November

FRC responds to IESBA consultation on long association of personnel with an audit or assurance client

13 Nov, 2014

The Financial Reporting Council (FRC) has published its response to the International Ethics Standards Board for Accountants (IESBA) exposure draft of proposed changes to the Code of Ethics for Professional Accountants (the Code) in relation to the long association of audit firm personnel with an audit client. The FRC support the objective of the proposals but believe IESBA should go further in strengthening the Code provisions in this area.

The IESBA consultation, published in August 2014, proposed a number of amendments to the Code.  In response to the proposed changes, the FRC's key points are:

  • In relation to IESBA's proposals regarding the allowed period of 'time-on' as a key audit partner, the FRC believe that IESBA has reached the wrong conclusion that it is not appropriate to reduce the current period from seven years to five.  They strongly recommend that IESBA reconsider the proposed changes to the Code in relation to this.
  • They support IESBA's proposal to increase the ‘time-off’ period for engagement partners to 5 years.  However, they do not agree that the 'time-off' period for other partners, such as the EQCR partner, should be shorter than this and recommend that the required 'time-off' period for all key audit partners should be 5 years.
  • As regards involvement with the audit during the 'time-off' period, the FRC believe that, other than in exceptional cases, a partner should have no involvement at all with an audited entity.  In relation to the provision of technical or industry-specific advice, the FRC recommend that either a total prohibition or provisions requiring the establishment of further safeguards are necessary.  This contrasts with IESBA's proposal that an engagement partner who has been rotated off could, after two of the five years have elapsed, provide consultation to the engagement team or client on such matters. Notwithstanding this, the FRC do support the proposal that during the time-off period the rotated partner should not act as ‘relationship partner’ for the client, or undertake any other role, including the provision of non-audit services, that would result in significant or frequent interaction with senior management or those charged with governance or an ability to exert direct influence on the outcome of the audit engagement.  The FRC agree with IESBA that these provisions should not prevent an individual from assuming a senior leadership role in the firm.
  • The FRC agree that if, in rare circumstances, it is considered appropriate to extend the total time-on period served this should require the approval of those charged with governance, ordinarily the audit committee or equivalent.

The full response letter can be obtained from the FRC website.

Prada warns that modification of IFRSs will lead to lack of international recognition

13 Nov, 2014

The Chairman of the IFRS Foundation Trustees, Michel Prada, delivered a speech entitled 'Accounting, markets and global economic growth' at the Shanghai National Accounting Institute. In his speech, he explained how the application of global standards is interrelated with economic growth and commented on the situation in China.

Mr Prada's overview of the success of IFRSs around the world was similar to his explanations in Tokyo earlier this week. He praised IFRSs as global standards for financial information that can help to power the global economy, which would be especially important today, "because every major jurisdiction seeks to maintain a level of economic growth, to provide further time to heal the wounds from the global financial crisis and to facilitate a continued economic recovery".

From the world economy Mr Prada turned to the role of efficient markets in China in connection with the 2020 reform programme that identifies the decisive role of markets and the need to facilitate overseas companies' entry to China and Chinese companies' expansion abroad. He stressed that the IFRS Foundation is very willing to work with the Chinese authorities to achieve this goal and he also included the hope, that a funding mechanism might be found that allows China to fully contribute to the costs of the IFRS Foundation and would see increased Chinese support for the Asia-Oceania office of the IFRS Foundation in Tokyo.

However, Mr Prada identified the modification of IFRSs as the major challenge China is facing. He noted the efforts China made in modernising its accounting systems and called them a "considerable undertaking for a country the size of China". He also mentioned that is was very impressive that the new Chinese standards are required for use by all large and medium-sized Chinese companies, not just listed ones. Yet similar to the point about familiarity he made in Japan, Mr Prada pointed out that international investors are wary when the IASB's standards are modified, even if only in small ways. He commented:

China has not fully received the international recognition it deserves by your efforts to move to global accounting standards. It is the same problem faced by any jurisdiction that chooses to adjust IFRS to meet local requirements. Other jurisdictions that have adopted IFRS in full and without modification often assume that the adjustments must be substantial to warrant such a change. So, the question for China is whether the relatively minor deviations from IFRS warrant the lack of international recognition that results from those changes? This is a question that China alone can answer.

