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2014

FRC issues consultation document on audit reform

18 Dec 2014

The Financial Reporting Council (FRC) has issued a consultation document on audit reform, "Consultation: Auditing and ethical standards – Implementation of the EU Audit Directive and Audit Regulation". This, in conjunction with the Department for Business Innovation & Skills’ (BIS) discussion paper, proposes change in the UK to implement the EU Audit Directive (‘the Directive’) and Audit Regulation (‘the Regulation’), as well as other changes that may made to enhance confidence and strengthen the audit regime.

In its consultation, the FRC is seeking views on implementation of the mandatory requirements of European law and on which of the optional requirements should be introduced into UK law. The Directive applies to all statutory audits and may, in particular, require changes to financial services law to broaden the application of the law to such companies; the Regulation only applies to the audits of public interest entities.

BIS intends that the FRC should continue to be designated to carry out regulation and oversight of the audit profession, gaining some additional responsibilities. In some cases BIS is proposing to enable the FRC to exercise the member state options in the Audit Directive and Audit Regulation. The FRC’s consultation document consults in these areas; a further consultation in 2015 will ask questions about the implementation of some new requirements for which there are no options.

The key areas covered by the FRC consultation document are:

  • Auditing standards: The FRC proposes to retain the right to set additional standards in areas not covered by International Standards on Auditing (ISAs) as issued by the International Auditing and Assurance Standards Board (IAASB), and to add requirements to those standards where necessary to address national legal and regulatory requirements or add to the credibility and quality of financial statements.
  • Auditor reporting to shareholders and audit committees: The FRC proposes retaining existing requirements which go beyond the IAASB’s requirements, and supplement their standards where additional matters are required by EU law.
  • Proportionate application and simplified requirements for the audit of small undertakings: The FRC believes it does not need to take action on the proportionate application of ISAs. They invite views as to whether the existing approach in the Ethical Standards Provisions Available for Small Entities should be maintained or expanded.
  • Public interest entities: The FRC agrees with the broad suggestion by BIS that the definition of “public interest entities” (PIEs) should not be extended. However, the FRC does believe that some, but not all, of the more stringent requirements applicable to PIEs as defined in EU law should be extended more broadly. These include the existing FRC requirements applicable to “listed” companies for the audit Engagement Quality Control Review to be carried out by a partner, audit partner rotation and more restrictions on non-audit services. Some entities would be PIEs but unlisted (e.g. unlisted banks and insurers), some entities listed but not PIEs (companies traded on AIM), and some may be of public interest without meeting either definition (e.g. major public sector entities). The FRC recognises that this is an area of some complexity and that there are arguments for implementing the minimum changes required by EU law; for aligning requirements; or for using the definition of “major audit” used by the FRC’s Audit Quality Review for inspection purposes.
  • Prohibited non-audit services: The EU Audit Regulation bans certain services for public interest entities, but provides a member state option to permit some tax and valuation services that are immaterial. Some services are banned by current FRC standards but permitted under the EU Audit Regulation and vice versa.
  • 70% cap on non-audit services: The FRC asks some questions on extending the cap. The cap in the EU regulation compares the fees for non-audit services (other than those required by law or regulation) provided by the group auditor to the preceding three years of audit fees. It asks if this should be extended to include services provided by network firms. The restriction only applies after the auditor has been providing both non-audit services and audit services for three years. The FRC asks if a modified cap should apply in earlier years. Finally, the FRC says that it does not believe they should exercise their option to establish a lower cap, but invite views.
  • Audit partner rotation: The Regulation limits key audit partners to seven years’ service followed by three years cessation before they can serve again. This existing FRC regime applies a five year maximum followed by a five year cessation for audit engagement partners; other partners can serve seven years with two years off. The FRC asks if it should retain their existing tougher requirements and whether these should apply more broadly than PIEs.

In their paper the FRC also indicate that they are undertaking a review of the ethical framework for auditors, which may result in further proposals in 2015.

