the recommendations in the Maystadt report. These concern the composition of the new Board (necessitated by the fact that the European Supervisory Authorities and the European Central Bank declined to accept full membership of the Board), decision-making in the Board with a fall-back solution introduced for cases where no consensus can be reached, and combining the functions of CEO of EFRAG and Chairman of EFRAG TEG (a suggested requirement of Mr Maystadt's report that was turned into a possibility).

Overall, the Commission comes to a favourable conclusion regarding the progress made:

On the basis of the above, it can be concluded that overall EFRAG has made promising progress in implementing the reforms following the key recommendations of the Maystadt report. [...] The Commission will continue to closely monitor the implementation of the reform of EFRAG and will duly report on that to the European Parliament and the Council.

Please click for access to the full report on the European Commission's website.

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