The full text of Mr Prada's speech is available on the IASB's website.

FRC consults on new interim reporting requirements

12 Nov, 2014

The Financial Reporting Council (FRC) has today published FRED 56 'Draft FRS 104 Interim Financial Reporting'. These proposals set out a new standard on interim reporting for entities that apply FRS 102 in their annual financial statements. The proposed standard is based on IAS 34, the international standard on interim reporting and will replace the existing ASB Statement 'Half-yearly financial reports'. Comments are invited by 12 January 2015.

When the FRC was developing FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', it was decided that FRS 102 would not contain guidance on interim reporting and that instead the FRC would undertake a separate project to review the existing ASB Statement 'Half-yearly financial reports'.

The FRC has now published the results of this project. Rather than update the existing Statement, the FRC is proposing to withdraw it and replace it with a new standard based on IAS 34 'Interim Financial Reporting', adapted for use by entities that apply FRS 102.  The new standard will not impose an obligation on entities to produce interim financial reports. However, entities that make a statement of compliance with it will be required to apply all of its provisions. The new standard will, for example, apply to those listed investment trusts which report under UK GAAP.

The FRC is proposing that entities which apply FRS 101 'Reduced Disclosure Framework' and are subject to a requirement to prepare interim financial statements should also apply FRS 104, but with references to FRS 102 read as the equivalent requirements in EU-adopted IFRS as amended by paragraph AG1 of FRS 101.

As well as withdrawing the ASB statement on half-yearly reporting, the FRC is also proposing to withdraw the existing ASB Statement 'Preliminary announcements'. This statement was issued in 1998 and in the FRC's view it is now obsolete, given developments in the requirements and practice around preliminary announcements since then.

The new standard is proposed to be effective from 1 January 2015, with the ASB statements withdrawn from that date. The FRC has requested comments by 12 January 2015 with the expectation that a final standard will be published by the end of the first quarter of 2015.

The press release and full consultation document can be obtained from the FRC website.

ICAEW calls for a shake-up of the UK corporate governance system

12 Nov, 2014

The Institute of Chartered Accountants in England and Wales (ICAEW) has published 'Who should be covered by codes?'. This publication calls for an overarching framework for company behaviour to be developed, expanding the corporate governance debate away from its current focus on boards to address wider concerns about company culture.

'Who should be covered by codes?' is the fifth and last paper in the ICAEW's corporate governance thought leadership series.  It concludes that the current cornerstone of the UK corporate governance regime, the UK Corporate Governance Code, is too narrow and prescriptive to deal effectively with all of the factors that affect business behaviour. In response to this, the ICAEW proposes that an overarching framework for business behaviour should be developed, setting out broad principles by which the companies of today can be guided. This framework can then be supplemented by more detailed codes, such as the UK Corporate Governance Code and Stewardship Code, which are designed specifically for particular groups.

Michael Izza, ICAEW chief executive, said:

"Codes are typically more effective than prescriptive rules in dealing with human behaviour so this approach has the potential to change business behaviour without creating new legislation. A framework could help promote consistency between group specific codes, encouraging a shared sense of accountability and would also allow us to maintain key benefits of a code-based regime, such as innovation and long-term learning.”

The press release and the paper itself can be downloaded from the ICAEW website.

IFRS Foundation updates the IFRS Taxonomy

12 Nov, 2014

The IFRS Foundation has published IFRS Taxonomy 2014 Interim Release 2 which updates the taxonomy for IFRS 15 and common reporting practice in transport and pharmaceuticals sectors.

The interim release provides additional taxonomy concepts that support the consistent adoption and implementation of IFRS.

More details (and a link to the interim release) are available in the press release on the IASB website. Our dedicated XBRL page is here.

ACCA responds to the BIS consultation on UK implementation of the EU Accounting Directive

11 Nov, 2014

The Association of Chartered Certified Accountants (ACCA) has published its response to the consultation issued by the Department for Business, Innovation and Skills (BIS) on the UK implementation of the EU Accounting Directive ("the Directive").