Comments are invited by 20 March 2015.

*The FRC held a consultation event on 11 March 2015 to discuss its plans for implementation of the EU Audit Direct and Regulation in its audit and ethical standards.  The slide pack and transcript from the meeting are available on the FRC website*.                  

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BIS issues Discussion Paper on audit reform

18 Dec 2014

The Department for Business Innovation & Skills (BIS) has issued a paper on audit reform. "Audit regulation - discussion document on the implications of the EU and wider reforms" proposes changes in the UK to implement the EU Audit Directive (‘the Directive’) and Audit Regulation (‘the Regulation’), as well as other changes that may be made to enhance confidence and strengthen the audit regime. The Financial Reporting Council (FRC) has also issued a consultation document on the same topic.

In its discussion paper, BIS is seeking views on implementation of the mandatory requirements of European law and on which of the optional requirements should be introduced into UK law. The Directive applies to all statutory audits and may, in particular, require changes to financial services law to broaden the application of the law to such companies; the Regulation only applies to the audits of public interest entities.

The discussion paper (link to BIS website) focuses on identifying legislative and non-legislative actions necessary to:

  • strengthen standards for the audit of public interest entities;
  • improve confidence in the independence of auditors;
  • avoid excessive concentration in the audit market; and
  • make audit reporting more informative.

Key points raised by BIS include:

  • Whether the definition of “public interest entity” (PIE) in law should be extended beyond entities with securities admitted to trading on a regulated market, credit institutions (including banks and insurance companies) and insurers. The Government is not minded to extend the definition to a wider class of entities.
  • Changes to the regulation and oversight of audit are necessary. The Government is proposing that, rather than the current regime whereby major audits are inspected by the FRC and others by recognised supervisory bodies (RSBs) such as the ICAEW, the FRC should be responsible for all inspections but delegate these back to RSBs for most non-public interest entities. Similar arrangements are suggested for investigation and discipline and a range of other regulatory functions. In the area of standard setting, the indirect force of FRC standards whereby RSBs must require their members to follow those standards will be changed so that FRC standards apply to statutory auditors directly as a matter of law.
  • The Regulation introduces a ‘blacklist’ of prohibited non-audit services for the auditors of public interest entities, and a 70% cap on permissible non-audit services performed by the auditor where there is no requirement that they are carried out by the auditor. The Government is proposing to give the FRC the power to implement the relevant requirements. There has been some question as to when the 70% cap will first apply; BIS have clarified that it expects it to apply first for financial years commencing on or after 17 June 2019 based on audit fees for the preceding three financial years.
  • The Government is proposing to take up the member state option to allow audit firms to serve a PIE for a maximum of twenty years, rather than ten, provided that a tender is undertaken after ten years. They are not proposing to take up the option to extend to twenty four years where there are joint auditors. Consistent with the Competition and Markets Authority Order on auditor tendering, BIS is seeking views on steps to encourage tendering earlier than ten years. The directors’ report of a PIE will be required to include key matters for the audit committee on the appointment of auditors, including tenure, date of last tender, expected year of next tender and reasons why this is thought to be in the shareholders’ interests.
  • Both the Regulation and Directive make changes to the requirements for auditors’ reports to shareholders and to audit committees of PIEs. Many of these have already been implemented in UK auditing standards; the FRC will be given legal powers to make standards covering the remaining matters.
  • The previous legal requirement for listed companies to have an audit committee was implemented in Disclosure and Transparency Rule 7.1. The UK is proposing that the Financial Conduct Authority (‘FCA’) should amend DTR 7.1 to implement the necessary changes which will put on a statutory footing the requirement for the majority of audit committee members to be independent, to allow audit committees to include those not on the board but appointed by a general meeting of shareholders. The FCA will consult on these changes in due course. The UK has previously taken an option to exempt unlisted banks and insurers from the requirement to have an audit committee. As this option is no longer available, BIS suggests that the requirement be introduced via the rules of the Prudential Regulation Authority.
  • The Regulation requires auditors to report information to the supervisory authorities of PIEs concerning legal breaches or breaches of administrative rules, doubts over continuous functioning or the issue of a qualified audit report. These duties are broadly in place for banks, building societies and insurers in the UK, but changes will be need, for example for unregulated listed companies. It is suggested that FCA rules will implement these requirements.
  • The Government proposes to make the minimum changes necessary to implement the new powers for minority shareholders holding more than 5% of voting rights and competent authorities to go to court to seek removal of an auditor on “proper grounds”. They do not intend to provide guidance on what are “proper” and “improper” grounds, other than noting that divergence of opinions on accounting treatments or audit procedures are not “proper grounds”.
  • The Directive allows for ‘passporting’ of audit firms and individual auditors. This means that another EEA audit firm could, subject to meeting requirements, register to audit UK companies. Similar changes would work the other way around; however, little detail is provided on the competence requirements for individual audit partners which would affect how this works in practice.

In its earlier consultation on implementing the EU Accounting Directive, BIS suggested that it might raise the size limits for small company audit exemption later than those for small company accounting exemptions. Feedback from that consultation suggested that the timing for these changes should be aligned. As the audit exemption limits in UK would increase automatically if the accounting limits were changed, BIS is asking whether action should be taken to introduce separate limits. In a change to their assessment at the time of their earlier consultation, BIS believe this change might lead to 7,400 companies becoming newly audit exempt.

Comments are invited by 19 February 2015, leading to a formal consultation on draft regulations in the summer of 2015.

* The comment period has now been extended by one month to 19 March 2015*

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IASB finalises amendments regarding the application of the investment entities exception

18 Dec 2014

The International Accounting Standards Board (IASB) has published 'Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28)'. The amendments address issues that have arisen in the context of applying the consolidation exception for investment entities. They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.

 

Background

In October 2012, the IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) providing an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities that meet the definition of an 'investment entity'. Subsequently, the IFRS Interpretations Committee received several submissions regarding the implementation of the exemption. The Committee recommended to the IASB to address the issues in a narrow-scope project, and in March 2014 the IASB formally added a project on IFRS 10/IAS 28 — Investment entity amendments to its work programme. An exposure draft of proposed amendments was published in June 2014 with comments requested by 15 September 2014.

 

Amendments

Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) makes changes aimed at clarifying the following aspects:

  • Exemption from preparing consolidated financial statements. The amendments confirm that the under IFRS 10 exemption from preparing consolidated financial statements for an intermediate parent entity is available to a parent entity that is a subsidiary of an investment entity, even if the investment entity measures all of its subsidiaries at fair value. However, intermediate parent entities adhering to the UK Companies Act 2006 will not be able to take advantage of this exemption.
  • A subsidiary providing services that relate to the parent's investment activities. A subsidiary that provides services related to the parent's investment activities should not be consolidated if the subsidiary itself is an investment entity.
  • Application of the equity method by a non-investment entity investor to an investment entity investee. When applying the equity method to an associate or a joint venture, a non-investment entity investor in an investment entity may retain the fair value measurement applied by the associate or joint venture to its interests in subsidiaries.
  • Disclosures required. An investment entity measuring all of its subsidiaries at fair value provides the disclosures relating to investment entities required by IFRS 12.

 

Changes from the proposals in the Exposure draft

ED/2014/2 Investment Entities: Applying the Consolidation Exception (Proposed amendments to IFRS 10 and IAS 28) proposed to provide relief to non-investment entity investors for their interests in investment entity associates, but not for their interests in investment entity joint ventures. To retain consistency in treatment in applying the equity method to both associates and joint ventures, the final amendments provide relief to non-investment entity investors in both investment entity associates and joint ventures.