The ACCA believes that the limits of a smaller company’s size should be increased to the maximum permitted by EU law for accounting purposes, but that the size limits for audit purposes should remain at the levels currently set by UK law. It comments that "many interested parties, including ACCA, would be cautious about an increase in the audit exemption limit to the same extent as the small company accounting limit. The value often perceived to be added by an external audit indicates that an impact assessment would, at least, be needed."

It also expresses concern over the reduction in notes to the financial statements for smaller companies, commenting:

ACCA does not believe that this is a good idea, as important information may be lost from the financial statements that stakeholders such as creditors and shareholders may want to see. The UK, however, has limited room for manoeuvre given what is in the EU Directive. We agree with the notes that BIS intend to require and understand that the overriding obligation for the accounts to show a true and fair view remains. But this combination is not going to make life easier for small companies. Directors, and in some cases auditors, will have to consider whether the few disclosures mandated by the law will be sufficient for their accounts to show a true and fair view. We think in many cases, more will be needed.

The ACCA supports the extension of small company relaxations to public limited companies  which would otherwise qualify as small if they were private, regarding this as "appropriate for the size and ownership profile of these companies". The response is not in favour of the proposals to permit small companies to prepare only abbreviated accounts, however, noting that it considers "...the stewardship responsibilities of directors to the company’s shareholders to be very important and transparency via the annual report and accounts are an important element in their discharge." It suggests that, as a minimum, shareholder approval should be required.

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Chairman Michel Prada explains that only full use of IFRSs will bring needed familiarity

11 Nov, 2014

The Chairman of the IFRS Foundation Trustees, Michel Prada, delivered a speech entitled 'Japan and global standards' at a meeting of the Financial Accounting Standards Foundation's (FASF) stakeholders in Tokyo, Japan. In his speech, he took stock of the adoption of IFRS around the world and commented on the situation in Japan.

Mr Prada commented on the ever growing number of jurisdictions adopting IFRS and explained that for most industry sectors in the world, IFRS is now the predominant basis on which companies' financial statements are prepared. As part of the reason for this success he made out that "investors have a clear bias for the familiar" and that IFRS have by now become the means to provide that familiarity to international investors. Jurisdictions or companies that decide not to apply IFRSs would need to be aware of becoming increasingly isolated and that the "costs of being outside the familiarity of the IFRS system" would rise.

Mr Prada then looked at the large economies that still have not adopted IFRS (China, India, the US, and Japan) and made out encouraging developments in all of them although he admitted that in the case of the US "progress has been slower than anticipated". Among these jurisdictions, he especially noted Japan and the careful and considered approach to the use of IFRS in Japan that has been chosen. He claimed that the option of voluntary adoption of IFRS was being watched carefully by other jurisdictions as it would allow larger, multinational companies to benefit from IFRS without immediately forcing smaller, more domestically focused companies to adopt a new system.

Among the Japanese encouraging developments, Mr Prada also looked at the introduction of Japanese Modified International Standards (JMIS) where an exposure draft has been published in July 2014. He commented:

I have no strong views on JMIS, and it is up to the Japanese authorities to determine what transitional steps to IFRS are required. However, if investor familiarity is the goal then this can only come from the full use of IFRS.

Mr Prada concluded his speech by underlining that the IFRS Foundation and the IASB have evolved into a global accounting standard-setter, willing and able to take on the resulting responsibilities but also willing to always keep and open mind and listen to and learn from the stakeholders.

The full text of Mr Prada's speech is available on the IASB's website.

IASB Vice-Chairman reflects on the progress of the IFRS

10 Nov, 2014

On 10 November 2014, IASB Vice-Chairman, Ian Mackintosh gave a speech on how significant changes that occurred in IFRS over the past decade may be coming to an end and what should be expected from the IASB in the future.