The IASB has added amendments to IFRS 12 Disclosure of Interests in Other Entities as the comments received in response to the ED highlighted a lack of clarity of the applicability of IFRS 12 to the financial statements of an investment entity. The additional amendments clarify that the scope exclusion in paragraph 6(b) of IFRS 12 does not apply to the financial statements of a parent that is an investment entity and measures all of its subsidiaries at fair value.

 

Effective date and transition requirements

The amendments are effective for annual periods beginning on or after 1 January 2016 and must be applied retrospectively. Earlier application is permitted. The amendments are subject to EU endorsement, but, aside from the IAS 28 amendment regarding uniform accounting policies, do not conflict with existing standards.

 

Additional information

IASB finalises amendments to IAS 1 under the Disclosure initiative

18 Dec 2014

The International Accounting Standards Board (IASB) has published 'Disclosure Initiative (Amendments to IAS 1)'. The amendments aim at clarifying IAS 1 to address perceived impediments to preparers exercising their judgement in presenting their financial reports. They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.

 

Background

The IASB added an initiative on disclosure to its work programme in 2013 to complement the work being done in the Conceptual Framework project. The initiative is made up of a number of smaller projects that aim at exploring opportunities to see how presentation and disclosure principles and requirements in existing Standards can be improved. Among them is a narrow scope project on IAS 1 Presentation of Financial Statements to ensure that entities are able to use judgement when presenting their financial reports as the wording of some of the requirements in IAS 1 had in some cases been read to prevent the use of judgement. An exposure draft of proposed amendments was published in March 2014 with comments requested by 23 July 2014.

 

Amendments

Disclosure Initiative (Amendments to IAS 1) makes the following changes:

  • Materiality. The amendments clarify that (1) information should not be obscured by aggregating or by providing immaterial information, (2) materiality considerations apply to the all parts of the financial statements, and (3) even when a standard requires a specific disclosure, materiality considerations do apply.
  • Statement of financial position and statement of profit or loss and other comprehensive income. The amendments (1) introduce a clarification that the list of line items to be presented in these statements can be disaggregated and aggregated as relevant and additional guidance on subtotals in these statements and (2) clarify that an entity's share of OCI of equity-accounted associates and joint ventures should be presented in aggregate as single line items based on whether or not it will subsequently be reclassified to profit or loss.
  • Notes. The amendments add additional examples of possible ways of ordering the notes to clarify that understandability and comparability should be considered when determining the order of the notes and to demonstrate that the notes need not be presented in the order so far listed in paragraph 114 of IAS 1. The IASB also removed guidance and examples with regard to the identification of significant accounting policies that were perceived as being potentially unhelpful.

 

Changes from the proposals in the Exposure draft

ED/2014/1 Disclosure Initiative (Proposed amendments to IAS 1) had included a proposal that an entity should 'not aggregate or disaggregate information in a manner that obscures useful information'. As disaggregation often means expanding totals and subtotals and thus providing added transparency, the IASB decided to rephrase the clarification to say that 'an entity shall not reduce the understandability of its financial statements by obscuring material information with immaterial information'.

ED/2014/1 had also proposed to use the term 'disclose' to mean information in the notes and the term 'present' otherwise. As respondents to the ED noted that a change in terminology should be part of a comprehensive review of IAS 1 and would be outside the scope of a narrow-scope amendment, the IASB did not finalise the proposals regarding use of the terms 'present' and 'disclose'.

Finally, the ED had proposed that an entity should disclose the fact that it applies the amendments when it does so for the first time. The transition provisions now state that an entity need not disclose the fact that it has applied these amendments (regardless of early application or application on the effective date), as the IASB considers the amendments to be clarifying and not directly affecting an entity's accounting policies or accounting estimates.

 

Effective date and transition requirements

The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted. Application of the amendments need not be disclosed.

 

Additional information

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IASB proposes amendments to IAS 7 as result of the Disclosure initiative

18 Dec 2014

The International Accounting Standards Board (IASB) has published an Exposure Draft (ED) of proposed amendments to IAS 7 'Statement of Cash Flows'. The amendments aim at clarifying IAS 7 to improve information provided to users of financial statements about an entity's financing activities and liquidity. Comments are requested by 17 April 2015.