Mr Mackintosh began by stating that most of Europe and many other parts of the world have already made the transition to IFRS and that “IFRS is a decade-old news story.” He noted the following:

  • The European Union’s adoption of IFRS on 1 January 2005, with Australia, New Zealand, Hong Kong and South Africa adopting soon after.
  • IFRS becoming the predominant reporting language for most global industry sectors.
  • Survey of 138 countries showed that 114 countries require the use of IFRS; while the remaining countries surveyed have shown positive progress towards IFRS.

Next, he commented on the more than 12 year collaboration by the IASB with the FASB to develop converged high quality standards. He mentioned that the convergence project has had several achievements (segment reporting, business combinations, fair value measurement, and revenue recognition) as well as setbacks (financial instruments).

Further, he provided his expectation for the IASB for the next decade. He believes there would be a “period of calm” in the standard-setting process after the IASB completes its leases, insurance, and conceptual framework projects. However, he noted with next year’s agenda consultation, constituents will have a chance to comment on the future path the IASB will take.

Lastly, he goes on to emphasise the need to consistently implement IFRS across all jurisdictions. Several steps the IASB has done to achieve consistent implementation include:

  • Public consultation during each phase of standard-setting.
  • Co-operation with national and regional accounting standard-setters.
  • Emerging Economies Group to gain perspective of countries without deep and liquid capital markets.
  • Islamic Finance consultative group to consider the effect of IFRS for Shariah-compliant transactions.
  • Expanding the role of the IFRS Interpretation Committee to address divergence in practice.
  • A Statement of Protocols with the IOSCO and ESMA to share information on the implementation of IFRS worldwide.
  • Education Initiative.

Text of the full speech is available on the IASB's website.

IIRC calls on G20 to encourage members to remove barriers to corporate reporting reform

07 Nov, 2014

The International Integrated Reporting Council (IIRC) has called on the G20 group of major economies to encourage its member nations to eliminate or address current barriers to the implementation of corporate reporting reform, and integrated reporting (<IR>) in particular.

The IIRC notes that the B20 group of businesses indicated in its Infrastructure & Investment Taskforce Policy Summary that it supports a review by the IIRC and IASB in relation to making corporate reporting more conducive to infrastructure and other long-term investment and eliminating or addressing current barriers.  The IIRC is calling on the G20 to echo this support and push for action at a national level to align the principles of corporate reporting to the objectives of economic policy, in particular to the promotion of long-term investment, as part of the conclusions to the November 2014 G20 summit.

The October edition of the IIRC newsletter, which includes this recommendation, can be obtained from the IIRC website.

FRC responds to the European Commission consultation on the impact of IFRS in the EU

07 Nov, 2014

The Financial Reporting Council (FRC) has published its response to the European Commission (EC) consultation on the impact of IFRS in the EU. The FRC welcomes the EC review of the IAS regulation and considers that the objectives of the IAS regulation have been broadly achieved.

In its response to the EC questionnaire, the FRC agrees that the objectives of the IAS regulation are still valid and that it has furthered the move towards establishing a set of globally accepted high-quality standards.  It also believes that the IAS regulation has led to a significant increase in the transparency of the consolidated financial statements of EU companies listed on regulated markets and in the comparability of companies' financial statements.  This in turn has significantly increased the effectiveness of capital markets, making it easier and cheaper for companies to access capital and improving protection for investors.

The FRC believes that the current EU endorsement process for IFRSs remains appropriate.  In response to the recommendations of the Maystadt report, the FRC considers that assessment of whether accounting standards adopted endanger the financial stability or hinder the economic development of the EU could be undertaken as part of the existing requirement that IFRS adopted in the EU “are conducive to the European public good” and that accordingly the existing endorsement criteria do not need to be modified.  In addition, the FRC recommends that the assessment of public good should take into account factors such as:

  • the benefit to EU companies from access to global capital markets; and
  • acknowledgement that the objectives of prudential and capital market regulation can run contrary to one another.

The FRC also strongly believes that the current limitation in the IAS regulation on the EC's freedom to modify the content of IFRSs is appropriate and do not consider that this should be altered.  In its view, to allow the EC more leeway in this area is likely to seriously undermine progress towards high-quality global accounting standards.

The FRC's full response to the consultation can be downloaded from their website.

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