 

Background

The IASB added an initiative on disclosure to its work programme in 2013 to complement the work being done in the Conceptual Framework project. The initiative is made up of a number of smaller projects that aim at exploring opportunities to see how presentation and disclosure principles and requirements in existing Standards can be improved. Among them is a narrow scope project on IAS 7 Statement of Cash Flows to improve information provided to users of financial statements about an entity's financing activities and liquidity.

 

Suggested changes

The IASB proposes in ED/2014/6 Disclosure Initiative (Proposed amendments to IAS 7) amendments with two objectives:

  • Improved information about an entity's financing activities, excluding equity items. The IASB proposes that an entity should disclose a reconciliation of the amounts in the opening and closing statements of financial position for each item for which cash flows have been, or would be, classified as financing activities in the statement of cash flows, excluding equity items. The reconciliation should include (i) opening balances in the statement of financial position, (ii) movements in the period, and (iii) closing balances in the statement of financial position. The proposed amendments also include an illustrative example.
  • Improved disclosures about the liquidity of an entity. The IASB proposes to extend the disclosures by adding required disclosures about restrictions that affect the decisions of an entity to use cash and cash equivalent balances, including tax liabilities that would arise on the repatriation of foreign cash and cash equivalent balances.

This is also the first time an IASB Exposure Draft includes proposed changes to the IFRS Taxonomy to reflect the effect of the proposed amendments.

 

Dissenting opinion

One Board member voted against the publication of the ED as this Board member believes that (i) it would be more appropriate to address the suggested amendments from a broader point of view as part of the principles of disclosure research project, (ii) the proposed amendments do not meet the needs of users of financial statements, and (iii) the costs of preparing the proposed reconciliation could be larger than expected.

 

Effective date and transition requirements

The ED does not contain a proposed effective date. However, the ED proposes that the amendments would be applied prospectively without further transition requirements.

 

Additional information

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Short survey on principles of disclosure

18 Dec 2014

The Italian standard-setter Organismo Italiano di Contabilità (OIC) is helping the IASB to understand preparers' views on the IASB's project on priciples of disclosure, which is undertaken with the view of bringing IAS 1, IAS 7 and IAS 8 into one standard. To this end the OIC is conducting a short survey.

The objective of the survey is to determine whether there are aspects of IAS 8 Accounting policies, Changes in Accounting Estimates and Errors that should be changed when they will be brought into this new standard. It has two sections:

  • Practical experience with application of IAS 8
  • A possible alternative approach

More information about the online survey is available on the OIC website. It should take approximately 30 minutes to complete and can be completed until 20 February 2015.

The OIC is currently also conducting a survey on accounting changes.

ACCA publishes report on risk reporting

18 Dec 2014

The Association of Chartered Certified Accountants (ACCA) has issued a report addressing the way in which businesses report the risks they face.

Reporting Risk, which was compiled from a range of interviews with senior industry figures over the course of a year, says that users, preparers and advisers in risk reporting agree that risk reporting needs to improve. 

Ewan Willars, Director of Policy with ACCA, said:

There are concerns that risk-reporting is currently seen as being ‘tick-box’ and process driven, with organisations reluctant to be frank. There was also felt to be little or no challenges from boards, auditors or investors about the potentially damaging ‘what-ifs’ which could destroy businesses. 

Report users we surveyed, including analysts, called for risk reports to clearly identify key risks faced by a company, with an explanation of why management believes these risks to be critical and what they are doing to mitigate the risks. A good risk report should identify new and emerging risks and explain how management assesses risk throughout the year. 

Our report concluded that proactive involvement by risk report users can only encourage better practice. Good risk reporting, in turn, gives investors greater confidence.

We believe that greater disclosure of risk is not a threat - but a chance to demonstrate the strength of the company’s controls and management. It is also critical that the conversation about risk reporting continues as that will help to improve the quality of those reports.

Click here to read the report in full (link to ACCA website).

Panel discussion on the accounting for the financial crisis

17 Dec 2014

At the 8 December 2014, joint ICAEW and IFRS Foundation conference, leaders from the financial and accounting community held a panel discussion to discuss the role accounting played during the financial crisis.

The panel discussion was moderated by Simon Nixon (Chief European Commentator of the Wall Street Journal) and featured views from:

  • Sir Winfried Bischoff (Chairman, Financial Reporting Council).
  • Mike Ashley (Chairman of the Audit Committee, Barclays).
  • Vincent Papa (Director, Financial Reporting Policy, CFA Institute).
  • Sue Lloyd (IASB member).
  • Hugh Shields (IASB staff).

The video is available on the IASB website.

Summary of the CMAC October 2014 meeting

17 Dec 2014

The IASB has released a summary of the Capital Markets Advisory Committee (CMAC) meeting which was held in London on 16 October 2014.

The topics discussed at the meeting included:

  • Rate-regulated activities.
    CMAC members provided feedback on the IASB’s discussion paper on reporting the financial effects of rate regulation. The members noted that it is important to provide information regarding rate regulation to investors and lenders. One of the main concerns from the discussions was how to measure regulatory assets and the level of judgement involved.
  • Measuring quoted investments at fair value.
    CMAC members discussed the IASB’s Exposure Draft Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value. In particular, they were asked which measurement method they believed will provide the most useful information to investors. All members believed measurement based on unadjusted Level 1 inputs is the most useful.
  • Post-implementation Review of IFRS 8 Operating Segments.
    CMAC members were asked for their views concerning potential amendments to address issues specified in the post-implementation review. Topics discussed included (1) identification and aggregation of operating segments, (2) preservation of trend data on reorganization, (3) allocation of reconciling items and central charges to operating segments, and (4) reported line items.
  • Research projects and investor involvement.
    CMAC members generally supported the IASB’s Research Programme, however, some believed that IASB should monitor the range of views it receives to make sure it is receiving input from the investor community at large.
  • Business combinations under common control (BCUCC).
    The IASB staff provided the CMAC members with an update of the BCUCC research project and the IASB’s tentative decisions on the scope of the project. In addition, the members were presented with two general BCUCC scenarios and provided feedback.
  • Disclosure Initiative.
    CMAC members provided feedback on sections of the Principles of Disclosure project on (1) cash flow statements and (2) non-IFRS information in financial statements.
  • Appointments.
    The CMAC announced the appointment of Paul Lee, Glen Suarez, and Marietta Miemietz.

The next CMAC meeting will take place on Friday 27 February 2015.

The full meeting summary is available on the IASB website.

Agenda for February 2015 IFRS Advisory Council meeting

17 Dec 2014

An agenda has been released for the upcoming meeting of the IFRS Advisory Council, which is being held in London on 23-24 February 2015. In addition to a number of reports and updates, the meeting will focus on the ASAF review, the Education Initiative strategy, the 2015 Agenda Consultation, and the IFRS Foundation structure and effectiveness review and MOU’s strategy.

A summary of the agenda (as at 17 December 2014) is set out below:

Monday 23 February 2015 (09:45-16:30)

  • Welcome and Chairman's introduction
  • Key strategic issues the Council has dealt with and has identified going forward
  • IASB ac­tiv­i­ties over the last four months
  • ASAF two-year review
  • Trustee ac­tiv­i­ties — seeking input on key issues and IFRS Foundation structure and effectiveness review
  • Education Initiative strategy

Tuesday 24 February 2015 (09:00-14:45)

  • 2015 Agenda Consultation
  • Future of corporate reporting — Global reporting initiative
  • Strategy for IFRS Foundation MOU
  • Sum up discussions

Agenda papers for the meeting will be available in due course on the IASB website.

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